Norwegian Cruise Line Holdings Ltd. today reported financial results for the first quarter ended March 31, 2020, and provided a business update in response to the novel coronavirus (“COVID-19”) global pandemic.
“In recent weeks, we have taken decisive action to significantly strengthen our financial position in response to the COVID-19 global pandemic, including our highly successful and oversubscribed $2.4 billion gross simultaneous quad-tranche capital raise announced last week. We believe this capital raise, coupled with other ongoing liquidity-enhancing initiatives, makes us well-positioned to weather an unlikely scenario of over 18 months of suspended voyages,” said Frank Del Rio, president and chief executive officer of Norwegian Cruise Line Holdings Ltd. “Our guests continue to demonstrate their desire for cruise vacations, and we continue to experience demand for voyages further in the future across our three brands. As we prepare to resume sailings, we are working around the clock alongside U.S. and global public health agencies and governments to develop and implement the next level of enhanced cruise health and safety standards.”
Booking Environment and Outlook
2020 started off strong and was expected to be another record year. All three of the Company’s brands entered the year in a record booked position and at higher prices on a comparable basis. For the first two months of the year, ships sailed full at prices that were higher than prior year despite meaningful capacity growth of approximately 7%. As with the broader travel and leisure industry, the Company has experienced rapid and significant impacts related to the COVID-19 global pandemic including significant softness in near-term demand and an elevated rate of cancellations for existing bookings. There continues to be demand for cruise vacations particularly beginning in the fourth quarter 2020 accelerating through 2021 with the Company’s overall booked position and pricing for 2021 within historical ranges.
All three brands have instituted programs for guests on cancelled sailings as a result of the Company’s voyage suspension which include offering value-add future cruise credits typically for 125% of the cruise fare paid in lieu of providing cash refunds. These future cruise credits are valid for any sailing through December 31, 2022. As of May 11, 2020, slightly over half of the guests who have had their voyages cancelled have requested cash refunds. As of March 31, 2020, the Company had $1.8 billion of advanced ticket sales, including the long-term portion. This includes approximately $800 million for previously announced voyage cancellations through June 30, 2020 where guests have the option of either a future cruise credit or a cash refund, and approximately $370 million for voyages scheduled for the remainder of 2020. The Company also continues to take future bookings for 2020, 2021 and 2022, and receive new customer deposits and final payments on these bookings.
Enhanced Health & Safety Protocols
Prior to the suspension of cruise voyages, the Company had begun developing a comprehensive and multi-faceted strategy to enhance its already rigorous health and safety protocols to address the unique public health challenges posed by COVID-19, including enhanced screenings, upgraded cleaning and disinfection protocols and plans for social distancing. Several of these protocols were put in place prior to the voyage suspension.
The Company is consulting with Dr. Scott Gottlieb, former Commissioner of the U.S. Food and Drug Administration and an experienced public health and medical policy expert, as an advisor to provide independent public health counsel as the Company develops the next level of health and safety standards to prepare for the resumption of voyages.
The Company will continue to work with the U.S. Centers for Disease Control and Prevention (“CDC”) and other federal agencies, public health authorities and national and local governments in areas where it operates to take all necessary measures to ensure the health, safety and security of guests, crew and the communities visited once operations resume.
COVID-19 Action Plan
The Company has taken swift, proactive measures to mitigate the financial and operational impacts of COVID-19. This action plan includes cost reduction and cash conservation levers the Company has deployed to preserve and enhance liquidity while also securing additional capital.
Reduced Operating Expenses
The Company anticipates estimated ongoing ship operating expenses and administrative operating costs combined to range from approximately $70 million to $110 million1 per month during the suspension of operations as a result of the following cost reduction measures:
- Meaningfully reducing cruise operating expense which includes reducing expenses associated with crew payroll, food, fuel, insurance and port charges. The majority of ships in the Company’s fleet are currently transitioning to cold layup.
- Significantly reduced or deferred marketing expense in the first half of the year.
- Introduced a temporary shortened work week and reduced work hours with commensurate 20% salary reduction for shoreside team members.
- Temporarily furloughed approximately 20% of the shoreside workforce through July 31, 2020. Furloughed team members remain employees of the Company and retain healthcare and other benefits. The Company is covering the employee share of medical insurance premiums during the furlough period.
- Implemented a company-wide hiring freeze.
- Paused employer 401(k) match contribution.
- Suspended travel for shoreside employees across the organization.
Reduced Capital Expenditures
The Company has identified approximately $515 million of capital expenditure reductions, comprised of:
- Approximately $345 million, or an approximately 65% reduction of non-newbuild capital expenditures for the remainder of 2020.
- Approximately $170 million in expected deferred capital expenditures for newbuild related payments through March 31, 2021. The Company is currently finalizing documentation for deferrals of these payments. Upon completion, the Company does not expect any newbuild related payments to have an impact on liquidity until April 2021.
- Total capital expenditures, net of expected deferrals of newbuild related payments, for the remainder of 2020 is expected to be approximately $195 million.
Improved Debt Maturity Profile
- Deferred approximately $385 million of payments related to guaranteed financing by Euler Hermes Aktiengesellschaft (“Hermes”), the official Export Credit Agency (“ECA”) of Germany, through April 2021 and amended associated credit agreements to incorporate this debt deferral in connection with an industrywide initiative granting a 12-month debt holiday to provide interim debt service relief for amortization payments and financial covenants (“Debt Holiday”). The Company is finalizing documentation for the deferral of the remaining approximately $155 million of ECA backed payments through March 31, 2021 with its other ECA lenders. Deferrals are to be repaid in eight equal semi-annual installments following the Debt Holiday.
- Secured a 12-month deferral for approximately $150 million of debt amortization through March 31, 2021 relating to the Term Loan A and Norwegian Jewel term loan. Deferrals are to be repaid 25% per year in equal installments following the deferral period with any outstanding balance paid in full at maturity.
- Extended $230 million Pride of America term loan by one year to January 2022.
- Extended $675 million Norwegian Epic revolving credit facility to March 2022.
Taken together, the aforementioned cash conservation measures and the deferral of near-term debt amortization and newbuild related payments2, the Company estimates its monthly cash burn to be on average in the range of, approximately $120 million to $160 million per month during the suspension of operations. This includes ongoing ship operating expenses, administrative operating expenses, interest expense (including approximately $12 million of additional cash interest expense per month for the next twelve months for debt refinancings and new financing transactions announced last week) and expected capital expenditures and excludes cash refunds of customer deposits as well as cash inflows from new and existing bookings. The increase versus prior monthly cash burn estimates of approximately $110 million to $150 million per month reflects additional interest expense.