Norwegian Cruise Line Holdings Ltd (NCLH) — Q1 2015 Transcript

Thank you, Bridget. Good morning, everyone, and thank you for joining us on our first quarter earnings call. I am 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 with commentary on the results for the quarter, as well as provide updated guidance for 2015, 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 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 first quarter 2015 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 forecasts or estimates, and we undertake no obligation to update any forward-looking statements. If you would like more information on the 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 measure and other associated disclosures are contained in the company’s earnings release. Now with that, I’d like to turn the call over to Frank Del Rio. Frank?

Thank you, Wendy, and good morning everyone. It wasn't too long ago that we announced Norwegian’s full-year results for 2014 and met many of you at our investor conference in New York City. It was an exciting time as we had much to share. The acquisition of Prestige had closed a few months earlier, and the two organizations were beginning to merge. We also introduced a corporate-wide organizational structure that balanced brand champions and department heads focused on maximizing revenue while keeping a close eye on controlling costs. Integration teams were created to quickly identify and capitalize on synergies within the organization. Most importantly, we began to outline the strategies that would serve as the foundation for my leadership team and me to leverage the size, brand positioning, and expertise of our newly diversified company to ensure significant future profitability growth. Each previously separate organization had already established an excellent foundation for growth. The Norwegian brand had undergone a remarkable turnaround and initiated a disciplined newbuild program with six new innovative ships scheduled for delivery through 2019, all while achieving 26 consecutive quarters of earnings growth and announcing plans to double its return on invested capital since its IPO. Meanwhile, Prestige dominated the upscale cruise market, generating the highest per diems and EBITDA per berth in the industry, while also planning to expand its market share in the luxury segment with the regent Seven Seas brand Explorer, the most luxurious cruise ship ever built, and in the premium segment, adding Serena, the fourth vessel in our award-winning R-class fleet. While both Norwegian and Prestige were individually successful, this combined success marks just the beginning of what lies ahead now that we have united the strengths of both organizations. Our most recent quarter marks the first full quarter of results following the merger of Norwegian and Prestige in November 2014. Despite some noise from the usual one-time items related to any acquisition, our results for the quarter demonstrate the solid earnings potential of our combined company. This better-than-expected result is just one part of our quarter's story. While our leadership team executed individual strategies from each company prior to the merger, they also focused on collaborating to identify areas where we could demonstrate, quantify, and implement initiatives showing that the combined organization is indeed much greater than the sum of its parts. Throughout the first quarter and continuing today, the positivity, optimism, and camaraderie at our Miami headquarters are palpable, with employees from both Norwegian and Prestige working together, sharing experiences and skills, and building new relationships. Our primary mantra at Norwegian is three distinct brands in one extraordinary company, and our culture reinforces that idea. Employees at all levels, from vessel operations to revenue management to finance, are dedicated to identifying best practices, leveraging our scale for cost reductions, and using technology and our shared knowledge base to drive demand for maximum revenue. These emerging best practices will create new playbooks for every area of the company. In this first year of the merger, my leadership team is dedicated to fortifying a foundation that facilitates exceptional profit growth in the future. I invested considerable time ensuring our organization was structured to foster both brand and corporate excellence, supported by the depth of talent and experience within our leadership team. While we are planning for a record-breaking 2016, our focus has remained steady on 2015, evidenced by our strong first-quarter results and improved earnings guidance, as well as higher synergy targets for the remainder of this year and next. At our investor day, we introduced various strategies aimed at generating long-term profit growth and committed to keeping you updated on our progress. As a quick overview, the main components of our strategy, referred to as FDR's new deal, include executing established strategies, driving higher per diems for increased yields, and leveraging scale to reduce costs. Regarding the execution of existing strategies, both Norwegian and Prestige were well on their way to success prior to the merger. The essence of the new deal is to continue effectively implementing those successful strategies, with adjustments and lessons learned from our merger, our larger scale, and fresh perspectives on each other's businesses promising to yield results. One initiative under the first component of the new deal aims to drive incremental organic earnings growth alongside rational capacity expansion. We've analyzed our fleet to identify areas for marginal changes aligned with market conditions that can enhance performance, including an average 6.7% increase in beverage prices, the introduction of a nominal room service fee, and reduced costs due to renegotiated shore excursion agreements. To illustrate the potential impact of these small changes, every dollar increase in yield translates to roughly $15 million in our bottom line. These initiatives are still in their infancy, but we see many more opportunities in this area both in the short and long term. The second component of the new deal focuses on increasing demand to drive higher per diems, which in turn leads to higher yields. Although executing this requires finesse and will take time to develop fully, we are already seeing early positive signs. This is particularly true for a critical initiative, incorporating elements of Prestige’s proven go-to-market strategy into Norwegian’s pricing practices. We are initiating this by integrating Prestige’s market-to-fill approach, contrasting it with the industry's typical discount-to-fill strategy into Norwegian’s revenue management and planning philosophies. This strategy emphasizes proactive communication to consumers and travel agents to boost bookings through rational pricing and value-packs early on in the selling cycle. The benefits are manifold: customers gain access to the best prices and state room availability when booking in advance, travel partners are assured higher commissions by encouraging clients to book early with price guarantees, and cruise lines can build a strong base of bookings essential for price optimization as supply decreases. Our combined company’s booking window at the end of the first quarter has improved significantly to 172 days, an increase from 154 days at the end of Q1 2014. As we look towards 2016, this strategy has been crucial in securing 39% more revenue on the books for 2016 compared to the same time last year. These encouraging metrics will foster consistent yield growth. This approach also helps mitigate the dissatisfaction associated with close-in discounting, which has been a persistent issue in our industry. By launching appealing value-add introductory offers to stimulate early bookings, we aim to shift customer focus from merely seeking price discounts towards recognizing the overall value offered. For instance, during this wave season, Norwegian introduced an appealing value-add offer, supported by additional marketing efforts, resulting in a record-breaking wave season for the Norwegian brand. This promotion was highly well received by guests and travel agents, suggesting that there is a shift in focus from price-oriented decisions to understanding the overall value of a cruise vacation. We believe our market-to-fill strategy combined with valuable promotions is a strong combination. Although these initiatives are in their early implementation phases at Norwegian, we have seen positive results, with better load factors in every quarter of 2015 compared to the same time last year and in 2016, our current load factor has greatly improved to about double what it was for 2015. This allows for better revenue management and pricing optimization throughout the remaining inventory sales cycle. Alongside the roll-out of certain onboard strategies designed to maximize onboard revenue as well as our go-to-market strategies, the first quarter also saw several other initiatives, which I will briefly outline. To enhance demand, which aligns with our second deal component of improving net per diem, we announced the expansion of our Norwegian brand sales force, focusing on enhancing our presence in the vital yet under-represented markets of Canada and California. Additionally, we are consolidating UK sales offices across our three brands and in Germany, the Oceania and Regent sales teams will share space in the Norwegian brand’s offices, which will enable us to directly market and sell without expensive General Sales Agents in this crucial market. Given that the luxury sector in Germany is as significant as in the UK, building a dedicated in-house sales office there is essential for brand growth. This move follows the opening of our sales, marketing, and reservation center in Brazil, which represents Norwegian, Oceania, and Regent brands in this emerging BRIC market. Lastly, we are using our scale to reduce costs. Our management team is thoroughly analyzing every area of the business that can benefit from our larger scale. We have made significant progress in several domains, including port contracts, insurance, fuel, and various purchasing and provisioning efforts. Before I pass the call to Wendy, I will update you on our strategy identification and implementation activities. We previously announced my leadership team's identification of $40 million in synergies for 2015, comprising $15 million from revenue enhancement and $25 million from cost reductions, with an expected annual run rate of $50 million starting in 2016. After further evaluation of potential efficiencies, my leadership team, along with our dedicated integration team, has now identified total first-year synergies of $75 million, with $30 million from increase in revenue and $45 million from cost savings. Looking ahead to 2016 and beyond, these synergies combined with newly discovered opportunities total $115 million, with more anticipated. With six ships scheduled for delivery between now and 2019, creating and stimulating demand is the most crucial initiative our three brands can pursue. The volume of these synergies enables us to allocate a portion for reinvestment, which will strengthen our new deal strategies and other initiatives while allowing most synergies to benefit our bottom line and shareholders. Of the identified incremental synergies, we plan to allocate $20 million for 2015 and $40 million for 2016 towards operational investments for the Norwegian brand. We believe these investments will enhance the guest experience, leading to increased customer loyalty and driving demand. Such reinvestments are vital for encouraging past guests to return more frequently and attracting discerning first-time guests willing to invest more in their cruise experiences aboard our exceptional ships. While I could discuss numerous other initiatives aimed at solidifying the foundation for long-term profit growth at Norwegian, I don't want to overshadow this past quarter’s significant achievements, including results exceeding our expectations and those of the market, which has helped improve our outlook for the remaining year. Advance sales for our upcoming fleet additions are performing extraordinarily well. Norwegian Escape, expected to join the fleet at the end of 2015, is set for a successful inaugural season and is booking 10 times better than Norwegian Getaway did at the same time before her delivery, and overall performing much better than Norwegian Breakaway and Norwegian Epic. Moreover, Oceania Serena and Regent Seven Seas Explorer have also propelled their respective brands to record booking days during Q1. The quarter brought a lot of good news, so I will now pass the call to Wendy to discuss the results in more detail and provide improved guidance for the year. Wendy?

Thanks, Frank. I would like to begin by noting that unless otherwise stated the following commentary compares first quarter 2015 and 2014 on an as reported basis. You may recall that in our last earnings release, we provided guidance for changes in net yield and net cruise costs on an as reported basis as we customarily do. This as reported basis compares current year’s reported results with those reported for Norwegian Cruise Line Holdings in the first quarter of 2014 results which occurred prior to the acquisition of Prestige Cruise Holdings. In order to provide a better comparison of the combined company’s true performance, we also provided guidance for net yield and net cruise costs which compares first quarter 2015 results for NCLH against the first quarter of 2014 which includes the results of Prestige. We refer to this guidance as combined company which we have provided on both an as reported and constant currency basis. For first quarter 2015, the company generated adjusted earnings per share of $0.27 compared to $0.23 in the prior year and guidance of $0.20 to $0.24. Contributing to the earnings’ beat were an outperformance in net yield and lower interest expense as a result of lower-than-expected interest rates and better grid pricing on certain credit facilities. Adjusted net yield performance was better than anticipated, increasing 18.9% on an as reported basis as a result of a full quarter of consolidation of the upper premium and luxury Prestige brands. On a combined company basis, adjusted net yield decreased a slight 0.7% compared to guidance of down 1% to 2% and was essentially flat on a constant currency basis. These results are even more impressive as they come against the strong first quarter of 2014 where net yield increased 3.8% for the Norwegian brands and included two high yielding charters for Norwegian Jade at the 2014 Olympics in Sochi and Norwegian Getaway in New York for the festivities surrounding the Super Bowls. In addition, fluctuations in foreign currency exchange rates had an expected impact in the quarter. While we saw a slowdown in onboard spend from European guests on the Norwegian brand, overall guest spend improved on the Oceania and Regent brands particularly for shore excursions and pre and post hotel stays. We expect exchange rates to continue to be a net headwind and we have included their expected impact in our guidance which I'll discuss later in my commentary. Adjusted net cruise costs, excluding fuel per capacity day, increased in the period by 28.7% on an as reported basis, mainly due to the addition of the Prestige brand and 5.6% on a combined company basis. The increasing cost can be attributed to the timing of certain expenses, including the receipt of technical spares as well as additional marketing investments, including return to television for the Norwegian brand which we frontloaded into the early part of the year to take advantage of wave season and build a strong base of bookings for 2015 and beyond. Regarding net cruise costs, I would like to point out one item which appears in our non-GAAP adjustments for this metric. This item is a $9.1 million benefit pertaining to the accounting of the contingency payment of $50 million to be payable to shareholders of Prestige Cruise Holdings prior to the acquisition, pursuant to the achievement of certain performance metrics in 2015. Accounting for this contingency is similar to a mark-to-market instrument with the value being adjusted based on the probability of achievement. The contingency payment is in two thresholds. The first threshold with a payout of 50% is based on 98% achievement of the target metric. The second threshold payout of the remaining 50% is contingent on achieving the remaining 2% of the target metric. But given the narrow band of the second threshold, small changes in the probability of achievement result in large swings in the contingency recorded. Now turning back to costs and fuel in particular, our fuel price per metric ton net of hedges in the period decreased 18.3% to $526 from $643 in the prior year. As with the prior quarter, we experienced a negative impact from our fuel hedge portfolio as a result of lower oil prices in the period. Excluding the impact of hedges, our at-the-pump fuel price per metric ton was $401 compared to $646 in 2014, representing a 37.9% decrease. The difference in the hedged versus non-hedged fuel price per metric ton in 2015 results in a $0.09 per share impact on adjusted EPS. Interest expense net was $51 million compared to $31.2 million in 2014 on account of higher debt balances resulting from the acquisition of Prestige, offset by the aforementioned lower than expected interest rates and improvement in grid pricing on certain of our credit facilities due to improved leverage metrics. Other income expense in the quarter included an expense of $29 million for a foreign currency collar related to a ship construction contract. At the time of the drafting of our prior guidance, we anticipated this collar would be designated as a cash flow hedge and thus receive hedge accounting treatment. The structure of the collar is such that it will not be eligible for hedge accounting treatment, thus we expect future impact of this line item on it is marked to market on a quarterly basis. Now looking to 2015, we’ve provided guidance along with associated sensitivity for the second quarter and full year 2015 in our earnings release. In addition to providing guidance on an as reported basis for net yield and net cruise costs, we are also providing guidance of this metric against 2014 combined company results as the basis with which to compare 2015 expectations. As stated earlier, these combined company results assume the consolidated results of Norwegian and Prestige for the second quarter and full-year 2014 as of the beginning of that year. In terms of impacts to the balance of the year, Norwegian Star underwent an unscheduled drydock in April to replace propeller bearings which malfunctioned after a recent scheduled drydock in the first quarter. While the cost of the drydock is minimal as the repairs are covered under warranty, the revenue impact of the cancellation of a 15-day Panama Canal sailing is more pronounced and is included in our guidance. Lastly, we expect to continue to experience the headwinds from a stronger dollar on foreign currency denominated sales. Offsetting these impacts are the benefits from incremental revenue synergies and business initiatives identified in the quarter. As a result, we are maintaining our full-year adjusted net yield guidance of approximately 17.5% on an as reported basis for results compared to those filed by the company for full-year 2014 and introducing constant currency guidance of approximately 19%. On a combined company basis, we expect adjusted net yield to be up approximately 1.5% and 3% on an as reported and constant currency basis respectively. Turning to costs, the additional investment of $20 million for projects and initiatives aimed at driving demand are offset by an equal amount of incremental identified synergies, resulting in our adjusted net cruise costs ex fuel to remain unchanged at up approximately 23.5% on an as reported basis while on a constant currency basis, we expect an increase of approximately 24%. On a combined company basis, we expect an increase of approximately 2.75% and 3.25% on an as reported and constant currency basis respectively. The benefits of interest savings for the balance of the year will be offset with higher depreciation expense as a result of additional capital investments stemming from the new deal program and its goal of enhancing the guest experience to drive higher per diems. That said, interest savings and better than anticipated net yield performance in the first quarter along with maintaining our net yield and new cruise cost guidance has resulted in raising the lower end of our adjusted EPS guidance by $0.05 to a range of $2.75 to $2.90. Guidance for the second quarter, where the impact of the Norwegian Star’s unscheduled drydock is most pronounced, particularly in terms of net yield, are as follows. On an as reported and content currency basis, we expect adjusted net yield for the second quarter of 2015 to grow in the range of 17.5% to 18.5% and 19.5% to 20.5% respectively. On a combined company basis, we expect adjusted net yield to increase between 1% to 2% on an as reported basis and 2.5% to 3.5% on a constant currency basis. Adjusted net cruise costs, excluding fuel per capacity days, on an as reported basis, is expected to increase between 23% and 24% and 23.5% to 24.5% on a constant currency basis. On a combined company basis, we expect a decrease of 2.25% and 3.25% on an as reported basis and 2% to 3% in constant currency. Lastly, adjusted earnings per share in the quarter is expected to be in the range of $0.70 to $0.75.

Thank you, Wendy. As I mentioned earlier, the excitement of Norwegian's prospects and those of our three brands is resonating with our travel agent partners, our valued past guests and throughout the organization as we continue to work for a great 2015 and ready ourselves for another year of outsized profit growth in 2016. Both Oceania and Regent will welcome fleet additions in 2016 that will further solidify their places in the upscale cruise space. And not to be outdone, the Norwegian brand will continue its history of innovation with a full year of sailings of its large ship Norwegian Escape, the introduction of a semi-all-inclusive experience on its three and four-night Bahamas product onboard Norwegian Sky and will begin the planning for the arrival in 2017 of the Norwegian Bliss. On the synergy front, we expect that on our next earnings call we will communicate the final tally from our formal synergy identification and implementation efforts that will transition to a new phase of our combined operations where we turn from identifying savings solely as a result of the combination but instead focus on broader opportunities that arise from day-to-day operations. We are working hard on all aspects of the business to bring our shareholders superior profit growth and investment returns. We continue to lead the industry in net yield, EBITDA margin and return on invested capital, and if the year continues as planned, we will have doubled our adjusted earnings per share in just two years. It’s a great start to our first full quarter of combined results and we look forward to speaking to you again next quarter. Thank you all for your continued support. We’d like to go ahead and open up the lines for questions.

Hey thanks guys. This is actually Brad in for Steve. First off, on the $30 million in identified revenue synergies, and perhaps what comes beyond, can you kind of give some color around how you see that shaking out between ticket and onboard?

So first off, I don't want to give too much color but I would say the majority of it goes to onboard and net shore exc.: And the smaller portion goes to the ticket side but that’s the opportunity and so that’s really – that’s the FDR deal that’s not baked into our guidance, it’s not baked into our long-term target for ‘17 that we put out there and I think, Frank, do you want to speak a little more to that?

Yes, at the investor conference, we discussed that one of the key factors driving the FDR deal is the strategy to boost demand, which will subsequently increase per diems and lead to higher yields. This is a long-term initiative that has already begun to take shape. I've shared some insights about our strong bookings for the remainder of 2015 and into 2016. With our load factor for 2016 being twice what it was at the same time last year, it's clear that unless we are completely inattentive, which we are not, per diem prices will rise. We have several initiatives in place to enhance our capacity to increase yields at a rate that surpasses historical averages. While we cannot provide detailed expectations for yield in 2016 right now, we have reaffirmed our yield guidance for the remainder of 2015. Given the strong booking load factors, it’s reasonable to expect that better pricing will follow.

And then on the second topic, since you last talked to us, a number of your competitors have announced kind of expanded plans and aspirations for the Chinese market. Just wanted to see if we could get an update on your thinking long-range around the China opportunity.

Well, what appears to be every ship in the world is going to China, maybe the rest of the world is a bigger opportunity now in China. I say that only tongue-in-cheek but it is incredible to see our competitors devoting their newest largest, probably their best performing ships to the Chinese market. We have launched the study group that we said we were going to launch back in the investor day conference, we have hired a very seasoned executive who has gone through the process of opening up China for one of our competitors. And so we believe that having him on board with his expertise will quickly increase our overall knowledge of that market. Harry Sommer, who now has been our chief integration officer, as soon as the integration efforts are complete by the end of Q2 will transition and lead that effort. And so we've got quite a bit of talent dedicated to that study group. I, of course, will oversee it and we’re still very bullish on China as the rest of the industry seems to be as well. So no real specifics at this time, as I mentioned at the investor conference, we expect to complete our work by year-end and be able to share it with you shortly thereafter.

I've got a couple of questions. Turning to your incremental reinvestments, can you give us a sense of what you are investing in and why? What is the strategy behind what you're trying to do with the incremental money that you are setting aside? And then have you assumed any impact on yield as a result of that investment?

The main driver is to increase demand. All of our three brands are taking on additional tonnage over the next few years as I mentioned in my opening comments. And so the most important initiative that any company can undertake is to make sure that you build that capacity coming online. And so a lot of the work that we’re doing is to do everything we can to generate more demand, and part of that is through sales and marketing efforts. You recall that very early in my tenure in Q1 we announced that we were going to increase the sales force to penetrate the under-performing Canadian and California markets for the Norwegian brand and we were going to do more work on the international arena that the Oceania and Regent brands had penetrated the international marketplace a little bit more effectively than Norwegian had up to now. And quite a bit of that money being spent is to do just that, a more pronounced presence in important markets and with the marketing spend that goes with entering those markets. The second part of the reimbursement is to make the onboard product better, to increase guest satisfaction. If you have happy customers, they are more likely to come back more frequently than if you have unhappy customers. So the Norwegian product is already very good but we want to make it the best it can possibly be and the industry-leading in our space. And so all the monies being spent on the product side are being spent on the Norwegian brand specifically. We’re very happy with the product – onboard product of the Oceania and Regent brands but we do think that the Norwegian brand could improve from where it is today.

Then that leads to my second question is it's been three months since –

By the way, Harry, I didn't answer your second part of your question is that there is absolutely no benefit baked into many of the numbers that we disclosed today, whether it is for ‘15 or ’16. And so we hope that these $20 million initiatives in ’15 and $40 million in ‘16 will lead to a greater demand which will in turn lead to higher per diems and higher yields but we’re assuming for the moment that we’re going to incur the cost and not reap any of the benefits. So we’re being very conservative with this reinvestment program.

Very good. And that leads to the next question, which is longer-term. You have made comments about the earnings power of Norwegian perhaps doubling by the end of 2017. It's been three months since you publicly commented on that. Has anything changed in the last three months to make your ability to achieve that goal more or less likely?

I want to clarify that we previously indicated earnings per share would reach $5 by 2017. This was based on the plan in place before my arrival, which anticipated $50 million in synergies. However, now, just a few months later, we see that the synergies are exceeding $50 million. From what I've observed at Norwegian, both structurally and from a brand standpoint, I believe there are significant improvements we can make, whether we label them as synergies or as business opportunities that have previously been overlooked or underutilized. I feel more confident today than I did three months ago that achieving $5, if not more, is possible. It's too soon to specify exactly how much more, and I prefer not to discuss plans for 2017 since we haven't completed 2016 yet. However, I see no reason to believe that our projections are overly conservative at this stage.

And I would just add that we had baked $50 million into the ‘16 synergy number to get to the $5 and so with the net 75 that we put out in our earnings release, that’s an additional 25 million upside to the $5.

I have a couple of questions. Frank, in your opening remarks, you mentioned a 39% increase in revenue for '16 compared to the same time last year. Is that figure a pro forma number? I want to understand the scale of that number. Is it pro forma, or is it because Prestige would not have been included in the books at this time last year?

No, it is apples to apples. We took what Prestige had in the books at this time last year for ‘15 and added the two numbers together. So it is a good number.

Can you provide some insight on the pro forma increase in ticket yields compared to the percentage increase in onboard yields on a constant-currency basis? There seems to be insufficient information available to understand what that would look like in pro forma constant currency.

Robin, we don't actually break out the ticket versus onboard in our guidance. I mean that’s a combined number. But what I can tell you is based on the synergies that we saw roughly two-thirds is going towards onboard and one toward ticket. And the upside or the opportunity for us is to continue to push on the ticket side.

But I was – it sounds just like the actual, Q1 actual?

On Q1, yes, 75% I would say is ticket and the way that – that actually skews more towards Norwegian and then the onboard upside really skews more towards Oceania and Regent.

Given the flat pro forma net yield for Q1, if most of that was from ticket sales, does that mean ticket sales were slightly up while onboard sales may have been slightly down?

Yes, when we previously announced our Q3 earnings call, we indicated that we expected Q1 to be flat or increase by 1%. However, as we entered the quarter, while our per diems were strong, our load was actually down. One of the initial changes implemented by the new management team was to prioritize increasing our loads first, and only then focus on boosting revenue. We also revised our marketing strategy, as discussed during investor day. Instead of an enticing advertisement that emphasized branding, we shifted to a more direct call to action, which resulted in an improvement in ticket sales for Norwegian.

Yes and that’s why we are excited, yes, for the second half of ‘15 and really into ‘16 because the necessary condition in my view of being able to raise prices and per diems and therefore yields is load factor. And when your book is well booked into the future as we are at this point, that bodes very well for constant increases in prices.

Can you clarify what the deferred revenue is that's included in your adjusted yield line item, which seems to add about 400 basis points to the reported yield? Additionally, how much did it contribute to your pro forma net yield? Given that pro forma net yield was basically flat this quarter, would it also have decreased by 4%? I'm trying to understand what exactly this adjustment entails.

So this is related to the acquisition of Prestige and it’s under the business combination accounting rules. So obviously we booked revenue when the ship sails but advance ticket sales, it was about $48 million in total, that is deemed that the sailing process had primarily occurred at the time of the acquisition. And so therefore you have to actually haircut that number and so we actually are adjusting out to $21 million because we are putting it back in, just say, this is real revenue that you need to look at for that selling. But because of the accounting rules they make you haircut it. And that was already baked into our guidance. We were discussing that at the last call.

That $21 million, under the accounting rules, will be reflected in future quarters? In other words, are they sailings that

That’s correct.

So those were sailings that hadn't been taken yet or something?

So we are going to see it for the rest of the year and it will go consistently down over the next three quarters.

To conclude on the question Robin asked about the $20 million in deferred revenues, does it decrease from $20 million to $10 million to $5 million to $5 million? This is significant because it affects the timing of the net yield, which is a key focus for us. Additionally, regarding your fuel costs, the price per metric ton is likely to increase from the first quarter to the second, yet your guidance suggests a lower fuel price per metric ton. I'm looking to clarify if this is related to the fuel hedges.

Okay good question. So on the deferred revenue, there is about $18 million to $19 million remaining for the last three quarters. And then that will go away. And then regarding the fuel prices, yes, so our fuel prices do actually spike up in Q2 and Q3 as we are moving into the more premium itineraries or burning more NGLs and then it’s going to go back down into the fourth quarter. You will see that lower back down to get us back to our full year guidance.

Frank and Wendy, really appreciate all the detail you provided in the prepared remarks, and so far in the Q&A. I'm just wondering, can you update us more specifically about what you're seeing in your various markets in 2015, Caribbean, Europe, Alaska, perhaps some details on pricing on bookings, and if you have seen any changes since your first-quarter guidance in those markets?

From that perspective, it’s been pretty steady. There isn’t any markets that are – that distinguish themselves either on the high end or the low end. If there is a market that shows a little weakness and I think it’s some leftover fears of the Ebola virus and some of the more exotic itineraries on the Oceania and Regent fleet that touch the African continents and go out to Asia. There is a little weakness there. The good news is that’s a very, very small part of our overall deployment but you issue itineraries a year and half, three years ahead of the actual sailing. So if I had to do all over again I may not have as many sailings in and out of Cape Town, Africa. But they are coming back a bit, I think, as the headline and all the negative news stories about Ebola start to fade in and the world is not coming to an end because of Ebola. But if there was one that I would tell you had a little bit of weakness, it would be that but overall Europe is strong, Alaska is strong, the Caribbean is very good. I mentioned to you how well Escape is going and Escape is a Caribbean ship out of Miami. So when you are booked as well as we are booked into the future given the diversification of itineraries by definition, the areas are all doing pretty well.

And then also, Frank, thank you. I know you are very focused on customer satisfaction. I think that goes without saying. You've talked earlier about raising your beverage pricing and your room service fees. I'm just wondering if those efforts have affected consumer satisfaction at all and what kind of feedback has Norwegian gotten from that, if any?

On the beverage, we’ve seen nothing at all. We have not seen a decrease in consumption. It’s pretty much what we thought, if you are thirsty around the pool, and you want a Pepsi in the middle of the ocean, you’re going to buy that Pepsi whether it’s $2.10 which was the old price, or $2.25 which is a new price, so nothing at all. On the more recent introduction of a fleet-wide $7.95 service charge on room service, if you read some of the online blogs, there has been some comments, there always is, no one likes to pay more. But we tested it on two ships in two different price points and we didn’t hear complaints. We improved the menus, so there was a give and take. So yes, you have to pay a delivery charge so that we can deliver faster, because that eliminates some of the folks who order a piece of toast on a cup of coffee in the morning and – but no, overall, all these initiatives that we have put in place that recognize the power of the captive audience that you have without going too far, they’ve all panned out as we expected.

And then just quick housekeeping. Wendy, can you just update us, if there is an update from your investor day on the FX sensitivities to yield and/or EPS?

Sure. It’s the same sensitivities actually that we had. So let’s see – it’s three-tenths of a penny, count to two-tenths Canadian, three-tenths and then Australian two-tenths that’s gaining.

The $5 that you guys are looking at in 2017 not only implies that you can capture some pricing growth, but also that net cruise costs, capacity-adjusted, are extremely well contained. And I think this quarter, like-for-like they were up about 5.6%, it indicated in the press release. So can you just sort of speak to your confidence level on the ability to maintain those costs and really where you see the best opportunity is to keep those costs under control?

First off, Jamie, we don’t have in $5. Any upside of FDR new deal into the revenue side of the business. I just want to say if you look back at what I just talked about with the long term outlook, that’s pretty much a 3% to 4% net yield growth baked into that year. So to the extent that these things start to take place and take a foot hold, that’s upside to the $5. And regarding the net cruise costs, I can just say in my role here, we are just as focused on net cruise costs as we always have been. This is an anomaly year, primarily an organic year, we don’t get the benefit of a new ship until the back end of the year and we already are putting a number of investments into marketing to really bolster the marketing where we believe remains to be and that’s both pre-Frank coming on-board and then post-Frank coming on board, saying, okay, I need to tweak it even more. I will turn it to you, Frank.

Yes, but as a general comment, I will tell you that I truly believe that whether you want to consider them formal synergies as I said we need to transition away from just looking at the combination as an opportunity for cost savings and transition to running a business period. We are not done at all on the synergy cost capture. Again we have been here four months now and have found – what we have found nearly $200 million in total but we are not done. Not going to tell you how much more we think we can get but it’s not de minimis. So we are going to continue to focus on costs. There’s lots of more opportunities. We hinted at our investor conference what we thought we could achieve on the back office, on payroll if you will and we hit the top end. Baked into the synergy number for 2016, for example, is a $27 million of headcount reduction and was roughly 10% of our payroll. And we think we are pretty much done there but there are many pockets – in a company that generates $4.5 billion worth of revenue and makes $500 million of the profit, it’s $4 billion of expenses and there is just more to get. So none of that – none of those costs above the $50 million in net synergies that are baked into the $5 in 2017 or the $3.71 I believe in 2016, zero upside to pricing to yields is baked in, whether you want to call it the FDR deal or just the fact that we are still well booked into the future and what’s going to happen next is you are going to see pricing steadily increasing as a result of that strong load factor. None of those factors, both which are positive, are embedded in the $5 in 2017 EPS estimate. And so again I don’t want to start adding A plus B equals C but at this point the $5 is a very well in our focus and it should exceed – the actual results should exceed that $5 target.

So I mean really good to hear that you are so well booked. And the 39% year-over-year increase in revenues for 2016 on the books, and then you compare that with the load factor at double, the primary difference there? And then, also, typically at this point in the year, if you don't want to give the specific number right now, but typically, how much of the forward year do you have on the books, just to see the magnitude of how important those numbers are?

Still low, I won’t give you a number. But any time you are that far ahead is good.

What is the significant difference between the 39% increase and the double load factor?

Difference is that the 39% encompasses all three brands and the double in load factor in Norwegian only.

And then finally, regarding Royal, obviously, as you listen to your competitor earnings calls, they mentioned the policy of stopping last-minute discounting. Has that had any impact on you? And have you noticed any change in behavior from some of the competitors, I guess it would just be Carnival, since there aren't many other big players out there? Have you noticed any differences in the competitive landscape in response to that?

I don’t know what Carnival is doing. I heard what Royal was going and I applaud them. No one likes to see discounts. We think that our go-to-market strategy while eliminating discounts, it certainly minimizes the need for discount because if you are again booked this far in advance like we are, the pricing dynamic is want to increase pricing and not to decrease pricing. So if we are successful at rolling out what we say we are going to do and by definition, the need for massive last minute discounting goes away.

Just a few more here. Wendy, could you maybe give us a little more color on the impact of the unplanned resumed drydock here due to the warranty issue on yield and cost? And then is there any possible recovery for business interruption insurance, either yours or be borne by the yard?

That’s a great question and obviously once we look into – so the good news is that the drydock cost is minimal. Our cost is less than $1 million on that because it’s being covered under warranty. The bigger item is the lost revenue and that’s in the mid single-digit million that we’ve actually lost on that 15-day Panama Canal sailing.

And then you would have some cost avoidance as well. You are not burning fuel, but you are still obviously paying the crew.

There is, Tim but on the same token, when we cancelled that sailing, we hauled tail if you will, to the Bahamas from the West Coast to get there to minimize any disruption before we did the Transatlantic. So it’s an offset.

Frank, the team has shown impressive performance. Given the earlier discussion about the incremental net cost savings after reinvestments and the additional yet-to-be-quantified opportunities, can you or Wendy provide an update on the thoughts regarding the debt prepayment? I recall you mentioned plans to prepay a certain amount of debt starting in 2016, which was considered in your guidance. Could you also discuss the balance between that and share repurchase, and whether this is still on track for 2016?

Great question. And we are very focused on that and including our board as to what’s the best use of our free cash flow. And what I said at investor day is that probably or there is likelihood that in the fourth quarter of ’15 we could start to either pay down some debt or go back and start – embark again on our share repurchase program. And I would say that we are still very focused on that. So it’s either late ’15 or into ’16, I think that’s what we are focused on. What I also stated was that there is more of an appetite with our weighted average cost of debt being just over 3.7%, we are inclined that share repurchases is more likely the better use of funds. And we are excited about that. So that’s highly likely, obviously it has not been approved by our board at this time but we are focused on that.

And lastly, Frank, I know this is a board decision, but you’d also talked about maybe initiating a dividend. And would that be reasonable to assume that you would maybe want to do that earlier than later, just to broaden out the investor base here?

Let me jump in and take that, Tim. I think it was the one that addressed that at the investor day. And it’s not that necessarily – I think what we said all along is that it’s a matter of time before a dividend is implemented. And we know that we want to broaden that investor base. But it hasn’t been the primary focus. We are probably more keen on repurchasing shares first but again that’s a good discussion at our board level and I do think it is a matter of time.

I have a couple of questions. First, regarding the yield, you exceeded your expectations in the first quarter, and your outlook appears very positive. I'm curious why yield guidance hasn't been adjusted upwards in light of this achievement. Is it due to Star going into drydock, or do you have other thoughts on this matter? Secondly, can you share any updates about Cuba, especially since we've seen the introduction of ferry services like JetBlue? Where does the cruise industry currently stand in discussions about reopening Cuba?

Well Cuba is of a special interest to me, not only because I run a cruise line but because I was born in Havana and haven’t been back in 54 years. So it’d be nice to go back. Look, I have said publicly Cuba was tailor-made for the cruise industry given where it is, given the pent-up demand that there has to be for Cuba after being closed to Americans and for most of the world for all these years. I will tell you that I welcome the initiatives that both governments have undertaken to resume discussions and resume a normal relations between the two countries, literally a week doesn’t go by some news comes out about making progress towards that goal. I think you saw this week where the administration approved four ferry companies to start ferry service to Cuba. I think that’s all positive steps. Obviously we need to go further. I don’t think that both countries want to stop where we are and so we are hopeful that progress continues and that some day not in the distant future, cruising to Cuba will be allowed. It will be a great boon to the industry and coupled with what we are seeing in China this can be the start of another golden boom in the cruise industry, where you’ve got new destinations to go to that are very sought after in Cuba and a whole new market, a large new market in China that wants to cruise. It could be heck of a 1Q punch to really increase overall demand for cruising. In terms of yields, could you repeat the question, please?

It appears that you exceeded the top end of the first-quarter guidance with yields. The commentary and the reinvestment you are making sound very positive. However, I'm curious why you have maintained the full-year guidance as it is. Is it mainly due to the Star drydock, or are you being particularly conservative despite the strong start to the year?

Great question. So yes, we did have a beat in revenue on Q1 but it’s a combination not only of the Star drydock that I just spoke about but then also the additional FX hit that we’re going through that at this time we anticipate will hit us for the year. That’s why we have left the yields where they are but we have said that the upside from the FDR new deal plan is baked into those numbers and it takes time to roll out those initiatives. So we feel very confident that they will be fully in place for ’16 but we think that there could be potential upside in ’15 too and we will just have to continue to message that to you.

Thank you, everyone for your time and support today. As always, we’ll be available later this afternoon to answer any questions you may have. Operator, thank you for your good work. Goodbye, everyone.