皇家加勒比遊輪 (RCL) 2014 Q2 法說會逐字稿

Good morning and welcome to the Royal Caribbean Cruise, Ltd.

2014 second quarter earnings conference call.

(Operator Instructions).

I will now hand today's call over to Jason Liberty.

Please go ahead, sir.

Good morning, and thank you for joining us today for our second quarter earnings call.

Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and Chief Operating Officer; Michael Bayley, President and CEO of Celebrity Cruises; and Laura Hodges, our Vice President of Investor Relation.

During this call we will be referring to a few slides which have been posted on our investor website www.rclinvestor.com.

Before we get started I would like to refer you to our notice about forward-looking statements, which is on our first slide.

During this call we will be making comments that are forward-looking.

These statements do not guarantee future performance and do involve risk and uncertainties.

Examples are described in our SEC filings and other disclosures.

Additionally we will be discussing certain non-GAAP financial measures which are adjusted as defined and a reconciliation of these items can be found on our website.

We are changing the format up a bit today.

Instead of each of us providing commentary on selected details within our operation Richard is going to provide a slightly longer strategic overview explaining the Double-Double Program and how we plan to get there.

I will then follow-up with a recap of our second quarter results, provide an update on the business environment, and give our outlook for the third quarter and full year.

We will then open up the call for your questions, Richard.

Thanks, Jason.

And good morning, everybody.

As always we appreciate the opportunity to provide more color on the earnings release and to talk about our progress.

As Jason said, we are changing our usual format today to focus on our strategic opportunities.

And I would like to first start by providing a fuller description of what we're trying to accomplish with our Double-Double Program and why we believe it is the right thing to do.

As you know we have been dissatisfied with an unexpectedly low level of ROIC and we have been working hard to bring our returns to more realistic levels.

Fortunately, we believe we are now on the verge of some dramatic breakthroughs in this regard and this is the time to push us over the top.

To achieve a dramatic change in performance it is important, where possible, to articulate clear and measurable goals.

The Double-Double Program is intended to do precisely that.

Obviously, these are aggressive goals, especially since our starting point will be record earnings this year.

And obviously there are more risks and uncertainties inherent in any such program.

Nevertheless, we have been putting in place aggressive measures that we expect will enable us to achieve both of these two important goals.

There is always a danger in publicly announcing such an ambitious program, but we feel that publicly disclosing these goals actually helps us drive the organizational initiatives that are so important to accomplishing them.

It also provides what we hope is useful information to you, our shareholders.

As you know, we have, for some time, pointed to the underlying strength of our business model.

It is enormously gratifying now to see that strength beginning to prove itself.

The difficulties over the last few years really have obscured the very strong power of our business model and I am pleased that that business model power is reasserting itself.

Our Double-Double program rests on three key pillars: optimizing revenues, controlling costs, and moderate growth.

I would like to comment on each of these briefly.

The real driver of our long-term success, of course, will be our success in delivering the revenue side of the equation.

And here I believe we have a lot of potential.

Some of the reasons for this are structural and some of the reasons for this are specific actions that we are undertaking.

Structurally the difficult period we are just emerging from has had a double whammy on us.

Firstly, there is then the general pressure on pricing.

Secondarily, there has also been a compression of pricing as the general market environment improves we are seeing a general rise in pricing.

And we are also benefiting, disproportionately, from the decompression effect as well.

We see four particular areas of opportunity for significant revenue expansion.

The first bucket of revenue opportunity is exploiting the strength of our brands.

I think people all too often underestimate the incredible power of a strong brand.

The strength of a brand's reputation and its market position go beyond purely quantitative differences.

Done properly, good brand positioning is an important driver of revenue and of profitability.

Today our brands enjoy an extremely strong market position and our teams are obsessively focused on taking advantage of their growing relative popularity.

For example, Royal Caribbean International continues to deliver the WOW and the introduction of Quantum of the Seas will take this a step further.

At the same time, Celebrity's Simplification and Intensification Program is propelling its performance to new levels.

We are seeing an upsurge in the popularity of the Celebrity brand and in our ability to attract the most profitable guests.

And Azamara is achieving double-digit yield improvements with its Destination Immersion and rising popularity.

The second revenue bucket is the globalization of our brands which helps us not only through diversification but also through better positioning.

Our global footprint gives us a unique opportunity to take advantage of different markets at different times.

For example in 2013 when it was the US market being particularly strong and Europe was suffering we were able to shift sourcing by bringing more Americans to travel on our European itineraries.

In [2014] the relative economic position switched and we have been able to use our global footprint to bring more Americans to US -- sorry, more Europeans to US itineraries.

The third bucket is the growth of Asia in particular, and of China -- sorry, Asia in general, and China in particular.

Our brand has established a terrific market position in China and the deployment of Quantum of the Seas is stirring an enormous amount of excitement there.

The fourth, and the final, revenue bucket relates to Pullmantur.

It has been a long time since I have referred to Pullmantur as providing upside potential but today Pullmantur is on the cusp of turning an important corner.

We have now completed the sale of its non-core businesses and we have increased our focus on Latin America.

I'm happy today to extend a welcome to Jorge Vilches who has recently taken over as CEO of Pullmantur.

For a while now Pullmantur has been a significant sea anchor to our progress.

Dragged down by a simply horrific Spanish economy.

Now, while we don't expect a miraculous resurgence of the Spanish economy anytime soon, we do expect that merely alleviating that negative drag will help us significantly.

Ergo, we have an opportunity to achieve significant topline growth, driven especially in four areas of opportunity.

The strength of our brands, exploiting our global footprint, enhancing our position in China and Asia, and turning around Pullmantur.

All of these factors present us with an unparalleled opportunity.

The role of our Double-Double Program is to make sure we take advantage of these opportunities.

Now, while we are excited about the potentials on the revenue side it remains crucial that the cost side of the equation remain under just as much focus.

Our business is a broad and complex one and controlling costs requires a discipline throughout the organization.

That culture of cost control has ingrained itself nicely throughout our enterprise.

Going forward, to achieve our Double-Double objectives it is important that we continue to maintain that strong focus on controlling costs commensurate with our product delivery requirements.

The third pillar of our strategic thrust is moderate growth.

One of the drivers of improved results is the fact that we are growing capacity more slowly than we have in the past.

We believe that this more moderate growth allows us to do a better job of maintaining the premium nature of our products and the premium nature of our pricing.

That drives higher overall returns going forward.

At the same time, we cannot allow our product and our brands to stagnate.

Some time ago we set our course on moderate growth and we publicly enunciated an expectation of 3% to 5% average compound growth.

We believe that 3% to 5% continues to be an appropriate range for us and we do not expect to deviate from that level.

Of course, ship deliveries come in big lumps rather than gradual changes in the growth curve.

As a result there will be significant difference in the figures for individual years.

But over time the average has, and should continue to be, in that range.

As we said before, we don't comment on the plans of our TUI Cruises joint venture, that operates separately and we're not including it in the above comments.

One last topic I would like to comment on is the issue of seasonality and the timing of our earnings.

We manage our business on a calendar year basis but we often find that shifts between quarters can cause confusion.

It very much reminds me of a science class I took in high school.

The teacher showed us a cup of water and pointed out how peaceful and calm the water was, however, when he put the water under the microscope we could see that beneath the surface there was a huge amount of activity going on.

While the overall result was calm water, looking at any one of the individual components was anything but predictable.

Similarly for us, our predictions for the overall figures have been surprisingly accurate within any given year but we often see anomalies within that period.

I think that it is remarkable that overall our revenue estimates have generally been within a percent or so of the actuals.

But I think everybody realizes that nobody can consistently be that precise.

Rather, the law of large numbers applies.

We often have significant variances in individual areas but these tend to offset one another.

Thus, in the first quarter of this year we did worse than we expected.

In this quarter we have done better.

Within any individual quarter everything has an impact, even seemingly small things.

Fortunately, they tend to average out over the year.

And it is not only revenue the bounces around because many of our operating expenses are for large items changing the timing of something like repair work can easily shift expenses from one quarter to another.

Lastly, I should point out that there is a seasonality factor.

Sometimes one quarter does better in revenue than another.

Not surprisingly, that may at first imply to a reader that there is a trend that will carry on into the next quarter.

If this quarter is up or down it makes sense that the next quarter will be up or down too.

It seems logical, but we often find that the cause for the variance is really due to particular markets, not to particular time periods.

If Alaska does particularly well that helps the third quarter but it doesn't help the fourth quarter because we don't go to Alaska much in the fourth quarter.

This phenomenon makes it different to extrapolate subsequent quarters based on trends in the current quarter.

Before handing the call back to Jason I have to express our excitement over the recent delivery of TUI Cruises first new building, Mein Schiff 3. This 2500 passenger ship is not only aesthetically a marvel but she is the first new building to be delivered with Advanced Emission Purification technology.

Together with an advanced hull and other energy-saving technologies, this ship incorporates some of our best learnings for environmental friendliness.

I would also like to comment on our excitement about the construction of Quantum of the Seas.

This ship will float out from the dock in a few weeks and it is exhilarating to see the innovations on board come to life.

With that, it is my pleasure to turn the call back to Jason for a closer review of the quarter's performance and the forecast, Jason.

Thank you, Richard.

I will begin by taking you through our results for the second quarter.

Now, unless I state differently, all metrics will be on a constant currency basis.

We have summarized our second quarter results on slide 2.

For the quarter we generated adjusted net income of $0.66 per share which was $0.16 above the mid-point of our guidance.

Net revenue yields were up 2.6% for the quarter which was 60 basis points better than the midpoint of our guidance.

Better-than-expected pricing on close-in business for Europe and Asia sailings drove this outperformance.

As anticipated, the environment of Caribbean has remained highly promotional and ticket revenue yields for the product were down year-over-year.

However, this was more than offset by continued strength on European and Asian itineraries where we had double-digit yield improvements for the quarter.

Onboard revenue initiatives continue to deliver positive results with a second quarter increase of 3% making this the tenth consecutive quarter for onboard revenue -- of onboard revenue growth.

Better load factors and the continued success of initiatives such as beverage packages, as well as Internet services drove this positive increase.

Net cruise cost excluding fuel decreased 4.7% for the quarter, which was 220 basis points better than the mid-point of our guidance.

All of these savings are timing related and are expected to be spent during the balance of the year.

So below the line was favorable by $0.06 per share driven mainly by the continued success of our equity investments, like TUI Cruises, and a portion of the change in value of our derivative instruments.

Now, I would like to update you on what we're seeing in the booking environment.

Since our last call booking volumes have been significantly higher than during the same period last year and the booking window continues to expand.

Load factors and APDs for 2014 are ahead of same time last year for both remaining quarters.

While it is very early in the booking cycle, we are encouraged with the early patterns for 2015 with both load factors and APDs up versus same time last year.

At the itinerary level trends since our April call have not changed.

We continue to see a highly promotional Caribbean environment counterbalanced by extremely strong demand for European and China sailings.

Demand for the Caribbean itineraries, which account for 46% of the full year and 28% of the third quarter, still remain highly price sensitive.

We have taken advantage of recent reservation system enhancements, this was offered different types of promotions which have resonated well with our guests.

These have also driven strong demand for these itineraries.

Although we are expecting yield decline on most 7-night Caribbean and short Caribbean itineraries we continue to generate pricing premiums on Oasis-class hardware and are seeing material year-over-year improvement in summer load factors on these ships.

You will recall that we were 80% booked for European sailings at the time of our April call.

Strong advanced sales left us with less supply to sell which in turn is leading to quality close-in demand with each of our core sourcing markets.

Guest bookings within 3 months of sailing are paying approximately 20% more than they did same time last year.

While it is not material our five remaining Black Sea sailings have been stressed due to the unfortunate situation in the region but this has been more than offset by strength throughout the rest of the Mediterranean.

We are pleased with how the summer China season is shaping up and we continue to anticipate a double-digit yield improvement for the product this year.

Looking forward we still have a conservative outlook on the Caribbean but remain bullish on Europe, Asia, and Alaska sailings for the remainder of the year.

As Richard discussed the Double-Double Program provides a strategic platform to guide internal decision-making and demonstrates our commitment to drive compelling returns to our investors.

These long-term goals are convergent on our ongoing efforts to drive disruptive revenue growth while remaining focused on cost within an environment that has moderate capacity growth.

The Double-Double Program will be a clear goal we strive towards over the coming years that ensures proper focus on our core financial objective.

Taking into account all we just told you I would like to summarize our updated guidance for the full year and third quarter.

If you turn to slide 3, you will see our updated guidance for the full year 2014.

Net revenue yields and net cruise costs excluding fuel are expected to be consistent with our previous guidance with net revenue yields expected to increase between 2% and 3% and net cruise costs excluding fuel expected to be flat to slightly down.

As I previously stated, continued strength in pricing for European and Asian sailings combined with strong onboard revenue expectations are driving this growth.

Also $16 million in lower-than-expected costs realized in the second quarter are timing related and are expected to be spent during the balance of the year.

Our fuel costs for the year have decreased slightly since our April call to $949 million driven mainly by rate.

And we are 55% hedged for the remainder of 2014, that is at a price of $614 per metric ton.

Based on current fuel prices, interest rates, and currency exchange rates, we are raising our adjusted earnings-per-share guidance to be between $3.40 and $3.50 for the full year.

Now I would like to walk you through our third quarter guidance on slide 4. Net yields are expected to be up by approximately 4%.

Our deployment mix shifts substantially in Q3; we have 44% of our capacity in Europe, 28% in the Caribbean, 10% in Alaska, and 7% in China.

As a result the Caribbean pricing environment is less influential on our overall yield in Q3.

And significant improvements in Europe and China, as well as positive yield trends in our Alaska sailings, are having more of an impact on our overall yield growth.

Net cruise costs excluding fuel are expected to be flat to up 1%.

We have included $231 million of fuel expense for the quarter.

Also we expect positive year-over-year impact below the line for the quarter driven mainly by the recent delivery of TUI Cruises' Mein Schiff 3. Taking all of this into account we expect adjusted earnings-per-share to be approximately $2.20 for the quarter.

With that I will ask our operator, Tamika, to open up the call for questions and answers, Tamika.

(Operator Instructions).

Your first question comes from the line of Tim Conder with Wells Fargo Securities.

Thank you.

First of all let me offer my congratulations for the ongoing strong execution.

And thank you for the multi-year benchmarks and the accountability that it implies.

Thanks, Tim.

A couple of things here, Jason, or Richard, whoever wants to take this, just maybe a little more color on what you are seeing early in 2015 and as it relates to that, I know, again, your global deployment is great and that is yielding fabulous benefits here, but the Caribbean, where do you see at this point a potential turning point for the industry?

And granted you guys are outperforming there but where do you see that at this point?

Hi, Tim, again, thank you for the nice comments starting off.

I think as it relates to 2015 it really is very early in the process and the positive trends that I talked about are really things that we're seeing across the products at this point in time.

But I think giving any more detail would not provide you better information than what we just communicated.

As it relates to the Caribbean I think overall we are really kind of getting closer to that inflection point.

We are seeing a very consistent environment in there and it has been actually quite consistent to what we saw on our April call.

I think it is quite predictable at this point in time.

Okay.

And from an inflection point are you thinking here over the next by the end of the year?

Is that fair from the industry, is that what you are implying?

I think what I'm implying, I think, again going into -- though again it is very early on we are seeing a positive outlook on demand for the Caribbean going into 2015.

I think, Tim, one comment we can make, one of the issues in the Caribbean has been the fact that there has been so much capacity there and we always overcompensate for these things, I'm afraid.

That situation carries on through the first quarter of 2015.

So I think, just to gauge it in terms of where the turning point would come, the first quarter is obviously going to be more difficult than the second, third, and forth as we are looking ahead to next year.

But I think, you know, our processes (inaudible) very much on the way bookings are coming in and we're not sure that we're -- we're not sure --we don't see enough bookings yet this early in the period to start being much more specific than we are being.

Okay, that is fair.

If I may, one more question for Mr. Bayley.

Michael, again, great progress in the brand.

When you came into the position here and where we stand now, how would you characterize, I guess, the low hanging fruit that you saw coming in?

Granted that your predecessor had done a lot of work before that.

Where you started the job where do you see the low hanging fruit from your perspective and where would you say we are, if you want to say, in innings of the ball game, so to speak?

Thank you, Tim, thanks for those comments.

I think when I came into the position I was fortunate in many ways because, literally, the brand was just about to take delivery of the fifth of the Solstice-class ships.

And so really there had been a transformation in the brand as it relates to the hardware.

And so much of the energy and resources of the organization was so focused on taking delivery of all of these beautiful ships that I was in a position where, because we had finalized the delivery of the final ship, that we could really focus our energy on delivering against the strategy that we had created.

So, I think it is a journey, as you pointed out.

We started that journey in late 2012, early 2013, and I feel we are probably about 30% of our way through that journey.

We've got a lot more to get done and we have got fairly clear plans for the future.

So that is kind of where we are.

Great, okay, thank you.

Thank you.

Your next question is from the line of Brian Dobson with Nomura.

Brian, your line is open.

Brian, please pick your phone up and make sure you're not muted.

Hearing no response from that line, we will go to the next question.

Your next question is from the line of Steve Wieczynski with Stifel.

Thank you, good morning, guys.

So, Richard, I guess the first question is with, you know, basically your EPS goal now, have you kind of projected out to 2017 your almost $7.00 in share in earnings?

That is basically implying 25% earnings growth for the next -- basically for the next 3 years or so.

I guess from a capital standpoint at this point, does it -- do you guys start to think about the way you're going to deploy capital to shareholders?

Does a share repurchase program make sense at this point?

I do think you are right, Steve.

As you say we get to a point with this kind of profitability where the cash generation becomes a new problem to have.

It is not a problem that we are that familiar with, to be honest.

Or to be blunt.

But it is a nice problem to have.

I do think we are beginning to talk about that.

We have said in the past that over time we think returning cash to shareholders is an appropriate thing for us to be reviewing.

We did double our dividend just under a year ago and so either higher dividends or cash repurchase seems to me as the success is coming through and as the cash flows are coming through is very much of an issue that we should be discussing.

It is very much of an issue that the board is discussing and does discuss and I think it is not necessarily appropriate for me to preempt them.

But that is, you're right, it is a new problem for us to have but it is a good one and we will be addressing it.

Okay, I got you.

And then second question, I don't know who wants to take this, maybe you, Richard, as well.

But broader question with China, and I know there is a lot of hype out there about the opportunity in China over the long term but -- maybe, how do you guys decide what is the appropriate type of investment to put in that market and then maybe help us think about where the investments will fall in that market as well?

Well, I will start and then Jason or Adam may want to chime in.

It has proven to be a very successful market for us but it is still young and we're still investing in it in two ways.

First of all the capital investment, I think the move of Quantum was a pretty bold move, now in looking back at it it was a pretty obvious one.

But these things are always obvious after-the-fact.

I think that reflects our commitment to the market.

It will, of course, I think we mentioned this earlier, it requires some, not only capital investment with the ships that we have put in and the very high growth rate that we have been having there, but also requires an investment in infrastructure and then operating costs.

And that has challenged us this year and will be a challenge next year.

We look at the bottom line impact and see it is very positive but there is some clear investment needed whenever you are developing any market but particularly one that is so fundamentally different than the other markets that we have penetrated.

Thanks, I appreciate it.

Steve, I will add on a little bit.

If I continue with the sports analogy that Tim used earlier, we're certainly pleased with how it has gone so far.

I would say it is something like we have scored a couple of runs in the first inning, but there's a lot more innings to play in that game.

We have a tremendous work ahead of us to do in terms of developing consumer awareness of our products and services.

We have a significant undertaking in terms of developing the kind of distribution and loyalty of distribution that we have achieved in North America and in European theaters.

We have a program next year with 4four different ships operating out of four different home ports in China.

That is something that we could not have envisioned even a few years ago.

Really to reach the targets that we have will take a lot of work, but we are excited about it.

There definitely is a momentum and we feel like we have created a leadership position for the Royal Caribbean International brand and we certainly want to see where we can go with the momentum that we have.

Great.

Thanks, Adam, thanks, Richard.

Your next question is from the line of Felicia Hendrix with Barclays.

Hi good morning, thank you.

And thanks, Richard, for all of the color today.

I have a question regarding the Double-Double Program.

I was wondering, can you talk about how management incentives might be aligned with achieving those goals?

Thanks, Felicia, good morning.

Yes, I think to accomplish something like this sometimes it helps to -- we have to shift a mindset.

We have been working on this for a while here.

So I do want to emphasize that.

This is not something that is starting today.

Obviously this is something we have been working on and I think you know that.

But to make the kind of shift that you want I think one of the things that Royal Caribbean has been so successful at has been to get the whole organization to move in a certain direction.

And, yes, we are using our incentives to accomplish that and we have put in, and expect to put in, some special incentives to make sure that everybody is focused first on the beginning of that period but also, although it hasn't been finalized, it is likely that as we are looking at our longer-term incentive programs like our performance-based share things that we will be considering making the Double-Double targets, which is a three-year goal, the measuring stick for those.

So we think for an organization to work everything has to work together and that includes the compensation and the incentive compensation.

And I think we are seeing it is working.

That is great, that is really helpful.

And, Richard, also you talked in the beginning in your prepared remarks about costs and you know have a culture of cost control.

Just regarding, you know, cost is expected to be flat, slightly down this year, for next year would you expect to continue that kind of flat to slightly down trend particularly given the delivery of the two new ships?

I know you are not ready to give guidance but I guess what I am trying to figure out is there anything that you can foresee coming up that would cause net cruise costs ex-fuel to be up next year?

Hi, Felicia, it is Jason.

Hi, thanks.

I think in terms of -- obviously it is early on for us as we are going through our planning cycle to be thinking about costs.

But I think our general commitment to our cost culture really remains unchanged.

But there will clearly be inflationary pressures, new investments, as well as cost efficiencies that will be kind of considered in that equation.

I would just say our overall commitment is the same but those pressures are really now what we are beginning to take into the consideration.

And I think I would, Felicia, emphasize as I did before that the focus is on getting the total profitability.

And so while we would love to keep having 0 growth in costs, I think we see that our real objective is the bottom line.

And so, for example, coming back to the question Steve asked, the costs in China, if we have to incur those costs and that take us slightly over what we would like to be but it generates more in revenue than we would do that.

So it is really a question of a balance in our minds rather than a bright line on the page.

Okay.

That is great.

And then Jason you sounded in response to another question to kind of get into the granularity about the Caribbean but I think a lot of us on the call are just trying to figure out how that is looking right now in the third quarter.

And so given we all know that the environment is promotional if you can give us any kind of color at all that would be helpful.

I think in terms of general color to start off with is that it really is a very similar environment to what we were experiencing 3 months ago.

I wish I could tell you that something had dramatically changed but it has been actually quite similar.

But the volumes have been pretty steady, it just has required those promotional techniques.

The other color that I had said in my remarks is there is a little bit more pressure on the Caribbean and 7-night -- on the 7-night and on the shore Caribbean product but that is generally kind of being balanced out.

But it is a very similar picture.

I think in fairness we have made it clear it actually got quite a bit worse between the first and the second quarters and I think we conveyed that in the second quarter call.

As Jason says, I think it has more or less stabilized since then.

But actually that is partially because we've brought to bear more yield management techniques and systems that we have talked about before that are coming online and that have helped us offset what otherwise might have been a tweak worse in the Caribbean.

Okay, that is super helpful, thanks.

Your next question is from the line of Robin Farley with UBS.

Great, thanks.

So, looking at your Double-Double Program and you're ambitious earnings target, I know you talked about some of the qualitative ways that you will get there, and I totally understand that there will be different moving pieces contributing to it, but just to think about it quantitatively because your capacity increases are pretty fixed, right?

Between now and 2017.

Right.

So it has to be set in stone.

And if we assume maybe some low expense growth per-unit given the investments you are making, is it kind of implying yield growth like a compound annual yield growth north of 4%?

Is that sort of in the ballpark of what you are thinking?

Hi, Robin, it is Jason.

I think that I would probably answer it that obviously there will be some ebbs and flows in terms of how it plays out in each year.

But I think what we really look at is, one our commitment on the cost side.

And then the other is just look at how our yields have grown over the past 5 years.

I think we really see moderate growth, I think 4% on average would be on the higher side, on average.

But that is kind of how we kind of came to that basic math.

Okay, so maybe there is actually expense reduction kind of per unit implied then?

I think, Robin, we are really uncomfortable in trying to get too much into the details of this.

I think we all have our models.

As you say, the capacity number is fixed.

I think we are pressing on costs but I think, if I heard your last comment correctly, I don't think we are thinking that a lot of -- there is going to be a dramatic improvement in costs.

We just think that there is a very strong underlying business model, particularly on the revenue side.

And when we extrapolate it out we think that it makes these targets doable, and we're determined to work towards that goal and make it happen.

Great, thanks.

And then just lastly, you talked about how some of the factors affecting one quarter don't necessarily, you know, when you shift into the next quarter and itineraries change, I wonder if you could just give us a little color on Q4 because there is now, kind of, an implied Q4 guidance since you have guidance through Q3 and you have a full year guidance?

Yes.

That always does make the second half easier because we implicitly end up giving two quarters rather than just one, Jason?

And then so that is still sort of implying pretty healthy guidance in Q4.

And it is in line with our expectations but I just wanted to hear since you won't have as much European capacity, just hear a little bit about what is driving the growth in Q4.

Yes.

Hi, Robin, it is Jason.

I think in terms of the general growth in Q4 it is relatively consistent for us in terms of having had some upside happening from Europe and Asia because we do have some of those sailings come in, and then we are dealing with a very similar environment, actually very similar booking environment for Q4 on the Caribbean side.

But I don't think, again, there has been a big change on the guidance side.

I think on the cost side, as we said, some of the savings that we had identified in Q2, or that was actually realized in Q2, that will shift into the future quarters in Q3 and Q4 would be included in those comments.

Great, thank you.

Your next question is from the line of Harry Curtis with Nomura.

Harry Curtis with Nomura, your line is open.

Please pick your phone up and make sure you are not muted.

Why don't we move forward?

Your next question is from the line of Robert Higginbotham with SunTrust.

Thanks, this is Robert in for Patrick Scholes.

So, you obviously put up some pretty strong guidance for net yields in the third quarter and we had actually been expecting that given some strength we had seen in our own pricing work.

That same pricing work really shows that you guys are pretty big out wire to the industry, meaning you seem to be outperforming your peers.

Maybe you could give us just some incremental color in terms of why you think that is and how you expect to sustain that?

I think I am not sure how we can describe it in more detail.

We focus on how our performance is going and the steps that we are taking both on the marketing side, the yield management side, and managing the demand.

I know it is a little better than maybe we were expecting before but basically the yield has just been holding up.

And I think we are very proud of the revenue management people that we have internally who predict these things and they have been remarkably accurate.

Obviously some luck goes into that but also we have spent a lot of time and money developing these systems, we have continued to invest in these systems.

By the way, I would refer you back to some commentary we have made over the last couple of years that we have invested a great deal in building these systems and building the capabilities.

And I think that our people have tried to come up with good models and they have been remarkably accurate.

So we actually haven't ended up changing our yield forecast as we have gone through the year and I would congratulate them in being able to do that.

Obviously we can't always be this accurate but they have been pretty good and I think we will continue to invest in these systems because we think they do help us.

Okay.

And a quick follow-up, forgive me if you mentioned this before, but I believe you recently launched a new pre-onboard planning tool, could you give us any sense of what the usage of that has been and if you have seen any visible uptick in spending from that?

Hi, Robert, this is Adam.

It is too soon to associate the use of Cruise Planner with the onboard revenue outcomes because that will be something that unfolds over these next few quarters.

It was important to us -- it is important to us that the Cruise Planner tool be used particularly by the people who have booked Quantum of the Seas for the first few months.

And in fact the derivation of Cruise Planner was very much inspired by all of the different features and amenities on Quantum and then applying that opportunity to the rest of the fleet.

So, for Quantum it has gone very well, we're very pleased with the usage of the Cruise Planner tool for that purpose.

While we're at it, not that you asked, but we have a lot of upcoming developments that we think will be beneficial for onboard revenue on top of beverage packages which we've mentioned and Internet services which has already been very positive for us but we are now just about two months away from having the O3b expanded Internet capabilities that we have really been working hard on for a long time behind the scenes with this O3b company that pioneered a new satellite technology specifically for the purpose of beaming land speed bandwidth down to earth.

And although they didn't think of cruise ships when they created that technology we end up being a perfect solution for it.

And we will bring that out on Allure of the Seas this fall and then Quantum and Oasis.

And this will be a revolutionary breakthrough in the capability of cruise ships to receive significant bandwidth at great speed and we are very excited about that and that will be a very interesting addition to our other onboard revenue capabilities which have been performing very well for actually all of our brands in the recent past.

Okay, since you mentioned it, on that new capability, is the plans to monetize that in any way marketing?

In other words, competitive advantage in terms of ticket pricing that you charge?

Is it an uptick or is it an increase in pricing that you will charge for Internet service?

Or would you expect there to just be higher usage of that service?

I think the Millennials are an enormous market for us and to be able to offer them homelike coverage at sea is an enormous advantage.

And, you know, I don't think we have talked enough about it, when we will have more bandwidth on one ship then every other ship in the industry combined.

You are talking about something that we think will help us bring in more customers, raise our prices, and this is the sort of thing that we have been doing to try and raise our yields and it is the kind of thing that underlies the Double-Double Program.

Great, thank you very much.

Your next question is from the line of James Hardiman with Longbow Research.

Good morning, thanks for taking my call.

Just a quick question here on the yield guidance, and you may have touched on this, maybe just codify it for us.

You beat the mid-point of your second quarter guidance by 60 bps, you didn't really raise the full year at all, is that just rounding and is it safe to assume that we are at least further into that range for the yield guidance for the year?

That's exactly right, James.

It is rounding related, the only probably slight negativity you would take on the back half would be the Black Sea sailings.

As I said in my commentary that has basically been offset by further strength in the Mediterranean.

Got it.

And then on the Double-Double Program, since we're sort of thinking about three-year outlook here.

Can you give us at least ballpark capacity growth assumptions over the next few years?

And, I guess, bigger picture, how should we think about the denominator of the ROIC piece over the next 3 years?

You talk about a 3.5% CAGR, in general is that maybe a decent assumption for the invested capital peace between this year and 2017?

I guess at least for next year it seems like a much bigger number than that, at least in terms of capacity.

How should we think about the puts and takes there?

Yes, I think, James, probably the best thing to do, Laura can certainly send it to you but in the press release, especially through 2017, it defines our capacity increases each year and it also provides our CapEx.

And really at this point, especially through 2017, there's very little that anybody can do to change those.

It is actually there through 2018 as well.

Got it, that is very helpful.

Last question in terms of Quantum of the Seas, maybe talk a little bit about sort of the pricing you are seeing early on.

What the occupancy assumptions are and I think you have talked about in the past, the costs are going to go up a little bit but maybe a Caribbean itinerary versus a Chinese itinerary for the same ship?

Can you maybe talk through some of the puts and takes and overall as I think about maybe EBITDA and EBITDA margins, how do the two compare?

As it relates to the latter half of that on our last call we basically we said that economically we expected this ship to perform at least as well in China as it was expected to do in New York, post it moving on to China.

I think economically that is the way that I would look at it.

It would probably require a little bit more costs, but we were also expecting a little bit more on the revenue side especially with the strength on the onboard element within China.

As it relates to bookings, also what we have consistently said is that for what is open to sale, which effectively is the North East products, which goes through the middle of May and then also the repositioning of the ship from New York to Shanghai, the pricing and load factors on that are doing exceptionally well.

And as we said in the past, it is in line in terms of how it is booking relative to when Oasis and Allure came out.

Excellent, thanks, guys.

Due to the allotted time for the question-and-answer session we ask that you only ask one question.

Your next question is from the line of Steven Kent with Goldman Sachs.

Hi, I know the last person who asked a question on ROIC, the Double-Double goal asked about could you do something on the denominator and I'm not sure you answered that?

But I just would like to understand that a little bit better.

I know Felicia and Robin both asked about reducing expenses, boosting revenues, but what about the capital side of it?

And maybe just think about that more broadly?

And then just one final thing, Richard, how about new ships going out a little bit further?

Any sense for how you're going to think about that over the next 5 years or so?

Sure, thanks, Steve.

First of all, the denominator I think the point we were trying to make is the denominator is largely immutable at this point.

There's very little that we would do that would change our capital base, as you know, we have ships on order.

And on our capital program we think we have given pretty good indications of what that is.

So, don't really see a dramatic change in that one way or the other that would have a huge impact on our calculation of ROIC.

So we do think that it will be the numerator, the profitability that will drive the change.

We have previously said that we are not contemplating any ship orders for our wholly-owned brands in 2017.

And in terms of what we are looking at going forward I think we have previously said that we thought the right range for us was to grow at a rate of 3% to 5% and as we are looking forward we think that is still the right number.

I think, as you know, it gets difficult because if a ship delivers in December of one year or in January the next it makes an enormous difference and every ship delivery is a big lump in the curve of growth.

But over any significant period of time we think that we will continue that average of 3% to 5%.

Thank you.

Your next question is from the line of Assia Georgieva with Infiniti Research.

Good morning, congratulations on the great numbers.

Jason, one question for you.

Onboard spend was nicely up, do you expect that to continue given the capacity of deployments in Q3 and especially the change into Q4 from the European source market?

Hi, Assia, thank you.

Obviously this had marked our tenth quarter in a row of onboard revenue improvement and last year we were up over 7%.

So the comparability gets more and more difficult.

But I think the focus we are putting on the onboard revenue line and also as sourcing, as we have more capacity, for example, in Asia next year we do continue to expect a positive performance on the onboard spending.

We haven't come out with any specific guidance on that obviously but expectations for us internally are to continue to improve that line.

And you mentioned beverage has done very well, I imagine that in Asia retail is probably the driver, and how about the shore excursions, spa, et cetera?

In Asia specifically?

Or just overall?

Just overall.

I think overall -- really on all of our line items on onboard revenue they are up.

We've also kind of doubled our efforts on the shore excursion side as we try to create a more destination experience feeling across our brands.

Your final question comes from the line of Greg Badishkanian with Citigroup.

Great, thanks, I just wanted to follow-up on the European strength that you have been seeing.

Two-part question, first comparing locally sourced business versus the North American sourced.

And then also have you seen any recent impact on demand just from the latest geopolitical headlines that we are seeing, particularly from maybe US or North American cruisers traveling abroad?

Hi, Greg, just to comment I think as it relates to some of the geopolitical, our exposure this year we really have a handful of sailings left that touched the Eastern Mediterranean region that is at risk and also on the Black Sea side.

So we haven't seen a lot of changes in the demand pattern outside of -- well there's been change in a sense of it being more challenging for us to get bookings for the recent sailings and that has been incorporated into our guidance.

As it relates onto Europe, really the trends are actually quite positive on a local level for both North American and European consumers whether they're traveling on European sailings or on the Caribbean.

It really is a good news story for both markets.

Yes, good.

Thank you.

Well, thank you for your assistance, Tamika, with the call today.

And we thank you all for your participation and interest in the company.

Laura will be available for any follow-up questions you might have and I wish you all a great day.

This concludes the Royal Caribbean Cruise Limited 2014 second quarter earnings conference call.

You may now disconnect your line.