挪威郵輪 (NCLH) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Norwegian Cruise Line fourth-quarter and full-year 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

This conference call is being recorded. I would now like to turn the conference call over to your host, Ms. Andrea DeMarco, Director of Investor Relations. Ms. DeMarco, please proceed.

Thank you, Sam. Good morning, and thank you all for joining us for our fourth-quarter earnings call. I'm 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 and the year. Kevin will then proceed with some closing comments, after which we will open 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 just a few items. Our press release with fourth-quarter and full-year 2013 results was issued this morning, and is available on our Investor Relations website. I would also 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 forecasts or estimates, and undertake no obligation to update any forward-looking statements during the quarter. If you would like more information on the 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 measure and other associated disclosures are contained in our earnings release and on our website. With that, I'd like to turn the call over to Kevin Sheehan. Kevin?

Thanks Andrea, and good morning, everyone. Our call is a little bit later than we had wanted this quarter, due to the SEC research restrictions for analysts from firms that participated in our latest follow-on offering in December. The restrictions have just expired, allowing us for coverage for the results for the quarter and the year, which Wendy and I will talk about in more detail later in the call. 2014 is off to an exciting start, with the recent delivery of Norwegian Getaway. With our builder Meyer Werft's work essentially complete one month ahead of delivery, it gave us time to accelerate the training of our crew, and today the ship is operating as if it has been in existence for several months, a well-oiled machine.

After delivery, we stopped in Rotterdam and in Southampton for travel agent events, and where in the UK we encouraged our travel partners to bring the best customers, who were either new to cruising or had cruised on the other lines, to introduce them to our unique product offering. The ship received rave reviews from guests, from travel partners, and the media alike. From Europe, Norwegian Getaway made a stop in New York City for an inaugural voyage for travel partners and guests. She remained docked in Manhattan and was converted to the Bud Light Hotel, which was held in conjunction with Super Bowl XLVIII. There too, she met with high phrase from guests for the quality of the experience, the incredible accommodations and the excellent service from our crew. But I'll talk a little more about Norwegian Getaway later in the call.

Now I'd like to turn the focus to a banner year that we are all extremely proud of. 2013 was a break-out year in Norwegian's storied history, a year that was a result of commitment and dedication, not just from only our team members, but also from our loyal travel partners and our guests. There's an excitement around the Norwegian brand that attracts those who want to be part of something special.

Looking back, the list of accomplishments this past year is quite impressive. First was a series of financial transactions that have strengthened our balance sheet and credit metrics. We began with our initial public offering in January, which was quickly followed by a notes offering. Later in the year we completed two refinancing transactions with our lender group that resulted not only in improved rates and terms, but also included amounts that when coupled with the proceeds from our IPO and notes offering. Allowed us to extinguish all of our higher rate debt, optimize our balance sheet, improve our credit metrics, and substantially reduce our interest expense going forward. In addition, we completed two follow-on equity offerings in the year, adding more liquidity in the market place for our shares.

The second highlight of the year was the launch of the next new build after Norwegian Epic, from what I term the new Norwegian Cruise Line. We took delivery of the 4,000-berth Norwegian Breakaway in April, and have not looked back. She became an instant part of the skyline when she reached our home in New York City, and to date she has carried over 170,000 passengers on voyages to Bermuda, the Bahamas, and the Caribbean.

She was an industry game changer from the moment she left the shipyard in Germany, with innovative features like The Waterfront and 678 Ocean Place, along with New York touches like the fine dining venue, Ocean Blue by Geoffrey Zakarian, and Carlo's Bake Shop by TLC star Cake Boss Buddy Valastro. She truly is New York's ship, and we are proud to have her as the largest ship to ever home port in the city. While her dynamic hull art by Peter Max may be what captures everyone's attention, let's not forget it's what's inside that counts, and what lies beneath the signature hull is a ship designed to deliver impressive earnings power. Her varied accommodations and superior stateroom mix result in premium ticket pricing, while her on-board offerings only enhance our industry-leading on-board yield.

While these accomplishments were significant, I'd be remiss to say that 2013 wasn't without its challenges. The industry faced several incidents throughout the year, the impact of which we are still feeling today. The environment has remained in a promotional state, but it's a state to which we've become accustomed. These challenges required us to be more flexible with our strategies; however, our results came in line with our expectations and we reported solid results, including earnings above the guidance range we provided at the beginning of the year prior to these incidences.

Looking ahead, we are optimistic as consumers continue their return to cruising, realizing that the amazing value proposition is above and beyond that of any other segment in the leisure sector. Looking at sailings in the first quarter, we kept our disciplined strategy of maintaining pricing while balancing load. As the quarter progressed, we have strategically adjusted our pricing to be more competitive where needed.

Also keep in mind that while pricing surveys may serve as a proxy of the environment at a point in time, industry pricing is very complex, and the surveys should be framed in that context. Having said that, we are providing Q1 and full-year guidance consistent with last quarter's call. But before getting too much into the coming year I'll turn the call over to Wendy, and she'll go over the results of the fourth quarter and full year.

Thanks Kevin, and good morning, everyone. The following commentary, unless otherwise noted, compares full-year 2013 and 2012 on an as-reported basis. Revenue for the year increased 12.9% to $2.6 billion, from $2.3 billion, on an increase in capacity days and net yield improvement. The 8.8% increase in capacity days came from the introduction of Norwegian Breakaway in April, partially offset by dry docks for Norwegian Pearl, Pride of America, and Norwegian Sky.

Net yield for the period increased 4.3%, or 4.2% on a constant-currency basis, from both strength in ticket pricing and on-board spend, which increased 4.7% and 3.2%, respectively, in the year. Ticket yield improvement was particularly strong in Bermuda, benefiting from the addition of Norwegian Breakaway's seasonal itineraries from New York, as well as our unique Hawaii itinerary. The year had some softness in Alaska, where the introduction of a third ship for the first time since 2009 was coupled with a unique itinerary that took time for travel partners and guests to absorb. On-board yield was strong in the year, from both the addition of the on-board, revenue-rich Norwegian Breakaway, as well as strength in all major areas.

Adjusted net cruise costs, excluding fuel, per capacity day increased 3.6%, or 3.4% on a constant-currency basis, primarily from incremental dry-dock expense, and expenses related to the delivery and launch of our new builds. Our fuel price per metric ton, net of hedges, increased 1.7% to $675, while fuel consumption per capacity day decreased 3.3%, from a mix of fuel-saving initiatives, as well as the introduction of the fuel-efficient Norwegian Breakaway. This brings our cumulative five-year consumption savings to 17%, a figure we expect to increase as further energy-saving initiatives are implemented, and we take delivery of newer, more fuel-efficient ships.

While on the topic of fuel, we recently announced our most recent program for the installation of exhaust gas scrubber technology on an additional six ships in our fleet. Between 2014 and 2016, we will be installing scrubbers on Norwegian Breakaway, Dawn, Jewel, Gem, Pearl and Sun. We have received exemptions from the appropriate regulatory agencies to burn high-filter bunker fuel until installed. These scrubbers carry a very attractive return on investment, and reduce our sulfur emissions to comply with the upcoming eco-fuel standards. These scrubbers are in addition to those currently being completed on Pride of America, as well as our two new builds, Norwegian Escape and Bliss.

Now going back to the P&L, net interest expense of $282.6 million included various charges related to financial transactions completed in the year. These transactions included pre-payment of certain credit facilities, and the redemption of certain of our high-rate senior notes, with proceeds from our initial public offering, our senior notes offering, and refinancing transactions. These pre-payments and redemptions triggered redemption premiums, and the write-off of deferred financing fees totaling $160.6 million, which ran through interest expense. Excluding these items, interest expense was $122 million in 2013, compared to $189.9 million in 2012.

Adjusted net income for the full year 2013, which excludes the aforementioned financial transaction-related expenses and other adjustments, increased 70.9% to $295.8 million, from $173.1 million, while adjusted EPS increased 45.4% to $1.41, from $0.97 in 2012. These earnings compare favorably, not only because they demonstrate healthy growth over prior year, but they also exceeded our guidance given at the beginning of the year, well before we knew the extent of the impact of industry incidents.

Results for the fourth quarter of 2013 mirror those of the full year, and are also impressive given the current environment, with revenue increasing 19.3% on a 13.9% increase in capacity days, and a 4.8% increase in net yield. Adjusted net cruise cost excluding fuel per capacity day increased 7.6%, or 7.1% on a constant-currency basis, primarily due to an incremental dry dock in the period, and initial launch costs for Norwegian Getaway. In addition, while we accelerated certain scheduled repairs and maintenance that increased net cruise cost in the fourth quarter, as mentioned earlier, full-year net cruise cost was in line with full-year expectations. Fuel price per metric ton net of hedges decreased 6.6% to $649, from $695 in 2012.

Interest expense net in the quarter benefited from the financial transactions and refinancing activities completed earlier in the year, decreasing to $24.6 million from $47.7 million. The combined impact of improved yields, the addition of capacity, and an optimization of our capital structure drove an increase in adjusted net income in the quarter to $40.5 million, from $5.6 million, and adjusted EPS of $0.19, up from $0.04 in 2012.

Now looking to 2014, we have provided guidance, along with associated sensitivities for both the first quarter and full-year 2014 in our earnings release. Unless otherwise noted, the following guidance metrics are both on an as-reported and constant-currency basis. For the full year, net yield is expected to increase approximately 4%, while adjusted net cruise cost, excluding fuel per capacity day, is expected to decrease between 1% and 2%. Full-year adjusted EPS is expected to be in the range of $2.20 to $2.35. Looking at the first quarter, net yield is expected to increase between 3.5% and 4%. Adjusted net cruise cost excluding fuel per capacity day is expected to increase between 2.5% and 3.5%.

As always, I want to point out that net cruise cost is a metric that should be looked at on an annual basis. In this instance, while our first quarter net cruise costs are showing an increase due to timing of dry docks and inaugural costs, this trend will reverse beginning in the second quarter, as upcoming dry docks line up with those in the prior year, and inaugural expenses are anniversaried out. As such, we currently expect our adjusted net cruise cost, excluding fuel per capacity day, to decrease around 3% in the second quarter. Lastly, adjusted EPS for the quarter is expected to be in the range of $0.20 to $0.24.

Deployment in the first quarter is 72% in the Caribbean, and 17% in Europe, with the balance in other itineraries. Looking at the full year, deployment in the Caribbean is 48%, while 21% is in Europe. Among other itineraries, we have 8% of deployment in Bermuda, 7% in Alaska, 7% in Hawaii, with the balance in other itineraries. With that, I'll hand the call over to Kevin for some closing comments.

Thanks, Wendy. As I mentioned earlier, the newest ship to our fleet, Norwegian Getaway, has already made an incredible impression as we toured her around Europe and New York. A little over 10 days ago she was christened at her new year-round home at the Port of Miami in a very exciting ceremony hosted by Brook Burke, host of the Dancing with the Stars, and included a performance by Pitbull and the Getaway Godmothers, the Miami Dolphin Cheerleaders.

Bringing Getaway home is significant on many levels. First, Cruise Line the Company that started the modern cruise industry 47 years ago at that very port has now brought the largest ship to sail here year-round. Second, her arrival marks the first time in a decade that Norwegian offers a year-round, seven-day sailing from Miami. As I said before, the importance of this can not be diminished, as it provides a consistency of offering to both our guests and travel partners wanting to experience a Norwegian Cruise at any time of year, from the cruise capital of the world.

While challenges from 2013's incidences are still lingering, we have incredible hardware and a unique product proposition that has delivered consistently across our 13 freestyle cruising ships. Most importantly, we have an incredibly passionate crew that are looking forward to welcoming close to 2 million guests that will sail on a Norwegian ship in 2014, and offering them a vacation experience of a lifetime. With that, we'll open the call up to questions. Operator?

Thank you, Mr. Sheehan.

(Operator Instructions)

Our first question comes from Tim Conder of Wells Fargo Securities. Your line is now opened.

Thank you. Kevin or Wendy, if you could -- I appreciate all the color that you've given here in the preamble. A little bit more, if you would, specifically the premiums that you're seeing on the Breakaway and Getaway versus the comparable amount of fleet for the Caribbean? Then Kevin, again, you're referencing the new Norwegian fleet. Anything you can talk about at this point, or just broadly, directionally, thoughts about additional ship orders looking to 2018 and beyond, and then how you would think about some of the older ships that are currently in the fleet?

Sure. That's three things, so let me make sure I get them all right. I think everything is going with -- let's start with the Breakaway, is going as expected. We knew first year in with a large ship in New York that we had to work harder, which we have, and the ship is filling out nicely. When you look at the booking levels at this point, we're actually more focused today on Bermuda and optimizing that opportunity in that premium itinerary.

Check the box, I think the Getaway is going to have another very good year, and the pricing is in a zone of where it was last year, as we look out at some of the initial sailings in the Bermuda sailings. Remember, you had the very high pricing of the first couple of sailings. Nothing there that I would say is inconsistent with what we thought.

The Getaway -- it's a little early to say, and I think we've been having a consistent performance in the Miami market. The thing that we're to be honest more focused upon, is that -- as you could imagine, the Pearl and the Sun -- several of the ships are moving out of Miami as we've had -- they repositioned up into Alaska, and the Epic moves over to Europe.

The Getaway will continue to get a big halo effect on that ship, and all of the unique product characteristics and experience. It's just been a little bit, to be honest, more complicated with the environment that we have. As you know, there's a lot of capacity in Miami.

But it's no different than anything else. I think we talked last year about putting our third ship in Alaska, and then last year it was the first year of the travel agents learning about it, blah, blah, blah. This year, as we had expected, it's moving into place quite nicely. I don't think anything from either of those ships is inconsistent with what our expectations were. We're still very excited about that.

As far as the -- skipping to the last part, the older ships -- we continue to keep our eyes open. The difference we have is that we have 13 ships, growing to 15, and so we don't have a sense of urgency. Obviously, there's a lot less ships than our major competitors, and there's plenty of places to put those ships. As you know, we've been very cautious in putting them into new markets and wanting to stay in the middle of the fairway as we build our business proposition with a very consistent execution.

Having said that, we also keep our eyes open as to whether there are opportunities to maybe move an older ship out of the market and replace that capacity, which segues into your middle question about 2018 and 2019. In a perfect world, I'd like to see Norwegian being as consistent as possible with growing rationally. Right now, the way we're looking at it is hopefully being able to figure out one of the older ships over the next year or two, and then replacing that capacity with something built more consistent with the ships that we're building today.

Okay. Just one other clarification point on the Breakaway, Getaway. Is it fair to say you're still getting double-digit premiums? Obviously with Breakaway you'll soon be starting to comp some pretty good premiums, as you've alluded to?

When you say -- well, when we comp Breakaway, then it becomes more organic kind of pushing there. You're not going to continue to get a big spike above the pricing from last year on Breakaway. On Getaway, I would say that it would be -- if you remember when we talked in the third quarter -- this is a very important point -- the question came up as to how were we loaded for 2014. We had said we were consistently loaded for the second, third, and fourth quarter, and we said we were behind on the first quarter. Hopefully everybody remembers that.

To be honest, now that we're closer to being what will ultimately play out for the first quarter, our pricing at that point was up double digits. We were trying to send a message of saying guys, as an industry let's keep our eyes open, and let's smartly price, we're all going to land out filling our ships and blah, blah, blah, blah, blah. Unfortunately that didn't play out. As a smaller player in the business, everybody needed to do what they needed to do to fill their ships.

As the quarter -- as that period progressed and into this quarter, we needed to adjust our pricing somewhat to get to the finish line. I'm happy to say that the yield, as you guys have heard from our guidance for the first quarter, is still I think going to be industry-leading, but I think not as strong as it would have been. That all plays into the mix of each of the ships. I think when you look at each ship, there were fits and starts along the way.

But at the end of the day I think the main punch line and the main headline, guys, is that we have announced that our guidance for the first quarter is, I think, very solid. We've announced what is bringing to the finish line the 60% growth that we had mentioned last quarter for our 2014 performance, which I think is really spectacular.

It's a little difficult to get too far into the weeds on the individual ships more than what we've said, because we're one brand. As you know, all of the competitors are listening in and they know exactly what we're doing and they're trying to figure everything out. I think from a strength of our business proposition, we try to just be a little bit less candid on some of this stuff, given the fact that we just have the one brand.

Thank you, sir, very much.

Thank you.

Thank you. Our next question comes from Robin Farley of UBS. Your line is now opened.

Thanks. For your yield guidance for 2014, I wonder if you could give a little bit of color by trade -- in other words, Caribbean versus Alaska, just to get a sense of what's getting -- and Europe, obviously -- just to give us a sense of how it's coming to that 4% of aggregate, ranges or ballpark, or something?

I'm getting a lot of no's here. Let me just say what we had said last year -- and I think is playing out nicely -- as you remember, a lot of the players moved ships out of Europe. We didn't. I think that's playing out to be a smart strategy on our side. We're feeling pretty good about Europe, we're feeling pretty good about Alaska.

The Bermuda market is a solid market. Canada, New England is solid, the Panama Canal. Of course, every year there's a market that you have to focus on, and we're working our way through the Caribbean. I think, given the fact that we provided the guidance we have, tells you how we feel about it.

Okay. You mentioned -- I think your comment was about late in Q4 how you felt that others maybe weren't holding price as well ending Q4. How are you feeling about that now, two-thirds of the way through wave season. When you look at the competitive environment, do you feel like it's improving, or the same as how you felt it was in late Q4?

I think we're starting to feel that things are settling a bit, and starting to see a little bit of a glimmer of hope and positive signs in the industry. Just remember, we're all relying on the great season, and we're all jumping into it. I think in the very first couple of days people were still on their vacations, so it didn't start exactly as -- but then it started to build in, and I think as we get further into it, we're starting to feel better about it.

But it's all, as we said on the earlier part of the call, it's a very promotional market. We're working harder to do what we need to do to get to the place. We're competing with two great corporations and they're doing the same sorts of things. Everybody's got a different game chart, and they're all working towards the same end zone of delivering on their promise, and we are, as well. But I would say that we're feeling a little bit better about the wave as we get through each week now.

Okay, great. Thank you.

Thank you. Our next question comes from [Harry Wortian] of Nomura. Your line is now opened.

Okay. Can you just quickly touch on your -- where you're seeing some cost efficiencies? Are you simply spreading more berths over relatively fixed costs, or are you actually seeing some ability to take cost out?

Yes. Thanks, Harry, that's a great question and I appreciate it. Because there has been a lot of noise in the numbers, and it's not anything but just taking the time to step back and look at the fact that we went through -- as you know in 2012, we didn't have any dry docks. In 2013 we had three, so now we're on an apples-to-apples basis in 2014.

Of course, there's nuances in each quarter, like this quarter we have I think 19 days of dry docks versus last year we had five or six with the Pride of America. So there's more dry docks in the first quarter this year. That's why the first quarter looks a little odd -- and of course the Getaway inaugural, like christening stuff.

Then as you get through the year, you start to see the real drive. This Company has consistently improved on the cost side of the equation, without obviously sacrificing on the guest satisfaction. That's a continuing lean management initiative. We have two teams that are working on that, one on the ships and one on the shore side. It is a long, long process. I will tell you that I can see this continuing to be on the margin improvement in our margins for four, five, six years.

Just as an example, you go on a ship and you go to a department, and you go through that department, and you wrinkle out all of the inefficiencies. Then you let it operate for a few weeks or a month, then you come back and you make sure that they've continued to keep that process in place. Once you perfected it on the one ship, then you go and you roll it out to -- so it's not as easy as it would be if we were in one building and everything was done. I think that's going to be a bleeding opportunity on the margin side for years to come.

I'll tell you, on the other side, as you said, the new ships are very efficient. I don't want to say -- I won't get too specific, but we just finished our first sailing on Getaway. I was blown away with the efficiency on the fuel for the week, and fuel consumption. If that is an indication of where that's going, that's just another example of how these ships are just by default of the size and the efficiencies that they are going to lead to margin improvement. You guys know that we've got a nice margin improvement in our year.

It's those sorts of things. Then it's also, of course, the top-line stuff that we're working on constantly, and just re-doing things, new deals or arrangements in how we articulate to the guest the experience.

If you were to break down your cost line items a little bit more, can you give us a sense of which line items you expect to move on a same-berth, same-ship basis move up versus where do you think you can probably expect some costs coming out?

Okay, I'll jump in there. First off, I would say that leveraging our SG&A, that's pretty powerful with bringing on these additional ships, and their being roughly double the size of our existing fleet. That's a large one there. Then on all the different operating costs within the fleet, we continually go back and leverage as we bring in a new ship, how can we continue to buy fuel, repairs and maintenance -- any type of item, you name it, we're looking at how can we buy smarter and gain more efficiencies.

I would not understate what Wendy said about the SG&A costs. We are really looking at that as being the drop-through. As you know, we grow X percent in a year on the revenue, and we're very watchful of that to make sure that we're getting the efficiencies.

We talk about in prior quarters about some of the departments where we went through and did the [Kisen] events on them. We actually landed on having the same or maybe even one or two people less because of the technology solutions and eliminating inefficiencies, even despite the fact that we're adding 17% or 18% in capacity.

The other thing, too, is that I would also point out, that I think is subtly into the improvements that we will continue to field is that we are taking the learnings from these ships and the digital signage that we have on the new ships and pushing that back to the old ships. We talked about in the past about the Churrascaria. Recently I accidentally announced that we were taking the Oceana's Pub and putting that on all of the ships. Any of you that have been on any of the Epic, the Getaway, or the Breakaway, know that that is the heart and soul of the ship, and that it's got a pulse well into the early morning hours.

Taking and solving for the atrium that's a not the excitement of the new ships on the -- say, as an example the Jewel-class ships -- to me is going to really make it all work. Then putting the Churrascaria right next to the Cagney's is more logical to our guests, because now it will be on all of our ships that the restaurants are in the same sort of location. We think a lot of these on the margin are just strengthening not only the on-board revenue, the efficiencies, and strengthening the existing ships.

That's very helpful, guys. Thanks.

Thanks,.

Thank you. Our next question comes from Felicia Hendrix of Barclays. Your line is now opened.

Thanks, good morning. Kevin, I just wanted to go back to something you mentioned in response to Tim's question earlier. Your comments that -- you talked about last quarter you made some comments about where you were loaded for this year. You said first quarter we -- I don't want to talk about first quarter so much because you gave guidance, but you said you're consistently loaded for the second through fourth quarters. I'm just wondering, is that still intact?

Yes, I would say for the back half of the year it surely is. The second quarter, we're in a period right now that I think we lost a little bit of ground, but not anything to be concerned about, and we've got a lot going on right now. I'm comfortable we're in the right place for each of the quarters, based on the strategies that's we have in place here, and the momentum and the way we've laid out our programs and promotions, et cetera. Yes, so I didn't mean to overstate that.

Yes, the first quarter, if it had played out, was going to be a pretty spectacular first quarter from a pricing standpoint. I think it will still be, as I said, a very solid quarter. It will be -- ticket and probably more moderate when you look at it relative to load. It will be more in the ticket side, as opposed to improvement in load.

Then when you talk about the promotional environment, is that just one competitor? Is it multiple? Is it industry-wide? Can you just comment on that a little bit more?

I think it's industry-wide. Just listening to the ride in this morning, and listening to commercials from the MSE's new ship down here, and all of the players, they're all on the air. One of the players who hasn't been on TV is on TV right now -- a very nice commercial.

I think it's just a very complex time with a lot of promotional activity. Again, we think we have the solution to work our way through to the numbers that we have guided everyone to. I think that's as much as -- if things change and get a little less competitive, that would be hopefully a positive for us. But based on where we see it right now, that's what we gave as guidance.

That's helpful, thank you. Then just on your -- last quarter you mentioned that your organic pricing was up about 2.5% to 3%. I was just wondering if that's also still intact?

I'm sorry --

On comp fleet.

Oh, yes. Actually, that's actually a very positive. Trying not to get into too much of the nuances on the specifics, to be honest, because it really gives away everything for our Company. But we are pleasantly surprised. When we rolled up the budget, the organic guys came in right where we needed them to be, and it wasn't like the normal budget.

Those of you who have been in companies you know how it's like you got to go through every line by line. This was one of the first times to me that the organic guys came in in a comfortable place, and we're doing fine with them. For whatever that's worth, we're not getting into too much color.

Thank you, that's very helpful. Finally, housekeeping. Wendy, when you give your guidance suggested net cruise costs ex fuel of down 1% to 2% in 2014, is that percentage change off of the adjusted net cruise cost ex-fuel results, or the actual? Is it off the down 7.6% or off the down 10%-ish percent?

It's off the adjusted.

Okay, helpful. Thank you.

Thank you.

Thank you. Our next question comes from Patrick Scholes of SunTrust. Your line is now opened.

Hi, good morning. I'm wondering if you'd give some updated thoughts on your potential or expectations for capital allocation once you reach your target leverage levels?

Yes, it's the same. I think we're listening to our shareholders. We're looking toward the end of the year and saying hey, at some point in and around that time period we need to be responsive. I think it would not be productive for us to be paying off 1.5% or 2% debt. It would be much more thoughtful for us to be re-distributing.

I think the shorter-term solution or answer would be that we would probably very carefully do some stock acquisition. If the selling shareholders are still in the puzzle, maybe we could marry with that at the appropriate discounts or whatever. Then at some point as we get on our feet, so-to-speak, from a liquidity standpoint, and strengthen and strengthen and strengthen, then when we know we never will ever have to look back, then we'll probably start a dividend. I would say that probably would be at least a year later than the first step with the share re-purchase.

Okay, got it. I appreciate the more detailed color on that.

Thank you.

(Operator Instructions)

Our next question comes from Steven Kent of Goldman Sachs. Your line is now opened.

Hi, good morning. Just a couple questions. First, can you give us any sense -- I know people have tried to get at this a couple difference ways as to close-in bookings. Is there broader pricing or better pricing as people get closer in?

Also, on the on-board spend, Kevin, can you give us some sense of how much of it is pricing and new offerings, versus a change in consumer sentiment? Finally, I think the part that I struggle the most with, with your story, is that your product does seem to be better. I mean I think you've shown that a couple of different times, yet you are impacted by the pricing initiatives of some of your competitors. I'm just trying to figure out when or how you start to get away from that, or what allows you over time to distinguish yourself more?

That last part, Steve's, great. I appreciate you asking that. We are obviously waiting for that moment in time. When you look back at the last six years, this is my sixth anniversary, from the oil price skyrocketing and the economic down-turn in Europe, and everything under the sun that has happened over this last six years, it's not been -- and I don't know.

Maybe it doesn't ever -- I shouldn't say it that way. But we have not had a reasonably good period without something out there that distracts the value of this fantastic experience for the whole industry. You've got guys that we compete with that have spectacular assets, as well. I think we're all waiting for that time.

I do think that when the world gets a little bit more healthy from -- and consumers have a short memory. We hope that if we can keep the industry focused on the merits of the value of a cruise and all of the fascinating family opportunities, et cetera, that we think that we will start to see that. It is what it is.

We can only come in every single day. As you know our team works like crazy, and we look at the game plan at every single day and we say how do we adapt, how do we adjust. But we're waiting for that opportunity.

So I'll let you know as soon as we feel a little bit of strength. I think you'll start to see it when we all start to say we're booked really solidly. I think when we -- as you know, when we walked into 2012 we felt like we were in a great position, same thing in 2013. We're waiting -- I'm going to keep my fingers crossed that as we get into 2014 we're going to be in a really solid position.

What I think as a -- from an intellectual standpoint, the stress and all the stuff that you feel in one year becomes the opportunity in the next. I think each of the companies coming through this as they are showing that they are, becomes more of the strength of this cruise experience in 2015. So that becomes pretty hopeful to me.

As far as the on-board revenue, it's -- we really haven't changed pricing. It's really the further penetration. It's really more communication. I think that's an area that we as a Company have some opportunities to continue to strengthen. But the more clarity that you provide -- because I think it's critical l that our guests understand that they can have an experience on our ships where they don't need to spend anything and they can come and go to the complimentary restaurants.

But we also want to make sure we lay out appropriately the opportunities to come, and have this fantastic experience by buying our ultimate dining package at $119 for a seven-day cruise. Then you're able to go to Cagney's one night and the Bistro another night, and just really have a very different kind of experience. The more we communicate, the more we lay those things out more appropriately on our website, the better off I think that stuff will be of leading improvement as we move forward. We have not really raised prices on anything at this point.

Thanks.

Thank you. Our next question comes from Steve Wieczynski of Stifel. Your line is now opened.

Kevin, the decision to move Epic out of Miami and take that over to Europe, is that more of a decision about concerns about the Caribbean, or is that more of a decision of you still feel like you're a little bit under-penetrated in Europe, and you feel there's a better opportunity there?

I think when we announce all of the itineraries it will be better -- it will be clearer to you as far as -- I don't think we're doing anything on the bleeding edge from a capacity standpoint in Europe. The thing that plays out for us with the Norwegian Epic -- and as you remember, the ship was designed as a ship that actually played out very well to the European consumers. We get great ratings over there. It's a great experience for the Americans that go over to Europe

It just plays out very strong as a ship that just stands on -- the Epic just continues to exceed the expectations I have as far as it books well, it gets great ratings and people are happy coming off. It's such a fantastic experience. I think it's going to play well in Europe. I think we're cautious about our capacity in any single market, but that was the next logical step for us.

Really, when you think about the inefficiencies of taking the ship back and forth 10-, 11-day sailings on these transatlantics that don't drive great ticket prices, and then as you can imagine when you get past a seven-day itinerary, the on-board revenue starts to slow. Even the demographics on those ships don't lend themselves to high demographics, as it is.

When you take into consideration that 20 days or 25 days of back and forth each year, and think about how you can make that a driving force for our proposition as winning the best cruise line in Europe by World Travel award six years in a row, I think it matches up very well.

Okay, great. The second question with Breakaway. I don't know how much you'll be able to say about this. With -- if you look a little bit further out later into this year, are you starting to see any pressure due to the -- I'd say the introduction of competitors coming into that New York market?

If you're referring to the guy that's coming into Jersey, no, we're not at this point. I think it's a little early. I think they've done a good job of marketing their new asset, as each of our competitors does. But I think those are huge markets. I think the more that there's a focus on new ships into a market, the more people will take notice.

I think at the end of the day there's always going to be a little give and take as you put a ship into a new market, but over time -- I learned this lesson very early from one of my competitors, who said Kevin, when we bring a new ship in, it's a little bit that first year, and then the second year it comes into its own. I didn't fully understand that in the beginning, but I do now.

I think that's the same as the other guys bringing new ships into New York. We're very confident with what we have in New York. I think the competitive advantage of being able to take a taxi to the west side and all that goes along with that, keeps us in, I think, a good position.

Great. Thanks, Kevin.

Thanks.

Thank you. Our next question comes from Assia Georgieva of Infinity Research. Your line is now opened.

Good morning, guys.

First question is in terms of your thinking as to Q3 yields, load factors, pricing, expectations at this point, it is I understand a difficult quarter to call given these in comparisons in mid-April and early May of last year. But in general, without really necessarily giving ranges, could you, Kevin or Wendy, give us some sort of a feel for how that quarter is developing and whether you're being very cautious on it?

I don't think we're cautious on anything, to be honest. I think we, 30 years in a public Company, we call it as we see it. I will tell you I think the third quarter, I hope what you're saying plays out, and if it does we'll feel better as we get further and further into the next 30, 60 days.

The other thing that's a factor too is the Northeast and the Midwest has been inundated with snow and completely beyond normal levels. We are having this debate and conversation as to whether we think -- everybody's looking -- the snow birds, they want to come down and get away from it for the spring break or something. But I think it's taken everybody's mind off the summer break.

I think we're cautiously optimistic that because of those two different things that this will play out over -- I think we have a better way of -- a better explanation as we report our first-quarter earnings that we have a little bit more clarity.

I guess my question stems from the fact that for Q1 you're offering yield guidance pretty much in line with the fiscal year. Given decent comparisons, I would have expected that the full-year outlook might be a little bit higher than Q1, where you had a pretty tough comp, given that last year's wave was very strong early on?

Yes, I'm not sure I follow that, but I think for us to be talking about a yield guidance at approximately 4%, we're already leading by far in the sentiment in the industry. I think we're very comfortable that that's a good place to be right now.

Okay. I agree, Kevin. Maybe on the flip side, Wendy, you might be able to help me with this one. Are the scrubbers going to be installed in dry dock, or can you do that while the ships are operational?

I'm sorry, the --

I got it.

Okay, the scrubbers?

Yes. The scrubbers are intended to be installed in dry dock, other than on the Norwegian Breakaway that won't be going to dry dock during that time frame.

Okay, so you can do it while the ship is operating. Same with moving some of the restaurants like Cagney's, et cetera, on some of the older vessels, you can do it while the ships are operating?

That's correct, Assia, we can. But to the extent we can do it while it's in dry dock, that's always preferential.

Yes, as you look at our dry docks in this year, they stage very well into getting that work done.

Sure, it makes sense. Last question. Should we expect net cruise costs ex-fuel to go up in Q4 because of dry docks?

No, it's going to go down in each of the three remaining quarters for the year.

Great. Thank you, Wendy. Thank you, Kevin, as well.

Thanks everyone for your support, your time, and we look forward to next quarter. We're around if anybody has any additional questions. Thanks so much everybody for taking the time today.

Thank you, sir. This concludes today's conference call. You may all disconnect. Everyone have a wonderful day.