Mark A. Kempa
Executive Vice President, Chief Financial Officer at Norwegian Cruise Line
Thank you, Harry, and good morning, everyone. My commentary today will focus on our very strong second quarter 2024 financial results, our improved full-year 2024 guidance and our increasingly solid financial position. Unless otherwise noted, my commentary on 2024 net yield and adjusted net cruise costs ex fuel PCD are on a constant currency basis, and comparisons are to the same period in 2023.
Let's begin with our second quarter results, which are highlighted on Slide 10. In short, we exceeded guidance across the board, outpacing our targets for the quarter. Starting with the top-line, results were impressive, with net yield increasing 6.3%, exceeding our guidance of 4.3% by 200 basis points. Several factors contributed to the exceptionally strong top-line growth in the quarter, which included robust demand for European, Caribbean and Alaskan sailings, where the majority of our capacity is deployed this quarter; stronger than anticipated onboard revenue and close-in sailing demand; and finally, the redeployment of canceled Red Sea sailings were better than our initial expectations.
Looking at costs, adjusted net cruise costs ex fuel PCD came in below guidance at $163, primarily due to the timing of certain expenses that will now fall into the third quarter. As expected, our unit costs this quarter included approximately $9 from higher dry-dock days and related costs as compared to '23. Excluding the impact of the dry-docks, our adjusted net cruise costs ex fuel PCD would have been flat year-over-year, once again demonstrating our ability to fully offset the impacts of inflation with our disciplined cost savings initiatives across the entire organization. These initiatives, combined with robust top-line growth, have yielded strong results. Adjusted EBITDA came in at approximately $588 million, surpassing our guidance of $555 million, resulting in a year-over-year increase of 14%. Adjusted EPS was $0.40, exceeding our guidance of $0.32 and increased 33% compared to the same quarter last year.
Overall, we are extremely pleased with our second quarter performance. Strong top-line growth, combined with our ongoing cost reduction initiatives, enabled us to surpass our guidance metrics for the quarter. This strong momentum positions us well as we look ahead, and as a result, we are raising our earnings guidance, as highlighted on Slide 11. We are thrilled to announce that for the third time this year, we have raised our full year guidance, reflecting the strong performance and strength of our business. Since our initial guidance in February, net yield growth is expected to increase 280 basis points to 8.2%. And we have maintained our adjusted net cruise costs ex fuel PCD guidance, which, excluding the impact of dry-docks, is expected to be flat for the year. I will go into more detail on this a bit later in my remarks. As a result of the strong top-line and sub-inflationary unit cost growth, we have increased our guidance for adjusted EBITDA by $150 million from $2.20 billion to $2.35 billion. All of this is flowing to the bottom-line, resulting in an increase in our adjusted EPS guidance of approximately 25%, underscoring our impressive operational execution and strong market demand. These results mark significant progress towards achieving our Charting the Course 2026 targets, as we outlined in May.
Moving on to a more detailed look at our guidance on Slide 12. We outlined our expectations for the third quarter and full year, as well as the implied metrics for the fourth quarter. Starting with net yield, we anticipate net yield growth of almost 6.5% in the third quarter. This growth is driven by several factors. Over 70% of our sailings in the third quarter are in Europe and Alaska, regions where we are experiencing strong demand from North American customers. Continued strong onboard revenue trends, combined with healthy pre-booking for onboard revenue -- onboard amenities. Unlike Q2 and Q4, this quarter is unaffected by disruptions from the Middle East cancellations and reroutings. These favorable trends and our ongoing momentum have allowed us to increase our full-year net guidance to 8.2%.
I want to emphasize that our latest guidance implies a healthy net yield growth of 5% for the fourth quarter. This builds off of an impressive 8% growth in 2023, that was underpinned by 14% pricing. Our Q4 2024 growth also comes in the face of headwinds from rerouted Middle East sailings, which comprise 10% of our deployment in the fourth quarter and was disproportionately weighted to our luxury brands.
Now, turning to our -- our attention to adjusted net cruise costs, where our guidance remains unchanged, a true testament to the diligent efforts of the entire organization. For the third quarter, we anticipate adjusted net cruise costs ex fuel PCD to increase by 3.3% to $156 from $151 in the same period last year. I would like to highlight a few points about the quarterly numbers, as there are many moving parts, and I will get into that -- those yearly changes later in my remarks. First, in Q3 of last year, we recognized approximately $2 of non-recurring benefits. Second, keep in mind the timing of expenses. As I mentioned previously, our Q2 unit costs were better than expected, primarily due to timing differences of certain expenses between Q2 and Q3. Consequently, on a year-over-year basis, Q3 unit costs are up. However, this is merely a timing issue. And for the full year, excluding the impact of dry-docks, we still expect our unit costs to remain essentially flat and in line with our prior guidance. And third, I will mention variable compensation. We are recognizing higher variable compensation due to our business outperforming initial forecasts, and this has a disproportionate weighting in the third quarter, consistent with the seasonality of our earnings. As a result of strong net yield growth and cost savings initiatives, our third quarter to adjusted EBITDA is expected to be $870 million, which is driving adjusted EPS of $0.92, a 21% increase over the same period in 2023.
Moving to Slide 13. I'd like to revisit our net yield guidance since our Q1 results in May and highlight the confidence and strength we are seeing for the latter-half of 2024. At our Investor Day, we increased our full-year guidance, indicating that the majority of the uplift was expected in the second half of the year. Giving more detail on this now, we had expected that about $35 million of the $50 million adjusted gross margin improvement, or an increase of 120 basis points of net yield, to materialize in the second half. Today, we are raising our full year guidance once again, with an additional $35 million improvement in adjusted gross margin, or 120 basis points in the second half. This positions us to achieve solid net yield growth of 5.9% in the back half of 2024.
Moving to Slide 14. I want to dive a bit deeper into our margin enhancement initiatives. As we stated at our Investor Day, a key pillar of our algorithm is boosting margins and reducing costs across the entire organization. And we continue to see these fruits -- the fruits of these efforts during 2024. During the first and second quarters, we have been able to keep our unit costs flat, excluding dry-dock. And as I mentioned earlier, due to the timing, this metric will increase in the third quarter, but should decline in the fourth quarter. And as a result, our adjusted net cruise costs ex fuel PCD will be essentially flat year-over-year, fully offsetting inflation, as well as the increased variable compensation due to the Company's strong performance. This feat is not easy and is the result of the tireless work of our entire organization and transformation team. I am confident that we will be able to continue this momentum in the years that come.
Turning to Slide 15. We can clearly see the impact of our disciplined approach to earnings and returns, as outlined during our recent Investor Day. The key elements of our algorithm are straight-forward. Improved net yields and rigorous cost management drive margin expansion. That margin expansion, in conjunction with controlled capacity growth, results in substantial adjusted EPS growth. Moreover, this adjusted EPS growth, when paired with our disciplined capital allocation strategy, allows us to prioritize debt repayment in the short- to mid-term. This approach not only reduces our net leverage, but also strengthens our balance sheet and enhances our adjusted ROIC, which, by the way, is on target to hit double-digits this year, another important milestone toward our 2026 target of 12%.
During the second quarter, we improved our trailing 12-month adjusted operational EBITDA margin to 33%. As we close out the year, we anticipate ending with a margin of 34.5%, marking a substantial improvement of 400 basis points from 2023. This progress is a significant milestone as we strive toward our target of approaching historical margins of approximately 39%.
Now, let's shift to our balance sheet and debt maturity profile on Slide 16, which has not changed significantly since Q1. During the quarter and, as expected, our 6% 2024 exchangeable notes converted to shares. And our next maturity is our $565 million notes due 2024, which we are expecting to refinance and/or partially repay by its maturity in December.
Turning over to leverage on Slide 17. We are proud that we achieved our net leverage goal six months ahead of schedule, reducing our leverage by approximately 1.5 turns and ending the quarter at 5.9 times. Achieving leverage in the 5s is no small feat, since we ended 2023 at 7.3 times. As you know, we are on a multi-year deleveraging journey to derisk the balance sheet, targeting the mid-4s, and this quarter's results are another significant milestone in that journey.
In closing, I want to emphasize that this has been an exceptional quarter, where we surpassed guidance across all key metrics. This momentum has enabled us to raise our full-year guidance for the third time. This is all a testament to the strategy we outlined at our Investor Day and that I discussed earlier. We are excited about the second half of the year and remain confident in our strategy going forward.
With that, I'll turn it back to Harry for closing remarks.
