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.

I'm sorry, I had you on mute. 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 have 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 one could ever imagine 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, our entire 28-ship fleet would still be at a complete standstill, moored in ports around the world waiting to set sail again. What we are experiencing as a result of the pandemic is unprecedented and extreme and uncertain, and it will surely be chronicled as one of 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 itineraries, changes to the onboard experience, or 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 roadmap 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 for 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, along with 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 shares 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, like 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 public health, infectious disease, biosecurity, hospitality, and marine operations, as 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 and 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 a 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 that cruising is unique in that it encompasses several experiences in one vacation, 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 innovations 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 two characteristics in which our company and our industry excel. 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 that the work of these changes, while being mindful of how those changes may impact guest satisfaction and the overall cruise experience, will ultimately benefit us. If you think about cruising 10, 15, or 20 years ago, the experience was different than it is today. Think of how we've introduced freestyle cruising and how much has changed since then, with innovations such as our groundbreaking electric Go-Kart race tracks and Galaxy Pavilion. I guarantee you that 5 to 10 years from today, things will also be different. A concurrent step in our roadmap 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, terminals, crew operations, and other considerations for these new procedures. In certain parts of the world where the spread of the virus has lessened, cruising has taken a critical first step in resuming operations. Regional operators are sailing both large and expedition-sized 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. 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 an even 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. The third step in our roadmap 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. Once we secure this approval, we can augment our marketing and demand generation investments and do what we do best: execute 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. Lastly, we are focused on our roadmap 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 revisit something. When you mentioned the ship operating expenses and the revenue required to cover those, did I understand correctly? Are you saying that for an individual ship, it accounts for 40% of net revenue, and to cover your corporate overhead, it would be 60% of typical net revenue levels? Is that based on what I missed and is that reflective of pre-COVID levels? Is that 2019? That's where I'm feeling a bit confused.

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 others might 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 distribution network. It seems that a lot of smaller or mom-and-pop agencies might be forced to shut their doors, if they haven't already. How do you see the travel agent network looking over the next 5 or 10 years? Could this potentially force the hand of customers to start booking a little more direct with you?

Look, it could happen. We've seen smaller mom-and-pop types of travel agents already folding their tents, even larger travel agent distributors furloughing employees, no different than the cruise lines that are also 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 this given time, given at least the 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 have been casualties so far in the cruise space. So I think on the margins, at least in the short term, when sailings resume, you might see a disproportionate amount of business coming through direct channels compared to where we were seeing prior to the crisis. But I think over the long term, 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. If anything, over the years, they've gotten stronger. So maybe around the margins at the beginning, but I think longer term, you're not going to see much change.

Okay. Can I squeeze one more quick one in for you, Frank? You have the youngest fleet in the industry. I think you only have a handful of ships over 20 years old. But you've seen some of your competitors starting to retire or scrap ships. Do you start thinking about taking similar actions, or do you continue to believe you need more capacity over time and 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, had $150 million invested in it as of mid-February, making it as good as new. We love our capacity. We are the smallest of the big three. 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. 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. So no, we absolutely have no plans to divest any of our vessels.

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? There have been several lines recently that have tried to sail and have had issues with COVID. 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 as 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 well. We haven't had a repeat of what happened earlier during the pandemic crisis. In terms of where we stand with the CDC, I think the next 60 to 90 days are going to be very, very key. As you know, the CDC requested a request for information that is 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 its first initial set of recommendations, which we, along with Royal, will look to implement in our return to sail protocols that we will submit around the same time as the RFI. The CDC will have a lot of information to comb through and digest and respond to, let's say, beginning in Q4. We'll see how they react to it. We're confident that our panel will come up with key science-based recommendations that the cruise industry can implement, which should impress the CDC. We hope that during the same time, the prevalence of the pandemic will subside to more manageable levels, and that the combination of the two will lead to a speedy return to service.

And just, Mark, on your balance sheet, can you remind us if you have any more capacity or if you have secured debt capacity? Are there any limitations on how much unsecured or convertible debt you could issue?

Yes. From a secured standpoint, Felicia, we are at our capacity, given some of the negative covenants we have on our 3.6% notes. However, we believe there is additional capacity on an unsecured basis, as well as through additional convertibles and common stock. We are in active discussions with our various investment banks and are always looking at additional options should we need them. We do have options available should we need them. 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 in this case. We will continue to evaluate all options that we have.

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. If you turn marketing back on and start drumming up demand, can you give us a sense for, if you're sailing in earnest in Q2, at what point we would 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 market philosophy is to market to spend — not taking no for an answer. We don't like discounting. We have not discounted. The good news is that industry-wide, 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. Given the limited marketing spend, I'm astonished at how well bookings are coming in, considering the industry is suspended. There is not much positive news flow. Looking forward, cruise lines have now suspended sailings through October 31 and in some cases through the end of the year. I believe that we, in the cruise industry, enjoy a very loyal customer base. Across our three brands, over 50% of our guests on any given cruise are repeat customers. We're going to lean on them heavily; they want to cruise again. Depending on when you think the restart is, there are going to be 15 million to 20 million people who were not allowed to cruise this year. There’s a lot of pent-up demand where I can't give you a specific date for when we think the booking window will normalize. 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 whatever you have to do to pack the ship. In our case, we market to fill. We think that's the best strategy, and it has proven its mettle time and time again. I can't give you a specific date, but I don't think it will take that long.

I appreciate the adjusted net yield and pricing bit of information you provided. As you look to other industry participants as we start to get into prime booking season for Q2 and '21 and beyond, are you seeing anyone else getting more promotional with pricing?

I really haven't seen that. 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. Logic tells you that business is soft not because of business fundamentals; business is soft because you can’t sail. In spite of that, business is relatively strong. If you had told me that we were going to be facing these circumstances, and I would be answering, "Frank, would you be taking any bookings?" I would have laughed at you. I would have said, "Of course not, who would book? It's crazy." But people are booking. People are confident that we're going to come back. They want to cruise again. It's a tremendous vacation experience, a great value. This is temporary; the question is how temporary. For those who have the financial means to stay in the game, they will reap the rewards later on.

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

I wanted to focus a little bit on your exposure to U.S. source. As you think about starting up sailings in key markets for you, what have you seen over time in terms of guest willingness to switch over itineraries if you're not rolling the whole fleet out at once and going a handful of ships by month? How willing are guests to switch ships?

Well, it all depends 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 activated to one that is, is a relatively easy phenomenon. It's more complicated if you're asking someone who booked a 4-day cruise to the Bahamas to take a 12-day cruise to Europe. So a lot depends on the start dates, and what we're talking about. For example, in Alaska, we have four vessels in the region. It's relatively easy to move guests within a region and itinerary from, say, Norwegian Joy and Norwegian Bliss, that are both operating 7-day cruises in Alaska. The only difference is one departs on a Saturday and one on a Sunday. Over time, we’ve seen customers willing to make those kinds of changes. You may have to incentivize with a shipboard credit or a cabin upgrade to entice them. Generally speaking, though, it’s not an overwhelming obstacle.

Great. I wanted to circle back on the 60% breakeven. Not to get too deep into the weeds here, but did you mention that that would cover the pre-crisis 2020 overhead? Haven't you made changes to that as you flex down costs, some of which I think would maybe continue into 2021? You've talked about the chance of pricing holding up well because demand has exceeded supply of available sailings for next year. Have you factored that into the margin and breakeven levels?

Yes, Vince, this is Mark. What we tried to do is keep it on a fluctuating basis. You're absolutely right that we have lowered our cost base. In fact, we've lowered our operating expenses quite a bit, more than 60%. We provided those figures on either a 2019 or 2020 expectation base to give it a solid foundation. You are correct; 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. There will be opportunities, but that was the basis for providing it at those levels.

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 surprising 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 booking coming from drivable locations to the ports, or are they flying? Is there anything positively surprising you? And then, second, are you able to work with airlines to create some kind of package promotion to take advantage of an opportunity there?

In terms of the airlines, they've lowered their rates substantially from their normal level, so there are good prices, and hopefully consumers will take advantage of them. Your first question is more important, and I've mentioned that in my script. We've not seen any major shift in consumer behavior. We have not altered our itineraries, so the same ones available before the pandemic for 2021 are still available today. By definition, this means that they are not favoring close-to-home cruising or avoiding Asia or Europe, because our itineraries are still available. Given our relatively strong booking volumes, we believe that our itineraries are appealing to our customers. We take great pride in our itineraries; it's the number one driver of yields. We lead the industry in yields by a very wide margin, which indicates our itineraries are very well received. Travel restrictions in place everywhere will dictate how customers favor one versus another until they start to get lifted.

Our next question comes 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 a state of what maybe a new normal could be, 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, what should we anticipate for costs, both on the ship side and on the shoreside, to be more structural once we get back to this new normal?

I would classify load factors as having so many variables involved, and I know you prefaced your question as being highly speculative, and you're correct. My instinct based on my 25-plus years in this business is that somewhere around the 75% range would be reasonable for full-year sailing. I guess it might start at 50% or 60%. I believe some of the cruise companies that have begun cruising are adaptable, and it will improve. The limitation will likely come from concerns about the spread of COVID rather than constraints on consumer demand; I believe consumer demand will be there. Many people want to get out after being cooped up. As long as we can present cruising as a safe, viable vacation alternative, customers will be coming back. With that, I'll leave it to Mark for the cost question.

Yes, Tim. From a cost standpoint, we’re learning along the way about potential levers we can pull. I do not anticipate any significant changes to our ship operating expenses. Yes, we may incur some incremental costs as a result of new health or safety measures, but I think on the margin, that will be minimal. When we look at our overhead structure and how we've cut back on marketing spend while still seeing strong bookings, we'll analyze this to find more efficient ways to spend our marketing budget. That said, we will continue to follow our strategy of marketing to fill, but if we can find ways to be more efficient, we will certainly pursue that. As we start sailing and ramping back up, we’ll be careful in how we add back to our overhead. We have always operated a relatively lean organization but will continue to err on the side of caution until we normalize.

Just to clarify, Frank, when you estimate that 75%, is that an exit run rate for '21 or the back half of '21? Mark, would we benchmark at '18, '19? Would it be lower than those levels, sort of like on a per diem basis?

Yes. I think when you look at '18 or '19, the key piece to focus on is our marketing spend in those years. On a net cruise cost basis, our costs are pretty normal. Fluctuations in our net cruise costs typically derive from marketing expenditures. Understanding how we isolated those in the past will help us assess future comparisons in the backdrop of increased structures.

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

It's actually Fred Wightman on for Greg. Last quarter, 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. Could you give an update on where that stands today, and is it just a matter of getting ships back into the water, or is there something else we should be tracking?

Fred, it's Mark. On our last call, we were a little more optimistic than it turned out. A couple of points: number one, voyages were suspended only through June 30 at that point, and now we've added through October 31. This has put more pressure on our advanced ticket sale refunds that have been in the queue. We were not working capital positive in the quarter. However, looking at the numbers, we were only roughly $100 million in deficit. Going forward, the biggest piece of our working capital is that advanced ticket sales. There’s really not much more cash outflow we expect to face. We had about $1.1 billion to $1.2 billion of advanced ticket sales on the books as of the quarter, with roughly $800 million of that in the form of future cruise certificates. From an inflow standpoint, we continue to take new bookings and collect deposits and final payments from customers who are booking in 2021. We anticipate by the tail end of the third quarter or fourth quarter to be breakeven or positive with our working capital situation.

Thank you, everyone, for joining us this morning. It is a tough environment. We have a good liquidity runway to see this through and are hopeful that things will begin to improve, both on the prevalence of COVID cases and our ability to build a comprehensive set of robust protocols that can get us back in service quickly. We look forward to speaking to you again, I guess, in late October or early November. Please stay healthy and safe. All the best. Bye-bye.

Thank you. Bye-bye.

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