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Operator
Good morning and welcome to the Norwegian Cruise Line Holdings fourth quarter and full year 2015 Earnings Conference Call.
(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.
- Head of IR
Thank you, Abigail. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2015 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 and full year 2015, as well as provide guidance for 2016, 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.nclhtdinvestor.com, and will be available for replay for 30 days following today's call.
Before we discuss our results, I would like to cover a few items. Our press release with fourth quarter and full year 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 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 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 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 like to turn the call over to Frank Del Rio. Frank?
- CEO & President
Thank you, Andrea, and good morning, everyone. I'd like to start off by pointing out that the song you've been listening to is the new Pitbull hit song 'Freedom' which has been rocketing up the charts. As I'm sure you know, Pitbull is the godfather of our newest ship, Norwegian Escape, and the song plays an important role in Norwegian's new Feel Free global ad campaign.
I'll talk more about the campaign a little later in the call, but first I'd like to discuss our robust financial results for 2015, talk a little about the initiatives we are implementing to keep the strong momentum in 2015 going into 2016 and beyond, and give some color on the current business environment as we see it. I'll then hand over the call to Wendy to review 2015 results in more detail and to highlight our 2016 guidance.
This past year we dedicated a great deal of our time formulating, implementing, and aligning the go-to-market strategies of Norwegian Cruise Line, Oceania, and Regent, by focusing on a targeted set of initiatives aimed at driving demand. These initiatives resonated incredibly well, and included our market developed approach to pricing, which direct our target market and our past guests to focus on the deal aspect and value proposition of a cruise vacation, rather than just a low price.
Let me start by reiterating that the Company came into 2016 in the best booked position in our history. We had more revenue on our books and we're better loaded coming into Wave season than ever before, and we're better booked in each quarter and for the full year, and at higher prices than at any time in our history.
We attribute this strong base of booking to our successful go-to-market strategies, which have put us in a position of strength as we continue to focus on increasing pricing as we move through the balance of 2016 and into 2017, and which should allow us to achieve constant currency adjusted net yield growth of approximately 4% for the year.
Turning for a moment to the macroeconomic environment, there have been several recent headlines which have raised concerns among our stakeholders regarding their possible impacts on our business. First is the Zika virus. Simply put, the impact of Zika virus has been negligible across our brand, and we believe, based on past experience from similar outbreaks, that any remaining concerns will soon subside.
Looking at the broader macro picture in my view, the cruise industry as a whole is one of the best harbingers of future economic activity because of the advanced booking curve nature of our business. I already spoke about our record booked position coming into 2016, but looking even further ahead, as of last week an early read shows that the first half of 2017 is already approximately 30% more booked, and at higher prices, on capacity growth of just 5%, compared to the same time last year.
While we largely attribute this year-over-year growth to the success of our go-to-market strategies and the power of our brand, we would not be experiencing this level of booking activity for sailings over a year out if consumer confidence was not strong.
I'd also like to comment on the state of the current and future markets where we operate. First, close to home destinations which rely predominantly on North American sourced guests, such as itineraries to the Caribbean, Alaska, Bermuda, Hawaii, and (indiscernible) New England, are performing extremely well.
Combined, these markets are more than offsetting softness which we have been experiencing in the Mediterranean, particularly in the eastern Med since the Paris attacks. After the latest incident in Istanbul, we redeployed all 2016 itineraries that touch Turkish ports across all of our brands to alternate destinations in Greece and Italy.
In conjunction with these itinerary changes, we have taken pricing action where necessary, and have diverted marketing dollars to help stimulate consumer demand for sailings operating in the region. We are confident that the Mediterranean area, with its unique destinations and world-class attractions will soon recover and return to its stature as one of the premium regions in our deployment portfolio.
Now turning to one of our future endeavors, as you know we announced our intent to enter the China market in October of last year, and we are on track to deploy our upcoming Breakaway Plus Class Ship from the Norwegian brand to the region in mid-2017. We are designing a ship customized for the Chinese consumer with features and amenities not only unique to ship sailing in the Asia region, but unique to any ship sailing anywhere in the world.
We also continued to develop and strengthen our relationships with travel partners, and are taking the time to learn about the intricacies and nuances of operating in China. These learnings will allow us to tailor not only our product offering, but also our business and marketing approach with our travel partners, so that we can offer the best possible experience and outcomes for all stakeholders.
The more we learn about the competitive landscape, the more we continue to be certain that the emerging, evolving, and growing Chinese market presents the best opportunity for maximizing fleetwide profitability, and is the best deployment option for new vessels to generate upsized, incremental earnings.
As a reminder, our $5.00 adjusted earnings per share target for 2017 did not contemplate our entry into China, meaning that any upside from our entry into China will be accretive to earnings per share beginning in the second half of 2017.
Looking now to our results for last year, 2015 marked the first full year of combined operation for the Norwegian Oceania and Regent brand, and our results for the period demonstrate just how successful a combination this has become. What makes these results more impressive is that they were delivered by a management team, who up until a year, weren't even under the same roof. The speed and efficiency with which we merged the two companies' themes and cultures to create today's NCLH is nothing short of remarkable.
Most importantly this flurry of activity we formulated an overarching strategy to make the most out of this combination, which we termed the New Deal, and here is a one year progress report how the New Deal is proceeding.
As a reminder, there are three tenets to the strategy. The first, build on a "steady as she goes" approach, continues the successful growth strategies that Norwegian has put into play prior to the acquisition of Prestige. One of these strategies, a disciplined newbuild program, is a key driver of future growth and the successful launch of Norwegian Escape, the first ship in our Breakaway Plus Class, demonstrates our ability to effectively deliver on these fleet introductions.
The second tenet, driving higher demand and higher yields, revolves around the various initiatives in the go-to-market strategy that I mentioned in my earlier comments. Although it is the most complex of the three to establish, it is the one where we have demonstrated the most success. Our strong net yield performance in the third and fourth quarters of 2015, which were either entirely or primarily a result of organic growth, as well as our extremely strong booked position entering into 2016, demonstrates that these initiatives have already gained traction and are producing outstanding results.
Lastly, utilizing our scale to suppress cost is demonstrated by the flattening of our organizational structure as we migrated to a primarily shared services based organization. The structure not only yields monetary savings, but more importantly gives us a strategic advantage as it encourages and facilitates the sharing of best practices throughout the organization in a quick and efficient manner.
Looking ahead, there are several initiatives that were part of the New Deal that are still in their early stages, but which will bear fruit in the coming years. First is rewarding net yield growth from organic sources, versus solely relying on growth from newbuild. While we posted strong same fleet net yield growth in the third and fourth quarters of 2015, we are strengthening this initiative by introducing brand specific programs aimed at enriching the guest experience through ship revitalization, destination enhancements, and other investments.
Last month, Regent announced a program aimed at elevating the experience on its current three ship fleet to the standards of its upcoming flagship Seven Seas Explorer. The Norwegian Cruise Line brand introduced the Norwegian Edge, which will see meaningful investments in all the brand's ships introduced in 2010 or earlier, as well as enhancements to our land based private destinations in the Bahamas and Belize.
These initiatives are aimed at stimulating demand and increasing yield on our current fleet, which when coupled with the returns of our future new ship additions, will bolster earnings growth well into the future.
Another driver of pricing we expect to gain traction this year is our continued diversification of itineraries. 2016 marked the year whereby we began to slowly wean the Norwegian brand away from its reliance on seven day milk run type itineraries.
Some examples are: the 2016-2017 winter redeployment of Norwegian Epic at Port Canaveral, offering Bahamas and Caribbean voyages of various lengths; the 2016-2017 winter redeployment of Norwegian Star through Asia and Australia; the summer 2017 redeployment of Norwegian Getaway to one of our highest yielding itineraries in the Baltic region; and lastly, the summer 2017 redeployment of Norwegian Jade to run dual homeport northern Europe itineraries from Southampton England and Hamburg, Germany, that take full advantage of our expanding presence in our major European sourced market.
The diversification of itineraries will inherently boost yields. This is not to say that we aren't any less bullish on seven night Caribbean itineraries, on the contrary, our ships in the region are performing extremely well and for good reason. Norwegian has some of the newest and best [hardware] selling in the Caribbean after the Norwegian Edge enhancements have been fully rolled out, we will have an even stronger presence in this key market.
So to summarize my comments, 2015 was an extraordinary first year for Norwegian as a combined company, with record results and solid affirmations that our go-to-market strategies are resonating well in the marketplace.
In addition, we will grow our industry-leading return on invested capital to double digits in 2016, on our path to achieving our stated goal of 14% in 2018. Lastly, we continue to build confidence and upside as we drive to our $5 adjusted earnings per share target in 2017.
And now to discuss our strong results for the quarter and year, as well as our outlook in more detail, I'll turn the call over to Wendy.
- CFO & EVP
Thanks, Frank. I am extremely pleased to report strong results for both the fourth quarter and full year 2015, which as Frank mentioned earlier, marks the first full year of operations of the combined Norwegian and Prestige organizations under one umbrella. I'll begin with the discussion of these results, followed by an update on booking trends, and then we'll close with our outlook for 2016.
Unless otherwise noted, my commentary compares 2015 and 2014 per capacity day metrics, on a constant currency combined company basis, which compares 2015 results for Norwegian against the combined 2014 financial results of Norwegian and Prestige.
I'll begin with commentary on our fourth quarter results, where adjusted earnings per share increased 42% over prior year to $0.51, exceeding the top end of our guidance range. The [beat] was primarily driven to by higher net yield as a result of higher pricing, as well as the benefit from lower fuel prices, partially offset by the timing of repair and maintenance costs.
Adjusted net yield outperformed our expectations, increasing 7.4% and exceeding our guidance of up approximately 5.5%, primarily as a result of strong pricing from same fleet operations, as well as a partial quarter benefit from the addition of Norwegian Escape to the fleet.
This comes on the heels of strong yield performance in the third quarter, where net yields improved 4.7% on solely same fleet operations. On a constant currency and as reported basis, adjusted net yield increased 16.9% and 15.2% respectively, as a result of the acquisition of Prestige and stronger pricing.
And moving on to cost, adjusted net cruise costs, excluding fuel, per capacity day increased 5.9%, or 4.8% on a combined company as reported basis, primarily as a result of two scheduled drydocks in the period, compared to no drydocks in the prior year. The increase was 17.8% and 16.6% on a constant currency and as reported basis respectively, mainly due to the addition of Prestige.
Turning to fuel expense, our fuel price per metric ton net of hedges decreased 15% to $509, from $599 in the prior year. Excluding the impact of hedges, our fuel price per metric ton was $351, compared to $529 in 2014.
Looking back at the full year, 2015 represented another solid year of strong financial performance. For the full year, adjusted earnings per share grew 27% to $2.88, primarily on same fleet operations, building on a 61% increase in 2014, which was driven by record revenue of $4.3 billion, representing a 39% increase from the prior year.
We are extremely pleased with our results for 2015, even more so given that it was a year with little benefit from new hardware in our fleet. With an increase of 3.7%, adjusted net yield for the year outperformed expectations and exceeded the high end of our guidance.
On a combined company as reported basis, adjusted net yield was up 2% also surpassing our guidance. This solid net yield performance was driven by strength in markets such as the Caribbean, Bermuda, and Alaska, as well as the overall success of our go-to-market strategy, which were implemented earlier in the year.
Adjusted net yield increased 20% on a constant currency basis, or 18% on an as reported basis, primarily as a result of the consolidation of Prestige, as well as the aforementioned strong pricing.
Turning to cost, adjusted net cruise costs, excluding fuel, per capacity day increased 3.8%, or 2.9% on a combined company as reported basis, primarily driven by increased investment in sales and marketing, and product enhancements to drive demand. On a constant currency basis, this metric increased 25%, or 24% as reported, mainly due to the addition of Prestige.
As for fuel expense, our fuel price per metric ton net of hedges decreased 13.8% to $539, from $625 in the prior year. Fuel price per metric ton excluding the impact of hedges was $424, compared to $605 in 2014.
Interest expense net was $221.9 million, compared to $151.8 million in 2014, mainly due to higher debt balances resulting from the acquisition of Prestige.
Now looking to 2016, we entered the year with a record booked position with over 50% of our overall inventory sold, as a result of the aforementioned strategy to drive demand. In addition, the booking window continues to improve over the prior year, as evidenced in the fourth quarter where it expanded 11%. As Frank mentioned, while still early in the booking cycle, we have seen encouraging trends into early 2017, with a booked position that is 30% higher with more revenue and higher pricing versus the same time last year.
Continuing on the subject of strong booking, Norwegian Escape was extremely well received by guests and travel agents alike, and continues to book very well. When compared to the Norwegian brand's other 4,000-plus berth ships launched in the Caribbean, Norwegian Escape remains the best booked at higher prices.
As part of our measured fleet expansion program, this year we will welcome Sirena and Seven Seas Explorer into the Oceania and Regent fleets respectively. The earnings benefit from these additions, as well the full year benefit from Norwegian Escape, will be very evident in our 2016 results. As a result of these fleet additions, total capacity for 2016 is expected to increase approximately 12%.
Looking at deployment for 2016, our core business is performing strongly, and we see continued strength in the Caribbean where our two newest ships, Norwegian Escape and Norwegian Getaway, are deployed year round from Miami. Approximately 43% of our overall capacity is in the Caribbean, which is up approximately 200 basis points from prior year. This has been a strong performing market both in 2015 and so far in 2016, with pricing and [load] higher year-over-year.
Europe, with 22% of our capacity for the year, looks to be a tale of two markets. The Baltic is performing very well, with both occupancy and pricing up nicely. This performance is being offset by softness in Med sailings, which as Frank mentioned earlier, were impacted by various geopolitical events that have occurred throughout Europe in recent months.
Also impacting overall yields is the deployment of Norwegian Epic year round in Europe. We have already redeployed her for winter 2016, where she will be back in the Caribbean, and we expect her to garner higher ticket pricing and enhanced onboard revenue.
As for other key markets, our deployment is similar to last year, with Alaska accounting for 7%, Bermuda 6%, Hawaii 4%, and the remainder of our capacity in the Asia, Africa, Pacific Region, South America, as well as other voyages.
We are seeing particular strength in the key markets which are primarily sourced from North America, which bodes well given the high percentage of guests we attract from the region. While our international expansion strategies have been successful to date, our current sourcing mix remains heavily skewed toward North American passengers, leaving us less dependent on Europe, Asia, and other sourced markets.
In terms of currency sourcing, approximately 85% of revenues are booked in US dollar. Bookings in local currency are predominantly in Euro, British pound, Canadian dollar, and the Australian dollar. A $0.01 change in this basket of currencies is approximately $0.02 in EPS on an annual basis.
Now turning to our guidance for 2016, in the first quarter we executed a purchase and sale agreement for our interest in certain land-based operations in Hawaii. The sale is expected to close in 2016, subject to customary closing conditions, including the receipt of all required regulatory approvals. While this transaction is deemed immaterial to our consolidated financial statements, for comparative purposes our guidance excludes the result of these operations for both current and prior year. For your reference we have provided key metrics for 2015 by quarter and full year, excluding these results in our earnings release.
As a result of our strong booked position entering the year, as well as capacity additions from new ships, we expect an increase in adjusted net yield of approximately 4% on a constant currency basis, and approximately 3.5% on an as reported basis.
For the full year 2016, we expect adjusted net cruise costs excluding fuel per capacity day, to increase 2.5% on a constant currency basis, and 2.25% on an as reported basis. The increase is mainly due to incremental drydock expense year-over-year, as well as our investment to expand into the China market. This investment is expected to be approximately $15 million in 2016, and an additional $15 million in the first half of 2017, prior to our ship's launch midyear.
Turning to fuel expense, our fuel price per metric ton net of hedges is expected to be $470 for the year, and excluding hedges is expected to be $290. As of December 31, 2015, approximately 60% of our total fuel consumption for 2016 was hedged at an average price per metric ton of $452. We've been opportunistic to layer on incremental hedges in the outer years, and as of year end 2015, we are 56% hedged for 2017 at an average price of $401, 49% for 2018 at an average price of $357, and 32% hedged for 2019 at an average price of $322.
2016 will be another year of strong financial performance, with earnings growth of approximately 30%, with adjusted EPS expected to be in the range of $3.65 to $3.85, and double digit ROIC.
Now I'd like to walk you through our guidance and expectations for the first quarter. Capacity will be approximately 13% due to the addition of Norwegian Escape that joined our fleet in the fourth quarter of 2015.
Adjusted net yield is expected to increase approximately 2.5% on a constant currency basis, or 1.75% on an as reported basis. It is important to note that this net yield performance is inclusive of a 24-day drydock of Pride of America, the highest yielding ship in the Norwegian brand, as well as impact from the deployment of Norwegian Epic in Europe during the nonpeak [shoulder] season. Excluding these items, yield would have been approximately 75 to 100 basis points higher.
Adjusted net cruise costs excluding fuel per capacity day is expected to increase 2% on a constant currency basis, and 1.75% on an as reported basis. And adjusted EPS is expected to be in the range of $0.34 to $0.39.
As we continue to execute on our strategies to increase returns on our existing fleet, while also taking delivery of new vessels with attractive earnings profiles, we expect to drive incremental shareholder value and continue to broaden the spread between our adjusted return on invested capital and our weighted average cost of capital, which at year-end were 9% and 8.4% respectively.
We remain committed to driving growth and delivering strong results, while continuing to be opportunistic with share repurchases under our previously authorized $500 million program, of which $313.5 million remains available as of December 31, 2015.
With that, I'll turn the call over to Frank for some closing comments. Frank?
- CEO & President
Thank you, Wendy. With the integration of Norwegian and Prestige well behind us, our team can now focus 100% on executing on our long-term strategies and developing complementary initiatives to drive further growth in our business.
A case in point is the Feel Free global campaign launched last month for the Norwegian brand. It brings a straightforward message that translates well in all markets around the world, and bolsters Norwegian's attributes of freedom and flexibility.
At the same time, we are delivering on our disciplined newbuild program, with the addition of Sirena to the Oceania Cruises' fleet, and the already legendary Seven Seas Explorer to the Regent's fleet.
Lastly, Norwegian's three brands continue to work together to align strategies and hone processes by sharing best practices, ranging from the best way to deploy digital marketing initiatives to producing world-class entertainment across our fleet and developing culinary programs that are best in class.
Both Wendy and I wish we had more time to discuss just how much activity is going on at Norwegian, in our drive to at least $5 adjusted earnings per share in 2017, and 14% return on invested capital in 2018, but we want to leave time for your questions, so Operator, I'll ask you to now please open up the call for Q&A.
Operator
Thank you, Mr. Del Rio.
(Operator Instructions)
Harry Curtis, Nomura.
- Analyst
Hi, good morning. Frank, can you talk about one of the concerns over the past six weeks about China, that there's simply too much supply coming and not enough demand or infrastructure to fill that capacity?
- CEO & President
I've heard those comments. I'm probably not the best expert to articulate what may be happening on the ground today, because you know we don't get there until another 18 months from now. But I've got to tell you, Harry, that everything that I've seen, everything that my team on the ground sees, the discussions we're having with the big charter travel agent operators, it reinforces our belief that overall there is no better place to deploy a new vessel, like we are deploying in 2017 than in China.
- Analyst
Can you talk a little bit more about diversifying the sourcing away from the charters, and your perception of how the travel agent system is building, and kind of the financial incentives or the reasons why that system should build pretty quickly?
- CEO & President
Well, I think it's at this stage more of a wish and a hope by the operator that it evolves into a more diversified multi-channel way of doing business than the singular charter. But I've got to tell you from our perspective, entering the market as we are for the first time, I think it works to Norwegian's advantage to have a very concentrated group of travel agents that are mainly responsible for the ultimate distribution of the product.
Perhaps years from now when we have four or five vessels, I will probably think differently, but entering this market pretty much as a startup in China, I kind of favor the existing, very one-sided model, because it allows me to focus all my attention on a known group of distributors as opposed to trying to introduce a brand in a populace of over a billion people. So for guys like me, it may not be the worst thing in the world.
- Analyst
Very good. And then I just had a quick question on costs. There was some talk after the Prestige merger of some cost savings, really long tail cost savings such as contract renewals. Can you give us a sense of where those are at this point? How much savings is still possible based on further synergies?
- CEO & President
No, we mentioned probably six months ago that the formal synergy program was over. We've done, I believe, done an excellent job in identifying those major contracts. Contracts have long lives in some cases, they're not all up for renewal in 2015 or 2016, and we continue to believe that as more of these contracts come up for renewal that the combined volume that we bring to a particular vendor, a particular contract, will be helpful in renegotiating new terms at lower costs.
- CFO & EVP
And I would just add to that, Harry, that I think in the beginning what you might be alluding to is taking out maybe the hotel operations contractor on Prestige, and we have decided to keep that in place, but instead what we've done is we've really pooled our buying power, and we're working very well together, not just on the Prestige side but also logistics for the entire fleet.
- Analyst
Very good and nice results. Thanks.
- CEO & President
Thanks, Harry.
Operator
Felicia Hendrix, Barclays.
- Analyst
Hi, good morning. Thank you and thanks for all the great color you provided on the call. Wendy, I believe you said that for the first quarter, just in reference to the drydock and some other items, that yields would've been 75 to 100 basis points higher. For the full year, I believe you still have some higher drydocks than you had last year, so for the full year, what would that yield impact be?
- CFO & EVP
So all of the other drydocks throughout the year, if you look at drydocks this year versus last year, they pretty much roll over each other, so the largest impact is when you pull out the Pride of America in Q1, Felicia, partly because it's a 24-day drydock, partly because it's also the highest yielding ship on Norwegian, so on a full year basis if you pull that out it's probably about 10 to 15 basis points.
- Analyst
Okay, thanks. And just while we're talking about the full year, in the past you guys have said that the Company could generate net yield growth of 2% to 3% in an organic year, and 3% to 4% in the year with there a new ship. So if three ships coming in this year, is it fair to say that these three new ships account for 100 basis points of yield to the forecast? Because it sounds like the legacy fleet and everything that you've done is performing well also?
- CEO & President
You've got to take them one at a time. Certainly the Escape is proving to be as good as her billing and consistent with what we said in the past about new vessels entering the Norwegian fleet. Sirena on the Oceania brand is performing on par with the other three sister vessels that are identical to Sirena. So not really accretive but just more of the good high yields that those kind of vessels produce.
And Explorer is doing very well, although she's only going to contribute to about five and a half months worth of business. But to give you an idea, she is in the Mediterranean in the third quarter, early fourth quarter, and in spite of the challenges that we've seen in the Mediterranean, she is booked at yields roughly 50% higher than a sister Regent vessel is generating in the Mediterranean during the same time. So, clearly that is a huge driver. But remember that, that vessel is only 750 passenger vessel. So on a weighted average basis, even though she books as well as I mentioned [to her], the overall impact on the annual yield growth is minimal.
- CFO & EVP
And I would just add that, that kind of helps counterbalance the Norwegian Escape, where obviously Norwegian ships are at a lower yield than the Oceania and Regent ships. But again, Felicia, if you take 3% to 4% is the number that we've always guided to in a year we bring in ships, at the midpoint of 3.5% we're guiding to 4% on a constant currency basis, which I think really points to the fact that we have really been growing the organic fleet.
- Analyst
Thank you for that color. And then just last thing, a little housekeeping, when you guys talk about 2017 your outlook for earnings to exceed $5, just curious, are you assuming buyback, stock buybacks in it?
- CFO & EVP
No, we are not. So the guidance for 2016 does not assume buybacks. In the original $5 plan, however, there was just under $800 million of free cash flow that we showed at that time to pay down debt. But not specifically buybacks.
- Analyst
Okay, thank you very much.
Operator
Robin Farley, UBS.
- Analyst
Great, thanks, two questions one is I wonder if you can talk a little about expense drivers in Q4 came in I guess a little bit higher than guidance, and which would've been something other than that drydocks, you would have had in the plan, I guess. And similarly for 2016 when we, sort of, quantify what the drydock increase is and the China expense there may be some other expenses that are up. And I know the whole Norwegian Edge program, most of that's going to be showing up in CapEx, so if you can give a little color on what the other expense drivers are?
- CFO & EVP
Sure. So on Q4, there were some partly repairs and maintenance, some timing items, and additional investments. Clearly you've seen the benefit as we've made investments primarily into the Norwegian brand into 2015 and what it's done to drive demand and yield.
On the 2016 side of cost, there are a number of puts and takes there, but clearly we are investing in China, we called that out, that's $15 million for 2016 for the cost of investing, and the ship comes in, in mid-2017 and get the benefits. There's about $20 million on the additional drydock. There's a little bit more interest and some FX, and then we also have a tailwind on the fuel side.
- Analyst
And maybe some other non fuel operating expense items in there, because if I backed out China and the drydocks, it seems like expense would still be up excluding fuel on operating side?
- CFO & EVP
Yes, somewhat, but overall, I would say that we're doing everything we can to keep -- if you take out China and the additional drydock expense, we would actually be sub 1% in our growth in that cruise cost, Robin, so we're doing everything we can to manage down those costs.
And you are correct by the way, on the Norwegian Edge program, there has been a little bit of misunderstanding there as to how we get to those numbers. But keep in mind that we have always been out there saying, post the acquisition, that we have about $175 million in what we would call maintenance CapEx for the combined fleet. So the Norwegian Edge and the Regent program, those span two years, so you've got $175 million times two.
We also have been opportunistic to lock in FX hedges on our new builds. So there's a few puts and takes. But overall, our CapEx guidance has not changed because we're managing through that.
- Analyst
Okay, that's great, thank you. And just lastly can you give a little more color around the Hawaiian land-based operation that you bought, and just what that will do to revenue and expenses? Is that accretive at the bottom line, that kind of thing?
- CFO & EVP
Sure. So it's about $32 million a year in revenue. And about $5 million per year to the bottom line. So pretty immaterial. And it actually is diluted to our yields as we bring in additional capacity. So what we've tried to do there is just make sure that we exclude it, assuming that the sale will go through and it'll be out sometime in 2016 and you give all the color to get your models right by quarter.
- Analyst
Great, thank you.
Operator
Steven Wieczynski, Stifel.
- Analyst
Hi good morning, guys. So, Frank, I guess going back to the 2017 guidance of $5, it now sounds like you're a little bit more favorable going north of $5, and you said that didn't contemplate any entry into China. So I guess the question is, does that now contemplate China? Is it better fundamentals? Is it lower fuel? I'm just trying to get at, why is that a little bit better versus $5 right now?
- CEO & President
So, yes. It did not include China. The $5 was introduced about a year ago. So lots of moving parts. Any time you are predicting what's going to happen two years down the road -- but everything that we see today, we have greater confidence than ever that the $5 earnings-per-share at a minimum will be reached. We think China will be accretive.
We think that if fuel remains at the levels it is today, it will be accretive. Not on a dollar for dollar basis, because don't forget our unfavorable hedges, but nevertheless we also had, we've also netted higher synergies than was contemplated when we put out the $5 back in February, March of last year.
But then of course the biggest driver of all is the confidence that we're seeing in the advance bookings. To be up 30% on higher pricing is very comforting, and we have yet to see the full effect of all the itinerary changes that we've announced, because some don't take effect until late 2016 and early 2017, and some don't take effect until mid-2017, which also were not included.
We believe that the move of Getaway alone to Scandinavia could have an impact of just under $0.10 a share. So we see a lot of good reasons why that $5 is coming into focus very nicely.
- Analyst
Okay. Then second question I guess would be in terms of this year, how are you guys viewing on board spend, and have you seen any weakness in on board spend in the last two, three months?
- CEO & President
We had a very, very strong Q4 in on board spend leading up to the holidays. We saw a little bit at the beginning of the year and it's typical. I think it's a little bit of the hangover from New Year. But over the last three weeks or so, we've seen a pickup back to where we expected it to be. So there's no headline there, at least not yet.
- Analyst
Okay, and then the last question real quick, have you guys bought back any stock in the first quarter?
- CFO & EVP
We will continue to be opportunistic and we will be buying back shares most likely in Q1.
- Analyst
Okay, thanks, guys. Appreciate it.
Operator
Greg Badishkanian, Citigroup.
- Analyst
Great, thanks. Just on Europe, when you mentioned that the recent geopolitical events as well as currency could have an impact of about $0.10, I'm just wondering the break out between currency versus the geopolitical issues impacting itineraries and demand.
- CFO & EVP
Yes, good question, so it's about half and half. $0.05 of that would be related to the impact of Turkey, and $0.05 would be on the FX.
- Analyst
Sure. Are you noticing any differences between North American sourced passengers going to the Med versus European sourced passengers going on Med as well as European itineraries? Is there any difference in behavior and demand?
- CEO & President
Yes, Greg, we see that the North American passenger up to now, we think it will change throughout the spring and summer, but up to now we see the North American passenger being a little more hesitant to book in Eastern Mediterranean itineraries, than if you are a European sourced guest. And that's very consistent with what we've seen in prior events similar to what we're facing now.
- Analyst
Makes sense. And then finally just the Caribbean, it's strong, it's very strong and that's pretty consistent within the industry. What's the key driver for that continued strength?
- CEO & President
Well, there's I think lots of various reasons, one, people want to go on vacation, they want a cruise. So if a person is perhaps hesitant to go to the Eastern Mediterranean, they will go to the Caribbean instead. So weakness in one theater of deployment will be offset by strength in the other.
I also think that in the case of Norwegian, we've got our best hardware there. People want to try to the Escape, people want to try the Getaway and Breakaway. And I think that our marketing is resonating, it's upbeat, it's just consistent with overall fun nature of the Caribbean. And there's not been any reason not to go to the Caribbean.
So it's always going to be the largest deployment theater for the cruise industry. It's been consistently in the mid-40s percent of capacity, and I think to some degree the demand has sort of built up to that capacity over the years.
- Analyst
Thank you.
Operator
Kevin Milota, JPMorgan.
- Analyst
Good morning, everyone. Two questions here. One, hopefully you give us the capacity increases, you gave us the first quarter and full year, but maybe second, third, fourth quarter capacity increases? And also talk through the cadence of net yields, can you give us some expectations on where you see net yields, how they're flowing through the year, given the new ship introductions in the second and third quarter? Thank you very much.
- CFO & EVP
Great, hi. So the capacity growth for Q2 is approximately 11%. Q3 15%, and Q4 11%. And then on the cadence for yield will be the highest in Q3. I've likened it to a bell curve in the past, and it still is similar to bell curve. And then Q2 would be the next highest. Q1 would be the third highest, and then Q4 would be the lowest, but that's because we're rolling over such high numbers in Q4 2015.
- Analyst
Okay, thank you very much.
- CFO & EVP
Thank you.
Operator
Tim Conder, Wells Fargo Securities.
- Analyst
Thank you. First of all, again, Frank and team, congrats on the great execution. And also, I'll echo some previous comments on that. Most of my questions have been answered, but a couple of clarifications. Wendy, the $20 million in incremental drydocks that we're going to see in 2016, should we assume, I know you got some accelerated drydocks in the first half of 2017, but on an annual basis should we assume that, that should go more back to normal, i.e. that $20 million go away in 2017, is the first question.
And then Frank, on China, just to clarify the $5-plus EPS that you were commenting on earlier, you said the incremental ship is not included, but does that include the 15 of incremental expense that you've called out?
- CEO & President
No, it did not. So China which is not contemplated when the original $5 forecast was disclosed.
- Analyst
Okay.
- CFO & EVP
And then, Tim, regarding the drydocks, so it's [eight] drydocks versus eight drydocks, 2016 versus 2017. Maybe slightly less in cost in 2017, due to the Pride of America drydocks.
- Analyst
Okay. And then back to the question on share repo and debt reduction. Again, you commented on what was and was not contemplated related to the $5-plus target there. Has anything changed as you see it now, related to your plans on debt pay down and your thought process there?
- CFO & EVP
Well, I think as we've talked to all of our investors, we've got a weighted average cost of debt of roughly 3.9%. It's hard to choose to pay down debt at those kind of rates. We have been out there as you've seen, being opportunistic and also participating with secondary offerings, so I think that's where our focus is at this time, especially with the rates where our stock is.
- Analyst
Okay. That's what we thought, thank you very much.
- CFO & EVP
Thank you.
Operator
Vince Ciepiel, Cleveland Research.
- Analyst
Great. A couple on the business. The first, you've mentioned a nice increase in the outside sales force in the past. Could you help us understand what payback you're seeing now that you've had a few quarters to digest that, and specifically California and Canada, how has that business changed for you over the last six to twelve months?
- CEO & President
Yes, I'm glad you asked. We made a big deal about this time last year, and through the fourth quarter our California business was up 20%, and Canada was up 19%. So we thought that was very good ROI, especially to get to those levels ramped up as quickly, and so I expect for that trend to continue through 2016 with the new ship introductions, etcetera.
- Analyst
Great, thanks. And then the 30% increase for the first half of 2017, I think it was, you mentioned as being indicative of consumer confidence. How much of that 30% increase do you think is an industry wide thing, or a lengthening of the booking curve, versus maybe some things you're doing specifically within the business, and a payback from new ad campaign, or other changes you made?
- CEO & President
I don't know, those aren't the kind things that I discuss with competitors, but my sense is that a high tide rises all boats, as they say, and if we're doing well in the future, my instinct is that others are as well. We're not doing anything particularly different for 2017 departures that we're not doing for 2016. It seems to resonate well in the marketplace.
As I said earlier, the only difference between 2016 and 2017 are some itinerary changes that we discussed earlier, that we think are going to be accretive to yields and therefore to earnings. But I think it just shows a fundamental, strong demand by consumers for cruise vacations.
We all know what the pundits have been saying about the overall economy and the threat of recession, et cetera, et cetera, but I've always believed that the cruise industry, because of our elongated booking curve, is a very strong indicator of future economic activity. And I hope that what we're seeing for 2017 carries on and it proves that the economy remains strong.
- Analyst
Great, thanks.
- CEO & President
Okay, Abigail, we have time for one more question, please.
Operator
Jared Shojaian, Wolfe Research.
- Analyst
Hi, good morning. Frank, there seems to be some debate philosophically about how luxury brands perform during recessions. You've got one camp that will say luxury is more cyclical because it deals with higher dollar pricing, and then the other camp will say luxury is less cyclical because you have higher net worth incomes. So I think based on comments you've made in the past, you lean towards the latter, but my question is, what sort of data can you share just to compare Oceania and Regent versus some of the contemporary brands just historically over the last few recessions? Thanks.
- CEO & President
You go back to 2008, 2009 with the great recession. Most cruise lines out there today have yet to reach their pre-recession yields. I think that's the best indicator of how resilient the brands are in the case of a downturn. And that's because most brands react by reducing pricing when natural demand dries up.
The Oceania and Regent brand didn't do that. Our go-to-market strategy is to not focus on discount, but to focus on spending more marketing dollars to stimulate demand. As a result, Regent returned to its high water mark. I think Regent never missed a year. Every year was a record year in yield, and Oceania missed it in 2009 and got back in 2010.
So from Oceania and Regent perspective, I will tell you that the upscale brands are more resilient to the downturn. Even the Norwegian brand on a standalone basis got back to their pre-recession yields in 2011. And so, I think a lot has to do with management and how they react to the situation, and we're very pleased that we keep growing yields, because we never had to climb that steep hill back up from deep discounting.
- Analyst
Okay, great, thanks, that's helpful. And then lastly we know there's a lot of incremental luxury capacity coming on later this year, whether that's in Viking or Seaborne and even yourself, so can you just update us on what you're seeing on the yield side in the luxury premium segment?
- CEO & President
Yes, I think that the bigger impact on yields in the upscale segment is not so much the capacity increase as you mentioned, but the geopolitical situation in the eastern Med, the Med, that's the area where a lot of upscale inventory goes to in the second and third quarters, and with that area having the negative impact, I think that's having a bigger impact on yield than whether one or two or three ships are entering the marketplace.
- Analyst
Okay, great, thanks.
- CEO & President
Okay well thanks, everyone, for your time and support as always. We'll be available to answer your questions later today. Thanks again.
Operator
This concludes today's conference, you may now disconnect.