NCLH Reports Fourth Quarter and Full Year 2018

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.

Cruise earnings as an economic outlook

Image result for cruise companies logo
Carnival Corp. issues year-end earnings every December and looks ahead to the coming year. In some ways last year’s report looks just like this year’s. For example, in 2017 bookings were ahead of the prior year in both occupancy and price, which was also true of the just published report.

But what jumps out at me was that last year, Carnival was wrong both on how strong its pricing would be and how much costs would rise in 2017.

In December 2016, Carnival projected that its net yields from revenue would rise 2.5% in 2017 and cruise costs (excluding fuel) would rise 1%.

The actual results were a net yield increase of 4.5% and a rise in costs, measured to remove the effect of currency changes, of 2.7%.

That would appear to suggest a robust business, and perhaps the prospect for continued price and cost increases in 2018, as the extraordinarily low inflation of the past few years begins to heat up.

The Federal Reserve, which controls the money supply and thus interest rates, raised its target rate this month for short-term rates by one-quarter percent. Although it said inflation in the short term is below its 2% target, it sees the prospect of 2% inflation emerging over the “medium-term.”

In its December statement, it said “economic activity has been rising at a solid rate and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.”

The Fed will get a new chairman in February, and the economy will get at least a short-term boost from the comprehensive tax cut approved by legislators in the waning days of 2017.

All of which suggests that the current economic weather pattern of low interest rates, subdued inflation, modest price increases and little or no growth in wages may be on the brink of a change.

For cruise suppliers, that could mean higher nominal prices, but a decline in real revenue and income after inflation takes effect. Cruise retailers, while not immune from inflation, would benefit from higher nominal prices on which their commissions are based.

With higher inflation comes the risk of recession as policy-makers try to cool increasing prices by quickly escalating interest rates. That seems to be nowhere on the horizon. And yet, the expansion that began in mid-2009 already is the third-longest in U.S. history and if it continues into the second half of 2019 would exceed the 10-year record set by the 1990s economic boom.

It doesn’t feel to me like we’re in the midst of record-setting prosperity. Nevertheless, let’s hope as we head into 2018 that cruise prices and the economy stay in a Goldilocks zone – not too hot, not too cold – for the foreseeable future.

Royal Caribbean’s increase in on-board revenue attributed to cruise ship revitalizations

Royal Caribbean’s increase in on-board revenue attributed to cruise ship revitalizations

Royal Caribbean reported third quarter financial results today and the big “star” of the results was the onboard spending, with a 7% increase overall.  So what is Royal Caribbean’s secret?  They think it’s all about the revitalization program.

During the financial results conference call, Royal Caribbean Chief Financial Officer Jason Liberty pointed to a few key factors that are part of the fleet-wide renovations to why the company is seeing better guest spending onboard their ships.

  • Specialty Restaurants
  • Casino
  • Internet
  • Unlimited alcohol packages
  • Shore excursions

“We benefited from new onboard venues introduced as a result of our revitalizations, and we saw further strength in spending from our U.S. customers, which helped generate improvement in gaming, beverage, specialty dining and shore excursions,” Liberty said during the conference call.Royal Caribbean CEO Adam Goldstein elaborated on how the company is looking to get more onboard spending, “So as I believe we mentioned earlier, gaming, beverage, shore excursions, retail and also some of the smaller revenue streams, internet has been doing well for us, which we wanted to see because we made a significant investment in, I think, 7 or 8x more bandwidth to the ships this year, and that seems to be paying off.

So a number of the investments that we have already made, we would expect to continue to pay dividends and revenue growth into 2014 and beyond. And we continue to look under every stone for onboard revenue opportunities that don’t conflict with the satisfaction of the product offering.”Basically, guests are spending more money in all these aspects and most of these venues are areas of the cruise ships that get upgraded or added as part of the revitalization program.  When each ship is refurbished, more restaurants are added and wifi is spread out to more areas across the ship. Add to that the new drink packages and Royal Caribbean is offering its guests more opportunities to spend money.