挪威郵輪 (NCLH) 2016 Q4 法說會逐字稿

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  • Operator

  • Good morning and welcome to the Norwegian Cruise Line Holdings fourth-quarter and full-year 2016 earnings call.

  • My name is Nicole 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, Vice President, Investor Relations and Corporate Communications.

  • Ms. DeMarco, please proceed.

  • Andrea DeMarco - VP, IR & Corporate Communications

  • Thank you, Nicole.

  • Good morning, everyone, and thank you for joining us for our fourth-quarter and full-year 2016 earnings call.

  • I am 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 to discuss results for the quarter and full-year 2016, as well as provide guidance for 2017, before turning the call back to Frank for closing words.

  • We will then open the call to your questions.

  • As a reminder, this conference call is being simultaneously webcast on the Company's investor relations website at www.nclhltdinvestor.com and will be available for replay 30 days following today's call.

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

  • Our press release with fourth-quarter and full-year 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 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 will undertake no obligation to update 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 measures and other associated disclosures are contained in the Company's earnings release.

  • With that, I would like to turn the call over to Frank Del Rio.

  • Frank?

  • Frank Del Rio - President & CEO

  • Thank you, Andrea, and good morning, everyone.

  • 2016 was yet another year of solid financial performance, with revenue approaching a record $5 billion and adjusted earnings per share at an all-time high of $3.41, an 18% improvement over 2015.

  • These results built on successive years of strong financial performance, resulting in a fivefold increase in earnings per share and a near doubling of revenue since 2013, the year of our initial public offering.

  • Since that time we have reached several key milestones and we look forward to more achievements in 2017 and beyond, including our much-anticipated entry this summer into the Chinese cruise market with Norwegian Joy, which I will update you on later in the call; historic sailings to Cuba on all three of our award-winning brands; and extending our growth profile well into the future with an order for the next generation of new ships for the Norwegian Cruise line brand.

  • 2017 is off to a solid start.

  • The booking momentum we experienced leading up to our last earnings call has accelerated into wave season, enabling us to build a strong base of business.

  • As of today, and even excluding the benefits of Norwegian Joy, we are in the best booked position in the Company's history.

  • We have seen strong booking volumes for all major destinations and a resurgence in demand from North American consumers for European sailing across all three of our brands.

  • Leading up to year-end, our primary focus had been to build occupancy in order to make up for the slowdown in demand we experienced last year.

  • Since the beginning of the year, the revenue management bias has shifted to increase pricing.

  • As I've said before, the key to optimizing net revenue is executing on what I call CYA.

  • First, focus on the speed, which is to build capacity and we've made tremendous progress in this area and are now significantly better booked compared to the same time last year.

  • Next, the focus pivots to the Y for yield and pricing, which started to come into focus in Q4, and given our excellent booked position, is now front and center, which is allowing us to leverage our pricing power.

  • And lastly, the A, which is to minimize customer acquisition costs and which remains in line with our expectations.

  • Today our record booked position, which inherently means less inventory to sell, coupled with an improving operating environment, allows us to focus on maximizing price for the remaining unsold inventory.

  • On our last call in November I mentioned our business as of that time had begun to improve across all major deployment areas over the previous eight-week period versus the same time last year, particularly from North American consumers and primarily as a results of a calmer geopolitical environment.

  • Since that time and post the election, the geopolitical environment has remained calm and business has continued to improve as booking volumes have accelerated and pricing volume has firmed.

  • In the last eight-week period, or since the beginning of the year, business has really taken off and has been the most robust since the financial crisis some 10 years ago.

  • As a result, and again excluding the benefits of Norwegian Joy, we are now significantly better booked than the same time last year for the full year and each quarter of 2017, with pricing for the full year up slightly.

  • First-half pricing is up mid single-digits.

  • Consistent with our expectations, and again excluding the benefits of Norwegian Joy, second-half pricing, while improving rapidly, is currently down low single-digits as a result of a few factors.

  • First, we have yet to fully lap the period in 2016 that was most negatively impacted by slowing demand and pricing erosion in the wake of last year's successive geopolitical events.

  • Second, the internationally-sourced business that had been on the books last year at this time were at stronger foreign-exchange rates prior to the Brexit vote.

  • Lastly, in 2016 we reaped the benefits of an extended premium price charter of Norwegian Getaway in conjunction with the Olympic Games in Rio de Janeiro.

  • While these factors bridge the year-over-year gap in second-half pricing at this point in time, going forward we expect pricing on remaining inventory to benefit from the following factors.

  • First, as we move through the year, new business will benefit from higher pricing as we lap the period impacted by the aforementioned pricing and demand erosion.

  • Second, our European and other premium itineraries are heavily weighted to the back half of the year and as we move through the booking cycle we have the opportunity to continue to build these sailings at higher prices.

  • Should business continue to perform as it has over the prior eight weeks, our remaining inventory would sell at significantly higher prices versus the same time last year.

  • To give you some context on the extent of the rebound in pricing, over the last eight weeks pricing on newly-booked business is up double-digits across all three brands with Mediterranean itineraries leading the way.

  • Turning to more recent developments, and as you know, we have been expecting to receive approval to sail to Cuba for quite some time, so I am tremendously excited about the upcoming sailings on all three of our brands beginning next month with Oceania Marina.

  • In the last few weeks we also announced 25 additional sailings with weekly round-trip cruises from Miami to Havana aboard Norwegian Sky, as well as six new departures on Oceania cruises.

  • We are thrilled to be the first cruise line to offer weekly sailing from Port Miami with overnight stays in Cuba's historically and culturally rich capital, Havana, through December of 2017.

  • While we have realized meaningful pricing premiums on these first 10 sailings to Cuba across all three brands, it is too early to determine how much of this premium is sustainable over the long run given the additional capacity that has been approved; not only for our three brands, but for other industry participants.

  • And while the opening of Cuba is an exciting development for our industry, and for our company in particular, it is important to note that Cuba-related inventory represents less than 2% of our total capacity.

  • And, therefore, we do not expect a material financial benefit on Cuba-related sailing on 2017.

  • Before turning the call over to Wendy to review 2016 results and our outlook for 2017, I would like to provide an update on our China operations.

  • We continue to be big believers in the potential of China as an important source market.

  • Our Norwegian Joy will arrive in Shanghai for her maiden voyage as scheduled in late June.

  • As of this time, Norwegian Joy's occupancy for 2017, based on signed full and partial ship charter and group contracts with major travel agents, is significantly ahead of the rest of the Norwegian brand fleet for the second half of the year at contracted prices that are consistent with our prior expectations.

  • We continue to expect the Joy will deliver pricing at a 20% premium to the Norwegian brand fleet.

  • We have also stated in the past that by the end of 2016 a decision would be made regarding the design of the fourth breakaway-plus class vessel slated for delivery late in the fourth quarter of 2019.

  • As a result of the aforementioned strength of charter and group contracts and related pricing, as well as the resounding feedback and popularity of Norwegian Joy's many unique and first-at-sea guest-facing features, we have chosen to design the fourth breakaway class vessel as a sister ship to Norwegian Joy.

  • I will return at the end of the call to discuss our exciting and recently announced newbuild order, but for now I would like to turn the call over to Wendy to go over into our results and earnings expectations in more detail.

  • Wendy Beck - EVP & CFO

  • Thank you, Frank.

  • Good morning.

  • Unless otherwise noted, my commentary compares 2016 and 2015 net yield and net cruise costs, excluding fuel per capacity day metrics, on a constant currency basis.

  • I will begin with commentary on our fourth-quarter and full-year results followed by color on booking trends and then we will close with our outlook and guidance for 2017.

  • I am pleased to report another record quarter of revenue and earnings.

  • Fourth-quarter results were slightly ahead of expectations with adjusted earnings per share of $0.56, above the midpoint of our guidance range of $0.53 to $0.57.

  • Adjusted net yield decreased 1.7%, or 2.2% on an as-reported basis, versus the prior year.

  • Stronger-than-expected growth in demand resulted in adjusted net yield outperforming guidance expectations of down 2.25%.

  • Looking at costs, adjusted net cruise costs, excluding fuel, decreased 0.7% on both a constant currency and as-reported basis.

  • Higher-than-expected expenses related to repairs and maintenance, mainly due to a technical issue on Norwegian Star, as well as an increase in other ship operating expenses resulted in costs coming in higher than guidance expectations.

  • Looking back at 2016, it was another year of record revenue and earnings and solid financial performance despite the impact of geopolitical headwinds.

  • For the full year, adjusted earnings per share grew 18% to $3.41, above the midpoint of our guidance range of $3.38 to $3.42.

  • Our strong earnings were driven by record revenue of $4.9 billion, representing a 12.2% increase from the prior year.

  • Other key metrics for full year 2016 are as follows.

  • Adjusted net yield for the year was up 1.8%, or 1.2% on an as-reported basis.

  • Adjusted net cruise costs, excluding fuel, increased 1.7%, or 1.5% on an as-reported basis.

  • And deal price per metric ton, net of hedges, decreased 13.5% to $466 from $539 in the prior year.

  • We are proud to share that since 2006 we have reduced fuel consumption per capacity day by approximately 30% as we continue to focus on fuel efficiency and energy-saving initiatives, implementing new technologies, and optimizing itineraries.

  • Now let's discuss our outlook for 2017.

  • On a full-year basis our capacity is expected to increase approximately 6.5%, with the midyear addition of Norwegian Joy, along with a partial-year benefit from the annualization of Oceania Cruises Serena and Seven Seas Explorer.

  • Looking at our deployment around the world, we believe we have an optimal mix of itineraries for 2017.

  • The Caribbean will make up 37% of our deployment mix with capacity in the region decreasing mid single-digits from last year, primarily due to the redeployment of Norwegian Getaway to the higher priced Baltic region during the peak summer season.

  • Europe, which will experience a capacity increase of approximately 10%, will comprise 23% of our deployment mix.

  • We have made several changes to our European deployments, reducing our capacity in the Mediterranean region by approximately 10% and significantly increasing our deployment in the Baltics and Northern Europe.

  • As Frank mentioned earlier, we are seeing strong demand for European itineraries, particularly from North Americans.

  • The Asia, Africa, and Pacific region will experience a significant increase in capacity with deployment mix increasing from 3% to 8%, primarily due to the introduction of Norwegian Joy to the Chinese cruise market, as well as the deployment to Asia and Australia of Norwegian Star in the first part of the year and Norwegian Jewel in the latter part of 2017.

  • As for other markets, deployment is consistent year over year.

  • Turning to the first quarter, capacity is expected to be up approximately 1.5% due to the addition of Seven Seas Explorer and Oceania Cruises Serena, partially offset by an increase in the number of drydocks in the quarter versus prior year.

  • As for our deployment mix, the first quarter is very Caribbean-centric with approximately 59% of our deployment allocated to the region.

  • This reflects a capacity decrease of approximately 8%, mainly due to the repositioning of Norwegian Star to the Asia-Pacific region, along with a heavier weighting of drydocks in the first quarter, which is partially offset by increased capacity in the region for both Oceania Cruises and recent Seven Seas Cruises.

  • This market continues to show strength with price and occupancy both ahead of prior year.

  • Turning to Europe, only 4% of our deployment mix is allocated to this region in the first quarter.

  • This includes a 54% decrease in capacity, mainly due to the repositioning of Norwegian Epic from Europe in the nonpeak winter season to the peak season in the Caribbean.

  • The Asia, Africa, Pacific region accounts for approximately 9% of deployment mix, which is approximately 400 basis points from prior year, primarily due to the aforementioned redeployment of Norwegian Star to the region.

  • As for other key markets, our deployment is similar to prior year.

  • Now turning to our guidance, for the full year we expect adjusted EPS to be in the range of $3.75 to $3.85.

  • Since our last earnings call strong booking trends, including the benefit of voyages to Cuba, have offset headwinds from fuel and the impact from a technical issue on Norwegian Star.

  • Adjusted net yield for the year is expected to increase approximately 1.75%, or 1.25% on an as-reported basis.

  • Adjusted net cruise cost, excluding fuel, is expected to be up approximately 1% on both a constant currency and as-reported basis.

  • As for the first quarter, adjusted net yield is anticipated to increase approximately 4.5%, or 4% on an as-reported basis.

  • The first quarter has a few positive year-over-year benefits, which will help to make this quarter the highest yield growth quarter in 2017.

  • These benefits include Pride of America, the highest yielding ship in the Norwegian fleet, is in service for the full quarter versus prior year, where she was in a 25-day drydock.

  • Norwegian Epic is sailing in the Caribbean's peak season, garnering higher pricing in both ticket and onboard versus Q1 of 2016 where she sailed in Europe during the non-peak shoulder season.

  • And the benefit from the addition of Seven Seas Explorer and Oceania Serena, both of which were not in our fleet in Q1 2016 and garner higher yields than the corporate average.

  • Now turning to costs.

  • Adjusted net cruise cost, excluding fuel, is expected to be up approximately 5.25% on both a constant currency and as-reported basis.

  • The first quarter also represents the highest growth quarter for adjusted net cruise cost, excluding fuel, mainly due to the timing of drydock with five scheduled drydocks occurring in the first quarter compared to two drydocks in the previous year, as well as the previously stated incremental expense of approximately $15 million related to the launch of our China operation which will occur in the first half of the year.

  • Looking at fuel expense, we anticipate our fuel price per metric ton net of hedges to be $450 with expected consumption of approximately 190,000 metric tons.

  • Taking all of this into account, adjusted EPS for the first quarter is expected to be approximately $0.36.

  • As we mentioned last quarter, there are a few items to keep in mind for the balance of 2017.

  • As mentioned last quarter, we will be up against tougher pricing comparisons in the third quarter when we lap the premium price 40-day charter of Norwegian Getaway in the period.

  • The third quarter also laps the introduction of Seven Seas Explorer, which entered the fleet in a premium market in peak summer season after experiencing record early bookings at the higher prices typically expected in an inaugural season.

  • 2017 marks Explorer's first full year of operation, resulting in a normalization of pricing that takes into account both peak and nonpeak seasons.

  • Now to discuss our recent newbuild order, I will turn over the call to Frank.

  • Frank?

  • Frank Del Rio - President & CEO

  • Thank you, Wendy.

  • As you know, we recently announced a major order for the next generation of ships for the Norwegian Cruise Line brand, extending our long-term growth profile to at least 2025.

  • This four-ship order spreads capacity increases smoothly from 2022 through 2025 with an option for two additional ships to be delivered in 2026 and 2027.

  • Each ship will be 140,000 gross tons, accommodate approximately 3,300 guests, and built upon the highly successful freestyle offerings found on Norwegian's most recent breakaway plus class ship.

  • The addition of these vessels will allow us to substitute newer, state-of-the-art vessels with a richer state room mix to our premium destinations, which in turn will allow us to redeploy existing vessels to other domestic and international home ports where we currently do not have a presence.

  • In addition, the size of these vessels provides an optimal balance between deployment flexibility and earnings potential, allowing us to add new ports of call worldwide while maintaining a strong return profile with a payback of roughly five years, in line with our most recent newbuild.

  • In addition, these ships have very attractive financing with fixed interest rates for the first two vessels averaging 2.7% and the second two vessels at 1.25%.

  • The expansion of our newbuild pipeline will drive meaningful revenue growth and will be accretive to both earnings per share and ROIC, further solidifying the key metrics to drive the financial success of our business.

  • I know we have covered a lot of material on today's call and I would like to take time now to answer your questions.

  • Nicole, please open up the call for questions.

  • Operator

  • (Operator Instructions) Brian Dobson, Nomura.

  • Brian Dobson - Analyst

  • Would you mind elaborating a little bit on your net yield growth outlook, specifically how introducing new Norwegian ships impacts your growth trajectory there?

  • There's been a bit of confusion about the comparability between you and Royal.

  • Wendy Beck - EVP & CFO

  • Sure.

  • That's a great question, thank you.

  • Due to the mix of our portfolio of brands, as we bring on Norwegian newbuilds, which are highly accretive to both revenue and earnings, their yields are slightly dilutive to our corporate average, which includes our higher-yield brand that make up approximately a third of our gross revenue.

  • In other words, the addition of a new Norwegian vessel, which has yields lower than the corporate average, inherently dilutes yield.

  • In addition, in 2017 we are also annualizing both the Explorer and Serena to include the nonpeak season.

  • We also do not have the benefit from the getaway charter which garnered a significant yield premium in the third quarter of 2016.

  • Again, I just reiterate that Q1 is where you will see the highest yield and then obviously that implies that the back half of the year then is much more moderate.

  • Brian Dobson - Analyst

  • Great, thanks.

  • That's very helpful.

  • Operator

  • Felicia Hendrix, Barclays.

  • Felicia Hendrix - Analyst

  • Good morning.

  • Frank, I was wondering if you could reconcile your guidance for the remainder of the year with some of the comments you towards the end of your prepared remarks regarding the potential pricing benefits you could see later in the year.

  • Just to help me cull through that all.

  • Is it fair to say that your guidance is -- what you are seeing now -- that is the color you gave regarding the second-half pricing being down or being in the low single-digit range, down low single-digits?

  • But there is opportunity to be above that based on the potential benefit from the easier Europe comps in the second half and your comment that premium itineraries are moving up in price?

  • Frank Del Rio - President & CEO

  • Look, several headlines here.

  • First one is that business has been very, very strong.

  • As strong as we've seen it in a long, long time during the eight-week period and even digging a little bit into Q4 of last year.

  • I think what my prepared statement said is, should that trends continue, we ought to see the back-half inventory sell at higher prices than what already sold for that back half sailing.

  • Remember that we have yet to lap, or yet to fully lap, the negative impact of all the cumulative effect of the geopolitical events that we saw throughout last year.

  • A lot of the business that is on the books today was booked during that stressful time.

  • And so as we come out of that -- and we have come out of it -- and business continues to improve and pricing continues to move up, the blended pricing of those sailings when they actually take place should be higher than they are today.

  • Felicia Hendrix - Analyst

  • Right, but you're not --.

  • Just to put it out there, you're not seeing that now so you're not putting it in your guidance yet?

  • Frank Del Rio - President & CEO

  • We have not extrapolated what we have seen the last eight weeks into the rest of the unsold inventory.

  • Felicia Hendrix - Analyst

  • Great, thanks.

  • Frank, just can you help us understand -- knowing that you haven't lapped the easier Europe situation, can you help us understand the performance of your three brands in Europe; what you are seeing now in the second and third quarter?

  • You kind of gave it to us consolidated and I know you don't like to talk about brand by brand, but maybe just directionally kind of how they are each performing.

  • Frank Del Rio - President & CEO

  • That's an easy one because all three brands -- and, therefore, at the H level -- are all performing extremely well in Europe.

  • A high tide floats all boats, so to speak, and this is the case now.

  • The Explorer continues to do incredibly well.

  • No question, the highest-yielding ship in the industry.

  • But the rest of the fleet, whether it's an Oceania or a Norwegian vessel or other Regent vessels, are all doing very well.

  • As I said earlier, pricing has been very strong the last eight weeks, double-digit with Mediterranean itineraries leading the way.

  • The Med last year took the biggest bow and this year is taking the largest increase.

  • Felicia Hendrix - Analyst

  • Okay, great; helpful.

  • Just last one.

  • Wendy, just on your cost guidance, the 1% was a bit better than the kind of 1% to 2% you have discussed in the past.

  • Just wondering what's driving the better outlook.

  • And I know that you've made it very clear what the drivers for the higher expenses were in the quarter, but I just wanted to make sure that there weren't any costs that you expected in 2017 that you were able to bring into the end of the year in 2016.

  • Wendy Beck - EVP & CFO

  • We have been working very, very hard on a number of supply chain initiatives that has been actively being worked all through 2016 and 2017.

  • So we are getting the benefit of that, as well as we are also getting the benefit of scale as we bring in the Norwegian Joy and leverage the rest of our costs.

  • Felicia Hendrix - Analyst

  • Okay, great.

  • Thanks.

  • Operator

  • Robin Farley, UBS.

  • Robin Farley - Analyst

  • Great.

  • So I just wanted to clarify; your commentary about bookings excludes the Joy in the release, but your yield guidance includes it.

  • And so if we look at after Q1, because you have that strong increase in yield in Q1, it looks like Q2 to Q4 you are looking for about 1% yield guidance, just doing the back-of-the-envelope math.

  • And it seems like the Norwegian Joy alone would add more than that.

  • If you take a 20% premium and it's 8%; in fact, in the last three quarters it would be slightly more than 8%.

  • So I guess the math I'm getting to, is that -- is your guidance suggesting that yield will be down for the rest of the fleet in the second half?

  • I know you talked about how trends have been improving in the last eight weeks, but it sounds like your guidance is assuming that even though prices will be higher than what's on the books today, they will still end up being lower year over year.

  • Am I doing the math right on that?

  • Wendy Beck - EVP & CFO

  • Okay.

  • Good question, Robin.

  • I would again point to the fact that it's dilutive to yield as you bring in or not -- meaning it's not increasing -- Norwegian ships are not increasing the yield.

  • The Joy is coming in on par with the average of the NCLH average yield.

  • So it's not increasing; it's still going to be one of the highest-yielding ships in the Norwegian fleet, but it's dilutive to the overall NC -- or at least not accretive to the overall NCLH yield.

  • Frank Del Rio - President & CEO

  • I think the big difference is that our company has a good portion of their inventory, of their capacity with the PCH fleet that has a completely different pricing profile than the Norwegian fleet.

  • The Norwegian new vessels still garner double-digit yield growth compared to the legacy fleet on a like-to-like basis and we have said repeatedly that we expect the Joy to bring home prices 20% higher than the Norwegian average.

  • Still based on the corporate yield, it is around a push.

  • It is not expected to increase yield significantly, although it does increase revenue tremendously and earnings per share tremendously.

  • So what we're trying to get across is focus on revenue growth, focus on earnings-per-share growth, because for us yield growth is a secondary story, not the primary.

  • Wendy Beck - EVP & CFO

  • Then the other things that I mentioned that were rolling over -- the Explorer, the Serena, and the Getaway charter -- for that reason, when you look at the yield being highest in Q1, you can imply then by our full-year guidance that yield will be much more tempered in the back part of the year.

  • Robin Farley - Analyst

  • Okay, great.

  • Then one other question clarifying that; just as a follow-up.

  • I know some of the other lines that operate in China have talked about how at this time last year they felt great about China and then -- having chartered everything.

  • And then travel sellers came back and they had to do things on the backend that ended up bringing in -- bringing yields down lower than what was factored in.

  • So just thinking about your commentary about what's on the books today which sounds very strong, are you factoring into your guidance that that is where -- that where you have chartered it is where it will end up?

  • Obviously there's less supply in China this year than last year.

  • So just wondering if your assumption is that -- in your guidance is that you may end up taking some back or do you feel like where you have chartered it is where the year would end up.

  • Frank Del Rio - President & CEO

  • I think you hit the primary nail on the head when you said that supply growth is very much tempered this year versus last year.

  • Supply is actually up, but up only 9% in Shanghai where our vessel will be deployed versus nearly 100% this time last year.

  • The factors of supply and demand are well in place in China, like it is everywhere else in the world.

  • But, yes, we have -- in addition to the fact that we believe that the market this year in China is more stable, it's one more year of maturity, etc., we do have provision for exactly what you mentioned and it's all baked into our yield guidance.

  • Robin Farley - Analyst

  • Great, thank you very much.

  • Operator

  • Steve Wieczynski, Stifel.

  • Steve Wieczynski - Analyst

  • A question about the first-quarter guide for you guys on the yield side.

  • I guess we understand Pride of America and we understand Explorer and Serena, but still, even taking those into account, it seems like the yield expectation is a decent amount higher than I think what most folks were expecting.

  • So does it come down to the Caribbean has booked out better than what you guys would've expected a couple months ago?

  • I know you guys had some deployment issues there in the fourth quarter of last year, but I'm just trying to get a sense of how strong the Caribbean pricing has been over the last, call it, couple months.

  • Frank Del Rio - President & CEO

  • The Caribbean is good; the Caribbean is strong.

  • We have some sailings in Q3 that include Cuba and we said that we've enjoyed meaningful premium pricing on those sailings, which has helped.

  • We also have the Explorer in the Caribbean, which has performed very, very well.

  • It's never one thing; it's a combination of factors, but overall the Caribbean is strong.

  • Steve Wieczynski - Analyst

  • Got you.

  • The second question would be around the European cruise market and your sourcing strategies over there.

  • I know when you looked back to last year you guys were clearly impacted the most as you are a little bit more reliant on the North American side of things.

  • But what have you guys done, Frank, in terms of -- to start changing your sourcing strategies over there and get more locals on board?

  • Or is it you are not going down that path and staying more reliant on the North American side of things.

  • Frank Del Rio - President & CEO

  • When business is good, it tends to be good in multiple areas and multiple channels and that's what we are seeing.

  • Clearly, the North American consumer is more engaged this year and we expect it to continue to be engaged as the year moves along, versus what happened last year in the geopolitical arena.

  • And so the pressure for us to source away from North America is lessened.

  • As a result of this lessening pressure, the pricing that we are garnering for our international-sourced business has also improved.

  • In 2017 we expect our international business, ex-Joy, to be up about 10%.

  • So we are sourcing more in international markets than we did in 2016, but the good news is we are not having to do it out of stress.

  • We're doing it in a position of strength because the North American market, which is the tempo setter, so to speak, is doing so well.

  • Pricing overall is also finding its way into our international-source market.

  • Steve Wieczynski - Analyst

  • Great.

  • Thanks, guys; appreciate it.

  • Operator

  • [Mark Savino], Morgan Stanley.

  • Mark Savino - Analyst

  • Good morning, guys.

  • Wondering if you could maybe just address the supply picture real quick, particularly in the luxury segment where there's a bunch of new ships coming online.

  • Just wondering if you are seeing any competitive pressure or if you do think that you are able to find enough demand to meet those needs.

  • Frank Del Rio - President & CEO

  • The first competitive pressure always comes from within, so in 2016 both the Oceania brand and the Regent brands took on new capacity.

  • We don't have that this year.

  • Although in the case of Regent it does lap for half the year in the case of the Sirena; in Oceania it laps for about eight months.

  • In our world, capacity has been somewhat tempered but, no, look at 2017 is much better booked across all destinations.

  • Bookings the last eight weeks have been at significantly higher prices than the prior year.

  • Overall pricing is still below where it was this time last year for the upscale brands, but clearly as the year progresses and we start lapping the erosion that took place last year, and if business continues to perform as it has the last eight weeks, that gap will shorten.

  • What the status is today on a year-over-year basis and compare that to how it ended last year is a very different story as we go through the booking cycle.

  • Capacity in the upscale area has always been lumpy because there are so few brands, so few ships, but it is not grotesquely outsized.

  • If I recall, the growth in 2016 with some 14% moderating to a CAGR of something in the neighborhood of 6% for the 2019 to 2022 period, that's not a whole lot different than what we see in the more contemporary space.

  • So I'm not worried about it.

  • And some of those ships, quite frankly, that have been talked about in the 2019 to 2022 period, I'm not sure they ever come to fruition.

  • Mark Savino - Analyst

  • Thank you, that's really helpful color.

  • Shifting gears real quick just to leverage and the balance sheet.

  • It looks like leverage is still on track to be sub 4 times by sometime in the back half of the year, so wondering if you can maybe give your latest thoughts on a potential capital return strategy.

  • Wendy Beck - EVP & CFO

  • Great question.

  • Yes, as of the end of 2016, on a pro forma basis, we actually are at 3.98 times but still at 4.34 times on an as-reported basis and delevering rapidly.

  • So on an as-reported basis, we will be at 4 times by the end of the year and we stay consistent with our plan that we want to continue to delever.

  • That will allow us to have -- to return capital to our shareholders in the back half of the year.

  • We continue to be favorable towards share repurchases, but we will be opportunistic and look at our options.

  • Mark Savino - Analyst

  • Great, thank you very much.

  • Operator

  • Tim Conder, Wells Fargo Securities.

  • Tim Conder - Analyst

  • Thank you.

  • Frank, just a clarification, if you would, on a couple of items.

  • One, the international sourcing; did you say that would be up 10%, ex-Joy, in 2017?

  • And then also the financing cost on the newbuild orders number three and four.

  • That's a clarification.

  • And then as it relates to adjustments for net yield, Wendy, what -- just kind of more of a definitional questions there, if I may.

  • Frank Del Rio - President & CEO

  • The financing, the interest rate on newbuilds three and four the average is 1.25%

  • Tim Conder - Analyst

  • Fixed?

  • Frank Del Rio - President & CEO

  • Fixed?

  • Yes, sir.

  • And international sourcing, the 10% is we expect international sourcing, ex-Joy, in terms of revenue to be up 10%, which implies the higher price that I discussed.

  • Wendy Beck - EVP & CFO

  • Then, Tim, with regards to adjustments to net yield, that actually ended in Q1 of 2016 so you won't see that any longer.

  • Tim Conder - Analyst

  • Okay, that's what I thought it was related.

  • Then as a follow-up -- and, by the way, thank you for the additional color on the dynamics of the net yield between the brands there.

  • But as an additional follow-up can you talk a little bit, Wendy, about how you roll-on fuel hedges on a go-forward basis and if you see any change in the percentage that you look strategy long term here as you delever?

  • Wendy Beck - EVP & CFO

  • Sure.

  • Our strategy has remained consistent.

  • Inherently, we say that we want to be at least 50% hedged as we move into a new year.

  • We are significantly higher than that this year at 78% hedged.

  • It is a mixture between HFO and MGO and hopefully investors and analysts have found it helpful with the additional color that we've provided in the last couple of quarters and also in this quarter breaking that out.

  • So of this 78% that's hedged, then you also have the correlation.

  • We are floating approximately 30%, somewhere in there, and we do use the fuel curves.

  • Next year we are at 66% hedged and the following years we are at 48% and 18% hedged.

  • But in those outer years, in 2019 and 2020, we will continue to be opportunistic because that's what we've done.

  • So we will continue to be benefits of our fuel hedges as we move into those outer years.

  • Tim Conder - Analyst

  • Would you hedge less going forward or a higher mix of the higher-sulfur fuel as you capacity shifts to China?

  • Wendy Beck - EVP & CFO

  • I think we have got a nice balance right now as to what we've presently hedged between HFO and MGO.

  • Tim Conder - Analyst

  • Okay, thank you.

  • Operator

  • David Beckel, Bernstein.

  • David Beckel - Analyst

  • Thanks a lot for the question.

  • Just wanted to quickly first clarify that I think you plan to spend $30 million in China this year.

  • And as a follow-up to that, if that's true, how much do you expect to spend in China going forward how and how should we expect that spending cadence to ramp as you now plan to expand your fleet in that region?

  • Frank Del Rio - President & CEO

  • $30 million is what we said our total SG&A spend, including marketing and sales initiatives, to be in 2017.

  • My guess is that that will be the run rate through 2018.

  • As 2019 approaches that likely will go up when the additional inventory arrives in China.

  • David Beckel - Analyst

  • Great, that's helpful.

  • Just as a follow-up; in light of recent technology announcements from some of your peers I was wondering if you could broadly comment on your technology strategy going forward and remind us exactly how your onboard customer-facing technology today compares with some of your peers.

  • Frank Del Rio - President & CEO

  • Listen, we are very impressed with what Carnival announced a few weeks ago.

  • We think it's a step in the right direction and we are certainly going to be keeping an eye on customer acceptance and to see whether it moves the needle.

  • We have had a programming, an app, a mobile app that accomplishes some of the things that this newer technology tries to accomplish.

  • So we are going to be continuing to focus on the app that we have out there -- it has proven to be pretty popular with our guests -- enhancing it in ways that allows us to do a lot of what the other technology tries to accomplish, perhaps at a lower cost.

  • Second, as you may know, we recently launched a digital bidding platform that allows guests to upgrade their state rooms and that is very much incremental to the yield.

  • And lastly, we've done a pretty good job we think of building technology into the Norwegian Joy with many virtual-reality features that is resonating very, very well in the Chinese marketplace.

  • We think it's one of the reasons why Norwegian Joy is booking as well as it has; that we are studying to see if we can leverage the concepts across other vessels in the fleet.

  • David Beckel - Analyst

  • Very interesting, thanks.

  • Operator

  • Jared Shojaian, Wolfe Research.

  • Jared Shojaian - Analyst

  • Good morning.

  • Thank you for taking my question.

  • Frank, you said that if you were to extrapolate out the last eight weeks that the remaining inventory in the second half of the year would sell at higher rates.

  • Can you just quantify that to give us some context?

  • How much higher would that be?

  • Frank Del Rio - President & CEO

  • I mentioned in my prepared notes that the last eight weeks pricing is up double-digits.

  • I'd like to leave it at that.

  • Jared Shojaian - Analyst

  • Okay.

  • So I guess it makes it a little tricky just to determine what's embedded in guidance for -- with that 1.75% without knowing exactly --.

  • Frank Del Rio - President & CEO

  • Let me make it clear.

  • We have not extrapolated; we have not implied in our 1.75% guidance that what we've seen in the last eight weeks will continue.

  • So it's a zero.

  • Jared Shojaian - Analyst

  • Okay.

  • Then if you were to just take out the first quarter and look at 2Q through the end of the year, can you give us an idea of what your book position would look like now relative to this time last year?

  • Frank Del Rio - President & CEO

  • Yes, it's up.

  • For the first half, load is up high single-digits.

  • Pricing is up mid single-digits.

  • For the second half of the year, load is again up very high single-digits, and as I mentioned earlier, pricing is slightly down but improving rapidly.

  • Jared Shojaian - Analyst

  • Got it.

  • Okay, thank you very much.

  • Operator

  • Stephen Grambling, Goldman Sachs.

  • Stephen Grambling - Analyst

  • Thank you.

  • Just a couple of quick follow-ups on the recent trend sourcing.

  • What percentage of the strong recent bookings are coming from new-to-cruise customers in North America?

  • And have the stronger booking trends run parallel with any changes in behavior onboard that could affirm a stronger, more competent leisure consumer?

  • Thanks.

  • Frank Del Rio - President & CEO

  • On the onboard side, we saw some weakness in onboard revenue in October of Q4 and almost miraculously, right after the election when I think the euphoria began, onboard revenues have been strong.

  • They were strong in November and December and continue through January, so we are hopeful that also continues.

  • In terms of sourcing, we have said in the past that we think we have an outsized opportunity to gain market share by doing a better job of mining our own past guests, certainly at the Norwegian brand.

  • We have seen past guests come back to the Norwegian brand up 13% since 2015 and we expect that trend to somewhat moderate but still be in the mid to high single-digits in 2017.

  • And so we focus our marketing, because we know who they are, we know where they live, we have all their contact information and we think that is a very efficient source of additional sourcing for us.

  • Stephen Grambling - Analyst

  • That's helpful, thanks so much.

  • Operator

  • James Hardiman, Wedbush.

  • James Hardiman - Analyst

  • Good morning, thanks for taking my call.

  • I guess a couple follow-ups here.

  • I just want to make sure I understand the difference between improvements that were expected I guess versus unexpected.

  • Obviously it seems like, versus the commentary you gave us three months ago, the full-year booking and pricing outlook has improved, although the guidance basically gets us in that low double-digit earnings growth.

  • So was it that that improvement was already factored into your previous sort of earnings growth expectation?

  • Or was that offset by other factors, be it currency or whatever else?

  • Then as we look forward -- and this has been asked I guess a couple times, but maybe let me ask it a different way.

  • It seems like the assumption that you are making on the remaining bookings in the second half of the year is that it's better than what's already booked.

  • The low single-digit decline, but not nearly as strong as what we've seen in the last eight weeks.

  • Is that the best way to think about that in terms of your guidance and how the remaining rooms book up?

  • Wendy Beck - EVP & CFO

  • James, good morning.

  • Fuel has actually moved up about 20% since our last call.

  • I also had made mention of the Star technical issues that we had.

  • Those were additional headwinds that we faced, but we have offset those additional headwinds by the strong operational environment as well as the 41 announced voyages to Cuba.

  • There's nothing further that we have implanted into our guidance for 2017.

  • Frank Del Rio - President & CEO

  • In terms of the pricing and the yield and the unsold inventory, look, demand is better across the board.

  • It's better from North America; it's better from the international source market.

  • Europe, which was the underperformer last year, is doing significantly better.

  • Our guidance, to be specific, again just does not take into consideration what we've seen in the last eight weeks.

  • Eight weeks does not make an entire year.

  • We've seen that movie before about this time last year so we are being cautious about that.

  • What we said about the European theater bookings, and we said it last quarter, was that we were going to assume that 2017 pricing per year would be the same as how it ended in 2016.

  • That's about how it was through most of Q4.

  • In late Q4 we saw a pickup and, as I said in my opening statements, the Mediterranean has really outperformed all other destinations in the last eight weeks.

  • So should it continue then we would see an up in pricing, an up in yield, but it's a big should.

  • James Hardiman - Analyst

  • That's really helpful.

  • Then I guess maybe just help us to put the guidance, both the yield and the cost guidance, maybe in a bigger picture perspective.

  • The 1.75% increase for this year; obviously you've got the Norwegian brand weighing on that to a degree, but I would assume that you are going to add more Norwegian ships than Prestige going forward.

  • How should we think about that in the context of the typical year and what we might expect yields to grow?

  • Then on the cost side, did we get to a point now that a lot of the Chinese investments are at least in the numbers; that we can see that number flatten out in future years in terms of net cruise cost?

  • Frank Del Rio - President & CEO

  • On the yield side, you're correct; as of today we -- excluding Joy, which comes in later this year, we have two more breakaway plus class vessels coming in 2018 and 2019 to the Norwegian brand.

  • And we have the four vessels that we just announced the Norwegian brand starting in 2022 and we only have one small 750 passenger ship coming for the upscale brands in late 2019, early 2020.

  • So you can see that the inventory is skewing greatly towards the Norwegian brand.

  • And as the Norwegian brand adds more vessels, even though those vessels generate tremendous cash flow, great profitability, very, very accretive to earnings per share, a ton of revenue at top line, if you are only focusing on yield growth, then it will be a number that is less than spectacular because this is no longer a yield growth story.

  • This is all about earnings-per-share growth, revenue growth.

  • The yield growth is still important.

  • We want to grow yield and we will grow yield, but it's not what to focus on.

  • It's all about the mix of our brands, mix of our shift within those brands.

  • In terms of the China, yes, like anything else, China is a startup for us, so we expect to have higher costs as we enter the market for the first time in 2017 on a (inaudible) basis and we expect to incur in 2018 and 2019 as more capacity is added to that marketplace.

  • James Hardiman - Analyst

  • Excellent, thank you.

  • Operator

  • Vince Ciepiel, Cleveland Research.

  • Vince Ciepiel - Analyst

  • Thanks for taking my question.

  • I was just wondering on a high level, bridging from the initial 5 to the more recent $3.80; obviously there's been a number of things have changed, but could you help us understand just kind of the buckets or the big drivers in terms of currency, fuel?

  • Obviously Europe profitability tied to events and then maybe the Caribbean.

  • How would you slice up that delta?

  • Wendy Beck - EVP & CFO

  • First off, I would say the vast majority of this is the reset from the revenue from 2016 which then you're starting with a lower base rolling into 2017.

  • So Q2 of last year on our earnings call we did specifically talk about 70% of the reset was specifically due to the geopolitical headwinds that we had faced, so that's the lion's share.

  • But then there is also fuel and FX that also has been affected.

  • All well baked within our guidance to say that we would be within double-digit EPS growth in 2017 and moving forward.

  • But the revenue the largest and then fuel and FX.

  • Vince Ciepiel - Analyst

  • Great, thank you.

  • Frank Del Rio - President & CEO

  • Thanks, everyone, for your time and support.

  • As always, we will be available to answer your question later in the day.

  • Thanks again.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.