挪威郵輪 (NCLH) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Norwegian Cruise Line Holdings Second Quarter 2018 Earnings Conference Call.

My name is Liz, 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, Liz.

Good morning, everyone, and thank you for joining us for our Second Quarter 2018 Earnings Call.

I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings; Mark Kempa, Senior Vice President and Interim Chief Financial Officer; and Andy Stuart, President and Chief Executive Officer of Norwegian Cruise Line.

Frank will begin the call with opening commentary, after which Mark will follow to discuss results for the quarter as well as provide guidance for 2018 before turning the call back to Frank for some 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'd like to cover a few items.

Our press release with second quarter 2018 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?

Thank you, Andrea, and good morning, everyone.

Today, I'm pleased to announce another quarter of record financial performance for Norwegian Cruise Line Holdings, underscored by a robust macroeconomic environment that shows no signs of weakening and bolstered by marketing initiatives that continue to drive strong consumer demand across our 3 award-winning brands.

This robust environment, combined with our record first half earnings performance, the stellar introduction of the latest ship in our fleet, Norwegian Bliss and a solid book position for the second half of the year have led us to meaningfully increase our earnings expectations for full year 2018.

Mark will discuss the details of our record financial results for the quarter a little later on, which included measurable outperformance in both top line revenue and bottom line earnings, while I will discuss some of the strategic initiatives that have resulted in our increased earnings power and heightened expectations for full year 2018 and beyond.

A few weeks ago, we announced a strategic shift in our 2019 and 2020 fleet deployment to capitalize on the strong and sustained cruise demand we are witnessing by enhancing our itineraries to include more ships, operating more sailings in better-performing unserved and underserved markets.

Concurrently, we took the opportunity to preview our earnings expectation for full year 2018.

Today, I'm pleased to report that we have not only increased our prior earnings guidance for the year but that confidence in our performance expectations is now such that we have increased the midpoint of our full year guidance well above the high end of our previous guidance range.

Our guidance for the full year adjusted earnings per share is now in the range of $4.70 to $4.80 with a midpoint that puts our expected year-over-year adjusted earnings per share growth at approximately 20%.

This improved outlook is even more impressive, given that it is inclusive of expected headwinds from higher fuel pricing, fluctuating foreign exchange rates and an impact of approximately $0.10 per share related to certain short-term market disruptions on Norwegian's Joy China sailings and the incremental sales and marketing expense associated with the new itineraries.

One reason for our more bullish outlook has been the stellar performance of Norwegian Bliss.

I want to take a moment to congratulate Andy Stuart and the team at Norwegian Cruise Lines for a textbook introduction of a new ship to the marketplace.

The team executed the launch plan flawlessly and in every aspect, from sticking zealously to the booking curve to consistently stimulating quality demand in the lead-up to launch to delivering a record-setting inaugural program that introduced Bliss to thousands of travel partners in several of the world's leading cruise ports while garnering over 2.4 billion media impressions in the process.

Her performance to date has been nothing short of extraordinary, particularly in terms of onboard revenue where her yields are surpassing our highest expectations and breaking record sailing after sailing.

Bliss' incredible reception from the cruising public is just the latest evidence of the extraordinary demand for cruise vacations that we have been experiencing since late 2016.

During that span, we have seen quarterly occupancies and pricing consistently exceed prior year levels with the booking window continuing to be at or near optimal levels.

The continued strength in worldwide cruise demand and the broad acceptance of our product offerings across all 3 brands is the main driver of our more bullish outlook.

This robust demand is being promoted by consumers, particularly from the United States that are enjoying positive economic environment that lead to a healthy wealth effect resulting from unemployment near-record lows, strong GDP growth, federal income tax relief, relatively low interest rate and stock market at near-record highs.

All of these factors converge to cause consumer confidence indices to also be at or near all-time highs, which in turn speeds and promotes increased discretionary consumer spending on items such as cruise vacations.

And as an industry, cruising has the unique advantage in that it can measure consumer confidence first-hand in both the short and long term.

We measure short-term confidence literally every day through trends in onboard spend while long-term confidence is validated by growth in the number of bookings, ticket pricing and the length of the booking curve.

At Norwegian Cruise Line Holdings, all of these short- and longer-term indicators have been at historic highs for some time.

Given the impressive macro trends bolstering the economy at large, we see no reason why these rising trends won't continue, supply growth notwithstanding.

And as you all well know, there has been much, perhaps too much, consternation over near-term supply growth, which at 6-or-so percent, is only 1 or 2 points higher than the previous 10-year CAGR.

Since 2015, the first full year after the acquisition of Prestige through the current expectations for full year 2018, Norwegian Cruise Line Holdings has demonstrated its ability to profitably absorb outsized supply growth.

On a CAGR basis, the company has absorbed supply growth of 9% while growing adjusted net yield over 3% and adjusted earnings per share by approximately 18% during the same 3-year period.

In fact, with less than 4% supply growth, 2019 represents one of the lowest years of supply growth for the company in quite some time.

Our disciplined supply growth of roughly 4% in 2019, followed by 8% in 2020 and 0 growth in 2021 is extremely modest when merited against both our demonstrated ability to take on new capacity and the abundance of unserved and underserved markets that are available for us to deploy additional capacity.

Given our consistently high load factors, coupled with our reliable year-over-year earnings growth and margin expansion as evidenced by our 40 quarters of consecutive trailing 12-month adjusted EBITDA growth, we are very confident in our ability to drive demand and continue delivering, by a wide margin I should say, best industry ticket yield, onboard yield and EBITDA per capacity day.

This stronger for longer cycle also manifests itself in our high-yielding third quarter sailings in Alaska, the Mediterranean and the Baltic, which are performing extremely well and garnering record yields.

This greatly benefits the Oceania and Regent brands, which have approximately 2/3 of their deployment in the Mediterranean and Baltic region with Alaska comprising the vast majority of remaining itineraries.

At the same time, the Norwegian brand is also benefiting with half of its capacity in these high-priced regions during the third quarter.

As I mentioned earlier, the previously announced fleet redeployment plan capitalizes not only in the strength of our core and strong-performing markets but also enables us to make inroads into some of the underserved and unserved markets that will further enhance the Norwegian brand's presence around the globe.

A key component of this shift is the redeployment of Norwegian Joy to Alaska in the summer of 2019 to capitalize on the strong demand of her cruises in the region.

She joins her record-breaking sister ship, Norwegian Bliss, along with Norwegian Jewel, to deliver an unparalleled offering of sailings to the last frontier that will include the 2 largest and newest ships deployed to Alaska.

The prospects of adding significant capacity to a mature market may cause some to pause, but as I mentioned earlier in my commentary, the company has, time and time again, proven that we are able to profitably add new capacity in mature regions.

And you don't have to look very far back to the latest example of our ability to create quality demand that outstrips supply growth.

Capacity in Alaska for the Norwegian brand grew 15% in 2018 as a result of the addition of Norwegian Bliss while ticket pricing improved a whopping 25% in the same period.

In winter 2019, Joy redeploys from Alaska to a market that had been historically underserved.

Beginning in October, Joy will sail a series of Mexican Riviera and Panama Canal cruises from Los Angeles.

We are very excited to bring a new and premier cruise ship to this historically underserved West Coast market by providing winter sailings in the second-largest metropolitan area in the country, which is a market ripe with opportunity.

Joy's redeployment frees up capacity that allows for deployments in 2019 to shift into other promising underserved and unserved markets for the Norwegian brand, including Australia, where Norwegian Jewel will return for a third season, adding a slate of new sailings from New Zealand, the company's sixth largest source market.

The greater Asia Pacific region, where, in addition to Norwegian Jewel, we will deploy Norwegian Jade to sail seasonally from Singapore and Hong Kong.

And lastly, Europe, by deploying Norwegian Pearl in summer of 2019 to debut a series of sailings from Amsterdam, a new homeport for the Norwegian brand, increasing the total number of the brands shipped in Europe from 5 to 6 during the peak summer season.

And rounding out this redeployment initiative is the seasonal deployment of Norwegian Spirit to Shanghai beginning in summer of 2020.

While these redeployments begin in 2019, due to the timing of certain costs and other factors, including a onetime noncash write-off of approximately $25 million tied to enhance -- tied to the enhancements planned for Norwegian Joy, we expect these deployment initiatives to be only slightly accretive for earnings in the year.

As a result, 2019's expected full year performance will still behave more like an organic year in terms of earnings per share and yield growth as the introduction of the year's only newbuild, Norwegian Encore, occurs at the tail end of the year, and we will be rolling over tougher comps from Norwegian Bliss' highly successful inaugural debut.

Conversely, 2020, which was already expected to be a breakout year with the benefit from close to a full year of sailings from 2 of our newest vessels, Norwegian Encore and Seven Seas Splendor, will further benefit from our itinerary optimization initiatives, especially Norwegian Joy's move to Alaska.

Now focusing on 2019, and since our last call, booking volumes have accelerated at higher prices, and the year is shaping up extremely well, better than 2018 at this time with all of our major destinations, Europe, Alaska and Caribbean, seeing year-over-year growth in both load and pricing.

Oceania and Regent, for example, whose itineraries tend to book further out are already 50% booked for the year, the earliest that either brand has reached this booking milestone in their respective histories, with pricing substantially higher versus this year's record levels.

The Norwegian brand, which will benefit from both Bliss' midyear introduction and Joy's new deployment is also performing at record levels with load and pricing well ahead versus at same time last year.

And to perhaps best demonstrate the health of our future booked position, at June 30, 2018, our advance ticket sales, which reflects deposit and final payments received for all future sailings, is up 26% over prior year on capacity growth of just 9%.

In the quarter just ended, it was the stellar performance of all 3 of our brands, led by strong yield growth and tight cost controls, that drove our record results.

These are also the same drivers that extend to our expected full year performance and the setting up of 2019 to be another record year.

And now to go over our results in more detail, I'll turn the call over to Mark Kempa, after which I will return with some closing comments.

Mark?

Thank you, Frank.

Unless otherwise noted, my commentary compares 2018 and 2017 net yield and adjusted net cruise costs, excluding fuel per capacity day metrics, on a constant currency basis.

I'll begin with commentary on our second quarter results, followed by color on booking trends, then walk through the puts and takes of the itinerary optimization initiatives, and will close with our outlook and guidance for the third quarter and full year 2018.

I am pleased to report yet another record quarter with both second quarter revenue and earnings, the highest in our company's history.

Earnings for the quarter exceeded expectations by $0.19 with adjusted earnings per share of $1.21, surpassing guidance of approximately $1.02.

The beat was driven by $0.09 of revenue outperformance from strong, well-priced close-in bookings and exceptionally strong onboard revenue; a $0.07 benefit from fuel and FX, of which $0.06 came in below the line from the impact of fluctuating foreign exchange rates on our advance ticket sales liability.

Please note that approximately $0.03 of this benefit is expected to reverse in the back half of this year, impacting revenue yield metrics on an as-reported basis.

A $0.02 benefit resulting from the timing of certain ship operating costs, which have shifted into the third quarter and the remainder coming from other below the line items.

It is worth noting that this record revenue and earnings performance comes despite headwinds from lost revenue and higher operating expense as a result of close to 50 incremental dry dock days scheduled in the quarter, which were primarily related to investments as part of our Norwegian Edge refurbishment program and had an approximately $0.20 per share drag to earnings in the quarter.

Net yield increased 4% or 4.7% on an as-reported basis versus prior year, outperforming guidance expectations by 200 basis points, driven by strong, well-priced close-in bookings and higher-than-expected onboard revenue and builds on last year's exceptional growth of 8.1%.

Excluding the impact from our new Norwegian brand capacity, which is dilutive to the NCLH corporate average in the quarter, our second quarter net yield growth would have been approximately 5.25%.

Looking at costs, adjusted net cruise costs, excluding fuel, increased 7.4% versus prior year and 8.4% on an as-reported basis as a result of the aforementioned incremental dry dock days.

Turning to fuel.

Our fuel expense per metric ton, net of hedges, increased to $481 from $469 in the prior year and was unfavorable to guidance as a result of higher-than-anticipated pricing.

Better-than-expected fuel efficiency from our newbuilds, along with consumption savings from continued energy conservation efforts, led to a reduction in fuel consumption, offsetting the rising fuel prices and resulting in favorable overall fuel expense versus guidance.

Taking a look below the line.

Interest expense net was $73 million compared to $64.2 million in 2017.

The increase was primarily related to additional debt in connection with the newbuilds, including Project Leonardo financing as well as higher interest rates due to an increase in LIBOR.

These increases were partially offset by the benefit from the full redemption of our 4.625% senior notes in 2017 and the $135 million partial redemption of our 4.75% senior notes in April 2018, which included a $6.3 million redemption premiums and financing fee write-offs.

Now let's shift to third quarter capacity and deployment.

Capacity is expected to increase approximately 8%, primarily due to the introduction of Norwegian Bliss to the fleet late in the second quarter.

As for deployment, approximately 18% of our capacity is deployed in the Caribbean during the summer shoulder season, up from prior year's 16% as Norwegian Sun joins Norwegian Sky to operate mainly 3- and 4-night itineraries to Havana and the Bahamas.

The deployment is rounded out by the Norwegian Getaway sailing Western Caribbean itineraries and Norwegian Gem sailing to the Bahamas and Florida from New York.

Our peak season sailings in Europe represent approximately 37% of our deployment, in line with prior year, while Alaska accounts for approximately 18%, up 200 basis points from the prior year as a result of the addition of Norwegian Bliss.

As for other key markets, Bermuda accounts for approximately 11%; Asia, Africa Pacific approximately 7%; Hawaii, approximately -- and Hawaii approximately 4% of our total deployment.

As Frank mentioned earlier, in July, we announced a strategic shift in the 2019 and 2020 deployments for the Norwegian brand.

I would like to walk you through the financial puts and takes of this initiative for the next 3 years.

First, in the back half of 2018, we expect an impact to earnings per share of approximately $0.10, half of which is revenue-related from Joy's announced redeployment from the Chinese market and the other half related to incremental sales and marketing expense for the new itineraries.

These headwinds are expected to be more than offset by stronger yields from our core fleet, bolstered by continued strength in global demand.

Both the impacts from the strategic redeployments, along with the benefits from stronger fleet-wide demand in our core markets, are reflected in our updated guidance.

In 2019, the itinerary optimization changes are expected to be slightly accretive to adjusted EPS, such that incremental earnings driven by the higher yields, commanded from a partial year of the new itinerary deployments, will be substantially offset by the following items: dry dock expenses for the upgrades and enhancements to Norwegian Joy; a onetime noncash write-off of approximately $25 million, stemming from the enhancements; lost revenue from the 5 weeks Joy will be out of service to complete her dry dock and reposition to Seattle; and additional sales and marketing expense for the new itineraries.

In 2020, adjusted EPS accretion is expected to be approximately $0.30 as we realize the full earnings power of these itinerary optimization initiatives.

Turning to expectations for the third quarter.

Net yield is expected to increase approximately 3.5% on both a constant currency and as-reported basis.

This growth comes despite headwinds in foreign exchange and the revenue impact from China sailings related to the itinerary optimization.

Excluding this revenue impact, net yield growth is expected to be approximately 4%, half of which is being driven by Norwegian Bliss, which is exceeding our high expectations and garnering yields above the NCLH corporate average.

Turning to costs.

Adjusted net cruise costs, excluding fuel, is expected to be up approximately 2.5% or 2.75% on an as-reported basis, primarily due to incremental sales and marketing expenses for the new itineraries, an increase in management incentive compensation due to expected overperformance on our financial results for the year and the timing of certain expenses between the second and third quarters.

Looking at fuel expense.

We anticipate our fuel price per metric ton, net of hedges, to be $505 with expected consumption of approximately 205,000 metric tons.

Taking all of this into account, adjusted EPS for the third quarter is expected to be $2.20.

As for the full year, continued strong booking trends across all core markets for all 3 brands have resulted in the raising of our outlook for net yield growth by 75 basis points and is now expected to be up approximately 3.25% or 3.5% on an as-reported basis.

This growth is inclusive of an approximate 25 basis point impact from Norwegian Joy's end-year China sailings stemming from the redeployment changes and comes on top of solid prior year growth of 5%.

Excluding new tonnage introduced for the Norwegian brand, net yield is expected to be up 3.5% inclusive of the 25 basis point impact from Joy, further illustrating the pricing strength of our core fleet.

Turning to costs.

Adjusted net cruise cost, excluding fuel, is expected to be up 1.5% or 2% on an as-reported basis.

The increase versus previous guidance is attributed to the aforementioned incremental expenses to market the new itineraries and the increase in management incentive compensation.

Looking at fuel expense.

Our fuel price per metric ton, net of hedges, is now expected to be $475 with expected consumption of approximately 825,000 metric tons.

Fuel consumption is favorable versus prior guidance as a result of newbuild fuel efficiency and greater benefits than anticipated from fleet-wide fuel savings initiatives, which are expected to more than offset higher fuel prices for the remainder of the year.

To summarize, strong and well-priced close-in bookings, along with strong onboard revenue in the second quarter, coupled with higher expectations for the remainder of the year, have resulted in an increase to top line expectations.

This is partially offset by headwinds from rising fuel prices, fluctuations in foreign exchange rates and the impacts from the itinerary optimization initiatives.

The net result is an improvement in our outlook for adjusted EPS to now be in the range of $4.70 to $4.80, which surpasses the high end of our previous guidance range.

Excluding the impacts related to the itinerary optimization initiatives, the midpoint of our adjusted EPS guidance would have increased to approximately $4.85.

At the midpoint of our new guidance, the $0.12 increase in full year adjusted EPS is driven by the following expectations: outperformance in the top line of $0.19, of which $0.09 was passed through from the Q2 beat and $0.10 is due to the stronger revenue outlook for the back half of the year; a $0.03 net benefit from FX; and approximately $0.02 of accretion from share repurchases during the quarter.

These benefits are expected to be partially offset by a $0.10 impact from the itinerary optimization, of which half is revenue- and half is cost-related and $0.05 due to the increased management incentive compensation.

The balance is due to a slight improvement to our outlook for fuel, interest and depreciation expense.

Our updated guidance now increases our expected growth in adjusted EPS to approximately 20% at the midpoint, which comes on top of prior year's strong growth of 16%.

Turning to capital allocation.

We remain focused on returning significant capital to our shareholders.

And as our balance sheet continues to strengthen, in combination with strong financial performance, we will continue to pivot towards delivering meaningful capital returns.

We opportunistically repurchased $200 million of our shares during the quarter, bringing the year-to-date total for share repurchases to $464 million.

These capital return initiatives resulted from our increasing confidence and conviction in the company's business outlook as well as the opportunity for us to repurchase shares at a discounted valuation.

As for leverage, we remain on track to delever to the low 3x by year-end.

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

Thank you, Mark.

As I stated earlier, 2020 will mark a breakout year for Norwegian Cruise Line Holdings.

The 2 newest vessels to the Norwegian and Regent brands will be sailing for essentially a full year, and by the end of 2020, we expect to have achieved the targets we laid out at our recent Investor Day.

These targets are focused on enhancing returns to shareholders by delivering a double-digit 3-year CAGR for adjusted earnings per share; adjusted return on invested capital of 12%, up from 10% in 2017; and expected returns to shareholders of $1 billion to $1.5 billion through share repurchases and dividends from 2018 through 2020, of which $464 million has already been returned to shareholders through share repurchases this year.

Looking beyond 2020, in July, we confirmed our order with Fincantieri for ships 5 and 6 in the Norwegian brand's new Leonardo Class, extending our newbuild portfolio and securing our company's growth prospects through 2027.

We are extremely excited about this new class of vessel.

The size of the Leonardo Class allows for tremendous flexibility and deployment with a footprint large enough to include all of the hugely popular features onboard Norwegian Bliss with new and exciting innovation that we will announce at a later date.

I am very excited for the future of our company as we continue to execute on strategies to drive top line growth, control costs and increase efficiencies, enhancing returns to our shareholders and most importantly, delivering exceptional cruise experiences to our guests whenever and wherever they want to travel across an unparalleled portfolio of brands.

And with that, I'll turn the call over to questions.

Liz?

(Operator Instructions) Our first question comes from Harry Curtis with Instinet.

I had a kind of a larger question relating to next year's supply growth and forward bookings.

What's your view of where in the globe the supply growth is going to be the highest next year?

And can you give us some more color on demand and pricing?

And then kind of the second part of that is as we get deeper into the booking cycle, shouldn't you expect that booking gap to eventually close as you yield manage for higher prices next year?

And isn't that a positive?

Thank you.

The capacity growth next year for the industry at large is in the neighborhood of 6.5%.

As I mentioned earlier, Norwegian Cruise Line Holdings' increase of supply is a little less than 4% as we lap about 5 months of Bliss and only have about a month of the Norwegian Encore.

So it's relatively subdued by our history and several points below the industry.

Where we're seeing -- where we're going to be deploying our additional capacity is thankfully where we're seeing the most strength, and that is in Europe and in Alaska with the Joy being repositioned there, starting in late April.

So we think we're putting our best hardware where it's generating the highest yield.

For the industry, I believe Alaska is the region of the world that will see the highest capacity growth year-over-year.

So we don't -- again, as you've heard me say before, this is a long-term business.

You order ships way ahead in advance.

We're very, very happy with the tenor of our supply growth.

I, quite frankly, wish I had more ships coming sooner.

Our load factors are at all-time high.

Our pricing is at all-time high.

I can make the argument that I'm capacity constrained.

So I'm glad to see Bliss performing as well as she's performing.

I'm anxious to get our hands on Encore.

That's all very positive.

And in terms of your other question, in terms of how far out do you get in terms of bookings and pricing, I -- you never really know what the optimal yield curve is.

There's -- what I always say is if I can continue to extend the curve or maintain the curve and -- at higher prices, I think it's pushing in the right direction, and that's exactly what we're seeing.

Our next question comes from Felicia Hendrix with Barclays.

So I have -- so Frank, you gave a statistic that I wanted to make sure I heard right.

You said that advance ticket sales were up 26%.

I think I heard that was for all future bookings, but I just wanted to make sure that, that was correct and not just 2019.

No, if you go to our balance sheet and you'll see that year-over-year, our advance ticket sales liability in the balance sheet is up 26% on a 9% increase in capacity.

So we can talk all we want how good things are, but that is a black-and-white auditable number that has to pass, the scrutiny of the auditors, if you will, that sits in the balance sheet, which I think is proof positive that the future business is very strong, stronger than ever, hard to grow that advance ticket sales up 26% if it wasn't.

So just as a follow-on to that, if we look at 2019, which is generally a function of what you're talking about.

And obviously, that's strong, you've laid that out in the press release and in your comments, just wondering since your last call, what's changed.

How much more booked are you than you were last quarter for 2019?

How much more visibility were you able to gain in the quarter?

Well, the -- I'm not going to give you the delta between where we were 3 months ago, where we are today.

I will tell you that, compared on a year-over-year basis, we are better booked today at higher prices than we were 90 days ago.

So that positive trend that I mentioned in my opening comments is manifesting itself in the number of bookings we're taking and at higher prices.

Okay.

And I just -- I do have a technical question for Mark.

The $0.10 impact from itinerary optimization that you were just going to see in the second half, is that fair to split it 50-50 between the third quarter and the fourth quarter?

And just -- is it fair to assume that if you adjust for the $0.10, 1/2 of that being affecting revenue yield -- revenues, would it be fair to say that the 50 basis point increase that you reported in the second half would have really been 100 basis points?

Yes, great question.

So the -- yes, the $0.10, it is split evenly between revenue and cost both in the third and fourth quarter.

In the third quarter though, you do have a bit more revenue impact.

And conversely in the fourth quarter, that -- there's a little less and the impact is more expenses around the marketing initiatives.

So then going back to our full year guidance, what we've said is if we raised our full year guidance 75 basis points or if we excluded the impact of that, we would have raised our yields 100 basis points.

So we're seeing significant strength.

We saw it in Q2.

Back half is building well, and we have great expectations for it.

Our next question comes from Steve Wieczynski with Stifel.

So I guess, the question's around the Norwegian fleet enhancements and the itinerary changes, Frank, you talked about this morning and brought up a couple of weeks ago.

You mentioned these are going to change -- or these changes will drive about $0.30 in additional earnings in 2020.

Now I was wondering if you could help us think about maybe how you came up with that estimate.

Or maybe what are some of the drivers going into that $0.30 number?

Steve, it's Mark.

Yes, so on a net basis, it's roughly $0.30.

If we looked at it as just moving the Norwegian Joy into the North American market, that's obviously a higher number than $0.30.

But then you do have a domino effect of taking out certain ships and redeploying them into other markets.

So you do have some puts and takes.

There is a bit more marketing expense that we have to incur.

And then there's a little bit of incremental depreciation.

So all in all, we think the $0.30 is a good number, but you have to keep in mind that there is some domino effects as you redeploy the other ships in the optimization.

But your assumptions behind, whether it's yield increases or onboard spend, are fairly -- essentially in line with what you're seeing today.

Is that kind of fair?

Yes, I mean, we're putting Joy in Alaska because Alaska, on the heels of Bliss' extraordinary introduction, is the place you want to put more capacity.

And Bliss and Joy our near-identical vessels so we think the market will really enjoy seeing additional capacity there.

And the fundamental driver of that $0.30 is higher yields, primarily higher onboard yield compared to where that vessel is operating today.

Okay, great.

And then Frank, second question.

As you decide to pull Joy out of the Chinese cruise market, it's clear you guys do remain committed to that market by putting Spirit in there on a seasonal basis.

But I guess, as you look back, what are some of the biggest things you have learned from being in that market with Joy?

And I guess, at the end of the day, is this move just the fact that given your smaller fleet size, putting Joy in there wasn't the right ship as you were leaving money on the table?

Or are there other things like the Korea issue or other things like that weighed more on this ultimate decision?

We are for -- we are a for-profit organization.

So at the end of the day, it has to do with the profit contributions of that vessel.

And you hit the nail on the head, Steve.

With only 26 vessels, we aim for quality, if you will, versus quantity.

We don't need unit growth.

We're always looking for higher and higher profitability.

And the delta between the performance of what that vessel was generating in China and what we expect it to generate in Alaska and in Mexico Panama Canal cruises in the wintertime, it was significant.

And so we do believe that China still holds significant potential, and we will participate in that potential with a vessel that doesn't have the same opportunity cost gap that the Bliss has -- excuse me, that Joy has.

Our next question comes from Jared Shojaian with Wolfe Research.

Frank, I want to go back to your targets that you laid out at the Analyst Day.

And specifically, if I look at your long-term EPS target of double-digit CAGR, is your expectation that each year should be double digits?

And specifically as I look at next year, you're starting at the year at a pretty great position just based on the booking commentary you've given, but it's also a lower capacity growth year.

So I guess, specifically, is your expectation that you could be at double-digit growth next year?

2019 is going to be a challenging year to achieve that double-digit.

We firmly believe that over the 3-year period, the CAGR will exceed the double-digits.

But whether we will be able to generate double-digit in year 2019, that's going to be a yeoman's effort.

We're going to do everything we can to do that.

We certainly acknowledged the optics behind that.

But you know that it's challenging to do so purely organically, especially given the fantastic year that we're going to be printing in 2018.

So we're going to give it everything we've got.

2019 is starting out very strong.

It gives us encouragement that we have a shot at it.

But it's going to be more difficult than in any other year that certainly I've been here.

Okay, that's helpful.

And just a quick follow-up for me.

Now that you've done the $200 million on the buyback, does that change your appetite for participating on a possible secondary?

And you -- it seemed like some of the language was more favorable towards capital returns.

Have you changed your thinking in terms of your long-term 2.5 to 2.75 leverage target?

No.

No, we haven't.

No, we haven't.

The only thing that we will have to see how things turn out is whether we decide to return capital via continued share buyback or dividends, and a lot of that will have to depend on the prices of stock, which -- certainly by the time we get to the point of deciding that, the stock should be back to more rational levels than it is today.

It's ridiculous that a company with our growth history of circa 20% year after year after year, with the visibility that we have in this business, that our stock trades at sub-10x next year's estimate.

So we certainly hope that the rationalization comes back into the market and that the stock price will reflect that, will reflect our performance because today, there's a grotesque disconnect.

Our next question comes from David Beckel with Bernstein Research.

So I just wanted to touch a little bit on IMO 2020 and the effects you guys will feel from that.

At your Investor Day, you were giving guidance at about 40% -- or sorry, 60% of your fleet would be exposed to lower-sulfur fuel.

Could you, I guess, start by explaining the extent to which you didn't install scrubbers on some ships and why?

And then also as a quick follow-up to that, has your 2020 guidance -- does that account for what some forward curves expect is a pretty dramatic increase in low-sulfur fuel and a decline in bunker?

Yes, so I'll take the 2020 curve question first.

Yes, our estimates do look at the curves, and we do take into account the potential drop in HFO pricing.

On the flip side, we are also accounting for what we expect is going to be an increased pricing on MGO.

So that is all taken into account in our estimates, and we watch that carefully every quarter.

In terms of installing scrubbers on our fleet, it really comes down to -- it's a couple of issues.

So some of the ships, if we take our smaller fleet in the Oceania and Regent vessels, it becomes a question of real estate versus the cost to burn the cleaner fuel.

And with the size of those ships, we just didn't feel like it was a wise investment to take away from the public space areas and potentially cabin revenue-generating areas.

Yes.

In some cases, they simply don't fit.

These are smaller vessels.

The stack on the vessels is just too small, given today's technology and the way scrubbers are built and installed, they simply don't fit.

And in some cases, the ROIs don't make sense either because of deployment or because of the size and -- or the age of the vessels.

So we look at this very, very closely, and we still believe that there are other options.

We talk -- we've heard analyses that there may be blends of certain fuels that will be available that will reduce the cost of the less-sulfur fuel.

So it's still early, but I assure you that we've done everything we can to minimize the impact of the new IMO regulation and that, that impact is fully reflected in our forward guidance.

That's helpful.

And a quick follow-up.

Can we assume that your NCL ships all have scrubbers or will by 2020?

The vast majority will have them.

There -- a couple of ships.

The older vessels, the Sky and the Spirit, most likely, will not.

And that was accounted for in our estimates when we gave the 60-40 percentage split on Investor Day.

Our next question comes from Robin Farley with UBS.

Robin, are you there?

(Operator Instructions)

Great.

Hopefully you can hear me now?

Yes.

Two topics.

One is with the firm order of the Leonardo.

I guess, I think this may be a record ordering a ship 9 years in advance, making it a firm order, I'm just wondering what was the reason for committing so far in advance.

Was there something much more attractive in the order price for that?

And then just the second topic I wanted to ask about was with the change in China of the Joy, I'm just trying to understand, what is the lost revenue this year since that deployment change is for -- starting in April of next year?

And then also expenses.

It looks like outside of the Joy, that $0.05 you called out are also going up, and I'm just looking for some color there.

Yes.

So on the -- I'll start with the Joy.

So it's a $0.10 impact this year, which is evenly split between revenue and costs.

The costs are really just related to incremental marketing expenses as we have to market the new itineraries.

And there is a bit of revenue dilution as we -- when we made the announcement, we did have a bit of market disruption on our -- from some of our operators, so we thought it prudent to lower our estimates.

But we believe that's a short-term blip in the radar.

And then in terms of our remaining cost increase, we did increase our costs by about 50 basis points.

And that's primarily due to overperformance on our financial results, so we've increased our accruals for our management incentive compensation.

And in terms of the Leonardo order, there's a couple of factors at work.

Number one that there is strong competition between the cruise companies or the very limited construction slots at the shipyard.

That's why the order book is as long as it is.

And second, we were able to lock in, as you suggested, favorable pricing.

As you know, in this business, you typically order a series of vessels and that averages out the high costs of the engineering.

We're very excited about the Leonardo Class.

We think that it's just perfect for what we're trying to accomplish at the Norwegian brand, a product, a brand that is priced on the very high end of the contemporary space.

And this vessel, as I mentioned in my opening remarks, is going to have all the bells and whistles that customers are just in love with on Bliss and a few others that we will announce at the right time.

So being able to secure the actual slot and being able to have a known quantity of supply growth coming at secured known prices was the primary motivator.

(technical difficulty)

Our next question comes from the line of Joseph Greff with JPMorgan.

Do you hear me?

Yes, we can hear you Joe.

Great.

This is actually Brandt Montour on for Joe.

So I was hoping you could give us some incremental color on the Caribbean in the first half next year.

What kind of pricing dynamics you're seeing maybe from some of your -- from your competitors?

Specifically, with older tonnage, given the capacity growth, any excessive promotional-type activity or any other kind of reactions from them?

Yes, Joe.

It's Andy.

I'll take that as Norwegian has the lion's share of the Caribbean product.

I'll touch on where we are first just to give you a sense about how are we doing.

And bear in mind, everything I'm going to give you is pre the pretty active storm season we had last year.

So for 2019, we're up on both load and pricing in the Caribbean.

We're seeing positive trends.

We're really happy with the momentum that we're seeing.

And the other thing you should think about on Caribbean is that we're coming up to what was last year's active storm season in a period of time where bookings were somewhat depressed.

So given the strong position we had this time last year to be ahead of that on load and pricing, and assuming we don't have a similar storm season, the likelihood that we -- with the momentum we've got continue to accelerate past that, we're feeling pretty good about Caribbean for next year.

As far as the competitive activity, we really don't see anything unusual out there.

And we feel very much that we're past the concerns that were driven by last year's storm season and are pretty happy with the momentum that we're seeing.

And I would say nothing unusual.

That's great color.

And then as a follow-up, as Freedom program starts getting implemented later this year, was wondering if you could give us some incremental color on kind of details on what that's going to look like.

And is it more of a testing-type rollout?

Or what kind of financial benefits, if any, do you think you expect early on?

Yes, Cruise Freedom is very much in process.

As we talked about, we partnered with a company who we view as the leader in proximity and location technology.

And we're very much on track with that program.

Our intent is every new ship that we roll out from now on will have components of this technology on board.

We will be testing elements of it on Norwegian Bliss, starting with her Alaska season and through to delivery of Norwegian Encore.

And Norwegian Encore will come out with elements of it.

We're really not ready to talk about any detail yet.

There's no doubt in my mind it's going to drive improvement to the guest experience.

We think that's a great opportunity.

And we also believe it's going to drive opportunity in onboard revenue, but we're really not ready to talk about any details of that yet.

Our next question comes from Tim Conder with Wells Fargo Securities.

Just to clarify, your organic net yields this year, any way if you strip out Joy and Bliss in the second half here, what those would be?

And then it seems like on the fuel side, with the increased concerns with your fuel mix in 2020 on the IMO 2020 that you've largely negated that here now with the itinerary changes based on current prices.

Just any comments there.

And then how that -- it would seem to position you better just than go along with what's continued yield moves in 2020?

Yes, we don't really look at the Joy changes or the other itinerary changes as a way to negate fuel prices.

We look at ways to maximize our profitability, maximize revenue.

Fuel is a necessary evil, and we do everything we can to minimize it, both in our very aggressive hedging program and all the investments we've made over the years to install technology.

They are really paying off.

And so we -- I guess, you can look at it that way that one negates the other.

But quite frankly, in -- when we are looking at how to manage our business, that's not the motivation for doing what we did.

And I'll let Mark discuss the -- your question regarding organic yield.

Yes, on the organic net yield, so as I said in my prepared remarks, we are estimating roughly 3.5% for the year, which includes the 25 basis points for Joy.

So excluding that, we're in the 3.75% and that's both excluding Joy and Bliss, just for clarification.

So we're very happy with that.

Okay, okay.

And gentlemen if I may, one last clarification here.

Seeing you guys had great onboard performance and seeing a little bit of deceleration there, is that largely Joy-related?

And maybe we'll see that until we get it repositioned into the North American market.

And then -- or maybe another way to ask it is if you pull out Joy, what would those onboards be?

Yes, so number one, as we've been saying, now that we've been selling our product on a bundled basis, GAAP requires us to allocate the revenue in ways that don't necessarily reflect the true performance when you look at the numbers on the financial statements.

So I think our onboard revenue is showing us up 0.5% for the quarter, but if you stripped out the GAAP allocation and you stripped out the Joy, that number would be closer to the 3% zone.

And then do you expect some reacceleration once Joy is changed over, Mark?

Certainly, because I think that's where -- that's part of the big opportunity.

That's where we see the gap today with the Joy versus being in the North American market.

So we definitely expect improvement on that front.

Our last question comes from the line of Greg Badishkanian.

So second quarter net yield came in well ahead of guidance, 4% versus 2% guidance.

So just maybe qualitatively in terms of what drove the improved close-in bookings, whether it's destinations that did particularly well or sourced passenger business that outperformed relative to your expectations?

Yes.

Well, the second quarter was great, much better than we anticipated.

It's really a number of things.

So the Bliss really outperformed our high expectations, which we're very pleased of, but we also saw very strong onboard revenue in the rest of our fleet, which is a great indicator for the health of the business.

And then with our remaining inventory that we had, we had very strong pricing on our close-in demand.

So it was really coming from all fronts, not one particular area.

Okay.

And then you also mentioned the easy compares that we're going to see when we lap the hurricanes from the last year.

So what are you assuming at least for 2018?

Are you assuming an acceleration in your guidance in terms of bookings so there's easier compares?

Or are you just assuming kind of a continuation of trend, even though the compares get really easier?

Yes, I think, again, what we're seeing today versus our booked position where we were last year, as Andy had mentioned, we are still comparing pre-hurricane last year.

So as we cross over into that in the next few weeks, we should definitely see a further spread in our booked position this year versus same time last year.

So we're definitely expecting to see that improvement.

And thank you, everyone, for your time this morning and your continued support.

As always, we will be available this afternoon to answer any questions you may have.

Thank you.

This concludes today's conference call.

You may now disconnect.