挪威郵輪 (NCLH) 2014 Q2 法說會逐字稿

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  • Operator

  • Good morning. Welcome to the Norwegian Cruise Line second-quarter 2014 earnings conference call.

  • (Operator Instructions)

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

  • - Director of IR

  • Thank you, Shannon. Good morning, and thank you for joining us for our second-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 up with more detail regarding the quarter. The call will return to Kevin for some final 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, with second-quarter 2014 results, was issued last night 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.

  • 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 the risks involved in forward-looking statements, please see our SEC filings.

  • In addition, some of our comments may reference non-GAAP financial measures. The 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.

  • - President & CEO

  • Thanks, Andrea. Good morning, everyone. The results of the quarter demonstrate once again our commitment to delivering disciplined, measured, orderly growth as we navigate through an environment that has remained highly promotional, most notably in the Caribbean.

  • But as we have proven time and again, we work our way through these temporary market adjustments, finding new and creative ways to attract customers to our products, with brand building and adding to our ever-growing community of loyal Norwegians. We've done this by focusing our offerings on value-add promotions and leveraging our travel-partner relationships to attract new guests to our brand. Our momentum continues, reporting strong net yield growth and earnings over the prior year.

  • The second quarter of 2013 garnered higher-than-usual pricing premiums for the first sailings surrounding the introduction of a first-in-class vessel -- in this case, the Norwegian Breakaway, which, as you remember, debuted in April of last year. While the second quarter includes the redeployment of ships to premium itineraries, we are pleased with the 2013/2014 winter season that included Norwegian Breakaway's first sailings to the Bahamas from New York and Norwegian Getaway's and [all her] sailings to the Eastern Caribbean from Miami.

  • While our newbuilds attract much of the attention, our core fleet has performed well in this environment. As I stated before, with promotions attracting guests to our products, it is critical that we seize the opportunity to cultivate loyalty to our brand.

  • We do that by offering an exceptional and differentiated Freestyle Cruising experience across our fleet, which no other brand can duplicate. To that end, in May, we announced a comprehensive $250-million investment program with the aims of enhancing the guest experience and rolling out the latest offerings and technological advances to vessels throughout our fleet. We've named the program Norwegian NEXT, with NEXT signifying new enhancements, experiences, and transformations.

  • The purpose of Norwegian NEXT is to distinguish projects that fit a set of criteria with the ultimate goal of fostering stronger ties with our guests and strengthening brand loyalty. In other words, the projects under Norwegian NEXT's umbrella are not incremental to the short- and long-term guidance that we have provided. They are projects that we either currently or soon to be in process will have a direct impact on what guests value in Norwegian.

  • We remain on the cutting edge of innovation that not only provides our guests with an unmatched vacation experience, but enables us to keep our fleet the most modern at sea. Norwegian NEXT crystallizes that focus with projects that bring new experiences specifically tied to NEXT or by bringing best offerings from our game-changing newbuilds.

  • Dining is one of the mainstays of a cruise vacation and Norwegian's Freestyle Cruising proposition offers the most choice in dining in the industry. All of our ships offer a series of complimentary dining venues, along with restaurants that offer a more specialty dining experience for a nominal charge. With up to 29 dining options running the gamut from All-American diners, to authentic Brazilian steakhouses, to fine French restaurants -- and all with flexible dining times -- Norwegian offers the most varied dining choices at sea. With Norwegian NEXT we are enhancing the dining experience with a comprehensive program that augments our already-varied culinary offerings. As an example, we recently introduced new rotating menus to our complimentary dining venues with a greater selection of traditional and contemporary offerings that meet the discerning palates of today's discerning guests. The menus also have a strong regional focus and differ, depending on itinerary.

  • In addition, as has always been a fixture of our Freestyle Cruising proposition, seating in both our complimentary and specialty dining venues is only with whom you choose and never with strangers chosen by the cruise line -- and, of course, at your schedule. Not only are we extending the options to our current complimentary dining venues, but we are also expanding the choice of venues by rolling out O'Sheehan's Neighborhood Bar & Grill concept, originally introduced on the Norwegian Epic, to the rest of the fleet.

  • O'Sheehan's give guests the option of an informal, casual meal in a relaxed atmosphere. In addition, as part of NEXT, we are expanding O'Sheehan's offerings to include nightly specials, such as the widely popular prime rib night and to bring something special to the typical bar and grill experience. In addition to the rollout of O'Sheehan's, we are taking other proven concepts and expanding them to the balance of the fleet as, you know, the Moderno Churrascaria, our Brazilian steakhouse, which has been a hit since it was introduced on the Norwegian Epic.

  • Lastly, our cafes across the fleet will become instantly more popular now that they will carry treats from the popular Carlo's Bake Shop. Norwegian's bars and lounges are also unrivaled, from the Bar City concept found on the Jewel-class vessels to the Ice Bars of our more recent ships.

  • As part of Norwegian NEXT we have elevated our beverage program, with the help of our partners such as the Michael Mondavi family, who helped with the creation of our new fleet-wide wine menu, and the James Beard-nominated mixologist at Bar Lab who created our seasonal destination-based cocktail menu. We are also escalating the training of bartenders, wine stewards, and restaurant managers to better serve our increasingly educated and discerning guests.

  • Entertainment has always been a Norwegian hallmark, highlighted by first-at-sea productions of Blue Man Group, Rock of Ages, Legally Blonde, and Burn the Floor. Complementing these Broadway shows will be productions from Norwegian Creative Studios, our 45,000-square-foot facility which allows us to custom tailor an ever-evolving collection of productions for individual ships and itineraries. We will also be expanding our Nickelodeon-branded activities with new experiences for kids in Splash Academy, as well as additional opportunities for the whole family to share.

  • Technology-wise we are expanding the reach and features of our mobile applications and rolling out innovations to make the pre-cruise and cruise experience even better. First, there is the fleet-wide rollout of iConcierge, the first app of its kind, which allows guests to preview and book shore excursions, view information on dining menus, and make reservations, review their folios, and much more while on board -- all from their smartphones.

  • Second is our Cruise Norwegian app, which not only allows guests to research ships and destinations but, with upcoming enhancements, allows for more in-depth and robust pre-cruise planning. Pre-cruise planning is also a focus of Cruise Coach, our newly developed booking engine that helps guests plan the right vacation.

  • Additionally, to assist guests while on board, we're expanding our digital signage throughout the ship. These touchscreens do much more than give guests information regarding the day's activities and events, they are interactive stations which allow guests to order specialty items, get directions, book reservations for dining, for entertainment and shore excursions.

  • Lastly, is the extension of the Norwegian experience from sea to land. Norwegian was the first cruise line to develop a private island and to provide a private beach experience to its guests. Great Stirrup Cay has been a fixture of the Norwegian Cruises in the Caribbean for four decades and a recent $30-million investment in enhancements, such as beach extensions, additional cabanas, [beam] bars -- sponsored by Bacardi and Patron -- not only make the beach experience that much more enjoyable for our guests.

  • Work has also continued on Harvest Caye, our port destination in the Western Caribbean. While it's premature to reveal the island's features and offerings just yet, I can say that it will be one of the most eco-friendly destinations in the cruise destination. One where guests will be encouraged to learn about the unique ecosystem of the island and its surrounding area.

  • In keeping with our commitment to minimize the impact on the environment, we are installing exhaust gas scrubbers on ships with heavy itineraries in the [eco] zone, as well as on all four of our newbuilds. In addition, all ships entering dry-dock are being treated with high-performance friction-reducing hull coating, which lowers fuel usage and, in turn, cuts down emissions, one of the many fuel initiatives that we have continued to talk about and innovate with.

  • We are excited about the expected results of the investments that comprise Norwegian NEXT and we'll be periodically keeping you apprised of our progress. We strongly believe these investments in our crew, our guest offerings, and our other areas, along with leveraging learnings from our most recent ships -- particularly Norwegian Getaway, which leads our fleet in guest satisfaction -- will draw strong results into the future. Now to go over the results of the quarter, I'll turn the call over to Wendy.

  • - EVP & CFO

  • Thanks, Kevin. Good morning everyone. The following commentary, unless otherwise noted, compares second-quarter 2014 and 2013 on an as-reported basis.

  • A 19.6% increase in capacity days, coupled with a 3.3% improvement in net yield, resulted in an increase in revenue to $765.9 million from $644.4 million in 2013. The capacity increase was the result of a full quarter of the Norwegian Getaway, along with a partial quarter of Norwegian Breakaway, which entered the fleet in April 2013, partially offset by a planned dry-dock of Norwegian Jewel.

  • Net yield increased 3.3%, or 3% on a constant-currency basis, resulting from improvements in on board and other revenues, higher occupancy of 110.4% versus 107.5 % in 2013, fundamental changes in our cost of sales structure.

  • We have been working very hard to leverage our growing scale by expanding our casino partnerships, renegotiating certain agreements such as our port agreements and credit card processing fees, lowering our air subsidies along with other initiatives, the benefits of which carry forward to future periods.

  • Keep in mind that we rolled over strong comps from the second quarter of 2013, which included a 3.7% increase in net ticket per diem, as a result of strong pricing on the initial sailings of Norwegian Breakaway, which were spurred by the strong demand surrounding the launch of a first-in-class ship. In addition, in 2013 we strategically held pricing post industry incidents. These tougher comps will start to ease in the fourth quarter.

  • Now turning to costs. Adjusted net cruise cost, excluding fuel per capacity day, decreased 2.3%, or 2.7% on a constant-currency basis. The declining cost was a result of a few factors: fewer dry-docks in the period compared to prior year, 1 versus 1.5 in the second quarter of 2013; the absence of inaugural expenses in the quarter, whereas the second quarter of 2013 contained inaugural expenses for Norwegian Breakaway; and efficiencies as a result of having both Norwegian Breakaway and Norwegian Getaway in our fleet, coupled with continued efforts in our lean management program.

  • Fuel expense for the quarter benefited from both lower prices and consumption. Fuel prices per metric ton, net of hedges in the quarter, decreased to $622 versus $686 in 2013, while fuel consumption on a per capacity-day basis decreased approximately 5% in the period.

  • Interest expense net in the quarter was $31.9 million, compared to $33.6 million in 2013 after adjusting for $70.1 million in charges related to the refinancing of certain credit facilities and the redemption of the remaining balance of certain senior unsecured notes that occurred last year. The decrease in interest expense net was the result of lower average interest rates and balances in the period due to the capital structure optimization. This decrease is also particularly impressive given it includes the impact of debt associated with both the Norwegian Breakaway and the Getaway.

  • Adjusted EBITDA increased 44%, to $219.4 million from $152.3 million in 2013. LTM adjusted EBITDA margin expanded to 26.7% from 24.6% in 2013. Overall, we are pleased with the bottom-line results for the quarter, which includes the doubling of earnings with adjusted EPS of $0.58, up from $0.29 in 2013 as a result of increased capacity days, gross to net yield, lower net cruise cost excluding fuel per capacity day, lower fuel prices, and lower interest expense.

  • Looking at the full year, the promotional environment has continued and we anticipate the trend to carry forward. The Caribbean remains the most promotional market while Europe, notably the Mediterranean, continues to perform very well.

  • Looking at the remainder of 2014, we have provided guidance, along with associated sensitivities, for the third-quarter and full-year 2014 in our earnings release. Unless otherwise noted, the following guidance metrics are on an as-reported basis.

  • It is important to keep in mind the following while reviewing guidance for the third quarter. First, the third quarter provides tougher comps on a year-over-year basis as we strategically held pricing last year post industry incidents to give you an indication that ticket-yield growth in Q3 2013 was 5%.

  • Second, we anniversaried the addition of Norwegian Breakaway to our fleet with the strong pricing of her first summer season as a first-in-class ship. Going forward, the growth rate for net yields for Breakaway are expected to grow in line with the core fleet.

  • Lastly, our largest increase in Caribbean capacity is in the third quarter. Our Caribbean capacity will account for 23% of our deployment mix, up from 13% in 2013 from the addition of Norwegian Getaway sailing year round from Miami. As a result of these year-over-year differences, coupled with the continuation of the strong promotional environment in the Caribbean, we expect an increase in net yield growth in the third quarter in the range of [2.25% to 2.75%], which is included in our full-year net yield guidance of 3% to 3.5%.

  • Now turning to cost. We are taking advantage of the benefit of lower fuel prices to make the strategic investments which Kevin touched on earlier for the remainder of the year in initiatives that increase brand awareness and enhance the guest experience.

  • These investments, which include incremental marketing spend to help bolster demand in future quarters, as well as initiatives under Norwegian NEXT, result in an increase in adjusted net cruise cost, excluding fuel, up 2% to 3%. Our adjusted EPS guidance for the quarter is $1.05 to $1.10 which is approximately 25% higher than the prior year.

  • Now looking at the full year. As a result of the aforementioned investments, we expect adjusted net-cruise cost, excluding fuel, to be flat to slightly up. With the benefits of these investments, along with the easing of comps and lower capacity growth in the Caribbean in the fourth quarter, we are reiterating our net yield and full-year earnings guidance with net yield expected to grow in the range of 3% to 3.5%, and adjusted EPS between $2.20 and $2.35.

  • Overall, load for the remainder of the year is ahead of prior year. Our new ships continue to have a powerful impact on our earnings, with both Norwegian Breakaway and Norwegian Getaway garnering premiums versus our core ships in the same itinerary, which is best viewed on a full-year basis.

  • Looking at deployment for the third quarter, 23% of our capacity is in the Caribbean; 32% in Europe; 17% in Bermuda; and 18% in Alaska. The balance of our deployment is in other itineraries, including Hawaii.

  • Looking to 2015, while the promotional environment has continued, and we anticipate that trend to carry forward into early 2015, we are cautiously optimistic as industry capacity growth in the Caribbean moderates to flat to slightly down for the year.

  • Before turning the call back to Kevin, I would like to recap. Net yield growth in the quarter was up 3.3% versus prior year despite significantly tougher year-over-year comps and the continuation of the strong promotional environment. Adjusted net cruise costs, excluding fuel per capacity day, were down due to the impact of both new ships in our fleet as well as the timing of year-over-year expenses, such as dry-dock and inaugural expenses. And both fuel pricing and consumption improved and interest expense benefited from the optimization of our capital structure.

  • Bottom-line results for the year -- we are reiterating our net yield and adjusted EPS guidance. We remain focused on executing on our strategies and delivering consistent orderly earnings growth. With that, I'll turn over the call to Kevin for some closing comments.

  • - President & CEO

  • Thanks, Wendy. Before moving on, I just wanted to put some context around our perspective with respect to our net yield guidance for the coming quarters.

  • In addition to Wendy's commentary, please keep in mind that our strategy to bring a year-round ship to Miami has always been based on a 12-month return. This includes a third quarter in which, similar to last year, the majority of our fleet is in premium markets outside of the Caribbean. The new piece of the puzzle this year is the addition of Norwegian Getaway in the Caribbean.

  • Her addition to the fleet resulted in the doubling of our Caribbean capacity for us to absorb in the third quarter. And now her yields, while strong, naturally dilute the overall yield landscape, given the pricing in the peak season for our premium markets. The results, still strong, projected in the third-quarter net yield increase, which was always factored into our full-year outlook, which would have been -- absent her introduction, just to give you a little perspective -- a little over 200 basis points higher for the third quarter.

  • Our strategy, though, for bringing Norwegian Getaway to Miami has always been to demonstrate our commitment to our guests and our travel partners, and is an investment in our brand and our future with a ship that has a five-year payback. Please keep that in mind. As we move into the fourth quarter, our capacity growth in the Caribbean has easier year-over-year comps and the benefits of our marketing initiatives positions us for yield growth in the fourth quarter, that we have articulated here, with the higher yielding Norwegian Getaway in the [mix]. Our strategy to grow and strengthen our community of loyal Norwegians as evidenced in the investments being made under the Norwegian NEXT program.

  • In addition, we are making smart, disciplined investments to grow our fleet. Norwegian Breakaway and Getaway have been two of the most well-received vessels in Norwegian's history. Their mix of innovative, public areas including the collection of restaurants and lounges that line the revolutionary open-air waterfront, and the hub of activity that is 678 Ocean Place, along with an unparalleled lineup of entertainment options and activities, is a winning combination that not only makes these vessels excel in terms of guest satisfaction but in earnings power as well.

  • We have naturally extended these successful concepts in the design of our upcoming ships, which includes the two ships announced earlier this month. The combined contract price for the 164,000-gross-ton 4,200-berth vessel is EUR1.6 billion with export credit financing in place at attractive rates. Deliveries are scheduled for the spring of 2018 and the fall of 2019,18 months apart.

  • This is the latest -- this latest order brings the total number of newbuilds on the contract with Meyer to four, with the first ship in this series, Norwegian Escape, scheduled for delivery in October of 2015. The cost of these two new vessels is somewhat higher versus our previous orders for a variety of reasons.

  • First, is a simple story of supply and demand as shipyards currently have more business on the books than at the time of our previous orders, which had allowed us to negotiate extremely attractive pricing -- best-in-class at that time. Second, is the value of the euro, which is approximately $1.32 at the time of the prior order as it compares to where we are today.

  • And, most importantly, the new features and enhancements of these ships, which we will announce in the future, also contributed to the higher cost. We believe these enhancements will continue to improve our brand positioning and expect a payback on the 2018 and 2019 deliveries to be 5.5 years, modestly higher than the 5 years of the other newbuilds.

  • Every team member at Norwegian is working hard for their respective stakeholders -- be it our guests, travel agents, or our shareholders -- to reach our ultimate goal of being the cruise line of choice with a growth rate that is unmatched in this industry. This is demonstrated in our industry-leading, return-on-invested capital, which, since our IPO, we have communicated to double, by the end of 2017, to 14%, in addition to our previously communicated doubling of earnings per share in that same period.

  • I thank you for your continued support and we look forward to continue to bring you the results you have come to expect from us at Norwegian. With that, we'd like to turn the call over for questions. Operator?

  • Operator

  • Thank you Mr. Sheehan.

  • (Operator Instructions)

  • Harry Curtis, Nomura Group

  • - Analyst

  • I just had a couple quick questions. First a little clarification on ticket pricing in the second quarter.

  • By our calculation it was down roughly 4% to 5% and my question is, is that a level that is baked into your third-quarter assumptions and if you would give us your sense of what the promotional environment looks like, vis-a-vis ticket pricing through the first quarter of 2015?

  • - President & CEO

  • Yes, it's a great question. The excitement, to me, is that, while we have started to see some real traction on the booking levels, and I would say for the last -- at least 12 weeks we have had substantial growth year over year in our booking activity, probably close to 20% or more.

  • What that has enabled us to do, as you can imagine the revenue management tools that we have, having a better-loaded position as we go into the remainder of the third quarter and the fourth quarter solidly loaded above the prior year, which enables us to be more capable of moving the pricing and protecting the pricing as we get closer to the sailing.

  • I think we have more confidence in at in our tasks for a while. As I look into the outlook I think you guys know that as we have had a very unusual environment for the beginning of this year. I feel like we are cautiously optimistic, we're starting to feel better, we still have more to see before we can say, hey, we won the whole thing, the Caribbean environment is still a little bit promotional, but a little bit less in my view than what it has been. But we will probably continue for a while as we regurgitate the market size as has been the case and other markets over the years.

  • What happens is the consumer sees the market, the travel agents point them over to the market, marketing campaigns move to the market and all of a sudden the market is right sized and then we have to watch out for what is the next market that we have to -- this is certainly more than what I have experienced since I came to the Company as a concentration, particularly with the ship that came out of nowhere from MSC, a brand new ship. But we feel now that we have a better position and we're selling our ships out consistently so it's a good feeling.

  • We do feel better about our pricing. I think touching on the pricing and the cost of sale and we have done some phenomenal work throughout the last -- actually, we have always been doing it but it's more evident now that we have the two big ships and we have the other orders that we can walk into a room and negotiate some pretty solid deals.

  • So the run rate that you see are the run rates that we expect prospectively. It's not like it's a one-time wonder. So, we feel pretty confident with that as well.

  • - Analyst

  • A quick follow-up question then on the cost side. It was down for berth in the second quarter, it goes back up in the third.

  • It looks like, based on the implied guidance for the second quarter, it actually comes down -- I'm sorry, for the fourth quarter, it comes down for the fourth quarter. Rarely do you see such volatility in cost per berth and what are the primary drivers behind that and how long you expect this volatility to last?

  • - President & CEO

  • Yes. I mean this is a Kevin Sheehan thing and I saw the opportunity with this -- when we launched the Breakaway it was a solid ship, solid results and good guest satisfaction, but when we took and suddenly changed a few things on Getaway, we launched a ship that got phenomenal guest satisfaction. You cannot walk on that ship and not get everybody to grab you and say, hey, I can't believe this ship and this experience.

  • Given some of the stuff that happened, as you see the fuel is coming in we have certainly, in a different place in the industry on our fuel costs, so it enabled us to say let's step back. We have this opportunity. Let's invest in making sure that all of the learnings from Getaway are pushed out to the other ships.

  • I have to tell you can't very excited about it. W e have a team of people that are pushing these out in every ship across the itineraries and I expect to see a nice bump in our guest satisfaction to just -- it's really a third quarter, moderates quite a bit in the fourth quarter but we figured let's make sure we take advantage now while the iron is hot to get all this stuff out into the fleet. That's kind of what you have been hearing in our script in the earlier part of the call.

  • - Analyst

  • Okay. So that really relates to the food offerings. Is there anything else that you might share with us that we as consumers would understand how it would impact our guest experience?

  • - President & CEO

  • Yes. It not only is the food offerings, it's how we interact with the guests. We've invested a little bit more in what we have on the ship from a human resource person that is dedicated on the ship.

  • We have added some trainers. We want to make sure we are continuously reinvesting in our team and giving them relevant and timely training. We just finished our survey and one of the things that we learned, we are in the top 25% of the [K'NEX] leading companies, so that was great news.

  • But the one area that we felt that it showed that we could learn from is some of the oversight of the crew and how do we develop them, how do we show them their career paths, how do we embrace them. So some of that is training that we are undertaking right now. And also, we are putting some incremental dollars into investing in some smart marketing that we believe will be different and you will see some of the initiatives we will be announcing a coming days.

  • So, we're excited about all the prospects and learnings and believe that this will position us -- the pain inflicted on this industry over the last couple of years including what we've seen so far this year, I believe is going to be the huge opportunity for the industry if we continue to keep our heads down, run the business smartly. The value proposition is incredibly important and as the consumers come back, and they will, you are going to see that ability to start navigate from a pricing standpoint.

  • - Analyst

  • That's it for me. Thanks.

  • Operator

  • Felicia Hendrix, Barclays

  • - Analyst

  • Wendy, you gave some very brief color on 2015 which was helpful. Thank you.

  • I was just wondering how much visibility do have or what is the booking curve look like? I was just wondering if you could give us any more details beyond what you said in your prepared remarks?

  • - President & CEO

  • Do want me to take it?

  • - EVP & CFO

  • It doesn't matter.

  • - President & CEO

  • So, we get a weekly -- I look at pricing and I look at the bookings [pre fund to date] just so you know that (inaudible) every single day. But as we look out into 2015 we are better loaded at this point than we were last year and the year before. So I think that's a good situation, it's still early in the year where we got another five months and the pricing also looks encouraging.

  • Although it's early, so you had to say oh my God, pricing looks good, but so far it's starting to look like we could be on the beginning of a fundamental shift. Do want to add anything to that?

  • - EVP & CFO

  • Yes. I think we're feeling good overall about 2015. Most of the pressure we're looking at is in Q1 as we talked about with the Caribbean capacity still --

  • - President & CEO

  • We had the Caribbean capacity and you had a phenomenally successful [Sloshe] Charter in the first quarter and the Bud Light Hotel. So we are lapping a few of those things so we just need to really carefully articulate that 2015, quarter by quarter, so that you guys understand how the pricing power will be in 2015, which we believe for the year will be solid.

  • - EVP & CFO

  • It's looking good.

  • - Analyst

  • That's really helpful. Just to be clear, because I wasn't specific when you talked about being better loaded last year and the year before -- we're talking about the Caribbean, right?

  • - President & CEO

  • That actually is across the board. That is the comforting thing.

  • I don't know if we took on too much with the two new ships so close together and we kind of -- I think a little bit of what has happened and I blame me a little bit in this, understatement of what we needed to do. But we've got it now. We've got the business, we've got the marketing, the sales, the entire organization is rallied around this bigger company and the good comforting thing now is that, as we grow in the future -- we had 18 months between Getaway and the Escape and 18 months between Escape and the ship after that.

  • So we've allowed ourselves so much extra time to make sure we navigate through these things very carefully and having learned a little bit from taking two ships within seven months kind of thing and it's my fault. We had a May of 2014 delivery and I started to get anxious about wanting to get the spring vacation and then it was president's week, and then we had the opportunity to do the Bud Light Hotel. So you can understand how we pushed it up a bit.

  • At the end of the day that's behind us. And now we've got those learnings to help us propel into the future.

  • - Analyst

  • But with the Caribbean capacity kind of flattish next year for the industry and notwithstanding the challenges you have in the first quarter, would you expect the rest of the year -- are you seeing improved business for the next rest of year specifically immigrating?

  • - President & CEO

  • Yes. I hate to say too much about it because it's a little early, but we are feeling better about the Caribbean. The first quarter is a little bit complicated, but once you get past that, the pricing looks very good for us in all of our itineraries, including the Caribbean.

  • - Analyst

  • I wanted to circle back to a question that Harry was trying to get to, because, when you look at the cost savings that you guys had in the transportation onboard and other cost lines, you had done a great job -- some of the cost that you have there put the Company at competitive disadvantage, specifically your port fees, which you are not passing through those to the consumer so that the positive.

  • And then -- but if you adjusted those costs and you normalize them then it would have looked like your net yield were down, which I think everybody gets. But going forward I would've thought there would've been a bit of a tailwind to your net yield and you reiterated. So I was just wondering mathematically if you could help me through that?

  • - President & CEO

  • Yes, I think you have to just step back and -- what is the yield guidance for the next quarter, take that number and then add what we talked about for the third quarter, which is 200 basis points. So we would have been about 4.5% had it not been -- you have to look at the fleet and then add in the new ship that happens to be something, as we have said from the beginning, you have to look at it on a 12 month basis, but the summer season is not the premium time for that ship in Miami to the Caribbean but over the 12 month it makes up for it.

  • But in that third quarter it pulls down our pricing in the premium itineraries because of its weight coming into the fleet. So I would say, look at it that way because you're still showing four and change pricing in the third quarter, so, if it wasn't for that entry into the market.

  • - Analyst

  • Okay. Thank you.

  • Operator

  • Steve Weiczynski, Stifel

  • - Analyst

  • If I could add on to Felicia's question a little bit.

  • So when you look at that yield in the second quarter, you have what really drove it was a little bit higher occupancy and that commission line was a good bit lower. I guess the question is going to be, it doesn't some like that was commissioned driven, it was other things and can you maybe touch on what those were and then is? With this kind of level that we saw this second quarter pretty sustainable going forward?

  • - President & CEO

  • Yes. That's a great question. It is -- we touched on hopefully is that this is sustainable things that we've done.

  • This is not a one-off that you'll see us revert back in the following quarter. And the big macro things, some of the opportunities we got because we're gaining scale and using that leverage and these four new ships and say, hey, you want us to be part of this? And you could have seen that with some of the stuff that we had done in the past without all of these big new ships. Wendy maybe take them through a little bit more specifically.

  • - EVP & CFO

  • Sure. So we have very aggressively gone after all of our ports agreements and looked at it with a more of a worldwide lens. And combining all the services in the ports and looking at how could we lower those costs and then in turn pass those on to our consumers.

  • - President & CEO

  • By the way, we hired the guy that ran the port of New York. He was an excellent hire. He was offered positions with several other companies but wanted to come work with us.

  • He has been a very big plus for us because he knows the nuances. He knows all the relationships throughout the entire ports and he has been a very good hire for us.

  • - EVP & CFO

  • I would also add that we continued to expand our casino players by extending different channels. Those are typically lower cost channels for us but it gives the customer the opportunity to upgrade their cabins, which puts more revenue up in the top line with little to no cost of sales. So we benefited from that and the expanded relationships.

  • The other thing that I had touched on in my commentary was the fact that we did a lot of air packages in the prior year. We have moved away from doing the air packages in 2014.

  • And credit card processing, that's the other one. We aggressively went in and renegotiated our credit card agreement which was way overdue. Which also benefits our cost of sales line.

  • - President & CEO

  • If you go back in time when we first came in here our credit card agreement was very expensive. And was naturally expensive because of the size of the business and history of the business and they also have financial holds on our cash because of the situation of the company.

  • So we've evolved from that case to a case where we now can drive to the best pricing by going to other players and say, hey, guys, this is a first-class organization, do you want our business? So we have been able to take advantage of that as well.

  • I hate to get into too much of the detail because, as you know, it becomes [harder] for everybody else in the industry.

  • - Analyst

  • Second question, Kevin, and I'm not sure what you can say and can't say, but you bought back from some stock in the quarter and that was a little bit unexpected, I guess, so early but you still have these two largest shareholders still own 35% or 40% of the Company and there really hasn't been much of an update in terms of what they potentially will do over time and I think that's something to continues to lean on your stock.

  • Is there anything that you can help us maybe try to put a little bit more clarity on that at this point?

  • - President & CEO

  • Yes. Sure. Remember, when we announced or what we did say was we had a two-prong approach. One was to take out inventory in the market when we thought it was opportunistic and the other was to -- if there was a sailing event that we could piggyback on that. So that we weren't leading it and we were giving them the ability that they were doing it we could just come in at the last minute and piggyback. So hopefully that is still the case.

  • The thing is, the stock performance these guys -- they know where the business is going and so they're saying, we're not going to sell at these levels. Which is unfortunate in one respect because it keeps that consequence of not knowing when they're selling out there but there are proponents of the business in the future of our organization. So I can't get a clear answer from anybody, of course, but each player as you saw even with TPG, they didn't even sell in the last time we did have an offering because they weren't happy with the stock price.

  • I think what you'll see is over time will be -- the stock will take care of itself over time because of the power of our earnings and our management team, of course, were frustrated with the stock price but we're in this for the long term. I've never even thought about selling share at these levels, personally. I'm in this to drive the value that I know is coming and in the out years.

  • It's a frustration the stock price is the way it is. We can't control that. We're doing our best to deliver on our results.

  • We hope the people will as the public now is almost 50% of the shareholder base and, at some point, three different players become just stakeholders in everybody's view and I wish I could tell you more and you never get -- you're never going to get a clear answer from any of them. Which is, of course, logical.

  • - Analyst

  • Right. Okay. Thanks a lot for the color. I appreciate it.

  • Operator

  • Robin Farley, UBS.

  • - Analyst

  • I wonder if you could give us the rough air-sea mix in Q2 versus the prior year.

  • - President & CEO

  • No, we're not going to provide that detail. That would be very proprietary.

  • - Analyst

  • Okay. And then I think your opening comments you mentioned --

  • - President & CEO

  • Maybe what we could do is give you some dollar change or something -- I don't want to not be responsive, but we don't want to get too clear since we only are one brand, as you know. After the call we can give you a little bit of color.

  • - Analyst

  • I mean, is not something that's been--a lot of (inaudible) hasn't been a huge fluctuation air-sea mix. I remember a couple of years ago it used to actually be talked about pretty openly because since it's really more of a pass through for the operators it's not something you normally try to yield manage, I guess, but --

  • - President & CEO

  • At certain times, in Hawaii as example, when air cost and we can go and negotiate air cost, that we may try to do a bigger percentage of our business through that program. So there's nuances that happened from year to year depending on the outlook.

  • - Analyst

  • Okay. And then just you commented on the volume in the last 12 weeks being up 20% and I wonder if you can comment at all on what pricing has been in the period in the last 12 weeks? In other words, you mentioned that the Caribbean has been promotional so perhaps the volume is been driven by that but I don't know if there's any color on pricing?

  • - President & CEO

  • Yes, one thing I can tell you is the guys have been moving the pricing, especially wherever the sailings look like they're being sold at a reasonable pace. One thing I can do is mandate, and we will see how this works, we, of course, if we have to we will roll back. But two weeks ago I mandated a 3% price increase on every sailing on every ship in every [META].

  • So it has been rolling for a couple of weeks. We're still seeing good volumes. So I'm hopeful that we'll be able to keep that into the market and then continue to navigate.

  • We just need to start to take conviction in our products and move our pricing. I can fight with the revenue management guys forever, but at some point you have say, guys, let's do it and let's believe in ourselves and let's see what happens. That's where we are right now.

  • - Analyst

  • Great. And then lastly if you could comment, sort of characterize a little bit Europe and Alaska in Q3? I know some others have said Europe -- European yields are up double digits in Q3 but not everybody is saying that so I don't know where you come out on that. Thanks.

  • - EVP & CFO

  • So for Alaska this year -- you know our most robust market, obviously has been Europe and that's the one that I touched on, but Alaska is doing well. This is the second year that we have the three ships in there.

  • The Sun being the newest one looked significantly better than it did its first year, its novel year last year into Alaska. But overall we're pleased with how Alaska has shaped up this year.

  • - Analyst

  • And can you put any kind of quantification around Europe in terms of the increase, just like a ballpark?

  • - President & CEO

  • Yes. I think in the second quarter it is double digit I think. When you look across the four ships that we have in Europe in the third quarter the pricing is up about 10%.

  • And remember, I know everybody is talking about this like it's Nirvana, but this is off of a horrible 2013 for the industry. As everybody knows. So it's a recovery. To me there's a big opportunity in 2015 and 2016 if the world starts to get a little bit more normalized.

  • - EVP & CFO

  • The other thing I would have there is that we're one of the cruise lines that actually has two ships year round so we also benefit from that in Q4. With significant pricing and loads increases on our Europe sailings.

  • - Analyst

  • Great. Thank you.

  • Operator

  • Tim Conder, Wells Fargo Securities.

  • - Analyst

  • Just a couple here. Regarding -- it's been talked about before and in the past the premiums that you're getting the degree thereof on Breakaway and Getaway versus the rest of the fleet in the Caribbean.

  • This is backward looking, obviously, but could we anticipate some of that narrowing that we've seen of late be due to base loading and now, Kevin, as you just alluded to you're trying to be a little bit more proactive in trying to take the price that you believe you deserve. Should we interpret part of that in that direction looking into the first in the first quarter?

  • - President & CEO

  • I'm not sure I followed the question but as far as the premiums on the two new ships, as well as Epic, when you look at them across the 12 months and do the 12 months of pricing and compare it to another ship in that itinerary it drives a double-digit premium. The only caveat I would have on that is a couple of the sailings were in the works at the time in the second quarter where you had to put on people with a little bit less price than you had a little bit less of a compromise on your onboard experience, because as you can imagine, if it's a bigger ticket item to a family they're not going to spend as much on board.

  • So I think check the box we got through the onboard the second quarter fine, but I could see a little bit of that and that is why it is important for us to make sure we're bringing the right guests on the right ships at the right time to ensure that the other part of the proposition, the onboard revenue, continues to drive a double-digit premium, as well, across the 12 months.

  • - Analyst

  • Okay. And then in relation to your statement there, is -- we've got a positive convergence coming up here with the Caribbean capacity for yourselves in the industry, the increase is lessening and actually declining as we get into the third quarter of next year so that's all good and has positive implications for price.

  • But could the recovery here for yourselves, Carnival, other folks, who are having to do with that little bit more challenged customer, could that be elongated? Because if you attracted a consumer who came and then maybe was not able to spend onboard, that consumer probably doesn't repeat next year or maybe even two years out. Does that leave a little bit of a hole that you have to fill that you maybe filled in the industry, filled on a 1 to 3 year basis in 2014 here with the aggressive pricing?

  • - President & CEO

  • No. I think it's a whole litany of things that happen between now and as you get out of the second half of next year with economic indicators and people are completely forgotten all of the noise in the industry and are back to looking at this as a phenomenal vacation experience. You saw some statistics about people who were reluctant to take a cruise because of all of the noise. The consumers memory is very short.

  • We are very hopeful that, as we get out into next year and we complete the showcase, the proposition, that we have and the other great brands as well, that via the unified -- not unified, but as a complete industry, I believe we have the opportunity to start to move back into the pricing categories that we should be at and we didn't have this year because of this shock to the system in the Caribbean.

  • - Analyst

  • Okay. And then if I may, lastly, regarding a little bit longer-term outlook with the order of the two additional Breakaway plus ships -- any thoughts on how you're thinking about Asia over the next couple of years given what some competitors have done and the opportunity in that market over the next couple of years with your capacity coming and then maybe does it have any implications for some of your older ships also?

  • - President & CEO

  • So were going to continue to watch that very carefully. To be honest. It gets back to the same thing with a number of ships we have we compete with brands that have so many more ships than us that we still are able to stay in itineraries that we feel comfortable with and have a better control over the outcome and knowing with certainty that we can drive the measured orderly growth.

  • Having said that, we are looking at a ship at some point, it's going to go over to Asia and maybe a period of time in Australia and New Zealand kind of thing. So we are going to continue to navigate that and when we announce it is probably not going to come with the next itinerary announcement but thereafter.

  • We want to be sure the one we look at that we know what the right asset is because I think that's an important point, in the old days you would put an older asset over there, is that going to make it work? As this market gets more interesting they may be looking for more interesting ships.

  • We'll continue to monitor that very carefully and, as we always said, when we go over to that market we have a lot of bandwidth already with the sailing efforts that we have in place today with the training centers that we have in Asia and all the rest of it. So we know we can walk in and be pretty comfortable with our success but it still looks like the opportunities that we have here are more certain. I guess that's what I would say about that.

  • - Analyst

  • That's fair. Thank you, Sir.

  • - President & CEO

  • We have time for one more question, operator.

  • Operator

  • Steven Kent, Goldman Sachs

  • - Analyst

  • Good morning. Just a question on how the board is thinking about capital allocation.

  • You answered it a little bit on share buyback and also the potential for an offering. But the reason I ask is, Kevin, you just said yourself that the shares were undervalued. They look very cheap et cetera.

  • And then you also said earlier that ships are turning out to be a little bit more expensive, although you did decide to build them. I'm trying to decide or understand how the board is balancing all of this.

  • And if I could throw one more in which is selling a ship or two, here or there. How does the board and you think about all those different factors at this time?

  • - President & CEO

  • Sure. Steve, you've known me long enough to know the were always thinking about capital allocation and how do we optimize what we can do for our shareholders and we are constantly looking to make sure we've got the right balance in each of the buckets.

  • As far as selling an older ship, we don't have any old ships. So we are different than the other companies in that our average age is so much less than the other guys and when you look at the ships that are the oldest in our fleet, which are 12 or 13 years old, they work perfectly in the itinerary that we have them.

  • If you take, as an example, our three or four day Miami ship. It's the youngest ship by far in the market. It compete very effectively. The people who take that experience love it. It's a typical people get on a Friday, have a party weekend, get off on Monday morning and then we expose families that are first, in many cases, first-time cruisers to our product.

  • That ship works very well there. That's our oldest ship. You get into that thing and say, okay, what would you sell?

  • And then there are brokers that have been talking to us as you expect saying -- hey, what about this ship? We have attractive ships for people.

  • Then the question is do you want to dispose of that ship as we are so much smaller than the other guys, and then what happens is you do the mathematics and you look at the returns that we drive on those ships. Sky is the perfect example, the ticket yield is a little lower, but it is so much more efficient because of the fuel. It's almost like you go out of the way for people to see where the land is. And you kind of stick around in that area and you don't have a big show on the ship so you don't have that big entertainment expense. It's just behaves as a party kind of vacation experience and people are running around on those Star cruises and they don't want to spend their evening in the pier.

  • There are many reasons why, on a return basis, the ships sound smart. That's kind of what it has been -- the pushback for me as these guys come to us and look at our ships. And want to think about us selling them. We will keep it in our view but we want to be smart too, because we want to drive EPS.

  • - Analyst

  • Thanks.

  • - President & CEO

  • I really thank everyone for your time. We really look forward to next quarter, give you another chance to see how we operate through this environment. We're always available. If anybody has any questions feel free to call Andrea, or Wendy, or myself and thanks for your time this morning. Take care.

  • Operator

  • This concludes today's conference call. You may now disconnect.