皇家加勒比遊輪 (RCL) 2016 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the Royal Caribbean Cruise's Ltd.

  • third-quarter conference call.

  • (Operator Instructions)

  • I would now like to turn the call over to Jason Liberty, Chief Financial Officer.

  • Please go ahead.

  • Jason Liberty - CFO

  • Good morning, and thank you for joining us today for our third-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 Royal Caribbean International; and Carol Cabezas, our Vice President of Investor Relations.

  • During this call, we will be referring to a few slides which have been posted on our investor website www.rclinvester.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 risks 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.

  • Richard will begin by providing an overview of the business; I will follow with a recap of our third-quarter results, provide an update on the current booking environment, and provide our early thoughts on 2017.

  • I will close with guidance for the full-year and fourth quarter.

  • We will then open the call up for your questions.

  • Richard?

  • Richard Fain - Chairman & CEO

  • Thanks, Jason, and good morning everybody.

  • It's a pleasure to have the opportunity to share more about our business and our progress to the Double-Double, so let me get right to it.

  • We are quickly coming to the end of 2016 and we'll shortly be starting the final year of our Double-Double program.

  • Reaching the Double-Double, will be a significant accomplishment for the 65,000 women and men who collectively make Royal Caribbean Cruises successful.

  • However, I do want to emphasize that Double-Double is not an end in and of itself.

  • Rather, it represents the completion of another step in our continuous journey of improving shareholder returns.

  • The success of the Double-Double rests on three pillars; strengthening revenue yields, controlling costs, and moderate growth.

  • Our progress on this journey has been steady.

  • Not only has the slope of the curve been very steep, but it has been remarkably strong and predictable.

  • As you can see on slide 2, both earnings and yields have consistently ended up right around the midpoint of the range that we stated at the beginning of each year.

  • This track record comes despite some unexpected impact from things like foreign exchange and fuel.

  • For example, our biggest non-dollar market has been the UK, but sterling has fallen 30% over the last two years, and that got a significant push from the recent Brexit vote.

  • This year is shaping up to deliver in a similar fashion.

  • Our yield guidance today, at 4% or better, is about the same as it was at the beginning of the year, when we adjusted the deconsolidation of Pullmantur.

  • Earnings-per-share expectations of $6 to $6.10, are a little better than our original range, despite a number of challenges that came our way this year.

  • So the fact that our year is ending above our original guidance, in spite of the challenges, is a testament to the focus, discipline and will of the team.

  • For that I express my appreciation.

  • I would also like to take a moment and step back to discuss some of the developments to our core financial objectives, including achieving investment-grade metrics, improving shareholder returns, and moderate capacity growth.

  • I know that many of you model our performance outlook diligently and you can see that we are now reaching the key financial metrics that are the threshold for investment-grade.

  • Getting to this point hasn't been easy, but it is important and we are committed to achieving and maintaining a BBB credit status.

  • In this regard, it was particularly satisfying when Moody's issued its upgrade of our improved outlook.

  • It is rewarding to see progress on all our goals and this is another big one.

  • I also know that many of you are up-to-date on our announcements and have noticed our recent increase in dividends.

  • Our dividend level is at an all-time high and is now four times what it was just over three years ago.

  • In the same period, we also executed significant buyback program.

  • As our earnings continue to grow and as conditions warrant, and by that I include earnings and free cash flow, we will continue to engage in a mix of moderate dividend growth and share buyback programs.

  • These steps are clear evidence of our commitment to improving shareholder returns.

  • Now turning to the third pillar, moderate capacity growth, that's been a focal point of a lot of conversation.

  • We've said before that the pipeline of supply is known and it's very much constrained by limited shipyard capacity.

  • We?ve said our target is 3% to 5% growth rate, and that's just what we have been doing.

  • Through 2005, our five-year actual capacity growth rate, was just under 4% a year, and for the coming five years, it's also just under 4%.

  • Now on the demand side, we have seen some markets contract, such as the Eastern Mediterranean, but we have also seen new markets expand, such as China and Australia.

  • It's important to note that cruising is still underpenetrated in all of our markets, including our core markets.

  • We opened up new markets like China because they are growing at extraordinary rates, not because of inadequate demand elsewhere.

  • For example, we are aware that some people have been arguing for years that the US market is saturated.

  • But we have been growing here strongly and consistently in both rate and volume.

  • And we expect to continue to do so for years to come.

  • Our task is to continue to make people, especially non-cruisers, aware of all that cruising offers.

  • That takes continued effort, but it is working.

  • This year alone we have added more than 1.6 million new to cruise.

  • That demonstrates our continued strength in this market and positions us for what we believe to be a bright future.

  • Now before I hand the call back over to Jason, I want to touch on one more point related to environmental stewardship.

  • Protecting the environment is a responsibility we take seriously at Royal Caribbean, both because of the impact on our environment and because it just makes good business sense.

  • We focus heavily on reducing our carbon footprint and we're proud to publish our energy consumption figures.

  • They consistently show that our burning of fossil fuels shows the lowest figures reported by anyone in our industry.

  • This success comes from a deep focus on finding new and better ways to do things.

  • For example, our bubble technology, which is more properly called the air lubrication system, reduces drag thereby reducing the need for burning fuel.

  • But in keeping with our mantra of continuous improvement, we have gone one step further.

  • Recently we partnered with the World Wildlife Fund to take our sustainability performance to the next level.

  • Together with WWF we have announced publicly, goals related to greenhouse gas emissions, sustainable food supply, and destination stewardship.

  • This partnership follows exciting progress on a number of other fronts, including our advanced wastewater purification systems and our zero-landfill policy, already implemented on 17 ships.

  • We are also very pleased to be working with the EPA and have their support as we install advanced emissions purification, or AEP systems, on our ships.

  • This is a massive and expensive task, but a very impactful one.

  • These AEP systems scrub more than 98% of the sulfur from our ships?

  • exhaust.

  • Lastly, we have recently announced a new class of ships dubbed Icon-class.

  • These ships will be powered by LNG and will also utilize the latest fuel cell technology.

  • Fuel cells are the ultimate in smoke-free exhaust.

  • The only emission from fuel cells is pure water.

  • In conclusion, it's been a good quarter and the future looks very bright.

  • Brexit and other factors have been unexpected blows, but we have more than compensated in other ways.

  • With that, I'll turn the call over back over to Jason.

  • Jason?

  • Jason Liberty - CFO

  • Thank you, Richard.

  • I will begin by taking you through our results for the third-quarter.

  • Unless I state otherwise, all metrics are on a constant currency basis.

  • We have summarized our third-quarter results on slide 3.

  • For the quarter, we generated adjusted net income of $3.20 per share, $0.10 better than the previous guidance.

  • About half of the outperformance was driven by better revenue, with the other half of the beat driven by a weaker dollar and lower fuel prices.

  • Third-quarter net revenue yield was better than expected, up 2.9% year-over-year.

  • Strengthened close-in demand for North American products was a primary driver of the outperformance.

  • Onboard revenue yields for the quarter did not disappoint, with yields up 4.8% for the quarter.

  • The growth was mainly driven by beverage packages and increasing demand for VOOM and Xcelerate, our high-speed internet offerings for Royal Caribbean International and Celebrity Cruises, respectively.

  • Costs were as expected for the quarter, with net cruise costs excluding fuel down 1.6%.

  • Before I get into discussing booking trends, I would like to discuss deviations between the quarters.

  • Our yield came in slightly better than expected in the third-quarter and are expected to be slightly lower than our previous expectations in the fourth-quarter.

  • As a result, our yields for the full-year are essentially unchanged.

  • We often get asked whether these small aberrations between quarters signify a trend.

  • The answer is no.

  • And I would like to explain why.

  • The reality is that we manage a large and diversified portfolio of brands, markets, and products.

  • This complex portfolio obviously has minor deviations, especially in a period as short as a quarter.

  • This year was a good example.

  • Something as simple and insignificant as the delay in the deployment of the Empress of the Seas, will drive yields to be lower for the fourth-quarter than we originally expected.

  • This delay has no long-term significance, but it does affect quarterly figures.

  • As Richard mentioned, our track record is pretty good and slide 2 shows that over the past several years, we have been able to deliver annual yield and earning results in line with the original guidance we set for the year.

  • We don't see this immaterial aberration between Q3 and Q4 to be a trend, just a reflection of managing a global and diversified portfolio.

  • This is further supported by the 2017 booking trend commentary I will be providing shortly.

  • Now I will share trends in the demand environment for the balance of 2016 and provide early insights into 2017.

  • Let me start off by discussing the fourth-quarter, where our mix of deployment shifts versus the summer.

  • We have more capacity in the Caribbean and Australia and less in the Mediterranean.

  • Our year-over-year growth in fourth-quarter Caribbean deployment is driven by the additions of both Harmony of the Sea and Empress of the Sea in South Florida.

  • As a result, Caribbean itineraries will account for half of our Q4 capacity.

  • We expect Caribbean yields to be up mid-single digits for the quarter, which as I previously mentioned, is softer than our previous expectations, due to the delay in opening Empress of the Seas for sail.

  • Expectations for the rest of the Caribbean products remain relatively unchanged.

  • Asia-Pacific and Europe itineraries are generally performing in line with our previous outlook.

  • In summary, we are 94% booked for the fourth-quarter and with the exception of Empress, yields are shaping up as expected.

  • Moving on to 2017, I want to start by providing you an overview of some of the structural factors and deployment changes that play a part in the upcoming year.

  • I will then discuss the early trends we are seeing in the business.

  • We will see a benefit in the first half of the year from the addition of both Harmony of the Seas and Ovation of the Seas.

  • We will have a tailwind to our yields related to the deconsolidation of Pullmantur, which is worth a little over 250 basis points for the first-half of next year.

  • As a reminder, our portion of Pullmantur's results, will be reported as an equity pickup and since we continue to own the vessels, we will continue to incur a depreciation for the ships.

  • Lastly, our joint venture, TUI Cruises, will receive another new ship during the second quarter.

  • As we announced earlier this year, Legend of the Seas will exit the fleet at the end of the first-quarter.

  • This sale is very much in line with our fleet strategy of opportunistically selling older capacity.

  • We are making several changes to our itinerary mix in 2017 that will reduce exposure to the Eastern Mediterranean while bringing new hardware to the Caribbean and moderately growing the Asia-Pacific region.

  • Our Caribbean deployment will increase in 2017 and will represent just under half of our total capacity.

  • This increase is largely due to the expanded season for both Harmony of the Seas and Celebrity Equinox.

  • Both of these ships will remain in the Caribbean year-around, versus sailing in Europe as they did during the summer of 2016.

  • The change in deployment for these ships combined with the deconsolidation of Pullmantur, is driving a reduction in Mediterranean capacity.

  • As a result, Europe will represent 15% of our overall capacity in 2017 versus 20% in 2016.

  • Asia-Pacific itineraries will account for approximately 20% of our capacity, which is relatively consistent with 2016.

  • Our capacity in China will decrease slightly as the longer season of Ovation of the Seas is only offsetting a portion of the reduction due to the sale of the Legend of the Seas.

  • While it's still too early to provide guidance for next year, I will share some preliminary insights.

  • Our booked position is stronger than last year, as we are up in both pricing and load factors across all major markets for like-deployment.

  • This is particularly noteworthy when you consider that our booked load factor has improved each year for the past several years, culminating in a record-high for next year.

  • Our Caribbean and Alaska products are trending well despite very difficult comparisons in 2016 and bookings for European sailings are up nicely year-over-year, driven by strong demand from North America.

  • We're also pleased with how the winter Asia-Pacific season is shaping up, with both Australia and China sailings booked ahead of prior-year load factors in the first-quarter.

  • Although it's still early in the booking window, these insights provide added confidence in our path towards the Double-Double and we expect that 2017 will be our eighth consecutive year of yield improvement.

  • If you turn to slide 4, you will see our guidance for the full-year 2016.

  • Net revenue yields are expected to be up 4% or better, essentially unchanged from last quarter's guidance.

  • Our cost guidance is also unchanged with net cruise costs, excluding fuel, expected to be up approximately 1%.

  • Our fuel costs for the year have decreased since our last call to $720 million, driven by rate, and we are 68% hedged for the remainder of 2016, at a price of $535 per metric tonne.

  • Based on current fuel prices, interest rates, and currency exchange rates, our adjusted earnings per share guidance is expected to be in the range of $6 to $6.10 per share, unchanged from previous guidance.

  • To summarize, the changes we have made since the last call, we exceeded the third quarter by $0.10 per share, approximately half of which was driven by the out-performance of our North American products.

  • This beat is helping to offset the previously mentioned impact from the delay in the deployment of Empress of the Seas.

  • A weaker US dollar and lower fuel prices contributed the other half of the third-quarter beat.

  • However, this trend reverses itself in the fourth-quarter.

  • Now I would like to walk you through our fourth-quarter guidance on slide 5. Net yields are expected to be up approximately 6%.

  • The year-over-year increase is being driven by the deconsolidation of Pullmantur and strong trends on our Caribbean and Australia itineraries.

  • Harmony of the Seas in the Caribbean and Ovation of the Seas in Australia are doing particularly well.

  • Net cruise costs excluding fuel are expected to be down approximately 1.5% and we have included $189 million of fuel expense for the quarter.

  • Taking all of this into account, we expect adjusted earnings per share to be approximately $1.20 for the quarter, which represents nearly 30% growth year-over-year.

  • With that, I will ask our operator to open up the call for a question-and-answer session.

  • Operator

  • (Operator Instructions)

  • Your first question comes from the line of Jared Shojaian with Wolfe Research.

  • Jared Shojaian - Analyst

  • Hi good morning.

  • Thanks for taking my question.

  • Can you quantify the EPS and yield impact from the delay in deployment for Empress in the fourth-quarter and was that the only reason why your fourth-quarter yields are a little bit lower than your prior forecast?

  • Jason Liberty - CFO

  • Sure Jared.

  • The impact from the delay in the deployment was about $0.06 or $0.07, for the fourth-quarter.

  • Outside of that there is small little puts and takes that make up the balance, but it's very immaterial.

  • Jared Shojaian - Analyst

  • Okay.

  • Great, thanks.

  • There has been a lot of concerns about the promotional environment, particularly in the Caribbean, can you expand on that and what you're seeing right now?

  • And if you feel the need to be a little bit more promotional right now because of some of the incremental capacity, or how you are thinking about that?

  • Michael Bayley - President & CEO

  • Hi, Jared.

  • It's Michael.

  • Yes, we are feeling pretty good about Caribbean.

  • 2017 is looking good both on volume and rate with the capacity increase and 2016 is shaping up pretty well.

  • It looks very typical in terms of what we are seeing with booking patterns in Q4 as we have seen in previous years.

  • Everything is looking quite normal.

  • Promotional activity ebbs and flows.

  • We had Hurricane Mitchell blowing through the week before last, so we had about a week of a drop in bookings, which is inevitable as it moved its way up the East Coast.

  • And then I think we did and others certainly tried to stimulate the demand by putting in some promotional activity, which then the response was very good.

  • We had a promotion last week, which was the second-best performing promotion in the brand's history.

  • Jared Shojaian - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Operator

  • Your next question comes from the line of a David Beckel with Bernstein Research.

  • David Beckel - Analyst

  • Thanks a lot.

  • I was wondering if you could, it may be a little early, but I was wondering if you could talk about net-cruise costs growth for next year just reminding us of what some of the key puts and takes are when considering modeling cost growth?

  • And as a follow-up to that, what are some of the more significant levers on costs you can pull if yields do come in lighter than expected?

  • Thanks.

  • Jason Liberty - CFO

  • Thanks David.

  • We are still going through our planning process for next year, but as we have said in the past we need to continue to control our costs like we have a over the past several years.

  • I know early on, in our Double-Double program, we talked more about some of the chunkier things that we have been doing on the cost side, and really over the past year or so a lot of this is thousands of little things that we do to become more efficient across our business.

  • There are always small levers to pull, to try to right yourself if there is yield challenges.

  • But there is nothing specific that I would call out.

  • I think -- I would leave this point with saying that I think we have shown over the past several years management's commitment to cost control and try to become more efficient year-over-year.

  • David Beckel - Analyst

  • Great.

  • Thank you.

  • Operator

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

  • Felicia Hendrix - Analyst

  • Good morning.

  • Thanks for taking my question.

  • Jason, thanks for the color that you gave for next year.

  • I wanted to see if we could get a little bit more granular to clarify things because there is three -- from our perspective there is three overarching concerns for the next year, right?

  • So the risk of continued yield pressures in China, supply growth in the Caribbean, and then also FX fuel headwinds for next year.

  • Regarding Asia-Pacific, I think you said that and China -- your booked position in China you are ahead in load, so I was wondering for a moment if you could touch upon if you think where yields could come out next year, if you think you could see yield pressure again in China?

  • And then also your confidence level of growing yields in the Caribbean?

  • And then if there's any way, I mean I think a lot of people are doing the math based on where FX and fuel is today to calculate where that might impact next year, so if you could touch upon that as well.

  • Jason Liberty - CFO

  • Well, first off when we think about next year it's too early to provide any guidance and any guidance by product.

  • What we do have is we have, where we are currently booked.

  • The commentary on Asia-Pac, which really at this point in the year, we have pretty good visibility into the first-quarter.

  • It's been encouraging.

  • And hopefully those trends continue on as that product books further out here over time.

  • And then when we talk about the Caribbean, and I would also include in Europe in there, at this point in time of the year a lot of that is driven by the North American consumer.

  • As I commented in my remarks, that we have seen very positive trends in both a rate and volume basis for the Caribbean, as well as for our European products.

  • To answer your question on the currency side, certainly the strength in the dollar relative to the pound has been challenging.

  • If you want to say what has it been since the last call, it has probably hurt us by about $0.12 to $0.15.

  • There are always headwinds in our business that we have to focus on and overcome.

  • But that's been the impact since the last time we spoke here in early August.

  • Felicia Hendrix - Analyst

  • Okay.

  • And then a follow-up on some puts and takes for next year, because you mentioned that there will be a tailwind from Pullmantur of 250 basis points from yields in the first half.

  • There's also -- do you also get a benefit from the management fee, as well?

  • Maybe you could help us understand how the full mathematical picture works for Pullmantur?

  • Jason Liberty - CFO

  • There is to the deconsolidation; there is the benefit.

  • And that's effectively included in that estimate of the 250 basis points in the first half of the year.

  • The balance of that for the year is immaterial as it relates to the management fees.

  • It's a small contributor but not something I would specifically call out in the buildup of the yield.

  • Felicia Hendrix - Analyst

  • Great.

  • Helpful.

  • Thank you.

  • Operator

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

  • Robin Farley - Analyst

  • Great.

  • Thanks.

  • I wanted to ask about the Empress because our impression has been that you are maybe not opening up Empress for new sailings because you were hoping for a new Caribbean itinerary to open up before the end of the year.

  • I wanted to ask what your expectation -- is it still that that potentially that could open up before the end of the year or is the idea to keep Empress into Q1 without opening it up for new sailings yet?

  • Jason Liberty - CFO

  • As we were considering the deployment for Empress -- typically as you know Robin, we deploy a ship or open up the deployment for a ship about 12 to 18 months ahead of time.

  • I think we have seen or we have been in conversations about what the future employment of that ship could be and that did not resolve itself in the back half of this year and that's really what caused the impact on Empress because we effectively opened up her deployment in August.

  • I think we continue to look for that ship to potentially have some other deployment, but I don't think we will be holding back our sailings in the future and we will deal with it as maybe some of that new deployment comes available.

  • Robin Farley - Analyst

  • Okay.

  • Great.

  • Thank you.

  • And just for my follow-up question --

  • Jason Liberty - CFO

  • Just a comment, Robin, and its already open for next year, Empress.

  • Robin Farley - Analyst

  • For existing Caribbean itineraries, right?

  • Jason Liberty - CFO

  • Yes, in Q1

  • Robin Farley - Analyst

  • That's great, thank you.

  • My follow-up question there have been some reports in the Korean media that China is limiting some tour-package travel to Korea for political reasons and just wondering if you're seeing any kind of impact at all since cruises from China call on Korean ports; any impact at all -- getting the sense that there's going to be some kind of a limit or any kind that you have seen so far for Mainland Chinese visitors going to Korea by cruise?

  • Michael Bayley - President & CEO

  • It's Michael.

  • No.

  • We have seen no impact whatsoever.

  • We think it's very much related to the type of package that is offered that really is all about encouraging Chinese customers to go to Korea specifically for shopping trips.

  • We think it's related to that.

  • So, there?s packages put into the market that are incredibly low cost and of course they bring the customers over and make their revenue from the retail.

  • We feel as if that's something that's very specifically focused.

  • We have not seen anything and we don't believe there will be any impact to us.

  • Robin Farley - Analyst

  • Great.

  • That's very helpful.

  • Thank you.

  • Operator

  • Your next question comes from the line of Tim Conder with Wells Fargo.

  • Tim Conder - Analyst

  • Good morning and gentlemen congrats to the whole team for ongoing execution.

  • Just a couple of things, I wanted to revisit the mix shift with the Harmony and the Equinox, Jason, that you called out.

  • Is that going to be yield accretive, given Europe traditionally has higher yields than the Caribbean?

  • Just on that shift for the similar comparisons year-over-year, a little color on that please?

  • And then fuel, you had been fairly aggressive towards the high-end or above the higher end of your 40% to 60% range in hedging, especially you appeared to have put on quite a bit when the oil was in the 30s.

  • Maybe a little bit more color on where your weighted average hedges are looking into 2017 and 2018?

  • And then if you continue to view as layering on more aggressively or maybe you backed off a little bit on that as you layer out 12, 24, 36 months?

  • Jason Liberty - CFO

  • Tim, on the first question as it relates to Harmony and Equinox, trends or demand for Harmony has been exceptional.

  • We do expect with Harmony being here next year for it to be yield accretive and certainly helps us a lot in the first half of the year.

  • Equinox mainly was in the Eastern Mediterranean and really in the center of a lot of movements we had to make with her with some of the geopolitical events that were happening.

  • We do expect the Equinox to be yield accretive to the Corporation next year.

  • On the fuel side, in 2017, we are hedged about 60%.

  • The average hedge rate there is about $508 and in 2018 we are 45% hedged and we're about $452 is the average hedge.

  • We continue to focus on having a hedge program to minimize the volatility within our P&L.

  • And we also respect that there is typically an inverse relationship between fuel and currency.

  • We also take into consideration the fuel curve and it has flattened out.

  • Earlier last year we did take advantage and put a little bit more hedging on in 2016 and in the outer years.

  • But you should expect us to continue to be pretty consistent to the past of that 40% to 60% side of things.

  • Again, with the goal of minimizing volatility within the P&L.

  • Tim Conder - Analyst

  • Okay.

  • Great.

  • And what my follow-up would be related to Europe.

  • You said you are seeing very good bookings so far out of North America, given that?s typically how it books early for Europe.

  • Any color by region?

  • Is it tilted more towards Northern Europe or the Western Med where everything is consolidated too in the Med?

  • Any additional color or how the Brits are also booking?

  • Michael Bayley - President & CEO

  • Hi Tim, it's Michael.

  • Europe is looking quite good for 2017, when we look at our forward bookings.

  • Eastern Med capacity is down versus last year and the year before.

  • We've been aware of that.

  • It's pretty much all over Europe.

  • Northern Europe is doing quite well and also Western Med European markets.

  • Typically, a later booking then the American market.

  • It's the American market that seems to be doing quite well at the moment for Europe.

  • And the British market surprisingly is quite robust.

  • We were thinking that we would see more of an impact.

  • There's a little bit of an impact in onboard spend but nothing really material.

  • Tim Conder - Analyst

  • Great.

  • Thank you.

  • We'll see you in a few weeks.

  • Operator

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

  • Steven Wieczynski - Analyst

  • I want to ask the Double-Double question a little bit differently.

  • One of the questions we get a lot from investors is how are you guys going to achieve the Double-Double next year without buying back a significant amount of your stock or getting some massive benefit from Pullmantur?

  • Can you maybe help us think about the bridge to get around or get close to the Double-Double range?

  • Meaning if you do a midpoint this year of $6.00, call it $6.05, from a very high level, how do you get up close to that $6.78 or $6.80 number?

  • That would be pretty helpful?

  • Jason Liberty - CFO

  • Thanks Steve.

  • We won't talk about any guidance for next year, but really you need us to continue to show strong cost control and have modest yield improvement and that gets you most of the way.

  • And then there is some benefit we get from the deconsolidation of Pullmantur but that's really a small amount of that pie.

  • Richard Fain - Chairman & CEO

  • You know, Steve, it's Richard here and one of the things that we have tried to emphasize for the last three or four years, is we put in place the Double-Double program with an idea that we wanted to motivate our team and focus our team on a particular target.

  • But it wasn't something -- and we?ve have said this before -- that required heroic efforts.

  • So we do need good cost control.

  • We think we have been showing that.

  • We do need moderate yield improvements.

  • We think we have been showing that.

  • And I think as you look to the Double-Double year, it's a complicated set of all the things that happened in our business.

  • But as we simply look at where we are today and with moderate yield improvements that we're looking for, we don't think we need to do anything heroic to make the Double-Double and we continue to believe we will do it.

  • Jason Liberty - CFO

  • And just one more comment, Steve.

  • I think -- always appreciating the sensitivities, because every 1% change in yield is about $70 million and so by just keeping your costs managed, most of that drops to the bottom line and that in itself drives that difference in earnings.

  • Steven Wieczynski - Analyst

  • Okay.

  • Great.

  • Second question, and you guys might kill me for asking this, but, I know we are not even remotely close with 2017 or done with 2017, but have you guys given any thought to what's beyond 2017 and what is beyond the Double-Double?

  • Looking back, is this something that you -- you have fully embraced it, but is there something that potentially could come once this is over?

  • Meaning another type of program like the Double-Double?

  • Richard Fain - Chairman & CEO

  • The beauty of having, Steve, we're not going to kill you for it, it's a reasonable question and it's in fact something that we ask ourselves all the time.

  • And I did actually I think I included it in my comments, something that the Double-Double is a step on a journey.

  • We, in terms of what comes after the Double-Double, I don't know whether it will be another program of that type or some other type.

  • The Double-Double was really to focus on a particular phase in our history and I think it's served that role very well.

  • As we look to 2018, we do have a couple of things that are quite exciting.

  • We do have the fourth of the Oasis-class ships.

  • But I would say even more so 2018 will show Edge-class.

  • And the Edge-class is a new class of ships, which I think in its own way will be as innovative and as transformational as Oasis has been.

  • We are very excited about it.

  • We'll probably be talking more about that early next year.

  • But Celebrity really has been on a roll.

  • I think we will see the benefits of that.

  • If it continues going the way it's going, we will see the benefits of that in 2017 and 2018.

  • And then when Edge comes, I think people are really going to be blown away.

  • So I?m very excited about 2018 but the importance of a program like Double-Double is to focus on a particular goal.

  • And one of the things that has been very successful for us is everybody is focused on achieving the Double-Double in 2017.

  • So that's our first one and I will be careful not to dwell too much on what comes after.

  • Steven Wieczynski - Analyst

  • Great.

  • Thanks for the color.

  • I appreciate it.

  • Operator

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

  • Harry Curtis - Analyst

  • Good morning.

  • The first question is, historically when you've headed into Wave Season and a stronger-than-normal booked position, do you think that you're borrowing from Wave, or does that usually lead to stronger incremental pricing because you've just got less inventory to sell?

  • Jason Liberty - CFO

  • Traditionally, as we've had a stronger booked position, the need is less.

  • But if you would do it on a capacity-adjusted basis, I would say that typically that gives us good tailwinds coming into Wave as we are in a stronger position, as we need less.

  • So I don't think that necessarily is an indicator, but certainly being in a stronger position allows you to take advantage of the demand as it comes in.

  • Harry Curtis - Analyst

  • Thank you.

  • And I just want to move quickly to China because it's been one of the key pillars of the bear thesis and the consensus for next year is that pricing in China is going to be down 10% to 15%.

  • Can you give us your perspective on what demand is going to look like -- demand growth is going to look like in China next year?

  • Do you think that the supply growth is going to be as big as some would have you believe, given that much of the capacity is coming in in the back half of next year?

  • Michael Bayley - President & CEO

  • Hi Harry, it's Michael.

  • China is very much a developmental market.

  • It's we believe a significant opportunity.

  • We have been in the market for several years now.

  • It represents about 9% of our overall capacity in 2017.

  • Interestingly in 2017 for Royal, our overall capacity in the China market is flat to slightly down, because of the sale of Legend, which takes it out of the secondary cities.

  • And also for industry capacity in 2017, it's actually a relatively low growth year in relation to the past years, which is probably a good thing.

  • And certainly in Shanghai, which is 60% of the China market, approximately, the growth in 2017 in Shanghai is less than 10%, which is one of the lowest growth rates we've seen for quite some time.

  • Overall China is accretive to the yields and will continue that way.

  • And as Jason commented earlier, our current forward booked position of Q1 China is looking good.

  • Harry Curtis - Analyst

  • That's great.

  • And just a quick follow-up, Jason, in China.

  • What efficiency measures can you take, even if pricing is flat there, to improve your profitability?

  • Michael Bayley - President & CEO

  • Hi Harry, I'm just going to jump in and give some comments on this.

  • We are very much engaged in developing the market.

  • So at the moment we are investing in China and we are investing in developing distribution and developing the channel.

  • So at the moment our focus is developing the market and investing in the market.

  • We believe the opportunity is significant into the future, so we're not actively pursuing efficiencies from that perspective.

  • We're looking at investing and developing.

  • Harry Curtis - Analyst

  • Thanks very much.

  • Operator

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

  • Greg Badishkanian - Analyst

  • Just a follow-up on the comment that Q1 China is looking good, which is encouraging.

  • How are your negotiations right now with the larger charter companies going for 2017?

  • Any color and when you think those will be completed?

  • Michael Bayley - President & CEO

  • The negotiations are in process.

  • We are feeling quite good about where we are in terms of the major charterers and the wholesalers in the market.

  • We have a long-term relationship with the key charterers and we are encouraged by what we are seeing for 2017 in terms of the dialogue and negotiations that we have with them.

  • And we feel quite optimistic about that.

  • Greg Badishkanian - Analyst

  • Good.

  • I won't ask you to quantify optimistic, but (laughter).

  • Michael Bayley - President & CEO

  • You can ask.

  • We just won't answer (laughter).

  • Jason won't let me.

  • Greg Badishkanian - Analyst

  • How about what's driving the strength in the North American passengers going to Europe?

  • Is it just easier comparisons things, maybe people are less concerned about going to Europe; is it less capacity; what do you think is driving that improvement?

  • Jason Liberty - CFO

  • Well, I think it's tough to pinpoint one thing.

  • I think when there is less events, that certainly helps bring confidence and confidence in people's travel.

  • But I think, as we have been saying for some time, we continue to see strength from the North American consumer.

  • Not only do see that in terms of their current bookings in Q4 and for next year but also we see it in how they spend each and every day on our ships.

  • I don't know if there is a specific thing, but Europe is an incredible destination and there is a lot of demand for it.

  • There were some events last year that maybe caused certain individuals to pause and it looks like they are revisiting that for next year.

  • Greg Badishkanian - Analyst

  • Good.

  • Thank you very much.

  • Operator

  • Your next question comes from the line of Sharon Zackfia with William Blair.

  • Sharon Zackfia - Analyst

  • Hi, good morning.

  • Just a couple of questions on the pound specifically, the more recent devaluation.

  • I'm curious if you're doing anything to help bolster onboard spending?

  • I know you said earlier it has remained pretty resilient, but I didn't know if that took into account the more recent step down?

  • Then separately Jason, can you remind us how much you have left on your share repurchase plan at this point?

  • Michael Bayley - President & CEO

  • I will talk a little bit about the pound and how we are approaching that from the perspective of onboard spend.

  • We've ratcheted up our pre-cruise marketing and we are bundling packages more aggressively than we have done in the past and we see a better response pickup rate from the British consumer in terms of the packaging that we put into market.

  • So I think we see it a little bit, but I think it's less than we originally thought we would see in terms of devaluation.

  • Jason Liberty - CFO

  • And then Sharon, on your question on the share repurchase, we did complete the $500 million share repurchase in the third quarter.

  • Sharon Zackfia - Analyst

  • Is there any timing on when the Board would discuss another share repurchase program?

  • Jason Liberty - CFO

  • The board is always evaluating things such as share repurchase or capital returns to shareholders.

  • And recently the 28% increase in the dividend was one of those actions they thought was a good idea to do.

  • Richard Fain - Chairman & CEO

  • And I would also pay attention to our free cash flow figures since obviously that is a key factor in the Board's thought process.

  • Sharon Zackfia - Analyst

  • Thank you.

  • Operator

  • Your next question comes from Assia Georgieva with Infinity Research.

  • Assia Georgieva - Analyst

  • Good morning.

  • I had a couple of related questions; first of all Jason, you mentioned Empress was about $0.06 to $0.07 to Q4.

  • Is that about a 1% yield detriment in the quarter?

  • Jason Liberty - CFO

  • That's right, Assia.

  • It's slightly over 100 basis points for the quarter.

  • Without that we would be about 7% and then also there is some rounding, as well in terms of -- by what the implied yield was for the fourth quarter.

  • Assia Georgieva - Analyst

  • Okay.

  • Thank you.

  • And given that even for Q1 2017 the ship was opened up relatively late compared to what you have traditionally done.

  • Should we expect a similar detriment for Q1?

  • Michael Bayley - President & CEO

  • It's Michael.

  • No, I think we opened up earlier; we've got marketing behind it.

  • So I think we really were holding it late in 2016 and hoping for some -- for the itinerary change but we are in a better position for 2017.

  • Assia Georgieva - Analyst

  • Okay.

  • That make sense.

  • Thank you, Michael.

  • And lastly without having to quantify anything on Q1 because I know you'd rather not do that, we are facing pretty tough comps and I think the industry in general had done very well.

  • Do you expect that on a sequential basis Q1 might be little bit more of a challenge than Q4?

  • Just very qualitatively?

  • Jason Liberty - CFO

  • I think there are several factors.

  • Obviously, Q1 on the yield side will have a positive impact from the deconsolidation of Pullmantur.

  • But also the strength that we have seen for Harmony and Ovation have been quite strong.

  • Harmony will be in the Caribbean and Ovation will be in Australia and demand from both of those markets and for those products have been exceptional.

  • I wouldn't necessarily say that -- it is a tough comp because Q1 was strong.

  • But there are some good tailwinds going into the first quarter.

  • Assia Georgieva - Analyst

  • Thank you Jason and thank you Michael.

  • Operator

  • Your next question comes from the line of James Hardiman with Wedbush Securities.

  • James Hardiman - Analyst

  • Good morning and thank you for taking my call.

  • The commentary on 2017 load factors was pretty consistent with what you said coming out of the second quarter.

  • I wanted to focus on the last few months in both the Caribbean and Europe.

  • I think in the Caribbean a lot of investors have been spooked as of late, as we look at some of the pricing analysis that is out there.

  • In the past it's always difficult to know how many rooms are being booked at a given price.

  • But maybe you have seen some of that analysis or at least some of those advertised prices.

  • Maybe help us connect the dots there?

  • Is it the same as normal that it's not a whole lot of rooms being booked at those rates?

  • What are your thoughts there?

  • Then on Europe, it sounds like over the past few months, bookings and pricing has maybe strengthened as we get further and further away from the terrorist activity, but just distill the last three months geographically?

  • Jason Liberty - CFO

  • I think as you're going from early August to today, people begin to transition and focus on their vacations for 2017.

  • I think as Michael commented, there were some tactical activity that you probably saw in the market and that was driven around Hurricane Matthew and that would probably be the best example where you would have seen that.

  • But we have actually seen very good booking trends forward-looking for the Caribbean and for Europe.

  • A lot of that at this point in the year is driven by the North American consumer because they book further out.

  • But as Michael said, we're also seeing positive trends happening for Europe.

  • James Hardiman - Analyst

  • That's very helpful.

  • And then I guess just once and for all with respect to this Double-Double, the EPS target is technically $6.78 but I think you mentioned maybe off-line that you're going to need to get to $7 for the ROIC target to still be in play.

  • Which number -- as we get closer to 2017 that $0.22 difference becomes pretty material.

  • How should we think about earnings power for next year implied in the Double-Double?

  • Jason Liberty - CFO

  • At this point we?re not going to get into providing guidance for next year.

  • I think for us we are focused on hitting both targets, the earnings target, as well as the ROIC target.

  • We will address specifically what we think that earnings range will be in late January or early February when we provide guidance for next year.

  • But good to try.

  • James Hardiman - Analyst

  • Fair enough (laughter).

  • Operator

  • Your next question comes from the line of Dan McKenzie with Buckingham Research.

  • Dan McKenzie - Analyst

  • Good morning.

  • Thanks.

  • On the 1.6 million new to cruise, how does that compare to last year?

  • I am trying to get a sense of the implied growth rate here and also how that rate might be trending, that's first.

  • Second, I'm curious what's driving that and what percent of the North American revenue we're talking about here?

  • Michael Bayley - President & CEO

  • Hi Dan, it's Michael.

  • 1.6 million new to cruise that's for globally, that's all markets.

  • It's disproportionate in terms of new emerging markets.

  • So for example China.

  • In the United States, which of course is a significant percentage of our overall business at approximately 50%, we've had a very productive year this year with new to cruise.

  • In fact, over time it had been slightly on the decline.

  • This year we've turned that around and we have seen a really positive increase in new to cruise and of course that's very much part of our focus is new to cruise not only in emerging new and developing markets, but also in established markets like the US.

  • We feel quite encouraged about what we are seeing.

  • Part of that is the campaign that we launched at beginning of the year and also Celebrity?s campaign.

  • Both of those campaigns have components that are very much attractive to new to cruise and when you do the research on how our positioning and how we are communicating resonates with new to cruise, it's very positive.

  • So, we are beginning to see that coming through in our bookings.

  • Richard Fain - Chairman & CEO

  • Dan, this is Richard and I'll just add a comment because we often get questions about trends of things that have changed and it's clear the questions are geared to is, is the world changing?

  • Is this a trend in the exogenous variables affecting us?

  • But as Michael pointed out, we actually work to change trends.

  • So there are periods of time where we, for example as both Royal, as Michael says both Royal and Celebrity made a conscious decision this year that there was a stronger opportunity, a good opportunity with first-time cruisers and so they actually focused more on their marketing, focused more on their message, and they actually worked to build that.

  • So when you look at a trend, it's not just, is the world changing?

  • But to some extent it's also what we are doing to shift our customer base.

  • And then that sometimes messes up nice trend lines when you're trying to extrapolate from external behavior.

  • Dan McKenzie - Analyst

  • Very good.

  • That's very helpful.

  • Thank you.

  • A second question here, wondering how big the impact to net yields is from the new revenue management technology implemented a while back.

  • And I'm wondering what inning we are in with respect to its implementation.

  • And for some perspective when airlines put in new revenue management they tend to go slow.

  • And I'm curious how you would characterize where we are with respect to that to Royal?

  • Jason Liberty - CFO

  • Thanks for the question Dan.

  • I think it's one of those things that's impossible to quantify and we put in new yield management systems several years ago and every day that goes by the yield management systems gets stronger because the information from the past and how we read information of what's happening in local markets and so forth gets better and better.

  • So it's surely it tailwind.

  • To quantify it is next to impossible to do.

  • But it really -- I think one of the greatest benefits it gives us is the ability to manage demand globally and that allows us to seek the highest yield for every cabin that's available from anywhere in the world and that's great on a revenue management standpoint.

  • And it's also great to be able to take advantage of that diversification.

  • Dan McKenzie - Analyst

  • Very good.

  • Thanks guys.

  • Operator

  • Your next question comes from the line of Stuart Gordon with Berenberg.

  • Stuart Gordon - Analyst

  • Good afternoon.

  • Couple of questions.

  • The first one is on the return of invested capital, does the Pullmantur change make any difference to the returns you make?

  • And secondly in China, could you talk about how next year the changing proportion of capacity, is it moving from pure charter to a more direct distribution?

  • Thanks.

  • Jason Liberty - CFO

  • On the ROIC side, on the invested capital side, there really is no difference because, as I said in my remarks, we still own those assets.

  • But surely as we have been talking about for years that Pullmantur was a turnaround opportunity.

  • This allows us to limit some of those turnaround issues, as well as get paid for the ships and the services.

  • It's definitely accretive to ROIC but it's on the earnings side, not necessarily on the invested capital side.

  • I will let Michael take the China question.

  • Michael Bayley - President & CEO

  • On the evolution of distribution; that's something that we have been focused on for quite some time.

  • It's a journey that we are taking.

  • I think what we are seeing is the beginnings of the development of distribution, in terms of starting to mirror and look very much like the North American distribution model in terms of our focus very much is engaged in opening all channels to market and optimizing each channel.

  • That includes our wholesaler charterer model, which we believe has done us exceptionally well up to this point and we are going to continue working with our charterers.

  • But we're also developing direct.

  • We're also developing retail, next cruise and that's very much what we have been engaged in over some time now.

  • So, I think that's the journey that we are taking and over time we will see the mix balance out in a very similar way to the other markets, more developed markets.

  • Stuart Gordon - Analyst

  • Thank you.

  • Jason Liberty - CFO

  • We have time for one more question.

  • Operator

  • Your final question comes from the line of Ben Chaiken with Credit Suisse.

  • Ben Chaiken - Analyst

  • Hello.

  • Following up on Europe and the North American consumer, what are you doing this year to encourage those customers to return?

  • Is there any education process or promotions?

  • If so, when did that start and is that with the travel agents or the customers directly?

  • Jason Liberty - CFO

  • I don't think it's necessary education, I think it's there has been less events that turned off certain consumers last year and, as I said before, is allowing them to revisit the opportunity to go to beautiful and great destinations in Europe.

  • And I think that's probably more of what it is versus anything specifically we are doing in terms of education.

  • Ben Chaiken - Analyst

  • Got it.

  • Can you remind us what the overall net yield decline was in Europe for 2016 and where you're going to lap next year?

  • Jason Liberty - CFO

  • We have not given that number, but it is down year-over-year.

  • Ben Chaiken - Analyst

  • Okay.

  • Are you going to quantify some of this positive trends that you're referring to with the American consumer coming into Europe?

  • Jason Liberty - CFO

  • The only thing I can quantify is that we are ahead on both rate and volume next year relative to same time last year.

  • Ben Chaiken - Analyst

  • All right.

  • That's really helpful.

  • Jason Liberty - CFO

  • Thank you for your assistance Victoria with the call today and we thank you all for your participation and interest in the Company.

  • Carol will be available for any follow-up questions you might have and we all wish you a great day.

  • Take care.

  • Operator

  • Again, thank you for your participation.

  • This concludes today's call.

  • You may now disconnect.