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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Norwegian Cruise Line Holdings Fourth Quarter and Year 2017 Earnings Conference Call. My name is Jonathan and I will be your operator. As a reminder to all participants, this conference call is being recorded.
I would now like to turn your conference over to your host, Ms. Andrea DeMarco, Vice President of Investor Relations and Corporate Communications. Ms. DeMarco, please go ahead.
Thank you, Jonathan. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2017 earnings call. I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings; Wendy Beck, Executive Vice President and Chief Financial Officer; Andy Stuart, President and Chief Financial Officer of Norwegian Cruise Line; and Mark Kempa, Senior Vice President of Finance.
Frank will begin the call with opening commentary. Afterwards, Wendy will follow to discuss results for the quarter and for full year 2017 as well as guidance before turning the call back to Frank for closing words. We will then open the call for your questions.
As a reminder, this conference call is being simultaneously webcast on the company's Investor Relations website at www.nclhltdinvestor.com and will be available for replay for 30 days following today's call.
Before we discuss our results, I would like to cover just a few items. Our press release with fourth quarter and full year 2017 results was issued this morning and is available on our Investor Relations website. This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statements contained in our earnings release.
Our comments may also refer to non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release.
With that, I'd like to turn the call over to Frank Del Rio. Frank?
Thank you, Andrea, and hello, everyone. I would like to start off my comments this morning by letting you know that as I embark on my 25th year in the cruise industry and my fourth leading this amazing company that this year is by far the most excited, most energized and most optimistic I have ever been at the start of a New Year. 2018 is indeed shaping up to be another record-breaking year for the company.
The strong demand environment that began late in third quarter of 2016 and continued to pick up steam throughout 2017 has accelerated through this year's early wave season, as both the number of new bookings sold and the price points achieved reached record levels at each of our three award-winning brands.
In other words, while we turned the New Year in the best book position in our company's history, with total book revenue, load factor and net per diems at all-time highs, our overall book position during the first seven weeks of 2018 further improved compared to the same time last year. In addition, we believe that the increase in net ticket revenue, driven mainly by higher per diems, has and will continue to have a positive impact on onboard revenue as past experience has taught us that the more a guest spends on their cruise ticket, the more they tend to spend onboard.
This strong sustained booking environment has been made possible by several factors, including widespread improvement across the major global economies and a U.S. consumer whose confidence is at or near all-time highs and driven by record-low unemployment, record-high stock market value, a low interest rate environment and most recently tax relief that is likely to increase discretionary spending. Collectively, these factors are contributing to strong consumer demand across all of our core source markets.
This strong booking environment is also being fueled by an industry that continues to introduce marvelous new ships that pique consumers' interest, invest heavily in modernizing and refurbishing its legacy fleets and dedicates hundreds of millions of dollars annually marketing the virtues of a cruise vacation to travel agents and to public at large.
Collectively, these positive and constructive factors have led to demand creation platform, the likes of which has never been seen before. This platform comes at a time when both millennials and baby boomer generations adopt cruising as a preferred vacation and find cruising to be the ideal vacation for all types of travelers, from solo travelers to newlywed couples and groups of friends to large generational families. Cruising has taken the mantel as the perfect vacation for nearly all leisure groups.
Our company, in particular, is leveraging this strong worldwide demand for cruise vacations with the appeal of our young, modern and refurbished fleets deployed optimally across the globe and with our clear and compelling bundling strategy and value-add offerings that are resonating extremely well with our target market and, finally, with our time-tested and proven revenue management strategy, acutely focused on maximizing our pricing power by stimulating demand early in the booking curve. The result is record high book load factors and pricing for each of 2018's four quarters.
And while load factors are at all-time highs and now approach optimal levels relative to sale date, the real star of the show, going forward, is our pricing power, with all three of our brands showing meaningful year-over-year pricing gains throughout 2018. And while still very early in the booking cycle, initial indications are that this fertile booking environment has a long tail as we are already seeing gains in both load factor and pricing into 2019, particularly for itineraries with extended booking curves.
Two examples of the benefits of this near optimal booking curve, which, at year-end 2017, had elongated by nearly five weeks since the prior year and the related pricing gains had come hand-in-hand with early bookings are, first, the 11% year-over-year increase in advanced ticket sales at year-end 2017 with adjusted capacity growth, excluding the China-based Norwegian Joy of just 2%; and second, the recent update to our final payment policy for the Norwegian brand, which now requires full payment 120 days prior to sailing versus the decades-old 90-day window.
The benefit of this change include accelerated cash flow, improved liquidity and most importantly, enhanced visibility and control over our inventory 30 days earlier than usual, enabling us to further strengthen pricing for close-in bookings. For our travel agent partners, the change reinforces our strategy to make the Norwegian brand their preferred brand to sell by accelerating payment of their hard-earned commissions of full 30 days earlier, significantly improving their cash flows.
In a nutshell, the current booking environment is strong and is, once again, demonstrating the resilience of this industry and of our company, which, despite experiencing the most devastating hurricane season of the past 200 years, has achieved record results in 2017 and looks to do the same in 2018 and beyond.
But before I get too far ahead looking into the future, I'd be remiss to omit mention of the many accomplishments achieved, initiatives launched and the strategies implemented to-date, the some of which have positioned us well for continued success in 2018 and beyond.
A little over a month ago, Norwegian Cruise Line Holdings celebrated the fifth anniversary of our initial public offering, marking the occasion by ringing the opening bell at the New York Stock Exchange. The major operational accomplishments achieved since our IPO can only be matched by our stellar financial performance.
From the recent launch of Norwegian Joy, our company's largest ship to-date, to the 2016 launch of the world's most luxurious one, the Seven Seas Explorer, and from the creation of Harvest Caye, a new island destination in the Western Caribbean to the commencement of sailings to the island nation of Cuba with over 500 years of history, but effectively close to Americans for the past 60, the operational milestones reached by the company these last five years are indeed significant and worthy of a high place in Norwegian's storied 50-plus year history of constant and continued innovation.
Also critical to our success story was the acquisition and seamless integration of Oceania Cruises and Regent Seven Seas Cruises in 2014. This $3 billion plus transaction cemented our top-three position in the industry with an unequaled portfolio of three award-winning cruise brands, each with clear product propositions and differentiators that give each brand compelling competitive advantages. Combined, our three brands have successfully launched six ships in the last five years and have a pipeline of seven confirmed new builds extending through 2025, all with committed financing, which will grow the number of berths in our fleet by approximately 45%.
The financial milestones reached during the last five years are equally impressive and every year since our IPO, we have posted double-digit growth in adjusted earnings per share, including year-over-year earnings growth every quarter. We've recorded annual year-over-year growth in adjusted net yield and continue our string of quarterly trailing 12 -month adjusted EBITDA growth, reaching 38 consecutive quarters.
During this five-year period, we have also doubled our revenue to over $5 billion, increased earnings per share six-fold and grew adjusted return on invested capital to double-digit levels.
Looking at just 2017, the year had no shortage of operational and financial accomplishments, as many trades across the globe experienced strength in 2017, but perhaps none benefited more in this environment than our Europe itineraries and the launch of our voyages to Cuba.
You will recall that successive geopolitical events through the summer of 2016 resulted in a noted depressed demand environment for European sailings. 2017, however, saw an unprecedented turnaround in demand for Europe voyages from our core North American customer, particularly for the brands that were disproportionately negatively impacted in 2016. The strength and speed of this turnaround was faster than anticipated, taking only one year for European itinerary pricing to recover and surpass 2015 prior peak levels.
2017 also saw our company make history as Oceania Cruises became the first established cruise brand and the first of our three brands to sail into Havana Harbor. The pent-up demand for sailings to the island resulted in all three brands achieving healthy pricing premiums compared to similar Caribbean voyages without calls to Cuba.
The feedback from guests has been extraordinary and we have not only added calls to the island on existing itineraries, but we have also deployed a second ship in the Norwegian brand, the Norwegian Sun, to sail to Havana beginning in May of 2018. The island's strategic geographic location relative to major U.S. ports, its rich heritage, welcoming people and pent-up demand from our key U.S. source market continues to make Cuba one of the most sought-after and high per diem destinations in the world and one in which we will deploy 4% of our capacity to in 2018.
Therefore, while 2017 yields benefited from the combination of strong and resurging demand for Europe sailings and the premium pricing from inaugural year of sailings to Cuba, these significant singular benefits combined contribute to a difficult year-over-year yield growth comparison for 2018.
During 2017, we also expanded our global footprint with our mid-year entry into the Chinese cruise market with Norwegian Joy. Our team in China successfully launched a new brand with premium customized hardware and delivered a profitable venture in its first year of operation in a difficult operating environment, where the restrictions on travel to South Korea continue and the maturing and expansion of the distribution system is evolving slower than hoped.
Despite these headwinds, we remain optimistic that the vast opportunities possible in China will come to fruition. And we are pleased to report that in her first year of operation, Norwegian Joy is consistently atop the guest satisfaction rankings of the Norwegian fleet and also enjoys the fleet's highest load factor. With these important successes boosting our resolve, we recently launched marketing, promotional and yield management strategies, that although novel in China, have proven successful in our other markets and we look forward to similar positive outcomes in China.
Lastly, Joy is fully chartered for the first half of 2018 and we are encouraged that the second half of the year is better chartered than this time last year at slightly higher prices. China is just one of the inroads we have made in our international sourcing and diversification strategy.
As I've mentioned in the past, the targeted sourcing initiatives we rolled out over the past few quarters in our core international markets have gotten us to a point where pricing for international source guests is at parity to or even slightly higher than that of North American-sourced guests, making us agnostic as to where a guest sails from. This advancement causes us to be even more enthusiastic than ever before in developing fast-growing international source markets such as the UK, Germany, Australia and various emerging Asian markets.
In 2017, our core international markets outside of China grew revenue by 17%, with the majority of the increase coming from pricing gains derived from initiatives such as our value-add strategies and the Free at Sea consumer marketing campaigns that have been proven successful in North America. More impressive perhaps, is that this sizable revenue increase was achieved with essentially flat marketing spend, demonstrating the resonance of our offerings, the strength of the global demand environment and the tremendous job done by our international team across the globe.
But our diversification strategy goes beyond just geography or itinerary deployment. Generational and demographic trends are playing important and critical roles in growing demand for cruise vacations to all-time highs. Today, the two largest generation populations, the baby boomers and the millennials, are reaching important tipping points in their lifecycles and our three brands are there and uniquely positioned to serve them.
As you all know, 10,000 American baby boomers retire each day, adding to the largest population of individuals outside the mainstream workforce in history. These individuals, with large nest eggs and plenty of available leisure time, are also inordinately benefiting from the booming stock market and low interest rate environment, resulting in after-tax income gains that can be tapped for discretionary spending.
At the same time, millennials have overtaken baby boomers as the single largest living generation. The sheer number of this cohort, which is about to enter its prime earning years, is influencing everything we do from the way we build our ships to the onboard offerings we provide, to the way we communicate with this populace. And while the way we engage with these very different groups and the experiences they seek in a vacation may differ somewhat, one factor that remains consistently important among these two vastly different generations is an emphasis on value and that is where the cruise industry really shines.
Effectively communicating the incredible value proposition of a cruise vacation and the variety of activities available aboard today's modern cruise ships, such as casino gaming, fine dining, shopping, spa and visiting multiple exotic destinations in one vacation, is key in keeping these groups engaged.
The sizable investments we have made in The Norwegian Edge and Regent Seven Seas fleet refurbishing programs are two other important initiatives aimed at engaging multi-generational guests by keeping our ships modern, fresh and relevant. These initiatives have enhanced our brands' hardware, allowing us to offer a more consistent and upscale experience across the fleet and providing us the ability and confidence to command higher per diems.
The vast majority of vessels in the Norwegian brand will have undergone Edge enhancements by the end of 2018, while for Regent, the Seven Seas Mariner, the brand's last ship to undergo revitalization, will go into dry dock in the next three weeks.
We also took an important step in keeping the Norwegian Cruise Line fleet cutting edge, four steps to be exact, as we extended our capacity growth profile with the announcement of an order for four next-generation cruise ships under the Project Leonardo banner. With an optimum footprint that allows for access to a more diverse mix of destinations, these 3,400 passenger cutting-edge ships will marry the modern variant upscale offering of our Breakaway Plus Class ships with the latest technological advancements in both ship operating systems and guest experiences.
Turning to our financial accomplishments in 2017, they have been equally impressive, as we reached new highs in revenue, earnings, net yield and return on capital. Our net yield continues to be the highest in the industry, and by a wide margin I may add, and our ability to maintain and in fact add to this advantage is due to our unique mix of brands as well as targeted investments in both hardware enhancements and in the onboard guest experience.
To give you an idea of how secure our net yield advantage truly is, please consider that the Norwegian brand alone, which at the time of our IPO in 2013, made NCLH the highest-yielding publicly traded cruise operator, which still on a standalone basis holds that first place position today.
In terms of enhancing the guest experience, the Oceania brand has invested heavily in the trend towards healthier lifestyles, partnering with Canyon Ranch to offer unique in the industry fully-integrated wellness programs that include shore tours, fitness classes, signature spa treatments and award-winning cuisine, including the most expansive vegan menu at sea.
At the Norwegian brand, we continue adding to our legacy of innovative first-at-sea offerings with the introduction of the industry's only ships, Norwegian Joy and Norwegian Bliss, to feature exciting electric go-kart racetracks and the virtual reality-centered Galaxy Pavilion that attracts adventure seekers with offerings that would be cutting edge on land, much less at sea.
But the 2017 highlight that truly affirmed our financial success was our inclusion into the S&P 500. This is a remarkable achievement for a company less than five years removed from its initial public offering and is a testament to the stellar work and yeoman's efforts of our global team members both shoreside and at sea.
In summary, 2017 was a solid and productive year with many milestones to be proud of, but more importantly, we have strategically positioned our company for continued strong performances in 2018 and beyond. I'll talk a little more about our positioning in my closing comments.
But now, I'd like to hand the call over to Wendy for a commentary on 2017 results and 2018 expectations. Wendy?
Thank you, Frank. Good morning. Unless otherwise noted, my commentary compares 2017 and 2016 adjusted net yield and adjusted net cruise cost, excluding fuel per capacity day metrics on a constant currency basis. I'll begin with commentary on our fourth quarter and full year results, followed by color on booking trends and then, we'll close with our outlook and guidance for 2018.
I'm pleased to report yet another record quarter, with both fourth quarter revenue and earnings the highest in our history. Results for the quarter exceeded expectations by $0.06, with adjusted earnings per share of $0.68, surpassing guidance of approximately $0.62. Better-than-expected results in core operations contributed to half the beat, with the other half coming from a one-time tax benefit as a result of the recent tax legislation.
Adjusted net yield increased 3.4% or 3.9% on an as-reported basis versus the prior year, outperforming guidance expectations of up 2.25%, driven by strong close-in demand, coupled with continued strength in all onboard revenue streams. Excluding the impact from our new Norwegian brand capacity, which is dilutive to the NCLH corporate average, our fourth quarter adjusted net yield growth would have been approximately 6%.
Looking at cost, adjusted net cruise cost, excluding fuel, increased 2.8% versus prior year and 3.2% on an as-reported basis, primarily due to an increase in marketing, general and administrative expenses as well as direct expenses in marketing initiatives related to the hurricanes and the technical issue on Norwegian Gem that we discussed on our last earnings call.
Turning to fuel, our fuel expense per metric ton, net of hedges, slightly increased to $460 from $459 in the prior year. The increase in our fuel price per metric ton was unfavorable versus guidance, primarily due to rising prices since our last earnings call.
Taking a look below the line, interest expense, net, was $84.3 million in 2017 compared to $88 million in 2016. In connection with refinancings of our senior notes and certain of our credit facilities, interest expense, net, included losses on extinguishment of debt and debt modification costs of $23.9 million in 2017 and $28.1 million in 2016.
Turning to full-year results, 2017 finished strong and we delivered yet another year of record financial performance despite the headwinds from the unprecedented hurricane season, which impacted both the third and fourth quarters. Both revenue and earnings were the highest in our history and we achieved a record gross adjusted EBITDA margin in excess of 30%.
Continued strong demand for our portfolio of products drove the beat to guidance with full-year adjusted earnings per share growing 16% to $3.96, $0.06 above guidance issued in November and $0.16 above the midpoint of our initial full-year guidance issued last February.
Revenue grew approximately 11% over prior year, reaching a record $5.4 billion. Other key financial metrics for full-year 2017 include adjusted net yield growth of 5% or 4.8% on an as-reported basis, exceeding the midpoint of our most recent guidance by 25 basis points. The year benefited from the strong rebound in demand for Europe sailings, the addition of sailings to Cuba, strong close-in demand in core markets and stronger-than-expected onboard revenue.
Adjusted net cruise cost, excluding fuel, increased 2.8% or 2.9% on an as-reported basis and fuel price per metric ton, net of hedges, decreased slightly to $465 from $466 in the prior year.
Now, shifting the focus to 2018, on a full-year basis, our capacity is expected to increase approximately 8.8% with the midyear introduction of Norwegian Bliss, along with the annualization of Norwegian Joy.
Looking at deployment around the world, we believe we have an optimal mix of itineraries for 2018. The Caribbean will comprise 37% of our deployment, with capacity in the region up high-single digits from prior year, primarily driven by Norwegian Sun, which will begin weekly sailings to Cuba in May.
Europe will comprise 20% of our deployment with capacity down low-single digits from prior year, primarily as a result of dry dock timing and the trending of capacity in the lower-yielding shoulder season. The Asia, Africa and Pacific region will experience an increase in capacity with deployment mix increasing from 8% to 12%. As for other markets, deployment is similar year-over-year.
Turning to the first quarter of 2018, capacity is expected to increase approximately 11%, primarily due to the annualization of Norwegian Joy and fewer dry docks in the period versus prior year. As for deployment for the first quarter, approximately 58% is allocated to the Caribbean, down slightly from prior year. Europe represents approximately 4%, in line with prior year. And the Asia, Africa, Pacific region accounts for approximately 17%, up from 9% in the prior year.
Turning to guidance, strong booking trends have continued across all core markets for all three brands. Adjusted EPS is expected to be in the range of $4.45 to $4.65. Since our last earnings call, we have experienced a sizable increase in both fuel prices and interest rates, which has been partially offset by favorable foreign exchange rates, resulting in a net headwind of $0.06 per share. Despite this headwind, we expect to grow earnings at least 15% in 2018, an improvement of $0.59 over prior year based on the midpoint of guidance.
Adjusted net yield for the year is expected to increase approximately 2% or 2.75% on an as-reported basis. This performance is on top of the already robust 5% growth we delivered in 2017, which was bolstered by the aforementioned strong turnaround in Europe and the inaugural season of premium-priced sailings to Cuba, both of which we lap in 2018. Excluding new tonnage introduced for the Norwegian brand, adjusted net yield growth would have grown an additional 100 basis points to approximately 3% or 3.75% on an as-reported basis, which illustrates the pricing strength Frank referred to earlier of our core fleet.
Adjusted net cruise cost, excluding fuel, is expected to be flat to up 1% or 0.5% to 1.5% on an as-reported basis, primarily due to an increase in dry dock days versus prior year. Without these incremental dry dock days, cost would have been down.
As we mentioned last quarter, there are a few items to keep in mind for the balance of 2018. When looking at our NCLH corporate yield growth, keep in mind that yields for the first half of 2018 will naturally be lower than the second half as we lap the final quarters of the inaugural year of the high yielding Seven Seas Explorer and Oceania Cruises' Sirena. In addition, the first half of 2018 will include the lower-yielding shoulder season of Norwegian Joy.
As for cost, 2018 is the last year of heavy lifting for the Norwegian Edge and the Regent Seven Seas revitalization programs. As a result, scheduled dry dock days will roughly double versus the prior year, primarily due to these longer, more extensive dry docks.
The majority of the year-over-year variance will impact the second quarter, resulting in a spike in adjusted net cruise cost, excluding fuel, which is expected to be up high-single digits in the quarter. Costs for the back half of 2018 are expected to be flat, as we lap one-time expenses from the prior year related to the hurricanes and costs associated with the launch of our China operations.
Turning to guidance for the first quarter, adjusted net yield is expected to increase approximately 0.5% or 1.25% on an as-reported basis. Keep in mind that Q1 not only has a tough year-over-year comparison with prior year growth of 5.5%, but also includes the lower-yielding shoulder season for Norwegian Joy as well as the extended scheduled dry dock of one of the higher-yielding ships in our fleet, Seven Seas Mariner. These items combined make this quarter the lowest expected yield growth quarter in 2018.
Excluding new tonnage introduced for the Norwegian brand, which is dilutive to the NCLH corporate average yield, adjusted net yield is expected to be up 3.5%, further demonstrating the core pricing strength of our three brands.
Turning to cost, adjusted net cruise cost, excluding fuel, is expected to be down approximately 2.75% or 1.75% on an as-reported basis, primarily due to the timing of dry docks with two scheduled dry docks occurring in the first quarter compared to five in the prior year. Looking at fuel expense, we anticipate our fuel price per metric ton, net of hedges, to be $450, with expected consumption of approximately 205,000 metric tons.
Taking all of this into account, adjusted EPS for the first quarter is expected to be approximately $0.52. As previously discussed, we continue to further strengthen our balance sheet and will meaningfully de-lever this year, bringing our expected leverage to the low 3 times. We remain focused on our capital allocation strategy. We are evaluating the best options to return capital to our shareholders, including the potential implementation of a dividend program and opportunistic share repurchases.
Embedded in our full-year guidance, we have assumed the utilization of the remaining balance of our currently authorized share repurchase program to help mitigate the anticipated dilutive effects of equity awards.
With that, I'll turn over the call back to Frank for closing remarks.
Thank you, Wendy. Operationally, we are now in the homestretch of preparing for the arrival of our 26th ship, Norwegian Bliss. She has maintained throughout her booking curve the fast-paced sales momentum and high pricing that has made her the best-booked newbuild in Norwegian's history. She has more cabins sold today at meaningfully higher prices than any of her sister ships at this point prior to delivery by a wide margin.
Some would say that the best-booked ship in Norwegian's history is worthy of an encore and that is exactly what our newbuild slated for delivery at the tail-end of 2019 will be. Last month, we cut steel on the last of Norwegian's game-changing Breakaway Plus Class fleet with Norwegian Encore. She will be deployed to fully leverage the strong secular booking environment that we are seeing in North America, launching with sailings of the Caribbean from PortMiami in mid-December of 2019.
A strong worldwide booking environment underpins our financial priorities for 2018 of achieving another year of double-digit adjusted earnings per share growth, de-levering to the low 3 times and preparing our balance sheet for the return of capital to shareholders, including the potential for the institution of a dividend.
As I stated at the beginning of this call, I have never been more excited or energized going into a new year as I am today for 2018. Among the things I am most excited about is showing off the highly anticipated Norwegian Bliss. Her first call in the U.S. will be in the Big Apple in early May, where we will take the opportunity to showcase her to you with an Investor Day on Norwegian Bliss on May 4. As a result of the timing of our Investor Day, our first quarter earnings conference call is scheduled for May 2. We look forward to speaking with you then and seeing you onboard Norwegian Bliss.
Mr. Jonathan, please open the call for questions.
Thank you, Mr. Del Rio. Our first question comes from the line of Felicia Hendrix from Barclays. Your question, please.
Hi. Good morning. Thank you. So, Frank, just looking at the outlook for the year, a lot of investors that I'd spoke with this morning thought your full-year net yield guidance is conservative and your prepared remarks were definitely optimistic. So, as you think about that 2% increase for 2018, can you just help us understand what regions and brands would be the most prime to drive upside to your guidance, and then alternatively, where you might be holding back, given what you're seeing today?
Oh, we don't hold back, Felicia. We give you our best view based on the current situation. And please note, it's very early in the year. Look what happened in 2017. Who would have guessed that late in the year, after a very benign year, that weather events would cause the havoc that it did. And so, we take those situations under consideration, but looking at the numbers, we said that each of our brands is performing extremely well, both in load and in pricing. We don't see weakness in any of our source markets. We don't see weakness in any of our core markets, source or itineraries.
Remember that we're lapping a couple of things from 2017. 2017 Europe performance was outstanding, following the issues that we all know about in 2016. The Cuba itineraries, as I said earlier in prior calls, were home runs and we continue to see high pricing for those itineraries, which is why we added a second vessel at the Norwegian brand, bringing our total capacity to Cuba to roughly 4%, double from 2017. But the year-over-year increase is not going to be as dramatic.
We also have the full-year impact of Norwegian Joy, especially in the first half. It's the low season in China. And we have the lapping of our very, very high-yielding Oceania and Regent ships, Explorers and Sirena were introduced in 2016. So we have the conundrum of adding Bliss, which as I said earlier, the best booked in load, in pricing, in velocity, you name it, Bliss is leading the charge. But it comes from the Norwegian brand, which no matter how profitable these ships are, their yields are lower than the corporate average because of our unique mix in the industry of having roughly 30% of our capacity being very high priced, very high-yielding brands. So, you shouldn't take the 2% to be conservative. You shouldn't look the 2% to be anything other than a start for the year in which we have high hopes for, but it is still early.
Okay. Thanks. And we're going to be strict with the one question rule, right, Andrea?
Go ahead.
Wendy, just on your balance sheet, I know you guys have been working hard to get optimal leverage level and you talked about that, but you're kind of with, you're in your range, not at the low end, but you're there. Just, given that interest rates are rising, I was just wondering if you'd consider locking in some incremental debt now at current interest rate levels to buy back stock with the intent to offset dilution from potential future sponsor selling.
Okay. Great question. And believe me, we have looked at all kinds of options. So first off, I mentioned in my prepared remarks that we have embedded in our 2018 guidance that we do plan to repurchase the $264 million in our authorization program. About half of that will help to offset dilution from equity growth and about half of that will be accretive. We'll continue to assess our options. As I also mentioned, we're keen on putting in a dividend program, potentially more repurchases. And regarding the interest rates, we will continue to fix our interest rates if we continue to bring on new capacity. So, we're right now about 54%-46%, but that will continue to grow more fixed.
Remember that in the fall, Felicia, we refinanced a good portion of our debt at the lowest rates that any company with our rating has ever achieved and really the rest of the debt that we have on the balance sheet is ship-related debt that is export credit agency-backed, which is so low you'd never want to refinance that debt. So, our balance sheet's capital structure is in very, very good shape and doesn't need a whole lot of tweaking.
Okay. Thanks, guys.
Thank you. Our next question comes from the line of Steve Wieczynski from Stifel. Your question, please.
Yeah. Hey, guys. Good morning. So, Frank, I guess if we look back at 2017, your initial yield guidance was I think 1.75% and you beat that by over 300 basis points. So, this is kind of a follow-up to Felicia's question, but I guess the question is what drove such a disconnect there between that initial yield guidance and where you ended up at the end of the year? Not sure if that was European demand or Cuba or what, but I guess what I'm trying to get at here again, is how could 2018 – could 2018 end up in a similar position, not beating by such a large margin, given some of the mix headwinds, but could there be a decent amount of upside to your initial range here?
We hope so, but we don't know yet. And as I said earlier, we give you our best read based on the timing of the year. I mean, if this was our fourth quarter call in November sometime, I'd have more data points underneath our belt, but a lot of things could happen between now and then. We are enthused, as I said, more so than we ever have and it's not just me, it's the entire management team. We have less inventory to sell than we've ever had before. The pricing we're getting across the board is very, very strong, but as I've mentioned in my comments to Felicia, last year, we had some unique situations with Cuba, with Europe making an incredible rebound year-over-year.
Who was going to expect that? 2017, the momentum really grew and grew and grew and it wasn't until the hurricanes hit in mid-September that we had any bump on the road. And so, you tell me how many bumps in the road we're going to have and I'll tell you by how much we can possibly beat our guidance. But we do take those situations into account and if business continues the way it's been and there are no bumps on the road, then I think we could have some very pleasant surprises down the road, but until that happens, we hesitate to comment on it.
Okay. Great. And then, second question, I'll try to ask this as nicely as I can, but with the transition with Wendy unfortunately leaving the company later this year, I guess, the question is where does that search stand, Frank, and maybe help us think about what you're ultimately looking for in her replacement? I guess what I'm getting at is, is this person, whoever that may be, could we think of this person as a possible replacement for you whenever you decide to step aside?
Yes. So, we underwent a pretty thorough succession plan review, top to bottom, in the company and feel very, very good about our senior leadership management team, where they stand and what back-ups there could be. In the case of Wendy, we're going to engage – we have engaged a nationally recognized firm to look for a top-notch leader that can certainly walk in and be a very effective CFO and someone who, in the three years or so that I have until my contract expires at the end of 2020, can compete for the CEO job.
We have several internal candidates who will also hopefully be competing for that CEO job, but having more options from a corporate governance perspective is better than having fewer. And so, we look forward to this person being a top-notch CEO and someone who can compete for the CEO job at the appropriate time.
Okay. Thanks a lot. Great color. Appreciate it.
Okay.
Thank you. Our next question comes from the line of Patrick Scholes from SunTrust. Your question, please.
Hi. Good morning. You noted all of the regions were "strong" as you look out into the future. I'm wondering perhaps if you can give us a little bit more color or ranking as far as what ones are very strong and which ones are only so-so strong, so to speak.
Even the guy who bats ninth for the Yankees when the Yankees were good was a good hitter. And that's what we've got here. We've got a lineup that I see no underperforming regions. I'm always looking where to move vessels to. Cruise lines seek to move vessels to the highest yielding destinations. That's why ships have propellers and rudders and today, it's one of those few times in my tenure in the 25 years I've been in the industry that I wouldn't move any of my ships. I like where they are. I think, as we said in our prepared statements, we have optimum itineraries and I think that's one of the reasons we're seeing the strong pricing that we're seeing is because they're in the right place at the right times.
Okay. Sounds good. Thank you.
Thank you. Our next question comes from the line of Tim Conder from Wells Fargo Securities. Your question, please.
Thank you. And thank you on the color so far. I'll follow Felicia's lead and take two shots here. One, Wendy, if you could just remind us by the end of 2018, where your mix of fixed to floating will be inclusive of swaps and then, the overall what you have locked in on the committed financings for the seven newbuilds that you have on order?
And then, the second question would be on China, Frank, how did everything perform in 2017? If you can kind of back out Korea, how did everything perform versus your expectations? And then, at this point, where do you see the potential for bringing a second ship to China, now that you've got Encore committed to the Caribbean?
You managed to squeeze five questions in, Tim. I'll take China first. Look, China was profitable for us in 2017. We said she would be and she delivered. There are still challenges in China. I don't think China is hitting on all cylinders like it can and still we remain committed. We remain optimistic that the areas of opportunity, the areas that we can improve upon will come to fruition. One of those is South Korea.
You've heard me say many times, Tim, that the leading – the most important variable in increasing yields is itinerary. And when you only have one country to go to on four or five-day cruises, that's what's popular in China, it's difficult to have itinerary optimization. So, I think once South Korea comes back and we're all hopeful it comes back sooner than later, I think that will help things.
Second thing that keeps me optimistic about China, at least in the short to medium term is that, for the first time, I think, ever, China is not going to experience double-digit or even triple-digit year-over-year capacity growth. For the most part, capacity is either flattish or slightly down, which should benefit those who have remained and we're one of those. And so, we're optimistic that that will continue.
And as far as what will it take to bring another ship to China, quite frankly the rest of the world is doing so well to Patrick's question a moment ago, that it's hard to pull a vessel when you only have 26 ships, like we do, into China. We have many other either unserved or underserved markets that we would also consider in the mix, should ships become available to us.
We don't have a presence in the mid-Atlantic states. We're not in Baltimore. We're not in Charleston. We don't have a presence at all in the world's second largest port, which is Fort Lauderdale. We don't have a presence in the Gulf States of Texas or Alabama. We don't have a year-round presence in Tampa or New Orleans or in Los Angeles. We only have three ships in Alaska, which is a very high-yielding market. Some of our competitors have up to eight vessels.
So, given our fleet size today and the fact that we will only be taking one ship per year, it could be a couple of years before we consider adding more tonnage to China, if the conditions in the rest of the world remain as robust as they are today. And with that, I'll turn it over to – Mark, I think, will take this question about your debt question.
Yes, I think, Tim, if I recall after the five questions, I think you were asking what our committed CapEx is for the next three years in associated financing. So, we have about $1.5 billion, $1.3 billion and $0.8 billion for the next three years of roughly which 50% of each of those years is we have committed financing in place. And I think the first part of your question was on fuel hedges, if I recall?
No, it was related to the debt. Where do you see the...
We have – about 55% of our debt is fixed and 46% is floating.
Where will that be, Mark, at year-end with swaps, I guess, was the question.
Yeah, that's going to be about 40% by year-end.
Okay. Great.
We'll take on the fixed debt with the delivery of the Bliss and that will continue to work down as we take on further deliveries.
Thank you.
Thank you. Our next question comes from the line of Stephen Grambling from Goldman Sachs. Your question, please.
Hey. Thanks. Another couple follow-ups on net yield and forward booking comments. What percentage of the year is currently booked? How much of a swing factor could close-in bookings be on net yield, given some of your comments on potentially seeing bigger swings recently in the close-in bookings? And does the guidance embed growth in the close-in booking pricing or is it just based on what's currently on the books? Thanks.
What's currently on the books, we don't give out. We don't disclose what our booking position is in terms of occupancy. I will tell you that the only time we do is at year-end and I will tell you that the turns at year-end, very, very close to our target of being sold 60% at year-end. And so, as I said earlier in my prepared remarks, the velocity of bookings during the first seven weeks of wave have grown year-over-year and so that advantage, if you will, at year-end from both in loading and pricing has further improved.
So, look, we don't need any home runs in order to hit our target. It's pretty much steady as she goes and hopefully if the environment remains how it is today, it could even be better. And also, there is always the – in terms of yields, the variable is always onboard revenue. It doesn't happen until it happens. So, we don't have the same visibility on onboard revenue, which is a very important and significant component of overall yields. We don't have the same visibility on onboard as we do on load or on ticket pricing.
I will tell you, as I mentioned in my prepared remarks, that we see a direct correlation between when you have high ticket pricing, you also see high onboard revenue. Customers, who have money to spend on tickets, have money to spend onboard and we've been seeing it throughout 2017 and expect to continue seeing it in 2018.
Great. So, maybe a quick follow-up on the onboard comments. Is there anything that you can call out as you look at the mix of onboard spending and the strength that you've seen there that would give you a sense for how 2018 is shaping up? And any color on – it looks like your onboard expenses were particularly well-managed. Anything going on there that we should think through for the next couple of years? Thanks.
No. When folks have money to spend onboard, they spend it in restaurants and in shops and, primarily, in shore excursions. We've seen this widespread move away from buying things to enjoying experiences. So, we've seen a nice uptick in our shore excursion business. Our casino business has always been strong. And so, again, you see this onboard general strength across the various onboard revenue streams that we have available.
Okay. Great. Thanks. Good luck this year.
Thank you.
Thank you. Our next question comes from the line of James Hardiman from Wedbush Securities. Your question, please.
Hey. Good morning. Thanks for taking my call. Obviously, a lot of the conversation has been about yields and I think rightfully so. It was a fantastic year with respect to yields, but I wanted to talk about costs a little bit. Obviously, you started the year guiding to about 1%. It was about 2.8%, I think, is where we finished. It's not really the norm for you or the industry in terms of cost inflation. That said, I'm really encouraged by the cost guidance for 2018.
So, I guess two things here. What gives you confidence that we won't see more cost creep over the course of 2018 like we did in 2017? And, if at all possible, is there any way to quantify sort of the Edge refurbishment impact here, particularly as we look forward to 2019? It seems like a lot of those costs will be falling off. Trying to figure out what type of a benefit we should see beyond this year.
Okay. So, a good question. First off, there's about $25 million of one-time expenses that we will be rolling over 2018 versus 2017. And when you parse that back, there's China start-up costs; there was additional marketing for both China and Cuba, of which some of that will continue; there were a number of expenses related to the unprecedented hurricane season; and we also had the Gem technical issue.
So, if you look at the back half of 2018 where we're lapping that $25 million, that's approximately 125 basis points that we'll get the benefit of in 2018. And for that reason, the back half of 2018 will basically be flat from a net cruise cost perspective. Now, for 2018, what's offsetting that is we have mentioned that we have incremental dry dock days in 2018, primarily related to these fleet enhancement programs. And we also have higher inaugural and launch-related expenses associated with the debut of Norwegian Bliss. So, keeping in mind that this is the first time we're having a North American ship in a couple of years, we are showing her off at four inaugural events.
And, James, just to pipe in on the 2019 comment you had, we are having more dry docks in 2018. Our run rate is going to be about 8 to 10 per year. And in 2019, we'll see that as well. But what's important to note is that we also have some of our larger ships going into dry dock for the first time in 2019. So, this is going to be our run rate going forward on, roughly 8 to 10 per year.
Great. Thank you.
Thank you. Our next question comes from the line of Harry Curtis from Nomura. Your question, please.
Hi. Good morning and I apologize. I've been on another call, so I hope I'm not asking a question that's already been asked and answered. Have you gotten the question about investor worries with respect to supply growth and what steps you're taking to ensure that demand lifts well ahead of that?
No, you got lucky, Harry. No one's asked that yet, so.
This is good.
I'll take it. I've been reading the analysts' reports, fielding investor calls the last few months on supply growth. And so think of it this way. For both 2017 and 2018, our brand has a higher capacity growth than the industry at large. And you can see that we have been able to introduce those vessels very nicely into our fleet, especially the Norwegian Bliss, with incredible high pricing, strong velocity of bookings. For 2019, which is the year that everybody seems to be concerned about, the Norwegian capacity growth is actually about half of the industry average.
And as I noted earlier in another call, we have so many markets that are either unserved by us or grossly under-penetrated by us. From a Norwegian Cruise Line Holdings perspective, we simply have no concerns about the supply growth. We do compete in a global marketplace, but we see so many opportunities to deploy vessels to strong areas, especially in the North American market which is showing very strong secular indications for sustained growth, that we can't wait to get our hands on new vessels. So no, I'm not worried about it.
For those of you who have not been in the industry for 25 years like I have, I've been seeing this question raised literally every year, that oh my God, oh my God, another ship is coming and all I know is that every ship is full at good prices. The industry makes plenty of money. We're resilient and I expect that to continue as we see a broader consumer base attracted to cruising.
It's not just about the boomers anymore. Millennials are taking to cruising. This is not just a North American sport anymore. We have a very large footprint internationally and when I say we, I mean us, our brand and also our three brands and also the industry at large, excluding China. And so the capacity growth, even though it is slightly higher than the long-term average, is not so high that it should cause any concerns, given the strength that we're seeing in the marketplace, the broad-based adoption by many markets to cruising. I simply don't have any concerns, Harry.
And maybe another source of demand that you can touch on, Frank, would be the mix of customers who were, say, under 55 or 60. Has that mix been growing for you?
Well, in absolute terms, yes. Millennials now make up roughly a quarter of our customers. That certainly wasn't the case even five years ago. The boomers are still the biggest, but the fastest growing without question, by a wide margin, are millennials. And we love to see that. We're seeing it in, especially on our North American-sourced customers for our North American type of itineraries. So, we're glad to see it. We need to have another group of folks outside of the boomers. The boomers have been great to the cruise industry, don't get me wrong. The boomers built the cruise industry that we know today, but the millennials are making a strong push to be alongside them.
That's great, Frank. Thank you.
Thank you. We've got, operator, time for one more question. We're over a little bit, but one more question, please.
Certainly. Our final question comes from the line of David Beckel from Bernstein Research. Your question, please.
Hey. Thanks a lot and no pressure on the last question here. Just wanted to ask a little bit of a different question about onboard technology. Last quarter, you sort of teased an onboard technology release and in your press release this morning, there was mention of the Norwegian app. Is that the release that you were referring to last quarter, Frank? And if so, can you talk a little about what some of the improvements are to the onboard experience and maybe the associated cost? Thanks.
Yeah. I'm going to have Andy Stuart, President and CEO of the Norwegian brand, answer that question, that he can do it a lot better than I can. Andy?
Hi. Good morning. Yeah, the app that was referred to in the release is the next generation of the Cruise Norwegian app and we soft launched that in Q4 onboard Norwegian Sky. And we're pretty excited about it, because this is the first time we've really been able to connect the pre-cruise experience, the embarkation process, the onboard experience into one seamless piece of technology. And the soft launch was extremely successful, well-received by our guests.
Of course, with any technology, you learn a little bit. So, we've incorporated those learnings into a new version of the app and we're in the process now of rolling that out for Norwegian Bliss. The Norwegian Bliss will launch with our guests having access to this new technology. And what it really allows is when guests book, they can immediately download the app, they can really plan their whole trip. So, they can book shore excursions. They can book dining. They can book entertainment, just to name some of things they can do on the app.
Once they get to embarkation, it then delivers mobile, online and paperless check-in. So, really enhances the experience of that we all want to go as quickly as possible getting onboard the ship. And then, onboard, it brings to life everything that's happened in the pre-planning process. It keeps guests up-to-date with all the onboard activities, messaging between guests and it is really a meaningful enhancement to planning, embarkation and onboard experience.
So, we're very happy with how it was received on Sky. We're very – we're looking forward to launching it on Bliss and then we'll plan the rollout across the balance of the fleet. So, this has been a great step forward for us.
Thank you, Andy, and thanks everyone for your time this morning and your support. As always, we will be available this afternoon to answer your questions and, again, I look forward to seeing you onboard Norwegian Bliss in New York. All the best. Bye-bye.
This concludes today's conference call. You may now disconnect.