皇家加勒比遊輪 (RCL) 2016 Q4 法說會逐字稿

Good morning, my name is Quashia, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Royal Caribbean Cruises Limited fourth-quarter 2016 earnings call.

(Operator Instructions)

Mr. Jason Liberty, CFO, you may begin your conference.

Thank you, operator.

Good morning, and thank you for joining us today for our fourth-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.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 risks and uncertainties.

Examples are described in our SEC filings and other disclosures.

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

Richard will begin by providing a strategic overview of the business.

I will follow with a recap of our fourth-quarter and full-year results.

I will then provide an update on the current booking environment, and will end with the full-year and first-quarter guidance for 2017.

We will then open up the call for your questions.

Richard?

Thank you, Jason, and good morning, everybody.

I am really excited to have finally arrived here at our DOUBLE-DOUBLE year.

We have worked long and hard to get here, and I can't say enough about the commitment of our people that has brought us to this auspicious position.

As you know, the whole purpose of the DOUBLE-DOUBLE program was to coalesce everyone's efforts to raise our performance to new heights.

It is not easy to get 67,000 employees all pulling in the same direction, towards the same goal, but this program has done that better than we dared hope.

I am not ready to break out the champagne until the year is over, but I am extremely grateful to each of the men and women who give their all, every day.

Now, before I provide more color on 2017, I would like to take a moment to review just a few of some of the noteworthy items in 2016.

I will focus on the numbers for a moment, as they illustrate the level of commitment and focus that our organization has placed on delivering consistent results, in spite of unforeseen events that many times, have clouded our forecast.

First, we shared an illustration with you on our last call, which is now complete.

On slide 2, you can see that our final results for each of the last five years are remarkably consistent with the guidance that we have provided at the beginning of each year.

I don't have to remind you that these last five years have not been easy ones.

The period has been marked by significant geopolitical upheaval, and significant foreign exchange challenges.

I would be surprised if many of the companies that you follow can show a track record as steady or as resilient as this one.

This doesn't mean that we are simply great predictors.

On the contrary, we have suffered from a number of unexpected challenges.

However, over this long period, and with the help of our DOUBLE-DOUBLE program, our team has shown a very strong capability to make adjustments when the circumstances dictate.

No one can forecast the future, but we hope you take comfort in our track record of predicting and/or adjusting to overcome obstacles.

As I look back on these years, I could not help but notice that we have reached several significant milestones that we are sharing.

On slide 3, you can see the figures I am referring to.

We have tripled our earnings, delivered four consecutive years of double-digit earnings growth, grown the dividends by five times and now exceeded $6 in earnings per share.

I am very proud of the employees, both ship-board and shore-side who have enabled our organization to thrive in this manner.

Now, these financial results are extraordinary, but we firmly believe that happy employees lead to happy guests and better yields.

For that reason, I would be remiss if I didn't point out that our employee engagement is at a record high, as is their overall satisfaction working here.

We remain steadfastly committed to making Royal Caribbean a great place to work, so our formula for success continues to have a common denominator of happy employees.

The second part of the formula, happy guests, has also improved.

This past year, our guests indicated the highest satisfaction levels on record.

This is a result of many factors, including our many innovations in vessel design and product delivery.

But, first and foremost, it is due to our fantastic crew, who impressed me every day.

But, we now stand at the threshold of what promises to be a sensational year, so let's get to that.

In our business, the beginning of the year starts in a dynamic fashion, with what we call Wave Period.

We define that as the first two months of the year, and it is important, both as a key booking period, and as a harbinger of how the year might unfold.

We are halfway through Wave, and so far, it has been quite strong.

Now, you know we are driven by data, and the sheer volume of that data that is captured by our pricings and our revenue management system is daunting.

Interpreting it is as much an art as it is a science.

There always seem to be items that indicate one view or the other, but the total picture can probably be summarized by simply pointing out that our book position is better than at any time in our history, with higher load factors, and at higher rates.

However, while we focus mainly on the science part of the process for our forecast, I also take some comfort from the tone or vibe I get from the people who run our brands, and how they interpret all of that information.

While the numbers have been impressive, I would say their feelings for 2017 have been even more so.

Over the last few months, we have felt a tone, which is as good or better than I can ever remember seeing.

Life is good, long may it continue.

Now, there are two important points I want to make as it relates to this forecast.

First of all, this good booking picture is the basis for the 2017 yield guidance that we have provided today, and the guidance does take into account all of the information we have available now.

Secondly, over the last several years, our book position has gotten better and better.

As we have noted, this year sets yet another record.

But this process doesn't and won't continue forever.

A good market helps to drive more early bookings but it is our Revenue Management Team that have a great deal of control over it, as well.

My sense is that the booking window has stretched as far as they will ever want it to do.

Future years are likely to show the same or lower levels of bookings, as they work to optimize the broad pattern of when and at what level to take more bookings.

It is going to depend on a large number of factors, but I don't expect to announce another record level of bookings a year from today.

In addition to industry-wide trends, there are several unique factors that are goosing our numbers this year.

Our new ships, Harmony of the Seas, Innovation of the Seas are beating demand.

The team continues to innovate in other ways too, including streaming Wi-Fi and customized destination experiences.

Voom and Xcelerate continue to provide the best Wi-Fi experience at sea, which is not only a boon to our guest but also allows unusual onboard digital enhancements.

Our ship upgrades are really paying off.

Since 2014, we have added over 1,000 lower berths, 24 restaurants, seven bars, refreshed our retail spaces fleet wide, and added boutiques such as kate spade, Michael Kors, and even Tiffany.

I won't go into all the other experiential enhancements we have made, but suffice it to say that you no longer have to choose between playing in the water and watching a big-screen movie on most of our ships.

One contributor, though small, has received quite a lot of attention, and that is the approval to sail to Cuba.

I admit, adding Havana has generated superb booking activity for those few lucky itineraries.

But, the scale is trivial, representing less than 1% of our capacity.

We are encouraged that future prospects remain positive, but at this time, the impact on our financials is marginal, and it will be quite some time before this is even remotely material.

Before I wrap up and hand it back to Jason, I want to touch on one other topic that I know you will not consider marginal by any means.

For some time, we have defined our three core financial objectives of improving shareholder returns, being an investment-grade company, and moderate growth.

We continue following that path.

Starting with shareholder returns, this is an area where we have made great strides, and where we expect to continue.

Besides the significant improvement in our financial results, since 2012, we have grown dividends by five times, and we have repurchased close to $750 million in shares.

While, these actions are Board-level decisions, we expect the Board will continue to focus on improving shareholder returns as a priority.

We will continue to behave like an investment-grade company, but as our free cash flow increases, it is reasonable to assume that we will focus more on that.

As the final item, as you have seen from our new building orders, our growth trajectory has been balanced, and remains in a similar range over the coming years.

As I said at the beginning of my comments, this coming year is shaping up nicely, but, I want to emphasize that the goals of our DOUBLE-DOUBLE program are not an end in and of themselves, but a means to an end.

Our goal was, and is, to push ourselves to reach and to maintain a powerful trajectory, that helps 2017, but is also focused on 2018, 2019 and beyond.

You can see that we have already taken many steps that aren't so positive in the short term, but buttress us for the longer term.

We will continue to make such trade-offs if they are in the best interest of our shareholders.

I believe that the success of the DOUBLE-DOUBLE program is not only the boost it has given us to date, but the powerful focus it has given us, that will continue to generate good returns in the future.

There is a lot to look forward to, and we are excited to see progress as the year unfolds.

With that, I get to turn it back over to Jason.

Jason?

Thank you, Richard.

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

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

We have summarized our fourth-quarter results on slide 4. For the quarter, we generated adjusted net income of $1.23 per share, which was $0.03 above our October guidance.

This was driven primarily by better-than-expected costs and the outperformance of our joint ventures.

Net revenue yields were up 5.3%, which was below our October guidance.

Softer close-in pricing, combined with lower onboard retail sales drove most of the yield miss for the quarter.

While onboard revenue was slightly lower than expected, yields for the quarter were up 9.5%.

Costs were better than guidance for the quarter, with net cruise cost excluding fuel down 1.9%.

We are very proud of the continued effort of our team to identify cost efficiencies throughout the business.

I will now discuss full-year results, which we have summarized on slide 5. This year we set another record in earnings, exceeding the $1.3 billion mark, resulting in adjusted earnings per share of $6.08, which exceeds the midpoint of both our initial guidance and latest guidance.

As Richard mentioned, these record earnings also mark a fourth consecutive year of double-digit percent growth in earnings.

Revenue yields increased 3.9% for the full year.

As we look back onto 2016, strong demand from North American products more than offset weakness in the Eastern Mediterranean and Shanghai.

Beverage packaging, high-speed Internet, and additional onboard revenue venues drove up a 7.8% year-over-year increase in shipboard revenue.

Our focus on effective cost management continued throughout 2016.

Costs came in better than expected, ending the year up 0.9%.

One-time launch costs associated with deliveries of Ovation of the Seas and Harmony of the Seas, combined with additional dry-dock days and investments in growth markets were key drivers of the year-over-year cost growth.

Now, I would like to update you on what we are seeing in the demand environment.

Over the past three months, bookings have been well above last year's levels, and as a result, we turned the year at a record book position.

Our book-load factors and APCDs are nicely higher than the same time last year.

The booking window continues to extend, and we have fewer stayrooms left to sell for the year.

The Wave Period is off to a strong start, with bookings trending nicely higher than last year.

While trends have been strong from our key sourcing regions, we are particularly encouraged by what we are seeing in North America.

Our full-year capacity is decreasing by 2%, due to the deconsolidation of Pullmantur, with most of the decline occurring in Europe and Brazil.

Our capacity is up in North America, and is up slightly in the Asia-Pacific region, as we benefit from a full year of both Harmony of the Seas and Ovation of the Seas in each of these markets respectively.

North American products will represent close to 60% of our portfolio in 2017.

While we are seeing strong trends across the group, Alaska continues to experience exceptional demand, building on a record season in 2016.

The Caribbean will account for close to 50% of our full-year capacity, up from 2016, mainly due to the full-year deployment of Harmony of the Seas and Celebrity Equinox in South Florida.

Demand for the Caribbean has been quite strong, with bookings trending well ahead of last year, and nicely outpacing capacity growth.

At this point, our full-year Caribbean load factors and APCDs are higher than last year.

The rate of capacity growth in the Asia-Pacific region is slowing considerably in 2017, for both us and the industry.

Our capacity will be up by 5%, with the combination of China, Southeast Asia, and Australia itineraries accounting for 21% of our total deployment.

In China, our capacity is down because of the exit of Legend of the Seas and industry capacity is expected to be up approximately 20%, compared to 100% in 2016.

Overall, we are in a strong book position for the region, particularly in China and Australia, with APCDs up modestly for the region.

We have made several changes to our European deployment, resulting in an overall capacity reduction of 23%.

While a portion of this decline is a result of the Pullmantur deconsolidation, we have also significantly reduced our deployment in the challenging Eastern Med, while maintaining the same capacity in the Western Med, and slightly increasing our northern European offerings.

Demand for Europe sailings have been very strong thus far, particularly from North America.

We are now booked at a much higher load factor than last year in both the Mediterranean and Baltics, and APCDs are also up nicely, even though we no longer have the high-yielding Harmony of the Seas in Barcelona.

Now, I would like to update you on the booking environment for the first quarter.

Our overall capacity is up 1% year over year, as the addition of Harmony of the Seas and Ovation of the Seas is offsetting the reduction associated with Pullmantur.

Two-thirds of our Q1 inventory is in the Caribbean, 16% in Australia, and 12% is in China and Southeast Asia.

The balance of our capacity is in several other markets including Dubai and South America.

As a reminder, the first quarter of 2016 was very strong, with robust trends in the Caribbean in early Easter, and our first winter season in China.

Despite the challenging year-over-year comparable, our book position is currently higher than the same time last year.

Now, taking all of this into account, if you turn to slide 6, you will see our guidance for 2017.

As I just described, demand across all key markets is trending positively, supporting a robust yield improvement in 2017.

Net yields are expected to be up in the range of 4% to 6%, which is our eighth consecutive year of yield growth.

Our new builds, Harmony of the Seas and Ovation of the Seas have been very well received in their respective markets, and are significant contributors to the yield improvement in 2017.

These two ships combined with further onboard packaging, pre-cruise sales, streaming WiFi and enhanced shore excursions are expected to help drive another year of strong onboard revenue performance.

Net cruises costs excluding fuel are expected to be flat for the year, as the teams continue to identify further operational efficiencies.

I wanted to provide some color on the expected cadence of yield and cost growth for the year.

We anticipate higher yield and lower costs in the first half of the year.

This is mainly driven by the timing of last year's new ship deliveries, the exit of older hardware, and the timing of the deconsolidation of Pullmantur, which took place in the back half of 2016.

We anticipate fuel expense of $704 million for the year, and we are 60% hedged.

Since our last call, fuel prices have increased, and the US dollar has continue to strengthen versus our basket of currencies.

The combination of these two factors has resulted in a $0.10 per share headwind to our 2017 earnings.

Based on current fuel prices, current exchange rates and interest rates, we expect another record-breaking year with adjusted earnings per share between $6.90 and $7.10 in 2017.

This represents our fifth consecutive year of double-digit earnings growth.

Now, I would like to walk you through our first-quarter guidance on slide 7. Net yields are expected to be up in the range of 4.5% to 5% for the first quarter, supported by very strong demand for Harmony of the Seas in the Caribbean and Ovation of the Seas in Australia.

This improvement, which is in part driven by the deconsolidation of Pullmantur is particularly noteworthy considering the very high bar set last year, where we had a 7% yield improvement during the first quarter.

Net cruise costs excluding fuel are expected to be down approximately 4.5% for the quarter.

Taking all of this into account, we expect adjusted earnings per share for the quarter to be approximately $0.90.

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

(Operator Instructions)

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

Jason, I have a couple of questions for you.

The first one is, give us a lot of detail about your book position by region.

Clearly North American demand is higher year-over-year, recovering from a terrible host of terrorist events this last year.

Just wondering, as you put together your guidance and you think about 2017, how did you think about Europe?

Particularly North American demand for Europe?

Sure.

So I think we always talk about different waves of demand, and really even on the last call, we talked specifically about seeing strong demand overall.

But a lot of that was mainly driven by North America, as that is the typical window when they start to book for the summer, as well as for the first half of the year.

And now going into this, you still have a lot of strong North American demand.

This is what we overall see, is a consistent pattern, actually an elevated pattern over the past three months for North American demand, and of course a lot of that demand is specific for Europe, as well as products like the Caribbean and Alaska and so forth.

I guess my question was really, given the sensitivity of the consumer to events in Europe or wherever they may be, as you thought about the full year, did you bake that into your considerations despite the strength that you are seeing right now?

We never build the forecast for perfection, there are events that happen throughout the period.

But what was in our consideration set was really what is our book position on both a rate and volume basis, and then also looking at different market dynamics in terms of what is happening in general pricing and overall demand gets taken into consideration, in terms of what we expect to take place in a product like Europe.

And as I said, those demand trends have been quite positive.

Okay.

And then moving on, you gave us some very strong commentary on the Caribbean and how that is coming together for this year.

That said, we do get a lot of investor questions on capacity growth, and with the Caribbean up mid-single digits in 2017 over a similar level in 2016, and within the quarters, there are some quarters that are growing nicely.

Despite your booking position now, can you talk to us about how comfortable you are that the supply in the Caribbean won't ultimately become an issue?

I think we have, obviously we have very good visibility on what the capacity increases are going to be by quarter, and by the way, the increase in 2017 is a little bit higher than what the increase in the Caribbean was in 2016.

And I think the way that we look at it is, we have an opportunity to get ahead of that, and we have gotten ahead of that, and that is baked in the commentary of us being ahead on both the rate and volume basis, overall, as well as for the product of the Caribbean.

Okay.

Final question.

Cuba, a small part of your business, given the current administration, is there any risk to the agreement you have with Cuba could be at risk?

Felicia, it is Michael.

I mean, obviously, we're used to, we do business all around the world, and we flex as the dynamics change.

So, we have got a few sailings open for Cuba at the moment which is doing very well, and we have more coming, and we will just adapt to what comes toward us.

Okay, thank you so much.

And your next question comes from the line of Steven Wieczynski of Stifel.

So, first question, Jason probably for you, we have got some questions about the fourth quarter close in price issues, and I know you tried to explain that a little bit in your prepared remarks, but could you maybe dig into that a little bit more?

I know you called out some softer retail sales, and maybe what drove that, and has that reversed in 2017?

Is there something else that we are not thinking about?

Did you basically try to hold price a little bit better than what you have done in the past?

Sure.

First, to start off, the overall revenue miss here was, we're talking about $8 million or $9 million on a very large number, so the miss is really small, and it is not really material.

Close-in demand, you have seen this before, some quarters, close-in is better than we expected, and sometimes it is at we expect, and sometimes it is a little bit softer.

We did see a little bit of further challenges with our store product as it relates to Empress, as we had rolled that out in a smaller period of time, in terms of the days to be able to book it.

Also what we saw in the quarter, which is also baked into our commentary about 2017 and the first quarter, is we saw the beginning of the shift in focus, from Q4 into 2017.

And then the other thing, before I talk about retail for a second, is we have also instituted, as you know, last year, this price integrity program, and what we are not willing to do is really sacrifice more pricing in a significant way, in order to deal with volumes, and we think that is helping us and that is also helping us build a better book of business.

The one comment I would say on the retail side, the holiday sailings were a little bit awkward in terms of this time in the year, and so the mix in guests were a little bit different, and I think that resulted in lower retail.

And also, this has been a bit of a consistent trend, as we see more and more people trading stuff, IE retail for experiences, and we typically see areas of the shore excursion, beverage, and so forth tick up, and retail has been more challenging.

Okay, and then the second question, it's a two-part bigger picture question.

I know you guys are going to say we still have 11 months until the Double-Double program is behind you, but can you help us start to think about maybe what comes post Double-Double, if anything?

If you would even answer that?

And then the second part of that question is backward looking.

When Double-Double was introduced in 2014, what has surprised you, meaning what did you get wrong with your forecasting?

That might not be saying it the right way, but what areas did you somewhat underestimate, and then overestimate as well?

Steve, it is Richard.

With respect to the Double-Double, I will take the second part of the question first.

I think overall, it has worked out very well for us.

The thing that perhaps we underestimated on the positive side was just how well the organization would respond to the push, and how that really led to everybody moving in the same way, and that has been very effective, so I think that has helped us on the positive side.

I think the thing that has been the biggest problem for us may surprise many, but the biggest has-been foreign exchange.

If we had the same exchange rates today that we had then, our bottom line would be higher by well more than, by close, in fact well more than $400 million.

That is one hell of an unexpected hit.

The positives on fuel offset a little less than half of that, but, to have that FX change, that has unquestionably been the biggest negative throughout.

With respect to what comes next, I think we are still maniacally focused on this, and I think I would do our people who are focused on this and do this whole process a disservice by talking about what is next.

A lot of people look at the Double-Double, and say, well that has been great why don't you just replicate that, or clone it in some way?

I think that is unlikely.

But, I think at this point, we aren't done yet, we are still focusing on it, and I would really like to continue to focus on just the Double-Double.

Okay great, thanks.

Thanks for the color.

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

Two questions.

One, can you give a sense of how much share repurchase is factored into your 2017 EPS guidance?

And then, I also do have a question on the 2017 outlook, and tying it to understanding the Q4.

You mentioned some of the closer-in was tied to the short product, the Empress, and that was specific to last-minute changes in the itinerary there.

So are you factoring in any close-in softer, or it really was just that short product on the Empress?

And you mentioned holding price, but your occupancy was up like 250 basis points, so it doesn't seem apparent if there were more cabins empty to preserve price, or if you can help us think about what happened there with the close-in at the end?

Thank you.

Sure, just to take the repurchase side of it, obviously, as Richard mentioned in his remarks, share repurchase is something that would be contemplated by the Board.

It would need to be approved by the board and into our forecasts.

Don't contemplate decisions that the Board hasn't taken yet.

So hopefully that answers the question on share repurchase.

As it relates on 2017 outlook and how that rolls forward for the fourth corner, one, on the occupancy side, the important thing to remember is that the consolidation of Pullmantur is a factor, and an improvement on the occupancy side, just on average, because the ships that operated on Pullmantur have very few thirds and fourths that are available on those vessels.

Empress, as we said, was a component of that, and I really, I think that I wouldn't read too much into, because again we are talking about some really small numbers here, I wouldn't read too much into what we saw close in.

I do think Empress, I do think there were some awkward, holiday sailings were a little bit awkward, and I think that the consumer as well as the trade really began to focus their attention in a very serious way based off of the elevated levels we have been seeing for 2017 on the forward picture.

Okay great, thank you very much.

And your next question comes from the line of Tim Conder with Wells Fargo Securities.

Congrats to the whole team, Richard.

A couple of things, if I may.

A little bit of updated color, thoughts, I know it hasn't changed materially, just on global industry capacity, I know some folks are still concerned about that, as you see the gross capacity versus the net capacity for the industry and for yourselves, looking out through let's just say 2021.

And Jason you gave us a little bit of color on 2017 cadence.

Just maybe a little bit more, Pullmantur benefits you in the front half, I think, Ovation and Harmony.

But then I think you get another TUI ship in the TUI JV, but maybe have a little more difficult cost compares in the back half.

So maybe a little bit more there?

And then finally, Richard or whoever wants to take this, on technology.

We are seeing some accelerated adoption and enhancements of data analytics, CRM, within the Cruise industry and the theme park industry.

Can you just recap for us where you are, what you have implemented over the last couple of years?

And maybe what we can see in 2017 and beyond from Royal, or your thoughts on the industry in particular?

Thanks, Tim, I think first on the industry side, I think we see industry capacity during the period of time that you're talking about growing at about 5%.

We are little bit south of that, we're closer to 4% over that period of time, and that is on a gross basis.

At least for us for example, we have been selling about a ship a year or a ship every other year, and as we have talked about, before as ships age, and we have now ships going into more the 30-plus year category, we do think there will be opportunity for that gross number to be reduced as retirements come into play.

And of course most of our ships that we have sold are going into markets in which we don't, or segments that we don't directly compete in.

On the cadence side for the year, as I said, most of our yield and our cost benefit is front loaded this year.

You are correct that we do take delivery of another Mein Schiff vessel for two week cruises, which does fantastically well.

And I think, to your point in terms of cadence, on I think fourth quarter has a tougher comp on both the yield perspective, as well as on a cost perspective.

And so like I said, I think what you will see is obviously the guidance on the first quarter and Q2 will be at an elevated level.

Q3 is probably something similar to, or around the range of where you would see in Q1 and Q4 and probably would be a little bit lower.

Again, that is just based off of the comps.

And, Tim, maybe I will take the question on technology.

As you have heard me say before, I think this is a very appropriate topic, you have heard me say that I think the pace of change that we are finding in our industry and in the world in general is simply slower today than we will ever see again.

And, we need to reflect that in what we are doing.

And technology can be used to help attack what is really our biggest single problem, which is that not enough people understand about cruising.

Anything we can do to make the experience better and easier, particularly easier for our guests, and for the people who haven't yet been our guests, is very helpful.

Obviously, the question is quite apt in light of Carnival's announcement earlier this year.

I view that as really a very positive thing for our industry.

It was a terrific rollout, and, got a lot of publicity, which, I think again inures to the benefit of all of us.

As you know you mentioned, we started a project with what we call our WOW Bands a couple of years ago.

That has been extremely effective in simplifying the process for our guests, but it is also obvious that the technology has improved a lot in the last two years, and what we can all do today is much better than we could have two years ago.

So I think you will continue to see us, and I hope the rest of the industry continues to move forward with that.

We call our internal project Excalibur, we would expect to be coming out this summer with a new and upgraded new app, that does reflect the technologies that are available today.

Over this next year, we would expect to roll this out to 6 to 11 new vessels.

And then, the following next year, we would expect to be rolling it out at a rate of one to two a month over the period.

I remember, at the time that we rolled out the WOW Bands, Lisa Lutoff-Perlo's comment was, we want to give people their first day back.

And I think that is really a very good way to look at it.

The more that we can do to ease that process, not only makes it more comfortable for them, but gives them the time to do the other stuff.

And one of the benefits is not only more in ticket revenue, but also on the onboard revenue, because we facilitate those processes.

So I think this is a trend that is happening in our industry, but it is happening throughout the industry, and I think it will enhance the cruise experience, and therefore be good for all of us.

Great, thank you both for all the color, much appreciated.

And your next audio question comes from the line of Harry Curtis with Nomura.

Richard, going back to a comment that you just made, about the booking window being stretched about as far as it can go.

Can you give a little bit more color on the comment?

Are there technical reasons for that, and to what degree, if at all, might it limit upside in pricing power in future periods?

Thanks, Harry, I appreciate the question because I think it is helpful to understand.

It is not a question that it is limited, and I don't think it limits our capability in the future.

On the contrary, I think that is a reflection of how strong we think the situation is and will be.

Really, what happens is, if we take too many bookings today, it is hard to imagine that, but if you take too many bookings today, what it really means is that somebody who decides a month from today that she or he wants to take a cruise and frankly is willing to pay more, it is simply not available.

So, our revenue management people are really, and I do think they are the best around, and they are quite sophisticated.

But depending on the time and depending on the circumstances, you don't want to take too few bookings, but taking too many is just as bad as taking too few.

And it is getting that balance.

The price integrity program has probably extended out more to take earlier.

But, in any given time, you look at the pattern of when they are coming, and when people are calling to book, and you want to get it right, not just the most you can get.

So, if we feel that we are taking too many bookings at a point in time we will raise our pricing, and obviously that will lower the pace of bookings.

And I think it is important for people to understand that while obviously more bookings is a good thing, we actually have a great deal of discretion, our revenue management people have a great deal of control over that pace.

And so I just think we feel in general that probably, we are at the point where it shouldn't be much faster than it has been.

But, of course, you look at the circumstances at the time, and it could be well different a year from now.

That is interesting.

A follow-up question for Jason on China.

You mentioned that both, that your pricing and bookings are encouraging there.

Can you maybe give us a little bit more color or break out the difference between the booking levels amongst your travel agents, versus where they may be booked?

Because there tends to be a difference, or can be a difference.

Harry, it is Michael.

I have to congratulate you, it is 43 minutes into the call, and that is our first China question, so that is quite unusual.

Yes, I think we have said in the past that China very much is a developmental market.

We have been in the market for a number of years.

We have been working on the distribution, and certainly we have been accelerating our investment in that distribution over the past couple of years.

This year, in 2017, we see a different picture as it relates to capacity in each of the regional markets.

So if you recall, last year was a big year for capacity overall in China and certainly in Shanghai, which was about 60% of the overall China market.

There was close to a 100% increase in capacity.

This year, that number is close to flat, so it is a different type of environment, and we have worked with our major distributors in terms of helping them develop the cadence of their marketing, and the way they go to market, and their selling techniques in terms of the cruise product.

We have also worked on opening up the channels, just as we have channels in the European and American markets, and we have put a lot of time and energy into that.

So we are seeing good traction in terms of these channels that we are opening, and we are seeing good traction with our major wholesalers, in terms of where they are with their bookings for 2017.

So I think as Jason had commented earlier, when we look at our 2017 book position versus 2016, we are in a significantly better place.

Very good, thanks, guys.

And your next question comes from the line of David Beckel with Bernstein.

For my first question, I was wondering if I could dig in a little bit on pricing in Asia by region.

You mentioned APDs are up modestly.

Could you give us a little bit better color in terms of what that looks like in China, Australia and the rest of Asia?

And the second question I have relates as a bit bigger picture.

I am curious what trends you saw in 2016 with respect to the customer mix in North America specifically.

Was there any notable trend in the mix of repeat versus new to cruise versus new to brand?

Thanks.

On the Asia Pac question, we don't break it down by market.

But, what I would tell you is the trend we talked about in terms of the book position and rate and volume is a similar description of what is happening, especially in Australia and China.

David on the second question, with regards to the customer mix in North America, we have seen the change, we saw a change in 2016, and we are accelerating that change in 2017, in terms of new to cruise and first to cruise.

So we have put a lot of our time and energy and resources in growing that segment of the market, and we have seen, for the first time in 2016, we saw a really positive uptick in the first to Cruise to both the Royal brand and the Celebrity brand.

And in 2017, we continue to see that uptick in terms of new to cruise.

A lot of that is supported by changes that are recurring in our marketing strategies, both in terms of how we go traditionally to market, but also a shift more into digital marketing, and we have had some success with that.

Great, thanks so much.

And your next question comes from the line of Jared Shojaian with Wolfe Research.

Jason, I think you said Europe is booked ahead on rate and volume, and this time last year was generally prior to the step down that we saw in demand, just from all the concerns on terrorism.

So, does that mean Europe has fully recovered, or do you feel like booking activity is still not as strong as where it was before the events?

I think it is tough to say, especially relative to last year, because don't forget the Paris attacks that happened in the fourth quarter of 2015.

I think that demand from North America has certainly rebounded.

I don't know if I would describe it as rebounding to how strong it was in the 2014 and 2015 timeframe, but clearly, we see strong demand coming from North America.

We see very good demand also coming from Europe.

And, I think the other component to that is we have about half of the capacity that we had last year in the Eastern Mediterranean, and there seems to be very good demand obviously, that itineraries are more west than they were east before, and the other itineraries like the Western Med and the Baltics, which did well last year, are seeing an uptick in demand from North America there.

Okay, thanks and then switching gears here on potential cash deployment, is 3.75 times net debt to EBITDA, is that the stopping point?

And if so, you are almost there, that will leave a lot of discretionary cash for buyback.

Is that the way that we should think about that?

I know you said it is a Board decision, but how should we think about the timing here?

Thanks.

In terms of the provided threshold, 3.75 times debt to EBITDA is the threshold for investment grade, as it relates to the metrics themselves.

Our goal is to be a solid investment grade credit, so I would say that is probably somewhere in the range of 3 to 3.5 times debt to EBITDA, and we are certainly looking to balance getting to become an investment grade credit, as well as investing moderately in our growth, and improving shareholder returns.

So keeping that balance is important, but also acting like an abasement grade company, as Richard mentioned, is critical.

And we will likely be at that 3.75 threshold at the end of the quarter, and then we would obviously be considering other actions, as it relates to cash.

Okay, thank you.

And if I could sneak in one quick one in real quick, you gave guidance on most line items.

What about the JV income?

And is there anything that is going to offset that number in the non op line?

I think we have said in the past actually, it has been said by our partner, is on average as a ship gets added on, they typically add $20 million to $25 million in income each year that the ship comes on, for a full year, for each of us.

That's our share.

Okay, thank you.

And your next question comes from the line of James Hardiman with Wedbush Securities.

Harry broke the ice on China, so I'm going to stay down that path.

You have given us a number of breadcrumbs with respect to the Chinese market.

A year ago, on this call you basically said the Chinese yields were going to be down low single digits.

My question is, should we come away from this call thinking that Chinese yields are likely to be up this year, or is it too early to really say definitively, just given how late in the year a lot of those itineraries book up?

Well, I have never heard our commentary described as breadcrumbs, so that is good.

So, thank you.

I think that the way that you should take is we are in a good book position for China.

And I do think, to your comment that it is a little bit too early to provide specific guidance to what we believe China yields will be, but we are encouraged, by what we are seeing in a booking environment, and we are also encouraged, as Michael noted, in terms of the progress we are making in diversifying our distribution.

Got it and then I was hoping you could give us a little bit more color on how close-in pricing trended over the course of the fourth quarter?

And it seems to me that there were a couple major events in the fourth quarter.

A, you had the election which was smack dab in the middle of the quarter.

B, you had the opening up of Cuba officially, and I know you said Cuba was not going to be very material for you, but it seems like the uncertainty around Empress in the lead up to that decision was very material.

So using those as key points, how should we think about how that close-in pricing trended over the course of the quarter?

On the quarter, the first month, it was at the end of the month that we gave guidance, so we had a good sense for the month of October.

As we got into November around the election time, I think that again we saw people really focus their plans onto 2017.

I think it was August when we actually put out the deployment for Empress for the fourth quarter.

And so I think that again, that was a little bit more of a challenge than we had expected it to be.

But again, I would really chalk it up more to people focusing more on the following year.

I do want to stress that every quarter gives a little bit of a different story on the close-in pricing side, and I think that in combination with our price integrity program can sometimes make that a little bit less predictable.

But again, I mean there were several quarters last year where close in pricing were stronger than we expected, and the fourth quarter was a little bit softer than we expected, and the difference is really insignificant.

Maybe just a quick follow-up there.

So again, Cuba, not very material for you in 2016, or not material at all, for 2017, I should say.

But Empress, can you quantify how much of an issue Empress was to your bottom line, and do you get that back in 2017?

I don't have the specific number, which we don't talk about what it is on the ship basis.

It was a more challenging vessel for us in 2016 just because the ship was in dry dock for an extended period of time, and we kept delaying the deployment of the ship.

Hoping that we were getting at the approvals for Cuba.

And as we mentioned on our last call, there were very strong signals that we were.

And so I think certainly as we look into 2017, we have the proper windows and periods of time to sell and market the product, and we don't expect there to be a negative impact as it relates to Empress in 2017 in terms of what we saw in 2016.

Got it, thanks.

And your next question comes from the line of Greg Badishkanian from Citi.

Two questions, the first on China, what do you attribute to the improved outlook relative to last year, that in your answer to James, how much of it is due to capacity growth slowing?

Greg, it's Michael.

I think, like many things, it is many factors.

Certainly, capacity in Shanghai is a contributing factor, because if you recall, we have a big increase in 2016 and another increase in 2015.

So I think there was a little bit of an issue with distribution being able to absorb that capacity in an emerging market, so the capacity is helpful.

And then, the other element was, if you recall back in 2015, there were a couple of knocks in terms of MERS, and then we had those particularly difficult typhoons which really did impact the wholesalers, so I think they were a little shy.

So I think those factors, and then of course as I have mentioned earlier, we have really invested in building out all of the channels.

So I think it is all of those factors coming together, better stability, less capacity, and evolving maturing markets, certainly not mature obviously, but maturing in terms of the relationship between the wholesales, distributors and our company, and the investment we are putting into the market in terms of developing these channels.

Good, thank you.

In terms of the strength of North American markets traveling to Europe, taking cruises in Europe, how long do you see the easy comparison?

How much do you think the underlying trend has actually improved to drive that strength that you are seeing?

Greg, I think again, I think it is a couple of things.

As Jason had mentioned earlier, capacity is down in Europe and down in the Eastern Med, so that has been one of the driving factors.

The dollar is strong against the euro, so people are more interested in going to Europe because they get more for their vacation dollar.

It is an incredibly popular destination with or without cruise, and I think we are seeing some of that.

And then, also I think there is just more consumer confidence, certainly in Q4, where we saw the stock market increasing nicely.

I think we have seen a really uptick in cadence in terms of the bookings of North Americans wanting to go to Europe, so I think all of those factors come together, and have contributed to what we are seeing with the European bookings.

Good, thank you very much.

And your next question comes from the line of Assia Georgieva with Infinity Research.

Question.

The first one, with Pullmantur making it a little bit more difficult as we saw now even on occupancy, the comparisons we are looking at.

Jason, could you give us a little more detail as to what organic growth would have been in Q4 and Q1?

And also if we can exclude the very positive impact from Ovation and Harmony that we are seeing?

As it relates to Pullmantur in itself, organically for Q4, it was worth about 275 basis points of the yield growth in the fourth quarter.

And in Q1, we expect it to be about 225 basis points as it relates to yield.

There is a little bit of a headwind on the cost side but it is, it is 20 or 30 basis points.

And, on the hardware side, as we look into 2017, certainly Harmony and Ovation drive a significant yield premium, and that minus Legend coming out, it helps us by about 125 to 135 basis points.

Okay, great, that is very helpful.

And my last question, at the time of the prior call, you were 94% booked if I recall correctly.

For Q1 at this point I imagine it is a number just slightly lower than that?

I think we said we are booked in a better position on both rate and volume, for the year, we've said it for the quarter, we are in a better position than we were in Q4.

Okay great, thank you Jason.

Thank you, Assia.

Operator, we have time for one more question.

Your next question comes from the line of Jamie Rollo from Morgan Stanley.

Following up from the last question, that hardware mixed benefit of 125 basis points, was that the full year or the anniversary impact for the first five months, please?

That is for the full year, Jamie.

So that implies about 250 basis points for Q1.

And Pullmantur you said was 225?

Does that imply underlying yields are broadly flat year on year on a tough comp?

A little bit lower in Q1, like for like for the year is about 250 basis points.

Okay, and then a quick one on cost.

The statement talks about a benefit from selling Legend.

Is that in the net cruise costs or EPS numbers, or will that be separated out?

That is in the net cruise cost, the main benefit is a less efficient vessel to operate, but there are several other things driving cost benefits in 2017.

One of them is the exit of Legend.

I meant is it a capital gain, rather than a benefit to average cruise costs?

There is a small gain on it, but it is not a material number.

Okay, thanks.

Thanks, Jamie.

Okay, thank you for your assistance, Quashia, with the call today.

We will thank you for your participation and interest in the company.

Carol will be available for any follow-ups you might have, and I wish you all a great day.

Ladies and gentlemen, as Mr. Liberty stated, that does conclude today's conference call.

You may now disconnect your lines.