皇家加勒比遊輪 (RCL) 2017 Q2 法說會逐字稿

Good morning.

My name is Dorothy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Royal Caribbean Cruises Ltd.

Second Quarter 2017 Earnings Call.

(Operator Instructions) Thank you.

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

Sir, you may begin.

Thank you, operator.

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

Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, our President and Chief Operating Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Carola Mengolini, our new 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 filings and other disclosures.

Please note that we do not undertake to update the information in our filing as circumstances change.

Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP historical 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 second quarter results, provide an update on the booking environment and then provide an update on our full year and third quarter guidance for 2017.

We will then open up the call for your questions.

Richard?

Thank you, Jason, and good morning, everyone.

I'm really very pleased to be able to speak with you all this morning and to give you some color on where we are.

At the beginning of the year, I commented that we sensed an intangible tone in the market that was as good as or better than any time I could recall.

This tone was hard to pinpoint or to define, but it gave us a very tangible sense that 2017 could be a particularly positive year.

Since then, the outlook has only gotten better.

Our earnings forecast now exceed even the high end of our original range of expectations.

In a normal year, we have a lot of pluses and minuses, and they usually balance each other out.

But this year, we are experiencing many more positive forces than negative ones.

Part of this appears to be industry-wide.

People have bought all the stuff that they need, and they're now looking towards more -- gaining more experiences.

Instead of buying TVs and cars, they seem to be buying memories as never before.

Since we're in an industry that specializes in providing great memories, that trend plays to our sweet spot.

Even better, the trend shows no respect for borders and seems to be occurring all around the world.

Our sailings in the U.S., Europe, Alaska, Baltic and Asia all demonstrate this marvelous phenomenon.

Now looking to next year, we're conscious of the fact that a particularly strong 2017 also provides particularly difficult comparables for 2018.

This is definitely a very nice problem to have, but it is nevertheless a very real issue.

On top of this marvelous industry-wide growth and demand, we're also seeing powerful drivers coming from the unique positioning of our special brands.

All of our brands are performing at a level we've simply never seen.

Our guest satisfaction ratings are at the highest point in our history, and they keep rising.

Our onboard revenue figures are doing well, both in terms of sales and satisfaction.

Some of this is driven by our wonderful new ships, such as Harmony of the Seas, Mein Schiff 6, Symphony of the Seas or Celebrity Edge.

But much of it also comes from greater engagement by our officers and our crew.

This is very much of a people business, and it is all about the people.

In addition, there are a few specific programs at Royal Caribbean that have proven very attractive in driving change.

The first, of course, is our Double-Double.

This program has been extremely successful in galvanizing our entire workforce through a common set of goals.

You've all heard me say before that if we give our people focus and a clear vision, nothing stops them from achieving extraordinary results.

The success of the Double-Double provides very tangible proof of that fact.

For that, I extend to all of them my sincerest thanks.

Remember, however, that the Double-Double was never just about 2017.

It's always been about positioning Royal Caribbean for the future.

I believe that's the real success of the Double-Double, not just the 2017 results.

As we approach the end of Double-Double, we are putting thought into providing direction again for a multiyear period.

As you know, our mantra is continuous improvement.

So I wouldn't expect our next announcement to be simply a clone of the Double-Double.

First of all, that would be boring, but also we need to focus on the drivers of success.

So I would expect that that's the kind of picture that we would be painting.

I know that some of you have suggestions for the structure of this program, and you are absolutely free to share them with us.

Be aware that any good idea you come up with will be shamelessly stolen without any credit to the author.

Now as part of the Double-Double, we've adopted a number of specific initiatives that support our overall objectives.

One of these is our price integrity program, which some of you have asked about.

Fortunately, we've only good news on that front.

As we had predicted, the early stages of the program cost us revenue in both 2015 and 2016.

That hurt, but once we established our consistency and credibility with the travel agents, with the public and with our own revenue managers, the benefits started flowing in.

Today, it's clear that the program is accomplishing our goal of rewarding those who book early, while disincentivizing those who push for last-minute discounts.

The key to this success has been consistency.

We don't do it only when it's painless or convenient.

We maintain the program even when it hurts, and sometimes we have to let cabins sail empty.

That goes against every one of our instincts, but the focus and the discipline have proven their value.

Ironically, the program has been so successful that we're now expecting to achieve a record load factor this year.

That, in turn, caused us slightly higher operating cost per lower berth, but obviously, the bottom line impact is very positive.

Now since we last spoke, there have been several other developments which I'd like to touch on today.

First, we announced the deployment of the first Quantum Ultra sailing in China in 2019.

With the Quantum class of ships, we're giving the most technologically advanced hardware to a market that is very digitally focused.

This move is a continuation of our strategy to have premium hardware in China, and that strategy is one that's enabled us to gain and to hold a leadership position in the eyes of the Chinese consumers, such that today, Quantum is essentially synonymous with cruising in China.

It's hard to believe that we've now been operating there for almost 10 years.

There has been a tremendous growth during this period of time, and we are finding that China is starting to behave more like a typical market.

Most markets have ups and downs, and we've seen both in China.

Most recently, the restrictions on travel to Korea have been painful.

Nevertheless, throughout these variations, our outlook for the future in China has not changed.

Our team on the ground is motivated, focused and making strides in driving the evolution of cruise distribution and destinations.

Speaking of evolution, one of the most important and most quickly changing is the use of digital tools for marketing, for product development and for delivering and enhancing the consumer experience.

We are proud to have focused on this for several years, and that gives us a leg up on expanding our capabilities.

We're currently working on what some might call version 2.0 of our capabilities, but as I previously reported, we've dubbed it Project Excalibur.

One advantage with Excalibur is that we already have years of experience in the area that allows us to build on.

In addition, because we spent so much effort during these developmental years, we have an infrastructure in place today that allows us to scale our innovations quickly.

For example, we expect to have Excalibur functioning on 15% of our fleet within 5 months of today and over half of our fleet by the end of next year.

I said before that our efforts in this arena are not nice to have, they are vital to keeping cruises relevant as a great vacation experience.

We are also aware that several of our competitors have announced plans to expand their digital capabilities as well.

We welcome those plans too, because it will make cruising even more powerful as a relevant vacation option.

Another aspect of the business that's sometimes underappreciated is the work to ensure the ocean and the communities surrounding it are healthy and protected.

We're very proud that the World Wildlife Fund is our long-term partner in this journey, and they are the gold standard in environmental stewardship.

With their help, we have established specific and measurable targets related to greenhouse gas emissions, sustainable food supply and destination stewardship.

We remain committed to this effort, and we look forward to following a path to achieve our long-term targets in this endeavor as well as on the financial front.

As you can see, we've got lots of reasons to feel optimistic about the future.

Demand is good, we're attracting new guests, we're developing young markets, our employees are happy.

All of this positions us beautifully for long-term success.

With that, it's a pleasure to hand the call back over to Jason.

Jason?

Thank you, Richard.

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

Second quarter results are summarized on Slide 2.

For the quarter, we generated adjusted earnings of $1.71, which is 57% higher than the same time last year.

These results are better than guidance due to strong close-in demand, better fuel trends and a better-than-expected performance from our equity investments.

Net revenue yields are up 11.5%, which is better than previous guidance.

Strong demand for North American products allowed for better close-in pricing trends and record high load factors.

Strong trends in beverage, shore excursions and high-speed WiFi all contributed to an 8.3% year-over-year increase in onboard revenue.

Net cruise costs, excluding fuel, were down 0.9% for the quarter.

Costs in the second quarter came in slightly higher than our guidance, driven by higher load factors, timing and additional investments in revenue-generating activities.

Moving on to the booking environment.

Over the past 3 months, new bookings have been up double digits compared to last year and at higher prices.

Booking volumes have been up more for sailings that are further out due to the ongoing extension of the booking window.

As a result, both load factor and APD are higher than same time last year for 2017 and in each of the next 4 quarters.

We are enjoying the benefits from our global sourcing model, revenue management strategies and the price integrity program.

When we first announced the price integrity program in 2015, we knew that it would have a negative impact on our load factors in the short term, but that it would contribute to long-term yield growth.

Now 2 years after its inception, we are experiencing the benefits of the program through an extended booking window, strong close-in pricing, higher overall APDs and record load factors.

North America remains our largest sourcing market, and the strength and demand we have seen from U.S. and Canadian guests have been unwavering for sailings on both sides of the Atlantic.

Now I'll provide an update on each of our key product groups, starting with Europe.

While most itineraries have benefited from strength of the North American consumer, we have seen particularly strong trends on European sailings, both in the Mediterranean and in the Baltics.

Fewer geopolitical events and stable air pricing have contributed to a surge in demand from our higher-paying North American guests.

As a result, North American guests will account for a larger percentage of Europe itinerary sourcing than in any other recent year.

This sourcing shift, which is made possible due to our significant global footprint and yield management capabilities, is contributing to higher ticket prices and higher onboard spend.

Our booked APDs for Europe sailings are significantly higher than same time last year and load factor is up nicely.

North American itineraries account for about 58% of our 2017 capacity and have been trending well.

The Caribbean, our largest product group, at close to half of our capacity, has continued to please and remained up year-over-year in both rate and load factor.

On our last earnings call, we noted that Alaska was outperforming last year's record season.

That trend continued throughout the last 3 months, and we continue to expect record yields for the product.

In the Asia-Pacific arena, we increased capacity by 5% year-over-year, with the combination of China, Australia and Southeast Asia itineraries now accounting for 21% of our 2017 capacity.

We achieved record load factors in the second quarter for our China itineraries and expect to meet or exceed prior year occupancies in both Q3 and Q4.

Unfortunately, the South Korea travel restrictions created a challenge for this year's China season, resulting in less-than-ideal itineraries and lower pricing.

Our strong relationship with key travel partners, combined with expanding direct business, contributed to a relatively quick stabilization and demand after the travel restrictions were announced.

Lastly, the upcoming Australia season, which accounts for more than 10% of winter capacity, is in a strong book position despite industry capacity growth.

While it's too early in the booking window to provide a lot of color on our overall 2018 expected performance, but I am willing to say that we are currently booked ahead of same time last year in both APD and load factor for 2018.

Now we can turn to our updated guidance for full year 2017, which is on Slide 3. We are now 95% booked for the year, and we now expect our net revenue yields to increase in the range of 5.5% to 6%.

This is an increase versus prior guidance, driven mainly by the outperformance in the second quarter and further strengthening demand from our North American source passengers.

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

The increase in the cost guidance is driven by higher-than-anticipated load factors, timing and investment in revenue-generating activities.

We anticipate fuel expense of $706 million, which is down slightly relative to prior guidance.

We are 64% hedged for the remainder of the year at a price of $487 per metric ton.

Based on current fuel prices, interest rates and currency exchange rates, our adjusted earnings per share guidance is in the range of $7.35 to $7.45 for the year.

In summary, a strong second quarter, coupled with the benefits of a weaker dollar, better fuel prices, better demand trends, some additional investment in revenue-generating activities, and better-than-expected performance from our joint ventures are driving the improvement in our guidance for the year.

Before getting into the third quarter guidance, I wanted to reiterate a point that we have emphasized on the past couple of earnings calls.

Our yield improvement in the first half of the year was greater than yield improvement we expect in the back half of the year, as we have already lapped the new entry benefits of Harmony of the Seas and Ovation of the Seas as well as the impact from the 51% sale of Pullmantur.

Additionally, Q3 yields are benefiting from very strong demand trends for Europe.

Since Europe makes up about 1/3 of our capacity in Q3 and approximately 10% in Q4, we expect Q4 yield growth to be lower than Q3.

Now we can turn to our guidance for the third quarter, which is on Slide 4. We anticipate a net yield increase of 4% to 4.5%.

The year-over-year improvement is mainly being driven by strong North American demand trends for our core products on both sides of the Atlantic.

Net cruise costs, excluding fuel, are expected to be up approximately 4% on a constant currency basis.

The year-over-year increase in our cost metric is mostly due to a year-over-year capacity reduction for the quarter.

Taking all of this into account, we expect adjusted earnings per share to be approximately $3.45.

Before we open up the call for a question-and-answer session, I wanted to note that our next earnings call is tentatively scheduled for November 7.

And with that, I would like to ask our operator to open up the call for a question-and-answer session.

(Operator Instructions) Your first question comes from the line of Harry Curtis with Nomura Instinet.

Two quick questions.

We've gotten several questions on the sources of the $0.30 increase for the year.

And when you back out roughly $0.08 for the beat, that leaves $0.22.

Of that, is it fair to say that half of that is currency, but the balance of that is just stronger operating performance?

Yes.

That's exactly right, Harry.

About half of the beat is driven by the weakening of the dollar, and the balance of that is driven by improvement in business trends.

Okay.

And then my second question is, given the strength of these trends, and this is the year that you should be generating a significant amount of cash, any explanation as to your hesitancy to buy back stock in the quarter?

Well, I wouldn't necessarily say it's hesitancy.

I would point out that, one, we've said from the start of the program that we were going to be doing it opportunistically, and we also said we were going to be doing it in line with free cash flow.

And most of the free cash flow gets generated really on -- in the back half of the year.

Okay.

So the message is, stay tuned?

Stay tuned.

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

Richard, in your opening remarks, you expressed a somewhat cautious tone, and maybe I'm over interpreting for 2018, given that the comps are indeed challenging.

I was wondering, you or Jason, could you help sort of itemize the sort of onetime items to be aware of?

There's obviously Pullmantur, but hardware changes and maybe Europe becoming more normalized, things of that nature that we should be thinking about as we think about 2018 yields?

David, I don't think it's necessarily Richard being overly cautious in anyway.

I think what's -- it is obviously as the year progresses and we continue to raise our yield guidance, which we have, the comp becomes more difficult.

We'll certainly benefit in '18 from the introduction of Symphony and Edge, which comes at the very latter part of the year.

I think it's just more -- this year has -- you can look at all your kind of core products outside of the challenge we've had with the South Korea sailings.

Everything has really kind of ended up in the better-than-expected column, and that's not a typical year.

In most year like -- as any kind of portfolio, you have some products that are doing better than others and some markets that are doing better than others and some that are not.

And so I think this trend of us just continuing to raise is a reflection of the current environment, but I don't think that we want people to extrapolate that you're going to see 5.75% yield improvements every year.

Yes, I think Jason has answered it.

It wasn't intended to be particularly conservative.

I think it really was just [tended] to say this is really proving to be an exceptionally good year.

And sometimes there's a tendency to extrapolate whatever happens this year, next year will be another good year where, again, everything seems to be going in the right direction, and this was just more a cautionary tone.

Next year does look very good, and everything we said about it is very positive of bookings.

Bookings continue to be at, in fact, a higher rate and a higher amount than we've experienced in this wonderful year.

But it's rare that we just see everything going as well as it has this year.

Got it.

Understood.

And second question, just quickly on China.

Had a lot of questions from investors that are having difficulty reconciling the message from you and other operators and participants about the potential of the Chinese market, while at the same time witnessing capacity withdrawals for 2018.

Can you walk us sort of through how the 2 reconcile going forward?

David, it's Michael.

I think one way of looking at it is strategic and tactical.

We see the China market as an opportunity.

And I think as Richard mentioned earlier on, we have a long-term development plan.

We've been in the market for 10 years, and we've built a great brand in China.

Changes in deployment in the short term, we don't consider as particularly meaningful in terms of the development of the market.

So for example, Royal's removing Mariner in '18, that's largely related to an opportunity for a drydocking that we want to undertake.

And of course, we've announced that we're putting Quantum Ultra into the market in '19.

So I think it's more of a looking at it as a long-term opportunity.

And then, of course, year-by-year there's puts and takes, but we see it as a good opportunity and we continue our development.

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

Just on 2018, the visibility that you have, the visibility that you're talking about for next year is the highest in my memory.

And so while this booked -- and you've talked about it a bit, but while this booked advantage -- booked position is advantageous in many obvious ways, it's just -- wondering if you could let us know what that kind of allows you to do this visibility that you might not have been able to do before?

And what kind of advantages does that give you for next year?

Felicia, I mean, I think on an advantage standpoint, obviously, being in a stronger booked position allows us to manage price more effectively north and also allows us to manage demand more globally as we have much less inventory to sell in.

And that has been a pretty continuous trend for us for some time as the booking window continues to extend.

Some of the commentary talking about how strong the booking trends have been over the past quarter, lot of that actually relates to our booking activities for 2018.

And so it gives us more visibility in terms of what the booked revenue is, but it also gives us the opportunity to manage price and try to recognize the opportunities as they come forward.

Right.

And so I think for those of us on the call who've looked at cruise docks for a long time, we never kind of in our wildest dreams kind of start out here at 5% or 6% yield growth, just based on history.

But it does sound like despite the tough comps, given where you are, you could have another very solid year next year.

Yes -- No, I do think the trends do show for it to be a solid year next year.

I think the thing to just -- you'd be cautious on is that in that 5.75% is some of the benefit from the Pullmantur deconsolidation.

So I would just want to point that out.

And of course, I mean, being in a strong booked position on a rate and volume basis is where you want to be kind of going into the forward-looking periods.

Of course, we always talk about that balance as being too booked because that also limits opportunity to be able to take on revenue at higher prices if the opportunity comes your way.

Yes.

And Felicia, another thing as part of what you've just commented on, our new ships are really doing very well.

The Symphony of the Seas, which is delivering next spring, is another home run for us, much as Harmony has been.

Edge is also doing extraordinarily well, but Edge doesn't deliver till very much at the end of the year.

So we won't actually have that benefit really until '19.

But yes, 2018, it's looking to be a good year.

But again, because I always have to say we always seem -- there always seem to be some headwinds that you run into.

Foreign exchange has gone both ways for us.

This year compared to last year, it's about neutral, but it's improved in the last few months.

So overall, I think we're feeling very strong, but always worried that there are these uncertainties that always seem to come up and temper that enthusiasm.

Great.

That's helpful clarity.

And then, Jason, just in your third quarter guidance, it seems to imply that TUI is also having a nice benefit on your numbers.

If you could just talk about the drivers there for your JV and where the surprises may be coming from?

Yes.

Well, I think it's a combination of things.

It's not -- I mean, TUI is performing exceptionally well.

I mean, obviously, we're seeing very strong trends, and we're seeing strong trends at sea.

It's likely that TUI Cruises is also seeing strong trends.

And we've been seeing those strong trends from TUI for some time.

But also, our Pullmantur brand is doing better than what we had expected it to do this year as well.

Okay.

So -- but it is a correct interpretation that some of that is flowing through into your third quarter guidance?

That's right, and that's also what I've talked about was the combination of -- the improvement in the $0.30 for 2017 also included the improvement from the joint ventures.

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

I'm just looking at the language in your release, and I know you're talking about being ahead in booked position and price.

I feel like a quarter ago, you might have used the word record, being at record book levels.

And so I'm just wondering, is it to the point where you're sort of maxed out, like you actually don't want to be more booked in advance anymore now.

Is that kind of maybe something to read in between the lines of that language change?

Robin, again, this is a nice problem to have, but sometimes we do feel that we shouldn't get too booked because we give up opportunities at higher prices.

And so that is a dialogue that goes on here every day.

We still are at record levels.

And simply the question is, do we want to continue to expand that, or do we want to raise our prices a little bit and, in fact, slow down the booking velocity?

So you're right, that's exactly what's happening and it's a debate that we have here every day.

Okay.

That's helpful.

I don't know if you would venture -- you mentioned that the travel to Korea, those restrictions hurt yields in China.

Any -- I don't know if you'd venture to sort of quantify what impact you think that might have had on yields in China just because if we get to a point where those restrictions are lifted, maybe we can think about through that now reversing.

I don't know if that's something you'd venture?

Well, thank you for daring us to venture.

But no, we're not going to get specific into a kind of market-by-market breakdown.

But obviously, we would certainly benefit if the Korean restrictions came off.

Thanks for trying, Robin.

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

So Jason, I guess the first question.

Your bump in your cost outlook for the remainder of the year, I guess the question is, how much wiggle room is embedded there in order to move some of those costs out into 2018 if you needed to?

I get the increase in the APCDs, but I would assume that some of that increased spending across the company to capture more of the current momentum.

Could some of that be pushed out a bit if need be?

Well, I mean, we can always manage the timing of our cost if need be, but we have put a lot of thought, obviously, into those costs.

And like we said, some of it is not necessarily creating more APCDs, just caring about 50,000 more passengers this year than we had expected.

That increases your numerator and your denominator.

The APCDs stay the same.

So that's going to have an effect.

And investing in activities that we believe are not only going to improve the top line but expand the bottom line and expand returns is how we think about our cost spent.

Okay, got you.

And then second question, I guess, Richard or Jason, you talked about the strength you're seeing in your core North American passenger.

But can you talk a little bit more about the European passenger as well?

It seems like that customer base is starting to strengthen, coming out of their shells a little bit.

And more importantly, I think it's starting to show that they're possibly willing to spend more once they're onboard.

Can you go into a little bit more detail there?

Steve, it's Michael.

Yes, we're seeing kind of a bounce back on the European passenger.

But obviously, the euro started to strengthen over the past couple of months, which is, I think, positive in terms of consumer confidence.

And certainly, this summer season for Celebrity and Royal Caribbean, we've seen, as we mentioned, great demand from the North American market, which really has pushed up pricing quite a way.

And of course that we thought would push down some of the European sourcing, but it's been quite robust and quite healthy.

So we feel quite positive about what we're seeing with the European source markets.

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

Just a couple more here.

Jason, just, I guess, a clarification.

Did you say that the pricing was down in Q2, or expected that all for 2017 due to the China-South Korea situation, the travel ban?

Pricing in terms of China specifically, Tim?

Yes.

Yes.

Pricing is down as a result of the South Korea ban.

For the full year you're looking at, or just for Q2?

For the full year as well as Q2 -- and the second quarter, yes.

But Tim, as we're pointing out that we had -- this is Michael.

We had record load factors in Q2 in China.

Okay.

And would it be fair to say that absent this ban, your pricing would have been up?

Is that...

Yes.

Yes.

Yes.

Okay.

And then wanted to circle back to the booking curve question.

At what point here -- realistically, you can't keep expanding that.

So at what point should we start anticipating from yourselves, or would you anticipate from the industry, because we start hearing that booking curves are similar year-over-year or booked load factors, however you want to frame it, but then ongoing pricing improvement?

So Tim, as you said, you just can't -- you can, but you don't necessarily want to just keep expanding that.

And it's a trade-off between the way you think the demand is and you don't want to so fill up that you'd not -- you don't have space available to accept demand at a higher price later.

I think earlier this year, I actually made the comment that the -- going back to something Robin said, that we were at a record level and probably wouldn't go higher than the load factors we had when we crossed the year at the end of last year.

But we've continued to actually inch up a little bit from those levels, and that's because our operating people and our revenue management people feel that there is a benefit to doing that.

And it's -- again, it's exactly the things that Felicia talked about.

You have more booked.

You don't -- you therefore have less to sell, so you can be more -- you can raise your prices on that additional amount to sell, et cetera.

And that's a trade-off.

As I said earlier this year, I actually predicted that last year was not only a record but was the record and that we wouldn't want it to go higher.

And since then, we've actually let it go a little bit higher.

But as you say, we're probably reaching the peak of that, which is a good thing.

And it simply means that we are spending our time focusing on how do we ratchet up the price as opposed to ratcheting or ratcheting out the booking curve.

Okay.

And lastly, any color by capacity, by region for '18 that you could provide us, whether that be China, Asia, Europe, North America, Alaska, just for the company or the industry, however you want to frame it?

Well, I can give you our perspective on the industry side or both.

But on the industry side, I think we expect the Caribbean to be up about 5% next year; Europe, up about 5%; China, down about 5%; Asia Pac, which would include China, down 4%.

So -- and if you want it for us, we are -- we'll be up about 8% in the Caribbean, 9% in Europe, down about 10% in Asia Pac.

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

So I want to ask about your guidance on the fourth quarter.

I think it implies yields are up somewhere around 1.5%.

But correct me if I'm wrong, aren't the issues from Empress a year ago helping fourth quarter by about 100 basis points, is that right?

Jared, I won't comment on the 1.5%, but that's right.

It's -- the challenges from Empress last year are -- were something that could affect the yield in the fourth quarter, year-over-year.

Got it.

Okay.

So then in -- I mean, on my math, and that would imply your core yield is really more like flat to up slightly.

Maybe you can help me just reconcile that deceleration with the commentary you've given on demand so far.

Jason, I think you said bookings this quarter have been up double digits; you're ahead on rate and volume.

Why aren't we really seeing that reflected in the fourth quarter?

Yes.

Well, I -- first off, on the 100 basis points for Empress, I think that's a little bit high.

I would say it's sub-50 basis points in terms of the impact year-over-year.

But I think one of the factors is it's a tougher year-over-year comp for us, especially in the Caribbean, because we saw a very strong trend in the Caribbean last year outside of Empress.

But it's also being driven by -- I mean, you look at the strength that's happened in the back half of the year, a lot of that is coming from -- on North American demand trends for Europe.

And as I commented, it's a much -- a portion of our capacity in Q4.

Got it.

Okay.

And can you just...

The other thing I wanted just to add, Jared, is the fourth quarter was really when Harmony came into the Caribbean last year and it was -- I mean, kind of record incredible demand for Harmony, which also makes that Q4 comp very, very difficult for us year-over-year.

Got it.

Okay.

And can you just share what percentage you're booked for 2018 right now and how that compares to historical?

Well, we typically say is we're at least 50% booked 12 months out, and it's pretty linear.

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

I was just wondering, on the talk with the joint ventures, whether you could give us some like-for-like numbers with last year, given the changes that happened on that front in the first half.

And secondly, just to clarify on Europe, you were, obviously, talking a bit more North American sourced passengers this year, which was helping pricing, but you also seem to suggest that the pricing gap between North American and European sourced passengers was closing.

Could you confirm that was the case and give us some color on sort of what the gap is now?

Yes.

Well, we don't provide specific color or guidance on the JVs.

But what we have said in the past is that as TUI takes on more capacity -- on average, as an enterprise, they've been adding $50 million to $60 million a year in earnings and about half of that comes directly to us.

That, in combination with stronger booking trends, can kind of give you some direction in terms of how their performance is doing.

Yes, the gap between North American and European guests has shrunk, but the North American consumer does not only spend more on the ticket, but they also spend quite a bit more on ships -- on the ships.

And the driver of that has actually to do more with the shore excursion side because it's kind of more of a bucket list vacation experience for them and so they tend to spend more on board than the European guests.

And that -- while that gap has shrunken somewhat, certainly, it's a more profitable opportunity for us if we're sourcing more North American guests versus European guests.

The last thing I would just add on that point is that as the European -- as the North American consumer is eating up a lot of that capacity, it also puts the European consumer in a position where they have to spend more in order to get on all the ships.

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

A couple of questions for me.

The first, as it regards to the psychology of your passengers as we think about the geopolitical component of your business.

Clearly, we haven't been hit with the multitude or the magnitude of the events that we saw last year, but we did see some events in the U.K. over the course of the second quarter.

So I guess my question is, it seems like that didn't really impact you much, if at all.

I guess, first, is that accurate?

Second, do you think that's more of a function of geography?

Or do you think that we're at the point that people aren't as easily scared away when they see something like that?

That would seem to be a much more bullish signal as we think about derisking your business.

Can you speak to that?

Yes.

I'm not sure that there are -- unfortunately, that there are that many fewer incidents.

I do think people have a little bit, to your latter point, acclimated to them and see them as perhaps less relevant to them.

I'm not sure that's a good sign for the society, but that's positive sign to the cruise business.

I also think there is a perception that this is a good vacation to be doing.

And so I think overall, at least at the kind of pattern that we are experiencing today, it seems to be less of an issue.

I'm not sure that we'd be willing to extrapolate that to all kinds of issues or all levels of intensity or frequency.

And I guess to that last point, you talk about strength of your North American passengers going to Europe.

Do you see that as more getting back to where we were prior to a really bad 2016, or are we beyond that in terms of the demand in terms of those North American passengers?

James, it's Michael.

I think it's probably a combination of the 2. I think there's a little bit of cyclical impact on vacationing to Europe.

But certainly, I think to Richard's point, people are becoming more, I guess, used to these events.

And I think there's just more of a desire attached still to the currency for Americans to travel to Europe.

Got it.

And then last question for me.

Jason, a couple of times in your prepared remarks, you talked about the various factors impacting the increased cost guidance.

You talked about load factors, you talked about timing, you talked about investment in revenue enhancing projects.

I guess, a, could you give us sort of an order of magnitude on those?

I'm assuming those are in the order of their importance.

And then, I guess, secondly, how much of those costs are ongoing in nature, sort of a new run rate?

And which, if any, do we maybe get back next year?

Yes.

So I want to -- in terms of the order, I would say it's kind of load factor.

And then it's investments and revenue enhancing projects.

A little bit of it's timing.

So there's not really a large element here that is something that we are moving forward from 2018.

Again, this is really with us kind of looking through the profitability lens, investments sort of we can make in order to improve the top line to expand returns.

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

As capacity swings from a decrease in 2017 to positive growth that accelerates through 2019, what is the expected contribution in net yield in the bottom line?

And are there any reasons why the new ships may differ from the more recent additions?

Yes.

Steven, as -- obviously, as the capacity comes on, especially the new ships, because of the inventory mix of the ships, the additional onboard revenue venues that are located on those ships, they certainly are good tailwinds to '18 and '19 and beyond.

They also benefit us, obviously, on the back office side by us able to grab more economies of scale as that capacity comes on.

And I'm not going to get into specifics.

It depends on the year when the new capacity is coming on in terms of what the impact is on our yields going forward.

But certainly, they are tailwinds and they -- not only are they good individual contributors, but they also help support the brand message and attract guests to our broader fleet.

Fair enough.

Then maybe another follow-up.

What are you seeing in terms of new-to-cruise passengers by region?

And how much of a contributor has that been to the overall demand environment?

Stephen, it's Michael.

We're pleased with the new-to-cruise developments.

I mean, obviously, in the emerging markets like China, the majority of our guests are new-to-cruise and, of course, that's an opportunity that we continue to pursue.

In the American market, we've been quite focused on developing the new-to-cruise in the millennial market, and we have been making very good progress over the past couple of years.

So if you look back over time, you'd see a decrease year-over-year in new-to-cruise and millennial to Royal Caribbean International.

But over the past 2 years, we've seen a good increase.

Part of that's related to our messaging and our marketing strategy, where we've moved from really traditional marketing to more digital.

And we're seeing a good pickup from new-to-cruise.

So we think there is opportunity in the American market and the European market and, of course, in the emerging markets for new-to-cruise.

And a lot of the brand messaging is very much focused on that opportunity.

And it's also fair to say that the new Celebrity Edge, which is a stunning new ship, is also focused on that market opportunity.

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

Couple of quick questions.

There seems to be some caution, I think, that has been pointed out, especially maybe Richard in your comments for 2018.

Is it again just being cautious, or the fact that, for example, the dollar has weakened?

And so, for '18, Europe might not be as attractive to the North American sourced passenger that has been the key driving force here.

Assia, it is -- I tried to say it was purely caution.

I -- we are having an extraordinarily good year in an extraordinarily strong market.

And I think it behooves us to say that not everything goes your way every time.

But the objective facts are very positive.

The weak dollar -- first of all, I have trouble calling it a weak dollar because when we look at, for example, our Double-Double, the strong dollar has been an enormous headwind.

And I think one of the reasons that we're feeling so good about 2017 is to have reached our Double-Double goals or about to reach our Double-Double goals in the face of the very strong headwinds of the strong dollar really makes us feel quite good.

The slightly less strong dollar, I'm going to use it -- I'm going to describe it that way.

Yes -- the -- is the glass half full or half empty?

The slightly less strong dollar is actually helpful to us in every which way, and so this is a positive for us after so long of facing these headwinds.

And I remind you that the dollar strength for 2017 is ending up about where it was in '16 and on our trade-weighted basis.

The difference is it's gotten better.

It rose up.

The dollar got stronger by the end of April of this year, and then it got weaker again.

But we're basically back to where we were last year, no stronger, no weaker.

So I would feel very happy if we simply can carry on with another year without more headwinds.

But again, I do want to make it clear, we view the weaker dollar as positive for us overall, balancing those things that are helpful and those things that are harmful.

Very helpful, Richard.

And a quick question.

Maybe, Jason, you can help me better understand this.

So out of the $0.21, $0.22 of the EPS range increase for the back half of the year, would it be fair to say that the half that is operational is primarily driven by TUI and a slightly better Pullmantur?

No.

The other half that's operational is really driven by strong close-in -- strong demand trends for the Caribbean and for Europe from the North American consumer.

TUI and Pullmantur have a modest helm -- help and that's somewhat kind of helping offset the cost increase that we (inaudible).

Per load.

Yes.

Okay, great.

And I'll sneak one more question.

Is it fair to say that the restriction on South Korea, if it starts to get lifted within a month, you might be able to start sailing again?

Or is that too short for the time frame?

Yes.

I mean, obviously, if it's lifted.

We're optimistic, at some point, it will be.

Then probably within a few weeks of that taking place, we'd be offering itineraries including South Korea.

But do remember, we're nearing the end of the season there.

So I think at this stage...

Totally understand, Richard.

Yes.

Unfortunately didn't happen sooner, and so...

Yes, exactly.

Thanks, Assia.

Our next question comes from the line of Dan McKenzie from Buckingham Research.

If I can go back to the digital capability commentary, I appreciate the perspective on the timing of the rollout.

But how should we think about the revenue opportunity once it's fully up and running?

And related to that, what are you thinking will be the bigger drivers encompassed in this part of the business?

I'm hoping you can elaborate a little further here.

Dan -- well, you obviously -- I think there'll be a lot of benefit from us taking friction out of the cruise experience.

But I think where we see the clear monetization opportunity is getting people to obviously book in an easier way with us, so whether that's via the web or via their digital device, their ability to prebook activities, and whether that's short excursion or manage their calendar on the ship through the entire customer journey, there's lots of opportunities to be able to stimulate the consumer to spend and also to allow them to kind of plan their vacations accordingly.

And by putting that tool in their hands, we think that there is an opportunity to improve the top line.

Dan, you did cheat to go over, but I'll cheat to add to Jason's comment.

Remember, I know everybody's focus tends to be on the guest-facing activities, and those are the ones that are easier to monetize.

But we view this whole process as multidimensional, and so a lot of it is relating to data analytics, data science.

It's the marketing program.

But a lot of it's also to make it better -- make us better in delivering.

So these are tools that are available to our crew members.

These are things that reduce the friction for them in coming to the ship and then -- and being employed and all the work that they have to do, tools that make them better at producing the service.

We also use it for safety features, better supply logistics.

So it's a really, a multidimensional tool that I just would emphasize.

The more visible part will be the kind of guest-facing things that we talked about, but I would not underestimate the importance, long run in terms of our position to market, in terms of our ability to produce these kinds of revenues, of the other aspects of the tools.

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

Maybe one on Cuba.

Could you just update us on your thinking for that area?

And I know on past calls, you've mentioned you don't think it would be that material, but it could provide a lift for Caribbean interest in general.

Curious if you've seen that lift, and how are you thinking about that going into 2018?

Vince, it's Adam.

So yes, and I think it's important to start out the answer to this question by reminding everybody that the Cuba sailings, in total, approach 1% of our company's inventory.

So there is really nothing that could happen in that 1% bucket that would meaningfully affect our performance at it has been discussed today.

We are pleased with the level of bookings and the interest that we've received from the 2 of our brands, Royal Caribbean International and Azamara Club Cruises, that are taking people to Cuba.

And I think our sense of the longer-term potential of Cuba to help with how people view Caribbean cruising is very positive.

But it's going to take considerable time for Cuba, especially to develop the infrastructure to have a meaningful amount of cruising taking place there.

So we look at it as being early days, very positive so far, but still a long road ahead.

Okay.

So just before signing off, I wanted to provide a big thank you to Carol for her great work in the IR role, and we wish her the best of luck as -- in her new role as the Chief Operating Officer of our Azamara brand.

And of course, we appreciate everyone's participation and interest in the company.

Carola, and I think Carol will be with her as well, will be available for any follow-ups you might have today, and we wish you all a very great day.

Take care.

Thank you.

That concludes today's conference call.

You may now disconnect.