皇家加勒比遊輪 (RCL) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Royal Caribbean Cruises Ltd.

First Quarter 2017 Earnings Call.

(Operator Instructions) Thank you.

I would now like to turn the call over to Jason Liberty, Executive Vice President and Chief Financial Officer.

Please go ahead.

Thank you, operator.

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

Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, our 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'd 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 filing and other disclosures.

Also, before 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.

Unless we state otherwise, all metrics are on a constant-currency adjusted basis.

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

I will follow with a recap of our first quarter results, provide an update on the booking environment and then provide an update on our full year and second quarter guidance for 2017.

We will then open the call up for your questions.

Richard?

Thank you, Jason, and good morning, everybody.

It's been another exciting quarter here at Royal Caribbean, and I am pleased to be able to talk to you all about it.

Actually, the best news today is no news.

We set aggressive goals for ourselves and we're executing nicely against them.

I'll start with the Double-Double Program, which has proven so successful in rallying a massive organization across both land and sea.

We have used it to inculcate a focus on effectuating step-change in our profitability, and it's done just that.

This quarter, again, illustrates our team's focused on maximizing revenue opportunities while maintaining cost discipline.

Growing yields by 6% this quarter, which follows a 7% growth rate last year, it's remarkable and it supports the increase in our guidance for the year.

Our first quarter results are up 74% from last year, which also shows that our focus on improving specifically the winter season is working.

Looking ahead through the year, we see the business progressing pretty much as we expected.

We keep emphasizing that we manage our year on an annual basis and that variations between quarters are the norm rather than the exception.

I know some of our investors attempt to draw inferences from fluctuations within the year, but we just haven't found these quarterly variations to be terribly helpful indicators of the year as a whole.

That's not because we can foresee all the events that invariably take place, rather, it's because during the year, we often have opportunities to adjust our business in ways that allow us to manage the variations throughout the year.

Now these actions called to my mind the image of a duck gliding calmly through the water.

As we look at the scene from the shore, all we see is an elegant duck gliding serenely across the pond.

But under the surface, there's a lot of fierce activity with a lot of energetic paddling.

I'm really very proud of the fierce activity that our team brings to their work, day in and day out.

Obviously, they can't handle every contingency no matter how hard they paddle, but our track record to date is pretty reassuring.

As you know, we've raised our guidance for the year by about $0.10.

However, the real impact of our message is that little has changed since our call 3 months ago.

At that time, we said that bookings were outstanding and accordingly, we predicted a strong revenue growth for 2017.

That prediction is proving accurate.

In fact, we continue to revel in strong daily booking reports.

The main negative has been the situation in Korea, where the Chinese government is in dispute with the Korean government.

We've rejuggled our itineraries to suit, but it is hurting.

It is reminiscent of the China-Japan dispute from several years ago.

But fortunately, bookings in Europe and elsewhere have compensated.

Shifting now to another event during the quarter that presages good news for the future.

A couple of weeks ago, we introduced a new design, the Celebrity Edge.

Edge is celebrities' newest ship, and it's being introduced late next year.

While I've been lucky enough over the years to have been involved with a number of transformational ship designs and, most recently, with the Oasis of the Seas.

Based on all that experience, I believe that Celebrity Edge will be yet another transformational ship, which will influence the design of ships for years to come.

Everything about the Edge-class is new and exciting.

The decor is highly unique and the new spaces are totally inspired.

Actually, speaking of inspired, we've just announced a partnership with the Malala Foundation, and we are honored that she will be the godmother of Celebrity Edge.

She's an amazing inspiration to young women everywhere and she inspires all of us here as well.

But I'm a numbers person, and there are several statistics about this ship which are striking.

One number that speaks volumes to me is double, as in double the percentage of suites.

On Edge-class, our mix of suite staterooms is 12%, which is a little more than double the amount for most of our existing ships.

Since our guest pay more for a suite, doubling the suite count is not a bad thing to do.

Another great number is 23, as in Edge's standard veranda cabin is 23% larger than the [corporate] ones.

This is due to an innovation in the way that cabins are designed and built.

It involves changing the very structure of our rooms so that all the veranda space can be converted into air-conditioned living area at the push of a button.

For all of you who've traveled on a ship before, you understand well that the space comes at a huge premium at sea, and this 23% increase in space will translate into yield premiums for this class of ships.

At the same time that we revealed the magic of Celebrity Edge, we also revealed some of the design techniques that enabled us to create such a product.

In particular, we publicly revealed our new innovation lab.

It allows us to design a ship fully in 3 dimensions, which also allows us to involve more creativity and more of our peoples' expertise in the process.

We take great pride in creating the most innovative ships that attract the most premium yields.

Now with this new lab, we can design and build these ships in an ever more efficient and effective way by bringing these spaces to life in 3D right here in our offices.

We also shared some of the vision, which I referred to as Project Excalibur during our last call.

Starting over 2 years ago, we have found intuitive digital applications to make the guest experience simpler and more comfortable.

You'll be able to open the door to your room without pulling out a card or key, request a beverage real-time from the comfort of your lounge chair and get recommendations for your traveling companion based on their preferences.

We take our guest vacation time seriously, and technology is a great enabler to improve the use of that.

Based on the experience we have gained over the last 2 years of our smart ship programs, we are now embarking on a new generation of technology to increase our competitive advantage in this area.

As you can see, we have a lot to be motivated about.

Our performance continues on a steady upward trajectory.

We have reached investment grade, we are embarking on another share repurchase program and our current efforts are setting us up for even greater long-term success.

Clearly, the future for cruise has never been brighter, which should make Jason's job very easy.

So with that, I get to hand the call back over to Jason, who has, may I note, such an easy job.

Jason?

Well, thank you, Richard.

And as always, thank you for trying to make my job easier.

I will begin by talking about our results for the first quarter.

Unless I state differently, all metrics are on a constant-currency basis.

Our first quarter results are summarized on Slide 2. For the quarter, we generated adjusted earnings per share of $0.99, which is approximately $0.09 higher than our guidance and 74% higher than same time last year.

Net revenue yields were up 6% for the quarter, which is noteworthy, considering this followed a 7% improvement last year.

These past quarter results were driven by continued strength in both ticket and onboard revenue.

On the ticket side, we received stronger close-in bookings for the Caribbean, which resulted in better-than-expected occupancy and pricing for the quarter.

Onboard revenue yield was up 8.9% for the quarter.

The strong year-over-year growth was driven by a combination of our new hardware, shore excursions and utilization of VOOM and Xcelerate, our high-speed Internet offerings.

As I've mentioned over the past couple of quarters, guest spend has been continuing to shift towards areas that involve experiences over buying things.

Our costs for the quarter were in line with guidance, ending down 4.4%.

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

On our last earnings call, we noted that WAVE was off to a very strong start.

These WAVE trends continued on both sides of the Atlantic, with bookings exceeding last year's levels on both a volume and rate basis.

As a result, we are booked ahead of same time last year in both occupancy and pricing in each remaining quarter and have approximately 15% fewer guests left to book than at this point last year.

Demand for European sailings has been particularly strong from North America and as a result, these itineraries are booked at significantly higher APD and load factor than same time last year.

The APD strength is particularly impressive when you consider that Harmony of the Seas spent their inaugural summer season in the Mediterranean last year, making year-over-year comparisons more difficult.

We are also seeing strong booking trends from European-sourced markets, but since we have a lot less inventory left to sell, we will end up sailing with a greater mix of North American guests than in a typical season.

These sourcing shifts are contributing to an even stronger rate position as North Americans usually spend more than the average on European cruises and take more shore excursions.

Trends for North American products continue to please.

Our summer Alaska sailings benefited from a strong WAVE period and remain on track to outperform last year's record season.

The Caribbean accounts were close to half of our capacity for the year and, overall, is performing as expected.

Over the past 3 months, both bookings and pricing have been above last year's levels and Harmony of the Seas is commanding premium prices for her first summer Caribbean season.

Now I'll turn to the Asia-Pacific region, which represents approximately 20% of our capacity this year.

Our China, Australia and Southeast Asia itineraries are each booked nicely higher than last year in load factor.

The Australian market welcomed Ovation of the Seas to Sydney this winter and yields did not disappoint.

In addition, Australia itineraries for next winter are in a strong book position despite industry capacity growth.

We did experience a decrease in demand for our China sailings as we work through itinerary changes related to Korea, but the product remains ahead and demand is returning to expected levels.

Before we discuss full year guidance, I would like to elaborate on our progress towards our financial objectives of improving shareholder returns, being an investment-grade company and moderately growing our business.

As you saw in the release this morning, our board authorized a $500 million share repurchase program.

We enter this program with the view of buying shares opportunistically over the next year.

This program, in combination with improving earnings by close to 17% per annum over the past 5 years, growing our dividend fivefold and repurchasing approximately $750 million in shares during the same period, demonstrates our continued commitment to improving shareholder value.

Additionally, last week, we achieved our investment grade objective when we were upgraded to Baa3 by Moody's.

If you turn to Slide 3, you will see our updated guidance for the full year 2017.

Net revenue yields are expected to grow 4.5% to 6%, an increase relative to previous expectations.

This higher guidance incorporates the outperformance in the first quarter, strong demand for North American and European cruises and the expected negative impact from Korean deployment changes.

From a cost perspective, we are anticipating net cruise costs, excluding fuel, to be flat to slightly up a marginal increase relative to previous expectations.

We expect fuel expense of $707 million for the year, and we are 60% hedged.

Based on current fuel prices, interest rates and currency exchange rates, our adjusted earnings per shares are expected to be of the range of $7 to $7.20, $0.10 higher than previous guidance.

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

Before moving on to the second quarter, I wanted to reiterate the guidance we gave on the last call regarding our yield and cost cadence for the year.

Our yield improvement is expected to be higher and our costs are expected to be lower in the first half of the year as we benefit from new capacity and lap the deconsolidation of Pullmantur.

Now we can turn to our guidance for the second quarter, which is on Slide 4. We expect net revenue yields to be up 10% to 10.5% for the second quarter.

The main drivers of this year-over-year improvement are strong demand for our European and North American itineraries, new hardware and the deconsolidation of Pullmantur.

Net cruise costs, excluding fuel, are expected to be down approximately 2%.

Based on current fuel prices, interest rates and currency exchange rates, our adjusted earnings per share for the quarter are expected to be in the range of $1.60 to $1.65.

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 Steve Wieczynski with Stifel.

So first, a 2-part question around your updated guidance.

First, I would assume that your updated guidance does not include any incremental buybacks from today's announcement?

Steve, obviously, we said in the release and also in my remarks that we're going to be doing this opportunistically.

I'm not going to specifically parse out the guidance, but if we did, it's not going to be a material change to our earnings for the year -- or EPS earnings for the year.

Okay.

And then, the second part around that, the updated guidance.

I guess, when we look at your updated earnings range now that -- with the midpoint of $7.10, I guess the right way to say this, and I know you'll probably cringe when I say this, but can we put some closure now to the Double-Double?

I mean, that was supposed to be originally about $6.78 I think, and now your low end of your guidance is $7, which, again, doesn't include any material buyback support.

So what am I not thinking about right there?

Well, I would say that you're not thinking about it correct, but I mean, I think in terms of Double-Double, it's -- every day, we're in the trenches, making sure that we achieve those targets.

So I wouldn't say we're at a point yet where we're running a victory lap here.

We're very focused on achieving that and making those targets.

Yes, Steve.

I think I would also add, besides the fact, yes, as Jason said, it's something we really have to keep focusing on every day.

The program was really more than just those 2 numbers.

The 2 numbers are an important part of it, but it was really an approach to try and galvanize everybody working towards it.

So in an ideal world, we would do as much better as we can and, of course, you know it's not our intention to stop with 2017 anyhow.

Okay, great.

And then, one more quick question just around China, if I could.

Can you just give a little bit more color around the consumers, the Chinese consumers' behavior after you started changing around those Korean itineraries?

That might be pretty helpful.

Steve, it's Michael.

Yes, I think when this initially happened, which was towards the middle of March, obviously, there was a slowdown and there was a little bit of confusion in the market because everything had to be adjusted and itineraries had to be changed and whatnot.

The fortunate thing is, of course, that Japan is very popular with the Chinese consumer, so we actually started to see some demand coming in because of the changes that had been made with many of the itineraries.

So initially, it was a little bit -- there was a bit of turmoil and uncertainty, and as Jason had already commented, we started to see demand return back to its previous levels.

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

A couple of things, or just to stay on Steve's question on China and South Korea here.

You talked a little bit about the consumer there, Michael.

Can you talk about how your distribution partners have reacted?

And then also, Jason, just to reconfirm, China as a whole is still tracking above on the year-over-year.

I thought that's what you said in your preamble, but I just wanted to reconfirm that.

Before the Korea situation, we were in a pretty good position, so we had a lot of inventory already out and we're in a good place.

I think the same thing happened with our distribution has happened with our customers.

Initially, obviously, there's just confusion in the marketplace as to what exactly is going to happen, and it took a couple of weeks, I think, for everything to get sorted out and straightened out.

And so I think, obviously, with the change, the drop of the Korean itineraries, it changes the dynamics in terms of the distribution and the product that they've got into the market.

And then to a certain extent, with the new itineraries that were put into place by ourselves and competing brands, then it's just a different product offering in the market, so it has a different kind of relationship with the distribution.

So I think we've kind of been through the period where we've had that initial turmoil and things are starting to settle down more now.

And in terms of what I commented in my remarks, we don't guide by market.

What I did say is that, as we said on our last call, we were in a very strong book position, we continue to be in a very good book position for China.

Okay.

And then, Jason, also just another clarification.

I think you were talking about the last 3 months of booking and pricing above last year's levels in Harmony?

That was all in context of the Caribbean, correct?

For Harmony, yes.

But overall, the booking levels we've seen, I think, I commented, it was on both sides of the Atlantic that we've seen strong demand from European consumers as well as North American consumers.

And obviously, those core products for them would be North American products like the Caribbean, Alaska, Bermuda and also would be Europe.

Okay.

And you had given some -- you'd talked about the cadence for the quarters, and how the first half, you've got higher yields, lower costs.

And I think in the prior call, you've commented that, that reverses somewhat in the back half of the year here, with yields having more difficult comparisons, the hardware doesn't benefit you as much, the deconsolidation of Pullmantur does not, yet the underlying core fundamentals seem to be good.

Any color or just update on the cadence between Q3, Q4 here?

First, allow me to say that it's pretty remarkable that how our forecast has been for the quarters is actually very much in line with how we expected the year to play out when we gave guidance in late January.

So the high-yield improvement in the second quarter, which is really mainly driven by strong demand for our North American products and European products, was very much in line with what we thought it was going to be for the second quarter.

And as you pointed out, Tim, as you begin to lap the new hardware and lap the Pullmantur deconsolidation, you really kind of move into a more kind of normalized second half of the year without those structural changes.

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

I was wondering if you could help us better understand the extent to which the Korean restrictions is reflected in the adjustment to your guidance, which was, of course, offset by Europe.

Can you help us sort of dimensionalize the overall impact?

And also, how long do you expect this disruption to last?

Well, I can -- I mean, talking about how long do we think the disruption is going to last, that requires a crystal ball that we don't own.

But there's obviously been times in the past, I think, it was in '14, when there was a dispute over a set of rocks between Japan and China, and that was resolved in a reasonable period of time.

In terms of the impact, I'm not going to give a specific number, but I would tell you that it's not a very material change to our forecast.

And as we said, strength in other products, which is why we benefit from this kind of global portfolio of products and markets, are offsetting what we expect the impact will be in China due to the change in the Korean sailings.

Got it.

And second question, yesterday you announced your public deployment plans for Asia 2018, 2019.

A few things stuck out to us.

First thing, that the new Quantum ship will be sent to that region, but it's seemed like it -- there was no specific mention of China, rather just Asia Pacific.

And you also announced that Mariner was moving to the U.S. Is there anything we should be reading into these moves about a tempering of expectations as it relates to the Chinese market?

No.

I mean, I think I believe that we had stated that Quantum Ultra would be going after Asia Pacific, and it would be going to China, along with Singapore and Australia, which is quite normal for us to do that.

So we're quite excited about that in 2019.

And then with Mariner moving back into the states, that was really about timing.

Mariner was coming out, anyway, when Quantum-Plus came into the market.

And we had an opportunity because we've got some revitalization and dry-dock work that's quite extensive that we're planning for Mariner.

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

So I have a big picture question that I wanted to start with.

In some of the conversations that we have with investors, they're kind of concerned that this is as good as it gets.

So I was just wondering how you would respond to that.

And what are you seeing today that makes you confident that these trends can continue?

Felicia, it's Richard.

Not quite sure how to answer that.

I understand the question and, I guess, I've heard it in different ways before.

It is a good time, and I think one of the points we've tried to make is it's an overall tone that we've seen in a number of markets, and frankly, we've been a little bit surprised at just how strong this year has developed.

I think we're also feeling pretty good about the execution our teams have done.

When you look at the introduction, as you know, of the Celebrity Edge, Harmony is blowing it out of the ballpark.

The new ships, the upgrades to the ships that are -- different brands have done, Symphony of the Seas, which comes out in April of next year, the forward bookings are terrific.

I think we both also know that nothing lasts forever and things do go up and down and, coming back to an earlier question, that's something you always have to worry about is we do see volatility in things like foreign exchange rates, we do see things happening in the world.

But overall, I think I would just say more and more people are understanding the wonderful value of cruising, and so as that message gets out, we're really seeing people learning and moving forward.

And I think the other thing, from my perspective, which is very good is just to see how well our teams are doing in terms of the product delivery, in terms of the marketing of that, in terms of using social media.

I know I'm going on, on a number of things, but there are so many things happening.

To answer your question, I think I have to, Felicia.

The other thing, coming back to something Jason mentioned, a few years ago, if you talked to somebody, what is it you want?

I want a flat-screen TV.

I want a big TV.

I want a better car.

And now people really are seeming to say, you know, this is the time I can spend with my family.

This is the time I can develop memories that will last me.

And I do think that's somewhat of a cultural shift, and I think we're benefiting from that.

And we're working to supply the ships and the people and everything else that makes that happen.

So I don't think we're seeing a sudden spike that makes this as good as it gets, and we certainly will continue to do our best to take advantage of that, what appears to be a cultural shift for us.

And I would assume, and I know you talked last quarter about how the booking curve, you're not going to try to keep elongating that for various reasons.

But I'm assuming that the length of the booking curve and the visibility that you have today also gives you some comfort in what you're seeing in the future, more so than you were able to in the past.

Yes, it's a good point.

So it's giving us a little more comfort.

Again, many of these things do change, but it's pretty far out there.

And so it does -- I think you're exactly right, it does give us some comfort.

Particularly, it gives us more visibility.

Great.

And then, Jason, just a question.

So on the second quarter net yield guidance, the 10% to 10.5%, I was just wondering how much that is on a same-store basis?

So before Pullmantur, the Easter shift, the addition of Harmony, Ovation, so before all of those things, what's the underlying apples-to-apples net yield change?

And then also on your full-year guidance, okay, so we all know it benefited from the pass-through of the quarter and you didn't really change your second half net yield outlook.

But it does seem that your cost outlook increased a bit.

So I'm just wondering, it seems to me that there might be something incrementally a bit better in the second half.

Can you also address that?

Okay.

So in terms of the second quarter, on a same-store sales side, a little over half of the yield improvement just comes from like-for-like improvement in the fleet, while the other half, is a combination of new hardware and the Pullmantur deconsolidation.

On the cost side, we very marginally increased our cost for the year.

There's not one specific thing, but it's a very immaterial change.

Okay, so it's so immaterial that your upside is -- it's just simply the pass-through of the quarter?

Yes, that's right.

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

Great.

I wonder if you can talk about 2018.

It seems like you've opened up sailings for next year earlier than you would have at the same time last year.

So I don't know if you have any sort of initial -- is it fair to assume that you're ahead in price and volume for 2018 as well?

I would say, good try, Robin, for us to begin to comment on 2018.

It's a little bit early for us to start to kind of give stats around it.

There are some additional sailings that have been opened up for '18, but it really has more to do around the launch of new ships like Edge and Symphony that come out next year, and that's really kind of what's driving some more recent announcements in terms of deployment for 2018.

Okay, that's fair enough.

And then also, just to circle back to a topic I know you've made a couple of comments on already, but just about the impact of Korea on China itineraries.

Can you give us just kind of a rough sense as to how you expect China yields to be with the impact of the disruption in Korea now?

Does that leave you for the year with yields maybe flattish in that market or maybe slightly down, given the Korea situation or actually, still positive?

Well, again, I'm not going to give specific guidance on the yield side.

But obviously, making a decision to put Quantum-Plus, a brand-new ship into the market, talks about our confidence in China.

Robin, as you well know, China will have its ups and downs.

Something like this is very frustrating.

You probably recall how -- the emotion in our voice when we complained about the problem a few years ago between China and Japan, it's very frustrating.

But it's such an upward-trending market.

It's such a large and growing market.

And when you see just the thing I like to quote, which is that there will be more middle-class Chinese than the population of either the United States or all of Europe, you simply say, yes, we will have bumps in the road and sometimes, those bumps will be big bumps, but it's still part of an onward, upward trajectory.

So that's the way I think we're looking at this.

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

Two quick questions.

How much capacity have you got left to sell for the balance of this year in Europe?

I'm trying to get a sense of how much leverage you've got to -- or incremental leverage from here that you have to -- the strength in Europe, whether it's U.S.-to-Europe or Europe-to-Europe passengers?

Just to kind of give you kind of more of a framing.

We certainly have a lot less capacity to sell for Europe than we did same time last year.

And as I commented in my remarks, there's also greater mix shift of North American versus European this year, which would also help you understand that most, North Americans book much further out than the Europeans do for their summer holidays.

So we have a lot less inventory left to sell for Europe for the balance of this year.

For the balance of this year, I mean, is it -- can we assume that it's 20%, 25% left to sell?

Well, I said that -- in my remarks that overall, we have 15% less inventory to sell than we did same time last year.

And you combine that with the strengths of what we have said about demand for European sailings from North Americans, that would tell you that you'd probably be above that one.

Okay, it was a good effort, anyway.

Points for trying on there, Harry.

Capacity growth, I'm trying to get a sense of what European -- your biggest markets, European and the Caribbean, your net capacity growth outlooks for 2018 and '19.

Some of the folks that we talk to, just looking at the bulge in capacity growth, just overall, in the cruise industry, are a little bit worried about capacity getting a bit ahead of itself in Europe and the Caribbean over that timeframe, and I wonder if you can comment on that.

I think that the only thing that I would -- it is early to talk about '18 capacity because things are still in flux.

The thing I would keep in mind is, for example, when Symphony comes out, Symphony will be spending the summer in Europe and the other new capacity that we have, which is in the very latter part of the year, Edge, that will have a very mild effect on our Caribbean capacity for 2018.

So there's some shifts, but it's -- I don't think you're going to see materials swings within the products.

And do you have -- I guess, my last question is, from a global perspective, inclusive of your competitors, are you getting a sense of how much incremental capacity there's likely to be in '18 and '19, overall?

Well, I think on the '18 side, I think we expect -- obviously I'll just talk to that, I think we expect capacity to grow in the mid-single digits.

It's a little bit more elevated in '19 on a gross basis.

And is that in both Europe and the Caribbean, or is it lower in Europe than in the Caribbean?

Well, I don't know exactly where they're going to deploy those ships.

I know that, obviously, in '19, when we deliver Quantum-Plus, that ship will be heading to Asia as Michael referred.

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

Just on the buyback, so you're now within your range of 3 to 3.5x debt-to-EBITDA.

If I just run higher EBITDA through, then at year-end, you'll be close to 3x.

So I guess what I'm getting at is, is -- the $500 million buyback feels a little bit light.

So can you just give us a sense for how quickly you plan to execute that?

And is it possible that you could announce another buyback before year-end?

Jared, I don't think I ever used the word $500 million and light in the same sentence.

But one, I think what we said is that we're going to be looking to purchase $500 million of shares opportunistically, and we'll see how we evolve on that program.

There's always the opportunity to lever or use additional free cash flow, but that's a board decision that will be taken at the time as we start to migrate towards those metrics.

Right, okay.

Yes, I mean, I'm just looking at my model and I've got over $1 billion in free cash for the balance of the year.

So light relative to that perspective, obviously not light relative to your historical standards.

But I guess, just as a follow-up on a separate topic, can you help me understand the joint venture income?

It was down quite a bit in the quarter?

Why was that?

And how should we think about that growing as the year goes forward?

Well, we don't really guide on the global line, but the driver of that is, as we deconsolidated Pullmantur, 49% of their earnings gets recorded into our below the line, where before, obviously, they were above the line.

And Pullmantur is a business that has a peak to it with the summer months and has deeper valleys in the winter periods of time and that's really what you're seeing affecting that equity pickup line.

Your next question comes from the line of Vince Ciepiel with Cleveland Research.

My first question was related to onboard spend.

It looked especially strong.

Just kind of curious, your expectations for onboard for the year.

And then also, if you could comment on what you're seeing with VOOM.

I think you completed the rollout around this time last year.

Yes, we've been very pleased with onboard revenue.

If you look back over, I think, multiple quarters, we've really seen good growth, over time, and it continues.

One of, as Jason had pointed out, what we are seeing is a switch to more experience-related revenue streams and, obviously, we're trying to leverage that, so things like shore excursions, obviously, and beverage -- beverage packages, and that kind of thing.

VOOM is doing well.

We've spent a lot of time with our pricing model and also with our pre-cruise sales of VOOM and Xcelerate for Celebrity.

And in -- with both cases, we've seen a good pickup, so using the word penetration, how many people are we actually selling the product to, we've managed to increase the volume of sales and we've managed to use different pricing models to really try to get the revenue up, and it's been quite successful.

Great.

And then a separate topic, I wanted to focus more on Europe.

It sound like there's a lot of positives happening within North American source demand right now.

But also keeping in mind that I think capacity is down year-over-year there, so how much of the strength that we're seeing in Europe is related to demand versus just the capacity set-up?

And how do you think that evolves over the next 12 months to 18 months in Europe?

Well, I think in terms of what we're seeing in terms of demand, is we're seeing demand actually quite healthy, not just from North Americans but from also the European consumers.

But the North American consumers, because they book further out, have gobbled up more of the inventory over the past 4 or 5 months, which, of course, puts us in a leverage position with the consumer to be able to charge more not only to North America, but also locally, on the Europe side.

Now how much of that is driven by they're being less capacity?

It's obviously a very difficult question to answer.

But I think it also shows -- I think one of the things, as I commented in my remarks, is that it's also a difficult comparable for us in Europe because Harmony spent the summer there last year, and is not spending the summer there this year.

And so I think that really encourages us in terms of the yield improvements we're seeing in the market.

Your next question comes from the line of Stephen Grambling with Goldman Sachs.

I just have a few follow-ups.

I guess, one clarification on the comment about mid-single-digit capacity growth for the industry, is that gross or net?

And do you see a tipping point anywhere on the future where retirements should start to accelerate?

Well, the comment I made was on a gross basis.

I'm not sure if there's a tipping point, but certainly, you start to see acceleration of ships over the age of 30 years as you get more 5 to 10 years out and you can kind of pick your point in time where you think there'd be a higher velocity of netting that would take place.

Okay.

And then, on onboard, very, very strong numbers.

I think it was probably the best since 2013 on our per-occupied birthday.

Can you just talk about any unique drivers on that line item, and any categories or regions that have led to that acceleration?

Stephen, I think, really, what we're seeing is we're seeing a really good pickup on our pre-cruise sales, and that's been driving a lot of these revenues.

There's various theories on how impactful pre-cruise sales are, and one of the theories is that if you sell $1 pre-cruise, you'll probably see anywhere from 20% to 50% uptick in the onboard spend by the very same guest.

So pre-cruise sales has been a focus for us, and we've seen that really increase quite nicely, I mean, literally over the past couple of years, but it's really accelerated over the past quarter.

And just to add to it, Stephen.

Also keep in mind, in terms of how we go to market, there's been more packaging, and so there's a mix shift that happens between ticket and onboard, depending on how we're selling that specific cruise.

And so for packaging, as an example, beverage, then we break out that beverage revenue, and we put that into onboard.

So there's a little bit of a mix shift, but it can also -- because we're doing more packaging, it ends up showing our onboard yields being higher than our ticket yields.

That's helpful.

And one last very quick one, if I could.

I don't know if I caught this, but did you talk new-to-cruise trends?

And as we look at the strength recently, what has new-to-cruise looked like?

So, I can obviously speak about Royal, we've been quite focused on new-to-cruise, particularly in the American market, and we're quite pleased with the progress that we've been making.

Last year was a really positive year for us in terms of the overall increase in new-to-cruise, and this year looks like it's on track to beat last year's performance in terms new-to-cruise.

And the way we've gone to market and how we go to market has changed quite a lot over the past couple of years, and we're seeing that resonate with the new-to-cruise potentials, and we're feeling quite good about, directionally, where we're going with that.

Even when we do brand awareness research in terms of new-to-cruise, we feel like we're hitting the spot in terms of our marketing and move to digital.

And any quantification there on the growth of new-to-cruise passengers?

No.

It's -- we feel pretty good about it at the moment, but no quantification.

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

Yes, just 2 quick ones on China.

You mentioned that it was kind of similar to the Japan-China dispute.

But what about 2015 MERS issue?

And then also, you mentioned that demand was coming back to normalized levels.

How do you expect demand to play out in the high season, where demand obviously increases in the summer, but you also have a little -- maybe some more supply coming into the market to take advantage of that as well?

Well, as Jason had pointed out, I think we're already -- we're in a good position for every quarter in China, and obviously, that's got a relationship to the capacity that's in the market.

We don't know for sure how the Q3 is going to play out in terms of the China demand.

It is peak season.

There's also a possibility, of course, that things will turn around with the situation in Korea or in China.

I mean, there are some theories that, that will occur, but of course, as Jason pointed out, we don't have a crystal ball.

The elections in South Korea occur in May.

Some believe that in June, this situation will resolve itself, and that would be, of course, great news if that happened.

But we don't know for sure how that will play out in the peak summer.

And just comparing it to the 2015 issues, was it -- how does it compare?

It's difficult.

I think, as Richard had pointed out, this market is a huge opportunity.

It's very much a long-term play, it's developmental.

We've been in the market for 10 years.

We've been -- over that decade, we've been through some ups and downs, and I think every year or every other year, we've had something thrown at us, whether it's MERS, typhoons, Japan, Korea, tsunamis, and I think we just have to adapt.

And I believe that we're kind of getting used to these curveballs when they come at us and we're quite flexible and rapid in terms of how we respond to them.

But I think it's something we just have to get used to, and that is the story of this developing market for us and we're becoming a quite adept at dealing with this.

So the comparison is between year-over-year.

It's very difficult to say.

They follow a very similar pattern, obviously.

An event occurs, and we go in to a little bit of a minor turmoil, and then there's some uncertainty, and then as things start to sort themselves out, we typically see the demand coming back.

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

I did want to ask Felicia's question from earlier in the call in a slightly different way about this being as good as it gets.

Obviously, yields are difficult, if not impossible, to predict.

I wanted to ask about cost, though.

The cost performance has been really exceptional, probably unprecedented versus historical standards.

You've been able to keep costs pretty flattish for -- assuming your guidance holds 4 years here.

And I think every year, we model whatever you guide us to for the year, but we assume, in the out year, that costs are going to go up because, historically, that's what costs do.

I guess, any thoughts about your ability to continue to find things to cut and offset whatever inflation that you have?

James, thanks.

Well, first off, it is incredibly difficult to try to manage all these cost inflations that happen around the world and that can impact our business.

What I would tell you is that there is a religious effort to make sure that we are effectively managing our costs.

And as we're addressing inflationary type of items, we do keep in mind that as we grow and as our capacity grows, there's opportunity or further opportunity to realize economies of scale in the business, and that's kind of where we're kind of focus.

I don't think, or I think we believe that there are areas where there are large cost opportunities, but there's always opportunities on the margins for us to be more cost-effective.

And James, let me just add to that, because I think the question does put its finger on a couple of things that are important.

First of all, I really am impressed.

The team has just been terrific in focusing on this and in executing against that.

But you're also right, you can't do this forever.

I do want to emphasize, though, our real future continues to be on the revenue side and performing on that and maintaining and expanding on the preference for our brands.

And so one of the things you said was you can't keep finding things to cut, and I don't mean to nitpick words.

I don't think it's so much a question of finding things to cut.

It's finding ways to do things better, and that may or may not mean a continuation of this -- the flattish trajectory that we've been on because you can't fight inflation forever.

But it really is impressive.

They keep looking for ways to do things better, and still, I would emphasize that our guest satisfaction is higher today than it was last year, and last year was a record.

Our employee engagement is higher than it was last year, and last year was a record.

And so I think our objective is to continue to build to maintain our product, our brand preferences and to hold the costs, but I think we will not -- we can't do it forever.

But I certainly like to take the opportunity to say thanks to the team for doing it as well as they have to get here.

Agreed.

My second question, the bear case, coming into the year, with respect to the Caribbean was just a notion that capacity was going to be accelerating thereafter flat-to-down years.

The last couple -- obviously, the first quarter would seem to fly in the face of that, but it occurs to me that the majority of the growth in the Caribbean is sort of yet to come.

I guess, as you look out to your future bookings, as that capacity ratchets up, are you seeing any impact on Caribbean pricing as a result of the increased capacity?

Yes, I would say, overall -- I mean, the demand for the Caribbean on both a volume and rate perspective has been very pleasing to us.

And while there is a good amount of capacity coming in in Q2, Q3 and Q4, what we're seeing in terms of volume or just general demand has been quite positive.

And it's not just all for Harmony.

It's really for the broader portfolio of product in the Caribbean.

Great.

And then last quick question for me.

Sort of Caribbean versus Europe, obviously, you don't guide or give results by region.

But so much of last year, probably going back even further, was this notion that in quarters where you had more Caribbean, since the Caribbean was outperforming, your yield was going to benefit from that.

It doesn't seem like that's necessarily the case as we look to 2Q.

Are we finally at the point where Europe -- European bookings aren't a drag on your overall yield numbers as they sort of catch up with the Caribbean?

I think what we're experiencing -- in Europe, first of all, there's a little more stability, there's been less activities that have disrupted the environment and, obviously, this year, we've made a lot of deployment changes that have created kind of a more stable environment in Europe.

And so first, I mean, Europe has always been a contributor to our yields.

Last year, the Eastern Mediterranean kind of weighed on European yields.

But I mean, overall, I mean, the demand we're seeing and the pricing we're seeing has Europe in a very good place this year and very similar to what it was in the '14 timeframe.

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

I should probably warn you that my parents are getting on one of your ships today, so you might want to watch out for those Zackfias.

But in terms of questions...

Hopefully they bought their wallet, Sharon.

So you might want to cut off the alcohol for them.

We'll notify security.

Most of my questions were answered, but I guess, I was curious in terms of passengers under 35, how you feel the appetite is for cruising in that generation and kind of what you're learning might be different or similar to prior cruisers at that kind of same age group.

Sharon, which ship are your parents sailing on?

They're on Navigator.

They're going across the Atlantic.

That's good, we'll make sure we take good care of them.

Under 35, I mean, one of the -- in the millennial market, one of the things that we believe in is when a millennial has a child, they really come into our sweet spot, for Royal Caribbean, certainly, and as soon as those millennials get kids, then they really want to have a great time with their family, and we work very well for them.

The one obvious thing that's quite meaningful is digital technology and access through VOOM -- to the world around them, so of course, that's something that we put into place a couple of years ago, and I think that's really proven to be successful.

The other kind of component is the whole idea of multigenerational vacations, and that's something that we really do focus on, this idea that we can offer a multigenerational experience to our customers and, of course, the Oasis-class ships really are the great expression of that.

So here, we see some differences, but we also see a great deal of similarities.

Our customers are looking for great quality, great vacation, attentive service, innovation and creating great memories, and I think we really have put a lot of energy into creating these very special moments with the nuance of digital technology.

And then dining, I think, is becoming something that's slightly different with the millennial market, and that's something that we're obviously focused on, both for our current fleet and then also as we look at our newbuilds coming online.

We have time for one more question.

Your next question comes from the line of Jaime Katz with Morningstar.

I just have one quick question on pricing integrity.

You guys haven't really specifically discussed it in recent quarters, but I'm curious whether you've thought about maybe expanding it to new source markets or if you have thought about changing the duration of it at all?

Not really.

It's been very successful for us.

We think it was well designed for the markets it's in.

Actually, I was a little taken aback by the question because we really haven't talked about it.

We think it's working, but we haven't, for a while, talked about extending it in any which way.

We gradually put it in over a little bit of time.

I suspect, now that you've raised the question, we'll take another look at it.

But it covers the bulk of our markets anyhow.

And we haven't talked about it, but I suspect we will.

Okay.

Well, thank you all for your interest, and thank you, Victoria, for your assistance on the call today.

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

Again, thank you for your participation.

This concludes today's call.

You may now disconnect.