挪威郵輪 (NCLH) 2015 Q2 法說會逐字稿

Good morning, and welcome to the Norwegian Cruise Line Holdings' second quarter 2015 earnings conference call. My name is Amanda, and I will be your operator.

(Operator Instructions)

As a reminder to all participants, this conference call is being recorded. I would now like to turn the conference over to your host, Miss Andrea DeMarco, Senior Director of Investor Relations. Miss DeMarco, ease proceed.

Thank you, Amanda. Good morning, everyone, and thank you for joining us for our second quarter earnings call.

I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings, and Wendy Beck, Executive Vice President and Chief Financial Officer. Frank will begin the call with opening commentary, after which Wendy will follow with commentary on the results for the quarter, as well as provide updated guidance for 2015 before turning the call back to Frank for closing words. We will then open the call for your questions.

As a reminder, this conference call is being simultaneously webcast on the Company's Investor Relations website at www.nclhltdinvestor.com, and will be available for replay for 30 days following today's call. Before we discuss our results, I'd like to cover just a few items.

Our press release with second-quarter 2015 results was issued this morning, and is available on our Investor Relations website. I'd also like to review information about forward-looking statements, and the use of non-GAAP information as a part of this call.

The Company's comments today may include statements about 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.

The Company cannot guarantee the accuracy of any forecast or estimates, and will undertake no obligation to update any forward-looking statements. If you would like more information on the risks involved in forward-looking statements, please see the Company's 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 the Company's earnings release.

With that, I'd like to turn the call over to Frank Del Rio. Frank?

Thank you, Andrea, and good morning, everyone.

The overall theme for the second quarter of 2015 is that the various initiatives that we've shared with you over the past few months have taken hold and are bearing strong positive results. As I mentioned on our last call, our first full quarter as a combined Company, our priorities were twofold.

First was ensuring that we came out of the gates strong in our first combined quarter to save positive tone for the newly combined Company. On that front, we can say mission accomplished as we posted strong earnings for Q1.

Second, and perhaps most importantly, was building the foundation to successfully bring the Norwegian and Prestige organizations together under one company. We created a motto for all stakeholders to rally around.

Three distinct brands. One incredible Company. This motto formed the basis for how we structured our organization.

On one side are brand champions, focused on stimulating demand to drive yields through sales and marketing initiatives. On the other, are areas with centralized responsibilities. Including vessel operations, supply chain, revenue management and finance.

All of which focus on maximizing our resources and capital allocation to drive further synergies and efficiencies. This flat organizational structure is one of Norwegian's main differentiators in the cruise space.

Another differentiator is our portfolio of brands. Position in the contemporary, upper premium, and luxury segments of the market, there's minimal overlap among them. Meaning, we do not compete against ourselves in the marketplace. All in all, we believe that our organizational structure and brand mix, both of which are unique in the cruise industry, our core strengths that are and will continue to deliver outside dividends in the future.

Turning back to the combination of the Norwegian and Prestige organizations. The integration is now substantially complete, and we are seeing the strong positive results expected.

Over the last few months, team members from both organizations have been collaborating on everything from purchasing, to systems integrations, to sharing sales and marketing strategies. All in an effort to make the whole greater than the sum of its parts. This is evident in our synergy capture initiatives.

With the majority of integration efforts substantially complete, we are reiterating our 2015 synergy target of $75 million. Comprised of $30 million in revenue and $45 million in cost synergies, of which $20 million is being reinvested in to the business this year. For 2016, we have identified an additional $10 million in synergies, raising the total to $125 million for the year, split about evenly between revenue and cost synergies.

$40 million of the $125 million remains earmarked for reinvestment in various business initiatives. Aimed at driving yields across our three brands to continue building momentum for what we believe will be a breakout year in 2016.

Along with an increase in identified synergies, each of our brand has launched various initiatives during the quarter aimed at bolstering revenue for 2016 and beyond. On our last call, I discussed weaving the Oceania and Regent market [to fill] strategies into the Norwegian brand, along with changing the conversation with consumers from one focused on low prices to one focused on high value. This time, I'd like to focus on another related strategy, that being creating scarcity of offerings to drive higher yields.

Looking at the Norwegian brand, just yesterday, we announced one of our most ambitious and diverse itinerary offerings in recent years. This diversified deployment is another example of exchanging of best practices between brands.

In this case, we are weaving in the concept of itinerary scarcity that has proven successful at Oceania and Regent into the Norwegian deployment strategy. This concept involves diversifying itineraries, not only for repositioning voyages, but more importantly, for seasonal and year-round regional and home port deployments.

Itinerary scarcity breaks up the glut of repetitive sailings or milk runs that in essence tend to commoditize voyages in a given deployment. Whereas in the past, the Norwegian brand focused on freedom, flexibility and choice in the on-board experience, we're now taking these important attributes and expanding them to be in the destination experience as well.

The following are a couple of examples to demonstrate this new itinerary development and concept. First is diversification of offerings with an entirely new group of itineraries. Using the expertise of the Oceania and Regent itinerary development team, we've crafted a deployment plan for Norwegian Star to begin sailing to Asia and Australia, targeting western guests.

For years, the Norwegian brand has received appeals from loyal guests to offer sailings in the Australia-Asia region. Echoing this sentiment is a fairly luciferous and growing group of Australians and New Zealanders who have sailed on Norwegian ships in other parts of the world. And who have requested time and time again that we bring our unique free style offering down under.

Norwegian Star seasonal deployment will satisfy both contingents, and mark the brand's return to the region after a 15-year absence. This new deployment also coincides with the ramping up with our sales and marketing operations in Australia, which I'll discuss later in the call. And replaces our lowest yielding seven-day product.

Star's new deployment is one of the most exciting for the Norwegian brand in recent years. During our repositioning and deployment, Norwegian Star will call on several ports in Europe, the Middle East, the Far East, Australia, and New Zealand. Including Copenhagen, Barcelona, Istanbul, Dubai, Singapore, Hong Kong, Sydney, and Auckland.

The second example is one of diversification of itineraries in some of Norwegian's most popular home ports. In the past, Norwegian was known for having almost exclusively seven-day identical and repetitive sailings, or again, milk runs, from certain ports, resulting in weeks and weeks of supply with no differentiation. With this new deployment, we have sought to slowly and methodically diversify our offerings while re-energizing home ports that have proven popular.

A perfect example is Norwegian Jade, which will deployed to Tampa beginning in October 2016. Along with their base itinerary of seven-day western Caribbean voyages, we've added a variety of 8, 10, and 11-day voyages to the eastern and western Caribbean. Which will call on new ports not previously serviced by Norwegian from Tampa.

We've done the same with Norwegian Spirit, which will be redeployed to Europe year-round beginning November of 2016. But this time, offering a variety of 7, 10, and 11-day eastern and western Mediterranean voyages departing from Barcelona, Venice, and Istanbul.

As a contemporary product, we fully understand that the Norwegian brand is positioned differently in the marketplace. And as such, is not expected to reach the same level of diversification that Oceania or Regent enjoys. It is our job to find the right balance between consistency and diversification of offerings in order to maximize yields.

What we do know is that the Norwegian customer wants to see the world as much as an Oceania or Regent customer does. And we continue to evaluate other opportunities to offer our guests a broader portfolio of destinations.

Looking at Oceania, we recently rolled out a new marketing campaign called O Life Advantage. This booking initiative reinforces Oceania's longstanding message to its guests. Which is to book their 2016 vacations early by offering a collection of Oceania's most popular incentives in one simplified program across the fleet, including Oceania's newest vessel, Serena, which joins the fleet in April of 2016.

Also joining our fleet in 2016 is Regent Seven Seas Explorer. During the quarter, we've revealed additional concepts that we believe will be very popular on board the most luxurious cruise ship ever built. Including an unrivaled infinity pool and sports complex, the addition of a canyon ranch spa club that rivals any on land, and the addition of a signature Pan Asian gourmet dining experience called Pacific Rib.

The expansion of our fleet with Explorer has allowed us to become more creative and adventurous with our itinerary planning for the Regent brand. As a result, we've announced a return to world cruising with a 128-day voyage aboard Seven Seas Navigator beginning in January 2017. Visiting 6 continents, 31 countries and calling on over 60 ports.

This cruise has proven so popular, that 70% of the voyage was booked on the very first day of sales. This is a testament not only to the allure of the Regent brand, but also to our belief that guests, on whichever one of our three brands they choose to sail, want unique, different, and rich destination experiences.

Before turning the call over to Wendy, I'd like to give you an update on our international expansion efforts. First is the appointment of Harry Sommer to the role of Executive Vice President of International Business Development.

In addition to serving as head of our successful integration initiatives, Harry has previously held various senior positions in finance, revenue management, and sales and marketing at Prestige as well as Norwegian. In this role, Harry will be responsible for advancing our global expansion strategy for all three of our brands, and I can tell you he has hit the ground running.

As I mentioned earlier, our Australian and New Zealand sales offices, which will be located in Sydney, will be ramping operations soon. We have appointed a well-known industry veteran with a strong track record to head that office, and lead our sales and marketing efforts for all three brands in the region.

In mainland Europe, we've added responsibility for Prestige sales and marketing activities to the existing Norwegian headquarters and [v spot] in Germany. And are well along in consolidating our UK operations in Southampton. Looking to Latin America, we leveraged the Norwegian brand's opening of a sales office in Brazil, and consolidated all three brands under one managing director for Latin America.

Lastly, turning to Asia. While we are excited for the Norwegian brand's return to the region after a 15-year hiatus, we continue to evaluate the opportunity to offer Asian centric product geared towards consumers in the region, particularly to those in China. We have the benefit of learning from the industry's initial entry in to the market, and are building our intelligence and crafting a strategy for the best way to enter the market.

Our [skunk works] team has substantially completed its assessment of entering the Chine source market with a dedicated vessel perhaps as early as 2017. Our original expectations, if you recall, were to announce a go, no go decision by spring 2016. However, given the significant progress made to date, we now expect an announcement to come sooner than we had initially anticipated.

There's a lot of excitement building for the Norwegian, Oceania and Regent brands. But we're here to talk about our second-quarter results, so I'll turn the call over to Wendy to discuss those in more detail. Wendy.

Thanks, Frank. I'd like to begin by noting that unless otherwise stated, the following commentary compares second quarter 2015 and 2014 on an as-reported basis.

In order to provide a better comparison of the combined companies performance, we have also provided guidance for net yield and net cruise costs. Which compares second quarter 2015 results for NCLH against the second quarter of 2014, which includes the results of Prestige. We refer to this guidance as combined company, which we have provided on both an as reported and constant currency basis.

For second quarter 2015, the Company generated adjusted earnings per share of $0.75. Compared to $0.58 in the prior year, and at the top end of our guidance range of $0.70 to $0.75. Strong earnings were driven by solid ticket and on board performance, particularly for the Norwegian brand, along with favorable timing of marketing investments which are now planned for the second half of the year.

Adjusted net yield performance was in line with expectations. Increasing 18.2% on an as-reported basis as a result of a full quarter of consolidation of the upper premium and luxury Prestige brands. On a combined Company basis, adjusted net yield increased 1.5%, coming in at the midpoint of guidance of up 1% to 2% and was up 3.2% on a constant currency basis versus guidance of up 3%.

The booking levels over the last few months have been one of the most successful in Norwegian Cruise Lines' history, primarily for two reasons. First was a result of the weaving in of certain aspects of Prestige's go-to-market strategy, where we began messaging to consumer and travel partners that booking early would result in the best value proposition.

Second was our free style choice offering, which not only benefited sailings in 2015, but also has helped build a solid base for sailings in 2016 and beyond. This offering was very well received by consumers and travel partners alike. As it provides amazing value to consumers, and higher earnings potential to many of our distribution channels.

Now turning to costs. Adjusted net cruise costs excluding fuel per capacity day increased by 21.1% on an as-reported basis. Mainly due to the addition of the Prestige brands, while the combined Company basis decreased 4.7%.

This decrease in costs can be attributed mainly to the timing of certain expenses. Including marketing investments, which will be deployed in the second half of the year as we ramp up for our new marketing campaign for the Norwegian brand post the announcement of our newly appointed advertising agency.

Regarding net cruise costs, I'd like to review the contingent consideration reliability related to the acquisition of Prestige. Pursuant to the achievement of certain 2015 revenue targets, this consideration was payable to the shareholders of Prestige, of which the initial 50% was based on a cliff vesting hurdle.

Based on the probability of achievements, this liability has been reversed in the quarter as a result of softness in the more exotic itineraries. Primarily Africa and Q4 eastern Mediterranean sailings for the Oceania and Regent brands. The $34.3 million benefit is recorded in the marketing G&A line item, and has been adjusted out of earnings.

Turning to fuel expense. Our fuel price per metric ton, net of hedges, decreased 10.3% to $558 from $622 in the prior year. While on the topic of fuel, I'd like to update you on the progress of our exhaust guest scrubber project.

As a result of the complexity surrounding this rapidly evolving technology, together with our decision to enhance the scrubbers from an open to closed loop system. We've experienced delays to the project. The enhancement from open to closed loop will provide future benefits, in that it will allow us to fully utilize our scrubber systems while the ships are docked in the vast majority of ports around the world. Which enables us to burn lower grade, less expensive fuel, not only while at sea but also while in port.

The delay put us outside the original operational timeline submitted to the EPA in order to receive fuel waivers to burn lower grade fuel during the installation period. This caused the EPA to rescind these waivers. And as a result, has changed our fuel consumption mix, reducing the amount of high filter fuel we will burn, and in turn causing the fuel hedges associated with this consumption to be de-designated for GAAP purposes.

At current market prices, the incremental impact of the change in our fuel consumption mix for the remainder of 2015 will be approximately $10 million. For the full year 2016, we expect the impact to be approximately $15 million. Tapering off to $10 million for full year 2017, as the scrubbers become operational over the course of the installation period.

Interest expense net was $52.4 million. Compared to $31.9 million in 2014, in connection with higher debt balances resulting from the acquisition of Prestige.

Other income and expense included a non recurring charge of $10 million related to the aforementioned de-designation of a portion of our fuel hedge portfolio. This was substantially offset by a $9.4 million benefit from a fair value increase, and a foreign currency caller related to the Seven Seas Explorer construction contract. As a reminder, the structure of this caller is not eligible for hedge accounting and will be mark to market on a quarterly basis, resulting in future changes to this line item until we take delivery of the vessel in Q2 2016.

Now looking to the remainder of the third quarter and full year 2015 in our earnings release. In addition to providing guidance on an as-reported basis for net yield and net cruise costs, we're also providing guidance on these metrics against 2016 combined Company results as the basis with which to compare 2015 expectations. As stated earlier, these combined Company results assume the consolidated results of Norwegian and Prestige for the third quarter and full year 2014 as of the beginning of that year.

As expected, the remainder of 2015 is shaping up nicely. Norwegian Breakaway, Getaway, and Escape are all commanding double-digit pricing premiums when compared to our core fleet and similar markets. Norwegian Escape, with her first revenue sailing to take place in November, is in a better booked position when compared to Breakaway and Getaway at the same time prior to their delivery.

Turning to booking trends for the remainder of the year. The Caribbean is shaping up well, with both price and load higher over last year. As for Europe, this market continues to perform well, and is booked slightly ahead of last year with pricing flat year-over-year despite softness in the Eastern Med.

Alaska is booking well, and is better loaded versus last year at comparable pricing. Bermuda is strong this year, well ahead on both pricing and load. And exotic itineraries, such as Africa, are experiencing softness in the back half of the year which is expected to continue into Q1 2016.

Looking at guidance, we are maintaining our full year adjusted net yield guidance of up approximately 17.5% on an as-reported basis. For results compared to those reported by the Company for full year 2014 were up approximately 19% on a constant currency basis. On a combined Company basis, we expect adjusted net yields to be up approximately 1.5% and 3% on an as-reported and constant currency basis respectively.

Turning to costs. Adjusted net cruise costs, excluding fuel decreases, slightly to up approximately 23.25% on an as-reported basis. While on a constant currency basis, we expect an increase of approximately 23.75%. On a combined Company basis, we expect an increase of approximately 2.5% and 3% on an as reported and constant currency basis, respectively.

Inclusive of the impacts from the aforementioned increase in fuel expense, we are raising the midpoint of our full-year earnings guidance to now be in the range of $2.80 to $2.90, primarily due to favorability and operating and interest expense. Guidance for the third quarter in terms of adjusted net yield is as follows.

On an as-reported and constant currency basis, we expect adjusted net yield for the third quarter of 2015 to grow in the range of 18% to 19%, and 20.5% to 21.5% respectively. On a combined Company basis, we expect adjusted net yield to increase between 0.5% and 1.5% on as reported basis, and 2.75% to 3.75% on a constant currency basis.

As a result of a shift in timing of certain expenses from the second quarter to the back half of the year. Adjusted net cruise costs, excluding fuel per capacity day, on an as reported basis is expected to increase between 28.5% and 29.5%, and 29.75% to 30.75% on a constant currency basis. On a combined Company basis, we expect an increase of between 5% and 6% on an as-reported basis, and 6% to 7% on a constant currency basis.

A few items to not regarding net cruise costs. First, Norwegian Epic will undergo her first scheduled dry dock. Which is 23 days in length, spanning Q3 and Q4.

Norwegian Gem also has a scheduled dry dock in Q4, which will be 14 days in length. Second, as we ramp up for the delivery of Norwegian Escape, we will also see inaugural and launch expenses that will straddle the third and fourth quarters. And lastly, adjusted earnings per share in the quarter are expected to be in the range of $1.30 to $1.35.

Turning to deployment, the third quarter is comprised of our peak seasonal itineraries across our fleets. In order to demonstrate the benefits of diversification from the addition of the Oceania Cruises and Regent Fleets, the following compares 2015 deployment on a combined basis to 2014 on a Norwegian brand-only basis.

19% of third quarter capacity is in the Caribbean, compared to 23% in 2014. Europe deployment increases 37% from 31%, while Alaska stays constant year over year at 18%. In Asia, Africa, Pacific, South America, and world cruises, which were areas where the Company had no presence in 2014, now combine to account for 2% of capacity with the addition of Prestige's Fleet.

Looking to 2016, as we previously mentioned, our various strategies are taking a strong hold. And as a result, our 2016 booked revenue is approximately 30% higher versus same time last year, while capacity increased approximately 11%.

With that, I'll turn over the call to Frank for some closing comments. Frank?

Thanks, Wendy.

As Wendy mentioned, 2016 is indeed shaping up to be another breakout year. It's hard to believe that by the time of our next call, we will have already welcomed Norwegian Escape in to our fleet. Not only is she the largest and most ambitious ship in Norwegian's storied history, she's also one of the most popular as evidenced by strong a book position that has out paced those of her recent predecessors. Her offerings from the first Margaritaville at Sea to our largest Haven complex will make her a fitting addition to Norwegian's innovative fleet.

Norwegian's Escape addition also means that this current quarter will be the Company's last organic quarter for some time. As we layer in the expansion of their Norwegian, Oceania and Regent Fleets throughout 2019.

As our Company grows with these latest additions, we'll continue to execute on our strategies. Which include the initiatives I spoke of today regarding creating scarcity of itinerary offerings to drive yields, and taking full advantage of the Norwegian and Prestige combination to expand our international footprint.

We believe these strategies, combined with others focus on driving yields and leveraging our scale, will drive Norwegian's growth well into the future. And keep us on track for our 2017 earnings target of $5 per share, and the doubling of our ROIC from our IPO levels in 2013 to 14% by the end of 2018.

Thank you all for your continued support. We'd like to go ahead and open up the call for questions.

(Operator instructions)

Our first question comes from Felicia Hendrix from Barclays. Your line is open.

Hello, good morning, and thank you. Frank, just to kind of hop on to your closing comments and Wendy's closing comments, at the beginning of your remarks, you called 2016 a breakout year. You guys put in the release and in the prepared remarks about your strong bookings for next year.

You're going to have a new ship. You're changing out your milk runs. You're growing internationally.

So I'm assuming that by calling 2016 a breakout year, you mean that all of these items will manifest themselves. So I wanted to just make sure I was understanding that properly, and maybe you could talk about some things that you see going forward additionally. And I think previously, you had talked about perhaps beating that $5 goal. Thanks.

Thank you, Felicia. Yes, by breakout year, I meant it in a very positive way. The 30% better book revenue is very healthy.

It comes from both a load factor improvement and pricing improvement. And we continue to see very strong onboard spend, especially on our newer vessels. And as we stated in the release, we continue to see that double-digit premium of the newer vessels versus the legacy vessels.

So the Escape is booking well, the Explorer is booking phenomenally well, as is Serena on the Oceania side. We've upped our synergies for 2015.

That doesn't mean that we're giving up on finding additional opportunities, they're there. But as I mentioned earlier, we want to close the book on synergies, the defined number, and focus more on an ongoing business.

So it just looks very, very strong, Felicia. The industry is strong. You've seen our colleagues also report strength, and so there's a lot to be optimistic about.

Can you touch on that $5 goal?

Yes, it's still the goal. And not only is it the goal, but I think we feel more confident than ever that we're going to get there. It's still a year away, or more than a year away. We're focused on 2016, and 2016 looks very, very strong, which hopefully will lead to even a stronger 2017.

Okay, great. Thanks.

Our next question comes from the line of Harry Curtis from Nomura. Your line is open.

Hello, good morning. Can you talk more specifically about your outlook for the Caribbean next year? What kind of supply growth do you expect overall for the area, and what kind of pricing you would hope to get on your same store fleet?

Okay. So first off, Harry, on our deployment, our Caribbean capacity for the full year 2015 is at 41%, and next year it will grow to 43%. Frank, do you want to address the pricing?

Yes, it's a bit early, Harry, to give you a whole lot of color on pricing. But as I said a little earlier to Felicia's question, we're seeing 2016 strength both in load factor and in pricing.

Specifically what I was after is on the supply growth, I appreciate your capacity, your mix going up. But there are some concerns that after a year in 2015 where we actually have a tailwind on supply overall in the Caribbean, that it's actually going to go up 4% or 5% next year. Is that a number that's consistent with what you're expecting?

No, we're anticipating 2% for the supply growth.

Industry-wide.

Okay. And then just quickly touching on China, can you give us a sense of a little more color on what your plans are in China? There seems to be an evolution of how you fill ships in China.

As you look into putting capacity there, are you likely to fill ships or a ship with partners? Are you planning on building out a marketing and sales force? Just a little more color on your plans there would be great.

That would be premature. We have not announced that we're going to China yet, and so I'd rather stay away from answering specific questions. The time will come for us to make that call.

But I agree that China is a different model than the rest of the world, although it is beginning to move more towards FIT bookings than the charter model. But it's been successful.

I think you've heard the other lines several times now mention how their most profitable ships, their high yielding ships, are based in China. And everything that we've seen indicated that is correct. So we want in on that action.

And like I said earlier, things are going well with our review and our assessment of the potential of China and Asia in general. And so we will make the decision to go or not go earlier than we once thought. And I'd like to leave it at that for now.

So last question is, it sounds like there is room for the possibility of your capacity going in before 2017, it's a possibility.

Not before 2017. If we decide to go to China, our ships will not arrive there in 2016. In 2017, at the earliest, if we decide to go.

Okay. That's great. Thanks.

Our next question comes from Steve Wieczynski from Stifel. Your line is open.

Good morning, guys. Frank, you talked about in the relief earmarking certain energy savings for reinvestment, and you barely glanced over it in your prepared remarks. Can you maybe help us think about what you're targeting in terms of some of those reinvestments?

Yes, in prior calls, we've said that we're going to invest in the onboard product, primarily in improving menus. And we believe the way to a person's heart is through their stomach, and so we want to make our food offerings the best they can be.

We're also going to be investing moneys in additional marketing to coincide with the new ad agency that we've contracted with. We want to keep the momentum going throughout 2016. Remember, there's a new vessel coming on the Norwegian brand for 2017.

So we believe that a combination of sales and marketing initiatives, primarily for the Norwegian brand, but some for the Prestige brand as well. Combined with an improvement in the onboard food product for the Norwegian brand, is the overwhelming majority of that reinvestment.

Okay, got you. Then second question with regards to your book to load position for the remainder of the year. We've heard your competitors out there saying they're in the best position they've ever been. Is that a similar type of story that you guys are in at this point as well?

Yes. We've said for some time now that we're in a better book position for the next six quarters or the last two quarters of the year and all of next year than we were this time last year.

Okay, great. Thanks, guys.

Our next question comes from the line of Robin Farley from UBS. Your line is open.

Great, thanks. Two sort of housekeeping items, and then just a question about your forward guidance.

For Q2, just looking at a couple of the add-backs. Can you just give more color around -- there was I guess $11 million of expenses related to the Prestige acquisition last year that fell in this quarter. And it looks like this is separate from accounting changes and separate from severance. So just wondering what that is.

Sure. I'll handle that. So about two-thirds of that $10.9 million is related to termination and break fees. For example, a large item in there is the breaking the casino contract that Prestige had so that we could bring it in house. And handle the casino similarly to how we've handled Norwegian and successfully grown it through the years.

And the other third is related to integration costs and stocks compliance to really get Prestige stocks compliant. But also as we integrate all of our programs together, we've got a big push here that we've got to have that done by the end of the year.

Okay, great. And then on the fuel expense, and you guys talked about why that may be going up. I just want to clarify, is the $10 million higher fuel costs that's from the EPA rescinding waivers, is that the same $10 million that you call out in the add-backs, that loss of $10 million related to fuel hedge contracts? Or are those two different expenses?

Yes, they're actually two different expenses. Happens to be the same number. So I don't know if you want me to clarify anything more on that, but there actually is some offsets in there too.

So we've got a loss of $10 million related to the certain hedge contract. And then we also have $9.4 million that's related to the Explorer exchange that's offsetting that. So that's in there.

Then we also have the $10 million for the MGO fuel costs, because we're going to have to now burn the more expensive fuel towards the back half of the year. So it just happens to be similar amounts.

Okay. But that $10 million higher fuel cost, that's just going to run through your regular operating expense?

That's correct. And then the other thing to note is that there's additional amounts that we'll actually see in 2016 and 2017. But that will mitigate, so it will be an additional $15 million in fuel expense into 2016 and $10 million into 17. Three of the ships that are getting scrubbers put on them will actually be online by the second half of next year.

Actually in the first half before we get to June. So then it starts to taper down. And then the remaining scrubbers will go out into 2017.

Okay, great. That's helpful. Thank you. Then just my last question, Frank, you mentioned the $5 a share in EPS still the goal for 2017.

Is it still fair to say that you've talked about potential up side to that coming from additional Prestige synergies like you announced today. And if there's share repurchase at some point between now and then, that those things would be incremental to the $5. Is that still how we should think of it?

Yes, and don't forget that of all the synergies we've talked about, we've never ascribed a single penny to improved pricing from the new go-to-market strategy. That, as we said earlier, we see a 30% increase in revenue, book revenue year-over-year.

So that also can be very much accretive to that basic $5. And my guess is that that would be the highest potential area to the $5 would be how much more ticket pricing we can see on the Norwegian brand because of the new strategy.

And the other thing that I would add in is that that also assumes $790 million in debt pay downs. So we've got that money out there as we've messaged numerous times to either pay down debt or buy back shares. So we've got some options there.

Okay, great. Thank you very much.

Our next question comes from Tim Conder from Wells Fargo Securities. Your line is open.

Thank you. Just a couple here. Relating to the fuel, Wendy, and the exploration of the hedges or the falling out of those. Is the net of that plus any incremental hedges that you've layered on to, is that what we're seeing in your hedge percentage guidance that you outlined in the press release?

Yes, so the hedge percentage actually goes down. Because now, it's a remainder that is left in that's getting hedge accounting. That percentage is related to the HFO that we will actually burn for the remainder of the year, and so that's the cause of it going down.

You will not see that change, so it's now at 48% for 2015, 54% for 2016. And you probably have noticed that we've layered in some additional hedges in the back two years now moving up to 44% in 2017. But the change down is purely related to the sea designation of our accounting hedges.

Theoretically, could you continue to put more hedges on? Although they may not qualify as of yet until you get some of the other scrubbers online, and then we could see that percentage jump?

Yes, definitely for the outer years we could do that if we chose to.

Okay. Then some others in the industry provided some I guess waiting by quarter or directional wait I should say by quarter and by the year on your FX. Is there anything that you guys could provide there either here on the call or in the filing or follow up?

So the first thing I would say is just as a reminder, roughly 15% of our currency is coming in from foreign sourced. It has shifted a little bit.

So we used to say of that 15%, 10% was euros. That's gone down to about 8% now, and the pound has actually moved up a little from 5% to 6%, with the remainder being Australian currency. And then, Tim, were you looking for sensitivities?

I guess just more of the waiting by quarters, where you have the exposure, a ranking maybe by quarters and then you just gave it for the year. But by quarters, how we should think about the cadence of the ranking by quarters.

Yes, so third quarter definitely would be the highest, and then fourth quarter, obviously, we're moving a lot in to the Caribbean. And then as far as cadence, I can tell you on like a full year basis, a $0.01 change on the yield impact for the euro would be 4.3 bips.

The pound is about 2.0. Canadian 3.5, and Australian at 2.1.

Okay. And then, Frank, one of the things that you outlined in the Analyst Day was an objective and a goal to really push to source more Canadians. Similar to what Prestige has been doing, but source more for the Norwegian brand.

Just maybe an update on that. Does that seem like a pretty good size pocket of opportunity relative to what others were doing in the industry?

Relative to what the Prestige brands had done in Canada, the Norwegian brand had under performed. So we have geared up in Canada, and are beginning to see positive results. Our international source business, and you can include Canada in that broad international space, is improving.

So we like what we see in the international expansion. And we're glad that we've made those investments. It's beginning to pay off.

And then lastly, you talked about your 30% booked revenue increase for 2016 on a year-over-year basis. Can you say just in absolute terms how much of your capacity of booked for 2015, and then any color if you would on 2016 on an absolute basis?

You want to know what our occupancy is for 2015?

Yes, just as a percent of capacity for 2015, how much were you booked at this point for the full year? Granted, part of the year is already done.

That's something that we normally don't give out, especially not by brand. But we like very much where we are. We're substantially complete.

Especially the Oceania and Regent brands, which are booked much further out than the Norwegian brand does. So that's about all I can tell you about that.

For 2016, we're really excited because it's throughout the year. And to have a 30% bump year-over-year with an only 11% increase in capacity, just gives you a feel for how robust the business is coming in. And it's been that way for several months.

This is a slow steady build up. We're seeing slow steady buildup both in load and in price.

Okay. Definitely great metrics. Thank you, sir.

Our next question comes from Joel Simkins from Credit Suisse. Your line is open. Hello, this is actually Christy on for Joel. I just wanted to ask how you're thinking about opportunities in Cuba, should this open to the US customers. And how quickly you'd move to dedicate suspect there?

Yes, so I'm very much involved in our Cuba strategy. We believe that once Cuba opens up totally, it's going to be a real windfall for the industry.

Everyone is excited about China, and I believe that Cuba can have a similar positive impact on the industry as a whole. Given its proximity to the United States, and given that the Caribbean as a whole represents some 40% of the industry's deployment.

We have applied for our OFAC license from the Department of US Treasury. We've applied for our Commerce Department Export license, and are waiting to hear the positive results. And we've also engaged the Cuban government in the discussions necessary to obtain their permission as well.

I don't know the timeline for any of those three license to come through, but I am hopeful that they will happen before the year is out. In terms of how quickly we can deploy a vessel, suddenly vessels or the availability of vessels comes in to play given how far in advance we're booked. As I stated earlier, up 30% of book revenue for the following year.

So I don't have an answer for you. It's going to be a nice problem to have to find a vessel that you move from an existing deployment to Cuba.

By definition, given the infrastructure limitations, it looks like the first vessel that would go to Cuba would most likely come from the Oceania fleet. As opposed to the large vessels or the larger vessels of the Norwegian fleet. So it's still very much a project that's in progress.

This is very new to a lot of people both in the US and in Cuba. But we're hopeful that, as I said earlier, the applicable permissions from both governments come soon, and then we'll have an interesting dilemma on our hands of what vessel to deploy to Cuba and from where.

Okay, great. Thanks.

Our next question comes from Steven Kent from Goldman Sachs. Your line is open.

Good morning. This is Lara stepping in for Steve. I was just wondering, in terms of the discount to sell and market to sell strategy and transitioning from one to the other. Is that contributing to any of your 2016 bookings being up 30%?

And then also my second question was just, if you could give us some color on how the Breakaway bookings look in the fourth quarter and early next year, as well Royals, Anthem enters the New York City market. Thanks.

You can never attribute any broad market move to any one particular action. But I do believe that on the broadest scale, that the new go-to-market strategy focusing on value, not necessarily low price, taking prices up steadily over time, with strong messaging to consumers and travel agents alike. That this is a great deal, that travel agents are earning higher commissions on because of higher pricing.

It all works together and helps elongate the booking curve. So one of the things that we're seeing as part of that 30% increase in revenue is an elongation of the booking curve into 2016, quite significantly. So we're very happy about that.

In terms of Breakaway, Breakaway is doing great. She's behaving much like she behaved in prior years. Her pricing is up.

The onboard spend, at least through the month of July this year, is double digits percentage-wise better than the core fleet. So Breakaway loves New York, and New Yorkers love Breakaway.

Our next question comes from the line of Jamie Katz from Morningstar. Your line is open.

Hello, good morning. I'm curious now that your study on Asia or the far east seems to be wrapping up. Is there any early read-throughs that you guys are willing to share with us from that?

And then now that you guys are opening an office in Sydney, how are you thinking about the sourcing strategy outside of the earlier discussion on Canada longer term, maybe from some of these other markets? Thanks.

In terms of sourcing, I don't think it's any change. You remember that Norwegian has, after delivery of Escape, three more vessels coming. One in 2017, one in 2018, and one in 2019, so we need to expand all our channels.

Don't want to take anything for granted. We want more demand. That's going to push up yields.

And so we think that Australia is an underserved market for the Norwegian brand. And are excited to be able to open up our own office there to service all three brands, and that we were able to recruit a very talented, experienced executive to head up that office.

In terms of Asia, the read-through is that other cruise lines have been successful in Asia. It's no longer a startup market, if you will. I think some of our competitors are now celebrating close to 10 years of being in China.

And given that the Norwegian fleet has now grown or will have grown by 2019 to 17 vessels, it's time for us to take a look and deploy some of our tonnage there. Which we hope to be able to make that decision, like I said, in short order.

Thank you.

Our next question comes from James Hardiman from Wedbush. Your line is open.

Good morning. Thanks for taking my call. I was hoping you could talk a little bit about the trends you're seeing with respect to onboard yields as compared to ticket yields.

I guess a couple different things here. One, should we be backing out the entirety of the deferred revenues from the ticket, or is some of that onboard? Secondly, are you still seeing European customers balk a little bit with respect to onboard spending just given the currency situation?

And third, as more of your brands move towards bundling traditionally onboard products and services into the ticket price. How should we think about where that shows up in your income, whether it's booked or onboard? Thanks.

Okay, great. So first off, no, you don't want to be backing out the deferred revenue. We actually show that in the adjustments to add it back in to show what the real revenue power is of the Company, as opposed to how you have to account for it in the acquisition.

Regarding our onboard revenue, in general, we've been seeing very robust onboard revenue in the Company. If you segregate out the European sourced customers, it's down, but it's marginal. And overall, we're seeing strong onboard revenue throughout our fleets.

Then regarding how we account for it, we're allocating that on a retail value. So if you're selling the bucket, it's being allocated equally based on their retail values to both ticket and onboard on a GAAP basis.

That's helpful. And just so I understand, the deferred piece, I'm sorry, I didn't mean back it out. Add it back.

Do I add it back 100% to ticket? Or is it split between ticket and onboard?

It's to ticket. Good question.

Okay. And then I guess last question for me, and ultimately, this should be just math. But you've got a lot of moving pieces here given the acquisition and everything else. How should we think about the implied yield growth and cost growth in the fourth quarter?

Again, we should have the pieces here to get to those numbers. But on a combined Company basis, are yields accelerating in the fourth quarter versus 3Q, and how should we think about costs?

Yes, so clearly, taking our full year you can get to the implied numbers. But they are accelerating in Q4.

Q4 in the prior year was a weaker quarter for us. But you will see some nice yield growth in our Q4 this year. You guys can all back into the numbers.

The duration in Q1. As the go-to-market strategy takes a hold and a greater percentage of the bookings come as a result of that new strategy as opposed to legacy strategy or old bookings, the pricing improves and accelerates into the future. So Q1 is better than Q4, Q2 is better than Q1, et cetera.

Got it.

I would say focus on the constant dollars. There has definitely been a shift with currency fluctuating the way it has this year that we're really to really look at our true results, we're saying look more at the constant dollar. The other thing is on the net cruise costs based on the guidance in Q3, the implied number for cruise costs is down from where it is at Q3 to get to our full-year number.

Got it.

We have time for one more question, please.

Our final question comes from Assia Georgieva from Infinity Research. Your line is open.

Good morning. Thank you for taking my question. Frank, if I may, I'd like to go back to your characterization of 2016 being a breakout year.

We have investment in international sales infrastructure, obviously, and the itinerary diversification. This latter factor, in the past, and the Norwegian Sun comes to mind, had become a little bit of an issue when that ship went to Alaska. Because travel agents were slow to embrace a new vessel that they weren't as familiar with in that market.

Do you think we may see a little bit of hesitation with Norwegian Star? And as part of that, is the expectation for 2016 more on yield or EPS as well? Thank you so much.

Look, remember, we took our lowest yielding seven-day product, which was our winter ship out of Houston. And that's the one that's going to Asia for the western market. So our risk reward factor is high, and that's where marketing comes in.

I think we're much more of a marketing-focused company today than we might have been before. And therefore, we will make sure that our past guests who we are going to rely on quite a bit to fill these vessels in Asia, because of the pent up demand. They've been on our Norwegian fleet across the world, but they haven't been to Asia with us.

The high producing travel agents, not just in the US but around the world, who have been asking us to go to Asia. So no. And remember, one more thing, Assia, it is a seasonal deployment.

So is there's a lot of pent up demand that wants to go to Asia over a four and a half to five-month period of our lowest yielding product that it replaces. So I think it all points up very positively. And I'm sorry, but I didn't get your second question.

2016, should we be looking towards yield or yield and EPS being break out metrics?

Well, I think both.

Okay.

If yields are up, your EPS better be up.

Given an infrastructure investments, that was a little bit of a concern of mine. Thank you so much for taking my question, both of you.

Thank you.

Thank you. Thanks, everyone, for your time and support. As always, we'll be available to answer your questions later today. All the best. Bye-bye.

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