挪威郵輪 (NCLH) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Norwegian Cruise Line Holdings first quarter 2016 earnings conference call.

My name is Latoya, and I will be your operator.

(Operator Instructions)

As a reminder to all participants, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Andrea DeMarco, Head of Investor Relations.

Ms. DeMarco, please proceed.

Thank you, Latoya.

Good morning, everyone, and welcome to the Norwegian Cruise Line Holdings first quarter 2016 earnings call.

Joining me today is Frank Del Rio, President and Chief Executive Officer for 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 to discuss results for the quarter, as well as provide guidance for the second quarter and full year 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 our Investor Relations website at www.nclhltdinvestor.com and will be available for replay 30 days following today's call.

Before we discuss our results, I would like to cover a few items.

Our press release, with first quarter 2016 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 financial information as a part of this call.

The Company's comments today may include statements about expectations for the future.

Those expectations are subject to known and unknown risks, uncertainties, and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested by these expectations.

The Company cannot guarantee the accuracy of any forecast or estimate, and we undertake no obligation to update any forward-looking statement.

If you would like more information on the risks involved in forward-looking statements, please see the Company's SEC filings.

In addition, some of our commentary may reference 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 good morning, everyone.

The reporting of first quarter earnings are customarily, the most anticipated of the year.

It's the quarter that gives us a first blush of actual results, and begins to provide a clearer picture as to expectations for the year ahead.

This year, our first quarter report is no exception, and it is doubly exciting, as it means that we are one quarter closer to achieving a double-digit adjusted return on invested capital at the end of 2016.

And while I know Wendy will review our first quarter results in more detail later in the call, I would like to call out a few highlights that demonstrate just how strong a quarter it was.

We posted strong yield growth of 3.6%, which while impressive, doesn't fully capture the whole story of just how strong our underlying business really is.

This healthy yield growth comes as a result of strong overall pricing from solid Caribbean demand, and better than expected onboard revenue.

And if not, for the following two factors would have been even higher.

First, as we have stated several times in the past, the decision to deploy Norwegian Epic, one of the brand's largest and best performing strips and a strong generator of onboard revenue, to sail western Mediterranean Canary Island itineraries in the relatively weak first and second quarters was as drag on yield growth.

And the second, was the planned drydock of Norwegian brand's highest yielding ship, Pride of America, as part of the line Norwegian Edge refurbishment initiative.

If not for these two factors, we estimate that adjusted net yield growth in the quarter would have exceeded 5%.

Pride of America is now out of drydock with improvements and enhancements that make her a better ship, than the day she was delivered.

In addition, and as a result of our itinerary optimization strategy, beginning in fourth quarter of this year, Norwegian Epic will be redeployed back to the Caribbean, where we expect that she will garner the ticket premiums and strong onboard revenue that made her a game-changer, when she first joined the Norwegian fleet in 2010.

So looking to more current events.

A little over a week ago, I had the honor of welcoming the latest edition to Oceania Cruise's award winning fleet.

Sirena was christened in a ceremony in Barcelona, and joined sister R-class ships Reggatta, Insignia and Nautica to form a fleet of four-mid sized 684 berth ships that deliver exceptional onboard experiences, destination-rich itineraries, and the finest cuisine at sea

Being a new kid on the block has its advantages, and Sirena is the first of our R-class vessels to incorporate features from the next-generation of ships in Oceania's fleet.

Among these features are the addition of popular Asian eatery Red Ginger with cuisine with the representative of the Pacific Rim, the all-new Italian Steakhouse concept Tuscan steak, and Jacques Bistro the first dedicated offering on our R-class fleet from Oceania's executive culinary director, the legendary chef Jacques Pepin, whose daughter Claudine who served as Sirena's godmother.

Sirena is the latest example of our strategy to introduce successful offerings from our most modern ships to the rest of our fleets, whether it be Oceania, Regent or Norwegian, and I'm sure that our guests who sail on her will appreciate these expanded offerings.

Sirena is spending her inaugural season sailing a diverse set of itineraries in the Mediterranean, where her deployment drove a 30%-plus increase in capacity in the region for Oceania, This sharp capacity increase, however, comes at a time when as you know, European sailings are under pressure.

The cumulative impact of successive events across Europe in the past month, have indeed affected booking patterns for sailings in the region, particularly among North American consumers who have comprised the majority of our sourcing pool.

The weaker demand from high-spending North Americans has increased our reliance on local European sourcing, which have historically booked closer in, and at lower prices, and with lower onboard spend.

This weaker demand, and the resulting shift in sourcing, coupled with the increased capacity in Europe for our premium Oceania brand and Norwegian Epic's winter season deployment in Europe have resulted in our tempered expectations for the second quarter.

And while the yield growth story for Q2 is not what we expected coming into the year, there are a number of very positive factors providing a solid foundation for the balance of 2016 and beyond.

First, is the runaway success of Seven Seas Explorer, which debuts in the Mediterranean in July of this year.

She broke single and multi-day sales records at Regent, and is almost entirely booked for her inaugural season.

I recently visited her at the yard, and she will certainly live up to her billing, as the most luxurious ship ever built, justifying the record high per diems she is garnering.

Second, we have a lengthy full ship charter of Norwegian Getaway at significant premium above her normal rate.

This charter will also shift capacity out of the non-peak Miami-based Caribbean season in the third quarter, and should bolster pricing for Norwegian brand's newest ship, Norwegian Escape, which is also based in Miami for Caribbean sailing.

Third, is the continued strong demand in North American consumers for sailing in markets closer to home, namely those in the Caribbean, Alaska, Bermuda, Hawaii and New England.

And those sailings comprise close to 60% of our capacity in the back half of the year.

The combination of a premium price 40 day charter for a Norwegian Getaway and strongly booked inaugural seasons for the high-yielding Sirena and Seven Seas Explorer, combine to lock in approximately half of our yield growth in the back half of the year.

Add to the fact, that the majority of sailings in the back half are in strong performing North American markets, further solidifies our positive expectations for the third and fourth quarters of 2016, where pricing is up mid to high single-digits, with occupancies slightly down.

These positive expectation also do not take into account the opportunity for potential upside for Europe sailings, where we believe the worst of the slowdown is behind us, as we have seen positive booking traction in the last four weeks, and remain hopeful that the momentum continues.

Lastly, adding to this momentum, is a fine-tuning of our pricing strategy to capture more business at favorable rate.

Our disciplined pricing strategy focuses guests on value versus price, and is a major driver in not only achieving the industry's highest yield, but also the industry's highest yield growth since our initial public offering.

For months now, the Norwegian brand has successfully bundled value-added packages, such as unlimited beverage and dining in its cruise fares.

First, in its Freestyle Choice offers, and then in its Free at Sea promotions to the majority of its guests, who recognize the outstanding value proposition of these programs.

One lesson learned, however, over the last few months, revolved around online travel agents or OTAs, which are one of the main distribution channels for selling close-in inventory.

One of the drawbacks of this channel is its difficulty in effectively communicating non-price dependent offers to consumers.

When guests search for cruise options online, the Norwegian brand were at times at a competitive disadvantage, as our value packed pricing would appear higher versus competitors for similar itineraries, even though our overall value was much greater.

We took this opportunity to introduce sail-away rates on the lowest level category of each stateroom type, excluding suite, which represents less than 10% of Norwegian's inventory.

Sail-away rates are cruise-only rates with no value adds, which will allow us to capture business that we temporarily were not capturing.

And while these fares appear to be at lower price points in third-party pricing surveys, the cruise fares result in net ticket yields that are generally equal to those of our bundled Free at Sea fares.

To summarize, we expect our strong book position, coupled with continued robust demand for North American itineraries and our enhanced pricing strategy will result in strong yield growth in the back half of the year, compensating for the moderate yield growth in the second quarter.

Our expected full year growth of 4% in 2016 is even more impressive, given that in prior years yields grew 4.7% and 7.4% in the third and fourth quarters, respectively.

There were several other highlights in the first quarter, including the first reveal of exciting activities and features on our upcoming China dedicated ship Norwegian Joy, which I'll cover in more detail in my closing comments.

But now to discuss the results, and outlook in more detail, I'll turn the call over to Wendy.

Wendy?

Thank you, Frank.

Unless otherwise noted my commentary compares 2016 and 2015 per capacity day metrics on a constant currency basis.

I'll begin with commentary on our first quarter results, where I'm pleased to report yet another strong quarter of financial performance.

Adjusted earnings per share increased 41% to $0.38, coming in at the top end of our guidance range of $0.34 to $0.39.

Strength in the quarter was the result of higher net yields from higher pricing, as well as lower than anticipated net cruise costs excluding fuel.

Strong pricing in the Caribbean which comprised 65% of our capacity in the first quarter, coupled with strong onboard revenue in the period drove outperformance in adjusted net yield, which increased 3.6%.

On an as reported basis, adjusted net yields were up 2.5%.

This outperformance is particularly impressive, given the year-over-year comps Frank discussed earlier.

Now looking at costs, adjusted net cruise cost excluding fuel per capacity day increased 1.5%, or 1.1% on an as reported basis.

Turning to fuel, our fuel expense per metric ton net of hedges decreased 16.7% to $438 from $526 in the prior year.

At face value, fuel expense net appears to be favorable versus guidance for the quarter by $1.6 million; however, when combined with a $5.2 million realized loss in other income and expense related to a portion of our fuel hedge portfolio which was deemed ineffective, all-in fuel expense was unfavorable by $3.6 million in the quarter, as a result of the increase in fuel pricing for our unhedged fuel consumption.

Taking a look below the line, interest expense net was $59.8 million, compared to $51 million in the prior year mainly due to higher interest rates, as a result of an increase in LIBOR rates, as well as an increase in average outstanding debt balances, primarily associated with the delivery of Norwegian Escape.

As for other income and expense, there are a few puts and takes impacting this line item.

First, was the aforementioned loss on our fuel derivatives of $5.2 million.

Second, was a loss of $4.2 million from the mark-to-market impact of foreign-denominated advance ticket sales, which will benefit future periods in the form of higher recognized revenue.

These losses were more than offset by a gain from the fair value increase related to a foreign exchange collar for the Seven Seas Explorer newbuild, which we customarily adjust out of earnings.

Excluding the $4.2 million non-operational translation loss, adjusted EPS would have been $0.02 higher or $0.40 in the period, further demonstrating our strong underlying operational performance.

As we discussed on our last earnings call, we have executed an agreement to divest our land-based operations in Hawaii, which we expect to finalize in 2016, subject to customary closing conditions including the receipt of all required regulatory approvals.

Our guidance provided, excludes the results of the aforementioned land-based operations.

And since the sale is yet to be finalized, results for the first quarter include this land-based operation.

The following key metrics back out the land-based operation from first quarter results to provide an apples-to-apples comparison to guidance.

Adjusted net yield growth on a constant currency basis would have been 3.9%, compared to guidance of approximately 2.5%.

And on an as reported basis, 2.7% compared to guidance of approximately 1.75%.

Adjusted net cruise costs excluding fuel per capacity day, growth on a constant currency basis would have been 1.6%, compared to guidance of approximately 2%.

And on an as reported basis, 1.3%, compared to guidance of approximately 1.75%.

Adjusted earnings per share remained unchanged.

Taking a look at markets, and deployment around the world, we see continued strength in the Caribbean where Norwegian's two newest ships, Norwegian Escape and Getaway are deployed year around from Miami.

For the second quarter, approximately 37% of our overall capacity is in the Caribbean, from 29% in the prior year due to the addition of Norwegian Escape to our fleet.

Europe accounts for 26% of our capacity for the second quarter, and while comparable to prior year.

As for other key markets, Alaska accounts for 11%, Bermuda 7%, Hawaii 5%, with the remainder of capacity in the Asia/Africa Pacific regions, South America repositioning sailings and other voyages.

Now I'd like to walk you through our guidance and expectations for the second quarter and full year 2016.

As a reminder, due to the pending sale of our land-based operation in Hawaii, all guidance and sensitivities exclude the results of this operation for both current and prior year.

In addition for your reference, in our fourth quarter 2015 earnings release, we provided key metrics for 2015 by quarter and full year, excluding these results to assist with modeling on a like-for-like basis.

Starting with the second quarter, capacity will be up approximately 10% due to the addition of Norwegian Escape who joined our fleet in October of last year, and Oceania Sirena who joined the fleet post her drydock at the end of April.

As previously mentioned, the weakness in European itineraries has tempered our expectations, and adjusted net yield is expected to increase approximately 1.75% or 1.5% on an as reported basis.

Adjusted net cruise costs excluding fuel per capacity day is expected to increase approximately 6.25% or 6% on an as reported basis, primarily due to the year-over-year timing of scheduled drydocks which we have noted on previous calls.

There are four regularly scheduled drydocks in the quarter, compared to only one the prior year, which equates to a six-fold increase in drydock days, resulting in higher net cruise costs in the quarter.

Looking at fuel expense, we anticipate our fuel price per metric ton net of hedges to be $480, with expected consumption of approximately 175,000 metric tons.

Taking all of this into account, adjusted EPS for the second quarter is expected to be in the range of $0.80 to $0.85.

As for the full year, expectations remain unchanged for our three key metrics.

Adjusted net yield is expected to increase approximately 4% or 3.5% on an as reported basis.

The cadence of adjusted net yield growth is led by the third quarter, which will have the highest growth benefiting from the addition of Seven Seas Explorer and Sirena to the fleet, as well as 40 day charter of Norwegian Getaway.

In order of growth, the third quarter is followed by Q1, then Q4, and finally Q2.

Adjusted net cruise cost excluding fuel per capacity day is expected to increase approximately 2.5% or 2.25% on an as reported basis.

As for cadence of growth, the second quarter will have the largest growth, followed by the first quarter, then the third quarter, and finally the fourth quarter.

Looking at fuel expense, we anticipate our fuel price per metric ton net of hedges to be $460, with expected consumption of approximately 715,000 metric tons.

As of March 31, 2016, we had hedged approximately 92%, 82%, 55%, and 50% of our total projected fuel consumption for the remainder of 2016, and the years 2017, 2018 and 2019, respectively, at an average price per metric ton of $380, $361, $356 and $309.

We opportunistically layered on incremental hedges throughout the first quarter, including new hedges for marine gas oil, or MGO which we had not previously hedged.

As a result of our ability to now hedge both our major fuel consumption types, our overall fuel hedge position significantly increased.

To illustrate our strong operational performance, had we not entered into a majority of our hedges prior to the steep decline in fuel prices, expected adjusted net income for the year would have been approximately $120 million, higher, adding an additional $0.52 to earnings per share.

Taking all of this into account, our expectations for adjusted EPS for the full year remains unchanged, and is expected to be in the range of $3.65 to $3.85.

There are a few other key metrics I would like to touch upon.

Our balance sheet remains in great shape, and we expect to be approximately 4 times levered on an as reported basis, or approximately 3.7 times on a pro forma basis by the end of this year, as we naturally delever, bringing us into our targeted leverage range of 3 to 4 times.

As for capital allocation, we opportunistically repurchased $50 million in the quarter under our previously authorized $500 million share repurchase program.

As of March 31, 2016, $264 million remained available in the program.

And while we will remain opportunistic for the remainder of 2016, we anticipate larger share repurchases in 2017, as we balance our share repurchase program, leverage targets, and liquidity profile.

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

Thank you, Wendy.

We are excited about our newbuild program which adds a new vessel to our fleet each year through 2020.

While we recently took delivery of Sirena for our Oceania fleet, and anxiously await the delivery of Seven Seas Explorer in July, the most exciting update on our newbuild program, was perhaps the announcement of some of the luxurious accommodations and thrilling features and activities of our first purpose-built ship for the Chinese market, Norwegian Joy.

Based on the successful design of our Breakaway Plus class ships, Norwegian Joy will be styled to appeal to Chinese travelers, and include everything from Norwegian brand's largest upscale shopping venue, and multiple casinos, to an increase in staterooms designed specifically for families, as well as interconnected staterooms for extended families traveling together.

The ship will include a number of firsts for the Norwegian brand, including concierge level of accommodations which feature larger balcony staterooms, with luxurious in-suite amenities, the services of a dedicated concierge, and an exclusive concierge lounge, with private bar and light food offerings available throughout the day.

The concierge level is a complement to the brand's luxurious The Haven by Norwegian Suite complex, which also will be part of Norwegian Joy's selection of accommodation, and has been expanded to include a VVIP casino.

At Sea First will abound on Norwegian Joy including a two level eight-turn electric car racetrack at the very top of the ship, and the Galaxy Pavilion complete with numerous immersive virtual reality experiences, thrilling simulator rides, interactive video walls, hover craft bumper cars, and a single-seat genuine Formula One racecar that's been converted into a state-of-the-art racing simulator, among other exciting activities.

If you like to learn more about Norwegian Joy's features, I invite everyone to visit her dedicated microsite at www.ncl.com\Norwegian-joy.

By the time of our next call, Seven Seas Explorer will have joined the Regent fleet as the most luxurious ship at sea.

As I mentioned earlier, her popularity was so great that she broke records and sold out many voyages as soon as sales were open.

And mind you, these initial sales were open only to members of Regent's loyalty program.

As sales opened to other guests, her popularity only grew.

So much so, that in March of this year, we announce an order for a sister vessel to be delivered in 2020.

We are very bullish on these highly anticipated Explorer class vessels, and look forward to the first addition entering our fleet this July.

The introduction of Norwegian Joy, Sirena and Seven Seas Explorer, along with our disciplined pricing strategy, deployment optimization, and cost-containing initiatives are a few of the many factors which reinforce our confidence in our long-term earnings per share and return on invested capital targets.

But perhaps the biggest factor contributing to our confidence is our strong book position for the first half of 2017, which includes double digit-pricing growth, while not including any benefit from our China ship which doesn't launch until July of 2017.

Consequently our view regarding our $5 adjusted earnings per share target for 2017 has not changed since last quarter, and we look forward to posting double-digit adjusted ROIC at the end of this year for the first time in our Company's history, and leading the industry in this all important metric.

And with that, I'd like to open up the call for questions.

Operator?

Yes, thank you, Mr. Del Rio.

(Operator Instructions)

Our first question comes from Felicia Hendrix of Barclays.

Hi, thank you, and good morning.

Frank, I just wanted to say with that last point you made on the $5, because I just think there might be some confusion.

I believe in your last release you had talked about exceeding $5, and then in this release it seemed more like you were on track for the $5.

So perhaps you could help explain the difference in semantics there?

Yes.

Look, there is no difference I just reiterated our position.

We feel as strong today as we ever have, perhaps stronger than ever, given that we are now closer to 2017, than we were one quarter ago.

And as I said earlier bookings, which is the main driver of this business remain strong for 2017.

Pricing is very strong, double-digit yield growth.

So we've never talked about exceeding the $5 target.

We've always said $5.

But the point I want to get across is, nothing has changed.

If we were going to exceed it, we're going to exceed it today, as much as we were last quarter.

And no one should read a whole lot into the change of words that we use, whether it was reach, or some other word to qualify it.

2017 is looking very, very good, and I'm very conformable with where we are.

Okay.

That's helpful.

Thank you.

And then I just wanted to touch on the well-known softness in Europe, now coming from North Americans.

So kind of a two-parter here.

One is when you think about where - if you are looking back in terms of what has happened so far, can you just parse out for us, how the low end demand for North Americans for Mediterranean cruises has affected the Norwegian brands versus the Prestige brands?

And then also I was just hoping you could touch upon a comment that you made that, over the past few weeks you think the worst is behind us, and that you're seeing some improvement?

Thank you.

Yes, I won't talk about the different brands individually.

A third of our overall business approximately, for European itineraries is sourced in Europe.

So we still rely primarily on the North American consumer.

And while we are trying to diversify our channels, as you know over the last year, we've opened offices in Sidney, Australia and in Sao Paulo, Brazil, in Germany, in China we're still a North American-centric Company, and that's good, because the North Americans pay the highest amount to go onboard cruises, and spend the most money once they're there.

But you have to recognize that given the events that have occurred in Europe over the last four or five months, multiple situations, it affects the North Americans more so, than the local markets in Europe.

But yes, as we as time and distances from the events, people tend to forget what happened.

We put the past behind us and we look forward.

And so yes I have seen what I believe is the worst of the downturn in North American market demand for European sailings behind us, and have seen an uptick in business in the last four weeks.

And we hope that momentum continues.

And if it does, we'll see upside to our projections.

Great.

That's helpful.

Thanks so much.

But it's important to note, Felicia, that we don't need a major rebound in European business to hit our targets.

We assume that the business will continue.

It has been, and we have reaffirmed our guidance for the full year.

If Europe materially improves, then we can see upside.

Very helpful.

Thank you.

Thank you.

The next question is from Greg Badishkanian of Citigroup.

Great, thanks.

I think your last comments on 2017 were very interesting, double-digit pricing growth.

And if you could kind of give some color on bookings, and why do you think it is so strong for -- is it first half of 2017, is that what you said?

I don't remember it was full year or first half?

First half, because the second half is still so lightly booked that it's not material to commentary.

Look, our brands are strong, our marketing platforms are resonating in the marketplace.

As we have repeatedly said other than European itineraries, this is strong as ever.

Caribbean is very, very strong, Hawaii, Bermuda.

Q1 of 2017 has been very little Europe.

As you know is primarily a Caribbean-centric quarter.

And as we again distance ourselves from the event of Europe, by Q2 of 2017, things begin to improve.

And remember the Norwegian Joy, the new China vessel doesn't come on until Q3.

So the fact that we are so well-booked at such high pricing without the benefits of the China vessel, which we all know is higher yielding than the rest of the fleet, is very encouraging for us.

Great.

And do you think that the improved traction in bookings for the -- I believe it's North American passengers going to Europe, which has been the big source of weakness, is that just because memories are kind of fading of the incidents in Brussels and Paris, and they're getting more comfortable with traveling to Europe, versus maybe promotions and discounts which I think everyone has been doing for awhile now.

But it seems to be resonating according to your comments.

Well, look there's a couple of things.

One is yes, those events are not hitting our customers in the face every day in the news cycle.

It's a bit of history.

Nothing new has happened, and let's -- hopefully, we keep it that way.

But another factor is because the overall travel through Europe is down, the airlines have also had to drop prices.

And so our customers are gaining the advantage of that lower price.

So it's more economical for them to travel to Europe.

So that's having an impact as well.

The strong dollar helps as well.

So we're hopeful again, that the worst is behind us, and we've got some greenshoots that indicate the worst is behind us.

Good, thank you.

Thank you.

The next question is from Robin Farley of UBS.

Hi, I have couple of things I want to clarify.

One is, can you give us a break down of Europe or maybe even Eastern Med, specifically Q3 versus Q2.

Just trying to think about, given the impact that that's having on Q2, and just thinking about what that might be in Q3.

I know you're not giving specific guidance for that in Q3, but just thinking about the percent exposure?

And then also, just looking at Q1 results, at the gross yield, I know there are different sort of deferred revenue adjustments, and it's -- we can't tell what's sort of with or without currency for that.

But I guess, how to think about the gross yield change in Q1?

I think kind of flattish, and like I said maybe there are adjustments to make there?

Yes, I'll take your question about the [Med], Eastern Med and so forth.

Our Q2 capacity in the overall Med is 21%, and the growth of 26% in Q3.

So it's more, but not so materially more.

But we are well booked in Q3.

And again our guidance for the full year, takes into consideration what has happened in Europe in Q2, what impact it has had in our Q3 Europe business.

And in spite of that weakness, we reaffirm our full year guidance.

We suggest that if Europe hadn't had the difficulties that its having, our results would have been even stronger.

But we do feel confident, that in spite of what's happening in Europe, and without the need for Europe to have a major rebound as I noted earlier, we are confident of our current guidance.

That's helpful.

So your current guidance, you're assuming that the declines in the Med in Q3, would be at least as much as the declines in Q2, right?

You're not looking for any improvement?

You're saying our guidance fully assumes yields will be down as much in Q3, as they were in Q2 in the Med specifically?

Well, the difference between Q2, Q3 when you talk about Europe in general, is that the Baltic which is a very high-yielding itinerary, and has been less impacted than the Mediterranean has, really comes into focus much more in Q3 than in Q2.

And in our case, the Baltic represents almost a three-fold increase in capacity over Q2 in the Baltic.

Great.

No, that's helpful.

And then on the Q1 gross yield?

Yes.

So I think what's really important to keep in mind here is that, as we have rolled out our bundled packages, which actually started in Q1 of 2015, the accounting rules stipulate that the revenues allocated between the ticket and the onboard revenue based on retail value.

Sao as a result the individual components are not representative of the selling price in the market.

So what I would focus everybody to concentrate on, and I've been saying this quarter after quarter, is look at total net yield, or total net revenue.

And so if you look at that, if you just take it on a component basis, and try and divide it out by capacity days, it looks skewed when you look at -- when you pull apart ticket and onboard.

But it's totally as a result of these bundled packages.

And then, once we get into Q2, we'll be rolling over like-for-like when you look at Q2 of the prior year, before rolling out the bundled packages.

Okay, great.

Very helpful, thank you.

And just one final thing.

Frank, I don't know if I heard you comment on the 2017 volume on the books, or just first half of 2017 volume on the books?

First half, yes.

Is volume up as well as price?

It's comparable to the prior year.

And as you know we've started the year in a great book position.

So I'm very happy of where we are for 2017.

To be more booked quite frankly, would probably be leaving money in the table, in terms of yield.

And I much more preferred at this stage to be up double-digit in pricing, than have another point or two in capacity.

Great, perfect.

Thank you very much.

That's great.

Thanks.

Thank you.

The next question is from Harry Curtis of Nomura.

Hi, good morning.

Just a follow-up on the second half of this year.

Can you provide us with a little bit more visibility on how well booked you are in the second half?

How much more is there really to sell?

Yes, hi, Harry.

So the per diems are up in the mid to high single-digits, with occupancy slightly down, and slightly down is primarily in Q3, because of the Europe situation we've been discussing.

So I'd rather be slightly ahead, but not anything significant that we can't overcome.

I'd rather much have the up in price, because it is so difficult Harry to claw back pricing, than it is to claw back occupancy.

Occupancy is foregone after that ship sales and comes back again, but that pricing tenure that you have in the marketplace lingers.

And so we're very, very pleased and proud of what we've been able to achieve on the pricing side.

All our three brands are recognizing the industry, as having the highest yield in their perspective categories.

And I want to protect that at all costs so to speak.

And the good news for us is that the tempo of bookings is strong.

It is strong, very strong in the fourth quarter.

It is very strong in 2017.

We know about the slight weakness in the third quarter, but it's being offset again by Explorer being so well booked -- just about sold out, if not sold out in an entire second half.

Sirena at a very high-yielding ship, is also very well-booked.

And then there is 40 day charter, that it is at a premium pricing.

So as we mentioned in the call, approximately half of our second half yield growth is locked in.

Thank you for that.

And let me shift gears.

If you could touch on or follow-up on your comments in the last call, with regard to Cuba.

It's a little bit later, getting the approval from the government than you'd thought, give us your thoughts on that?

And one of your competitors commented, that they thought that the impact of Cuba would be relatively modest.

Do you feel differently?

I am still confident that a Norwegian Cruise Line holding vessel will cruise to Cuba before year-end.

We continue to make progress.

I'm both happy of where we are, and disappointed that I missed your April deadline, but I'm getting closer.

And again feel very strong that we will have all this wrapped up soon, and that one of our vessels will cruise into Cuba first of the year.

Look, I still believe that Cuba will garner a yield premium to anything else in the Caribbean.

The question is going to be what percentage of any brands or any companies overall capacity will be dedicated to Cuba, and how many sailings will that ship operate in Cuba?

Obviously, for a Company like us, that we're smaller than our two other competitors in this space, Cuba or a ship like China that could represent a much bigger impact than it does for others.

As you know Norwegian Joy, one vessel in China represents 8% of our capacity.

And so I don't want to say I disagree with whoever made that statement, but on a relative term, I think Cuba will likely be more significant for us than it may be for the other two, because of pure size.

Thanks, Frank.

Thank you, Harry.

Thank you.

The next question is from Kevin Milota of JPMorgan.

Hi, good morning, everyone.

Was hoping you could give us a sense for what you think the Explorer, Sirena and the Getaway charter will add to core net yield growth of 2% to 3% in the second half?

I don't have that number off the top of my head to give you, but I'll tell you that that business is baked in.

The charter is a contract, baked in.

Sirena and Explorer, both very high-yielding vessels are much more sold that rest of the fleet, and that's what gives us the confidence that we are going to be able to achieve our yields in the second half of the year.

Like I said earlier, it's roughly half of our projected yield growth, in the second half of the year are baked in because of our already strong book position.

Remember, I said that our currently booked position is up mid to high single-digits in the second half of the year, along with those three items.

So I would just add Kevin that our implied yields are very strong for the back half of the year, approximately 4.5%.

But we've also given the cadence that Q3 will be stronger.

We don't actually break it out by the brands, but significant strength is coming from those three items we've cited.

Okay.

Very good.

And then second, could you give a sense for what the total percent of your business has been booked for the third and fourth quarter?

We typically don't break out occupancies like that, specifically.

I will tell you that the back half of the year, the second half of the year pricing is up mid to high single-digits, with overall occupancy compared to this time last year slightly down, whereas slightly down is all in Q3, because Q4 is slightly up.

Okay, thank you.

Thank you.

The next question is from Tim Conder of Wells Fargo Securities.

Thank you.

Just a follow on, Frank, on a couple of the questions that have been asked.

And by the way, thank you for all of the color you've given so far, greatly helpful.

The Prestige brands, given they book further out, did you see cancellations post Brussels on those?

And is that what is impacting Q2 more so, and then not as much Q3 because of the skew into the Baltic?

Or is it -- and then going forward here, with the changes that you've made, are you attracting more Europeans to fill, even though you don't source that many Europeans?

Just a little more color on the dynamic with Q2, Q3 in Europe?

And then if you could also, anything you can give us on the type of premium that Getaway charter is achieving for those 40-45 days that you mentioned?

No, by contract we can't talk about that charter.

It is at a premium to what you ordinary would generate, had she operated our normal itinerary.

But getting back to your first question about cancellations post Brussels, typically when these kind of events happened, cancellations is not what causes the weakness.

If you're booked, you tend to stay.

What typically happens is new bookings are harder to come by.

And that's what happened after Paris.

It's what happened after the Istanbul situation in early January, and it's what happened after Brussels.

And so it takes a little bit of time for the new cycle -- and Brussels as you'll recall, was a heavy news cycle, that lingered on for awhile.

So it's now behind us, and bookings are beginning to come back.

It's also prime time Europe is, this is when people start going to Europe.

And so it is possible, although we aren't counting on it from the point of view of our guidance, that there will be a late Europe booking season, later than normal to bridge the gap from where we are today, versus where we normally are.

Okay.

And then Wendy, or whoever wants to take these if I may, a couple of just maybe a little nuanced color here.

China, well, what percent of your capacity overall?

You had mentioned that Joy will be 8% of capacity, but given its coming mid year, can we say roughly 4% will China represent of your 2017 capacity, and then on a full annualized basis And then, Wendy, on the hedging, historically all your hedging has been concentrated in that 3% sulfur type of grade.

How should we think about the mix now of your hedging, with the MGO now starting -- you're able to qualify that for hedge accounting?

So in terms of your question on China, yes, it will be roughly 4% for 2017, because the ship comes mid year.

And on a run rate basis, based on current capacity it is 8%.

Okay.

And Tim, on a -- from a mix standpoint nothing has changed.

So we're roughly 70% HFO, 30% MGO, but we're using Brent as a proxy for hedging for MGO.

Okay, great.

Thank you both.

Thank you, Tim.

Thank you.

The next question is from Vince Ciepiel of Cleveland Research.

Great.

Thanks I wanted to circle back on fuel.

When you look at the guidance of the fuel price per ton, and then also consumption, it looks like there's a $0.05 benefit versus when you last gave guidance.

But you've also mentioned some other items that are impacting earnings.

So could you just help us with the math, on what the net EPS impact of fuel is, versus when you last gave guidance?

Sure.

So hi, Vince.

So full year is down about $13 million.

And at the time that we gave our original guidance our hedge position was roughly 75%, meaning 25% of consumption was subject to volatility.

So we since, pretty much locked that in being 92% hedged.

I'm sorry, and what was -- did I answer that, or do you have another question?

No I was just wondering if your updated full year guidance if fuel has been a head wind, tail wind or neutral to that?

(no audio -- technical difficulties)

Ladies and gentlemen, please stand by.

Your call will resume momentarily.

(no audio -- technical difficulties) Okay, the call will resume now.

Sorry about that.

We don't know what happened.

Is everybody back on?

Yes, Vince, are you still there?

I'm here.

Okay.

Vince, can you repeat your question, or did you have a new one?

Yes.

So on fuel, I was just wondering if moves, since the last time you've provided guidance were neutral, a headwind, or tail wind for the full year EPS guidance?

Vince?

Okay, because we couldn't hear you.

Can you repeat that.

We're having a little technical difficulty here.

Sure.

I was just wondering if the moves in fuel, since you initially provided the full year EPS guidance have been a head wind, a tail wind, or roughly neutral to the updated guidance?

Yes.

So the updated guidance, Vince, is actually a tail wind for us.

So we've locked it in.

It's $13 million to $14 million on a full year basis that we'll benefit from.

Great, thank you.

And then secondly, on China I had written down you had about a $15 million cost investment in 2016, $15 million in the first half of 2017.

And then turning profitable in the second half of 2017, so much so that it should be accretive and additive to the $5 target.

And I was just curious if I had that correct?

And if anything has changed, since the last call that suggests that's no longer the case?

No, you have that correct.

So it's $15 million in 2016.

I would straight-line that throughout 2016.

And then 2017 first half, there's an additional $[15] million of cost, and although that would be a run rate of $30 million for the year.

We really just call attention to the fact that the ship isn't there in the first half, and it is there in the second half.

But even with those costs in 2017, it's still a run rate is profitable in 2017.

And that is accretive to our $5 EPS target.

Great, thanks.

Thank you.

The next question is from James Hardiman of Wedbush Securities.

Hi, good morning.

Thanks for fitting me in here.

Most of my questions have been answered, but maybe just a couple mechanical questions on the first quarter.

Obviously, the first quarter yields were significantly better than you had expected.

Costs were also better.

So presumably that other income line that you talked about was worse.

How should we model that throughout the remainder of the year?

Is there an offset in other income later on, or should that be a similar negative for the year, as what we saw in the first quarter?

And then secondly, it looks like you've got a pretty nice benefit from occupancy in the first quarter, about 140 basis points better than last year.

Help us understand that?

Were just more families taking trips, or was there something more structural that allowed you to do that, might be a benefit going forward?

Yes, in terms of the Q1 occupancy, it was a strong quarter.

We had Escape for the first time, we didn't have Escape Q1 of 2015.

She's very popular.

It's the peak winter Caribbean season.

The marketing has resonated very well, and we rolled out the Feel it, Free at Sea promotions.

And the vast majority of the inventory was out of Europe, and already booked at the turn of the year.

Remember., we had a very strong book position at the end of the year, which benefited Q1 more than any other quarter but just because of its proximity.

So then, just rolling down through Q1, yields as we called attention to, we have seen great -- much greater strength in the Caribbean.

We also saw increased onboard revenue.

So you get the right passengers on there, they tend to spend more as we've called attention to.

So we definitely got a boost to our yield.

Net cruise cost, some of that is timing, primarily on marketing.

Let's see, on the other income, you can't really model that.

So this is the first time that we've called attention to this mark-to-market on our ATS, or advanced ticket sales.

The advanced ticket sales is a liability, for the fact that these are future sailings, and due to the weakening of the dollar at quarter end, we recorded this.

But if rates hold at these levels, it would provide a similar tail wind to future quarters.

So you book that revenue then, as the ship sales if you will.

And again, we've never really called this out in the past, because it was immaterial.

So I don't think from that standpoint, you can really model it, but we will call attention to it in future quarters.

If currencies don't change, what was a head wind in Q1, will turn into a tail wind in future quarters, for the reasons that Wendy just said.

I think that's why it's important, I called attention to it, was the fact that it's $0.02 added on to $0.38.

If it wasn't for this mark-to-market, we delivered $0.40 EPS.

Just so I understand that, the benefit that you'll get will be on the yield side, rather than on the other income line?

That's correct.

As long as the ship hasn't sailed.

Mark-to-market, whatever is in your liability in ATS, but then once it sails, it's actually in yield.

Got it.

And then, my last question while we're talking about currency, it seems like the currency headwind for the year is essentially unchanged versus your prior guidance, which is a little bit of a surprise, given at least what I'm looking at the Euro, the Canadian dollar and British pound all strengthened versus three months ago.

Maybe that just wasn't enough, but why aren't we seeing a little bit of a benefit on that front?

Well primarily we source 85% of our business from North America, and therefore 85%, 86% of our business comes in US dollars.

So it's not material, and number one and number two, the currency hasn't changed that much.

Right.

We're rolling over similar levels from the prior year.

Okay.

Fair enough.

Thanks guys.

Thank you.

Latoya, I think we have time for one more question.

Yes, sir, the last question will come from Dan McKenzie of Buckingham Research.

Hey, good morning.

Thanks for squeezing me in guys.

I'm wondering if you can remind us, what percent of the Mediterranean capacity is tied to luxury versus contemporary cruising in the second quarter?

And then, I guess just related to that, given what you are seeing, is there a need to perhaps increase or expand distribution in Europe looking ahead?

Well we are working to diversify our sourcing, so that we are not so dependent upon the North American market.

It's one of the pillars of the FDR deal that we rolled out last year.

So since last year, we opened sales offices in Sidney, Australia, we've opened up three offices in China, we opened an office in Brazil, and we've added resources to both our German offices to take care of Continental Europe and UK office in South Hampton, as the UK is our single largest non-north American market.

So that takes time, but we are already seeing a increase in business from these non-north American markets.

It's one of the reasons why we feel pretty good about Q3.

We'll be able to source more business out of Europe primarily for the Europe itinerary, although we have to recognize that those likely will come in at a lower price point, because that's just how the European business is.

But we do have, we are booked so well at such high prices for Q3, that we can absorb that.

And we don't --I'll take the first part of your question is, we won't break out the capacity by brand.

But overall, our Mediterranean capacity, I think I mentioned it earlier in the call is 26% in Q3, versus 21% in Q2, and only 15% in Q4.

Fir the full year is 17%.

Okay, understood.

Appreciate that.

And I guess, Wendy, with respect to deferred revenue tied to the Latitudes program, have any of the accounting assumptions changed around that, in terms of the amount of ticket price you might defer to future periods?

And then, I guess, just tied to that when do the points expire exactly, before it becomes recognized as actual revenue?

Okay.

So when you're saying Latitudes put on -- first off, the advanced ticket sales is whether you're a Latitude member or not.

It's all revenue that is deferred, that's on the books.

But are you referring to the Cruise Next program, where you're actually booking your cruise in advance.

Yes, just in terms of the earned credits for the -- with respect to the Latitudes program.

Yes, so that's just when they're redeemed.

Understood, okay.

And do they -- (multiple speakers)

It's like 12 months, and it expires.

I see.

Okay, very good.

That will do it for me.

Thanks, guys.

Thank you.

Well thanks, everyone for your time and support this morning.

And as always, we are all available to answer your questions throughout the day.

Have a great day.

Thanks, everyone.

Bye-bye.

Thank you.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.

Good day.