挪威郵輪 (NCLH) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Norwegian Cruise Line Holdings Third Quarter 2017 Earnings Conference Call. My name is Tekia 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 of Investor Relations and Corporate Communications. Ms. DeMarco, please proceed.

Thank you, Tekia. Good morning, everyone, and thank you for joining us for our third quarter 2017 earnings call. I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings; and Wendy Beck, Executive Vice President and Chief Financial Officer. Frank will begin the call with opening commentary, after which Wendy will follow to discuss results for the quarter as well as provide an update to 2017 guidance, before turning the call back to Frank for closing words. We will then open the call for your questions. As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at www.nclhltdinvestor.com and will be available for replay for 30 days following today's call.

Before we discuss our results, I would like to cover just a few items. Our press release with third quarter 2017 results was issued this morning and is available on our Investor Relations website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statements contained in our earnings release. Our comments may also reference non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release.

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

Well, thank you, Andrea and good morning, everyone. I am pleased to report that Norwegian's third quarter business continued to benefit from the positive momentum and dynamic booking environment that has been building throughout 2017. The sustained and robust consumer demand from all our top source markets for major destinations has resulted in a booking curve that is at an all-time high and which has yielded very strong pricing for voyages throughout the third quarter and beyond. Accordingly, our 2018 booked position for both load and pricing continues to be meaningfully ahead of this year's record levels across all 3 of our brands, despite the disruptions to our normal booking patterns caused by the unprecedented hurricanes we witnessed during the last 6 weeks of the quarter.

As the third quarter began, the 25 ships in our fleet were well positioned in their customary premium deployments of Europe, Alaska, Bermuda and other peak season destinations. The combination of strong consumer demand coupled with premium price deployment, particularly in a resurging Europe, propelled our third quarter adjusted net yield to record levels. Our third quarter also chronicles the highest revenue, highest earnings and most guests ever carried in any single quarter in our company's history. In short, Q3 was exceptional both in terms of results posted and in its contributions to future performance.

What is more impressive is that these financial results came amidst the challenges wrought by one of the most active hurricane seasons on record, one which affected to varying degrees over 50 million people in communities throughout the Caribbean, Texas and Florida. The lost revenue from 2 shortened sailings and the outright cancellation of an additional 3 along with costs associated with our humanitarian and other relief efforts resulted in an impact of $0.06 per share in the quarter. This impact was mitigated by outside performance in other major markets that produced a $0.03 beat to our earnings guidance for the quarter.

When hurricanes Irma and Maria began to impact Eastern Caribbean basin in early September, bookings for the fourth quarter of this year and the first quarter of next year for Caribbean sailings slowed dramatically for the ensuing 6 weeks. During that time, booking velocity and pricing for other deployments were not affected and remained strong, with the net result being that our booked positions lost some of its lead, but still remained ahead of prior year. Bookings for Caribbean sailings have since rebounded to prehurricane levels and are now recapturing the volume lost during that 6-week slowdown.

Our thoughts continue to be with those impacted by the storms, especially our friends to the South in the Eastern Caribbean basin. The effect of these weather-related events continue to be felt in these communities in varying degrees. And I'm extremely proud of the response from my colleagues in the industry and of course, from the crew and team members across our 3 brands, who lent both a physical and financial hand in helping get the region back on its feet. From evacuating stranded guests from the U.S. Virgin Islands to partnering with charitable organizations and delivering relief supplies to Cuba, we continue to show our support and compassion for the impacted areas. Our efforts continue with the launch of the Hope Starts Here hurricane relief fund in partnership both All Hands Volunteers. 100% of donations to Hope Starts Here, up to $1.25 million, will be matched dollar for dollar by the company, with the proceeds earmarked to rebuilding schools in the areas affected by the recent hurricanes. I urge you to find out more about this worthy cause and consider a donation by going to the hurricane relief section of the NCLH corporate site.

Now turning back the third quarter. Our strong financial performance was also bolstered by several successful initiatives across our 3 brands which grew top and bottom line results above expectations. Our deployment optimization initiatives resulted in more capacity being deployed to premium, higher-priced destinations during the Europe peak season, such as Norwegian Getaway's deployment in the Baltic region, where she is benefiting from continued strong demand from North Americans. Deployment optimization initiatives such as this will also benefit future periods.

We have also made significant strides in raising pricing from internationally sourced guests, particularly for the Norwegian brand, by strategically enhancing the value of our cruise vacations and building more value-added features and amenities into the base cruise fare. The improvement in pricing is such that we are now indifferent as to where a guest is sourced from. We believe this achievement is not to be overlooked as it provides the company much greater flexibility in its sales, marketing and revenue management efforts to optimize pricing across a variety of source markets.

The rebound in North American demand for European voyages coupled with our strategic international pricing initiatives have resulted in strong overall pricing for our European itineraries, which have now exceeded the previous record levels set in 2015 and is a trend that we see continuing into 2018.

Of course, highlighting our international expansion and diversification strategy, during the Q, we completed our first full quarter of peak season sailings on our new China-based ship, Norwegian Joy.

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Based on current trends, we expect our full year business in China to perform in line with our revised expectations and to be profitable in this, our very first year of operation in this high potential market. With our first full year of operations coming up in 2018, we look forward to our China-based ship contributing even greater profits to the company's bottom line now and well into the future. We view our contribution to the growth of the Chinese market as steadfast and as a long-term investment worth nurturing.

Looking ahead and while acknowledging that the booking environment through 2017 has been among the best in the industry's history, we believe that based on our forward booked position, 2018 will continue Norwegian's string of strong financial performance leading to further earnings growth in ROIC and margin expansion.

One area that will certainly contribute to our expected improved performance in 2018 is our doubling of sailings to Cuba. As the first cruise operator to have its full portfolio of brands approved to sail to the island, Norwegian continues its position as the premier operator of sailings to Cuba. In the coming years, ships from the -- from all 3 of our brands will call on Havana and other Cuban port cities, more than doubling the number of high-yielding sailings to Cuba, which will represent approximately 4% of our fleetwide capacity in 2018.

Also midway through 2018, we welcome our third Breakaway Plus class ship, Norwegian Bliss, to the fleet. The ship has benefited from the strong booking environment we have been discussing to become the best booked newbuild, both in terms of load and pricing in Norwegian's brand history.

I'll be discussing more about Norwegian Bliss later on. But for now, I'd like to turn the call over to Wendy to go over our record results for the quarter and guidance for the remainder of the year in more detail. Wendy?

Thank you, Frank. Good morning, everyone. Unless otherwise noted, my commentary compares 2017 and 2016 adjusted net yield and adjusted net cruise cost, excluding fuel, per capacity day metrics on a constant-currency basis. I'll begin with commentary on our third quarter results, followed by color on booking trends, and then we'll close with our outlook and guidance for fourth quarter and full year 2017.

The third quarter of 2017 marks the latest in a series of record-setting quarters for the company. Both revenue and earnings were the highest in our history, and results exceeded expectations with adjusted earnings per share of $1.86 above guidance of approximately $1.83. Excluding the direct impact of the weather-related events, adjusted earnings per share would have been $0.06 higher or $1.92, which reflects the strength in our overall business.

Adjusted net yield increased 3% or 3.1% on an as-reported basis versus the prior year, outperforming guidance expectations of up 1.75%, driven by strong close-in demand, coupled with continued strength in onboard revenue. Excluding the lapping of Seven Seas Explorer's inaugural season and the premium price Norwegian Getaway Rio charter in 2016, along with the addition of the Norwegian Joy and the impact of weather-related events in 2017, our third quarter adjusted net yield growth would have been in excess of 7%.

Looking at costs. Adjusted net cruise cost, excluding fuel, was in line with guidance, increasing 50 basis points versus prior year on both a constant currency and as-reported basis due to a slight increase in marketing and general and administrative expenses as well as hurricane-related costs, primarily as a result of our humanitarian efforts, offset by the timing of certain expenses into the fourth quarter.

Turning to fuel. Our fuel expense per metric ton net of hedges decreased 4.7% to $476 from $500 in the prior year. The increase in our fuel price per metric ton was unfavorable versus guidance, primarily due to rising prices since our last earnings call.

Taking a look below the line. Interest expense net increased to $66.3 million compared to $60.7 million in the prior year. Interest expense for 2017 reflects an increase in average debt balances outstanding, primarily associated with the delivery of new ships and newbuild installments as well as higher interest rates due to an increase in LIBOR. Additionally, tax expense was higher than expected due to the strong performance of our U.S.-based operations.

Looking ahead, capacity for the fourth quarter is expected to increase approximately 9%, primarily due to the addition of Norwegian Joy to our fleet. As for deployment mix for the fourth quarter, approximately 47% is allocated to the Caribbean, which is in line with prior year. Europe represents approximately 14%, down slightly from prior year. In the Asia, Africa, Pacific region, which has become a sizable share of our global deployment mix due to the introduction of Norwegian Joy to the Chinese market, accounts for approximately 13%, up from 6% in the prior year.

Now focusing on expectations for the fourth quarter. Adjusted net yield is expected to increase approximately 2.25% or 2.5% on an as-reported basis. To demonstrate the underlying strength in our organic fleet, our guidance for fourth quarter adjusted net yield growth would have been in excess of 5% when excluding the weather-related events as well as our new Norwegian brand capacity, which is dilutive to the NCLH corporate average.

Turning to costs. Adjusted net cruise cost excluding fuel is expected to be up 2.25% or 2.5% on an as-reported basis, primarily driven by expenses related to increased operating costs and humanitarian efforts as a direct result of the hurricanes, marketing initiatives to stimulate demand for Caribbean sailings post-hurricanes, costs associated with the technical issue on Norwegian Gem and the timing of certain expenses from the prior quarter.

Looking at fuel expense. We anticipate our fuel price per metric ton, net of hedges, to be $440 with expected consumption of approximately 205,000 metric tons. The increase in fuel expense is primarily the result of the impact of rising fuel prices since our last earnings call.

Taking all of this into account, adjusted EPS for the fourth quarter is expected to be approximately $0.62.

Turning to the full year, as Frank mentioned in his opening remarks, the booking environment has remained extremely strong. Strength across all 3 brands has resulted in the raising of our outlook for adjusted net yield growth by 50 basis points and is now expected to be up approximately 4.75% or 4.5% on an as-reported basis.

Turning to costs. Due to the aforementioned items in my Q4 commentary, adjusted net cruise cost excluding fuel is now expected to be up 2.75% on both a constant currency and as-reported basis.

Looking at fuel expense. Our fuel price per metric ton net of hedges is now expected to be $458 with expected consumption of approximately 780,000 metric tons.

As a result, our full year guidance for adjusted earnings per share is now expected to be approximately $3.90. If not for storm-related headwinds of $0.12 along with $0.03 from the aforementioned technical issue on Norwegian Gem, guidance would have been $0.15 higher or approximately $4.05 above the high end of our prior guidance range as a result of out-performance in the third quarter and higher top line growth expected in Q4.

I'd now like to take a moment to discuss our outlook for 2018. As Frank mentioned, the positive operating environment we've seen throughout this year continues to extend into 2018, which remains well ahead of prior year, both in load and pricing. All 3 brands are firing on all cylinders and will contribute to what we expect will be another record-breaking year.

While we are not ready to provide 2018 guidance at this time, items to keep in mind include the following: When looking at our NCLH corporate yield growth, keep in mind that yields for first half of 2018 will naturally be lower than the second half, as we lap the final quarters of the inaugural year of the high-yielding Seven Seas Explorer and Oceania Cruises Sirena. In addition, the first half of 2018 will include the low yielding shoulder season of Norwegian Joy.

As for cost, next year will be the last year of heavy lifting for our Norwegian Edge and Regent Seven Seas revitalization programs. As a result, scheduled dry-dock days will roughly double versus the prior year, primarily due to these longer more extensive dry-docks, with the majority of the year-over-year variance impacting the second quarter.

As we look to the future, we remain focused on further strengthening our balance sheet through deleveraging. We are now back to our target of sub-4x leverage. And over the next 12 months, we expect to meaningfully delever down to the low 3s, at which point our focus will pivot to returning capital to our shareholders.

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

Thank you, Wendy. We recently unveiled that several of the cutting-edge and high-tech focused entertainment features and offerings, that have already proved popular aboard Norwegian Joy, will also be part of the guest experience on Norwegian Bliss. These include the largest electric car racetrack at sea, a half-acre outdoor laser tag course, and the brand's largest and most exciting aqua park featuring ocean loops and aqua racer waterslides. New and popular dining venues and lounge concepts also abound on Bliss with the Q-Texas Smokehouse, elevated Mexican cuisine in Los Lobos and the latest outlets of Margaritaville at Sea and The Cellars in Michael Mondavi's family wine bar.

As I stated earlier, even prior to the announcement of these incredible new offerings, Norwegian Bliss was already the best booked positioned ship in both load and pricing in our company's history. We expect her strong performance to continue, supported by the marketing initiatives and media coverage surrounding these unique and special features as well as the inaugural activities that will occur midway through 2018.

And lastly, before turning the call over to Q&A, I wanted to cover one recent significant milestone for our company. Last month, Norwegian Cruise Line Holdings was selected to join the S&P 500 Index. This is a particularly significant achievement for a company that has been trading in the public equity market for less than 5 years and highlights our solid track record of consistent and improved financial performance. This accomplishment is a testament to the hard work and dedication of the entire team at Norwegian Cruise Line Holdings, from our shipboard officers and crew to our shoreside employees and our supportive Board of Directors.

With that, I'd like to open the call for questions.

(Operator Instructions) Our first question comes from Felicia Hendrix with Barclays.

Hey, Frank, intra-quarter, there was just some discussion on China regarding the belief that you were frustrated with current operations there. You did address a lot of that in your prepared remarks, but I was just wondering if you could get a little bit deeper regarding your view on the Joy there, its positioning? And then also last quarter, you expressed frustration with the South Korea restrictions, and it now looks like they may be lifted. So I was just wondering if that makes you more optimistic regarding next year as you begin your contract negotiations for '18 sailings, and if you can build a lever into pricing if South Korea does come back as an option.

Yes, Felicia. Yes, look, China is a very exciting and dynamic place. We now have a full 4 months of experience under our belt, which we appreciate, we're enjoying. But it is still a work in process, not just for us but for the industry, quite frankly. You have to look at China as a long-term investment that needs nurturing. And as all long-term investments, there's going to be ups and downs and bumps on the road that some of them that we have seen. But it is important to talk about some of these bumps so that it can be addressed. And so that is the point that I had made earlier. But we're very, very pleased with the performance of Joy. She is performing in line. And as I mentioned in my prepared remarks, we're profitable in China. And I think that ought to be recognized that a brand-new ship with a brand-new brand that enters this incredible potential market can be profitable in its first year of operation. Mind you, only really a half year of operation because we introduced Joy literally on July 1, so very pleased with that. For 2018, there are reasons to be excited. The -- it will be the first year that capacity is down in China. So anytime you have flat to lesser capacity, those that remain in the marketplace should enjoy some renewed strength on the demand side. And of course, the renewed conversation about South Korea can only help. As I think you've heard me say many times before, the #1 leading driver of yields is itineraries. And so if we can bring South Korea back to our itineraries, they will improve the itineraries, make it more attractive to consumers, and I think that will help pricing, so very encouraged by that potential development.

And Wendy, just in your prepared remarks, you had talked about the net yields for your guidance for the fourth quarter would have been over 5% if you were to adjust it for the hurricanes and Joy. Just wondering if you could give us what the hurricane impact was, if you could just peel that out of that number?

Yes. So in general, what I would say is the hurricanes cost us about $0.12 for the back half of the year, of which $0.06 is for Q3, $0.06 is for Q4. And the way I would look at that is the vast majority of the $0.06 in Q3 was revenue-related, primarily due to canceled sailings. And the vast majority of the $0.06 in Q4 is expense-related.

Our next question comes from Greg Badishkanian with Citigroup.

And Frank, you mentioned that occupancy and load as well as pricing were up meaningfully ahead in 2018. But to kind of follow up to that, which regions were particularly strong, either from a sourcing or itinerary basis? And then the second part is, if you're meaningfully ahead on occupancy, would that imply that prices -- assuming a similar environment, prices are likely to increase even further as you go into and throughout 2018?

Well, you just defined revenue management, Greg. Look, I can't think of a major operating arena that is not performing well for 2018. The Caribbean is strong. We did have that 6-week interruption, but she's come back roaring. Europe, as I said several times in my prepared remarks, is very, very strong both in load and in pricing, especially in pricing. Alaska continues a string of several years now where performance is just incredible, and in our case, it's helped by Bliss. Bliss is attracting incredible demand and reflected in price. So all markets are performing really, really well. All source markets are particularly performing well led by North America, but the Eurozone is also contributing very, very strongly. I would tell you that while we are meaningfully ahead in both load and in pricing, the star performer of those 2 metrics is pricing. So we clearly see that we're ahead in pricing, and we're very alert to be able to raise pricing along the way. And each of the brands are ahead again meaningfully in pricing versus same time last year. And that's very, very promising that we're ahead at this point, as we are about to approach 2018, meaningfully ahead in load and that it's also translating to strong pricing. So it's a good situation, Greg.

Great. And just on the Caribbean having returned to pre-storm levels, what's the promotional environment looking like for 4Q and 1Q for just the value adds and promotions? And then I'm assuming that really trails off beyond -- in later 2018, there's no need to really promote for those sailings, but I'm just -- I'm asking the question again.

No, no, no, it's a good question. Look, during the actual 2 weeks when the hurricanes were affecting the areas and for the next 3 to 4 weeks immediately afterwards, the marketplace was no -- it was in no mood to book anything in the Caribbean. And that is certainly reflected in the slowdown in the bookings that we took. And so we thought it was not effective to do much marketing during that time frame. And so promotional activity was pretty much a nonfactor during that 2 weeks during and the immediate aftermath. Once the islands began to announce that they were coming back and there was not front-page news, we did initiate some promotional activity that would have probably been a little more aggressive than we would have taken had the hurricane not taken place, because we needed to trigger the -- and spur additional momentum. That additional promotional activity will end right at Thanksgiving. And from Thanksgiving forward through Q1, our promotional calendar is exactly what it would have been, had the hurricane not taken place. Because we see the lost business that didn't materialize during that 6-week period, we ought to be back to call it par.

Our next question comes from Mark Savino of Morgan Stanley.

As it relates to the China market, I know you guys had talked in the past about hopefully being able to sell direct to consumers. Just wondering if there's been any updates on that front and when you think you may be able to do that, and how beneficial that might be to your overall yields in that market.

The necessary conditions to sell direct was to obtain what is referred to as the operational license. And we're pleased to report that just in the last 10 days, we've obtained it. So now we go into that mode of trying to, in essence, monetize that opportunity. As you recall, we have a relationship with Alibaba that had sort of been on hold until we received this operational license. We really like the potential that the Alibaba relationship can bring us. I don't need to tell you of Alibaba's prowess in e-commerce in China, their prowess in data mining. And we believe that among 1.4 billion Chinese consumers, that only 2 million cruise a year, data mining is very important, perhaps more important than it is in -- certainly more important than it is in the Western world. So we are very conscious about that opportunity and look forward to researching all the opportunities that having that relationship with Alibaba brings. And look, if it can be achieved, certainly having another strong channel to distribute our brand's products directly to the consumer, where the cruise line has more influence, more control of the pricing, would be a good thing. And we also think that having that platform will help our travel agent partners by being able to promote our product that they have chartered or contracted for, to be able to sell it through that very popular platform, is a win-win for everyone.

Very helpful. And then as it relates to Cuba, just wondering if you can maybe give a little more color in terms of what you're seeing on the demand front there, specifically, if there's been any impact from some of the recent travel warnings that we see.

The quick answer is no, Mark. Cuba remains the star of the show for the year. The booking curve continues to behave like a booking curve of a much longer, more exotic destination. As you know, typically booking curve for 3 and 4-day cruises, the Bahamas, is very, very short. The Cuba itineraries have proven that to be just wrong. And in terms of pricing, while I won't give you a number, I would just tell you that it is substantial -- the demand that there is for Cuba and the way we've been able to take up pricing and demand continues. Onboard spend, primarily because of shore excursions on the island, are much stronger than they would have been on our Bahamas-only 4-day cruise. So as you know, during the last 3 or 4 months that the administration has issued several different directives regarding Cuba, the one you mentioned of the travel warning -- for the first week or so, we probably had more chatter on the calls, people wanting to know what it really meant more than anything else. We didn't see a real slowdown in bookings, just more chatter and more questions. And then of course, yesterday's OFAC regulations that were issued cleared up a lot of the mystery and a lot of the concerns that some people had, which is very, very good for the cruise industry. I think yesterday's regulations clearly show that going on a cruise to Cuba is the easiest and less hassle-free way to visit the island.

Our next question comes from Harry Curtis of Nomura Instinet.

I wanted to turn to -- back to Europe. Frank, I don't know if you have this at your fingertips, but I'm curious if you have a sense of how much earnings power in the third quarter you may have given up by perhaps selling -- preselling Europe more aggressively a year ago. And does your strategy change for 2018?

Look, there's no question that if we had, had a crystal ball, had we known that 2017's booking environment was going to be as strong as it ends up being that we would have raised prices sooner. So, yes, we probably left money on the table because the -- you have to understand that the improvement in the European booking environment was very, very quick and very dramatic from what we saw throughout 2016 as a result of all the geopolitical events that happened in Europe. It's difficult for me to quantify how much higher our yield growth would have been, how much higher our profits would have been had we had that crystal ball. But look, we're very pleased with the results as they are. We had more capacity in Europe in 2017 than we had, had in the past, primarily at the Norwegian brand because of Getaway's redeployment from the Caribbean to the Baltic. For 2018, let's just say that we learned our lesson a bit because that strong environment that we saw developing throughout '17 has continued in '18. And so we have been more quick to the punch, if you will, to start off '18 with a higher price point, and we continue moving it up. So 2017, we reached, we broached the high-water mark of 2015. So certainly the trend is positive. '17 hit an all-time high, and we expect 2018 yields to beat 2017. So Europe is a good news story right now.

Okay. And then just as a follow-up on Europe, let's say, God forbid that Europe gets into [geo pushed] year. From a sourcing point of view, if it were to happen, are you better positioned to deal with it in '18 than you were in '16 and '17?

No question. I think you heard me say that through modifying the delivery of our product, how we market our product in international markets, primarily in Europe, from just a naked cruise to a bundled product, we've been able to raise prices in a way that has not detracted from our ability to generate more volume. So our volume, just in outright numbers of bookings, have increased in the teens in -- during 2017. And as I said earlier, from a pricing perspective, we're indifferent whether the guest books from Germany, the U.K., France or Minnesota. But certainly, Harry, the proof will be when you have to stress test that situation, and a lot will depend on how severe the geopolitical events are. I'm happy to report that this year, 2017, we've had several geopolitical events in Europe, several in London. We had Barcelona. And we haven't seen any interruptions in business whatsoever. Of course, they weren't as severe as what we saw in '16. And you can make an argument that perhaps the American consumer has become a little insensitive, if you will, as taking these kinds of events more in stride. But certainly, so far, 2017 has proven to be a strong booking period for both in-year Europe business and for 2018 business.

The next question comes from Andrew Didora from Bank of America Merrill Lynch.

Frank, maybe switching back to China. I know -- I understand that it's early days there. But maybe could you give us a sense of maybe what you've learned so far in terms of operating in the market, maybe what has surprised you on both the good and the bad ends? And then I know this is a long-term -- a market for long-term environment, but has your view of the capital spend that's needed in the market changed at all since the launch of the Joy a few months ago?

No, my views haven't changed in terms of capital. I think the Chinese consumer is a consumer who knows exactly what they want. We know that the Chinese consumer is the world's largest consumer of upscale luxury products. And if you're going to compete effectively in China, you got to have your best hardware there. And so we're glad that the Joy is there and -- can compete as effectively as she does. Some of the learnings, of course, we've learned. We've learned a lot and we continue to learn. We are surprised, pleasantly surprised perhaps, at the volume of people. The Joy has the highest occupancy of any of our ships, especially in the peak season when it's primarily families and multigenerational groups coming online. And so they -- one thing that we learned that you might chuckle at is they sure like to eat. And so our food costs in China are a little bit higher than we originally expected because they do enjoy their meals. We like to find ways to introduce shore excursions, quite frankly, into the product mix. As you know, shore excursions and the ability to enjoy a destination is a key component of why people take vacations around the world. And in China thus far, it is not very popular. The typical Chinese consumer wants to go to the Japanese islands that we visit, or hopefully South Korea as well in the future, to shop. And while that helps certainly our onboard revenue in the shops is 60% more space on Norwegian Joy than our typical Breakaway-class vessel, and that shopping mentality certainly helps our onboard retail, we would love to see shore excursions be brought into the mix. Because we think it helps diversify the product. I think the word of mouth back home would be even better when they go back and tell their friends and family what a wonderful time they had on the ship because of the onboard experience, and also the experiences on shore. And because shore, quite frankly, is a high-margin item that we promote. So there are areas that need improvement in China, and I think those have been relatively well-documented. The distribution system needs to be broader. We hope to achieve some of that through the comments I made earlier about our relationship with Alibaba and now that we have the operational license. But certainly, China is a work in process. You got to keep your eye on the big picture, and that is, there's 1.4 billion people, the world's fastest-growing economy, miles and miles and miles of coastline, a government that is supportive of the cruise industry being a major part of their citizenship's vacation plans. And so you have to be excited about the potential in China, and we certainly are.

That's great color. Second question for Wendy, I know you mentioned in your prepared remarks that your leverage is now in line with your goal. And based on '18 numbers, obviously gets better as you go through next year. In terms of capital returns, do you prefer more of a dividend strategy, maybe putting a yield more on par with other cruise companies? Or could we see more of a dual strategy with buybacks given the valuation discount that you currently trade at?

So we are pleased to be sub-4x at this point on a leverage standpoint, and we are very focused right now of getting down into the low 3x. So plan that for the majority of '18 anyways as we continue to delever at a pretty rapid pace. We do still have 264 million availability under our share repurchase program. We have that, and we can remain opportunistic using that. But we are primarily focused on deleveraging at this point once we get to the low 3x. And at that point, it -- I think you would see a combination of things, both a dividend program as well as share repurchases.

Our next question comes from Steve Wieczynski of Stifel.

So, Frank, 2 bigger picture questions for you, I guess. When we look at your competitors, it seems they've been getting more aggressive on the technology side of things, trying to improve the customer experience both the fore-boarding and then post-boarding. Also trying to capture more of that onboard spend. To us, you guys have always been the onboard kind of trend setter. And I guess what I'm getting at here is where do you guys stand in terms of trying to keep up with your competitors? We haven't really heard any big over-the-top type of announcement from you guys, but I assume you're not sitting back either and not doing anything on that front.

Stay tuned, Steve. It's coming. We're very happy to see our peers doing what they're doing. I think it's just a reflection of consumers in their everyday life because at the end of the day, what you see on board cruise ships is that as we've evolved throughout the years, how we've evolved in building ships and the lifestyle onboard, it's just a reflection of what's going on in their everyday lives. So today, it's a digital world, and the migration from an analog world to a digital world occurred some time ago. It's just that the pace of acceleration has sped up. And so I'm pleased to see what others are doing, we're going to be -- we will be announcing our strategy very, very soon. I don't think that an earnings call is the best way to -- the best time to announce it. We want to get our marketing bang for our buck. But in the meantime, we're very, very pleased at the investments we've made in technologies that customers can enjoy very interactively. And I'd point out to the Galaxy Pavilion that we've rolled out in -- on Norwegian Joy. It has every conceivable high-tech, state-of-the-art, virtual reality game and experience that's available in the world today. And it is jam packed every day, and we plan on rolling that out on -- in the future. And of course, the icon, if you will, of Joy is the racetrack, has proven very, very popular. Who would have thought just 5, 10 years ago, that you could have a 1,000-foot track -- racetrack of 2 stories, eight turns, zipping miles per hour in the middle of the ocean.

So those kinds of technological advances have proven very popular for us. And we expect to engage and be competitive and like I said, stay tuned for more.

Second question, Pride of America is an absolute machine for you guys. And yes, we know it's more costly from a staffing perspective and a tax perspective, and you don't have the excess capacity that some of your competitors have. But Frank, is that a market you would consider putting more capacity in over time, given how strong the market currently is?

Yes, especially with our Leonardo project ship starting to roll in, in 2022. We can certainly see where having additional tonnage in Hawaii would pay off, no question.

Our next question comes from David Beckel of Bernstein.

Last quarter, you had mentioned that you, in China specifically, would be implementing initiatives to improve onboard yields. You talked a bit about that, but I'm wondering, actually more specifically, and you just talked about shore excursions in that region. Are you finding it that the demand for traditional shore excursions is low? Or are the chartering agents themselves in any way, preventing you from offering the types of packages that you'd like?

I don't think they're preventing. I think that the way the chartering agents are selling the product in many ways is being sold as a shopping tour, a shopping excursion, as opposed to a cruise in the full sense of the word that we in the Western world would look at it. So I see it as a huge opportunity to start educating consumers, or start educating the travel agents, that there is a whole opportunity beyond just shopping. But of course, part of the issue is the itineraries. You -- the consumer likes short cruises, 4-day cruises. And with South Korea not being part of the mix, that means you must spend 2 days at sea, 1 to get to the island from Shanghai, and then 1 to get back to Shanghai, which if shopping is important to them, doesn't leave much time for anything else. So we believe that hopefully when South Korea comes back on, that there'll be more of a balance to these short cruises, between not just shopping excursions, but also visiting these places for the wonderful cultural historical features that they have available.

That's helpful, and it's actually a good segue to my second question. We were over there recently. And based on conversations we've had with agents, it seems like there is a fair amount of unmet demand at the higher end of the market. We all know what's going on at the mass end. But in theory, your hardware would be ideally suited for such a service over there. Is that something you've explored? Or does that seem like heresy at this point, given the market's maturation?

No, no heresy. We're focused on the high-end markets through our Oceania and Regent brands on fly cruises, where we believe that, that by definition, the high-end consumer wants a more rigorous Western-flavored cruise experience to places like Europe or Alaska, South America than just coastal cruises. So the emphasis on the high end is primarily in the Oceania, Regent fly cruises to distant places. And it's working very well. It's one of our fastest-growing -- small numbers, mind you, but fastest-growing source markets for those 2 brands.

Our next question comes from Robin Farley of UBS.

Great, obviously the yield commentary, very encouraging. I wanted to understand a little bit better about the expense increase in Q4. You mentioned the hurricane disruptions falling half in Q3, half in Q4. And I guess it seemed like Royal's commentary, 80% of the disruption was Q3, not much in Q4. So I don't know if there's just something accounting-wise with future cruise credits or something that is making -- it impacts the expense in Q4 more than we would expect. And then the change in your guidance for Q4 expense is something like 400 basis points. So just it looks like there are other significant pieces of expense there that's outside of the hurricane disruption, and maybe if you could quantify a little bit if some expense has shifted from Q3 to Q4, or just sort of quantify some of the other factors.

Okay. Robin, this is Wendy. So regarding the direct impact. I think the thing to note is that we changed the majority of our itineraries. And so we are calling new ports, and that has -- that's got a significantly higher port cost, operating cost due to changing those itineraries and not passing that along to the guests. Also, we've got quite a bit of humanitarian supplies baked into that cost as well as displacement expenses for guests, activation, mobilization for our shoreside teams. And then to stimulate the demand, as Frank talked about earlier, it's a whole number of marketing initiatives that was really focused on stimulating demand for both Q4 and Q1 sailings. And the good news is it -- we have seen those marketing efforts come to fruition as bookings are now virtually back to prehurricane levels.

Okay. And so I guess that was -- some of it was marketing expense. But when you didn't spend in Q3, it shifted to Q4. The Gem expense, could you quantify what that is in Q4?

Yes. So the Gem expense is a technical issue with one of the azipods. And there are -- it's probably about half revenue, half expense. But it's logistics, it's airfreight costs, technical teams, a number of expense items in getting that ship back up and running as well as canceled sailings.

And that would just be a Q4 issue? Or could that affect Q1 as well?

No, that would be a Q4 issue.

Our next question comes from Jared Shojaian of Wolfe Research

I'm wondering if the Bliss and maybe the Joy could be skewing your 2018 commentary, and maybe even Cuba too? So would you say that same-ship loads and pricing is also up meaningfully year-over-year? And then is every single quarter of 2018 also up meaningfully on rate and load as well?

Yes and yes.

Great, and then just sticking with the theme on costs, can you tell us what fuel looks like for 2018 at current spot prices and accounting for your hedges, and then maybe interest expense as well with some of the refinancing? And then on your nonfuel unit costs, obviously you have dry-dock headwinds, but you also have big tailwinds with mix shift and now reversing the hurricane impact. So is it reasonable that this line doesn't grow in 2018?

Okay. So regarding fuel costs right now with the latest data that we have, fuel costs will actually be up slightly on a dollar basis year-over-year. And post our refinancing that actually closed in Q4, our interest will now be up roughly 10% whereas you may recall in the past, I said it was more like 15%. Regarding net cruise cost in general, we tell everybody to look at net cruise cost growth somewhere in that 1% to 2% range. We do have the benefit of bringing in the large Norwegian capacity. But then as I mentioned in my prepared remarks, we've got the additional cost related to the heavy lifting on the final year of the Norwegian Edge program as well as the Regent revitalization program, which is not only more dry-dock days but heavy lifting as well with that.

Are you able to tell us how much a dollar basis year-over-year that incremental dry-dock and Norwegian Edge contributes to next year?

That's a great question, but we're not ready to provide guidance at this time on '18.

Our next question comes from Vince Ciepiel with Cleveland Research.

Just one follow-up on the cost, I'm curious how management comp in China plays into net cruise cost into next year.

It's like any other cost. Management isn't incentivized any greater -- to any greater degree on the China vessel as any other vessel.

Unless you're asking for what's the effect as far as year-over-year, is that what you're asking?

Yes. Yes, there was a return of incentive in '17, and I was wondering if that neutralizes in '18. There's also a step up in investment in China in '17. I was curious if that continues to step up, or the run rates that into '18.

Okay, so that's a great question. And I'm glad you asked that because comp and China costs should be on par year-over-year. So you won't see that stepping up. You'll now see that just rolling over year-over-year.

Great, and one other, just supply-demand dynamics in a market like Alaska or even Europe longer-term. A number of your peers have noted they plan to bring capacity out of the Chinese market into more established markets like Europe and Alaska. I'm just curious what incremental supply looks like for those markets and if that impacts your view of the trend line and potential yield growth?

No, not, really. I mean, there's relatively few vessels in China and certainly lesser number coming out of China. I don't believe that the increase in Alaska or in Europe from those vessels will change the supply/demand dynamic. Look, cruise lines chase yield. It is a fixed-cost business. And certainly Europe and Alaska is performing well. And I could certainly understand why certain lines are making the changes they're making.

Operator, we have time for one more call -- one more question.

Our last question comes from Stephen Grambling of Goldman Sachs.

I have one quick follow-up and one broader question. I guess one on the follow-up on the strength in load and pricing by region, given the longer booking window for the Prestige brands, are you seeing any differences in the pricing among those bookings versus Norwegian brand?

No, no. The -- both Oceania and Regent are again performing very, very well for 2018. They're ahead in both load and pricing with pricing certainly taking center stage for them. There's no new capacity at the Oceania brand, no new capacity at the Regent brand. The markets are strong where they operate primarily in peak periods, meaning Europe and Alaska. And so as you would expect, we're taking up pricing nicely.

Great. And then the maybe nuanced broader question, your commissions, transport, and other line was a tailwind in the quarter and had been previously for a couple of years before the Prestige acquisition, what are the key components of that improvement? And what are the puts and takes to think about longer-term? Or asked another way, what percentage of your bookings are from third-party travel agents versus direct currently? How does that evolve? And how do you think that will evolve in the next few years?

Yes, great questions. So we have done a lot to work on driving costs out of that line, but that has not been at the expense of the travel agent. It's really been in negotiating the other costs such as port fees, credit card fees, et cetera, things that actually fall into the expense lines. But specific to this quarter, what you're really seeing is more channel efficiency. There's less reliance on the OTAs. If you look at where we were in Q3 of '16 versus Q3 of '17, in Q3 of '16 we had much more capacity to still load. It was a much more urgent situation post all of the geopolitical events, whereas we have been well booked all year long less reliance and more efficient use of the travel agencies.

Well, thank you, everyone. Thank you for your time, thank you for your support. As always, we will be available later in the afternoon to answer your questions. Thanks again.

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