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

Andrew G. Didora - Bank of America Merrill Lynch Felicia Hendrix - Barclays Capital, Inc. Harry C. Curtis - Nomura Instinet Robin M. Farley - UBS Securities LLC Timothy A. Conder - Wells Fargo Securities LLC Jared Shojaian - Wolfe Research LLC Steven Wieczynski - Stifel, Nicolaus & Co., Inc. David James Beckel - Sanford C. Bernstein & Co.

LLC Mark Savino - Morgan Stanley & Co. LLC Rebecca Stone - Goldman Sachs & Co. LLC Vince Ciepiel - Cleveland Research Co. LLC.

Good morning, and welcome to the Norwegian Cruise Line Holdings Second Quarter 2017 Earnings Conference Call. My name is Leanne and I will 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. Wendy Beck, Executive Vice President and Chief Financial Officer. Ms. Beck, please proceed..

Thank you, Leanne. Good morning, everyone, and thank you for joining us for our Second Quarter 2017 Earnings Conference Call. I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings.

Frank will begin the call with opening commentary after which I will follow to discuss results for the quarter 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 for 30 days following today's call. Before we discuss our results, I would like to cover a few items.

Our press release with second quarter 2017 results was issued this morning and is available on our Investor Relations website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements.

These statements should be considered in conjunction with the cautionary statement 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, Wendy, and good morning, everyone. In the second quarter of 2017 the stars aligned just right as we took each of our three leading cruise brands and their award-winning 25-ship fleet to new heights.

The booking environment was as strong as any we've witnessed in recent history and was aided by a confident consumer that was willing to spend more than ever before on onboard activities to enhance their vacation experience.

The strong booking environment was coupled with deployment initiatives undertaken to optimize deals plus existing itineraries were enhanced with the addition of new destinations that garnered double-digit yield premiums.

Lastly, we benefited from the sustained benefits that come with a comprehensive fleet wide revitalization program that ensures that the industry's youngest fleet remains fresh and relevant.

The outcome was a quarter where all the factors I just mentioned coalesced to produce strong record results including a record adjusted net yield growth that allowed us to confidently raise our earnings per share and yield growth expectations for the remainder of 2017.

The extraordinarily strong booking environment which we have experienced and have been discussing in our most recent call continues to thrive. To use a nautical phrase, this rising tide is lifting boats throughout the industry.

At Norwegian Cruise Line Holdings, however, we have leveraged and fine-tuned our unique revenue optimization strategies of providing value pack offerings early in the booking cycle to build solid loads at healthy per diem.

We also deployed the marketing support needed to fill whatever close-in inventory remained in order to avoid price erosion late in the booking cycle and thus ensure maximum yield growth.

The result was a yield performance that exceeded our expectations and further solidified our position as the cruise operator with the highest absolute net yield in the industry. The robust booking environment is benefiting from near-high positive consumer sentiment, especially from our broad North American consumer base.

Not only is the result a consumer willing to pay more for their cruise fare, but also a consumer willing to spend more for onboard experiences such as short excursions and other experiential activities.

This behavior is also encouraged by our revenue optimization strategy where the inclusion of value-added onboard offerings as part of the ticket price through programs like Norwegian brand's Free at Sea and Regent's all-inclusive fares mean that guests have had time to replenish their wallets between booking and sailing dates resulting in increased overall onboard spend.

This onboard spend phenomena has taken hold not just from North American sourced consumers.

Our value-added strategy of adding more offerings into the ticket price, particularly for the Norwegian brand, has also proven successful in European sourced markets to the point where the sum of ticket pricing and onboard spend gap has narrowed so that we are agnostic as to whether bookings originate from North America or from international markets.

The quarter also benefited both from our deployment optimization initiatives as well as the inclusion of new destinations to our itinerary portfolio. An example of the former is Norwegian Getaway's redeployment to the Baltic region beginning early in the summer season.

This redeployment of the formerly year-round Miami-based ship allows us to take advantage of significantly higher per diems in peak summer Europe compared to low season summer Caribbean.

The move also bolstered pricing for Norwegian Escape in the second and third quarters, as she is now our sole Miami-based Caribbean mega ship during the summer, running alternating Eastern and Western Caribbean itineraries.

The latter of these itineraries includes calls to the region's newest purpose-built destination, our Harvest Caye resort in Belize.

As I stated earlier, sailings to new destinations benefited the quarter and Harvest Caye continues to be one of our highest rated destinations in our entire portfolio of over 500 ports of call, but in terms of benefiting the quarter, no new destination has had quite the impact of Cuba.

Our voyages to Havana have been a home run since we began sailing on Oceania Cruises in March of this year. The second quarter particularly benefited from 11 sailings to Havana.

Included in these initial sailings were nine four-night sailings onboard Norwegian Sky, which garnered very healthy ticket price premiums, compared to Norwegian Sky's former four-night Bahamas-only itinerary.

And while early on, we were unsure as to whether these pricing premiums would endure; subsequent sailings in Q2 and beyond have continued to gain meaningful premiums which we now believe are sustainable given the limited capacity to call on Cuban ports and the low likelihood of any near-term infrastructure improvements in Havana.

The success of Norwegian Sky voyages to Havana has prompted the Norwegian brand to add a second ship to regularly call on this historic city. So beginning in May of 2018, Norwegian Sun will begin sailing four-day itineraries to Havana from Port Canaveral.

In addition, demand is extraordinarily strong for Oceania Cruises sailings to the island in 2017 and in 2018. All in, 2018 capacity that includes calls to Cuba is double that of 2017, now reaching approximately 4% of our deployment mix.

Performance in the quarter also benefited from investments in our Fleet Enhancement Program, particularly the Norwegian brand's Norwegian Edge. The enhancements tied to the program have facilitated our ability to charge higher ticket prices and further boost onboard revenue.

These enhancements make the contemporary space's youngest fleet even more desirable with a core quality of offerings that is more consistent from our smallest to our largest new vessels.

Looking ahead, and while I may sound a bit repetitive from our commentary last quarter, the momentum from the strong demand trends that we have experienced over the last several quarters continues to have a positive impact across our brands, across deployments and across quarters.

I had mentioned in our prior call that we expected pricing for second half 2017 sailings to begin to surpass last year's levels as strong demand was driving improved pricing for remaining inventory. This expectation has come to fruition and pricing for sailings in the second half is now up mid-single digits.

In addition, the second half of 2017 is so well-booked that the dearth of inventory left to sell has resulted in the vast majority of the strong booking momentum shifting to 2018 sailings. This pivot is true for all three brands, which are now well ahead in load and pricing versus same time last year.

There was one seminal event late in the second quarter that while it did not impact results for the quarter itself, marked an important milestone in our globalization and diversification strategy. That event, of course, was the launch of our China-based ship, Norwegian Joy, in Shanghai.

While her first revenue cruise was not until June 28, the period prior to her launch was dedicated to familiarizing her unique offerings to travel agents and the Chinese cruising public.

By the time Norwegian Joy arrived to her new home port of Shanghai for her christening, she had already received a flurry of media coverage, resulting in an incredible 5 billion impressions.

The number of impressions doubled to 10 billion as a result of extensive media coverage from her inaugural and christening activities headlined by her Godfather and China's King of Pop, Leehom Wang.

This media coverage complemented the year-long marketing campaign we launched to introduce Norwegian Joy as a first-class at sea experience to the Chinese cruising public.

From television commercials to billboards to an e-commerce based sweepstake with our marketing partners at Alibaba that attracted nearly 1 million participants, we started from scratch and built the foundation for a solid brand backed by premium hardware. Norwegian Joy's launch, however, came on the heels of travel restrictions to South Korea.

The resulting uncertainty surrounding itinerary deployment, coupled with our lack of operating history in China, caused us to perhaps be overly conservative and cautious in our last earnings call.

Fortunately, during the first six weeks of operation, Joy's performance has been slightly better than what was included in the estimate embedded in our prior guidance. Cruise pricing for future voyages appear to have stabilized and load factors for voyages in the last six weeks have been some of the highest we have ever experienced.

We look to build on this momentum with the hopeful return of sailings to South Korea at some point in the near future. Now, I'd like to turn the call over to Wendy to go over our excellent results for the quarter and revised upward guidance for the remainder of the year in more detail. Wendy, please..

first we are up against tougher pricing comparisons in the third quarter as we are lapping both the premium priced 40-day charter of Norwegian Getaway for the Rio Olympics and the introduction of Seven Seas Explorer, which entered the fleet in the peak summer season after experiencing record early bookings at the higher prices typical of inaugural season.

Second, Norwegian Joy entered the fleet just prior to the beginning of the third quarter. As we previously discussed, due to the mix of our portfolio of brands, when any Norwegian Cruise Line ship joints our fleet, their yields are lower than the blended NCLH corporate average which inherently impacts our corporate yield growth.

Excluding the aforementioned factors, our third quarter net yield guidance on a like-for-like basis would have been in excess of 5% compared to our guidance of up 1.75%. That said I want to reiterate that these mega ships are highly accretive to both revenue and earnings.

Now turning to costs, adjusted net cruise cost excluding fuel is expected to be slightly up on both a constant currency and as-reported basis. Looking at fuel expense, we anticipate our fuel price per metric ton net of hedges to be $455, with expected consumption of approximately 195,000 metric tons.

Taking all of this into account, adjusted EPS for the third quarter is expected to be approximately $1.83. Turning to the full year, as Frank mentioned in his opening remarks, the booking environment has remained extremely strong.

Strength in all core markets across all our brands have resulted in the raising of our outlook for adjusted net yield by 150 basis points, which is now expected to be approximately 4.25% or 4% on an as reported basis.

Turning to costs, adjusted net cruise cost excluding fuel is now expected to be up approximately 25 basis points to 1.75% on both a constant currency and as reported basis.

The approximately $5 million increase in the cost guidance is primarily attributable to the costs associated with higher than anticipated load factors, and incremental startup costs for Norwegian Joy as she entered service in the Chinese market.

Looking at fuel expense, our fuel price per metric ton net of hedges is now expected to be $456 with expected consumption of approximately 785,000 metric tons. The increase in price is primarily the result of the impact of rising fuel prices since our last earnings call, as well is the previously mentioned changes in our expected consumption mix.

As a result of our strong second quarter performance, and a continued robust booking environment that we believe will positively impact our next two quarters, we have raised our full-year guidance of adjusted earnings per share by $0.14 to a range of $3.93 to $4.03 which surpasses the high end of our prior full your guidance range.

Of the guidance increase of $0.14, $0.07 is due to outperformance in the second quarter, and approximately $0.18 is due to the outperformance we anticipate earning during the remainder of the year, driven by stronger than previously expected yield growth, partially offset by $0.05 of expense due to higher fuel costs, $0.02 due to the increase in net cruise cost x-fuel attributable to our recently launched China operations, and the balance is due to an increased tax provision as a result of the improved performance of our U.S.

based operations, and a slight change to our interest in depreciation expense. With that, I'll now turn the call to Frank for closing remarks.

Frank?.

Thank you, Wendy. As I had mentioned in my earlier commentary, the same strong overall business environment that has benefited 2017 has permeated well into 2018. And no ship has benefited as much from this pivot as the first purpose built ship for Alaska Sailings, Norwegian Bliss, which we will welcome to our fleet in May of 2018.

Today her book position in terms of cabins sold is at a level that took the next best booked breakaway newbuild an additional 10 weeks of sales to reach. In terms of pricing, she recently exceeded that of the previously best priced breakaway newbuild at this point prior to sailing.

We fully expect Bliss' strong performance to continue to climb, and indeed be boosted by the marketing initiatives and media coverage surrounding our upcoming announcement of Norwegian Bliss' cutting-edge features and offerings. I look forward to updating everyone on these announcements as well as our results and other updates next quarter.

But for now, I'll turn the call to Leanne to open the call for questions..

Thank you Mr. Del Rio. Our first question comes from Andrew Didora with Bank of America. Your line is open..

Hi. Good morning, everyone, and thank you for the questions. Frank, Wendy I know your overall net yield growth is impacted by your fleet mix.

So, is there any color you can provide on how each of your brands did in 2Q just relative to your overall system net yield growth of the 7.2%? And maybe how you're thinking about that in the back half of the year?.

We don't comment on individual brands, but I can tell you that all brands contributed to the beat. As I mentioned earlier, high tide raises all boats, raises all brands and that is certainly true for our three brands..

And Andrew I would just add that when you look at our second quarter net yield growth on a like-for-like basis, it's roughly 5% of the 8.1% like-for-like, and then we have the benefit of the Explorer and the Sirena..

Great. Thank you for that, Wendy. And then just my follow-up question, Wendy, you mentioned just slightly higher interest expense as LIBOR and your principal balances creep up. How are you thinking about leverage here? On our numbers, we can see you can delever about half a turn per year with your growth and some cash build.

Would you want to delever quicker as maybe interest rates come up? Or are rates just still too attractive to allocate capital to debt reduction now? Thanks..

Good question. It's about a half a turn on an annual basis if we just naturally are deleveraging, and we're always looking at what's the next move to improve the balance sheet? As a reminder, we've said that we want to delever down into the three to four times range, probably preferably down to the lower end of that..

Thank you..

Thank you..

Your next question is from Felicia Hendrix with Barclays. Your line is open..

Hi, thanks. Good morning. Frank, last time I called a ship a boat and I almost got executed, so..

Almost..

So, first I wanted to, on the Joy. Obviously, it's been a nice surprise. I'm not sure if you're going to call out how much was responsible for anything in the quarter. But I'm really – if you can, that would be great. But I'm also really hoping you can talk more about what you're seeing on onboards there.

I know you had high expectations, so I just wanted to know, kind of, if that has been even your high expectations and if the Joy has made you feel more confident about the ship addition in 2019..

Good morning, Felicia. Onboard revenue at one time we expect it to be up to 20% higher than the average fleet. As you know, the Norwegian brand has the highest onboard yields of any of our competitors, so it was a high barrier to reach. The South Korea restrictions have affected both the ticket per diems and an onboard.

And so, the outlook that we have that we had previously noted and certainly the revised one, that we revised upwards today does include what we're seeing in the onboard space. Having said that, we have certain initiatives underway that we believe will improve the onboard revenue generation like it would on any new vessel.

This is not only a new vessel for us, but a new market, so we still have some opportunities to improve upon what we've already seen..

Okay. And then just to complete this question.

Just talking about, does it make you feel more confident about 2019?.

I think it's too early to talk about 2019. We're committed to the Chinese market. Obviously, there have been some bumps in the road the last year or so. We've seen what others have done in terms of deployment in the future. We're committed to being in this market, and like any market it will have ups and downs.

Perhaps the Chinese market is a little more volatile than some of the other more mature ones, but we're committed to being in China in the long term. We clearly see the psychographic dynamics of that Chinese market where hundreds of millions of people travel outside of China every year.

And we think that cruising is a fantastic value, not just for the Western world, but for Asians, as well, and we want to be a part of that..

Great, thanks. And then just moving on to the next question, my follow up. So, look, you gave us nice optimistic color on 2018 overall regarding loads and pricing. Previously you guys were trying to keep the investment committee tempered because of what new Norwegian branded ships do to the overall mix.

But I'm just wondering, given the momentum that you're seeing, was that prior tempered view maybe too cautious and can we see a 2018 yield growth like we're seeing this year?.

This year, as I mentioned in my opening sentence, all the stars aligned up very nicely and it would be difficult to predict another almost perfect year as we've seen this year. So, no, I wouldn't want you to model in the kind of yield growth that we're seeing this year for 2018. I think you would be overshooting quite a bit.

Nevertheless, we do like the way 2018 is coming in. Business is strong. We're building loads very well at good pricing. So we like the way it's coming in. A bit early to really give you a definitive answer, but just historically it would be difficult to predict another year like 2017..

I would just add, Felicia that as I said in my commentary, that the first half of 2017 greatly benefited from the addition of the Regent Seven Seas Explorer as well as the Oceania Sirena.

We don't have that same benefit in the second half of the year, and instead we're bringing in the Joy which will get a half-year benefit from in 2018 as well as a half-year benefit from the Norwegian Bliss, both of those being Norwegian ships as we've talked about, being below the NCLH average.

So it's hard to achieve the same type of yield growth that we've just posted for Q2..

Okay, great. Thank you..

Your next question is from Harry Curtis with Nomura Instinet. Your line is open..

Good morning. Very good results.

And just following up on the prior questions, to what degree did you – based on the – in Europe, kind of, oversell or more cautiously sell for the 2017 than usual? And in the sense that do you think it's had much of a drag on your yields this year, particularly in the second half?.

Hi, Harry. Not as much in the second half because the drag that you talk about is simply the function of the booking curve.

So remember, the business started to turn, in our view, sometime in mid- to really the late-Q3 period last year, and by that time we had a sizable amount of inventory sold for the 2017 Europe season, more so in the upscale brands that have a longer booking curve than the Norwegian brand.

And as that turnaround took hold, and business continued to improve, and we gained confidence that that was sustainable, we continued to raise prices. But you can't take off the book, the lower-priced business that was already on. In fact, history tells you that as you raise prices, people are less apt to cancel those bookings because they got a deal.

So, as we progress through the booking cycle and into each quarter, the effect of that weakness that we saw throughout 2016 in terms of bookings moderates. So that effect is greater in Q2 than in Q3, for example, and to some degree, to the degree that we have business in Europe in Q4, even less there..

So thanks.

And looking ahead, given this strong demand, what do you plan to do in 2018? Will you hold back more for 2018 in anticipation of better close-in bookings next year?.

What do you mean hold back? You mean hold back inventory for sale?.

Yes..

When demand is there, you take it, Harry, and you take it at higher pricing. And that's what we're seeing. So as I said in my commentary, we're well ahead across all three brands in both load and in pricing for 2018..

Okay. And then my second question is related to just a little bit more color on the second half guidance versus where your booking and yield trends are. You talked about mid-single-digit yields, but your outlook is for 2% yield.

And I'm just wondering, what are the offsets that we should be considering for the back half of this year?.

Sure. Great question, so you really are alluding to it with how much was already booked. So if you look at the remaining category of cabins left to sell, it's primarily the Norwegian brand that's left for the back half of the year, and primarily even into Q4.

And then even if you parse the types of cabins, it tends to be the lower categories of cabins that are booking close-in. So although we are thrilled with where we stand with the mid-single digits in pricing, there's not enough of the mix for the blended NCLH yield to materially move the numbers for Q3 and Q4.

And then on top of it, as I've previously mentioned, Q3 we're further rolling over the Rio charter from last year as well as the inaugural season of the Explorer, oh, and Joy..

Okay. That's helpful. Yes. Thanks very much..

Your next question is from Robin Farley with UBS. Your line is open..

Great. Thanks. One question I wanted to clarify, and I think, maybe, your comments did already, but just to clarify. In the release, you talked about the next four quarters having strong volume and firm pricing. And then you say the next two quarters have price and occupancy up mid-single digits.

So, I wonder if you could just comment on the first two quarters of 2018, whether strong and firm, does that mean up for both of them, just looking at those first two quarters of 2018?.

We're not going to talk about individual quarters in 2018. My commentary broadly said that as of now, for 2018, we're well ahead both in price and in load versus same time last year. And that is true for all three brands..

Okay, great. And then one clarification, just looking at your CapEx for 2017, it looks like since last quarter it went up by, kind of, $250 million to $300 million. I know you had called out previously that Project Leonardo would be adding about $70 million in CapEx this year.

What's the other kind of $200 million in CapEx since last quarter that you'll end up spending?.

Yes, so great question. So it is bringing on the Joy. It's also The Norwegian Edge program, as that continues to roll out, and then as you mentioned, the Leonardo ships..

Okay.

So the Joy or something with the Edge just ended up coming in a little higher in 2017?.

Yes, and then a little bit of FX..

Okay. All right, great. Thank you very much..

Your next question is from Tim Conder with Wells Fargo. Your line is open..

Thank you. Let me maybe return to a question that was alluded to earlier. Frank, could you address the booking curve? The whole industry, as you said, is doing well; the stars aligned this year.

Do you look to further expand or do you want to further expand the booking curve? Or is it sort of at the, in finance terms, the efficient frontier at this point?.

Yes, that's something that we look at constantly, the trade-off of an incremental booking versus the outlook for future price increases. I'm one of the opinion that when demand is there, you take it and you take it and you keep pushing pricing until that demand hits a resistant point.

And, so, the commentary I'll tell you is that throughout the last couple of quarters, certainly today, we're telling you that across the board, across markets, across brands, across periods, pricing is strong. The consumer is alive and well, especially the North American consumer is showing a lot of strength, certainly versus last year in Europe.

And, as you know, that North American consumer is the best consumer; books the earliest, books the highest cabin categories and, once onboard, spends the most money. So today, our booking curve is at an all-time high, a little over seven months on average. And that is a significant improvement over where it was this time last year.

Do I want to take it higher? I don't have any preconceived number in my mind that I want it to be eight months versus six months. Seven months is certainly where we are today and I'm very happy with it, and I'm also very happy with the per diems that, that booking curve is generating. One cannot look at one without the other.

So today the business environment is strong and we're getting both load and price..

Okay. Okay. Thank you. And then any commentary from your perspective, Wendy, you gave some color I think on Q3. But looking into 2018 from an industry global capacity allocation, Europe, Alaska, North America, China, just – and some of the major regions, what you see from an industry perspective at this point..

Sure. So for 2018 total, we're anticipating for the industry that capacity will be up mid-single digits. That's the same for the Caribbean and Europe, both up mid-single digits and China being down mid-single digits..

Okay, okay.

And Alaska, Wendy?.

I don't have Alaska. Yes, I'll have to follow up with you on that one, Tim..

But our Alaska, obviously, capacity will increase nicely given the introduction of Norwegian Bliss. And as I mentioned earlier, her advanced bookings both in load and pricing are really impressive. So, we're eager to get our hands on her and deploy her to Alaska..

Congrats, and thank you both..

Your next question comes from Jared Shojaian with Wolfe Research. Your line is open..

Hi. Good morning, everyone. Thanks for taking my question. Frank, maybe you can help me understand the Cuba impact a little bit better.

How much of your 4.25% yield growth guide is Cuba? Is it 50 basis points, 100 basis points? And since you're ramping Cuba further in 2018, could that contribution to yields increase further again next year?.

Yes. Jared, we don't comment on region specific or ship specific yield, but I will tell you that Cuba is performing very well. I think I described it as a homerun. Certainly Cuba contributed to the yield beat both in Q2 and in – expected to be in Q3 then Q4.

We believe that always looking at deployments that enhance our profit profile and moving the Norwegian Sun there in spring of 2018 will certainly do that. And given the inherent infrastructure limitations to Cuba, there is only so much capacity that can enter Cuba.

So we're very fortunate that we've been able to maximize our presence in Cuba, in Havana in particular, and in doing so we've been able to increase our deployment there to be about 4% of our capacity from 2% in 2017. All three brands will call on Cuba with the Norwegian brand having the most impact of roughly 60 sailings, 59 to be exact for 2018.

The Oceania brand will have 21 sailings. So again, I want to remind everyone that while looking at individual deployment and ship contributions certainly impact overall yield growth, the Norwegian Cruise Line Holdings story is not a yield growth story because of the makeup, the unique makeup of our three brands in the categories that they're in.

It is a revenue growth and more importantly an earnings growth story. So I urge everyone to focus on our drivers for earnings growth over the years to come and not so much on the yield growth necessarily..

Okay, thanks. So let me follow up on that point then. If I look at your unit cost, they've been running around 1% to 2% annually which I know is in line with your long-term target as well, and I appreciate that you're not prepared to give any guidance on next year.

But maybe can you just help us quantify the mix impact of bringing on Norwegian metal versus a normal year? And is negative unit cost growth for next year; is that in play at all?.

Yes. So we're not prepared to give you guidance on 2018 today. Clearly we do benefit as we bring on more of the – especially the large Norwegian ships. Our guidance has always been in that 1% to 2% range and all I would tell you is that there will be some benefit to bringing in the Bliss as well as the half year of the Joy..

Okay. Thank you..

Your next question is from Steve Wieczynski with Stifel. Your line is open..

Hey. Good morning, guys. So, Wendy or Frank, I guess what's embedded for Joy for the rest of the year in your guidance? I know the last time we talked, you were talking about embedding a price or a yield drop through the rest of the year.

So, maybe how you're thinking about joy now that you've been operating that for, call it, five or six weeks? Are you guys expecting pricing to remain flattish from where it is today or does it get slightly better or worse?.

Again, Steve, we don't provide guidance by market or by specific ship. What we're seeing in the marketplace has already been embedded in our future guidance. As I stated earlier, we were pleasantly surprised that she's performed as well as she has versus our revised expectations during the first six weeks.

We're about to enter in the, starting in September some time, the shoulder season, and the shoulder season is somewhat different than the peak summer season. So, do not expect pricing to increase in absolute terms in the shoulder season versus summer.

How it will compare to prior seasons, we're not sure because we weren't there in prior seasons, but we think that our overall guidance for the company certainly takes a cautious look at what we expect out of Joy..

Okay, great. And then the second question, I guess, a bigger question around Europe. But, Frank, it seems like that North American passenger is really starting to – willing to head back over to Europe, and again, that is your sweet spot over there.

But, I guess, the question is, how do you guys balance your book of business now over there? Meaning, are you still trying to source more locals so you don't get impacted again if that market turns around, like what happened last year? Or are you still really trying to get as many North Americans onboard as possible?.

You might have missed my point earlier, but I've said that we now reached a point of parity where we're agnostic whether that consumer books from North America or from international markets.

We've done certain things in our revenue management and our marketing and our product offerings that has de facto increased the per diem and also the onboard yields. So, today there is a very nice balance.

We have increased our business in absolute terms with the introduction of Getaway in the European markets, but disproportionately more North Americans our booking our European itineraries than same time last year..

Okay, thanks. Thanks for the color..

Your next question is from David Beckel with Bernstein Research. Your line is open..

Hey, there. Thanks for the question. You had some of the cost growth increase 25 basis points, and you explained that well, due to the load factor. But it's the second increase in as many quarters.

Just a broader question, I guess, do you feel more comfortable increasing cost in a strong demand environment such as what we have today? Or would you have increased cost this year, sort of, regardless of the environment?.

I think this was an unusual one this quarter. We've never had a ship in China, and so the 25 basis points which is approximately $5 million is totally related to the launch of the Norwegian Joy in China.

To seat it, it was additional startup costs as well as the fact that we are experiencing record occupancies – the top record for all of Norwegian Cruise Line ever..

David, I would also follow up that there's an old business adage, it takes money to make money, and we've seen margin expansion. And so we're very pleased to take up our net yield growth by over 8%, and only having to increase costs overall by 25 basis points is a very strong trade-off that I'll take any time..

That's a great point, and I appreciate that color. Some of your peers have – seem to be investing in marketing and revenue-generating spend ahead of expected future demand for even next year.

Is that something that you might be anticipating within your budgets, either this year or next year?.

Well, certainly it just doesn't happen automatically. Our marketing spend, while in line with expectation, is generating very, very strong results in terms of both load and yield. Part of the revenue-generating initiatives we've undertaken is the CapEx that we've invested in revitalizing our vessels.

And so that gives us an opportunity to showcase our ships in the best light possible. And our travel agent partners are recognizing that, and so are our guests..

That's helpful.

And as a quick follow-up, if I could, you mentioned Alibaba briefly, but I was wondering if there are any specific anecdotes you could pass along as to how well that partnership is progressing?.

They're great partners. We did some fantastic work alongside them to introduce Joy to the Chinese market. A lot of the impressions that I mentioned earlier in my commentary was a direct result of the marketing work that we did alongside them. We continue to have discussions with them on how we can commercialize, if you will, our partnership.

We are still waiting for certain licenses that will allow us to sell our cruises directly to the consumer in China. And I think once that happens, we will be able to monetize if you will that relationship a little bit better..

Very helpful. Thanks..

Your next question is from Mark Savino with Morgan Stanley. Your line is open..

Hey. Good morning, guys. Just wanted to follow up on the back-half yield guidance. I think if you look at sort of what's implied for 3Q and 4Q, it implies a sort of a similar yield growth in the fourth quarter. And I would've thought given some of the comp issues in the third quarter that 4Q may be, sort of, sequentially stronger.

So I was just wondering if you could maybe comment on that and if there's maybe something else that may hold back that 4Q yield growth..

Sure. So, as I've mentioned, we will not have the benefit of the Explorer or the Sirena in Q4 of this year. And instead, we have the benefit of the Joy, which is not accretive to yields but certainly is to the bottom line.

And then on top of it, it is the remaining category of cabins left to sell, again, primarily Norwegian, primarily (49:56) that don't tend to help the overall corporate yield. Obviously, on a standalone basis for Norwegian (50:05) but not when you take the blended NCLH (50:08). So we believe we've put out appropriate guidance for the implied Q4..

Okay. That's helpful. And then, just a quick housekeeping question, you talked about a higher mix of MGO in the quarter which drove up your fuel expenses a bit.

What's the right sort of mix between HFO and MGO in the back half and then going forward into 2018?.

It's roughly a 70%-30% mix; 70% HFO, 30% on MGO. That's pretty good. And then, just keep in mind, too, we're approximately 76% hedged. In the press release, we break that out by the types of fuel and there's approximately an 80% to 90% correlation there..

Perfect. Thank you..

Thank you..

Your next question is from Stephen Grambling with Goldman Sachs. Your line is open..

Hi. This is Rebecca Stone on for Stephen Grambling. I was wondering if you could talk a little bit more about the higher marketing expense.

How much of that is coming from the Norwegian Joy versus marketing programs, such as targeting Europe itineraries more or new initiatives related to targeting new-to-cruise consumers and your expectations for that higher marketing expense going forward? Thanks..

Hi. So we had already talked about the fact that there was $15 million incremental expense that would be in the first half of 2017 versus 2016, and that would be initial startup, marketing, offices et cetera to make our entrance into the Chinese market.

Then, of course in Q1 on our last quarter call, we talked about the fact that we were having incremental marketing expenses for both Cuba and China post the South Korea travel ban, which that extrapolated to about $7 million between Q2 and Q4 of this year.

Yes. But the spend that we're incurring is certainly a very – what I would call a very efficient spend, given how well booked we are for the rest of 2017 and my commentary on the status of bookings for 2018 versus what we're spending in marketing is very efficient.

Bookings are coming in strong, and we're not having to over-market, if you will or over promote. It's a very, very good pipeline. And so we don't see marketing expense being a driver of costs, certainly not in the next two quarters..

Thank you. That's very helpful. And then I was wondering if you could comment a little bit more about your Fleet Enhancement Program. What has feedback been with Edge? What changes have you made exceeded your expectations or what changes been the largest contributors to higher onboard spend on these ships? Thank you..

The Norwegian Edge program and also the similar program that we launched on the Regent brand has been very, very well received by travel agents and consumers, both. We revitalized both staterooms and public areas. We've introduced new restaurant concepts.

And by making the ship's general atmosphere, general look being refreshed, more relevant, people feel better onboard. They're out of their cabins, if you will, and just it's an environment that facilitates higher spend. And, as you know, the Norwegian brand leads the industry by a very wide margin in its ability to generate onboard revenue.

So we're very, very pleased that we're able to do this relatively quickly. Now with 15 ships, we've been able to do this over a three-year period. 2018 is the last year of The Norwegian Edge program in any big way.

I believe we will have one more vessel to dry dock and refurbish in 2019, so the heavy lifting, if you will, for the programs including the Regent program will end in 2018..

Thank you..

Okay.

We have time for one more question, Leanne, and there is anybody there?.

Your last question is from Vince Ciepiel with Cleveland Research. Your line is open..

Thanks for squeezing me in here. A question on like-for-like, you mentioned that it was, I think, 5% of the 8% in 2Q.

Curious how much of the 4.25% that you expect for this year and the 1.8% last year was like-for-like?.

That's a great question, Vince. So it's actually immaterial on full year and it's because of the strength that we gain from an NCLH blend perspective with bringing in the Regent Seven Seas Explorer and the Oceania Sirena in the first half of the year, offsetting not having them in the back half where we're bringing in additional Norwegian capacity..

Great. Thanks for explaining those moving pieces. And then, also, you've emphasized how Norwegian is kind of more of an earnings growth story given how new ships can swing yields and that maybe it's not indicative of the core trend.

So, if you just take a step back and think about Europe specifically this year, are your like-for-like ships there growing earnings year-over-year in Europe?.

Yes. That's a very pertinent question. I will tell you that NPDs (56:08) for our Q3 will be up 5% on a like-for-like basis. And the difference between like-and-like and the overall is that Getaway is in the Baltic for the first time this summer.

So, 5% growth in Q3 given the prior commentary about how some of the inventory for Q3 Europe had sold earlier on in the booking cycle before the upturn in bookings, I think bodes very well..

Great. Thanks..

Thank you..

Well, thanks, everyone, for your time and support this morning. And as always, we will all be available to answer any questions you may have later in the day. All the best, bye-bye.

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