挪威郵輪 (NCLH) 2013 Q3 法說會逐字稿

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  • Operator

  • Good morning, and welcome to the Norwegian Cruise Line third-quarter 2013 earnings conference call.

  • (Operator Instructions)

  • This conference call is being recorded.

  • I would now like to turn the conference over to your host, Ms. Andrea DeMarco, Director of Investor Relations. Ms. DeMarco, please proceed.

  • - Director of IR

  • Thank you, Karen.

  • Good morning, and thank you for joining us for our third-quarter earnings call. I am joined today by Kevin Sheehan, our President and Chief Executive Officer; and Wendy Beck, our Executive Vice President and Chief Financial Officer. Kevin will begin the call with opening commentary, and Wendy will follow with more detail regarding the quarter. Kevin will then provide some closing comments, after which we will open up the call for your questions.

  • As a reminder, this conference call is being simultaneously webcast on our Investor Relations website at www.investor.ncl.com, and will be available for replay for 30 days following today's call. Before we discuss our results, I would like to cover a few items. Our press release for the third-quarter 2013 results was issued yesterday, and is available on our Investor Relations website.

  • I would like to review information about forward-looking statements and the use of non-GAAP information as a part of this call. Some of our comments today may include statements about our expectations for the future. Those expectations are subject to known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested by these expectations.

  • We cannot guarantee the accuracy of any forecast or estimates, and we undertake no obligation to update any forward-looking statements during the quarter. If you would like more information on risks involved in forward-looking statements, please see our SEC filings.

  • In addition, some of our comments may reference non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures and other associated disclosures are contained in our earnings release and on our website.

  • With that, I would like to turn the call over to Kevin Sheehan. Kevin?

  • - President & CEO

  • Thanks, Andrea. And good morning, everyone. Thanks for joining us today.

  • I always look forward to the third quarter of each year, not only because it is our seasonally strongest quarter and our ships are positioned in some of our most exciting itineraries. But with kids out of school and parents looking for a well-deserved break, is when our ships sail most full. Meaning it is the best opportunity to engage the largest number of guests by offering an unsurpassed experience that will make them lifelong Norwegians.

  • Once you have sailed past the breathtaking Na Pali Coast in Hawaii on the Pride of America, or been splashed with paint during a performance of Blue Man Group on the Norwegian Epic, or walked the plank in the middle of the Atlantic on the Norwegian Breakaway, you have created memories of a lifetime. And ones that can only be created on a Norwegian Cruise vacation.

  • In the third quarter of 2013, our capacity increased by 15% with the addition of Norwegian Breakaway to the fleet. Our deployment included four ships in Europe, demonstrating our commitment to the region, where pricing gained some traction over the last year. We had three ships positioned in Alaska for the first time since 2009. And while we grow into our shoes with the introduction of a unique new itinerary, we remain committed to a region that is a must-do for seasoned and novice cruisers alike.

  • And our capacity in Hawaii increased slightly, as state rooms on the Pride of America, which began being built during her dry-dock earlier this year, opened to receive their first guests in September. The addition of these 24 luxury suites, 4 inside and 4 studio staterooms, demonstrate our continued focus on not only improving the onboard experience for our guests, but also enriching the returns of our existing fleet. The build-out of studio staterooms, along with the addition of the Moderna Churrascaria, also demonstrate how we are taking the learnings from our new-builds, in this case both concepts being drawn from Norwegian Epic, to continually enhance the guest experience throughout our fleet.

  • The quarter also marked the first full quarter of operation for the 4,000-birth Norwegian Breakaway. And her results in guest experience have exceeded expectations. Guests and travel agents alike continue to rave about the variety of dining, entertainment and accommodation options, as well as the energetic atmosphere that keeps that ship buzzing late into the early morning hours. She finished her inaugural season in Bermuda, and has now transitioned to seven-night itineraries from New York to Florida and the Bahamas.

  • The expectations surrounding Norwegian Breakaway were many. She is the first of our new-builds launched with the principles from our Continuous Improvements and Platinum Standards programs, and the results were evident. We assembled some of the best and the brightest crew from across our fleet to ensure that her introduction was a success on the operational side.

  • The result has been a measurable improvement in guest satisfaction scores in the first months of operation, when compared to our last new-build, Norwegian Epic, for the same period after her introduction. She operates at healthy premiums in both ticket pricing and onboard spend, and contributed to our industry-leading 4% increase in net yield in the quarter.

  • Norwegian took the traditional concept of cruising and turned it upside down with the introduction of Freestyle Cruising. The Breakaway class provides even more freedom and flexibility as the latest generation of freestyle vessels. Communicating the unique experience we offer to potential guests is extremely important, which is why I want to thank all of our loyal travel partners, who are the best educators and promoters of our product. It is in large part due to their hard work and dedication that has made Norwegian Breakaway the success that she is, and gotten us through much of the challenging environment in the industry over the last few years.

  • Now these same travel agents are poised to benefit from Norwegian growth that is unparalleled in the industry. That growth includes Norwegian Getaway, arriving in January 2014, and the recently named Breakaway Plus vessels, the Norwegian Escape and Norwegian Bliss, debuting in the fall of 2015 and spring of 2017, respectively. But I will talk a little bit more about these exciting new vessels later in the call.

  • Turning to our performance in the quarter, higher net yield, coupled with business improvement efficiencies, resulted in EPS slightly above our guidance range. And while I am always pleased to report results that beat expectations, I want to point out that they come in an environment that has been more challenging than we had expected at the beginning of the year.

  • Incidents earlier in the year have been coupled with the macro economic events that included deliberations around the government shutdown and debt ceiling. While the impasse was eventually resolved, those 16 days of the government shutdown coincided with a challenging booking environment. As a result, as you guys know us, we are working harder and harder to get through these macro economic- and industry-related events that have led to a heightened closed-end booking environment.

  • Knowing the value of the proposition of the Norwegian Cruise vacation will always resonate with consumers. But before looking ahead, we should look at the quarter just ended. So I will turn the call over to Wendy for more detailed commentary on our third-quarter results. Wendy?

  • - EVP & CFO

  • Thanks, Kevin, and good morning, everyone. The following commentary, unless otherwise noted, compares third quarter of 2013 to the same period in 2012. And figures are given on an as-reported basis.

  • Net revenue in the quarter increased 19.6% to $596.1 million from $498.4 million, as a result of an increase in capacity days and an improvement of net yield in the quarter. The 14.9% increase in capacity days was driven by the addition of Norwegian Breakaway for the full quarter. Net yield for the period improved 4.1%, or 3.9% on a constant currency basis, with growth in both passenger ticket and onboard revenue. Net yield from passenger ticket revenue increased 5%, with net yield from onboard improving 1.5%, both helped by the premium pricing and rich onboard offerings of Norwegian Breakaway.

  • Looking at expenses, adjusted net cruise costs, excluding fuel per capacity day, increased 4.6%, or 4.3% on a constant currency basis, and below the lower end of our guidance. Mainly due to better-than-expected results from business improvement initiatives in the period. As always, I would like to reiterate that the effective timing and other factors make net cruise cost metrics better analyzed than an annual versus a quarterly basis.

  • Fuel prices in the quarter increased to $695 per metric ton, compared to $679 in 2012. While higher fuel prices had an impact, they are partially offset by efficiencies. Particularly, the addition of the fuel-efficient Norwegian Breakaway, which helped reduce overall fleet consumption metrics when compared to prior year.

  • The hard work put in over the past few quarters to optimize the balance sheet, including the redemption of higher rate debt and the refinancing of certain credit facilities, resulted in a sharp 44% decrease in interest expense in the period, to $26.6 million from $47.2 million in 2012.

  • To give you further evidence of the benefits of these transactions, you only have to look at the trend in our cost of debt. At December 31, 2012, our weighted average cost of debt was at 6.6%. At March 31, 2013, our cost of debt was 5.4%, as we used proceeds from our IPO and $300 million of the 5% senior unsecured notes offering to redeem certain high-rate senior notes. Currently, our cost of debt has decreased to under 4% after refinancing certain existing credit facilities and redeeming the outstanding balance of our higher-rate notes.

  • Summarizing results for the quarter, Norwegian Breakaway's first full quarter helped drive top line growth in both whole dollars and net yield. While net cruise costs were better than expected as a result of business improvement initiatives. The result was a 21.2% increase in adjusted EBITDA to $271 million, and an improvement in adjusted EBITDA margin in the quarter to 34% from 33.2%.

  • Layering in lower interest expense as a result of the aforementioned transactions, our bottom line result was a 42.1% increase in adjusted net income, to $182.2 million from $128.2 million, and an increase in adjusted EPS to $0.86 from $0.72 in 2012.

  • Looking ahead, deployment for the fourth quarter shows the majority of our capacity returning to warmer climates. 55% of our capacity will be in the Caribbean, with our deployments sailing from home ports in Miami, Tampa, New Orleans and New York. 17% of our capacity will be in Europe, with the remaining capacity spread between Hawaii, Panama Canal, Bermuda and other cruises.

  • Lastly, we have provided guidance, along with associated sensitivities, for both the fourth quarter and full-year 2013 in our earnings release. The following guidance metrics are both on an as-reported and constant currency basis.

  • For the fourth quarter, we anticipate an increase in net yield between 4% to 5%. Note this increase comes against strong comps from prior year, during which we had held pricing in the wake of Superstorm Sandy, adjusted net cruise costs, excluding fuel for capacity days, expected to increase between 6% to 7%, due to a dry-dock for Norwegian Sky and partial launch expenses for Norwegian Getaway, which enters the fleet in January 2014.

  • Also affecting year-over-year comparisons was the true-up of compensation expense in 2012, as the impacts of Hurricane Sandy and the incident in Italy on our earnings for the year resulted in us falling shy of our internal bonus compensation targets. Regarding adjusted earnings-per-share, we expect to be in the range of $0.13 to $0.18. For the year, we expect net yields to increase 4% to 4.5%, and adjusted net cruise cost ex-fuel per capacity day to increase between 3.5% and 4.5%.

  • Lastly, the guidance range for adjusted EPS has been narrowed to between $1.35 to $1.40. As I stated on our call last quarter, industry incidents and the ensuing media coverage impacted not only our results for the quarter, but our guidance as well. As with last quarter, our growth, particularly in net yield, has been tempered a bit from our view at the beginning of the year. However, we still reported great results, and continue to guide to solid growth in Q4 and the full year.

  • Looking to 2014, we expect adjusted net cruise costs, excluding fuel, to stabilize and decrease in the range of 1% to 2%, as we return to our more normalized dry-dock schedule, and new-build launch expenses roll over, year over year.

  • With that, I will hand the call over to Kevin for some closing comments.

  • - President & CEO

  • Thanks, Wendy.

  • As I mentioned earlier, the positive results for the quarter came in an elevated, closer-end booking environment. But while there been some bumps in the road that undoubtedly had some effect on bookings, including the government shutdown and the debt ceiling, we already know we have a bright spot to start the year strong.

  • Norwegian Getaway will debut in the first quarter, with some inaugural activities in Europe before crossing over to New York, and eventually to her home year-round port of Miami. There are many reasons to be excited for her arrival in the Magic City. Like her sister ship, she embodies much of what makes her home port city unique. And Getaway will have many touches that are unmistakably Miami, from the Tropicana Room, a complementary dining venue that evokes the Miami Beach of the 1940s and 1950s, to Flamingo Bar & Grill, a casual poolside dining venue serving authentic dishes from throughout Latin America that can be capped with a Cuban coffee, otherwise known as the rocket fuel that keeps Miami buzzing.

  • Getaway's godmother has also deepened the ties to the city. Being a fairly young city, institutions are still developing in Miami. However, one institution that is immediately linked to the city is the Miami Dolphins football team, which is why we are proud to have the Miami Dolphins Cheerleaders as godmothers for Norwegian Getaway. Their enthusiasm and commitment, not only for their team, but for the community of South Florida, make them a perfect choice to represent Miami's ultimate ship. But aside from her features and amenities, one of the most important aspects of Norwegian Getaway is her positioning as not just the largest ship to home-port in Miami year-round, but also as Norwegian's first year-round seven-night Miami ship in over 10 years.

  • The importance of this year-round return to Miami cannot be understated. There was a time when Norwegian ships were a year-round staple at the Port of Miami. But deployment decisions predicated on the size of our fleet left us without a year-round presence for almost a decade. The impact of our absence was particularly felt in the summer months. For years, potential guests, assuming we had a year-round presence, were met with a disappointment when looking to book a summer Caribbean cruise with us. It was also difficult for travel partners, as they would have to make a conscious effort to remember what became a difficult phrase for us to digest, that Norwegian didn't sail out of Miami in the summer.

  • That will no longer be the case, as we not only bring in a year-round ship, we bring in one of the largest and most innovative ships to Miami. Getaway's presence in Miami does double duty, fulfilling the demand from guests for a year-round option in the Caribbean, as well as keeping Norwegian top-of-mind for travel agents wanting to provide their customers with the freedom and flexibility of a Norwegian Cruise out of Miami at any time of the year.

  • If the performance and recent awards received by Norwegian Breakaway are any indication, we are feeling pretty good about how Norwegian Getaway will be received in Miami. Breakaway recently took home the US and UK Editors' Choice Award for Best New Ship from Cruise Critic, along with Gold Awards from Travel Weekly in the Contemporary and Large Ship categories, as well as the award for pool design for the innovative water park. Miamians will now be as lucky as New Yorkers to have the most innovative vessels ever sailing year-round from their home port.

  • Before turning over to questions, I would like to comment on the talk about the industry regarding capacity in the Caribbean, particularly in 2014. With the Norwegian Getaway and Breakaway, we have two of the industry's newest and most innovative vessels sailing to the region from two of cruising's busiest ports. And while they share a common region as their destinations, they are different products, with different ports of calls, and different sourcing regions and patterns.

  • By home porting Norwegian Breakaway in the country's largest metropolitan area, we are able to source the majority of passengers from in and around New York City and the Northeast. Meanwhile, Getaway's sourcing, along with the sourcing for ships sailing from warmer climates to the Caribbean, we cast a wider net and take a more national focus. These differences and nuances are key when looking at the capacity change in the Caribbean.

  • Another nuance is the utilization of Norwegian Pearl as part of our seasonal Caribbean deployment out of Miami in 2014. While she is contributing tonnage to the region, the majority of her sailings in the first quarter are chartered, reducing the capacity we have to sell for Caribbean sailings. The same is true in Europe for Norwegian Jade, which has been chartered for a month-long stint to accommodate guests at the Winter Olympics.

  • We are entering 2014 executing on our strategies of driving demand to our incredible product, enhancing the guest experience to continue growing the family of loyal Norwegians. And smartly investing in our fleet and leveraging new-builds to drive increased returns from our unique assets. It is with that backdrop that we expect earnings to grow approximately 60% in the coming year.

  • With that, we will open the call up to questions. Operator?

  • Operator

  • Thank you, Mr. Sheehan.

  • (Operator Instructions)

  • Felicia Hendrix from Barclays.

  • - Analyst

  • Hi, Kevin and Wendy and everybody. Good morning. And Andrea. Kevin, you snuck in that last sentence pretty quickly. I wanted to touch on that. And in light of your comment that earnings should grow about 60% in the coming year, maybe you can just talk about what you are seeing in 2014.

  • Thank you for the color on the sourcing and the capacity that you are adding. But if maybe you can just help us understand better what you might be seeing by region, not only in light of your own capacity increases, but your competitors', that would be helpful. Thank you.

  • - President & CEO

  • Sure. Thanks, Felicia. When you look at the business -- and as you guys all know, I am very anal when looking at this stuff 20 times a day. And looking at the booking trends for 2014, I want to make sure I provide a little bit of context.

  • As you remember -- and I have said this many times over the last couple of years, especially since we have been public -- a big focus of mine when we came out of the economic downturn in 2009 and into 2010 was a very important focus on the booking curve. And getting our business to be at a solid position when we come into the new year. And as we finished 2011, we had our best book position that we ever had, going into 2012. And then as we finished 2012, we had actually even improved upon that as we went into 2013. So it's important, just so you know that we have put a lot of emphasis on that, and we continue to do that.

  • For this period now, as we look at the booking patterns, we, for the most part, break it into two stories -- the first quarter, and then I am going to say the rest of the year. So our booking position is solid and on par with last year, or a little bit ahead in some of the quarters, except for the first quarter. The first quarter, we are booked a little bit behind. And it is a conscious decision by us. It's always a delicate balance between -- do you want to be booked, or do want to go for pricing? And the situation that we are in right now is that we are booked slightly behind, and there is a couple reasons for that. One being that the Easter break, which is a big time-off, as you know, especially in the Northeast, is toward the end of April this coming year, versus it was, I think, March 31 for 2013. So that booking momentum has changed a little bit into the second quarter. The other thing is that we are solidly priced in the first quarter of 2014. I would say that the pricing is above the mid single-digits -- to not get too much specificity to it. But that is the balance that we are working through. We want to continue to push on pricing, and keep a careful eye, of course, on the load.

  • So that is really the book position. And I would say when you look at the Caribbean as a percentage of the book position, we are pretty consistent with the booking position for the first quarter of 2014 with our overall position. And having said that, are we happy with that? I think I would like to see it a little bit stronger. We have a couple of things going on right now that is giving us some momentum. So every week, it is a critical time to look at everything, make sure we are gauging everything. And hopefully, you guys have seen how we have done this in the past, and industry-leading pricing in the quarters, and all the rest of it. So we are going to continue to run the business for the long-term success of this business. And we watch every single quarter, but we are also keeping a very careful eye on 2015 and 2016 and the next 10 years.

  • So having said all of that, let me just give you a little bit of color on 2014. And yes, it was a 60% increase in EPS that we are, as I see it now -- just keep in mind that we are very early in the budget process. But as I glean the information from what I've been able to see so far -- and we are a couple weeks from the time when I actually get into it and go through a forensic review of every single line item. But where I see it now, and why I feel pretty comfortable that we will be at a 60% increase for 2014, is our yields -- the way I see it today -- will grow with a yield increase of something that hopefully begins with a 4. Whether it is the low-4s or mid the mid-4s, it is too early to say. But I'm comfortable to say that, that is the yield side of it. On the per capacity day basis, we see that our costs -- as we have told you, now that we have anniversaried the dry-docks that we had in 2013, we expect our per capacity day cost basis to come down by 1% to 2%. So those are the two big contributors into it.

  • Wendy gave you a lot of color on the balance sheet. So you can see where our interest cost is. And then the depreciation, you just have to weigh in the additional ship in there. And the interest -- excuse me, the tax cost, given the fact that we have an American ship, will be in the range of 3% to 4% on a long-term basis. But 2014, it will be a little bit less, about 2%, as we move through that converting from -- recouping losses to being in the earnings side.

  • So that is how we get to the 60% increase in 2014. And as we get further into the year, we will have a lot more color. When we come back with the year-end results, there will be 12 more weeks of data, and we can provide some more specificity behind that.

  • - Analyst

  • Okay. Thank you for all that color.

  • Operator

  • Robin Farley from UBS.

  • - Analyst

  • Great. You gave a lot of color that actually clarified a bunch of things. I just -- maybe two points of clarification. When you mention 60% earnings growth next year, is a fair to say that you are also talking about in the 60% range, as well? In other words that, just taking the pieces that you mentioned, it seems like it would actually be up a little bit more than 60%. So you don't have to commit to a number, but to clarify that.

  • And then also, you mentioned Q1 -- I think you were saying mid single-digit price increase on the books. And I assume that, that includes the mix benefit of having -- because it will be Breakaway's first Q1, as well as Getaway. Is there -- I wonder if you could give us any color on same-ship growth, how that looks? Just to get a sense of the premiums from the new ships versus the core fleet.

  • - President & CEO

  • Sure. Yes, the way I came up with the 60% is, I took the midpoint of the guidance we have for 2013. Which, as a matter fact, we have gone from $1.20 to $1.40 when we first went out with the guidance, to, last quarter, $1.30 to $1.40. To this quarter, $1.35 to $1.40. So each time, we have raised up the lower end of that. So it is, at the midpoint, about $1.375. And if you take 60% on top of that, you get to, I believe, $2.20. And hopefully, as we get more clarity on the environment, we will build up from there. But I think for the most part, when you look at it -- and taking into account the consensus that we see as a couple outliers. But we are comfortable in that low- to mid-$2.20 range at this point. So that is that.

  • For the first quarter, you are right. We have the benefit of the Breakaway for its first quarter. And we also have the Getaway coming in, probably by the time we actually are diverted up to New York. Which was not originally scheduled -- for a big event that we happen to be hosting in New York that I can't talk about. That happens to be a big event in New York at the end of January, beginning of February, which will go without any further clarity. And then we come down to Miami.

  • So it's a partial quarter. But when you cut through and you look at the pricing that we expect from our new ships, and then you look at the organic pricing, we are in the range of what we have said is our long-term guidance. I would say 2.5% to 3% is probably the comfortable level that you could see the give-or-takes in the different ships. And each one is behaving a little bit different. It's never a straight line.

  • - Analyst

  • Okay, great. That is helpful, thank you very much.

  • Operator

  • Greg Badishkanian from Citigroup.

  • - Analyst

  • Great, thank you. And what is driving the 4% plus net yield growth in 2014? How do you foresee the Caribbean discounting environment, which is pretty aggressive, by one of your big competitors? And how do you see -- what is your expectations for Europe also developing for 2014, to get to that 4% guidance?

  • - President & CEO

  • I think it is a mixed bag. I think we are working harder, as I said, with the load. We are balancing that. But when I look at the pricing in the first couple of quarters in the Caribbean, we have a healthy pricing environment right now. So it's going to be -- let's get through another few months to see how that continues along. But we are managing it as carefully as possible. And we are -- it is a promotional market right now. And we are in there as well as everyone else. And we are working our way through it.

  • I suspect that, as you know, the consumer has a short-term memory. And we have had a pretty benign environment for now a period of time. And as we get to the beginning of the wave season, I expect that the consumers will remember the phenomenal value of a vacation. And things will get back more towards the expectations that we all have for 2014. And hopefully, that will be a little bit of a positive.

  • - Analyst

  • Right. And just finally, in terms of the promotional environment right now, let's say over the last one or two months. Have you noticed any difference in the promotional environment in the Caribbean? Or has it been pretty stable?

  • - President & CEO

  • No, I think it is a little bit more promotional. And I think we all want to make sure we are doing as best we can. But we are working our way through it. I've got to tell you -- this is the thing that I think everybody needs to remember is that, this is a competitive industry. Since the day I walked in here, we have had different markets that have been competitive. And we work our way through them and then we get on to the next market and the next quarter. And we all focus absolutely on the things we need to do. And as an industry, I think that has proven out to be the success of the industry over the long-term.

  • - Analyst

  • Right. Just to clarify, I know it has been very promotional the last number of months. But the last month or two, you are saying it has gotten more promotional, or it has been just consistently very promotional?

  • - President & CEO

  • No, I think it's been pretty consistent.

  • - Analyst

  • Okay.

  • - President & CEO

  • I wouldn't say it is like a huge difference in what it has been from prior years. This is the -- fourth quarter is usually the time -- and remember, we build our businesses for the peak parts of the year, the second and third quarter. And we will work very hard to be thoughtful about how we book our ships for the first and fourth quarter, to be in a stronger position coming into them as possible. And some of the stuff that has happened in the year has put us a little bit behind. So that is why there is a little bit of a heightened promotional activity, but not enough to say it is a different market.

  • - Analyst

  • Right. Okay, thank you.

  • Operator

  • Harry Curtis from Nomura.

  • - Analyst

  • Hi, good morning. Just wanted to follow-up on the European piece. Can you give us a sense of the mix of Europe for all of 2014? And I don't know if you -- I may have missed it, but did you get into the level of detail on your expectations for Europe as you did on the Caribbean?

  • - President & CEO

  • Yes, hi, how are you doing, by the way? For 2014, our European deployment -- it is about 20% for the entire year. It, as you know, peaks up a little bit in the second and third quarter, as we have the Epic in there and we have a ship up in the Baltic. So that is consistent with what we have this year. I made the conscious decision to stay with the ships. And to be honest about it, we debated quite a bit about whether we should move a ship. But something very critical to me was keeping consistency of our ships in the market so that our travel agents knew where we were, and they start to rely on us being more consistent. And that helps our booking behaviors from the travel agents. And the pricing has been a positive from the way we are looking at it today. And our position in 2014, as we get out to the summertime, is loaded well. So we are feeling pretty good about Europe right now.

  • - Analyst

  • Do you think the pricing -- is it fair to use a mid single-digit range in that pricing?

  • - President & CEO

  • Yes, I think that is a reasonable assumption.

  • - Analyst

  • Okay. And then just the --

  • - President & CEO

  • Remember, but it's the -- after being down quite a bit, as you know, in the last couple of years. So we are just reclawing our way back, as an industry.

  • - Analyst

  • Yes. And then the last quick question was a housekeeping item. Can you give us the average price of your fuel hedges for 2014?

  • - EVP & CFO

  • Sure. So we are 64% hedged in 2014. And we use US Gulf Coast 3% as our hedge proxy, which historically has had a high correlation with what we consume. And the rate is in the high 80%s.

  • - Analyst

  • Okay, very good, thanks very much.

  • Operator

  • (Operator Instructions)

  • Steven Kent from Goldman Sachs.

  • - Analyst

  • Hi, good morning. Two questions. First, Kevin, you mentioned a couple times that during the government shutdown, things got weak. How weak did they really get? That is a lull period anyway. But did you actually turn negative on bookings and phone calls and just the level of activity?

  • And then second, what kind of premium are you getting on the new ships as you go out into 2014? I think at one point, it was 30%, 40% of our premium to the rest of the fleet. Is that decelerating as you get further out into 2014?

  • - President & CEO

  • On the first part of that, yes, it was just a benign difference, to be honest. You just could see it. We were positive, but just a little bit less positive than the expectation on the booking activity. Nothing to be overly concerned about. It is just that we could notice a little bit of distraction. As you can imagine, every time some macro news that goes on, people are distracted a bit.

  • On the second point, those numbers are not any numbers we have ever talked about on the premiums on the new ships. We have always said that the premiums on the new ships are double-digit. I think some of you guys in the industry have come up with -- the sell-side and buy-side have come up with numbers that are more specific than that. But we have continued to say that we find that the new ships are pricing at about a double-digit premium to the Epic. And the Epic has been pricing at a double-digit premium to the rest of the fleet. So that is where we are seeing it, and we don't see anything different from that right now.

  • - Analyst

  • So they have not decelerated, even from the double digits you were seeing earlier in the year, as you get further through?

  • - President & CEO

  • Well, the only -- I would say in the Getaway, when we first went out -- which is a normal thing -- we price it really high. So that is a natural thing. You are trying to attract in the beginning. And then as you get closer, you start to gauge the supply/demand and the booking curve. And it just naturally moves that way as time goes by. But nothing that was not expected.

  • - Analyst

  • Thank you.

  • Operator

  • Steve Wieczynski from Stifel.

  • - Analyst

  • Good morning, guys. So on the cost side of the equation, you have done a very good job this quarter in terms of driving costs down. And Wendy, I know you talked about -- you categorized it as business improvement initiatives. And that came in a little better than you expected. Can you break that down a little bit?

  • And then, Kevin, I know you have talked about before trying to pull out another 500 basis points in margin. And I think that was a couple quarters ago. So does that number seem pretty conservative now?

  • - President & CEO

  • (laughter) Do you want to do the first part first? (laughter)

  • - EVP & CFO

  • Sure, definitely. So looking further at the cost improvements that we have had, first off, a good portion of it is coming from our lean management initiative, which some people will call Six Sigma. But internally, we call it continuous improvement. We also are gaining efficiencies through our disciplined inventory control, both on the technical and hotel operations. Also leveraging purchasing across the fleet. Implementation of standard service contracts and in-house writing crews for continuous proactive maintenance, things like engines, coffee machines, et cetera. Those are the primary ways that we are continuing to drive inefficiencies and waste out of the business. And there's lots of opportunities still.

  • - President & CEO

  • And as far as the margin improvement, when we look at our model the way we have built it -- and just keep in mind that we are looking at the environment that we are in, and we are not building in Nirvana from an economic standpoint. So if the interest rate environment continues, and oil prices continue, and unemployment continues, and housing starts, and all the rest of the things that play into the economy and people's feelings about their spending behaviors -- if we have a return to more normalized, or an improved economic climate, that would be something that would enable us to improve upon the 500 basis points. But what we look at when we see our same-store building in the new ships, and running the business smartly, and the lean management, and all the stuff that we have been talking about for years now, we see that in the same economic situation growing by about 500 basis points.

  • - Analyst

  • Okay, and second question, if I could. Kevin, can you just give a little color in terms of Getaway, and maybe how that is booking right now? And I know it is a ship that you wanted to go after more of the Latin American community, and maybe how that is booking from that perspective as well.

  • - President & CEO

  • Yes I would say, without giving away any trade secrets, the ship is booking consistent with the expectations we had when we determined that we were going to put it down here in Miami. It is coming from various different markets. So that is working consistent. And I would say that there is nothing that it has happened that is inconsistent with what we thought the view would be when we first announced the ship.

  • - Analyst

  • Okay, great. Thanks guys.

  • Operator

  • Tim Conder from Wells Fargo Securities.

  • - Analyst

  • Thank you. Kevin, I wanted to circle back on the premiums of the newer ships versus the rest of the fleet. Have you seen -- given the ongoing promotional environment, have you seen that premium widen in any way? If the legacy part of the fleet maybe has come in a little bit more challenged than you thought 90 days or six months ago? Has that premium widened because of that, or has that stayed the same? That is question number one.

  • Question number two then is related to the cost outlook. That 500 basis points -- just maybe refresh us on the time frame. And then as to what level of black belt Wendy would have to achieve to get that.

  • - President & CEO

  • (laughter) So let me start with the second question, and then I will come back to the first. The 500 basis points is when we look at the model through 2017. That is the underpinning of that. And then the other part of that is, that also enables us to double our return on invested capital -- and hit about 14%. So everything that we have been doing is consistent with that, and will be consistent. And we are going to work like mad to make sure we deliver on those results.

  • As far as the promotional environment and the pricing of the new ships versus the old. I think we are still -- if you look at it, as I said, we have a strong view -- a strong pricing for the first quarter. And so I would say that nothing is really playing out different than what we expected. And the organic ships are coming in kind of at the price improvements that we expected, as well as the new ships. So I don't think anything has really changed the thesis.

  • - Analyst

  • Okay, great. Thank you both.

  • Operator

  • Thank you. And our --

  • - President & CEO

  • This will be our last question, thank you.

  • Operator

  • Joel Simkins from Credit Suisse.

  • - Analyst

  • Okay, good morning, guys. I'm glad I got a chance to sneak in here.

  • - President & CEO

  • (laughter) Well, you've got to be easy on us.

  • - Analyst

  • Okay. So starting with, I would say, Europe. It does seem like some of the commentary you have heard out of some of your peers, as well as folks in the lodging industry, seems to suggest that it's starting to get a little bit better over there. So with that in mind, how are you are thinking about the itineraries as you start to think about 2015 and beyond, and whether or not you would tilt some capacity back to that market?

  • - President & CEO

  • Well, I think the capacity we have in the market now is the biggest we have had in the history of this Company. We have two ships year-round in Europe. We have the Epic in the summertime, seasonally, over in the Med. And then we have a ship up in the Baltic. That's a comfortable position for us, so I'm not sure I see that changing too much in the short term. But we have a lot of work we do in analyzing the itineraries. And we price out every possible itinerary before we make the decisions where we put our ships. So it's a rigorous process. And at the end of the day, it's where do we get the best result?

  • So we haven't announced anything yet for the upcoming itineraries. But I wouldn't think that the European market would be much different in the future than it is. What we need to do a better job of at Norwegian is getting more Americans on those ships. And we are working very hard on that. And that will enable us to deliver even stronger onboard revenue, and all the rest of it. As you know, the spending behavior is quite different for the Americans, versus Europeans.

  • - Analyst

  • Sure. And one quick follow-up on that, on the onboard. Obviously you had a little bit tougher comps in the third quarter. Can you just speak some from a high-level perspective what you're seeing on the onboard product? What is working, what is not working, or where you are seeing the most traction?

  • - President & CEO

  • Yes. So the third quarter, we talked about the casino stuff, the nuances, in the third quarter. The fourth quarter was starting out -- we started the quarter strong. The first month we pretty much have a handle on where we are. And I would say, it exceeded our expectations. And back more towards the normalized level. It will be dependent on how well we fill the ships over the next number of weeks, for the fourth quarter. But we feel very confident with our onboard revenue. And the trends that we have had, we expect to continue.

  • - Analyst

  • Thank you.

  • - President & CEO

  • Okay, thanks everyone. Thanks for your time and support. We look forward to our next quarter call. And as always, Andrea and Wendy will be available to answer your questions. And thanks for your support, guys. And have a great Halloween. Take care.

  • Operator

  • Ladies and gentlemen, this concludes today's conference call. You may now disconnect.