挪威郵輪 (NCLH) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Norwegian Cruise Line Holdings third-quarter 2015 earnings conference call. My name is Nicholas and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for this session will follow at that time.

(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, Head of Investor Relations. Miss DeMarco, please proceed.

Thank you, Nicholas. Good morning, everyone, and thank you for joining us for our third-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 up 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 would like to cover just a few items. Our press release, with third quarter 2015 results, was issued this morning and is available on our Investor Relations website. I would also like to review information about forward-looking statements and the use of non-GAAP information as a part of this call.

The Company's commentary 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 we 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 the comments may refer to non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measures 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 welcome everyone. Appreciate everyone joining us today. As you saw from our press release this morning, Norwegian posted impressive record results for the third quarter, particularly the top line where our industry-leading net yields continued its' quarter-over-quarter acceleration, exceeded our guidance range, and drove strong earnings growth of 22%, with adjusted earnings per share coming in at the top end of our guidance.

These results demonstrate our various strategic initiatives that we began implementing early this year by driving outsized earnings growth. From our go-to-market strategy of marketing to fill versus discounting to fill to our consistent consumer communication of emphasizing value over price, these strategies resulted in strong yield performance that is more commensurate with a quarter that has the benefit of a newbuild introduction as opposed to the actual case this quarter where yields and revenue growth was purely organic and came solely from same-store operations.

This quarter marks our consecutive quarter of net yield growth, with yields essentially flat in the first quarter coming off very strong prior year performance, yields up 3% in the second quarter and now up 4.7% in the third quarter. This strong booking momentum continues into 2016, where we are entering the year at record loads, well ahead of last year and significantly exceeding our 11% increase in capacity, with higher pricing across all brands and an extended booking curve that is now 12% longer than same time last year, allowing us to optimize pricing for 2016 and beyond.

Wendy will delve more deeply into current financial results along with color on 2016 later in the call, but for now, while traditionally, my commentary has focused on discussing key events and strategic initiatives, I'd be remiss if I did not take this opportunity to discuss our recent event and announcements that occurred outside of the third quarter, but which are essential to Norwegian's growth trajectory, both in the short and long-term. Most recently, is the addition of Norwegian Escape. At approximately 4,200 berths, she is the Company's largest ship and the latest incarnation of its Freestyle Offering. We've been taking immensely popular award-winning design of our Breakaway class ships and added new features, venues and entertainment options that build on the already high level of freedom and flexibility on all our Norwegian Cruise Line ships. Norwegian Escape has enjoyed record-setting bookings which have surpassed our highest expectations and outpaced the strong booking levels that we experienced with each of Norwegian's most recent three newbuilds.

She also continues to garner double-digit yield premiums when compared to other ships in the same or similar itineraries and deservedly so. As you know, my cruise background is from the upscale side of the business. And pound for pound, or should I say tonne for tonne, the design and offerings on Norwegian Escape will impress the most of discerning upscale traveler. The design of her public venues and the cuisines served in all of her restaurants are on par with fine restaurants found in any large international city and her suites leave nothing to be desired. She truly sets a new standard for mega ships in the industry.

A few weeks prior to the delivery of Norwegian Escape, we made a series of other announcements that reinforced our long-term commitment to the international expansion efforts of our three brands. First was the official opening of our sales and marketing office in Australia, which is our first in the Pacific region. This Sydney-based team represents all three of our brands and offers the support to travel partners and guests in Australia and New Zealand, a market where we have grown our guests by 12% over the last three years.

The office, which opened ahead of Norwegian Cruise Line's return to sailing in the Asia-Pacific region in late 2016, with a product geared to Western guests, will also support the Oceania and Regent brands which has sailed in the region for some time. This new Australia office, combined with our offices in the UK, Continental Europe, and Brazil lend dedicated sales and marketing support to our three brands in key source markets worldwide.

Our second and most important announcement was regarding a 2017 entry into the world's fastest-growing market, China. During an intensive nine-month study, a dedicated team of senior executives worked with experts in the Chinese cruise industry and analyzed the market's potential and its competitive landscape. At the completion of our research, the results were clear. The size, scope and growth potential of the Chinese cruise market was so compelling that Norwegian's entry wasn't a matter of if but when, and also how.

In 2014, Chinese vacationers accounted for over 100 million outbound international trips to destinations as close as Hong Kong and as far as the United States. Of these, only about 700,000, not even 1% were on cruises. These 100 million travelers led the world in tourism spend close to $165 billion, accounting for 13% of global tourism receipts.

To put this into perspective, the second closest country was the United States, with approximately 60 million outbound travelers spend about $110 billion, almost one-third less than the spend of Chinese travelers. Equally as important as the compelling and almost numbing potential is to ensure that we have a thorough understanding of Chinese vacationers' wants and needs when it comes to their vacation experiences.

First, to service Chinese travelers who prefer to stay closer to home, we announced the deployment of a highly customized and purpose-built ship for the Chinese market that will debut in the summer of 2017. This ship will sail under the Norwegian Cruise Line brand and is the second in our existing four ship order of Breakaway Plus Class vessels. As for the ships' design, not only will we take the best of the features from across the fleet that bring to life the Norwegian brand's unique offerings of freedom and flexibility, which our research determined resonates very well with the Chinese consumer, we will also draw upon the depth of design experience from all three of our brands as well as from a host of Chinese lifestyle experts that we have retained specifically for this purpose to create a purpose-built ship that is from the onset, equipped to cater to the unique needs, desires and tastes of the Chinese vacationer. We will be announcing more regarding the ship's unique design and first at sea features and regular updates and reveal as the ship's launch draws closer.

As with all ships, the guest experience isn't just predicated on the quality of the hardware; it is the quality of the crew that brings the ship to life that really counts. Our dedication to the China market goes beyond just delivering outstanding hardware. We must also deliver an outstanding cruise experience and to this end, our hotel operations team is partnering with Chinese hospitality experts to recruit Mandarin-speaking personnel and craft training programs that will result in an onboard staff that is able to deliver the highly personalized service that we are known for, while still being cognizant of the cultural differences that are unique to China. We strongly believe that the combination of stellar service tuned to local sensibilities, our product offering that includes a variety of authentic Mandarin, Cantonese and Szechuan dining venues and entertainment options geared towards local tastes, all on a ship designed to have expanded onboard shopping, gaming and family friendly areas with never-before-seen features at sea will amaze our guests and will give Norwegian the best cruise proposition in the region.

With the hardware and staffing components of our strategy complete, we turned our attention to sourcing which will be managed by our recently opened sales and marketing offices in Shanghai, Beijing and Hong Kong. These offices will serve a dual role. First, they will support our travel agent partners to capture a portion of the 80 million Chinese vacationers who opt for short-haul vacations and steer them into a cruise vacation. Opening these offices a full 18 months prior to the delivery of our China dedicated ship will allow ample time to further develop relationships with key travel partners, obtain their guidance on devising strategies to drive demand to cruising, and build brand awareness among Chinese cruisers.

The second role of these offices is a grow China as a source market for long-haul cruises outside of the region on our three brands. China is already our fastest-growing source market, with guests growing in a three-year CAGR of 30%. With vessels of all sizes and offerings for every taste, our Company is in a unique position to offer Chinese cruisers a vacation experience that is tailored to their desires.

While investments for the expansion of these offices, as well as marketing efforts to build brand awareness have already begun, the majority of the ramp-up will occur in 2016, with the first sailing expected to occur in the summer of 2017. We are excited about the opportunity to enter a China sourced short-haul market with the largest, newest and most innovative ship in the region and look forward to having Chinese travelers experience the freedom and flexibility that makes the Norwegian Cruise Line an incredible vacation experience.

And now to discuss our strong results for the quarter and our outlook, I will turn the call over to Wendy.

Thanks, Frank.

I'd like to begin by noting that unless otherwise stated, the following commentary compares third quarter 2015 and 2014 on an as reported basis. In order to provide a better comparison of our Company's current performance versus last year prior to the combination Norwegian and Prestige, we provided guidance for adjusted net yield and adjusted net cruise cost, excluding fuel per capacity day, which compares third quarter 2015 results for NCLH against third 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 the third quarter of 2015, the Company generated adjusted earnings per share of $1.35 compared to $1.11 in the prior year and at the top end of our guidance range of $1.30 to $1.35.

Strong earnings were driven by solid net yield performance, mainly due to strength in the Caribbean, Bermuda and Alaska markets, which more than offset softness in certain European itineraries. Adjusted net yields outperformed expectations, increasing 19.8% on an as reported basis, as a result of a full quarter of the consolidation of Prestige, as well as strong pricing. On a Combined Company basis, adjusted net yield increased 2.2%, coming in above guidance of up 0.5% to 1.5% and was up 4.7% on a constant currency basis versus guidance of 2.75% to 3.75%. Our go-to-market strategy and other initiatives have led to a strong base of bookings, which has lengthened the booking curve versus prior year, allowing us the opportunity to optimize pricing.

Turning to cost, adjusted net cruise cost excluding fuel per capacity day increased 30.5% on an as reported basis, mainly due to the addition of Prestige, while on a Combined Company basis, increased 6.4%. The increase in cost can be attributed mainly to the timing of marketing expenses and incremental discretionary shipboard enhancement and maintenance costs, which will drive future returns. As a reminder, net cruise costs are always best viewed on an annual basis, as the timing of expenses may cause variations between the quarters.

Turning to fuel expense. Our fuel price per metric tonne decreased 11.7% to $566 from $641 in the prior year. Fuel price per metric tonne excluding the impact of our hedges was $491 compared to $634 in 2014. Now taking a look below the line, interest expense net was $49.8 million compared to $32.3 million in 2014, mainly due to higher debt balances resulting from the acquisition of Prestige.

Turning to the remainder of the year, we have provided guidance on an as reported and Combined Company basis for the fourth quarter and full year 2015 in our earnings release. With the combination of Norwegian and Prestige occurring midway through the fourth quarter of 2014, this Combined Company guidance assumes the consolidated results of Norwegian and Prestige for the full fourth quarter, as well as the full year 2014.

As a result of continued solid net yield performance, we are increasing our full year adjusted net yield guidance to approximately 17.75% on an as reported basis, or 19.5% on a constant currency basis. On a Combined Company basis, we expect adjusted net yields to be up approximately 1.75%, and from 3.25% to 3.5% on an as reported and constant currency basis, respectively.

Turning to cost, full year adjusted net cruise cost excluding fuel per capacity day increases slightly from prior guidance to approximately 23.5% on an as reported basis while on a constant currency basis, we expect an increase of approximately 24.75%. On a Combined Company basis, we expect an increase of approximately 2.75% and 3.5% on an as reported and constant currency basis, respectively. The increase is primarily due to drydocks for Norwegian Epic and Gem in the fourth quarter, where we took the opportunity to make several guest spacing enhancements which were not in the original plan, but which contribute to our ability to generate outsized pricing performance.

Looking at fuel expense for the fourth quarter and full year 2015, we anticipate our fuel price per metric tonne net of hedges to be $535 and $545, respectively. Excluding the impact of hedges, fuel price per metric tonne is expected to be $380 and $435, respectively.

As of september 30, 2015, we had hedges in place for 59% of our expected fuel consumption for the remainder of the year at an average price of $475. Our expected consumption is approximately 185,000 and 670,000 metric tonnes for the fourth quarter and full year, respectively. On an annual basis, our fuel mix, which varies by season, is in the high 60%s, and the remainder is marine gas oil.

As a result of the aforementioned increase in our guidance for adjusted net yield and adjusted net cruise cost excluding fuel, we expect adjusted earnings per share to be in the range of $2.85 to $2.90 for the year. The pricing strength in Caribbean, Alaska and Bermuda itinerary, along with all of the new strategies implemented this year more than offset the incremental fuel expense as a result of the change in our fuel mix, as well as the softness in exotic itineraries, such as Africa and Eastern Mediterranean.

Guidance for the fourth 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 fourth quarter of 2015 to grow approximately 13.75% and 14.75%, respectively. On a Combined Company basis, we expect adjusted net yield to increase approximately 4.5% on as reported basis and 5.5% on a constant currency basis.

Adjusted net cruise cost excluding fuel per capacity day on an as-reported basis is expected to increase approximately 15% and 17% on a constant currency basis. On a Combined Company basis, we expect an increase of approximately 4% on an as reported basis and 5% on a constant currency basis.

To provide some relativity on a Combined Company basis, our 25 basis point change to adjusted net cruise cost excluding fuel per capacity day in the quarter equates to approximately $1 million. And lastly, adjusted earnings per share in the quarter is expected to be in the range of $0.45 to $0.50.

Turning to deployment, the fourth quarter contain several repositioning voyages as ships redeploy from summer to winter itineraries. The following compares 2015 deployment to 2014, which included only a partial quarter of Prestige.

47% of fourth quarter capacity is in the Caribbean, compared to 60% in 2014, Europe accounts for 15% of deployment, which is similar to last year. And the balance is comprised of Bermuda, Hawaii and other itineraries, along with repositioning sailings.

Looking to 2016, as we mentioned on our last call, 2016 is following in the footsteps of 2015 and is shaping up to be a breakout year. Well, it's too early to provide detailed guidance, I'd like to give some color on quarterly cadence. There are two main items to consider from a year-over-year perspective.

First, we're looking forward to welcoming Sirena and Seven Seas Explorer into our fleet as part of our measured fleet expansion program. The revenue benefit from these fleet additions, as well as a full year of Norwegian Escape will be truly evident in our 2016 results. Second, 2016 will include eight scheduled drydocks of various lengths, totaling 131 days compared to five in 2015, totaling 63 days.

Let's discuss how these ship additions and drydocks affect each quarter. We anticipate the first quarter will be a tougher year-over-year comparison from a yield perspective. There are two scheduled drydocks in Q1 compared to one in 2015, which includes an extensive 24-day drydock Pride of America, the Norwegian brand's highest yielding ship.

In addition, Norwegian Epic will experience lower yields due to her deployment in Europe during off-peak winter season compared to what she garnered in the Caribbean in the prior year. In the second quarter, Sirena will join the Oceania Cruises fleet and will immediately undergo an extensive 35-day drydock to bring her up to the standards of her sister vessels with her first sailing commencing in late April.

Seven Seas Explorer will join the Regent fleet in June with inaugural and launch expenses spanning the second and third quarters. There are four scheduled drydocks in 2016 for 62 days versus one the prior year for 10 days. In Q3, Seven Seas Explorer begins her revenue sailings in mid-July.

This is the first newbuild for the Regent fleet in over 13 years, so there is much anticipation for her arrival. As for drydocks, there are none scheduled in 2016, compared to the beginning of Norwegian's Epic drydock in the third quarter of 2015. The quarter also includes a 40-day bare boat charter of Norwegian Getaway.

Lastly, in the fourth quarter, there are two schedule drydocks, totaling 40 days compared to two in 2015, totaling 32 days, which includes the majority of the 23-day drydock for Norwegian Epic, which span the third and fourth quarters of this year. Overall, for 2016, we see continuing strength in the Caribbean, where Norwegian Escape and Getaway are deployed year-round from Miami.

In addition, Europe is shaping up well for 2016, while exotic itineraries such as Africa are experiencing some softness. Overall, we continue to see the momentum build and have generated solid demand as we move into 2016, which will enable us to maximize pricing.

With that, I will turn over the call to Frank for some closing comments.

Thank you, Wendy.

Now in a few weeks, we will mark the first anniversary of the combination of Norwegian and Prestige, and I have to tell you that I'm extremely pleased with the seamless and smooth integration of the two companies. When you walk the halls of Norwegian, you would find it hard to believe that a year ago, we were operating as separate entities.

Today, our operations are completely interwoven, with vessel operations, revenue management, supply chain, logistics and support services all under one corporate umbrella. And while the synergy harvesting program officially came to an end last quarter, these areas continue to share best practices and uncover further efficiencies. It's part of the DNA that we have fostered in this Combined Company.

2015 has been an eventful year. And while not yet over, but as I said earlier, we are in a very strong booked position; in fact, the best in the Company's history, which sets up a robust 2016, a year ago -- excuse me, a year where the convergence of our revenue enhancement strategies combined with international expansion and planned fleet additions will result in increased to already industry-leading net yields.

We also look forward to reaching notable milestones, such as $5 billion in revenue, $12 billion in assets, posting record EBITDA margins, and continuing our series of consecutive quarters of EBITDA growth. All on our march towards targeted adjusted earnings per share of at least $5 in 2017 and the doubling of our return on invested capital to 14% in 2018.

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

Thank you, Mr. Del Rio.

(Operator Instructions)

Our first question comes from the line of Felicia Hendrix with Barclays. Your line is now open. Please proceed with your question.

Hi, good morning. Thanks for taking my question. Wendy, thanks a lot for the color on the cadence of the quarters; that was helpful. Frank, you wrapped up by saying that Norwegian is in the best booked position in the Company's history. But if I could just drill down a little further and maybe just get obvious. Are you booked higher on a load end APCDs for 2016? And then taking the cadence that you discussed, Wendy, in the prepared remarks, are you seeing that for every quarter of 2016?

The answer to your first question is yes. More booked -- more passengers booked, more revenue booked, significantly outstripping our capacity increases, as I said earlier. And we see stronger pricing across all three brands.

And Wendy, how does that fall across the quarter? You said first quarter would be a little tougher.

We still are positive, Felicia, but it's definitely skewed with Q1 having several hurdles, as I mentioned with the Epic deployment in Europe. And as you all know, we've now moved the Epic for the following year. We're overlapping that as well as taking our highest Norwegian yielding ship out of the fleet for 24 days in Q1. So, Q1 is the most skewed on the pricing.

Okay, thanks. And then Frank, just moving to China, you gave us a lot of color there earlier. I'm just wondering, how should we think about your MS&A expenses as you build up infrastructure in China, and do you expect the ship to generate profit on a fully allocated per PPCD basis as early as 2017?

Not sure it will turn a profit in the full first year, given that we only have six months of operation and a full year of expense. A lot will depend on just the kind of yield premiums we will be able to achieve. But clearly, all the potential that we see in China, the alternative itineraries that you would deploy of that or any vessel, China is clearly the winner.

The expense so far in 2015 has been minimal. We will ramp up in 2016. We are finalizing the budgets now, but the -- it will impact the results in 2016, but it's an investment. You have to think of entering China almost as a start-up where you have upfront expenses that -- and you have to wait at least a year, in our case, up to 18 months before you start generating revenue, but we think that is the way to do it. We don't want to rush into the market. But we think it will pay dividends once we do with this brand-new ship, as I described, the biggest ship that will be operating in China. So, we're very bullish on the opportunities there.

Okay, but despite that, you're still confirming or reiterating that at least $5 goal and the 14% ROI goal.

Absolutely.

Okay, great. Thanks.

Our next question comes from the line of Harry Curtis with Nomura. Your line is now open. Please proceed with your question.

Hi, good morning. Just going back to one of Felicia's questions. Can you give us a sense of how well booked, what percentage of bookings you are in 2016 so far? And I'm guessing that as of today, the pricing that you're seeing across your three brands is now ahead of where was at this point last year.

Hi, Harry. Yes, we are ahead versus where we were last year. A bit early to give you specific guidance on -- and of course, we never give guidance on a per-brand basis/ But our target is to be about 55% in booked or so for the three companies combined -- three brands combined by the end of the year.

And we're on target for that.

Okay. Just along the same lines, is it -- it is early, but can you venture to say what your worst case yield outlook ought to be next year?

No, I think that's not the right question to ask. We believe that the yields next year will be better than they were this year, but that's as far as we will go at this time.

The only other color I would add to that, Harry, is if you know our long-range model, we say 3% to 4% in years that we bring in a new ship, which is significant with the yield that we've reported in this quarter. As we pointed out, it's an organic quarter. Historically, we've said our yield will be 2% to 3% on comp fleet. Our goal this year has been to drive the yield strength on our organic fleet in addition to getting the bump with bringing in new ships. In a year where we bring in a new ship, like next year, our long-range model is 3% to 4%. Obviously, we're looking to beat that, and that's the path that we're on.

Okay. And my last question just related to some of the costs in the third quarter, it was interesting that year-over-year, both your other ship operating and your SG&A, they were definitely higher than we were looking for. And if you could talk about what in the quarter you view as recurring versus nonrecurring, that would be helpful. Thanks.

Yes, so the first thing is in Q2, we said that we were deferring a number of our marketing expenses. As you know, we mentioned that we hired a new marketing agency. And we are in the process of launching a new marketing campaign. So, part of it is ramp up with marketing. Also, as we go into international, we've been layering in some marketing.

On the intentional investments that we've made into the -- primarily, it is the Norwegian fleet. It's a number of soft items: carpets, linens, plates, cutlery, it's standards that Frank has brought in that said these are minimum standards that we have to be operating at. There is a lot of soap and water going into that; that is fortunately not stuff we have to expense, because we've got the labor, but it's the soft side that we had to go out and expense. Frank, do you want to add anything?

No, look, I think that we are focused on growing the top line, growing the yields, both in ticket pricing and on onboard. And you have to spend a little money on some areas to be able to facilitate that, the onboard experience. I will tell you that I think perhaps there was some underspending in prior years that we're playing a little catch up on. I think we've done that for the most part in the quarter. The good news is that eight vessels will undergo drydock in 2016, I believe another six in 2017. We have an opportunity when these ships to go into drydock, to bring them up to the highest level they can be, given the space that they're in across the fleet, whether it's the Norwegian brand or the Regent brand, we'll have two drydocks next year.

But we have the youngest fleet in the industry. but some of the vessels are a little bit more seasoned than others. And this is the time when -- it's opportune time for us, I should say, because these drydocks are coming at the right time where we can go in and bring them back up to as new condition. But not all vessels are being drydocked next year, some are waiting for 2017. Some of these steps that we've taken in the third quarter, as Wendy mentioned, we're -- we spent the money to bring these up in anticipation of the drydock occurring in the next 12 to 24 months.

Okay, that does it for me. Thanks.

Our next question comes from the line of Robin Farley with UBS Securities. Your line is now open. Please proceed with your question.

Great, thanks. I want to just clarify, Wendy, from the color that you gave on the cadence of the quarters. That was helpful. Thank you. Were you suggesting that Q1 -- I know there are some things that will make it a more difficult comparison, but it would still be a positive yield quarter year over year in Q1; is that right?

Absolutely, yes, it will be positive. It's just it's a harder -- it's harder with the number of things that we called out as to the rest of the quarters. When we give our full-year guidance, Q1 will be lower than the other quarters.

Okay, no, that's helpful. Thank you. And then I just want to understand the timing and the -- I understand the Q3 expense timing, your marketing shifting between quarters. But with the full-year expenses going up for 2015, is that expenses-- is that like the new offices in China opening earlier? Or I guess what's the -- it seems like there's a shift of expense between 2016 and 2015?

Yes, it's still -- there is some additional infrastructure, but primarily, it's marketing as I laid out and then it's also the additional investments into the Norwegian fleet. Specifically, we have the Epic and the Gem drydock. So although a portion of that is capitalized, there is more OpEx expensed. And those were in addition to what we had originally planned at the beginning of the year.

This has definitely been a year of transition. At the time that we planned those drydocks, it was actually before Frank even came in as the CEO. As we've gotten into the year and there's been ship inspections by Frank and the Management team, they've made intentional investments and decisions as to, how can we garner the highest return on those ships and how do we continue to drive pricing? How do we drive guest satisfaction? And so there is additional investments being made into the Norwegian fleet.

With the timing of the drydocks didn't shift, it's just that you're putting more investment in the drydocks in Q4 that otherwise would have taken place at some point in 2016, is the idea?

That's correct. And as far as the international infrastructure, it's fairly minimal in Q4; we will see that start ramping up into 2016.

Okay, great and then just my last question. With the commitment to send capacity to China, because in many ways, as a smaller fleet than some of the others out there, you could have also benefited just by staying in the Caribbean while your others went to China. I know you're taking obviously a longer-term view than just that first year or so. But I guess when you -- since you're not sourcing passengers from China for Chinese based cruises right now, I know when you looked into it, you had outside consultants. Can you give us a view on what you're hearing about pricing in China as supply is moving there and what your consultants are telling you? What's taking place with price and the markups with travel sellers in China?

By all accounts, China will become the second-largest cruise market in the next 5 years. Within the next 10 years, that could exceed the United States. So, waiting much longer was just not an option. And given that we have the opportunity to come into the market with a brand-new vessel that really resonates in the marketplace that we are going to customize, we think today there isn't a product in China that is perfectly geared for the Chinese.

All the vessels that are in China today were built to go elsewhere, were built for the Western market. And depending on which ship and what brand you're talking about, there was some level of customization made, but not whole lot. We believe that although we're coming to China a little bit later than others, we will enter with the best hardware that anybody else has. It will be the biggest ship. It will be the newest vessel and it will be customized to a level that no one else has done yet. All the intelligence that we hear from our sources in China is that the bookings remain strong, perhaps not at the strongest level ever as more capacity has come in and has to be digested. But still significantly higher than an alternative Western itinerary, whether it's the Caribbean, or Alaska or Europe. The Chinese itineraries are outperforming the others.

And so we're very bullish that even though we may not have first mover advantage, we have other advantages. We're learning where others perhaps might have made certain mistakes, would wish they had done things differently, we have the benefit of those -- of that history. We have the benefit of introducing a brand-new ship. We have the benefit of 18 months of runway until our ship gets there. So we believe that on par, it is the perfect time to enter the Chinese market with this incredible vessel and everything we hear, it's no question the right decision. It's literally a no-brainer.

That's great. Thank you very much.

Our next question comes from the line of Steve Wieczynski with Stifel. Your line is now open. Please proceed with your question.

Good morning, guys. So first question would be on Escape and I think, Frank, you talked about Escape right now still seeing double-digit yields at this point. But could you maybe compare Escape at this point versus how Getaway was booking at the same point? And maybe also how Escape bookings have trended over the last three to five months would be helpful as well.

Escape, without question, is the most successful introduction in the Company's history. She is booked three times deeper than Getaway was at the same time, with about the same pricing. So very happy to see that performance, and she has been building strong all along. Not just in the last three or four months but ever since we introduced her, she has been a strong, strong performer. And once you see her, hopefully you can come down now over the weekend and see her for yourself. She's truly breathtaking, an amazing vessel for a ship that size. You would not expect to see the kind of finishes, the kind of upscaleness that you see in this vessel. We have high hopes that she can continue generating double-digit growth well onto the future.

Great. Then second question would be on a booking curve. I think you talked about how it's 12% longer at this point, but when you look at the industry in general, it seems like all you guys have essentially -- have gotten consumers to book a little bit further out. I guess I'm just wondering how much -- what else can you do at this point to get people to book even further out, and how much more do you think you can get that booking window to expand at this point?

I don't think necessarily you'd want to extend the booking window to infinity. I'd rather raise prices to infinity. And so I'm very comfortable with the booking window the way it is now. Much more than that, you'd probably be leaving yield on the table. So, you're never sure what the perfect balance of bookings are, but we will finish the year, as I said earlier, occupancy in the mid-50s for next year, that's very, very strong. Up significantly from where we were this time last year, or we will be year end versus 2014 year end.

So I think that the emphasis will continue to be push prices up. Not just ticket pricing, but take advantage of the onboard revenue. We've seen very, very strong onboard revenue, especially at the Norwegian brand over the last quarter. We hope and believe that will continue. It's part of what we learned in the integration and synergy review that we put into place. And we think that's got sustainability.

Thanks, guys. Appreciate it.

Our next question comes from the line of Steven Kent with Goldman Sachs. Your line is now open. Please proceed with your question.

Hi, good morning. A couple questions. I guess fundamentally, it's going to be very hard to understand the earnings momentum of your operations, given all of these moving parts. And just wondered if you had reconsidered showing the performance of Prestige and Norwegian brand separately. Because between the drydocks and the product rollout, it is going to be almost impossible to get a quarterly progression to assess the power of your brands and fleets from the outside, especially because you're -- you have a relatively small base.

And then just one other issue. In terms of weakness in Europe, what is underlying that? You mentioned it a couple times; is it too much supply in the region? Is it that North American consumers are preferring to buy hotel rooms and the depreciated euro more than a cruise ticket in US dollar?

Steve, the answer to your first question is no, we have not considered that suggestion. In terms of Europe bookings, look, there's been some issues in Europe, right? The Eastern Mediterranean has been impacted and has been impacted now for the last several years, so it's a little bit of the cumulative effect. We've got the Black Sea situation; it is still not back to normal with the Crimean situation. We have had several disruptions in Istanbul. The Greek financial crisis did not help the Greek Isle itineraries. There is always tension -- or there has been more attention than usual in the Israel space because of the Syrian situation.

We've got the refugees spreading across some of the Eastern Mediterranean areas. And then the strong dollar, as you mentioned earlier, would tend to cause, if anything, a move away from cruising. Cruising is very, very good when the dollar is weaker because you -- all of your expenses are paid upfront and you don't have to pay for lodging and food.

So, I imagine there on the margins that the strong dollar has favored land programs versus cruises in Europe this past year. And look, ships have to go somewhere. So there has been a reduction -- a slight reduction in capacity out of the Caribbean; the Caribbean is now strong. The weakness might be Europe. There may be more capacity in Europe than there has been in prior years. But on the other hand, Northern Europe remains strong; Western Europe remains strong. So, hopefully the Eastern Mediterranean will shape up in the next few months, next years.

Okay. See you next week.

Can't wait.

(Operator Instructions)

Our next question comes from the line of Tim Conder with Wells Fargo Securities Your line is now open. Please proceed with your question.

Thank you. Frank, again, just maybe to recap here, if I heard you correctly, the catch up investments that you had here as far as getting the Norwegian ships up to your standard, when you want the customer to step on, they want to be able perceive the ship as being new continually. For the Jade and so forth that are being drydocked now, that will effectively be completed. And then as you drydock the others, will that effectively complete that raising the standard up to the FDR standards?

I think you need to look at it over a two-year program. We drydocked Epic and Gem, and those were extensive drydocks in Q3, Q4 this year. As Wendy mentioned, we have eight drydocks next year. Two with the Regent brand, one at the Oceana brand, five at the Norwegian brand. And I think -- I know that it will -- that kind of drydock-heavy schedule will now continue into 2017. I believe that by 2017, every one of Norwegian ships, except the brand-new ones, will have been drydocked except for one vessel. So that gives us a very unique opportunity to upgrade the fleet over a short concentrated time so that the whole brand gets elevated in terms of product delivery and allows us to continue to raise prices more so than if you hadn't done these things.

At the end of the day, the consumer is not stupid; the consumer has choices. We think that the ROIC on these kind of investments is -- outpaces, if you will, the ROIC in the payback of new vessels. And so our goal is, we've got billions of dollars invested in these ships. You have to maintain them at the highest standards if you expect to achieve these higher yields. And so far, we're very pleased with our abilities to raise prices, our abilities to generate incremental onboard revenue, and we believe that if the fleet were to be in tiptop condition, that will continue.

Okay, okay. I totally agree. Totally agree. How should we, I guess then, think about the portion that will flow through to the P&L over this period versus what we'll call a normal run rate? And then of course, layering in your -- I think China, your investments, those will probably be an ongoing, just given the long-term and near-term even potential.

But if we could maybe break those components out going forward here incrementally, and then of course, they start to fall off in 2017 on the reinvestments. Any color you can give us there? And then as it relates to -- you talked a little bit about sourcing passengers from China, the reason you opened up the three offices for markets outside -- itineraries outside of China. How do you see that ramping the Prestige brand versus the Norwegian brands and other global markets for Chinese-source passengers?

Well, the Oceania and Regent brands have been sourcing customers out of China. As I mentioned earlier, it has been the largest percentage gain. There is still small numbers, but largest percentage gainers/ And we've been doing that as absentee marketers because we did not have a strong presence in China. We've been doing through general sales agents, et cetera.

But now that we have three offices in the major cities in China and Hong Kong, we expect that business to continue to accelerate. The Chinese consumer is sophisticated; they've got the wherewithal. And if you've been to the major capitals of Europe lately, you see upscale Chinese travelers everywhere. And so we believe that a natural evolution of the Chinese consumers wanting to travel and seeing the world is to do so on a ship. And so we're focusing those two brands on that type of consumer because the type of Chinese consumer that does travel outside the country on these long-haul trips tends to be the more upscale consumer in China, which we believe to be Oceanic and Regent brands fit well. But also, with the Haven onboard the Norwegian ships, we also believe that, that type of consumer will also consider the Norwegian brand. So, we're very enthusiastic about entering the Chinese market, not just for the new vessel that's going into China, but China as the new source for our existing vessels.

And then regarding the expense on upgrade, if you will, to the Norwegian fleet. Typically, we have guided to $7 million to $8 million on the drydock expense per Norwegian ship, and that would be a good run rate also for our entire fleet. The Pride of America, however, is going to be a more expensive drydock. As you know, that, that ship is out in Hawaii. We were not able to get into the US Naval Yard there, so we're actually bringing the ship over to San Francisco. Which five-day transit each day, plus 14 days, gives you the 24 day drydock. So, that is a little bit more expensive.

We will have all of this, we will give clarity when we give our guidance for 2016. I think the walkaway here is that we have said today that we are very comfortable. We're on target to exceed the $5 EPS target for 2017. And everything that we've talked about, the incremental spend on the Norwegian fleet, the offices opening internationally as we continue to grow all three of the brands as we move into China. That's baked into our targets that are out there. So as far as giving everyone clarity on that, we will give you clarity, it will be when we will roll out our next quarter, when we roll out our guidance for 2016.

And then same thing with CapEx. We've been running with a run rate of approximately $175 million on a combined basis. This is excluding our newbuilds. So to the extent that, that number is higher, as we complete these drydocks, again, we will give you clarity on that. But again, that is still baked into our target, including our 14% ROIC at the end of 2018.

Okay, thank you, Wendy. Thank you, Frank.

Our next question comes from the line of Kevin Milota with JPMorgan. Your line is now open. Please proceed with your question.

Good morning. Thank you. Most of my questions have been answered, but just to beat a dead horse a little bit more here on the net cruise cost. New ship introductions, could you give us the offsetting factor for how much more fuel efficient, energy efficient, cost efficient those ships are and how that might be helpful to net cruise cost next year just to offset the China investment and the drydock spend? Thank you very much.

New vessels are more efficient on fuel, but net cruise costs are ex-fuel. So I don't see a new ship adding a whole lot of efficiency, if you will, to net cruise cost. They are primarily -- they deliver double-digit yield growth. That's what new vessels bring to the table more so than cost savings. You do get some spread, your overhead over a broader base of beds and of course, that tends to decrease the cost overall. But the main driver, why you bring new ships online, is the ability to drive double-digit yield growth.

And I would reiterate, Kevin, that we are right on path with holding our G&A as tight as we possibly can as we continue to bring in newbuilds. Just as we've talked about in the past, we will continue to add sales force, we will add direct agents, res agents. But you're still spreading it over the rest of the corporate offices, as Frank said.

And just captured in your $5 EPS number, what would do -- the underlying net cruise cost increase has not changed, is what you're trying to message to all of us.

Correct. We're -- we've have been messaging 1% to 2%, that's what we're trying to stay in line with; however, we have said there's puts and takes in that $5 target. We've already know that there's upside to it and yet we know that there is incremental investment into China. So we haven't actually quantified yet what is the investment into China and these international offices, but the underlying into the $5 plan is the 1% to 2% net cruise cost.

Okay. Thank you.

Our next question comes from the line of Jamie Katz with Morningstar. Your line is now open. Please proceed with your question.

Good morning. Thanks for taking my questions. I'm curious how you guys are thinking about capital allocation, now that shares have increased pretty significantly over the last year. And whether or not you've made any changes to your assessment on whether it would be more strategic to pay down debt rather than buy back shares? And how that plays into your $5 price target in 2017 -- I'm sorry, your $5 earnings target in 2017?

Okay, great question. So, when we originally put the target out there, as you will recall, it was roughly $800 million of free cash flow that we had assumed at the time of Investor Day that we would actually pay down debt. We've been messaging that towards the back half of this year, we would like to get back out there and repurchase some shares. You will see in our filings that we actually have embarked upon it in a small way in Q3. As we've said to everyone, we will be opportunistic. And we did take it up at a very nice price, although it's a small amount. We are still on path for that right now. Right now you may see us do a little bit on the debt paydown and you may see us out there also with share repurchases. We will continue to be opportunistic and look at that.

Okay, and then as far as the lengthening by brand of the booking curve, has there been any bifurcation you guys have seen across the different brands that you're willing to comment on? I'm just curious of any of the different demographics you cater to are responding differently.

No. All three brands are showing an extended booking curve. All three are contributing to that 12% overall extension on the booking curve.

And then lastly, can you just update us on any changes to capacity growth in either the fourth quarter or ahead of the timing of the ships come on?

Sure. So for fourth quarter, Norwegian Escape is actually contributing to capacity growth of 2.2%, and then do you need capacity for the outer years, Jamie?

If you have it.

So 2016, we're going to be up 11%. That's Escape, Sirena and Explorer. 2017, up 8%; 2018, 9%; and 2019 is 4%.

Excellent. Thank you so much.

You're welcome.

We have time for one more question.

Certainly. Our last question will come from the line of James Hardiman with Wedbush. Your line is now open. Please proceed.

Hi, this is Sean Wagner for James Hardiman. With respect to China, the urgency with which you wanted to enter that market has changed since your Analyst Day. Can you walk through how your decision-making on China has evolved over the past year? Was it just that you couldn't afford to wait any more, like you had mentioned?

I don't think it's changed. We said that we were going to take a close look, a measured look. We've been working on it all year. But at the end of that study, which was very thorough, we concluded that the Chinese market was still the highest yielding market for the introduction of a new vessel. And the one that is growing the fastest. So if it's the highest yielding and the fastest growing, where would you put a new ship?

Fair enough. Along those lines, with several new incremental shifts going into that market, at the same time the economy has sputtered there, I understand that in the short term, demand is outpacing supply, but when do you think the two even out? And has that point moved up, considering the ongoing capacity growth in the region?

There will be 14 ships in China next year; there will be 19 in 2017. Not all are year-round. We will be there year-round. Some of these are seasonal. Even though the general wisdom or the consensus is that the Chinese economy is slowing. It may be slowing from the unsustainable pace of double-digit growth that we might have seen 10 years ago, but it is still 7% or so.

And it is 3 times the United States, several times more that of Western Europe. So it is still the safest bet that the Chinese market will continue to grow in an outsized manner. And again, it has the highest pricing. Chinese consumers got money in their pockets and they want to spend it. And we're seeing that in the way that they, not only buy cruises, but also their spending habits onboard. Their retail spend, from everything that we can gather is substantially higher than that from the Western markets. The gaming revenues are substantially higher than the Western markets. And so we believe that all told, it is still the best place to enter a new vessel. We think we will have a competitive advantage, given the tonnage that we will bring in to the market, being the newest, the largest, the most customized. And so we can't wait for 2017 to get here.

Okay, great. Thank you very much.

Well, thanks, everyone, for your time and support today and as always, we will be available to answer your questions. Have a great day.

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