Yahoo Finance Norwegian Cruise Line Holdings Ltd (NCLH) Q4 2018 Earnings Conference Call Transcript
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Norwegian Cruise Line Holdings Ltd (NASDAQ: NCLH)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 10:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Norwegian Cruise Line Holdings Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Liz and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for the session will follow at that time. (Operator Instructions) As a reminder to all participants, this conference call is being recorded.
I would now like to turn the conference over to your host Ms. Andrea DeMarco, Vice President of Investor Relations and Corporate Communications. Ms. DeMarco, please proceed.
Andrea DeMarco Sieger -- Vice President of Investor Relations and Corporate Communications
Thank you, Liz. Good morning everyone and thank you for joining us for our fourth quarter and full year 2018 earnings call. I'm joined today by Frank Del Rio, President and Chief Executive Officer of Norwegian Cruise Line Holdings; Mark Kempa, Executive Vice President and Chief Financial Officer; and Andy Stuart President and Chief Executive Officer of Norwegian Cruise Line. Frank will begin the call with opening commentary after which Mark will follow to discuss results for the quarter and full year as well as provide guidance for 2019 before handing the call back to Frank for closing remarks. 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. We will also make references to a slide presentation during this call which may also be found on our Investor Relations website. Both the conference call and presentation 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 fourth quarter and full year 2018 results was issued this morning and is available on our Investor Relations website.
This call includes forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from such statements. These statements should be considered in conjunction with the cautionary statements contained in our earnings release. Our comments may also reference non-GAAP financial measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release and presentation.
With that, I'd like to turn the call over to Frank Del Rio. Frank?
Frank J. Del Rio -- President and Chief Executive Officer
Thank you, Andrea, and good morning everyone. The team at Norwegian Cruise Line Holdings delivered what can only be described as a breakout year in 2018 with several key milestones and notable accomplishments achieved. The highlight of which is here on slide four of the accompanying presentation. I'd like to take just a few moments to recognize and thank the 33,000-plus team members across our organization and around the world for their remarkable contributions to our record results and for their dedication and passion in providing exceptional vacation experiences and world-class hospitality to the 2.8 million guests who sail the Seven Seas aboard at our 26 ships last year.
We started 2018 in a record book position and while I don't want to get too far ahead of myself I am pleased to report that we started 2019 in a book position that is even better. I'll discuss more about 2019 later in my commentary. For 2018, stronger-than-anticipated demand and robust onboard spend across all three brands and across all source and destination markets along with the launch of the most successful newbuild in Norwegian's history propelled adjusted earnings per share and net yield growth well past what were already high expectations at the beginning of the year.
Norwegian Bliss was indeed a major driver of this outperformance. When we launched during April, the expectation was for strong performance and pricing premiums on par with other newbuild introductions. But instead, we have experienced performance that can only be described as extraordinary with demand, ticket pricing and onboard revenue metrics that have all shattered records and surpassed our highest expectations. And if you worry that Bliss might only be a one-year wonder, please note that in months where 2019 lapped for 2018 debut where ticket yields are equal to what in some months slightly higher than a inaugural season. A follow-up performance seldom is ever seen in our industry.
In 2018 we achieved record highs in several key financial metrics including revenue which surpassed $6 billion and GAAP net income which was just shy of reaching the $1 billion milestone along with adjusted earnings per share, adjusted EBITDA, adjusted EBITDA margins and most notably a net ticket and net onboard revenue yield where we continued to lead the industry by an extraordinarily wide margin. As you can see on slides five and six, we not only led the industry in net ticket net onboard and total net yield in 2018 but also in revenue growth which hit 12. 2% on capacity growth of just 8.5% and adjusted earnings-per-share growth of 24% and an EBITDA per capacity day.
These highs helped extend our hard-fought and lengthy track record of strong financial performance. This past year marked our fifth consecutive year of double-digit earnings growth, our sixth consecutive year of net yield growth, and as shown on slide seven, over a decade of year-over-year growth in adjusted EBITDA with continued margin expansion. We also made meaningful progress toward achieving our Full Speed Ahead 2020 Targets, which we set out at our Investor Day last May. With two years left in our three-year plan, we are more confident than ever in achieving our stated targets. In terms of financial performance, 2018 will certainly be remembered as a breakout year, but there were other significant events that also made this year so memorable.
On the ownership front we reached an important milestone with the exit of our main sponsors including Apollo Global Management which exited its 11-year stake in Norwegian Cruise Line Holdings concluding what was undoubtedly one of the firm's most profitable pre-financial crisis vintage investments. And as I previously mentioned, we took delivery of Norwegian Bliss, the most successful ship in the Norwegian brand's 52-year history. We continue to see strong demand for her sailings in the Caribbean and as previously noted especially for her second Alaska season this coming summer. We also launched OceaniaNEXT, a multifaceted program including a complete reinspiration of the brand's four classic vessels along with more ambitious initiatives which I will touch upon later.
These achievements and milestones taken together have strengthened the financial and operational foundation of the long-term strategy we have laid out and positions us well as we move into 2019 and beyond. And just as we did in 2018, we entered the year in record book position and at record pricing which has allowed us to capitalize on 2019 strong WAVE season during which we have witnessed the highest pricing of sold inventory in the history of the company. This achievement puts us in a strong position from which to continue driving meaningful price appreciation on remaining inventory and to optimize the positioning and launch of our next newbuild Norwegian Encore which joins the fleet in late November. And while it is still early in the overall booking cycle, the strong demand we are experiencing across all brands and across all markets is also spilling over into 2020 with the Company's three brands now substantially better booked and at higher prices than at this time last year for 2019.
This robust performance has resulted in the booking curve extending approximately 9% over last year with our advanced ticket sales balance at year-end 2018 spanning an impressive 22% higher than at year-end 2017. The underlying strength of this booking curve is best observed in our Oceania Cruises and Regent Seven Seas Cruises brands where each line is now better than 80% booked for 2019 sailings and nearly one-third booked for 2020 sailings, all at meaningfully higher prices to the previous years. From our vantage point, there does not seem to be a near-term end to the bull booking conditions our Company has and is experiencing. Our yield guidance for 2019 which Mark will cover in his commentary gives everyone confidence about the state of the vacationing consumer and therefore of our Company's prospects, particularly those who are still concerned about where we are in the economic cycle and those concerned with the higher-than-average industry capacity growth.
Our Norwegian brand for example when Essence launched three 4,000 passenger vessels Norwegian Bliss, Joy and Encore in a span of just 18 months, representing a 24% increase in the brand capacity making it by far the largest capacity increase in any 18-month period in our history. Bliss' stellar performance to date is well documented and Norwegian Encore continues to be the best booked and highest-priced Caribbean introduced ship in the Norwegian brand's history. But to also be able to absorb Norwegian Joy's deployment to Alaska in the Mexican Riviera and to do so with a sales window that is only nine months or half as long as that of a typical ship introduction while still delivering strong pricing should completely dispel any overcapacity fears at least as they pertain to Norwegian Cruise Line Holdings.
This successful absorption of capacity demonstrates three things. First, that our go-to-market strategy and retail value proposition, smart and disciplined marketing spend and sophisticated revenue management practices which we purposely do not publicly discuss very much for competitive reasons, indeed drive quality demand and generate industry-leading financial results. Second, that 2019 marks the first in a four-year stretch of moderate capacity growth as a company with a CAGR of less than 4% which bodes very well for our ability to profitably absorb future capacity increases while continuing to drive pricing higher. And third, there remains many attractive unserved and underserved markets both domestically and globally where our brands can deploy future capacity additions.
Meanwhile, the Oceania and Regent brands as I mentioned earlier are enjoying record book positions and strong pricing power of their own. So well booked are these brands for 2019 that they are now pivoting their marketing initiatives earlier in the year than ever before to build an even stronger base for 2020 sailings which includes the introduction of the Regent Seven Seas Splendor and a full year of sailings by three of the four Oceania R-Class ships that will have received extensive refurbishment under the OceaniaNEXT program.
Turning to consumers, and despite stock market volatility, fear of trade wars, Brexit uncertainty and other short-term disruptions such as the recent government shutdown, our indications are that consumers remain confident in both the short and long term especially the all-important North American consumer from which we enjoy an outsized benefit given our strategic sourcing mix and focus on global versus national brands. We are also benefiting on several other fronts. First, our go-to-market strategy and the sizable marketing investments we have made to communicate the wonders of our three brands to travel agents and consumers as guests are recognizing more and more the benefits of booking early to get the best and highest value. Our elongated booking window is proof of this.
And another data point is the sale of future cruises onboard our ships. In 2018, all three of our brands experienced meaningful increases in the number of guests who booked their next cruise even before finishing their current one, locking them in into future cruises while reducing marketing-related costs. Second, we are benefiting from the continued shift of consumer spend from material things to experiences. While the retail sector has been a mixed bag of data, the experience economy as we see it remains strong. And third, just as we are seeing consumer confidence in booking cruises further out, we are seeing equal confidence in their current spending as the onboard revenue continues to surpass the record levels of the prior year.
Lastly, we continue to leverage the strong global demand environment with our expanded worldwide sales and marketing organization that allows us to further hone our best guest strategy which focuses on sourcing the best guest defined as the highest yielding guests regardless of their providence. At the same time, our core markets remain strong. 2018 was the second consecutive year of double-digit pricing growth in Europe driven by all three brands while 2019 is building on that solid foundation with pricing above last year's record levels. In Alaska, despite industry capacity growth in the mid-teens which includes our very own 27% increase in capacity, we expect another blockbuster season with Norwegian Joy joining Norwegian Bliss and Norwegian Jewel. Norwegian Joy's repositioning to Alaska has brought heightened attention to this market and to the Norwegian brand.
Joy is booking well and at higher prices compared to the smaller vessels she replaced in our deployment despite her condensed nine-month booking window. And lastly, business in the Caribbean continues to accelerate and we are pleased with our performance in the region as we await the late year introduction of Norwegian Encore. So the story for 2019 Norwegian Cruise Line Holdings is taking shape. A strong start to the year with a record booked position the successful absorption of a record capacity increase in the most profitable North American market, a confident consumer that is willing to book further and further out and is going to spend more and more on board. It all sounds to me like the making of an encore performance.
I'll return at the end of the call to discuss our longer-term initiatives, but now I'd like to turn the call over to Mark to discuss our results and guidance in more detail. Mark?
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Thank you, Frank. Unless otherwise noted, my commentary compares 2018 and 2017 net yield and adjusted net cruise costs excluding fuel per capacity day metrics on a constant currency basis. I'll begin with commentary on our fourth quarter and full year results followed by color on booking trends and close with our guidance for the first quarter and full year 2019. Throughout my commentary, I will be referring to the slide presentation which Andrea mentioned earlier in the call.
I am pleased to report yet another record quarter one where the Company generated the highest fourth quarter revenue and earnings in its history. Adjusted EPS of $0.85 exceeded expectations by $0.07. As you can see on slide eight, the beat was driven by $0.02 of revenue outperformance from strong well-priced close-in bookings and exceptionally strong onboard revenue; a $0.04 benefit below the line from the impact of fluctuating foreign exchange rates on our advanced ticket sales obligation which we expect to reverse in 2019 and will impact our reported revenue and yield metrics. And a $0.04 benefit from interest tax and other below the line items, all of which were partially offset by higher ship operating expenses as well as performance-related compensation expense.
Turning to slide nine. Net yield increased 4.7% or 4.2% on an as-reported basis versus prior year, outperforming guidance by 70 basis points. The beat was driven by strong well-priced close-in bookings and exceptionally strong onboard revenue across all major revenue streams. Excluding the benefit from new Norwegian brand capacity, Norwegian Bliss which garnered yields above the NCLH corporate average in the quarter, our fourth quarter net yield growth would have been approximately 4.5% which excludes approximately 75 basis points of revenue dilution from China operations related to the itinerary optimization initiative.
Turning to costs. Adjusted net cruise cost excluding fuel increased 3.6% versus prior year and 3.4% on an as-reported basis. Our total fuel expense was in line versus expectations as fuel consumption savings offset an increase in fuel price per metric ton net of hedges which came in at $496.
Turning to full year results. 2018 finished strong and we delivered yet another record year of financial performance. Both revenue and earnings were the highest in our history and we achieved a record adjusted EBITDA margin of 31.3% up from 30.7% in the prior year and expanded our double-digit adjusted ROIC to 11%.
Turning to slide 10. Full year adjusted earnings per share grew 24% to $4.92 or $0.37 above the midpoint of our initial full year guidance issued last February. This result comes despite a $0.07 impact from unfavorable fuel prices. Outperformance in the top line from continued strong demand for our portfolio of products and Norwegian Bliss's record-breaking inaugural season contributed to the beat to guidance. Revenue grew over 12% versus prior year reaching a record $6.1 billion. Other key financial metrics for the full year 2018 include, net yield growth of 3.5% or 3.7% on an as-reported basis which exceeded the midpoint of our prior guidance by 20 basis points. The year benefited from the successful introduction of Norwegian Bliss, strong demand for European sailings, additional high-yielding sailings to Cuba, well-priced close-in demand and stronger-than-expected onboard revenue.
Excluding new Norwegian brand capacity, full year net yield growth would have been approximately 3.8% which excludes approximately 30 basis points of revenue dilution from China operations. Adjusted net cruise cost excluding fuel increased 2.6% or 2.9% on an as-reported basis. And fuel price per metric ton net of hedges increased to $483 from $465 in the prior year. It's important to note that while fuel pricing decreased since our last call, our substantial hedge position entering Q4 as well as the lag in the at-the-pump pricing minimized any tailwind from the market declines.
Shifting to 2019. On a full year basis, our capacity is expected to nominally increase approximately 2.7%. With the annualization of Norwegian Bliss along with the late November introduction of Encore to the fleet partially offset by the approximately 50-day drydock and repositioning for Norwegian Joy. As Frank mentioned earlier, 2019 is the first year in a four-year stretch of moderate capacity growth for our Company.
I'll direct you to slide 11 to review some deployment highlights. For the year, a little over one-third of our capacity is in the Caribbean which includes Norwegian Bliss and Encore's debut in the region while capacity in Europe is up in the low teens as we deploy a sixth Norwegian ship to that region in the peak summer. Norwegian Joy's redeployment results in a decrease in APAC share of our deployment and increases Alaska's share which equates to approximately 27% capacity increase in the region. First quarter deployment is similar to prior year with the exception of APAC who share decreases as Norwegian Joy enters drydock before her repositioning to Alaska.
Looking at expectations for the full year on slide 12. Strong booking trends have continued across all core markets and all three brands. Adjusted EPS for full year 2019 is expected to be in the range of $5.20 to $5.30 or approximately 7% growth over prior year at the midpoint. This includes an adjustment for the onetime noncash write-off in depreciation and amortization of approximately $25 million associated with Norwegian Joy's enhancements, which will make her even better than her record-breaking sister ship Norwegian Bliss. Since our last earnings call, we have seen a decrease in both fuel prices and interest rates which has been partially offset by unfavorable foreign exchange rates resulting in a net tailwind of approximately $0.10 per share.
As previously discussed, our expectations for 2019 earnings growth in the high single-digit range is primarily a result of four factors. First, we have moderate in-year capacity growth of approximately 2.7%. Second, we are lapping extremely strong financial performance in 2018 with adjusted earnings growth of 24%. Third, we are incurring marketing and launch costs associated with two upcoming ship launches, Norwegian Encore in late 2019 and Seven Seas Splendor in early 2020 with minimal in-year contribution due to the timing of deliveries. And lastly, the itinerary optimization initiatives skews both our yield and cost metrics higher in 2019 due to a partial year benefit from higher revenues which will be substantially offset by the associated costs, including the extended drydock and repositioning for Joy.
Net yields for the year is expected to increase 3% to 4% or 2.5% to 3.5% on an as-reported basis. This performance is on top of the already robust 3.8% growth we delivered in 2018 which excludes approximately 30 basis points of revenue dilution from China operations. When excluding incremental capacity from Norwegian Bliss and Norwegian Encore, it results in only a marginal difference to our annual net yield guidance of 3% to 4%. Norwegian Bliss's Caribbean sailings are garnering yields above the NCLH corporate average and are offset by the low corporate average yields when sailing in the Mexican Riviera. Concurrently, Encore's one month of revenue service does little to move the needle.
Adjusted net cruise cost excluding fuel is expected to be up approximately 3.25% or 2.75% on an as-reported basis. This is primarily due to an increase in total drydock days and associated costs versus prior year, fewer capacity days which increase our systemwide unit cost due to the approximate 50 days Norwegian Joy will be out of service to complete her drydock, reposition to Seattle and carry out inaugural activities. Incremental marketing costs associated with the deployments of the vessels involved in the itinerary optimization initiative and marketing and inaugural expense for Norwegian Joy, Encore and Seven Seas Splendor.
Looking at fuel expense. We anticipate our fuel price per metric ton net of hedges to be $465 with expected consumption of approximately 860,000 metric tons. We have continued to strategically layer on additional MGO hedges for 2019 and 2020 and are now hedging into 2021. As a result, we currently have 57%, 53%, and 33% of our total fuel consumption hedged for 2019, 2020 and 2021. There are a few key items to keep in mind for the balance of 2019. When looking at the cadence of net yield growth, the first quarter is expected to be the lowest yield growth quarter primarily as a result of the Easter holiday shift into the second quarter as well as Norwegian Joy's final China sailings during the low-priced winter season. We expect net yield growth for the remaining three quarters to be relatively consistent as Norwegian Joy's redeployment to North America will offset the tougher comps from the lapping of Norwegian Bliss's inaugural season as well as the impact from six scheduled drydocks for the high-yielding Oceania and Regent brands.
As for the cadence of the net cruise cost excluding fuel per capacity day, the third quarter is expected to be the highest growth quarter mainly due to the timing of drydocks with one scheduled drydock for an Oceania vessel occurring at the tail end of the quarter compared to zero dry docks in the prior year. Q2 is expected to be the second highest quarter primarily due to the drydock and repositioning of Norwegian Joy.
Now let's take a look at our expectations for the first quarter which can be found on slide 13. Net yield is expected to increase approximately 2.5% or 2% on an as-reported basis. This growth comes despite headwinds from the shift of the Easter holiday into the second quarter which includes premium price sailings for the spring break period as well as Norwegian Joy's final China sailings. Excluding the benefit from our new Norwegian brand capacity, Norwegian Bliss, which is garnering yields above the NCLH corporate average while sailing in the Caribbean, net yield growth is expected to be approximately 2%. This comes on top of 4% growth in the prior year.
Turning to costs. Adjusted net cruise cost excluding fuel is expected to be up approximately 2.5% or 2% on an as-reported basis. As for fuel expense, we anticipate our fuel price per metric ton net of hedges to be $456 with expected consumption of approximately 215,000 metric tons. Looking below the line, we expect a $0.10 onetime benefit from tax planning initiatives as discussed on our previous call which has shifted from Q4 to Q1 and is expected to be partially offset by $0.04 exchange loss resulting in a net benefit of approximately $0.06. Taking all of this into account, adjusted EPS for the first quarter is expected to be approximately $0.70, a 17% increase over the prior year. As Frank mentioned earlier, in 2018 we made significant progress toward achieving our Full Speed Ahead 2020 Targets, that we provided at our Investor Day.
As you can see on slide 14, we've reported better-than-expected adjusted EPS growth of 24%, increased our double-digit adjusted ROIC to 11%, delevered our balance sheet to 3.3 times and returned $400 million or approximately one-third of our targeted $1 billion to $1.5 billion of capital to shareholders all in just (Technical Difficulty).
Looking at Slide 15. Our cash generation continues to accelerate and we remain extremely focused on returning meaningful capital to our shareholders. In 2018, we repurchased a total of approximately $665 million worth of shares under our previous and current repurchase authorizations. We have a $600 million remaining on our current $1 billion three-year authorization. Our goal is to have a balanced approach to our capital allocation strategy while maintaining maximum flexibility. We continue to explore with our Board, the potential initiation of a dividend.
With that, I'll hand the call back over to Frank for closing commentary.
Frank J. Del Rio -- President and Chief Executive Officer
Thank you, Mark. While my earlier commentary focused on our 2019 story, I want to reinforce that we are focused just as much on the long term and on our sustainable success as we continue to make sizable investments to drive future returns even higher. We continue to invest in the growth and quality of our fleet with recently announced new ship orders for the Oceania and Regent brands which, number one, expands our newbuild program to 11 ships featuring approximately 28,000 berths for delivery over the next nine years through 2027, a 50% increase from current capacity levels.
Number two, these new orders give us new state-of-the-art tonnage for our three best-in-class brands. And number three, provide us with measured capacity growth for years to come all financed at historically low interest rates. We also continue to invest in our existing fleets with the OceaniaNEXT initiative I mentioned in my earlier commentary and Norwegian Edge which saw the penultimate ship in the program Norwegian Sky undergo a comprehensive refurbishment that has left the ship in as good-as-new condition elevating our offering in the three and four-day Bahamas and Cuba markets.
We continue investing in port-related and destination-specific infrastructure with a new dedicated state-of-the-art terminals at PortMiami under construction, a partnership to develop a strategically important Icy Straight Point Port in Alaska and the completion of exciting new guest-facing developments at Great Stirrup Cay, our Bahamas private island. And last but not least, we continue investing in technology with Cruise Freedom, our innovative technology platform that leverages the very latest in proximity and location technologies including wearables. Cruise Freedom will meaningfully enhance the guest experience and will be ready to make her debut on Norwegian Encore late in 2019. We'll have more news on that as we get closer to Encore's launch.
Today we've covered a lot of ground. So we provided some key takeaways which you can find on slide 16. Looking back, we delivered a breakout year in 2018 with record-setting financial results driven by strong demand and the exceptional performance of Norwegian Bliss. Looking to the intermediate term, we look to build on our strong book position and deliver another record-breaking year in 2019. And last but not least, we are ahead of pace to deliver on our Full Speed Ahead 2020 Targets. On behalf of our 33,000 employees, I'd like to thank all of our stakeholders whether you are a shareholder, a creditor, a travel agent partner, a vendor or our valued guests for continued confidence and trust and support.
And with that, I'll open the call for questions. Operator?
Questions and Answers:
Operator
Thank you, Mr. Del Rio. (Operator Instructions) Our first question comes from Harry Curtis with Instinet. Your line is now open.
Harry Curtis -- Instinet -- Analyst
Good morning, everyone. Very strong results. I had a couple of questions. Frank if you could give -- discuss given your record booking level, the strategy going forward balancing the need to continue filling your fleet this year and next versus pushing price because you are so well ahead, is it not likely that you're just the math behind being ahead you have less cabins to sell. So what is the balance we should look forward to between pushing price versus occupancy?
Frank J. Del Rio -- President and Chief Executive Officer
Good morning, Harry. So loaded in very, very good shape both for 2019 and 2020 as we stated in our commentary. So we're focusing on price. We're pushing price higher everywhere we can both in 2019 and 2020. You saw the booking curve elongate 9% year-over-year. I always say that I'm not sure what the optimal booking curve is but any time I can push the booking curve out and raise price at the same time that's good for our business. So I think overall while we still have a lot of cabins to fill, the emphasis will be on raising prices across all three brands.
Harry Curtis -- Instinet -- Analyst
Very good. And then a follow-up question is 2019 is another sizable renovation year for your legacy fleet. And as you exit 2019, if you could describe the competitiveness of the legacy fleet vis-a-vis its need for any significant additional renovation spend beyond 2019.
Frank J. Del Rio -- President and Chief Executive Officer
Well, drydocks are a continual phenomena in our industry required by our class. But I will tell you that the heavy lifting as I've mentioned several times in prior calls will be behind us at the end of '20. The entire Regent fleet has not been completely refurbished. The OceaniaNEXT program has one vessel behind us and that was done at the tail end of '18, two more in '19, the last one will be in '20. We just finished Norwegian Sky. I just walked her the day after she came out of drydock. She literally is as good as new. And the last one we're going to focus on is Norwegian Spirit. And I don't think it's any coincidence that our record industry-leading yield are as a result of how well we maintain our vessel. And that's something that is core to our strategy of offering consumers the very best product possible. And we can see that consumers are willing to pay for it.
Harry Curtis -- Instinet -- Analyst
So the bottom line is that your free cash flow in 2020 should look pretty measurably then?
Frank J. Del Rio -- President and Chief Executive Officer
It will because of our performance, our increased yields, it will because we'll have more capacity. 2020 will be a very sizable year in capacity. We have two new vessels each of them operating roughly 11 months each. And one of them is what I suspect will be the highest yielding ship in our fleet, the new Regent Splendor. So yes, free cash flow is something that we expect to accelerate as part of our 2020 target of returning up to $1.5 billion to our shareholders one way or the other. And we're -- as we mentioned during our prepared comments, we're well on track to achieve that.
Harry Curtis -- Instinet -- Analyst
That's great, everyone, thanks very much.
Frank J. Del Rio -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Felicia Hendrix of Barclays. Your line is now open.
Felicia Hendrix -- Barclays -- Analyst
Hi, good morning. Your very detailed prepared remarks blew through like almost all my questions. (multiple speakers). So the first thing I want to talk about was your first quarter net yield guidance. I was just wondering if you could talk about some of the things that changed clearly for the better regarding your outlook there since you last reported because if we kind of dial back to then and if you look at where consensus was and it's been -- came down kind of into the call, the perception was that your first quarter guidance was going to be a bit more muted than what you gave. So just kind of wondering, I mean, I think Frank you're very clear to say that pricing has been getting better and stronger. But if you could just kind of walk us through what happened from then until now to give us some color about the strength in the market to help us understand that, that would be great.
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yeah. Hi, Felicia, this is Mark. I think it's just a result of what we've been seeing in the overall industry. We're seeing strong pricing in all of our markets. Caribbean is doing fantastic. We're guiding 2.5% for the first quarter and about 0.5 point of that is related to the Bliss and she's operating in the Caribbean. But when you strip out the new capacity, the underlying organic fleet is strong and that's coming across all markets. So we're just seeing good business everywhere we operate.
Felicia Hendrix -- Barclays -- Analyst
But I guess my point is that it seems to have been getting stronger even in a short period of time, no, because I mean if we go back to when you reported again I think the view was that the number wasn't as thought to be as high as what you actually came in with your guidance.
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yeah, we're seeing strong pricing on our remaining inventory. And we're seeing significantly strong trends in our onboard revenue as well so that's helping profit up. So when you put that together, it's creating a nice healthy momentum for us.
Felicia Hendrix -- Barclays -- Analyst
Great. And then just on Alaska, I mean, Frank, I think that you made a lot of really good points there. But the investment community is concerned about the capacity increases we're seeing in Alaska this year which has to do with the Joy, right? And I'm just wondering like obviously you guys are going to do well there with the new hardware there. But do you think that the Joy and the Bliss will have created a halo effect over the entire region like lift Alaska in general in terms of the consumer and demand? Or do you think your ships might be cannibalizing other supply that's there?
Frank J. Del Rio -- President and Chief Executive Officer
It's hard to say, Felicia. Certainly the -- two years in a row of us being able to deploy top hardware to the region has created excitement in the region, even more excitement from our own brand. Even our third vessel in the Alaska region, Norwegian Jewel that obviously Joy and Bliss overshadow is doing better than ever. It's been two years in a row now of double-digit growth and capacity not just for us but for the industry. But I think it goes to show the strengths of Alaska. It's a short season. People know that they only have a small window to be able to go and people are going. Alaska has become a go-to must-have destination on your bucket list especially for families and our ships certainly are built for families. There's everything you can possibly think of to do on these vessels. I think millennials love the outdoors and the environmentally oriented destination of Alaska. So I think it's got a lot going for it. And -- but I do hope that next year the -- in 2020 and I think it is we'll have much more moderate capacity growth in that region.
Felicia Hendrix -- Barclays -- Analyst
Great. Thank you so much.
Frank J. Del Rio -- President and Chief Executive Officer
Thank you.
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
Our next question comes from Jared Shojaian with Wolfe Research. Your line is now open.
Jared Shojaian -- Wolfe Research -- Analyst
Hi, good morning, everyone. Thanks for taking my questions. So, Frank, I was pretty surprised to hear your comments on the Bliss and just your ability to hold and in some cases raise price from a year ago. So I guess of your 3% to 4% yield guide for the year, how much of a tailwind have you baked in from Bliss, if you baked in a tailwind at all? And then can you also parse out how much of a tailwind you've baked in from the Joy redeployment?
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yeah. Hi, Jared, this is Mark. So we guided 3% to 4%. And when we -- first let's address the Bliss. Bliss is doing fantastic. In many -- as we've said in many months she's booking at or above what she garnered in her inaugural year which there's not a lot of cases where you can say that. That said, she is also annualizing year-over-year, so you have some tailwind that knocks that down. So Bliss is really essentially a push or slight tailwind for the year. As far as the Joy, I think the best way to think about it is we had said with this whole itinerary redeployment -- it was going to be a $0.30 accretion in 2020. If you kind of parse that back and you look at that and say that's a clean annualized number and you pull out the drydock cost which are I guess around $0.03 to $0.04 and then you say she's operating about only two-thirds of the year in '19, that gets you to about let's say $0.17 or $0.18 of accretion.
And as we said with the redeployment, it's all on revenue, it's all ticket and onboard revenue accretion. So when you compare that against our what is it a point of yield is approximately $0.23, you get to about 75 basis points of yield tailwind for the quarter -- for the year. And then with the lower capacity days her being out of service, it gets you around the 1% zone. So our underlying organic fleet growth is really growing at our 2% to 3% in line with our expectations of what we target every year.
Jared Shojaian -- Wolfe Research -- Analyst
That's really helpful. Thank you. And I know it's a little early to be talking about 2020 but I'm going to ask you about anyways just given some of your comments, and it seems to be shaping up well. And on the yield side you've got several tailwinds with Splendor and Encore and annualizing Joy. And then on the cost side you have tailwinds from lapping the drydocks and the marketing spend et cetera. So is it unreasonable to assume that 2020 yields and costs could look better than a normal year just assuming kind of a steady macro environment from here?
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yes, assuming a steady macro environment, that's always the necessary requirement. With Splendor coming on certainly she's going to bring premium yields to our corporate average but that's going to be somewhat offset by Encore again. So Encore as we said Bliss is doing well in the Caribbean. Encore is our best booked ship newbuild launch in the Caribbean. But you have to look at her on an annual basis. So at this stage looking forward it's a bit early. We don't necessarily believe that Encore may be accretive to our system yields. But it is -- it's booking great but it's just still way too early to make that commitment. And then in terms of the cost, yeah I think we will see some deceleration on the cost front from '19 to '20 given some of the onetime or rampup in costs that we've seen this year.
Jared Shojaian -- Wolfe Research -- Analyst
Okay, very helpful. Thank you very much.
Operator
Our next question comes from Thomas Allen with Morgan Stanley. Your line is now open.
Thomas Allen -- Morgan Stanley -- Analyst
Ho, good morning. One of your peers talked about a little bit of weakness from Europe-sourced customers just given the macro uncertainty there. Are you seeing that at all?
Frank J. Del Rio -- President and Chief Executive Officer
Yeah, UK has been a little up and down but unlike our peers where we don't have national brands that require a whole lot of locally sourced business to make things work. Our percentage of business that comes from Europe is a little bit less than half of our total internationally sourced business. So can Europe be doing a little better? Yeah, probably could. But again, our domestic demand is so strong for Europe itineraries that we're not relying a whole lot on Europe-sourced business to sell our vessels. We're more focused on raising prices in Europe. And over the last two years, we've now had two consecutive years where we've been able to raise prices for Europe-sourced business over 20% as we hone in on our best guest strategy. With only 26 ships, the demand that we're seeing for our products, we can be selective in what customers we source. And quite frankly we're going for price. And so as I said before, we've raised prices to the point where there's parity for us. As a source market, we are indifferent whether a Brit, a German or an American book our cruisers, because we price it accordingly. And so I think that's one of the perhaps key differences for us and some of our peers that we simply don't have to rely on the European markets as much as others may have to.
Thomas Allen -- Morgan Stanley -- Analyst
That's helpful. Thanks. And then last quarter there was a lot of focus on your Free Air promotion and kind of bundling it in. Any updates on how that's progressing?
Andrew Stuart -- President and Chief Executive Officer, Norwegian Cruise Line
Yeah. Hi, it's Andy. I'll take that one. We've been very happy with how Free has been received. It's the very heart of our focus of -- focusing on value over price. And we see it as one more tool in the toolbox. And so we're able to use it where it makes sense and that tends to be in some of our further out inventory longer haul products. It's definitely a program not a promotion. It's something that we're going to use at times where it makes sense to add value, keep the story well away from pricing. And along with the beverage package, the dining package, WiFi, shore excursion, an opportunity to add value, move away from price and continue to have this really strong pricing performance that we've been demonstrating. So we like it. You'll continue to see it. And we'll place it strategically where it makes sense for us.
Thomas Allen -- Morgan Stanley -- Analyst
Helpful. Thank you.
Operator
(Operator Instructions) Our next question comes from the line of Steve Wieczynski with Stifel. Your line is now open.
Steve Wieczynski -- Stifel -- Analyst
Hi, guys. Good morning. So, Mark, you touched on this a little bit, but I guess around the Norwegian fleet enhancements, you guys have kind of talked about it, you think that would drive about $0.30 in additional earnings in 2020. And I was wondering if you could help us think about where that estimate currently sits? Is that still a pretty good range? I guess what I'm getting at it, it seems like there could be some upside to that range now given how strong the demand and pricing patterns that are currently out there in the marketplace.
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yeah, $0.30 that was our best guess. We always try to give you our most educated forecast. And I think it's really early. That was -- we're seeing great signs, great booking patterns on the Joy and the other redeployments that we initiated. But it's still early. I think we're confident in that number, but to say we're going to exceed that at this point, I think is a bit premature.
Steve Wieczynski -- Stifel -- Analyst
Okay, got you. And then second question would be around fuel consumption. I guess if we look at the first quarter consumption of 215,000 tons and then compare it to the full year estimate of 860,000, seems to be a pretty big step-up in consumption in the last couple of quarters. Just wondering what might be driving that. And then also maybe how we should think about consumption in 2020 as well and if there's anything that we should be thinking about around consumption over the next 12 or 24 months? Thanks.
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
I think in the first quarter a big portion of that is going to be Bliss as she repositions to her drydock and comes out of Asia. I'm sorry, Joy, I apologize I said Bliss. And then as we look forward our consumption, if we normalized our consumption per capacity day for '19, if we took out the Joy repositioning, we took out the Encore which is again being delivered later in the year who have to come across the Atlantic, we would expect our consumption to be down somewhere at 0% to 1% which is consistent with what we aim to deliver. And then in 2020, I think we would see an escalation in that possibly in the 2% to 3% zone as we annualize the larger ships and the Splendor comes on board as well.
Steve Wieczynski -- Stifel -- Analyst
Okay, great. Thanks, guys. Appreciate it.
Operator
Our next question comes from Brandt Montour with JPMorgan. Your line is now open.
Brandt Montour -- JPMorgan -- Analyst
Thanks. Good morning, everyone. Appreciate you taking my questions. So I know it's a ways away but on China I just wanted to ask about the Norwegian Spirit's plans to redeploy there next year. Is that still the plan? And how is your thinking regarding viability that market changed if at all since Joy repositioning was announced last July? Thanks.
Frank J. Del Rio -- President and Chief Executive Officer
Yeah, Spirit will be year-round ship to Asia. We're always looking to deploy vessels at the highest yielding itineraries. As you know you heard me say many times itineraries is the number one driver of yield. And so we'll continue evaluating that. And -- but yes Spirit will go to Asia. And I think the second part of your question is have we seen anything different in the Chinese market? If that was your question, I'll tell you that Joy has performed in line slightly ahead of what we had expected in the first quarter of 2019. But nevertheless, her deployment to Alaska for all the reasons you heard so far today in our prepared statement was the right thing to do.
Brandt Montour -- JPMorgan -- Analyst
Great. Thanks. And then just following up on just a little housekeeping. On CapEx, and I apologize if you already touched on this but CapEx guidance came up a little bit for this year and next year and I just wanted to get a sense of how much of that is the new port you announced in Alaska and what else may be in there?
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yes. So our agreement with the port and the infrastructure in Alaska that's an asset-light agreement so it's not really a lot of CapEx that's coming on that very similar to our Port of Miami agreement. The increase is really driven around the additional ships that we recently announced. As you recall, we announced two newbuilds for Oceania and one additional for Regent cruises, and an addition to our Leo 5 and 6 class. So that in conjunction with some further investments that we plan to make around technology and other infrastructure.
Brandt Montour -- JPMorgan -- Analyst
Great. Thanks. Congrats on nice quarter.
Frank J. Del Rio -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of David Beckel with Bernstein. Your line is now open.
David Beckel -- Bernstein -- Analyst
Hi, thanks for the question. I had a quick question about onboard spending and the beat in Q4. Can you just provide a little bit more color on exactly where -- I know you mentioned across all components, but are there specific initiatives you put in place that are driving stronger-than-expected onboard? Or is it more a function of just robust consumer environment? And just to follow up on that for 2019 what are you sort of expecting in terms of onboard spend growth on a year-over-year basis?
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yeah, so in -- for the quarter, fourth quarter we saw great trends across all of our streams. So I think the key is and we've been saying this is we've been investing and getting to -- getting the consumer touch point earlier in the booking cycle. So we're selling more ahead. We're bundling more a head. So what happens is the consumer is coming onboard with a clean wallet, a fresh wallet. So that helps us. We're seeing strength in our casino channels. It's just really across every channel. As we pivot to 2019, we typically look for 1% to 2% of growth in onboard revenue. Obviously we always try to outperform that. But that's our typical modeling range. And the early signs of what we're seeing in the quarter for January and February are looking good. We're seeing continued strong trends there, so very positive.
David Beckel -- Bernstein -- Analyst
Great. And if I could just had a quick follow-up there. Can you remind us about what percentage of your I guess it's mostly Bliss Norwegian passengers are packaging or what percentage of onboard spend is prepackaged versus actually on board the ship?
Frank J. Del Rio -- President and Chief Executive Officer
Yeah, I don't know that we've given specific details on that but I think we're probably north of half of our guests are in the bundled packaging deal.
David Beckel -- Bernstein -- Analyst
Great. Thank you.
Operator
Our next question comes from the line of Vince Ciepiel with Cleveland Research. Your line is now open.
Vince Ciepiel -- Cleveland Research -- Analyst
Good morning. I wanted to circle back to fuel expenses. At the Investor Day you mentioned potential that MGO could step up to 60% of the mix. Is that still the thinking going into next year? And then it looks like your hedged position increased from 3Q release to the 4Q release and now 50% hedged for 2020 which is ahead of scheduled. I think you normally target to be 50% return a year. So how are you thinking about fuel costs going into 2020 with that change? Could you elaborate a little bit on that?
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yeah, certainly. So everything we see for 2020 we are still targeting that roughly 60% MGO mix. We have a significant investment in our scrubber technology and all the ships that are coming online are coming online as planned within our date range. So that's positive. In terms of hedging well you guys have seen it. Since our last call in November at one point fuel markets were down almost 7 -- what 17% or so. So we took advantage and we layered on more hedging for both '19 and '20 and more particularly we layered it on in our gas oil which is our proxy for MGO. So we were able to obtain some favorable pricing. And in terms of our strategy, we aim to be at a minimum 50% hedge going into the year. But we've always said that when there's dips in the market we'll opportunistically ramp that up and that's what you saw over the course of Q4.
Vince Ciepiel -- Cleveland Research -- Analyst
Great. Thanks. And just separately in the Caribbean. Could you touch on what you're seeing on a regional basis? I know that throughout 2018 sounded like the western was improving and maybe coming in at a bit of a premium to the east. Just curious what you're seeing as demand has recovered for Eastern Caribbean sailings what pricing looks like there. And just your thoughts on Caribbean pricing as a whole for 2019 versus 2018?
Andrew Stuart -- President and Chief Executive Officer, Norwegian Cruise Line
Yeah, it's Andy. I'll take that. Overall we're very happy with Caribbean. As Frank said in his opening comments we've seen an acceleration overall pricing up in the Caribbean, load factor is up in the Caribbean. We're seeing it broadly across the region. And Bliss of course has been an outstanding performer in the Caribbean as well as in her Alaska trade. And so in the east she's performed extremely well. So we really don't see any hangover in the Caribbean at all. We just see acceleration in performance, strong pricing, strong load and feel very good about the outlook.
Frank J. Del Rio -- President and Chief Executive Officer
Operator, I think we have time for one more question.
Operator
Our last question comes from the line of Tim Conder with Wells Fargo. Your line is now open.
Tim Conder -- Wells Fargo -- Analyst
Thank you. And congrats to the whole team on the conclusion of the year. I wanted to circle Frank on the Med, and particularly the Eastern Med, and with the Splendor coming and maybe shifting around a little bit of capacity. That historically has been a very high-yielding segment for the industry. What are you seeing there with demand? I know some itineraries have been solely added back for yourselves and the industry but what are you seeing -- how do you see that looking on out into '21 and so forth at this point assuming no changes in geopolitical obviously?
Frank J. Del Rio -- President and Chief Executive Officer
Yeah, I'm ready for that question, Tim. We, for the first time since 2016, we went back to the Med to the Eastern Med this coming summer with 12 sailings increasing to 20 sailings in 2020. And I'm pleased to tell you that all 12 sailings in 2019 are better loaded and at higher pricing that -- than the surrounding sailings that do not include Turkey. Turkey is the -- when we talk about the Eastern Med, Turkey is the key destination which has been somewhat off-limits to the industry for the last couple of years. So the fact that the North American consumer who is the one booking most of these Eastern Mediterranean cruises seem to want to come back to the Eastern Med and is going to pay a premium price bodes very well for 2020.
As you know, itineraries are developed and put up for sale 18, 24 months, sometimes before the actual sale date. So you test the waters, you see what happens and then it takes you a while to really ramp up. So at this point assuming that there are no other disruptions or reasons to not go to the Eastern Med, I expect that we along with the rest of the industry will probably increase the number of deployments to the Eastern Med beginning in 2020 and in some -- and more in 2021. So it's good news. As you know, when the Eastern Med is good it's as good as any it if not the best of all itineraries. So we're all looking forward to being able to increase our presence there. Thank you, Tim.
Tim Conder -- Wells Fargo -- Analyst
Okay. And then a quick follow-up here if I may. The -- Mark just a little bit more detail if you would. Can you enumerate what the tech investments are in the CapEx? And then when you anticipate having all those tech enhancements rolled out to the fleet?
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Yeah, I think it's a bit early to say what we're investing in. I think we're looking at all different aspects. As we said, we're rolling out some new technology with the Encore later this year. And then as we go forward we want to make sure our platforms and our systems behind-the-scenes are capable and ready to handle that as we look forward and maybe we start integrating voice features or artificial intelligence down the road. But we're doing some catch-up here. We're making investments slowly but surely but you're not going to see anything radically different than what we've already announced. It's more back of the house.
Tim Conder -- Wells Fargo -- Analyst
Okay, great. Thank you, gentlemen.
Frank J. Del Rio -- President and Chief Executive Officer
Thank you, Tim. And thanks everyone for your time this morning and your continued support. As always, the team will be available to answer your questions later today. All the best. Bye-bye.
Operator
This concludes today's conference call. You may now disconnect.
Duration: 63 minutes
Call participants:
Andrea DeMarco Sieger -- Vice President of Investor Relations and Corporate Communications
Frank J. Del Rio -- President and Chief Executive Officer
Mark A. Kempa -- Executive Vice President and Chief Financial Officer
Harry Curtis -- Instinet -- Analyst
Felicia Hendrix -- Barclays -- Analyst
Jared Shojaian -- Wolfe Research -- Analyst
Thomas Allen -- Morgan Stanley -- Analyst
Andrew Stuart -- President and Chief Executive Officer, Norwegian Cruise Line
Steve Wieczynski -- Stifel -- Analyst
Brandt Montour -- JPMorgan -- Analyst
David Beckel -- Bernstein -- Analyst
Vince Ciepiel -- Cleveland Research -- Analyst
Tim Conder -- Wells Fargo -- Analyst
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