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Speaker 1 [00:00:00]

This is Kevin Curran for and today we are aboard a lovely Oceana brands insignia ship. It is a completely refurnish ship. And joining me today is Norwegian Cruise Line Holdings CFO Mark Campa to explain to me all the good things that are going on in cruising and why you need to know about the industry moving forward.

Speaker 2 [00:00:17]

So Mark this is a new ship and I understand you're getting even more on these ships moving forward. Explain the plan for expanding the brand here. Yeah thanks for having us. Kevin we appreciate it. So this is a this is actually a reinspire ship it's part of our. New Program Oceana and next we're investing over 100 million dollars and for ships to reinspire them so our thought process behind that is we can make a small investment relative to relatively 25 to 30 million. Which is a fraction of the cost of a new ship and we can get similar returns on that. So it's phenomenal. We just announced two days ago that we're building two more ships for this brand that will be delivered in 2022 in 2025. So if you think that the cost of those is about five hundred seventy five million euro. I could spend 330 million and essentially have a new ship today. So ordering first is ordering a brand new one but you are spending those 575 million euro. And there's a lot of people that are worried about a looming recession and maybe the next one to two years. Obviously if you're spending that on some a brand that depends on consumer discretionary spending are you not for seeing that. Or is this brand completely mitigating that effect. Let me tell you. Here's an interesting fact if you took Orlando in Las Vegas and combined that hotel hotel rooms together in those two destinations alone and warm rooms there then there is the entire global industry cruise footprint. That's an amazing fact. Only 2 percent of the world traveling population has been on a cruise. Only 8 percent of North Americans. So when you think about it the cruise industry is severely under penetrated and further with with the Oceana brand. This offers us the ability to meet the demand for culinary destination based upscale luxury and that market is booming. It's off the charts. So when you say that only a small percentage of the population has been on a cruise ship what demographics or geographic regions are you targeting. Maybe you haven't been on a cruise ship. So we have offerings across the entire world. We have three award winning luxury brands Norwegian Cruise Line Oceana cruises and Regent Seven Seas cruises. We offer the entire expansion so Norwegian's focuses on the younger demographic. The average age is in the lower 50s. The Norwegian the average age is in the mid 60s and Regent which is an all inclusive luxury Proposition 65 plus. So our biggest growing consumer right now is really the the millennials as you know they make up roughly 28 percent of today's population. On our Norwegian brand roughly 25 percent of our passengers are millennials. What do Millennium's want. They want value. They want experiences they want experiences they want to go places offering that. And you can come to one destination one price and you're getting all of it and then the only thing I want to ask about was I have the chief financial officer here. All the analysts on Wall Street are saying this company has a huge free cash flow. What exactly are you looking to do with that free cash flow in 2019. Can we expect any surprises. Yeah great question.

Speaker 1 [00:03:11]

So as you know on our Investor Day we said we wanted to return a billion to a billion five of capital back to our shareholders by the end of 2020 proud to sit here and say today at the end of each team we've delivered over to over one third of that today.

Speaker 2 [00:03:25]

So as we turn to turn 19 we're looking to have a balanced approach for share repurchases potentially looking at improving your dividend it's something worth discussing that will be very interesting but we want to have a balanced approach. And with us generating a billion to a billion five of free cash flow per year. We've got a great problem on our hands. I'm going to be do levered down to the 2 points 7 5 2.5 times in 2020. This is a great story. We're spending tremendous amounts of cash and we're at this key inflection point where we can start delivering meaningful capital back to the shareholders.

Speaker 1 [00:03:56]

And it's a little bit of a different story than a competitor like Carnival as well. And that's one thing I wanted to touch on that a bit of a softer forecast in the 2019. How much of that is company specific and how much of that might be industry trends that you're seeing that might be affecting them more than you look.

Speaker 2 [00:04:09]

Industry trends are strong. If you look at our Democrat our sourcing roughly 75 percent of our sourcing comes from North America and the other 25 percent comes from overseas. Ten percent of that comes from Europe. Carnaby's comments were really based on regional operators. We are not seeing any weakness in any of the overseas operators overseas markets source markets everything is strong and the last thing I want to ask you about was there's all these different tiers.

Speaker 1 [00:04:34]

How does Norwegian differentiate itself by making these ultra premium middle premium and different types of brands that target different demographics.

Speaker 2 [00:04:41]

Well we're we have three award winning brands. We have a Norwegian Cruise Line which is a mass market upper premium brand. We have Oceania Cruises which the insignia which is what you're on today is an upper premium brand. And then we have Regent Seven Seas brand which is a premium all inclusive so we're covering the entire gamut the market from the young generation to the older generation and the biggest growth is really coming in in the Oceania brand. Boomers are retiring at roughly 10000 boomers per day. And then you look at the Norwegian brand 25 percent 28 percent of millennials. We are kidding for that brand. We're giving them value we're giving them the experience they want and a great price. So it's the growth is off the charts.

Speaker 1 [00:05:25]

Interesting. Well certainly a lot of boomers are retiring and if you're targeting millennials with. The biggest demographic in America certainly a hard argument to make against you.

Speaker 2 [00:05:33]

And it's catching on. Like I said 25 percent of our population are Norwegian brand Norwegian Cruise Line brand is millennials and that's grown significantly over the last 35 years.

Speaker 1 [00:05:41]

Interesting will be something we're watching for. Thank you very much. Thank you very much.

Norwegian Cruise Lines Holdings (NCLH - Get Report) CFO Mark Kempa still sees smooth sailing ahead for his company.


Shares of the cruise line's leader have rebounded strongly in 2019, bouncing back from the Christmas Eve bottom that struck many stocks.

Kempa told Real Money's Kevin Curran that the stock should only trend further upward as droves of late Baby Boomer's retire and take up cruising at the later stages of their life.

"If you took Orlando and Las Vegas and combined those two destinations alone, there is more rooms there than there is in the entire global cruise industry footprint," Kempa explained. "Only 2% of the world traveling population has been on a cruise, only 8% of North Americans."

He said that the the company is really only touching the tip of the iceberg in terms of consumer reach, leaving it a lot of room to grow, which is in part motivating its expansion of a newer, larger fleet.

Further, he set the ship's course for the profitable and under-penetrated millennial cruising population.

"Our biggest growing consumer right now is really the the millennials as you know they make up roughly 28 percent of today's population," Kempa said. "On our Norwegian brand roughly 25 percent of our passengers are millennials. What do millennials want? They want value. They want experiences they want experiences they want to go places offering that. And you can come to one destination one price and you're getting all of it."

He touted this expansion into new and larger demographics as part of his thesis that the company has smooth seas ahead of it even as competitors like Carnival Corp. (CCL - Get Report)  encounter problems with their own positioning.

Much to the contrary, Kempa highlighted the remaining opportunity the keep plans to pursue to make keep chareholders contended as they ride along with Norwegian.

"As we turn to 2019 we are looking to have a more balanced approach of more share repurchases and potentially implementing a dividend" Kempa said. "With us generating $1 billion to $1.5 billion of free cash flow per year, we have a great problem on our hands."

The company announced in 2018 that it would return up to $1.5 billion to shareholders through 2020, a plan it is already one-third of the way to accomplishing.

Check out the full conversation with Kempa above.