NCLH takes action to strengthen liquidity

2020-05-15T14:08:05+00:00 May 15th, 2020|Finance|

Norwegian Cruise Line Holdings (NCLH) reported a GAAP net loss $1.9 bill or EPS of a negative $8.8 for the first quarter of this year, compared to a profit of $118.2 mill or $0.54 in the previous year.

This included a non-cash impairment loss of $1.6 bill, primarily related to goodwill and trade names.

The adjusted net loss was $211.3 mill or adjusted EPS of a negative $0.99, compared to plus $181.8 mill or $0.83 in 1Q19. This result included adjustments of $1.7 bill primarily consisting of expenses related to impairment losses, non-cash stock-based compensation and amortisation of intangible assets.

Revenue decreased 11.2% to $1.2 bill in 1Q20, compared to $1.4 bill in 2019. Gross Yield increased 1.6%, primarily due to increased on board spending. Net Yield decreased 12.3% on both – an as reported basis and constant currency basis – on a decrease in capacity days of 12.6%.

The net yield decrease was primarily due to an increase in protected commissions and credit card fees recognised in the quarter as a result of cancelled sailings announced through quarter end. The decrease in capacity days was primarily due to the cancellation of sailings in 2020 to stem the spread of COVID-19, partially offset by the addition of ‘Norwegian Encore’ and ‘Seven Seas Splendor’ to the fleet.

Total cruise operating expense increased 20.3% in 1Q20, compared to 2019, primarily due to costs associated with the suspension of sailings, including the cost of the related protected commissions, a 27.2% increase in fuel expense associated with the IMO 2020 regulations and the addition of ‘Norwegian Encore’ and ‘Seven Seas Splendor’ to the fleet.

Total other operating expense increased 396% in 1Q20, compared to 2019 primarily due to the $1.6 bill impairment loss comprised of $1.3 bill related to goodwill and $0.3 bill related to aggregated impairments for trade names.

Frank Del Rio, NCLH’s President and CEO, said; “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 bill 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.

“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 US and global public health agencies and governments to develop and implement the next level of enhanced cruise health and safety standards,” he said.

As for bookings, this year 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 in 2019, despite meaningful capacity growth of around 7%.

However, NCLH 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 4Q20 accelerating through 2021 with the company’s overall booked position and pricing for 2021 within historical ranges.

As of 31st March, 2020, the company had $1.8 bill of advanced ticket sales, including the long-term portion. This includes about $800 mill for voyage cancellations through 30th June, 2020 and around $370 mill for voyages scheduled for the remainder of 2020.

Prior to the voyage suspensions, NCLH had begun developing a strategy to enhance its 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.

NCLH will continue to work with the US Centres 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.

To mitigate the financial and operational impacts of COVID-19, the company has devised an action plan, which includes cost reduction and cash conservation initiatives to preserve and enhance liquidity while also securing additional capital.

NCLH said it anticipated ongoing ship operating expenses and administrative operating costs combined to range from about $70 mill to $110 mill per month during the suspension of operations, as a result of the following cost reduction measures:

  • 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 around 20% of the shoreside workforce through 31st July, 2020. Furloughed team members remain employees of the company and retain healthcare and other benefits. NCLH is also covering the employee share of medical insurance premiums during the furlough period.
  • Implemented a company-wide hiring freeze.
  • Paused employer 401,000 match contribution.
  • Suspended travel for shoreside employees across the organisation.

At the same time, NCLH has identified about $515 mill of capital expenditure reductions, comprised of:

  • Around $345 mill, or an about 65% reduction of non-newbuild capital expenditures for the remainder of 2020.
  • About $170 mill in expected deferred capital expenditures for newbuild related payments through 31st March, 2021. The Company is currently finalising 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 around $195 mill.

Taken together, the cash conservation measures and the deferral of near-term debt amortisation and newbuild related payments, NCLH estimated its monthly cash burn to be on average in the range of, about $120 mill to $160 mill per month during the suspension of operations.

In response to COVID-19, NCLH secured a new $675 mill revolving credit facility on 5th March, 2020 and fully drew down on this new facility, as well as its existing $875 mill revolving credit facility beginning on 12th March, 2020 for a total of $1.55 bill.

As of 31st March, 2020, NCLH’s total debt position was $8.6 bill. In connection with the actions taken to improved its debt maturity profile, the Company has reclassified $1.4 bill of debt, which was originally classified as a current liability based on the contractual maturities outstanding to long-term debt. At the same time, NCLH’s cash and cash equivalents were $1.4 bill and the company believed it was in compliance with all debt covenants.

Earlier this month, the company launched a series of capital markets transactions, led by Goldman Sachs, to raise about $2 bill. As a result of significant demand, oversubscription and the full exercise of options to purchase additional ordinary shares and exchangeable notes, the total amount of gross proceeds increased to around $2.4 bill.

Following the recent transactions, total pro-forma liquidity is about $3.7 bill as of 31st March, 2020.

“Our swift actions to preserve cash and secure additional liquidity in this uncertain environment provide a strong foundation to withstand the operational and financial impact of COVID-19,” claimed Mark Kempa, Executive Vice President and CFO. “Our focus on strengthening the balance sheet and strong financial track record were instrumental in our successful capital raise. We are confident the company can navigate through an unlikely extended zero revenue scenario and emerge in a strong position.”