Norwegian Cruise Line CFO: ‘Consumers are past COVID’

Norwegian Cruise Line CFO Mark Kempa joins Yahoo Finance Live to discuss post-COVID operations, consumer demand, margin pressure from inflation, and the outlook for the cruise line industry.

Video transcript

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- Welcome back. Earlier this week, Norwegian Cruise Lines eased up its COVID-19 restrictions, announcing that passengers will no longer be required to show they are vaccinated or wear a mask while on board. Joining us now to discuss that and the business is Norwegian Cruise Line CFO Mark Kempa.

Mark, good to see you again. It's been a while. So take us to this decision on the mask front. What has been the customer response amongst those you've talked with?

MARK KEMPA: Well, good morning, Brian. And thanks for having me from aboard beautiful Norwegian Prima. Look, you know, taking down the requirements, the-- you know, it eliminated another barrier for the traveler to see the world. And we-- our first set of that was in August, when we reduced the vaccination requirements. We immediately saw significant boost in our bookings as a result of that.

And most recently, just this past Monday, our Norwegian Cruise Line brand also took down all vacc-- all testing requirements. So we look at it as it's just another barrier for us to remove for the traveler and make it easier for everybody to see the world.

- Mark, the calendar is almost turned to 2023. What are you-- what are some of the major revenue obstacles you and the team are up against for next year?

MARK KEMPA: Look, we see opportunity. We don't see-- we don't look at revenue as being an obstacle. We have a-- we have the youngest fleet in the industry. We have a sizable yet nimble fleet. When we look at our demand picture, our demand continues to be very, very strong, even against the backdrop of a lot of different world events, economic events.

Our customer tends to be a higher-level customer than that of our peers. So while not insulated from any sort of recessionary issues or economic malaise, our customers tend to be more insulated and more resilient from that. So we don't look at it as revenue as-- revenue opportunities as being obstacles. We see many opportunities. And that's really been demonstrated when you look at our first half and our second quarter pricing.

I think, if I recall correctly, on our first half, our net per diems were up 18%. And yes, I said 18%. And if you look at our peers for the first half, they were roughly about flat. So everything we see in all of our indicators, whether it's our booking curve, what the consumer is spending on board today, all indicators are pointing that 2023 is setting up to be a phenomenal year for us.

- What type of margins relative to when you were seeing full vessels, people booking on a very healthy basis, and when do you expect that you'll kind of reassume some of those statures?

- Yeah. Look, pre-COVID, we were setting record-level margins. We had EBITDA margins roughly at about in the low 30s. And I would be naive to tell you that we're not seeing some sort of inflationary pressure today. But we believe that's short-term pressure. That's near-term pressure. And all signs that we're seeing, at least from the cost front, we're starting to see easing in all of the key commodities, whether it's proteins, fruits and vegetables, consumables, the like.

But the other side of that coin is we're also able to garner very strong pricing. And again, as I said earlier, that's been evidenced by the fact of our performance in both Q1 and Q2 of this year. And if you look at Q3 and our most recent guidance, we had said that our total net revenue per diems are expected to be up in the high single digits.

So again, there's-- you know, inflation is real. It is starting to level off. We are going to see some near-term pressure on margins. But we don't believe that this is going to be a long-term sustainable margin issue. As we look at and look at our trends and our business over the next year to two years, we see margin improvements significantly. And we believe we can get back to the same margin levels we saw prior to the pandemic.

- Mark, it's Julie here. Let's talk about another important cost input that has nothing to do with commodities, and that's people, right, which seemingly every industry has been struggling with. How many people want to get on a ship as an employee these days? And how are they interacting also with the change in rules that you guys have been making?

MARK KEMPA: Look, people want to travel. People want to experience the world. They want to see the world in all forms of fashion. It doesn't matter if it's a consumer, it's our employees, anybody.

We're here in New York today. We expect a full ship. The ship is sailing this evening. It's going to be almost at full capacity, limited by our own restrictions as we launch a new vessel. But demand is off the charts. Consumers are past COVID. The world has past COVID.

- Right. But employee-wise, so you guys aren't having trouble finding good people to staff the ships?

MARK KEMPA: No. When you look at our employee base, our-- you know, you have to remember, our employee base, they did not receive subsidies during the course of the pandemic. So they wanted to come back to work. They were excited to come back to work. We've only seen employment issues very-- you know, on the very margin at best in certain areas. But overall, it has not had any impact on our experience that we offer to all of our guests.

- Mark, that's good to hear about the Prima. I know it's a nice-looking ship. And of course, it's taken a while to get to this point, given everything going on in the world. But I also want to ask you too, in terms of the debt position, you know, as you look towards next year, how do you-- how are you going to repay some of that debt? Is it a-- is it a share sale? Are you going to try to refinance?

MARK KEMPA: Look, we were very deliberate and proactive during the pandemic. You know, we had to add a lot of debt to the balance sheet. But when we added debt, we looked at it, and we looked at our maturity towers down the road. We wanted to ensure that we had a very clean path coming out of COVID.

So as we look forward over the course of the next two to three years, we have about a billion dollars a year plus or minus that's coming due. And we firmly believe, given our trajectory today, that with our existing cash on hand and our expected organic cash flow, we are going to be able to pay off our debt in the normal course of business by just good old-fashioned earnings and cash generation. We have no appetite. Our board has no appetite to issue any sort of equity to pay down debt or to delever. We have the ability. This company is a cash engine machine.

And if you look at the performance pre-pandemic, we were generating on average about a billion and a half, close to $2 billion of free cash flow. And we were also returning capital to shareholders at the same time. So again, as we get back to full operations, we expect to be back at full capacity for the second quarter of 2023. And that is by design. We think, given where 2023 and '24 are positioning, we have ample room to pay off our debt in the normal course.