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NCLH Reports Fourth Quarter and Full Year 2018

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Norwegian Breakaway

Norwegian Cruise Line Holdings today reported financial results for the fourth quarter and full year ended December 31, 2018, as well as provided guidance for the first quarter and full year 2019.

“The team at Norwegian Cruise Line Holdings delivered a breakout year in 2018, once again generating industry-leading record financial performance.  Strong global demand for our portfolio of brands, the successful, record-breaking introduction of Norwegian Bliss and the flawless execution of our demand creation strategies drove our fifth consecutive year of double-digit earnings per share growth,” said Frank Del Rio, president and chief executive officer.  “Building on this momentum, we entered 2019 in the best booked position in our Company’s history, with pricing above prior year’s record levels.  The strong start to this year’s WAVE season, coupled with our moderate in-year capacity growth and our solid booked position across our three brands, has us well-positioned to continue driving price throughout the year and into 2020, where we will also benefit from the first full year of sailings from Norwegian Encore and the addition of Regent’s Seven Seas Splendor.”

Highlights:

  • The company generated GAAP net income of $954.8 million or EPS of $4.25.  Adjusted Net Income was $1.1 billion or Adjusted EPS of $4.92.
  • The company beat full year Adjusted EPS expectations by $0.07, and surpassed the midpoint of its initial February 2018 Adjusted EPS guidance by $0.37, despite a $0.07 impact from unfavorable fuel prices.
  • Total revenue increased 12.2% to $6.1 billion. Gross Yield increased 3.4%.
  • Net Yield increased 3.5% on a Constant Currency basis, exceeding the Company’s initial February 2018 guidance by 150 basis points.
  • Achieved record gross Adjusted EBITDA Margin of 31.3%.
  • Adjusted ROIC increased to 11.0% from 10.1% the prior year.
  • Reached year-end Net Leverage target of low three times.
  • Authorized $1 billion, three-year share repurchase program and embarked on meaningful capital returns to shareholders by opportunistically repurchasing approximately $665 million shares under previous and current program. Approximately $600 million remains available under current authorization.
  • Record-breaking introduction of Norwegian Bliss, the first cruise ship specifically designed with features and amenities for the ultimate Alaska cruising experience.
  • Broke ground on new, state-of-the-art passenger terminal at PortMiami.

Full Year 2019 Highlights

  • Company’s 2019 booked position at all-time high entering the year and at higher pricing.
  • Net Yield growth guidance on a Constant Currency basis for full year and first quarter 2019 of 3.0% to 4.0% and approximately 2.5%, respectively.
  • Norwegian Joy to join record-breaking sister ship, Norwegian Bliss, in Alaska in spring 2019.
  • Norwegian Encore, the fourth and final ship in the tremendously successful Breakaway Plus Class, will join the fleet in the Caribbean in the fourth quarter.
  • Company reaffirms expectations to achieve its Full Speed Ahead 2020 targets provided at its 2018 Investor Day.

Full Year 2018 Results

GAAP net income was $954.8 million or EPS of $4.25 compared to $759.9 million or $3.31 in the prior year.  The Company generated Adjusted Net Income of $1.1 billion or Adjusted EPS of $4.92 compared to $907.7 million or $3.96 in the prior year.  Strong growth in 2018 including an increase in GAAP EPS of 28.4% and Adjusted EPS of 24.2% follows strong 2017 growth of 19.1% and 16.1%, respectively, further demonstrating the Company’s continued underlying earnings power.

Revenue increased 12.2% to $6.1 billion compared to $5.4 billion in 2017. This increase was primarily attributed to an 8.5% increase in Capacity Days due to the delivery of Norwegian Bliss in April 2018 and Norwegian Joy in April 2017, as well as strong organic pricing growth across all core markets.  Gross Yield increased 3.4%. Net Yield increased 3.5% on a Constant Currency basis and 3.7% on an as reported basis.

Cruise operating expense increased 10.2% in 2018 compared to 2017, primarily due to an increase in Capacity Days.  Gross Cruise Costs per Capacity Day increased 2.7%.  Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 2.6% on a Constant Currency basis and 2.9% on an as reported basis.

Fuel price per metric ton, net of hedges increased to $483 from $465 in 2017.  The Company reported fuel expense of $392.7 million in the period.

Interest expense, net was $270.4 million in 2018 compared to $267.8 million in 2017. The increase in interest expense primarily reflects additional debt incurred in connection with the delivery of Norwegian Bliss and Norwegian Joy in the second quarter of 2018 and 2017, respectively, Project Leonardo financing costs, and higher interest rates due to LIBOR rate increases. The increase in interest expense was partially offset by the benefit from the October 2017 full redemption of the 4.625% Senior Notes due 2020 and the benefit from the partial redemption totaling $135 million of the 4.75% Senior Notes due 2021 in April. This year’s results included a non-recurring $6.3 million redemption premium and write-off of fees in connection with the partial redemption. 2017 included losses on extinguishment of debt and debt modification costs of $23.9 million.

Other income (expense), net was income of $20.7 million in 2018 compared to expense of $10.4 million in 2017. Other income in 2018 was primarily due to gains on foreign currency exchange.  Other expense in 2017 was primarily due to losses on foreign currency exchange.

Fourth Quarter 2018 Results

GAAP net income was $154.6 million or EPS of $0.70 compared to $98.8 million or $0.43 in the prior year.  The Company generated Adjusted Net Income of $188.8 million or Adjusted EPS of $0.85 compared to $156.8 million or $0.68 in the prior year.

Revenue increased 10.5% to $1.4 billion compared to $1.2 billion in 2017.  These increases were primarily attributed to the addition of Norwegian Bliss to the fleet, along with strong organic ticket pricing growth across all core markets and robust onboard spending.  Gross Yield increased 3.0%. Net Yield increased 4.7% on a Constant Currency basis and 4.2% on an as reported basis.

Total cruise operating expense increased 8.5% in 2018 compared to 2017, primarily due to an increase in Capacity Days.  Gross Cruise Costs per Capacity Day increased 1.8%.  Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 3.6% on a Constant Currency basis and 3.4% on an as reported basis.

Fuel price per metric ton, net of hedges increased to $496 from $460 in 2017.  The Company reported fuel expense of $104.4 million in the period.

Interest expense, net decreased to $68.2 million in 2018 from $84.3 million in 2017. In connection with the redemption of senior notes and refinancing of certain of credit facilities, interest expense, net included losses on extinguishment of debt and debt modification costs of $23.9 million in 2017.

2019 Outlook

“2018 marked a key inflection point for the Company as we have made significant progress towards achieving our Full Speed Ahead 2020 Targets.  Our cash generation continues to accelerate and we remain keenly focused on returning meaningful capital to our shareholders, already returning approximately one-third of our three-year targeted capital distribution,” said Mark Kempa, executive vice president and chief financial officer of Norwegian Cruise Line Holdings Ltd.  “We are confident in our outlook for 2019 and beyond, and have built upon our foundation for measured capacity growth by enhancing our growth profile through 2027, with announced orders for all three of our award-winning brands, now totaling eleven vessels, enabling us to expand our presence both globally and domestically and further diversify our product offerings to continue driving outsized shareholder returns.”

2019 Guidance and Sensitivities

In addition to announcing the results for the fourth quarter and full year 2018, the Company also provided guidance for the first quarter and full year 2019, along with accompanying sensitivities. The Company does not provide guidance on a GAAP basis because the Company is unable to predict, with reasonable certainty, the future movement of foreign exchange rates or the future impact of certain gains and charges. These items are uncertain and will depend on several factors, including industry conditions, and could be material to the Company’s results computed in accordance with GAAP. The Company has not provided reconciliations between the Company’s 2019 guidance and the most directly comparable GAAP measures because it would be too difficult to prepare a reliable U.S. GAAP quantitative reconciliation without unreasonable effort.

Fiscal realities now tempering cruise lines’ China infatuation

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The Norwegian Joy, built for the Chinese market, will move to Alaska next spring.

The Norwegian Joy, built for the Chinese market, will move to Alaska next spring.

Wall Street has long questioned whether the international cruise industry’s romance with China is the beginning of a lifelong affair or just one of those things. While it is still too soon to call, that relationship in recent months has shown signs of cooling.

The latest evidence is the decision by Norwegian Cruise Line to pull its year-old Norwegian Joy out of China, where it was sent in 2017 to cruise year-round.

The Joy, which was custom-built for the China market, will move to Alaska in April, then remain on the West Coast through the winter of 2020.

In its place, Norwegian will send the 20-year-old Norwegian Spirit to cruise from Shanghai seasonally starting in summer 2020. That would leave a gap of more than a year when the cruise line will be altogether absent from China.

While the move is welcome news for U.S. travel agents and will put Norwegian’s two newest ships in Alaska next summer, it seems to write off much of the investment that Norwegian made to enter China.

Norwegian president Andy Stuart said the switch is more a reflection of hot demand for Alaska than it is discouragement with China.

“We’re still optimistic about China,” Stuart said. “China’s a good market. We introduced Bliss in Alaska, and we’ve seen a tremendous strength and a lot of excitement around the introduction of a new ship to the Alaska market.”

He added: “We’re seeing such strength in Alaska, good strength in Europe, and the beauty of our industry is that assets are flexible. So it’s really right-sizing the market as we’re seeing demand today.”

Stuart said the recent tension in Sino-U.S. relations, with each side imposing new tariffs on goods imported from the other, had no bearing on the decision to move the Joy out of Asia.

But even before that, cruise lines were not enjoying the smooth sailing they had once hoped for in the world’s most populous country.

The Norwegian Joy arrived in June 2017 in the wake of the installation of a U.S.-provided defensive missile system in South Korea. The system gave Chinese military officials heartburn, and they moved to punish South Korea economically, in part by ending permission for China-sourced cruises to visit Korea.

That left cruise lines cutting the prices on their charter contracts with Chinese travel wholesalers.

Still, officials at Norwegian Cruise Line Holdings (NCLH), parent of Norwegian Cruise Line, remained upbeat. Asked in a February conference call which world markets were the least robust, CEO Frank Del Rio said that all were good enough.

“It’s one of those few times in my tenure, in the 25 years I’ve been in the industry, that I wouldn’t move any of my ships. I like where they are,” Del Rio said.

But he went on to add he wouldn’t necessarily put the second ship in China.

“There are still challenges in China,” Del Rio said. “I don’t think China’s hitting on all cylinders like it can.”

He went on to reel off the names of a half-dozen unserved or underserved markets in North America, among them Los Angeles and Alaska.

The Joy news cheered Wall Street. NCLH shares rose 5.4% on the day of the announcement, with other cruise companies seeing smaller increases. In an investor note, Citigroup analyst Greg Badishkanian said Norwegian’s move “should help right-size capacity in China.”

Analyst Robin Farley of UBS Group said in May that yields for the Joy in China this year were likely to be 25% below the other Breakaway-class ships, such as the Norwegian Escape. She said it would boost Norwegian’s earnings to move the ship to North America.

The news was also greeted warmly by travel agents.

“It’s really exciting to have new hardware and new experiences for our customers in Alaska,” said Ashley Hunter, vice president of business development at Avoya Travel, which has its operations office near San Diego.

Agents on the West Coast have been starving for up-to-date inventory, and having the Joy for a year, sailing Mexican Riviera cruises from Los Angeles in the winter of 2019-20, will expose more people in Western states to the brand.

Many cruise lines cut back their already small presence on the West Coast after the 2009 swine flu outbreak and unrest in Mexico, Hunter recalled, but she said the trend is starting to reverse.

“I think we’re starting to see a movement back over to the West Coast,” Hunter said, citing new Carnival Cruise Line capacity in Long Beach and San Diego in addition to the Norwegian Joy announcement.

Conversely, the urge to add capacity in China is ebbing.

In 2015, Princess Cruises said it would devote the new Majestic Princess to year-round cruising in China and customize it to Chinese tastes, even giving it a Chinese-language name. But in September, the 3,560-passenger ship will begin an eight-month deployment in Australia.

The brands with a remaining multi-ship commitment to China are Royal Caribbean International and Carnival Corp.’s Costa Cruises.

Stuart said Norwegian’s size relative to the two other big cruise companies gives it more flexibility.

“We’re not the largest brand,” he said, “and the size of our fleet allows us to be a little more nimble in making sure you capitalize on opportunities where you have overperforming markets.”

Norwegian plans to spend $50 million on the Joy before it arrives in Seattle to make it a virtual twin to Bliss, Stuart said. But it plans to keep the hull art by Chinese artist Tan Ping of a large red phoenix, a symbol of beauty and good luck in Chinese culture.

Stuart said that while it might strike a note of discord with some in Alaska, others will view it differently.

“It feels like a beautiful piece of art on the side of the ship,” he said.

“I’m not sure if everybody started from scratch and said, ‘Look at the art on Norwegian Joy. What country does it represent?’ I don’t know that everyone would immediately say China,” Stuart said.

Norwegian Changes 2019-2020 Itineraries, Pulls Joy From China

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Norwegian Joy
Norwegian Cruise Line has announced changes to its 2019 and 2020 itineraries. Among these, the Norwegian Joy is leaving China to join the Norwegian Bliss, sailing seasonally in Alaska in the summer 2019, and will offer Mexican Riviera and Panama Canal voyages during the winter 2019-2020. The Norwegian Spirit will replace the Joy in China in 2020, leaving Norwegian out of the Chinese market for one year, and the Spirit will only sail there on a seasonal basis.

The Pearl, which is in Alaska now, will sail to Europe as the cruise line’s sixth ship in the region in summer 2019, while the Jade and Jewel will expand Norwegian’s presence in Australasia in winter the 2019-2020 winter season.

The Joy repositions to Seattle in April 2019 to offer seven-day voyages to Alaska, replacing the Pearl as Norwegian’s third ship in the region, joining the Bliss and Jewel. Prior to her arrival in Seattle, the Joy will undergo approximately $50 million in work to match her sister ship, the Bliss.

When she goes to Europe in 2019, the Pearl will be sailing from Amsterdam as well as Civitavecchia, Barcelona and Venice.

With the Joy on the West Coast, the Jewel will go to Australia, New Zealand and the South Pacific, sailing from Honolulu, Papeete, Sydney, Auckland, Singapore, Hong Kong and Yokohama.

In addition, the Jade will offer sailings throughout Southeast Asia departing from Singapore and Hong Kong for the 2019-2020 season.

Norwegian Cruise Line said it remains committed to serving the Chinese cruise market. Prior to her 2020 arrival in China, the 1999-built Spirit will undergo a previously scheduled bow-to-stern revitalization as the final ship to undergo enhancements under the Norwegian Edge® fleet refurbishment program.