Norwegian Cruise Line Holdings Ltd. reported financial results for the second quarter ended June 30, 2016, provided guidance for the third quarter and full year 2016 and updated expectations for previously stated financial targets.
Highlights
The Company generated GAAP net income of $145.2 million or EPS of $0.64 compared to GAAP net income of $158.5 million or EPS of $0.69 in the second quarter of 2015. Adjusted Net Income was $192.6 million or Adjusted EPS of $0.85 compared to Adjusted Net Income of $171.6 million or Adjusted EPS of $0.75 in the second quarter of 2015.
Total revenue was $1.2 billion, up 9.3% from prior year. Adjusted Net Yield increased 1.2% on a Constant Currency basis or 0.8% on an as reported basis on Adjusted Net Revenue of $917.8 million.
Full Year 2016 Adjusted EPS expected to be in the range of $3.35 to $3.45.
Regent Seven Seas Cruises welcomed Seven Seas Explorer to its fleet, the first newbuild for the brand in 13 years.
“While successive geopolitical events dampened North American consumer demand primarily for our Mediterranean itineraries, our management team worked diligently to identify cost saving opportunities to partially mitigate these impacts and generate solid Adjusted EPS growth of 13%,” said Frank Del Rio, president and chief executive officer of Norwegian Cruise Line Holdings. “It was a challenging booking environment where we remained mindful of our go to market strategy to minimize discounting and maintain our hard-fought pricing gains, resulting in lower occupancy, which in turn lowered onboard revenue and overall Net Yield growth compared to our expectations earlier in the year.”
Second Quarter 2016 Results
Net income was $145.2 million or $0.64 per share compared to $158.5 million or $0.69 per share in the prior year which included a benefit of $34.3 million as a result of a fair value adjustment of the contingent consideration related to the Acquisition of Prestige, which was included in marketing, general and administrative expense in 2015 but not in 2016. The Company generated Adjusted Net Income of $192.6 million or $0.85 per share compared to $171.6 million or $0.75 per share in the prior year.
Revenue increased 9.3% to $1.2 billion compared to $1.1 billion in 2015. Adjusted Net Revenue in the period increased 10.3% to $917.8 million compared to $832.4 million in 2015. These increases were primarily attributed to the addition of Norwegian Escape and Oceania Cruises’ Sirena to the fleet as well as improved pricing, slightly offset by four scheduled Dry-docks in the period. Adjusted Net Yield improved 1.2% on a Constant Currency basis or 0.8% on an as reported basis, mainly due to efficiencies in cost of sale.
Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 4.1% on a Constant Currency basis or 4.0% on an as reported basis. The increase was primarily due to four scheduled Dry-docks in the quarter compared to one in the prior year.
Fuel price per metric ton, net of hedges decreased 15.9% to $469 from $558 in 2015. The Company reported fuel expense of $80.6 million. In addition, a loss of $3.2 million was recorded in other expense related to the ineffective portion of the Company’s fuel hedge portfolio due to market volatility.
Interest expense, net increased to $68.4 million from $52.4 million primarily due to an increase in average debt balances outstanding primarily associated with the delivery of Norwegian Escape in October 2015 and slightly higher interest rates due to an increase in LIBOR rates. The increase in interest expense, net also includes a write-off of $11.4 million of deferred financing fees related to the refinancing of certain of our credit facilities.
Other expense was $10.8 million in 2016 compared to $3.7 million in 2015. In 2016, the expense primarily related to a loss from the fair value decrease related to a foreign exchange collar for the Seven Seas Explorer newbuild and the aforementioned loss on fuel hedges, partially offset by gains on foreign currency exchange. In 2015, the expense was primarily related to the dedesignation of certain fuel swap derivative hedge contracts and the ineffectiveness of settled fuel swaps in 2015, partially offset by income related to the fair value adjustment for a foreign exchange collar which did not receive hedge accounting treatment.
Sale of Hawaii Land-based Operations
In the first quarter of 2016, the Company executed an agreement to divest its interest in a certain land-based operation in Hawaii. The amount of the transaction is considered immaterial to the Company’s consolidated financial statements. The agreement is subject to customary closing conditions, including receipt of all required regulatory approvals. The sale is expected to be completed during 2016. The Company’s second quarter financial results include the results from this operation. For purposes of comparison to the guidance provided by the Company in its prior release, key operational metrics excluding the results of this operation are as follows:
Adjusted Net Yield growth would have been 1.3% on a Constant Currency basis or 0.9% on an as reported basis (excluding the results of the aforementioned operation).
Adjusted Net Cruise Costs Excluding Fuel per Capacity Day growth would have been 4.2% on a Constant Currency basis or 4.1% on an as reported basis (excluding the results of the aforementioned operation).
Company Outlook
“Although we experienced significant booking headwinds we delivered earnings consistent with expectations, generating Adjusted EPS growth of 20% for the first half of the year. As we enter the second half of the year, we are revising our earnings expectations primarily as a result of four factors: continued weak demand from our core North American consumer for European sailings at a time when half of our fleet is deployed in the region, including eight of our highest yielding ships; the effect of a weaker British pound post the Brexit vote; an adjustment to earlier pricing expectations for Miami-based Caribbean itineraries, which continue to outperform prior year despite a doubling of capacity in the low season months; and the impact from maintaining pricing discipline to minimize discounting,” said Del Rio. “With this revision to expectations, we are confident we will deliver strong earnings growth for full year 2016 and grow 2017 Adjusted EPS in the range of 15% to 25%.”
As a result of its revised expectations, the Company no longer expects to achieve its previously stated target of $5.00 Adjusted EPS in 2017.