Andrea DeMarco Sieger - Norwegian Cruise Line Holdings Ltd. Frank J. Del Rio - Norwegian Cruise Line Holdings Ltd. Wendy A. Beck - Norwegian Cruise Line Holdings Ltd..

Brian H. Dobson - Nomura Securities International, Inc. Felicia Hendrix - Barclays Capital, Inc. Robin M. Farley - UBS Securities LLC Steven Wieczynski - Stifel, Nicolaus & Co., Inc. Mark Savino - Morgan Stanley & Co. LLC Timothy Andrew Conder - Wells Fargo Securities LLC David James Beckel - Sanford C. Bernstein & Co.

LLC Jared Shojaian - Wolfe Research LLC Stephen Grambling - Goldman Sachs & Co. James Hardiman - Wedbush Securities, Inc. Vince Ciepiel - Cleveland Research Co. LLC.

Good morning, and welcome to the Norwegian Cruise Line Holdings Fourth Quarter and Full Year 2016 Earnings Call. My name is Nicole, and I'll be your operator. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions for the session will follow at that time.

As a reminder to all participants, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Andrea DeMarco, Vice President, Investor Relations and Corporate Communications. Ms. DeMarco, please proceed..

Thank you, Nicole. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2016 earnings call. I am joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings; and Wendy Beck, Executive Vice President and Chief Financial Officer.

Frank will begin the call with opening commentary, after which Wendy will follow to discuss results for the quarter and full year 2016 as well as provide guidance for 2017 before turning the call back to Frank for closing words. We will then open the call 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 30 days following today's call. Before we discuss our results, I'd like to cover just a few items.

Our press release with fourth quarter and full year 2016 results was issued this morning and is available on our Investor Relations website. I would also like to review information about forward-looking statements and the use of non-GAAP information as a part of this call.

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

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

The company cannot guarantee the accuracy of any forecast or estimates and will undertake no obligation to update forward-looking statements. If you would like more information on risks involved in forward-looking statements, please see the company's SEC filings. In addition, some of our comments may reference non-GAAP financial measures.

A reconciliation of the most directly comparable GAAP financial measures and other associated disclosures are contained in the company's earnings release. And with that, I'd like to turn the call over to Frank Del Rio.

Frank?.

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

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

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

2017 is off to a solid start. The booking momentum we experienced leading up to our last earnings call has accelerated into wave season, enabling us to build a strong base of business. As of today, and even excluding the benefits of Norwegian Joy, we are in the best booked position in the company's history.

We've seen strong booking volumes for all major destinations and a resurgence in demand from North American consumers for European sailings across all three of our brands. Leading up to year-end, our primary focus has been to build occupancy in order to make up for the slowdown in demand we experienced last year.

Since the beginning of the year, the revenue management bias has shifted to increased pricing. As I said before, the key to optimizing net revenue is executing on what I call CYA.

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

Next, the focus pivots to the Y, or yield and pricing, which started to come into focus in Q4, and given our excellent booked position, is now front and center, which is allowing us to leverage our pricing power. And lastly, the A, which is to minimize customer acquisition costs, and which remains in line with our expectations.

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

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

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

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

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

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

First, we have yet to fully lap the period in 2016 that was most negatively impacted by slowing demand and pricing erosion in the wake of last year's successive geopolitical events. Second, the internationally sourced business that had been on the books last year at this time wore a (7:33) stronger foreign exchange rates prior to the Brexit vote.

And lastly, in 2016, we reaped the benefits of an extended premium price charter of Norwegian Getaway in conjunction with the Olympic Games in Rio de Janeiro. While these factors bridge the year-over-year gap in second half pricing at this point in time, going forward, we expect pricing on remaining inventory to benefit from the following factors.

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

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

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

To give you some context on the extent of the rebound in pricing, over the last eight weeks, pricing on newly booked business is up double digits across all three brands, with Mediterranean itineraries leading the way. Turning to more recent developments, and as you know, we have been expecting to receive approval to sail to Cuba for quite some time.

So I'm tremendously excited about the upcoming sailings in all three of our brands beginning next month with Oceania's Marina. In the last few weeks, we also announced 25 additional sailings, with weekly round trip cruises from Miami to Havana aboard Norwegian Sky as well as six new departures on Oceania Cruises.

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

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

And while the opening of Cuba is an exciting development for our industry and for our company in particular, it's important to note that Cuba-related inventory represents less than 2% of our total capacity, and therefore we do not expect a material financial benefit from Cuba-related sailings in 2017.

Before I turn this call over to Wendy to review 2016 results and our outlook for 2017, I'd like to provide an update on our China operations. We continue to be big believers in the potential of China as an important source market. Our Norwegian Joy will arrive in Shanghai for her maiden voyage as scheduled in late June.

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

We continue to expect that Joy will deliver pricing at a 20% premium to the Norwegian brand fleet. We have also stated in the past that by the end of 2016, a decision would be made regarding the design of the fourth Breakaway Plus Class vessels slated for delivery late in the fourth quarter of 2019.

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

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

adjusted net yield for the year was up 1.8%, or 1.2% on an as reported basis. Adjusted net cruise costs excluding fuel increased 1.7%, or 1.5% on an as reported basis. And fuel price per metric ton net of hedges decreased 13.5% to $466 from $539 in the prior year.

We are proud to share that since 2006, we've reduced fuel consumption per capacity day by approximately 30%, as we continue to focus on fuel efficiency and energy saving initiatives, implementing new technologies and optimizing itineraries. Now let's discuss our outlook for 2017.

On a full-year basis, our capacity is expected to increase approximately 6.5%, with the midyear addition of Norwegian Joy along with a partial year benefit from the annualization of Oceania Cruises' Sirena and Seven Seas Explorer. Looking at our deployment around the world, we believe we have an optimal mix of itineraries for 2017.

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

Europe, which will experience a capacity increase of approximately 10%, will comprise 23% of our deployment mix. We have made several changes to our European deployments, reducing our capacity in the Mediterranean region by approximately 10%, and significantly increasing our deployment in the Baltic and Northern Europe.

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

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

As for other markets, deployment is consistent year-over-year. Turning to the first quarter, capacity is expected to be up approximately 1.5% due to the addition of Seven Seas Explorer, and Oceania Cruises' Sirena, partially offset by an increase in the number of dry-docks in the quarter versus prior year.

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

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

This market continues to show strength, with price and occupancy both ahead of prior year. Turning to Europe, only 4% of our deployment mix is allocated to this region in the first quarter.

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

The Asia, Africa, Pacific region accounts for approximately 9% of our deployment mix which is up approximately 400 basis points from prior year, primarily due to the aforementioned redeployment of Norwegian Star to the region. As for other key markets, our deployment is similar to prior year.

Now turning to our guidance, for the full year we expect adjusted EPS to be in the range of $3.75 to $3.85. Since our last earnings call, strong booking trends including the benefit of voyages to Cuba have offset headwinds from fuel and the impact from a technical issue on Norwegian Star.

Adjusted net yield for the year is expected to increase approximately 1.75%, or 1.25% on an as reported basis. Adjusted net cruise costs excluding fuel is expected to be up approximately 1%, on both a constant currency and as reported basis.

As for the first quarter, adjusted net yield is anticipated to increase approximately 4.5%, or 4% on an as reported basis. The first quarter has a few positive year-over-year benefits, which will help to make this quarter the highest yield growth quarter in 2017.

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

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

And the benefit from the addition of Seven Seas Explorer and Oceania Sirena, both of which were not in our fleet in Q1 2016, and garner higher yields than the corporate average. Now turning to costs, adjusted net cruise costs excluding fuel is expected to be up approximately 5.25% on both a constant currency and as reported basis.

The first quarter also represents the highest growth quarter for adjusted net cruise costs excluding fuel mainly due to the timing of dry-dock with five scheduled dry-docks occurring in the first quarter, compared to two dry-docks in the previous year.

As well as the previously stated incremental expense of approximately $15 million related to the launch of our China operations, which will occur in the first half of the year. Looking at fuel expense, we anticipate our fuel price per metric ton net of hedges to be $450, with expected consumption of approximately 190,000 metric tons.

Taking all of this into account, adjusted EPS for the first quarter is expected to be approximately $0.36. As we mentioned last quarter, there are a few items to keep in mind for the balance of 2017.

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

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

2017 marks Explorer's first full year of operation, resulting in a normalization of pricing that takes into account both peak and non-peak season. And now to discuss our recent newbuild order, I'll turn over the call to Frank..

Thank you, Wendy. As you know, we recently announced a major order for the next generation of ships for the Norwegian Cruise Line brand, extending our long-term growth profile to at least 2025. This four ship order expresses capacity increases smoothly from 2022 through 2025 with an option for two additional ships to be delivered in 2026 and 2027.

Each ship will be 140,000 gross tons, accommodate approximately 3,300 guests, around built upon the highly successful Freestyle offerings found on Norwegian's most recent Breakaway Plus Class Ship.

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

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

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

The expansion of our newbuild pipeline will drive meaningful revenue growth and will be accretive to both earnings per share and ROIC, further solidifying the key metrics that drive the financial success of our business. I know we've covered a lot of material on today's call, and I'd like to take time now to answer your questions.

So, Nicole, please open up the call for questions..

Thank you, Mr. Del Rio. Please limit yourself to one question and one follow-up. Our first question comes from the line of Brian Dobson of Nomura. Your line is now open..

Hey, how are you this morning?.

Hi..

Good. Thank you..

Hey, so would you mind elaborating a little bit on your net yield growth outlook? Specifically how introducing new Norwegian ships impacts your growth trajectory there? There's been a bit of confusion about the comparability between you and Royal..

Sure, that's a great question. Thank you. So due to the mix of our portfolio brands, as we bring on Norwegian newbuilds, which are highly accretive to both revenue and earnings, their yields are slightly dilutive to our corporate average, which includes our higher yield brands that make up approximately a third of our gross revenue.

In other words, the addition of a new Norwegian vessel which has yields lower than the corporate average inherently dilutes yields. In addition, in 2017 we are also annualizing both the Explorer and Sirena to include the non-peak season.

We also do not have the benefit from the Getaway charter, which garnered a significant yield premium in the third quarter of 2016. So again, I'd just reiterate that Q1 is where you'll see the highest yield and then obviously that implies that the back half of the year then is much more moderate..

Great, thanks, that's very helpful..

Thank you. Our next question comes from the line of Felicia Hendrix of Barclays. Your line is now open..

Hi, good morning. Frank, I was wondering if you could reconcile your guidance for the remainder of the year with some of the comments you made towards the end of your prepared remarks regarding the potential pricing benefits you could see later in the year. So just help me kind of cull through that all.

Is it fair to say that your guidance is what you're seeing now, that is the color you gave regarding the second half pricing being down, or being kind of in the low single-digit range, down low-single digits, but there is opportunity to be above that based on the potential benefit from the easier Europe comps in the second half and your comment that premium itineraries are moving up in price?.

Hi, Felicia. So, yes. Look, several headlines here. First one is that business has been very, very strong, as strong as we've seen it in a long, long time during the last eight-week period, and even sneaking into a little bit into Q4 of last year.

So I think what my prepared statement said is, should that trend continue, we ought to see the back half inventory sell at higher prices than what already sold for that back half of sailings.

Remember that we have yet to lap, or yet to fully lap, the negative impact of all the cumulative effects of the geopolitical events that we saw throughout last year. A lot of the business that's on the books today was booked during that stressful time.

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

Right, but you're not – so just to kind of put it out there, but you're not seeing that now, so you're not putting it in your guidance yet..

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

Okay, great. Thanks.

And, Frank, just can you help us understand, knowing that you haven't lapped the kind of easier Europe situation, can you kind of help us understand the performance of your three brands in Europe, what you're seeing now in the second and third quarter? You kind of gave us a consolidated – and I know you don't like to talk about brand-by-brand, but maybe just directionally kind of how they're each performing..

No, that's an easy one, because all three brands, and therefore at the H (28:35) level, are all performing extremely well in Europe. High tide floats all boats so to speak, and this is the case now.

So the Explorer continues to do incredibly well, no question the highest yielding ship in the industry, but the rest of the fleet, whether it's an Oceania or a Norwegian vessel or other Regent vessels, are all doing very well, as I said earlier.

Pricing has been very strong the last eight weeks, double digits, with Mediterranean itineraries leading the way. The Med last year took the biggest bow, and this year it's taking the largest increase..

Wendy, just on your cost guidance, the 1% was a bit better than the kind of 1% to 2% you've discussed in the past, so just wondering what's driving the better outlook.

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

We have been working very, very hard on a number of supply chain initiatives that have been actively being worked all through 2016 and 2017, so we're getting the benefit of that, as well as we're also getting the benefit of scale, as we bring in the Norwegian Joy and leverage the rest of our costs..

Okay, great. Thanks..

Thank you. And our next question comes from the line of Robin Farley of UBS. Your line is now open..

Great. So I just wanted to clarify – your commentary about bookings excludes the Joy in the release, but your fuel guidance includes it. And so if we look after Q1, because you have that strong increase in yield in Q1, it looks like sort of Q2 to Q4, you're looking for about 1% yield guidance, just doing the back of the envelope math.

And it seems like the Norwegian Joy alone would add more than that if you take, like, a 20% premium, and it's 8%, and in fact in the last three quarters it would be slightly more than 8%.

So I guess the math I'm getting to – is your guidance suggesting that that yield will be down for the rest of the fleet in the second half? I know you talked about how trends have been improving the last eight weeks, but it sounds like your guidance is assuming that even though prices'll be higher than what's on the books today, they'll still end up being lower year-over-year.

Am I doing the math right on that?.

Okay, so good question, Robin. I would again point to the fact that it's dilutive to yields, as you bring in – or not meaning – it's not increasing. Norwegian ships are not increasing the yields, so the Joy is coming in on par with the average of the NCLH average yield. So it's not increasing it.

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

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

The Norwegian new vessels still garner double-digit yield growth compared to the legacy fleet on a like-to-like basis, and we've said repeatedly that we expect the Joy to bring home prices 20% higher than the Norwegian's average. Still, based on the corporate yield, it is around a push.

It is not expected to increase yields significantly, although it does increase revenue tremendously, and earnings per share tremendously. So what we're trying to get across is, focus on revenue growth, focus on earnings per share growth, because for us, yield growth is a secondary story, not the primary..

And then the other things that I mentioned that were rolling over, so all – the Explorer, the Sirena and the Getaway Charter. For that reason, when you look at the yields being highest in Q1, you can imply then by our full-year guidance that yields will be much more tempered in the back part of the year..

Okay. Great. And then one other question clarifying on – and then just a follow-up.

I know some of the other lines that operate in China have talked about how at this time last year, they felt great about China, and then having chartered everything, and then travel sellers came back and they had to do things on the back end that ended up bringing yields down lower than what was factored in.

So just thinking about your commentary about what's on the books today, which sounds very strong, are you factoring into your guidance that where you've chartered it is where it will end up? I mean, obviously there's less supply in China this year than last year, so just wondering if your assumption is that, in your guidance, is that you may end up taking some back, or do you feel like where you've chartered it is where the year would end up?.

I think you hit the primary nail on the head when you said that supply growth is very much tempered this year versus last year. Supply is actually up, but up only 9% in Shanghai, where our vessel will be deployed, versus nearly 100% this time last year.

So the factors of supply and demand are well in place in China, like it is everywhere else in the world. But yes, we have in addition to the fact that we believe that the market this year in China is more stable, it's one more year of maturity, et cetera. We do have provisions for exactly what you mentioned and it's all baked into our yield guidance..

Great. Thank you very much..

Thank you. Our next question comes from the line of Steve Wieczynski of Stifel. Your line is now open..

Question about the first quarter, the first quarter guide for you guys on the yield side. And I guess I – we understand Pride of America and we understand Explorer and Sirena, but still, even taking those into account, it seems like the yield expectations a decent amount higher than I think what most folks were expecting.

So does it come down to the Caribbean has booked out better than what you guys would've expected a couple months ago? And I know you guys had some deployment issues there in the fourth quarter of last year, but I'm just trying to get a sense of how strong the Caribbean pricing has been over the last, call it a couple months..

The Caribbean is good. Caribbean is strong. We have some sailings in Q3 (sic) [Q1] that include Cuba, and we said that we've enjoyed meaningful premium pricing on those sailings, which has helped. We also have the Explorer in the Caribbean, which has performed very, very well. So it's never one thing.

It's a combination of factors, but overall, the Caribbean is strong..

Okay, got you. And the second question would be around the European cruise market and your sourcing strategies over there. I know when you looked back to last year, you guys were clearly impacted the most as you are a little bit more reliant on the North American side of things.

But what have you guys done, Frank, in terms of to start changing your sourcing strategies over there and get more locals onboard? Or is it you're kind of not going down that path and staying more reliant on the North American side of things?.

You know, when business is good, it tends to be good in multiple areas, in multiple channels, and that's what we're seeing. So clearly, the North American consumer is more engaged this year, and we expect it to continue to be engaged as the year moves along, versus what happened last year in the geopolitical arena.

And so the pressure for us to source away from North America is lessened. As a result of this lessening pressure, the pricing that we're garnering for international source business has also improved. So in 2017, we expect our international business, ex-Joy, to be up about 10%.

So we are sourcing more in international markets than we did in 2016, but the good news is we're not having to do it out of stress. We're doing it in a position of strength, because the North American market, which is the tempo-setter, so to speak, is doing so well. So pricing overall is also finding its way into our international source market..

Okay, great. Thanks, guys, appreciate it..

Thank you. Our next question comes from the line of Mark Savino from Morgan Stanley. Your line is now open..

Hey, good morning, guys. Wondering if you could maybe just address the supply picture real quick, particularly in the luxury segment where there's a bunch of new ships coming online. Just wondering if you are seeing any competitive pressure, or if you do think that you're able to kind of find enough demand to meet those needs..

Yeah. The first competitive pressure always comes from within, so in 2016, both the Oceania brand and the Regent brand took on new capacity. We don't have that this year, although in the case of Regent, it does lap for half a year in the case of the Sirena, and Oceania, it laps for about eight months.

So in our own world, capacity has been somewhat tempered, but no, I look – 2017 is much better booked across all destinations. Booking the last eight weeks have been at significantly higher prices than the prior year.

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

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

Look, capacity in the upscale area has always been lumpy, because there are so few brands, so few ships, but it is not grotesquely outside the – if I recall, the growth in 2016 was some 14%, moderating to a CAGR of something in the neighborhood of 6% for the 2019 to 2022 period.

That's not a whole lot different than what we see in the more contemporary space. So I'm not too worried about it. And some of those ships, quite frankly, that have been talked about in the 2019-2022 period, I'm not sure they ever come to fruition..

Thank you. That's really helpful color.

Shifting gears real quick just to leverage and the balance sheet, it looks like leverage is still kind of on track to be subbed 4 times by sometime in the back half of the year, so wonder if you could maybe give your latest thoughts on a potential capital return strategy?.

Great question. So, yes, as of the end of 2016, on a pro forma basis, we actually were at 3.98 times, but still at 4.34 times on an as-reported basis and de-levering rapidly.

So on an as-reported basis, we will be at 4 times by the end of the year, and we stay consistent with our plans that we want to continue to de-lever, and that will allow us to return capital to our shareholders in the back half of the year. So we continue to be favorable towards share repurchases, but we'll be opportunistic and look at our options..

Great. Thank you very much..

Thank you. Our next question comes from the line of Tim Conder of Wells Fargo Securities. Your line is now open..

Thank you. Frank, just a clarification, if you would, on a couple of items. One, the international sourcing, did you say that was up 10% ex-Joy in 2017? And then, also the financing cost on the newbuild orders number 3 and 4, that's a clarification.

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

Hey, Tim. So the financing, the interest rate on newbuilds 3 and 4, the average is 1.25%, and....

Fixed?.

Fixed, yes, sir..

Okay..

And on international sourcing, the 10% is we expect international sourcing ex-Joy in terms of revenue to be up 10%..

Okay..

Which implies the higher pricing that I discussed..

And then, Tim, with regard to adjustments to net yield, that actually ended in Q1 of 2016, so you won't see that any longer..

Okay, that's what I thought it was related to. And then as a follow-up, and by the way, thank you for the additional color on the dynamics of the net yield between the brands there.

But as additional follow-up, can you talk a little bit, Wendy, about how you roll on fuel hedges on a go-forward basis? And have you seen any change in the percentage that you look strategy long term here, as you de-lever?.

Sure. So our strategy has remained consistent. Inherently we say that we want to be at least 50% hedged as we move into a new year. We're significantly higher than that this year at 78% hedged.

It is a mixture between HFO and MGO, and hopefully investors and analysts have found it helpful with additional color that we provided in the last couple of quarters and also in this quarter, breaking that out. So of the 78% that's hedged, then you also have the correlations.

We're floating approximately 30%, somewhere in there, and we do use the fuel curves. Next year, we're at 66% hedged, and the following years we're at 48% and 18% hedged. But in those outer years, in 2019 and 2020, we'll continue to be opportunistic.

That's what we've done, so we will continue to see benefits of our fuel hedges as we move into those outer years..

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

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

Okay. Okay, thank you..

Thank you. Our next question comes from the line of David Beckel of Bernstein. Your line is now open..

Hi, thanks a lot for the question. Just wanted to quickly first clarify that I think you plan to spend $30 million in China this year.

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

Yeah, so $30 million is what we said our total SG&A spending including marketing and sales initiatives will be in 2017. My guess is that that'll be the run rate through 2018, and as 2019 approaches, that likely will go up when the additional inventory arrives in China..

Great. That's helpful. And just as a follow-up, in light of recent technology announcements from some of your peers, I was wondering if you could sort of broadly comment on your technology strategy going forward and remind us exactly how your on-board customer-facing technology today compares with some of your peers..

Yeah. Well, listen, we're very impressed with what Carnival announced a few weeks ago. We think it's a step in the right direction, and we're certainly going to be keeping an eye on customer acceptance and to see whether it moves the needle.

We have had a program, an app – a mobile app that accomplishes some of the things that this newer technology tries to accomplish, so we're going to be continuing to focus on the app that we have out there.

It's proven to be pretty popular with our guests, and enhancing it in ways that allows us to do a lot of what the other technology tries to accomplish perhaps at a lower cost. Second, as you may know, we recently launched a digital bidding platform that allows guests to upgrade their staterooms, and that is very much incremental to yield.

And lastly, we've done a pretty good job, we think, of building technology into the Norwegian Joy with many virtual reality features.

That is resonating very, very well in the Chinese marketplace and we think is one of the reasons why Norwegian Joy is booking as well as it has, that we are studying to see if we can leverage the concepts across other vessels in the fleet..

Very interesting. Thanks..

Thank you. Our next question comes from the line of Jared Shojaian of Wolfe Research. Your line is now open..

Hi, good morning. Thanks for taking my question. Frank, you said that if you were to extrapolate out the last eight weeks, that the remaining inventory in the second half of the year would sell at higher rates.

Can you just quantify that to give us some context? How much higher would that be?.

I mentioned in my prepared notes that the last eight weeks' pricing is up double digits. I'd like to leave it at that..

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

Jared, let me make it clear. We have not interpolated, we have not implied in our 1.75% guidance that what we've seen in the last eight weeks will continue, so it's zero. Zero influence, yeah..

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

Yeah. It's up for the first half. Load is up high-single digits. Pricing is up mid-single digits. For the second half of the year, load is again up very high-single digits. And as I mentioned earlier, pricing is slightly down, but improving rapidly..

Got it. Okay, thank you very much..

Thank you. Our next question comes from the line of Stephen Grambling of Goldman Sachs. Your line is now open..

Hi, thank you. Just a couple of quick follow-ups on the recent trends in sourcing.

I guess what percentage of the strong recent bookings are coming from new-to-cruise customers in North America? And have the stronger booking trends run parallel with any changes in behavior on board that could affirm a stronger, more confident leisure consumer? Thanks..

Hi, Stephen (50:11). On the on-board side, we saw some weakness in on-board revenue in October of Q4, and almost miraculously right after the election, when I think the euphoria began, on-board revenues have been strong. They were strong in November and December, and continued through January, so we're hopeful that trend also continues.

In terms of sourcing, we've said in the past that we think we have an outside opportunity to gain market share by doing a better job of mining our own past guests.

Certainly at the Norwegian brand, we've seen past guests come back to the Norwegian brand up 13% since 2015, and we expected that trend to somewhat moderate, but still be in the mid- to high-single digits in 2017, and so we focused our marketing because we know who they are, we know where they live. We have all their contact information.

And we think that's a very efficient source of additional sourcing for us..

That's helpful. Thanks so much..

Thank you. And our next question comes from the line of James Hardiman of Wedbush. Your line is now open..

Hi, good morning. Thanks for taking may call. I guess a couple follow-ups here. I just want to make sure I understand the difference between improvements that were expected, I guess, versus unexpected.

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

So was it that that improvement was already factored into your previous sort of earnings growth expectation or was that offset by other factors, be it currency or whatever else? And then as we look forward, and this has been asked, I guess, a couple times; maybe let me ask it a different way, it seems like the assumption that you're making on the remaining bookings in the second half of the year is that it's better than what's already booked, right, that the low-single-digit declines, but not nearly as strong as what we've seen in the last eight weeks.

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

So, James, good morning. Fuel has actually moved up about 20% since our last call. I also had made mention of the Star technical issues that we had, so those were additional headwinds that we faced, but we have offset those additional headwinds by this strong operational environment as well as the 41 announced voyages to Cuba.

So there's nothing further that we have implanted into our guidance for 2017..

And in terms of the pricing and the yield and the unsold inventory, look, demand is better across the board. It's better from North America. It's better from the international source market. Europe, which was the underperformer last year, is doing significantly better.

Our guidance, to be specific, again, does not take in consideration what we've seen in the last eight weeks. Eight weeks does not make an entire year. We've seen that movie before about this time last year, so we're being cautious about that.

What we said about the European theater bookings, and we said it last quarter, was that we were going to assume that 2017's pricing for Europe would be the same as how it ended in 2016. And that's about how it was through most of Q4.

In late Q4, we saw a pickup, and as I said in my opening statements, the Mediterranean has really outperformed all other destinations in the last eight weeks. So should it continue, then we would see an up in pricing, an up in yields, but it's a big should..

That's really helpful. And then I guess maybe just help us to put the guidance, both the yield and the cost guidance, maybe in a bigger picture perspective.

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

How should we think about that in the context of the typical year and what we might expect yields to grow? And then on the cost side, do we get to a point now that a lot of the Chinese investments are at least in the numbers that we can see that number flatten out in future years in terms of net cruise costs?.

Yeah, so on the yield side, you're correct.

As of today, excluding Joy, which comes in later this year, we have two more Breakaway Plus Class vessels coming in 2018 and 2019 for the Norwegian brand, and we have the four vessels that we just announced for the Norwegian brand starting in 2022, and we only have one small 750-passenger ship coming for the upscale brands in late 2019 or early 2020.

So you can see that the inventory is skewing greatly towards the Norwegian brand, and as the Norwegian brand adds more vessels, even though those vessels generate tremendous cash flow, great profitability, very, very accretive to earnings per share, a ton of revenues to the top line, if you're only focusing on yield growth, then it will be a number that is less than spectacular because this is no longer a yield growth story.

This is all about earnings per share growth, revenue growth, and the yield growth is still important. We want to grow yield, and we will grow yield, but it's not what to focus on. It's all about the mix of our brands, mix of our ships within those brands.

And in terms of the China, yeah, like anything else, China is a startup for us, so we expect to have higher costs as we enter the market for the first time in 2017 on a per-berth basis than we expect to incur in 2018 and 2019 as more capacity is added to that marketplace..

Excellent. Thank you..

Nicole, we have time for one more question, please..

Perfect, thank you. Our next question comes from the line of Vince Ciepiel of Cleveland Research. Your line is now open..

Hi, thanks for taking my question.

I was just wondering on a high level, bridging from the initial $5 to the more recent $3.80, obviously there's been a number of things that have changed, but could you help understand just kind of the buckets or the big drivers in terms of currency, fuel, obviously Europe profitability tied to events and then maybe the Caribbean? Like, how would you kind of slice up that delta?.

First off, I would say the vast majority of this is the reset from the revenue from 2016, which then you're starting with a lower base rolling into 2017. So Q2 of last year on our earnings call, we did specifically talk about 70% of the reset was specifically due to the geopolitical headwinds that we had faced.

So, that's the lion share, but then there is also fuel and FX that also has been affected, all well baked within our guidance to say that we would be within double-digit EPS growth in 2017 and moving forward. So revenue the largest, and then fuel and FX..

Great. Thank you..

Okay. Thanks, everyone, for your time and support. And as always, we will be available to answer your questions later in the day. Thanks again..

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