Good morning and welcome to Norwegian Cruise Line Holdings Third Quarter 2021 Earnings Conference Call. My name is Laurie and I will be your Operator. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session, and instructions for the session will follow at that time.

I would now like to turn the conference over to your host, Ms. Jessica John, Vice President of Investor Relations, Corporate Communications, and ESG. Ms. John, please proceed..

Thank you, Lori (ph) and good morning, everyone. Thank you for joining us for our Third quarter 2021 earnings and business update call. I'm joined today 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 our financials before handing the call back to Frank for closing remarks. We will then open the call for your questions. 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 30 days following today's call. Before we begin, I would like to cover a few items.

Our press release with third quarter 2021 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 Frank Del Rio.

Frank?.

Thank you Jessica. And good morning everyone. And thank you for joining us today. And as always, I hope that all of you, as well as your loved ones, remain healthy and safe. Today, we will discuss commentary on 3 areas. First, the progress we have made on our great cruise come back.

Second, our recent booking and demand trends, which have shown particular strength for sailings operating in second half of 2022 and for all of 2023, when our fleet is expected to be back in full operation in its normalized occupancy levels.

And finally, on our exciting pipeline of new vessels, which we expect to contribute outsized EBITDA growth and other important financial metric improvements. Slide 4 outlines how far we have come on our return to service plan.

When we last spoke in early August, we had just relaunched the first vessel in our fleet, Norwegian Jade in Greece, and we're on the verge of resuming cruising in the U.S., with Norwegian Encore making our West Coast debut, sailing to Alaska from Seattle.

Since then, we have successfully relaunched 11 of our 28 vessels, with all 3 of our award winning brands resuming operations. We couldn't be more pleased with the performance of our re-launch ships. First, our crew has not missed a beat since returning.

Seamlessly adapting to our new health and safety protocols and going above and beyond to deliver the exceptional vacation experiences our brands are known for. This commitment to service has resulted in record high guest satisfaction scores with each one sequentially better than the month before.

And second, we are seeing the power of our industry-leading bundling strategy pay off and get our boarding our vessels with fresh wallet, which coupled with robust pent-up demand for all kinds of experiences, is translating to remarkably strong onboard revenue generation.

In fact, onboard revenue has exceeded our base on expectations by over 20% with broad-based strength across all shifts, regions, and revenue streams.

While I would caution though, against extrapolating these figures as permanent or indicative of steady-state future performance just yet, as there are several transitory factors that may be contributing to the elevated current level including pent-up demand, cabin, and guests mix, it is nonetheless an encouraging and positive signal of the healthy consumer demand we are experiencing.

Lastly, and most importantly, these relaunched shifts have already contributed positive cash flow in the third quarter, even with our self-imposed occupancy level cap s.

Despite a return to service going studying with the unfortunate summer stood as a Delta variant, I'm happy to say that our robust multilayered sales face health and safety protocols worked as designed to mitigate the introduction and transmission of COVID-19 aboard our vessels.

The prevalence of cases we identified is pre -boarding testing, mid-Cruise and then at departation were in consequential and well below what we all saw in the general population during this time.

In short, we were able to fairly evaluate and fine tune our rigorous protocols during one of the highest heights of the pandemic, and the stellar results speak for themselves.

Today, all ships in our fleet continue operating with a strict 100% vaccination requirement, coupled with universal pre -embarkation testing and multiple layers of additional protection once onboard, including upgraded air filtration systems and well-resourced medical centers.

We will continue to follow science and evaluate and modify our protocols as needed, with guidance from our team of experts led by former FDA Commissioner Dr. Scott Gottlieb, and former applicable Public Health Authority.

As I have said, time and time again, our commitments at health and safety is far and away, the most important principle that our Company operates at all levels. And not just now, but pre and post pandemic as well. And we are willing to go to great lengths to protect our guests, crew and the communities we visit.

Just last week, we were pleased to receive positive view from the CDC with a temporary extension of the framework for conditional sailing order through January 15th of 2022, at which point the order will revert to a voluntary program.

We view this as a positive step forward for our Company and the industry at large and we were encouraged to see positive recognition by the CDC of the successful resumption of cruising and the length we have all taken to enhance our already stringent health and safety protocols in response to COVID-19, which continue to be much more rigorous and much more comprehensive than those implemented by any other travel, leisure, or hospitality sector.

With the progress of is met with vaccinations, therapeutics, and adapting to living in the ongoing pandemic environment, the worst is seemingly behind us. Each day we become increasingly confident in our ability to flawlessly execute on our Phase Voyager assumption, which is detailed by Brian and by on Slide 5.

We continue to expect our full fleet to be back in operation by April 1st of 2022, and with this steady and prudent trajectory, we are well-positioned for a projected return to pre -pandemic occupancy levels across our fleet no later than the beginning of the third quarter of 2022, and in time to capture peak summer season demand and pricing.

While we expect to continue seeing some fits and start as we ramp up our re-launch, we are keeping a close watch on port availability, travel restrictions, and any other changes in global public health environment which could affect our return to service plans as we are ready to adapt accordingly.

Turning to slide 6, we shift today's discussion to our booking and demand trends. I'm pleased to report that we continue to see robust future demand for cruising, particularly for sailings operating in the second half of 2022, and all of 2023 as evidenced by our record cumulative book position during these periods.

You'll recall at the beginning of our third quarter, our booked position for full-year 2022 was meaningfully and significantly ahead of 2019's record levels and at higher pricing.

However, in consistent with the pullback seen by the broader economy and in particular the travel and leisure sector, that summer Delta variant surge resulted in a marked slowdown in our net booking volumes.

The impact was heavily weighted to closer in-sailings, particularly for fourth quarter 2021 and first quarter 2022, with the impact lessening sequentially throughout 2022 and beyond.

Rather than chase scarce demand during the delta surge by dropping prices, and/or spending marketing funds in a less than optimal manner, we strategically chose to wait for consumer sentiment to rebound, as we have seen direct ebbs and flows in our booking patterns throughout the pandemic coinciding with changes in the public health environment.

Throughout this difficult 10-week period, we remain disciplined and continue to hold or even raise pricing, and the outcome is that today, we see both record load and record pricing for the second half of 2022 and for all of 2023.

We are intently focused on the long-term brand positioning and profitability of the Company and are simply not willing to sacrifice pricing in order to increase load factors in the upcoming transitional quarters.

As it happened in past surges and as the COVID-19 situation recently improved, we have experienced a rebound in bookings, with net booking volumes improving sequentially over the past 6 weeks. We believe this improvement will accelerate moving forward at first.

Our brands begin to ramp up their demand-generating marketing investments in mid-November, coinciding with Black Friday and Cyber Monday promotion. And second, the much anticipated and expected recovery in the travel agent channel space.

And lastly, the approval of vaccines for children ages 5 to 11, which came just last night and will allow for an expanded group of 100% vaccinated guests, especially families, to sail on our brand. Our go-to-market and full vaccination strategy has paid off and drove.

And today, our full-year 2022 load factor remains in line with 2019 record levels and at higher pricing, even when including the diluted impact of future cruise credits. In addition, we are meaningfully better booked for second half of 2022 and full-year 2023 sailings, and at better pricing that at any similar point in time in the past.

Our primary focus continues to be on these periods when our fleet is expected to be in full operation and at normalized occupancy levels. and as I mentioned before, just in time to capture the all-important third quarter peak summer season, which traditionally is the most profitable quarter for the industry.

Now, breaking down our book position for full-year 2022 further, more than 55% of bookings are from loyal repeat cruises to our brand. In addition, approximately 75% is comprised of new cash bookings with the remainder comprised of future cruise credit. So far, approximately 60% of the total value of our outstanding SECs have been redeemed.

As a reminder, the value added 125% future cruise credits will issue -- will issue -- that we issued at the beginning of the pandemic can only be applied to sailings through year-end 2022, resulting in 0 yield dilution when we look to 2023 and beyond.

And while still early, booking trends with 2023 as I've -- as I hinted thus far, are also off to an impressive start. Our booking windows continue to be elongated versus historical level, with guests booking further into the future, particularly for the Oceania Cruises and Regent Seven Seas Cruises brand.

Case in point in August, Regent set a record for the largest booking day in its 29-year history with the launch of its 2023/2024 voyage collection. Reservations surpassed its previous record by approximately 15%.

And while all itineraries were popular, notable destinations of interest were Africa, Asia, and the Baltics, demonstrating our guests continued appetite for long and exotic itineraries.

And in September, the sales launch of just a single ship, Oceania Cruise 's new 1200 passenger Vista, which doesn't debut until April of 2023, set an all-time single day booking record for that brand that surpassed the most recent record set in March of 2021 by nearly 60%.

1/2 of the available inventory for Vista's inaugural season, was sold in a single day, with 30% of bookings coming from new to brand guests. These incredible record-breaking milestones are further proof of the exceptional demand we continue to experience for our brand's unique product offerings from both new and loyal guests alike.

Strong future demand in both load factor and pricing is also empirically evidenced in our advanced ticket sales bills. Our advanced ticket sales increased approximately $500 million on a gross basis in the quarter, equating to an approximately 65% increase versus the prior quarter's fill.

In addition, and more importantly, our cash advanced ticket sales for sailings beginning in the second quarter of 2022 and beyond are approximately 45% higher than at the same time for record year 2019. As we move forward with phasing in the rest of our fleet, we expect this tremendous momentum to continue sequentially.

Looking to the future of 2022 will also mark an exciting new chapter for our Company as we welcome the first shift in the next class of vessels for Norwegian Cruise Line, Norwegian Prima, in summer of 2022.

I just returned from the shipyard in Italy a few weeks ago where I was able to witness firsthand what an evolution, Prima, is for them, the Regent brand, and for the industry at large, which you can see on slide 7. Everything about her was impressive and she has been meticulously designed to elevate the guest experience.

Last month, we unveiled Prima 's entertainment lineup, including its interactive headline show, the Tony-award nominated musical Summer, the Donna Summer Musical.

Norwegian Prima will also showcase numerous cruise industry first and new to brand experiences, including the world's first transforming venue that converts from a three-story theater into a Vegas style nightclub, exhilarating freefall drop dry slide, and a tri -level 1200 foot long race track, the largest at sea.

The Prima Speedway will be the first ever 3 level race track and is over 20% larger than that on Norwegian Encore, featuring 14 turns, where drivers can reach speed of nearly 40 miles per hour.

Prima's advanced sales continue to impress, even after her record shattering sales debut in May, which set a single best booking day and best initial booking week record, doubling the previous record set by Norwegian Bliss in 2018. And despite the introduction being 6 weeks later than Norwegian Bliss.

Our booking volumes are trending in line with data Bliss the previous fastest selling new builds for the line and a materially higher prices. As you can see on Slide 8, Norwegian Prima is just the first ship to look forward to in our industry-leading growth profile of 9 world-class ships coming online to 2027.

This new-build will grow our berth count by approximately 40%, adding 24,000 additional berth across our 3 brands. In 2023 when our fleet is back in full force, we expect our berth capacity to be approximately 20% higher than 2019's pre -pandemic levels.

The addition of these new cutting-edge ships will also favorably change our cabin mix as illustrated on slide 9, with premium cabins increasing to approximately 65% of total berth versus approximately 60% today.

In addition to the premium mix of real estate onboard, our new ships have all the bells and whistles, additional streams for onboard revenue generation with new and innovative experiences, and the latest technology to improve efficiency versus our existing fleet.

Excitement around new ships is also a significant demand driver and a powerful engine to fuel future yields, EBITDA, cash flow and ROIC growth. It brings new guests to our brand s, and it brings back repeat guests as well, helping us to appeal to every segment that we are targeting.

And given our base of only 28 ships in our fleet, we are ready and eager to easily and profitably absorb this new capacity as it will allow us to further diversify our product offerings and penetrate numerous attractive and high potential unserved and underserved markets globally.

The strategic addition of the Prima and Prima Plus Class, for example, which are smaller but more upscale than our previous Breakaway and Breakaway Plus Class at approximately 3,200 berth for the first two Prima Class Ships, and increasing to nearly 3,600 berths for the next four Prima's Plus Class Ships will give us additional bandwidth and flexibility to optimize the deployments that are most profitable and allow the line to continue to manning premium pricing with the right size ship in the right place and at the right time.

And as slide 10 shows, we have historically demonstrated our success and not only absorbing capacity, but translating this capacity growth into outsized revenue, outsized adjusted EBITDA and operating cash flow growth that significantly outpaces the growth in absolute capacity.

We fully expect to continue this trend and drive meaningful growth to the top and bottom line with the addition of these exciting new ships. I'll be back later to provide an update on our ESG efforts, as well as provide the closing remarks but for now, I'd like to turn the call over to Mark for a financial update. Mark..

Thank you, Frank. We reached a significant financial milestone in the third quarter with our first voyages resuming sailing after a previously unimaginable, 500 plus days with 0 revenue-generating operations. Our return to service has been very successful and we remain on track to execute on our Phase Voyager resumption plan.

By the end of the third quarter, we had started 37 voyages, completed 29, and had 8 ships in service, representing approximately 40% of our berth capacity. Occupancy in the third quarter was approximately 57%, in line with our expectations and reflecting our self-imposed occupancy limits.

As we have outlined previously, we have taken a conservative approach to occupancy with our voyage resumption, which proved to be prudent with the rise of the Delta variant, to ensure that health and safety remains our number 1 priority.

Increasing our occupancy is not a race, and we are focused on being diligent and thoughtful in ramping up of occupancy levels to protect not just our guests and crew, but also our long-term brand equity.

Despite the reduced occupancy levels in the quarter, I am extremely happy to report that the fleet that operated in the period was cash flow positive. Looking ahead, by year-end, we expect to have 17 ships representing approximately 75% of capacity back in service with the full fleet operating as we enter the second quarter 2022.

Turning to liquidity and cash burn on Slide 11, we ended the quarter with approximately $1.9 billion of cash and cash equivalents. In addition, earlier this week, we further enhanced our liquidity profile by entering into a 1 billion commitment, through mid-August 2022.

This liquidity backstop enhances our financial flexibility and provides immediate and additional liquidity should the need arise. If drawn, the commitment would convert into an unsecured note maturing in April 2024. For sake of clarity, we have not drawn on this facility and do not intend to do so given our current projected recovery at this time.

As for cash for the third quarter, Our average monthly cash burn rate was approximately 275 million lower than prior guidance of 285 million. For the fourth quarter, we expect our average monthly cash burn to increase to approximately 350 million as we continue to ramp up restart expenses and additional vessels reenter service.

During the quarter, we are expecting a ramp up of demand-generating marketing investments as we head into the holidays with Black Friday, Cyber Monday, and Wave Season.

It is important to note that this cash burn estimate does not include our expected cash inflows from both new and existing bookings, or the contribution from shifts that have re-entered service, both of which we expect to accelerate as we move forward.

On a net basis, based on our current resumption plan, we continue to expect to reach a crucial inflection point with operating cash flow turning positive towards the tail under the first quarter of 2022. In addition, based on our current trajectory and market conditions, we are on a solid path to return to profitability for the second half of 2022.

Turning to slide 12, our cash balance in the third quarter decreased to $1.9 billion of cash and equivalents, driven by approximately $825 million of operating cash burn, including OpEx expenses, SG&A interest and CapEx, customer cash refunds of approximately $115 million, and net working capital and other inflows of approximately $125 million, which is net of health and safety investments and cash collections from current and future voyages.

With 2022 now just around the corner, we have provided some additional guidance to assist with modeling for certain metrics on slide 17, including depreciation and amortization, interest expense, fuel consumption, and capital expenditures. In addition, we have provided detail on our annual capacity growth expectations on Slide 18.

As we gear up to deliver on our impressive growth profile through 2027, which we expect to be meaningfully accretive to both earnings and cash flow generation. Lastly, with much of the focus in the market on inflationary pressure, I wanted to touch quickly on what we're experiencing.

We're still fine-tuning our 2022 plans and related projections, and we'll provide more color on our cost outlook on our next earnings call. However, similar to almost all other industries, we are seeing pockets of pressures in areas such as fuel, food, and other commodities. Our supply chain group continues to work diligently to mitigate these costs.

And we are fortunate that the timing of our ramp-up in operations is relieving some of the transitory cost pressures. The good news is that we are a primarily fixed cost business, which is beneficial in an inflationary environment.

On the labor front, we have a high degree of visibility on our costs as the vast majority of our crew, which comprises the bulk of our employee base, are covered under multi-year agreements. On the flip side, we're also seeing very strong pricing power, which is helping to offset inflationary crusher.

Even with the pricing power we are seeing, cruise vacations continue to operate incredibly compelling value proposition versus a land-based vacation alternative. We have said in the past, that a cruise vacation typically offers at least 20% to 30% better value, than a similar land-based alternative.

With the current inflationary backdrop and on a relative scale, we believe our offering and value proposition is even more compelling now than ever before.

Without the same labor market pressures that many of our land-based peers are experiencing, we can provide a consistent and exceptional level of service for our guests, which is evidenced by our record, high guest satisfaction scores since resuming sailing.

These factors combined will continue to allow us to further increase our prices on our multi-year strategy to achieving pricing parity to that of land-based vacation offerings.

Before handing the call back to Frank, I want to reiterate that while the global public health environment remains fluid, and we are not yet completely out of the woods, we are increasingly optimistic as we continue on our road to recovery.

We are now in a position to pivot to a more offensive approach and shift our attention to executing on our medium and long-term financial recovery plan, which is outlined on slide 13.

As part of this plan, we will remain focused on rebuilding our strong track record of financial performance, optimizing our Balance Sheet, and delivering on our attractive and disciplined growth profile. I look forward to updating you on our progress in our next call, but for now, I will hand the call back over to Frank to provide closing commentary.

Frank..

Thank you, Mark. Before we wrap up our prepared remarks, I'd like to provide an update on our global sustainability program, sales and sustained on slide 14. We are committed to driving a positive impact on society and the environment through the advancement of this program.

On the environmental front in addition to ongoing initiatives to reduce our greenhouse gas emissions rate, during the quarter, we made the first purchase under our new carbon offset program.

As a reminder, over the summer, we announced that we have committed to purchasing high-quality, verified harboring credit to offset the equivalent of 3 million metric tons of carbon dioxide over a 3-year period.

This is a measurable step in near-term emissions reductions, which will help bridge the gap in our decarbonization effort until new technologies become feasible. Our 3 million ton commitment is sizable, and we plan to increase offset purchases in future years that help us reach our goal of carbon neutrality.

We also strive to maintain a supportive and empowering workplace for our team members across the globe, who are without doubt our most valuable asset.

As such, we recently announced that we have indefinitely moved to a 4-1 flexible work model for our shoreside team members globally, which requires employees to work in office Monday through Thursday and remotely on Friday.

This new work model allows us to provide additional flexibility for our team members while also supporting our business goals, maintaining productivity and fostering the in-person collaboration and workplace culture that we are so proud of.

We are honored that this commitment to our team was recognized with our naming to the Forbes World's Best Employers list.

This recognition came after also being named to the Forbes America's Best Employers list earlier this year in which we ranked among the top 75 companies in the overall large employer category and among the top ten companies in the travel and leisure sector.

And while we are pleased with the progress we have made to date on our ESG efforts, we have no plans to stop here. We are committed to continuing to drive positive change and make a lasting impact on the world as responsible corporate citizens.

In addition, we remain focused on enhancing disclosures around our ESG efforts to ensure transparency and accountability around this critical topic for our key stakeholders, and I look forward to sharing additional details with you as we continue on our ESG journey. Turning to slide 15, I'd like to leave you with a few final key takeaways.

First, our return to service is on track and initial voyages have been successful on all fronts. Our health and safety protocols are working as intended, and we are seeing strong onboard revenue and high guest satisfaction scores.

And we are increasingly confident in our ability to execute on our phase voyage resumption plan with a target to have our full fleet in operation by April 1st of next year.

Despite headwinds in the third quarter related to the Delta variant, we continue to experience strong future demand for cruising, with positive booking and pricing trends, particularly for the back half of 2022, and throughout 2023. And lastly, we believe we are nearing an inflection point with the worst of the pandemic now appearing to be behind us.

Our future is bright and we look forward to the next chapter in our Company's storied history as we deliver in our industry-leading growth profile, which we expect while providing meaningful boost to financial results and shareholder value in the coming years. And with that Laurie, let's open up for questions..

Thank you, Frank. . In order to get as many people through the queue, please limit your time to 1 question. . Our first question comes from Stephen Grambling of Goldman Sachs. Your line is open..

Hey, thank you for taking the questions. I know you don't want to give too much color on 2022 yet, but I would love to just hear any guard rails to think about for load factor over the course of the year. And then maybe looking longer term.

If you compare and contrast the Company versus 2019, what's structural changes are you contemplating as it relates to their itineraries, marketing approaches, or otherwise as you assess consumer behavior and changes to your own operations? Thanks..

That's a mouthful, Steve. But I'll try to get through it. We thought we have perfected our itineraries, our deployment. And so I don't see major changes in how we deploy our vessels in 2022 and beyond, assuming that the world re-opens. Today as the world is in the process of reopening.

As you know, Asia is still primarily closed, but we believe that by the time our next Asia season begins, which would be about this timing '22, that it will be open. We do have new vessels coming online. Like I said, four over the next 2 years and we're eager to take possession of those vessels.

We said time and time again, we have many unserved and underserved market because we only have a fleet of 28 vessels. So we're anxiously awaiting the receipt of those vessels, which we believe will be accretive to the yields and certainly EBITDA and ROIC and all the financial metrics.

Turning to 2022, we have to start looking at '22 not as a year, not as a block, but sequentially. Certainly, a back half of '22 today is looking much better than the first half, partly because of the effects of the Delta variant on booking trends. And consumer behavior will affect Q1 more than Q2 and Q2 more than Q3.

But sequentially, 2022 is ramping up very, very nicely. We said in our prepared remarks, the back half of '22 today is meaningfully, and significantly better booked than we were at this time for 2019 or any year. So, we're way ahead in load.

And that gives us confidence to continue with the price discipline because today, not only do we have that meaningful load, but we're ahead in pricing. I feel very, very good about 2022, and I can make the same identical remarks about '23, ahead in load, meaningfully, and ahead in pricing. Q2 is a what I would really call the pivot quarter.

We see demand coming back strongly for '22.

But as you know, where we still have -- by the end of the year, we'll have 17 ships in the water, that means that we're going to introduce 11 vessels between January 1 and April 1, and those will be ramping up until second quarter will be a transition year -- a transition quarter where all the vessels will be an operation.

But we look -- we feel very good about Q2 as well. So, look, I'm feeling better than I have nearly 2 years. Advanced bookings are strong. One of the wonderful things about this industry is that we have incredible visibility into the future.

And because consumers are booking earlier than ever, as I mentioned in my prepared remarks, we have visibility into the -- and further into the future than we ever have. And that visibility is a very positive one..

Perhaps as a quick follow-up.

When you look at the strong booking trends in the back half of the year, can you provide any color on the composition between new to brand or new to cruise versus the existing custom base, and what's driving that?.

Look, I think it's not much different than what we said earlier. About 55% are repeat are slightly higher than normal. We've moderated our marketing spend. And so, when you moderate, you're marketing spend, you tend to go to that segment of the market that you know best that's the easiest and least expensive to go after, and that's our past guests.

So, we have a little bit of an elevated past guests, which is good. They know the brand, that's what you want. We're not getting ready to roll out our big marketing push in anticipation of ways to promote Black Friday, to promote Cyber Monday. And we have high hopes for a very, very good voyage season..

Fair enough. Thanks so much. I'll jump back in the queue..

And our next question is from Brandt Montour of JP Morgan. Your line is open..

Hey. Good morning, everyone. Thanks for taking my questions.

Frank or Mark, I was hoping you could provide a little bit more color on occupancy nearer term, perhaps maybe exit rate coming out of the third quarter, or maybe even better, just talk a little bit about the self-imposed caps and how you foresee your ability to raise those in the next, call it 2 to 5 months?.

Good morning, Brandt. Look, so third quarter was in line with our expectations. I think we had roughly 57% occupancy. As we said time and time and again, we're not in a race to just fill volume. We want to maintain price discipline and we're going to do that.

When we look ahead at the fourth quarter, we're going to have, I believe, 17 ships in operation, approximately 75% of our capacity. And as we continue in the first quarter, we'll have almost our entire fleet operational effectively by the end of the first quarter.

Rather than look at occupancy, I think a better metric is looking at the number of passengers that we're carrying. I think in the third quarter, we had about 60,000 of roughly passengers carried. That's going to increase to roughly 150,000, 175,000 in Q4, 250,000 to 300,000 in Q1, and then you're up back into the 0.5 million.

So, our occupancy is ramping up in line with our fleet roll out. Pricing discipline is important to us. We've said time and time and again, we want to protect that. We want to protect the long-term brand equity. So, we're going to do it in a thoughtful and rational manner rather than chasing that cheap customer just to gain that point of occupancy..

Thanks for that, Mark. That's helpful. And then as a follow-up, I think one of the themes of travel and leisure this quarter is just trying to figure out how long the pent-up demand can last and positively impact consumer spend.

Frank, I was wondering if you wanted to just give some thoughts on the onboard spend picture, and is there any reason why it doesn't eventually revert to 2019 levels? Anything structural you would call out as why it might settle above those levels going forward?.

In terms of your pent-up demand question, no one has a crystal ball. All I can tell you is the empirical evidence that we have based on bookings. People are booking out -- booking further out than ever before. That's the combination of the fact that we have introduced itineraries earlier than ever, though there were available for sale.

But also, people's -- the psyche of the consumer, they want to cruise, they want to travel. Maybe they don't want to travel this quarter or maybe even next quarter, and they're pushing it out further and further, hoping that the COVID situation improves drastically.

So, I do believe that we're going to continue having greater visibility than we had in the past. Then that will continue for some time. In terms of onboard revenue. Look, we’ve seen the consumer spending across -- lots of different sectors are up and it's no different onboard our vessels.

As you know, we lead the industry by a very wide margin in onboard yield -- onboard revenue yield, and that continues.

I cautioned in my prepared remarks that I'm not ready to declare victory in the sense that the very positive trends in onboard revenue higher than they've ever been before will continue and definitely and then you can put it in the permanent column because it's just too early, is the reason why people are spending so much because of the pent-up demand.

Is it because of cabin mix where at least in the third quarter and you'll see it in the fourth quarter as well, slightly elevated percentage of our cabins that have sold are in the upper categories, the suites, the balcony cabins? And one of the truisms of this business is those who pay more to get onboard pay or spend more once onboard.

But it also goes to the fundamental strength of our industry-leading bundling strategy. We believe in the bundling strategy.

We're doing more and more bundling across the three brands, and that gives people a very fresh wallet because the combination of them booking further out means they have even more time to refill that wallet and make it even fresher, if you will. And so, all these factors are contributing to the higher onboard spend. I hope it continues.

We'll do everything possible to fuel that continuation. But I just wanted to fill a little bit of caution to the wind that I'm not ready to the chalk it up as a permanent shift, if you will, or a permanent source of revenue above and beyond what we've always led the industry on..

And Brandt one just -- one piece of additional color there is we are getting smarter not only what the bundling. But our marketing systems around the pre onboard sell. We're getting smarter throughout the booking cycle. We started really working on that heavily a couple of years ago and we started to see some fruit bearing on that in 2019.

Again, that's just going to be another propellant to help us. But I think as Frank has said, we'd be naive to think that there's not going to be some settling..

Excellent. Thanks for the thoughts, guys..

And our next question is from Vince Ciepiel of Cleveland Research. Your line is open..

Thanks for taking my question. I'm just curious. You are the moving pieces as it relates to occupancy ramps and sounds like pricings quite strong, you alluded to some cost pressures in the business, fuel prices are up. Curious on the other side of this exiting in the next year, but hopefully things are more back to normal.

What do you think the margin opportunity is within the business going into even '23, and if you think efficiencies gained can put your margins higher than they were pre -COVID? Thanks..

fuel, commodities, food. But we've got that pricing power that is translating into high yields. So we believe that in late '22, '23 forward, our margins should improve. And events on those on the new capacity that comes online. Generally speaking, is we're bringing new capacity. It tends to be anywhere from 10% to 15% more efficient on a unit basis.

So that inherently provides some tailwind for us as we move forward and with our growth profile, I think we can -- there's some tremendous opportunity there..

Great, thanks. And as follow-up to that, I thought , were interested losing relative to the land-based alternatives. If you look at hotel leisure prices were a good amount ahead of 2019 levels, curious if there's any way to quantify that gap.

Do you see it being a significant opportunity, 10%, 20% of value relative to land-based or any way to qualify moving towards parity of land-based and what they can mean for yield?.

Look, I think there's a great opportunity and you have to do it almost brand by brand. You want to compare a region to the cruise to stay at a Four Seasons Hotel, you want to compare a Norwegian Cruise to perhaps a share into it.

But I can tell you that all the internal analysis that we do when you combine the total cost of a vacation, transportation, accommodations, your meals, your drinks, entertainment, in any location a cruise vacations value is just off the charts.

And while we want to continue offering consumers that great value, which is why our ships are always full -- the industry ships are always full. Hotel chains, can't say that their hotel rooms are always full, but we can't because of the value proposition, the way we market. And therefore that's where the opportunity is.

The opportunity is to claw back some of that value that we're giving away and still provide consumers with a very attractive vacation experience..

And every dollar we compare we can claw back in that gap. The vast majority that drops directly to the bottom line. So it really becomes this really bottom-line economic driver pretty quickly. So we're very So, focused on that..

Thanks for all the color..

And our next question is from Steve Wieczynski of Stifel. Your line is open..

Hey, guys. Good morning. So Frank I'm going to ask you another question about load factors and kind of getting the path back to normalized load factors that you talked about the third quarter of next year. I'm just wondering if you could elaborate on that a little bit more.

It seems like the most debatable vaccine demographic, so to speak, is obviously around kids. Meaning that it seems a lot of parents are not going to get their kids vaccinated.

So I guess the actual questions here is, once this CSO is eventually relaxed in January, do you see yourself starting to potentially relax that vaccine mandate for kids in order to get your load factors back to normal, or that just won't be the case? And if that's not the case, maybe help us bridge that gap..

Yeah. This -- I don't -- we're going to announce very, very soon that we have indefinitely extended our 100% vaccination requirement. I think that today that continues to be a competitive advantage to our 3 brands.

I think that our 3 brands emerge from this COVID crisis in a much better standing in the consumer's eye because of our strong early stands on health and safety, vaccinations, etc., and it's something we want to build on. The children's vaccination for 5 to 11 year old were just announced yesterday.

My understanding is that likely sometime in Q1, the same vaccination approval will be given for up to four-year-old. So I do believe that the target market that cruises is more likely than general population to number one be vaccinated and then we will see.

Time and time again where a past cruiser or a one who intends to cruise is significantly more vaccinated than those who don't intend to cruise. So it's a bit of a self-selection situation. I believe that will translate also into children.

But we're not going to sacrifice the health and safety of anyone for the sake of adding a point or 2 or 3 or whatever the number is to load. So we will continue mandating a 100% vaccination as long as the science dictate that that's what we ought to do..

Understood. Thanks for that. Second question would be around direct bookings. And it seems to us from the outside that the direct bookings are -- have moved a good bit higher relative to pre -pandemic levels.

And I'm wondering if that's kind of what you guys are seeing as well and maybe what you think is potentially driving that? And is this something that could change long-term booking patterns or is it just something else that's causing uplift right now in direct?.

we're -- we've seen it as well. We're hoping that the travel agent community comes back in full force. They've also been out of work, and unlike the big public cruise companies that can go to Wall Street and raise billions of dollars, these are mostly smaller businesses and can't. And so I'm praying and hoping that they do come back in full force.

But at the end of the day, we have to fill our vessels in any way we can, and we do offer consumers multiple choices of how to engage with us. We prefer the travel agency channel. It is our biggest channel. It is coming back.

We've seen improvements sequentially quarter-by-quarter in terms of the percentage of our business that is being booked by travel agents. And I do believe that once our fleet is back in operation, along with that of our peers, that they will come back.

But if not, we have adapted, we are prepared, we have the technology, we have the wherewithal to take the bookings..

Okay. Great. Thanks, guys. Appreciate the color..

And our next question is from James Ainley of Citi. Your line is open..

Great. Thanks for taking my question. Could I ask you maybe for some color on the brand performances? I guess should be attracting to suggest that the higher-end brands have been garnering much stronger interest.

Is that something you're seeing or are you seeing that demand spreading out the stack down the brand scales, please?.

Well look, the upscale brands, the luxury brands, typically booked further out than the contemporary brands because their itineraries are longer, more exotic in there for the planning process.

And so, we do have more visibility into -- especially into 2023 on the Ocean and the Regent brands than we do in Norwegian, but we're seeing steady progress throughout the ecosystem.

The Norwegian brand customer coming back and booking as they normally would book, except that for second half of '22 and in all '23, that booking volume is better than ever.

And so we're very pleased with that, that the demand is such that consumers want to cruise, and as I said earlier, everything else being equal, they feel more confident being able to cruise in Q3 next year, than in Q1 for example.

Because of the ever-present threat of the COVID and if COVID starts to fade into the background, all the experts have said COVID is not going to go away one day. It will pan out from being a pandemic to an epidemic, and we'll all have to learn to live with it. We may have to take COVID booster shots every year like the flu.

But I do -- I am encouraged to see how, in different parts of the world and I traveled internationally for the first time in the last few weeks. I went to Italy, I went to the UK, went to New York for the first time in almost 2 years, how people have adapted.

And like I said earlier the cruising population, the target cruiser is a better versed individual than the average population. They can afford to cruise, they're better vaccinated. And so all those points, I'm encouraged that again, the pandemic is not going to go away or the COVID is never going to disappear. But we will learn to live with it..

Thank you. And as a follow-up, can I ask about how you're handling the sort of operating restrictions.

Are you able to sail your ships to the majority of places you want to go to? And there's the reason I'm asking is a loyal Regent Seven Seas customer might come back for one cruise, but then it's looking for something new and something different and but do you feel that you can offer enough variety given the kind of state of focal restrictions as you see them today?.

We are -- the answer -- the short answer is yes. The longer answer is we're staging the return of our vessels not haphazardly but in a very measured way based on the availability of ports.

And so, by the time that our entire fleet is operating, which will be very early in Q2 on April 1st, we believe that the seasonal nature of the cruise industry being heavily in Alaska and Europe beginning in Q2 throughout Q3, that the world will be open.

By the time we get to Q4 of '22 and you start sailing to exotic places throughout Asia, South America. We believe that by then the closure that we are seeing today will abate. And so yes, itineraries are a big deal.

It's one of the secret sauce ingredients that make our Company the highest yielding Company, because we go to high yielding itineraries with wonderful vessels that have a lot of cabins that are with balconies and suites, which as I said, many times is the second driver of yields after itinerary.

We believe all those pressures that we're seeing today will subside by the time that our operations are back in full..

Great. Thank you very much..

You're welcome. Operator, I think we have time for 1 more question..

Yes. Our last question is from Robin Farley of UBS. Your line is open..

Great, thanks. I wanted to ask a balance sheet question. You mentioned in the slides before return to paying dividends that you want to focus on the balance sheet. I'm just wondering if there's a targeted leverage range you're thinking. And then related on the balance sheet is, I'm curious why the billion-dollar facility undrawn.

You're so close to positive cash flow and you have no big maturities in the next 2 years. I'm just curious behind setting that up. Thanks..

Good morning, Robin. Yeah, first on covering the targeted leverage. Pre -pandemic we had said our goal was to get to that 2 1/2, 2 3/4 range. And we haven't lost sight of that. But I think when we look at the near and mid-term, our first goal is going to be to get, "let's get below 5, " and then we're going to target to get below 4.

So we're going to continue to chop it down year-after-year with accelerating cash flows and get that back down into that 3, 4 times. It's going to take some time to do that, but we're focused on it. We've done it before. We know how to do it, there is management team. So we're confident we can get there. We have the ability in the business.

In terms of the billion-dollar commitment look, I think as we look forward, I stated in my remarks that we're now going into a more offensive approach around our balance sheet management.

What this does is really is we look at it as a very low cost but yet effective backstop rather than us having to necessarily go out and commit to permanent debt and/or permanent further dilution.

I -- it's an extremely low-cost measure to have on the books which will allow us independently of that, to start taking some balance sheet action and not have to worry about the broader picture. Again, we do not intend to draw on it. Our intention is not to draw on it. We have the facility there as part of our larger game plan.

But in the event we need to draw on it or something in that nature. Most likely, or more than likely, we would go out to the public markets and go after some papers that is much more cost-effective. So, again, in balancing all of our needs, we think this provides a backstop without committing us for any long-term additional debt dilution.

And look one additional thought is that we've seen what Delta does and we want to make sure we're always been in a position to be ahead of some of the unknown. So again, this is more of us going to an offensive approach in terms of our balance sheet on a go-forward basis..

Okay, now great. That makes sense. Thanks. Can we just -- one final thing. Are you back to issuing future cruise credits again, when you have to cancel the cruise, which I realize there's not probably not --.

No. We stopped that, I believe in the -- either at the end of 2020 or the first quarter -- in the first quarter of 2021. Actually, much earlier than that. I'm sorry, mid-2020, I think it was. So we have not issued future cruise credits. I want to say probably second quarter - ish of 20..

Okay..

I might be off their slightly, but generally speaking, that was the timeframe..

Okay. Great. Thank you..

Thank you, Robin. And thank you, everyone for your time and support today. We will be available to answer any of your questions a little later on. Have a great day and stay safe..

Thank you, everyone. Bye bye..

And this concludes today's Conference Call. You may now disconnect..