皇家加勒比遊輪 (RCL) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Royal Caribbean Cruise Lines Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions)

It is now my pleasure to turn the floor over to Jason Liberty, Chief Financial Officer.

Please go ahead, sir.

Thank you, operator.

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

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

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

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

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

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

Examples are described in our SEC filings and other disclosures.

Please note that we do not undertake to update the information in our filings 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 up with a recap of our fourth quarter and full year results for 2017, then I will provide an update on the current booking environment and will end with full year and first quarter guidance for 2018.

We will then open up the call for your questions.

Richard?

Thank you, Jason, and good morning, everybody.

It does feel good to be able to provide some color on our results on this beautiful 75-degree day here in Miami.

For the last 3 years, you've heard me talk repeatedly about the Double-Double, and I must admit that it feels very good today to formally say that we have accomplished what we committed to do 3 years ago.

Our earnings per share have more than doubled to $7.53, and our return on invested capital is 10.5%.

These figures are $0.75 and 50 basis points better than our targets.

Our company worked very hard to achieve the Double-Double, and now we've done it.

The feeling is very fulfilling, and I want to thank each and every member of the teams that reached these aggressive goals.

I also think it's important to emphasize that while the EPS and ROIC targets were the official goals of the company and the program, our aspirations were actually much higher.

In order to reach such aspirational goals, we had to raise our game in many, many areas.

We needed to increase the preference our brands earn in the marketplace.

We needed to upgrade our already excellent revenue management systems.

We needed to upgrade our onboard product.

We needed to reduce our energy footprint.

And we needed to upgrade the caliber and engagement of the men and women who produce these results.

We also used the Double-Double program to strengthen our credit metrics, achieving investment grade, and to return capital to our shareholders in the form of dividends and share buybacks.

Because this achievement would not have been possible without the passion and the commitment of our people, the company has decided to give them a surprise reward.

Every one of our 65,000 employees will receive a bonus equal to 5% of their salary.

We're calling this the Thank You, Thank You Bonus.

It will be in the form of equity grants vesting over 3 years, thereby giving every employee a stake in the company's future.

The program also includes major upgrading of crew facilities and recreation areas.

Our people are what make our business.

We wanted to show our appreciation in a tangible way, and we wanted it to reach every employee regardless of level of the organization.

Today's announcements also address another issue that needs to be considered when looking at a program like the Double-Double.

There's always an inevitable risk that such a program could motivate a management to favor short-term expediency over long-term value.

Ours is a long-term, capital-intensive business, and we simply can't afford short-term decision-making.

Our announcements today with respect to forward prospects demonstrate clearly that our work over the last few years has enhanced, not detracted from, our longer-term prospects.

We believe that our Double-Double efforts have not only helped us reach these specific targets but created a cultural vision that position us to jump ahead with our 20/20 Vision.

Speaking of which, our indicators denote that we are heading into another record year.

We're currently booked ahead of last year in both load factor and rate.

Now you may recall that a year ago, I said, and I'm quoting, "My sense is that the booking window has stretched as far as we will ever want, and I don't expect to announce another record level of bookings a year from today." Well, I wasn't terribly accurate.

Here we are a year later and we are announcing another record level of bookings.

Notwithstanding my prediction, our revenue managers concluded that the market is so strong that we could eke out yet another increase, and that having this much booked would help us raise our prices as the year progresses.

However, my overall sentiment from last year still applies.

We manage the booking curves to maximize revenue, and I feel and I predict that next year we will choose to leave more available for bookings during the coming year.

Now, Jason will provide more detail on our expectations for 2018, but we believe our strong forecast reflects the power of our brands.

Recent trends have been particularly strong for our North America, Europe and Asia Pacific itineraries.

These trends, coupled with strong onboard spend, are positioning the company for another year of yield growth.

Having said that, it's also important to note that we're still early in our Wave period, and we are up against particularly strong year-over-year comparables.

Based on all this, we expect yields to increase broadly in the range of 1.5% to 3.5% in 2018.

Now, it's also important to look at the cost side of the equation as we estimate that our net cruise costs, excluding fuel, will be up 1.5% to 2%.

Last year, on one of these calls, we were asked the following question, again quoting, "The cost performance has been really exceptional.

Any thoughts about your ability to continue to find things to cut and offset whatever inflation that you have?" Now at that time, we answered that we've not been in a perpetual state of cost cutting, but in fact, our cost performance reflected our culture of continuous improvement and innovation.

However, in thinking about this important topic, we realized that this is actually very complicated and it has many variables impinging on it.

For example, many of our expenses are directly linked to driving revenue, but they're not necessarily linked in time to the revenues that they generate.

For instance, we goosed marketing expenses in the fourth quarter of last year and are doing so in the first quarter of this year because our marketing people thought that would be the most impactful way than spreading it over the year.

Another example would be our investments in our people, a big investment here, and in new technology.

In both cases, we spent money in 2017, and we will spend money in 2018.

And we don't expect any of those expenditures to have a significant benefit until 2019 or '20.

Such costs and timing of costs can drive any 1 year's stats out of line with past or future trends.

But we still think that the result is very much in our investors' best interests.

The fact that we continue to [main] overall such low level of costs despite our very aggressive revenue-enhancing investments, I find to be very encouraging.

Now, as I noted in our last call and we said earlier, we are experiencing very strong demand for our product, driven by, among other things, changes in consumer preferences that don't necessarily particularly relate to us but we benefit from them.

Those changes also call for us to respond and adapt quickly as we look to position ourselves as a leader in travel.

This past November, some of you got a glimpse of the kind of innovations we are pursuing in order to make the whole cruise vacation as frictionless as possible.

We are rolling out an unprecedented wave of digital innovation, touching every aspect of our business and focusing on the overall guest experiences.

Consumers are buying experiences, they're not buying things, so we are creating vacations which are rich in made-to-order and memory-making moments.

The technological transformation also encompasses many areas beyond simply the guest experiences, including innovations to make our ships more energy efficient, enhance ship management and put connectivity in the hands of our crew members.

As consumer preferences change, we are also enhancing our product offering by increasing our experientially focused itineraries.

This past November, Celebrity Cruises unveiled the Celebrity Flora, a stunning new ship delivering in 2019, designed specifically to operate around the Galapagos Islands.

In March, we take delivery of the spectacular new Symphony of the Seas.

I'm always amazed at how our newbuilding team keeps coming up with new ways to make these ships ever more impressive.

Symphony will start operating in the Mediterranean and will move over to the Caribbean next fall.

The excitement and, therefore, thankfully, the bookings, have been heartwarming.

And by the way, speaking of excitement, next fall, Celebrity Edge will start her inaugural season.

It's been extremely gratifying to see the extraordinary level of interest this ship has generated.

It's been a long time since any new vessel generated so much anticipation, and I can tell you right here that all that attention is warranted.

Actually, 2018 will be the first year where 3 of our brands welcome a new ship, since Azamara Club Cruises is also introducing their Azamara Pursuit in the summer.

This year, we're also kicking off a transformational fleet upgrading program.

For Royal Caribbean International, it's called Royal Amplified; and for Celebrity Cruises, it's called Celebrity Revolution.

These programs will extend our lead in terms of brand preference with both active cruisers and the new generation of cruisers.

We are redefining the experiences that drive choice, guest satisfaction and, ultimately, revenue.

With respect to our Caribbean itineraries, last month we also added more capacity in Cuba, with now 2 ships sailing to the island, Majesty of the Seas and Empress of the Seas.

We also added 2 new destinations.

Now looking at other accomplishments important to our business, I wanted to share with you that Royal Caribbean has again been recognized as one of the world's most ethical companies by the Ethisphere Institute.

This is an organization that measures corporate ethical standards and promotes best practices in corporate ethics.

Ethical leadership is an important part of our worldview, and we greatly value this honor.

In summary, 2017 was a phenomenal year.

Double-Double is done, and we have now all our focus on delivering a successful 2018 and thence our 20/20 Vision.

Now with that, I get to turn it back to Jason.

Jason?

Thank you, Richard.

I will begin by taking you through our results for the fourth quarter of 2017.

These results are summarized on Slide 2. For the quarter, we generated adjusted net income of $1.34 per share, beating the midpoint of our guidance by $0.17 per share.

Our yields increased 3.9% for the quarter, which is 165 basis points higher than the midpoint of our previous guidance.

Better-than-expected close-in demand for our core products and continued strength in onboard trends drove the outperformance.

On the cost side, net cruise costs, excluding fuel, were in line with our guidance, up 8.7% for the quarter.

Better fuel consumption, fuel rate and a weaker dollar benefited the quarter by $0.04.

In our continued efforts to return capital to our shareholders, we repurchased $100 million in shares in the quarter, which was on top of the $128 million in dividends that we declare for the quarter.

I will now discuss our full year results, which we have summarized on Slide 3. To summarize the revenue performance for the year, strong demand for our North American and European products, combined with increased spend on onboard experiences, helped offset challenges from the redeployment of our Korea sailings and the unprecedented impact from the 2017 hurricane season.

As a result, we generated more than $1.6 billion in net income, resulting in earnings per share of $7.53, which exceeded the midpoint of our latest guidance by $0.16 and our January guidance by $0.53 per share.

This result marks the fifth consecutive year of double-digit growth in earnings per share.

Net revenue yields increased by 6.4%, exceeding the midpoint of our November guidance by 40 basis points and our January guidance by 140 basis points.

On the cost side, net cruise costs, excluding fuel, were up 2%, which was in line with our previous guidance.

Before getting into the current booking environment, I will touch on Double-Double.

In July of 2014, we set our course to double earnings per share and reach double-digit return on invested capital by the end of 2017.

To achieve this, we said that our formula for success would include modestly growing yields, effectively managing our costs and moderately growing our business.

Through the unwavering execution of this formula, we have successfully surpassed our Double-Double targets.

As you can see on Slide 3, our earnings per share for 2017 are $7.53 per share, which is $0.75 better than the Double-Double EPS targets we set in the middle of 2014.

We also delivered an ROIC of 10.5%, which is 50 basis points better than our Double-Double target.

Over the same period, the company successfully returned to investment grade, delivered EBITDA margins of over 40%, increased our dividend by 140% and repurchased $725 million in shares.

A stronger dollar and numerous geopolitical activities provided strong headwinds throughout the Double-Double period.

However, the strength of our brands, the resiliency and diversification of our sourcing and deployment model, our unwavering cost and capital discipline and, most importantly, our world-class workforce successfully led us through these headwinds to over-deliver on our targets.

As we pivot towards our 3-year financial targets under our 20/20 Vision, we will continue to employ our formula for success in combination with enhancing the guest experience and employee engagement and remaining steadfast in our commitment to the environment.

These factors will lead us to achieve double-digit earnings while improving on ROIC.

Now I will update you on what we are seeing in the demand environment.

Booking volumes exceeded prior year levels for the past 3 months, and we once again turned the year in a record book position.

The critical Wave period is upon us and is off to a very good start, with booking trends above same time last year.

Last year's Wave season was incredibly strong, so we are encouraged that bookings are trending even higher this year.

As a result, we are booked ahead of last year in both load factor and rate.

The strength in demand we've been seeing for the past couple of months has been particularly evident in North America, with bookings up nicely for sailings on both sides of the Atlantic.

As we discussed in the last earnings call, Caribbean bookings were relatively soft for the 6 weeks following the hurricanes.

Trends normalized in November and have been in line with our expectations since then.

First quarter Caribbean sailings were in a very strong book position before the storms, recovered relatively quickly afterwards and are currently booked ahead.

Our Asia-Pacific itineraries have also been trending well.

About 17% of our deployment is in this region, split between Australia, China and Southeast Asia itineraries.

While these products are important for our success for the full year, they are particularly influential in the first quarter where they account for 27% of our capacity and are collectively booked well ahead of last year in both rate and volume.

I'll finish with a few comments on booking trends for the upcoming European season.

Demand for both Mediterranean and Northern Europe sailings has consistently surpassed our expectations, with all key source markets booked nicely ahead of last year in both rate and volume.

As you would expect, Symphony of the Seas is garnering significant premiums, but APDs are also up nicely for the rest of the fleet.

In regards to 2018 capacity, each of our brands will welcome a new ship into their fleet this year.

Royal Caribbean International will welcome Symphony of the Seas in April, Azamara Club Cruises will introduce Azamara Pursuit in August, and Celebrity Cruises will introduce Celebrity Edge in Fort Lauderdale in November.

These additions will result in a full year capacity increase of 3.9%.

The introduction of this new hardware as well as our ongoing efforts to optimize itinerary mix has resulted in some changes to our deployment in 2018.

Caribbean itineraries will account for just over half of our full year capacity and will include more calls to Cuba than in 2017, an expanded program in the Northeast, an inaugural winter season for both Symphony of the Seas and Celebrity Edge beginning in Q4.

We will also welcome Mariner of the Seas back to South Florida market midway through the year after she repositions from Singapore and undergoes a significant modernization during a 6-week drydock.

With Mariner transitioning back to North America to make way for Spectrum of the Seas' arrival in China in 2019, our Asia-Pacific capacity is decreasing year-over-year and will account for 17% of our total inventory.

And finally, we are building on a very successful 2017 European season with 17% of our capacity in this region in 2018.

Symphony of the Seas will spend her inaugural summer season in Europe, replacing Freedom of the Seas in Barcelona; and Azamara Pursuit will debut in Europe towards the end of the summer.

Taking all of this into account, if you turn to Slide 4, you will see our guidance for 2018.

We expect net revenue yield growth of 1.5% to 3.5% for the full year, which makes 2018 our ninth consecutive year of yield growth.

The yield improvement is coming off of an extraordinarily strong 6.4% increase in 2017.

Strong demand for our core products, new hardware and continued growth in experience-driven onboard revenue areas are expected to drive the yield improvement.

On our November earnings call, I mentioned that factors such as drydock timing, an earlier Easter and tougher comparables during the summer would likely result in more yield growth in the first and fourth quarters than in the second and third quarters.

This is still our expectation.

Net cruise costs, excluding fuel, are expected to be up 1.5% to 2% for the full year.

The main drivers behind the increase in this metric are investments in the guest experience and revenue-generating activities, additional drydock days related to our upgrade programs and the lapping of some benefits from hardware changes.

We included $675 million of fuel expense for the year, and we are 50% hedged.

Based on current fuel prices, currency exchange and interest rates, we expect another record-breaking year with earnings per share between $8.55 per share and $8.75 per share and, therefore, another year of double-digit EPS growth.

Now I'd like to walk you through our first quarter guidance on Slide 5. Net revenue yields are expected to be up in the range of 3% to 3.5% for the first quarter.

First quarter yields benefit from additional drydock days, the earlier timing of Easter and the year-over-year benefit from hardware changes.

Net cruise costs, excluding fuel, are expected to be up approximately 10% for the quarter.

Similar to last year, the cadence of expenses for 2018 are not linear, with the first quarter weighing heavily on the overall increase in the cost metric.

The increase in the quarter is mainly driven by the timing and scope of drydocks related to our ship upgrades, together with the lapping of the benefits from hardware changes.

Taking all of this into account, we expect adjusted earnings per share to be approximately $0.95 per share.

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 of Stifel.

So first question is around the yield guidance for the year.

And you guys have said in kind of a so-called normal year, you think yield growth should be about 2% to 4%, meaning a midpoint of 3%.

Obviously, your 2018 midpoint is slightly below that at 2.5%.

So I guess the question is, is that 2% to 4% range still in play long term?

And I guess the second question would be, if you didn't have such a strong fourth quarter, which made the year-over-year comparison that much tougher, would your midpoint have been closer to the 3% range?

And I hope that all makes sense.

Thanks, Steve.

So first, just to kind of address the 2% to 4%, I think that's -- has been fairly -- it fairly represents how our yields have grown over the past 4 years.

And so it's tough to say if that's how we will see it going forward, but we do expect our yields to grow moderately.

Your math is exactly right.

Obviously, Q4, the acceleration in close-in demand and the better performance in onboard increased our yield performance for the full year by about 50 basis points.

And of course, that increased the base And so mathematically, our yields for 2018, if not for that acceleration, would have been at the midpoint of 3%.

Okay.

Got you.

And then second question, still going back to the yield guidance.

Can you give us some thought about maybe how that breaks down in terms of how you're thinking kind of ticket versus onboard?

The onboard continues to grow really nicely, and I guess what we're just kind of looking for is maybe some color on how you view that this year.

On the onboard side, obviously, some of that onboard revenue includes some of the packaging that goes on when we go to market and might include something like beverage or shore excursion or something like that.

I would say that we expect onboard yields to trend slightly higher than ticket this year, which has been a similar performance to the past.

But some of that, just to stress again, is just the geography of the accounting of -- as we're selling that package, some of that revenue gets recorded in onboard versus ticket.

Okay.

Got you.

Then one quick final question, I guess, around the Caribbean.

There clearly are some concerns out there that the Caribbean is starting to see some softness pick up in kind of 2Q and 3Q.

And given your prepared remarks, we didn't -- I didn't really hear too much of that.

So can you maybe just address some of those concerns that are out there?

Steve, it's Michael.

Yes, I mean, I think we're feeling pretty good about the Caribbean.

As Jason had commented earlier, after the hurricanes in September, we saw that softness for about 4 to 6 or 7 weeks, but that recovered and picked up.

And we're in a good book position for Q1.

And overall, we're feeling pretty good about the Caribbean for '18.

We're fortunate because we've got Symphony of the Seas coming into the Caribbean towards the end of the year.

We've also got Celebrity Edge.

And we're introducing Mariner of the Seas after an extensive modernization and revitalization.

And we're putting that product into the short market.

So that's quite a lot of volume that's coming into that market, but we're actually very excited about what that product's going to do.

It is booking very well and it's still outside of its typical booking window because it's a short product.

So overall, we're feeling okay about the Caribbean.

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

Richard, now your hurdle is even higher on the Vision 20/20 given the good job on Double-Double.

Yes.

Thank you.

I'm not sure I should thank you for that, but I think we're well aware of it.

And also, I just wanted to commend management as a whole on the recognition of your employees through the Thank You, Thank You.

That was impressive.

So Michael...

And well deserved.

Yes.

Michael, maybe we could just stay on the Caribbean for just one moment, understanding that Royal Caribbean has introductions of ships and revitalizations and all that kind of stuff that might set you apart.

Just trying to maybe triangulate what companies see versus what we hear from the trade.

And I think there has just been this consistent commentary that recently there's been a bit of a lull in Caribbean bookings, as people might be deferring their decisions to go to the Caribbean.

So despite the fact that you guys are potentially well positioned, have you been seeing that on the margin more recently?

No.

I mean, we -- obviously, we're coming off of a very strong 2017, and when you think about Wave in '17, it was really a strong Wave.

And our Wave for '18 has been stronger than '17.

So we're feeling pretty good about what we're seeing in terms of both the rate and the volumes of bookings that are coming in.

I think when you look at capacity overall, certainly for Royal, the capacity's skewed more towards Q3 and Q4 because that's where we've got Mariner coming into the shorts market and Symphony coming online into the Caribbean and, of course, Celebrity Edge.

But all 3 of those products are in a good place, and as I said before, we're quite excited about what those products are going to do for us.

So we're not seeing that, your comments.

We're feeling pretty good about Caribbean.

Just to add one point, too, Felicia, and just more kind of broadly on our commentary around our book position.

Being in a strong book position also means that you have less inventory to sell.

And so sometimes, when you're doing some of those channel checks, the volumes may not be what we're looking to fill because we're in a stronger book position.

So the volume can sometimes be lower.

I think, I think -- sorry.

Well, I was just going to say that's a segue to my next question, but I'd love to hear what you're about to say.

Sorry.

Well, I was just going to say that there are occasions sometimes when a new product enters into the market, sometimes from competitors, and they may have some challenges initially and you may see some fairly aggressive pricing going into the market.

I mean, that can be disruptive, but it's very localized.

So that -- maybe that's what you're hearing or seeing.

Do you want to be more specific on that?

No.

And I would add just one other point, Felicia.

Just also always be mindful that when we're sourcing guests for our products, that sourcing is happening globally.

And so, again, some of the trading activity might be taking place more in a different market other than the local markets that you guys might be checking.

Yes, that's a great point.

And then maybe can you guys just help us understand how booked you are for the second and third quarter in the Caribbean?

I would just comment that we are -- we're well booked for the year.

Okay.

And then, Jason, can we just talk about Project Excalibur for a moment?

If I understand correctly, that's going to be rolled out to 50% of your fleet this year.

Is that fact giving you some of the optimism for onboards this year that you highlighted in the press release this morning?

No.

Felicia, it's Richard again.

No, I don't think we think that it will have that immediate impact.

We think it's simply part of the overall growth of the business.

Obviously, it also tends to be a little bit back-ended as the rollout works well and gets accelerated.

So I think, actually, we're thinking that is more something that will help us longer term rather than have an immediate impact this year.

Okay.

Helpful.

And then just housekeeping, just drydocks accelerated this year.

'19, how should we think about drydocks?

Well, I think on the drydock side, it's more of a normal year.

I mean, very similar to what you would have seen in '15 and '16.

And so I would expect going forward, for us to have a similar drydock schedule to '18, mainly driven by the upgrade programs that we're planning.

Felicia, if I can actually come back, I just want to say, I didn't want to suggest that I wasn't incredibly excited about what Excalibur is going to do.

And I really think it is going to transform.

You've seen sort of mock-ups of it.

I think it's going to be fantastic.

But I think it will take a little while for it to roll out and for the public to see just how exciting it is.

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

So I just want to circle back to annual guidance, if I could.

And I'd love to know if my math is wrong here, but in 2017, if you were to remove the benefit of Pullmantur, I believe your guidance for next year at the midpoint is implying a pretty steep deceleration at the midpoint, and that's despite a very strong global macro backdrop, potential increasing demand for the U.S., and after normalizing for hardware, potentially even growth lower than inflation.

So I'm wondering, one, if I'm missing something there.

And two, were there any sort of extraordinary demand drivers in 2017 -- you mentioned tough comps, but it is a growing business -- that may not be expected to repeat in 2018?

Yes.

So first, the impact from Pullmantur was 125 to 150 basis points in our '17 yields.

So yes, that 2.5% is lower than your 4.5%.

But I don't think we look at this at all as a deceleration.

I think we look at this as a compounding off of a very strong 2017.

And I think the thing to keep in mind on the yield side is that you're averaging up and averaging down as that business is coming on.

And I think as we've pointed out through the course of all of last year, you pretty much had everything on the ledger outside of Korea and the hurricanes working your way.

And that is not a typical year.

It's typically like we've talked about in the past, like a stock portfolio of products and markets that do better as expected and sometimes not as expected within a given year.

And I think, again, the acceleration that we saw in 2017, if not for that acceleration in the fourth quarter, yields would have been closer to the midpoint of 3%.

David, it's Michael.

I'd just like to add that contrary to deceleration on demand drivers, I think what we've seen is an acceleration of our new-to-cruise coming to our brands, and we felt pretty good about the kind of results that we're generating with our new-to-cruise strategy that we started to execute a couple of years ago.

So we're seeing a very good improvement in that segment.

That's helpful.

And as a follow-up, I wanted to know, sounds like you might be pulling the curve back a little bit this year, possibly.

But I was also wondering, part of the Double-Double Program was installing a price integrity program on short-term discounting.

Now the Double-Double has been achieved, are you willing to revisit that policy at all going forward?

Absolutely not.

And I'm glad you asked because the -- remember, as we kept emphasizing, the Double-Double wasn't to be a finite period of time.

It was to help galvanize everybody in the company to work in a certain direction.

And the price integrity program was a part of that, and we think the benefit keeps growing over time.

So the price integrity program has been a big success for us.

We've been fairly religious about executing against it, and we continue to expect to do that.

Just to add one thing to this on the price integrity.

We introduced several months ago a nonrefundable deposit pricing program for the Royal brand, and that has proven to be also very successful for us.

So we have a significant percentage of our '18 bookings are in this nonrefundable category, which means that we will see significantly less churn in our bookings as we move through the calendar year for '18 and into '19.

Your next question comes from the line of Greg Badishkanian of Citi.

I think -- did you mention that during Wave, price was also up during that same period?

I know bookings you said were up.

That's correct.

We were up on both a rate and volume basis.

All right.

Good.

And for 2019, I don't know if it's too early to ask this, but how that looks -- how much you're typically booked at this point?

And particularly, as it relates to Richard's comment that he doesn't expect the booking curve to be as lengthened as it was coming into this year, a nice surprise for you the last 2 years, but are you really well booked for 2019?

Yes.

So how you started off was correct, that it is too early to talk about 2019.

But I think what I would say is, obviously, with assets like Symphony of the Seas coming in -- or a full year of that ship, Edge coming in, there's a lot of excitement and demand for those assets, which have a strong part of -- or are a strong part of our 2019 picture.

And Greg, just to add to that, to Jason's points, we also opened deployment for Royal Caribbean International for 2019 4 months earlier than we typically do.

So they are small -- relatively small numbers, but our book position for 2019 versus 2018 same time last year is significantly further ahead.

But they're on very small base numbers because we opened so much earlier for '19.

And Greg, I'd just like to follow up on the question on the booking curve, because one of the things I like to emphasize is we really determine what the booking curve is.

It's really our revenue managers who decide whether they want to take more bookings now or save their powder for later on.

And they are making decision.

Michael, Lisa, Larry have to choose exactly how they want to ramp up.

And so it probably -- I don't want to give the impression that bookings are so strong that the booking curve got longer out.

It's really looking at all the factors.

Our people felt that it should be a longer-term booking curve.

And I -- my guess is that next year, even if it's a stronger year, they will want a slightly shorter booking curve.

But that's a decision we make rather than something that is determined based simply on there's enough demand and so we book up ahead.

So if, at the end of this year, we actually end up saying we want or we have fewer bookings for the following year but at higher prices, that wouldn't be necessarily a negative sign.

Your next question comes from the line of Patrick Scholes of SunTrust.

My question concerns your various regions.

If you think about in relation to what you gave for your net yield guidance, where would you place your various geographic regions?

What would be at the higher end of the range?

What would be at the lower end of the range?

Yes.

So we don't obviously provide yield guidance by market, but I think some of the things that you would have heard in my remarks is strong demand from North America on both sides of the Atlantic, so meaning effectively Europe, and our North American products seem to have very strong yield trends.

But overall, we are expecting yield improvement in our core products.

Okay.

Fair enough.

And then as we think about 2018 as the year progresses, how should we should think about the net yield growth cadence by quarter?

Yes.

Also, as I commented on, the expectation is that Q1 and Q4 yields will be higher than Q2 and Q3 yields.

Some of that is just comparables.

Our yield growth in the second quarter of last year was about 11%.

That quarter had Easter in it.

This year, Q1 has Easter in it, so there are some of those structural elements of it.

But that's the expectation, is that it's effectively a smiley face, high in Q1 and Q4 and lower than Q1 and Q4 for Q2 and Q3.

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

Can you give us the first quarter yield guidance, excluding the benefits of the drydocks?

We don't give that specific breakdown, Jared, in terms of what -- there's lots of things that are driving the differential within the quarter.

But certainly, one of the drivers that we had called out was that coming from the drydock, which has lower APCDs and a lower yielding period.

Okay.

So let me try asking it for the full year then.

Of the 2.5% yield guide, can you just tell us how much of that is coming from same-ship yield growth and then maybe how much is new tonnage related or anything else I'm missing?

Yes.

It's about half and half.

So half is coming from the new hardware -- or the hardware changes for the year, and the other half is coming from like-for-like business improvement.

Got it.

Okay.

And then do you expect your yields to be up in every single quarter this year?

And would you expect yields to be up in every single geography as well?

I'm not going to break it down by geography, but we do expect our yields to be up in each quarter this year.

Great.

And then just one quick last one for me.

Is the higher CapEx guidance, is that just a function of the weaker dollar?

And I know this is a record CapEx year, do you expect to be free cash flow positive this year just looking at op cash and CapEx?

And would you still buy back stock regardless?

So the main driver on the CapEx increase is the weaker dollar.

And I think as it relates to share repurchase or just returning capital to shareholders, the more of the guide for us is maintaining our net debt to EBITDA, staying kind of within the 3% to 3.5% zone.

And so points that are lower than that will be opportunity to lever above and beyond any additional free cash flow that we generate.

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

I have one question, which I never thought I would be the one to ask.

Ships ex China, you've reduced capacity there, but there seems to be continued reduction in price, including when we compare it to the post South Korean ban or advisory.

Is that because capacity continues to be absorbed?

Is there anything structural that we can look forward to, including more direct business that could change that trend?

Assia, it's Michael.

Capacity is down for the industry in China overall, which is the -- I think the first year in a number of years that capacity is down.

Capacity for Royal is down partly because we moved Mariner slightly earlier than we'd originally planned to put it into the shorts market.

But we're not seeing pricing down for our product in China.

In fact, our current book position contracted cash down is significantly stronger than the previous year.

So not quite sure what comparables you're looking at in terms of pricing.

It could be maybe the -- I don't know, but it could be contracted pricing before the Korean situation, which certainly was higher before the South Korea situation hit.

And then, of course, there was a lot of renegotiations last year as a result of South Korea that dropped the pricing down.

So -- but overall, for Royal in '18, we're in a good book position and we're feeling pretty good about where the market is going.

Of course, it's China, so every year, China is a gift that gives so we are always aware of that.

But it's currently looking quite good in China.

And again, that is not the market that I find to be the most transparent of all the ones I look at.

Exactly.

And you're giving me a very good segue, and maybe I can ask Jason.

So Mariner is going to go through what I seem to think to be its 36-day drydock before it enters the Caribbean.

And that is going to affect mostly Q2.

We also have Pursuit being in drydock.

Should we expect, similarly to Q1, to have a decline in APCDs and the higher cost level because of those 2 pretty significant drydocks?

Yes.

The Mariner is one of other drydocks that are going on.

But the fewer APCDs relative to the absolute cost is a key driver for the cost increase in the first quarter as well as Richard comments around timing of sales and marketing activities and those type of things.

And again, to some extent, having Mariner out and in drydock, should that help yields?

If you're looking at a same-store basis Q2 '18 versus Q2 '17, which was a fantastic quarter, do you think that Mariner being out of service in Q2 is helping yields somewhat this year, because it is an older vessel?

Yes.

It helps a little, but it's not going to be the main driver of yield growth, for sure.

As I said, most of the yield growth is coming from hardware and like-for-like improvement.

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

I know you've addressed a lot of questions about the guidance and how things are shaping up.

But maybe I'll just ask sort of one more clarification, not because we're picking up on weakness in the Caribbean, because I don't think that's the case, but just maybe to address the concern that's out there.

Can you comment on whether bookings for the Caribbean during Wave -- you said overall bookings have been up in price and volume, and is that the case for the Caribbean specifically?

Or is the situation just that you have so much less inventory that maybe it can't be up in volume?

But maybe that would be helpful for people to hear.

Yes.

We -- as I said, we're not looking to kind of give commentary specifically product by product, but we are -- as I said in my commentary, we are quite encouraged in terms of the booking volumes and pricing across our core products.

And I think to your latter point, Robin, that's exactly right, is our need is less overall.

And so if you are hearing some of that noise, some of that is volume need that is less and also us potentially sourcing from other markets.

But I just want to add, I mean, I think as Michael commented, I mean, we are feeling positive about the Caribbean.

While we appreciate that there might be some channel check concerns that you -- that's out there, our trading overall is feeling quite positive.

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

So I get the feeling the answer to this is it's either really difficult or really early.

But is there any evidence whatsoever that the recent tax cuts are going to stimulate demand from your customers as you talk to various travel agents?

Is there anything that's showing up there that would be helpful?

Nothing really, but I mean, certainly, we feel and sense that consumer confidence is in a really good place.

And we feel that really globally across many markets that there's just a confidence that I think is coming through in people's vacation decisions and how they're buying up product.

So it's -- but nothing directly related to tax cuts.

Got it.

And then secondly here, obviously the dollar has weakened pretty meaningfully over the course -- well, for a while but certainly over the course of the last month.

Do you think that could potentially be an onboard benefit for you?

Jog our memories here; your European customers are paying, for the most part, in U.S. dollars, and that should, in theory, help.

I know for a number of years, we were worried about the dollar going in the other direction.

Help us understand the potential impact of the dollar weakening here.

It's Michael.

I think that's right.

It's a great point and it's correct.

I think we -- as the dollar is strong, then we see a little bit more softness in the international onboard spend, and as the dollar weakens, we see a little bit more strength, but it has no material impact to the American customers.

So that's right, we will see an uplift because of that.

Got it.

And then I guess lastly for me, Richard, you had some comments in the preamble about net cruise costs and how the timing of costs don't necessarily sync up with expenses.

Maybe dig in a little bit more on that, help me understand, the 1.5% to 2% for 2018 on top of about 2% growth in '17.

Is the point that, that is out of line with what the normal is?

Or is the point that that's the new normal?

I guess as we look forward, should we expect, after some really fantastic years where costs were down in some instances, is this more sort of the normal in terms of what we would expect?

And does -- you touched on this new fleet upgrade program, does that play any role in '18 longer term in terms of the net cruise costs?

Yes.

No, that wasn't what I intended to convey.

I think rather than say that it was -- that costs were likely to be higher, it was likely -- the costs were likely to be bumpier.

I think that's a theme that we've had before.

People look at the fourth quarter and the first quarter, and I think my comments were specifically focusing on the quarter-to-quarter quite type numbers.

And costs are bumpier.

Whether we do a drydock or we do a special bonus for our employees or whatever it is, it will distort, particularly when you look at individual quarters.

And I think, overall, we've continued -- I think we've got a very good culture at this stage of people being careful about those costs, but not so much being obsessed if saving money is going to cost us in revenue.

So no, I wasn't trying to communicate anything other than it was bumpier, and I think I was mostly focusing on a relatively high number for the quarter, both in the fourth quarter and in the first quarter.

Yes.

And James, just to add to it, I think just to keep in mind that it's now been several quarters where we've had capacity declines.

And really now, as we start getting into the back half of this year, we're kind of, again, in that posture where we can take advantage of economies of scale as capacity improves, which has been kind of one of our levers on cost management.

Well, let me ask it this way, if I may.

You had a couple of years there where net cruise costs were down 60 basis points.

Last year, it was up 200 basis points.

I'm struggling with sort of what the normal cost increase is that we should think about.

Is it closer to that minus 60 or closer to the plus 200?

Yes.

So I'm not going to guide for '19 and '20.

What I would say is that I think we expect to behave and we've installed a culture to behave similar to how we've been managing costs over the past several years.

So we don't think '17 is a reflection or '18 is a reflection.

We look at the period as continuing to effectively managing our costs.

And a lot of that, again, comes from taking advantage of innovation and taking advantage of scale as we manage costs in the forward-looking period.

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

In your comments, you referenced the acceleration of new-to-cruise strategy and the increase in your technology spend impacting 2019.

My question pertains to the lift in supply growth in 2019.

And to what degree does this incremental tech spend focus on new-to-cruise?

How does that help you get ahead of this incremental capacity coming in 2019?

And what else are you planning to get ahead of it?

Harry, it's Michael.

Yes, I mean, we've been shifting marketing -- investment, marketing, organization and expertise literally gradually and increasingly more aggressively over the past few years towards a different channel in terms of moving more digital than traditional.

And certainly, we've seen the results of that in terms of the growth of our new-to-cruise customers coming to the brand.

So we are continuing on that journey.

So in terms of marketing investment, more and more of our marketing dollars are going towards that channel rather than traditional.

And then, of course, our focus on social media and our whole integration in terms of our organization and our product into this kind of digital universe is going to be massively accelerated by Excalibur, which really is going to take us to -- into the future.

And so we're quite excited about what Excalibur will deliver for our customers and for our business over the coming years.

So that's really part of the overall strategy that we have in place.

In terms of '19 overall with regards to capacity, obviously we've been -- we're planning for the future, and we've been looking at '19 and '20 for some time.

So we have the benefit of a very large and maturing global infrastructure.

So that's one of the benefits that we believe we have over our competition in terms of our global footprint.

And so a lot of that capacity will be spread across our brands, across our markets and most importantly, across segments, which is where we come back to our focus on new-to-cruise.

Do you feel like you need to lift your marketing budget ahead of the capacity increase in 2019?

What's interesting about the marketing is that digital is a lot more accurate than -- we believe, than traditional.

And so we have a significant marketing budget and investment that's pretty much related to our capacity and increasing capacity.

But what we are seeing is an improvement in the efficiency of that marketing investment over time because of digital.

Because it's a lot easier to track and understand the results that you're generating through digital versus traditional.

So I think it's -- yes, we're investing more in our marketing, and yes, we're investing more as we look into the future, but we're also seeing an improvement in the efficiency of that investment.

And then a quick one for Jason.

The $80 million in the Thank You, Thank You, was any of that realized or expensed in the fourth quarter?

If not, how do you see it being expensed by -- progressively throughout 2018?

Yes.

So some of it was related to '17, and then it's a -- most of it is a 3-year grant that vests over the 3 years.

So it really spreads itself through '18, '19 and '20.

But there are costs related in Q4 and the forward-looking periods.

And in the fourth quarter, can you give us a sense of how large those costs were?

No.

No.

Your next question comes from Jaime Katz of Morningstar.

I'm curious how you guys are thinking about share repurchases versus dividends given the run-up in share price over the last year and whether you feel there is a more tactical road to choose on reallocating capital in the year ahead.

Yes.

I think our objective very much remains the same.

We're going to continue to be opportunistic in repurchasing shares.

We have over a couple hundred million dollars left on our share repurchase program.

But our point of view is to do it opportunistically over the period.

But we do continue to believe that there should be a mix between share repurchase and dividends.

Okay.

And then can you just remind me, I think in the past, you've talked a bit about asset disposals.

And the capacity growth that you guys have given does not include asset disposals.

Do you have an idea of maybe what that might be if you continue to pare back a ship a year?

I think you offered those numbers at the November Investor Day.

Yes.

That's exactly right.

We have, on average, sold about a ship a year.

And obviously, depending on the size of the ship, that could make a 50 to 100 basis point impact on the capacity growth within a period.

Okay.

And then lastly, is there any commentary that you guys have on how you guys are reallocating the square footage on some of the revitalization programs that you're doing?

Are you taking out maybe some of the retail and putting in some other more activity-based opportunities to drive that onboard spend because it seems like that's where the consumers are going?

I would just say we are constantly looking at how to improve the guest experience as well as how to improve the performance of the ships on a per square foot basis.

So sometimes that comes from us adding cabins.

Sometimes that leads to more onboard revenue, and many times, that's just creating more fun activities for people to do, whether that's in culinary or other elements.

So it's not a perfect formula, except that we're just constantly revisiting it to see how we can enhance the experience and then, of course, leads typically to enhanced yields.

Your final question will come from the line of Tim Conder of Wells Fargo Securities.

Just a couple here to wrap up -- whoever wants to take this.

First, a couple of clarifications.

Jason, the double-digit that you talked through 2020, was that EPS or earnings?

Just to clarify that.

And then on the new-to-cruise here, Michael, was that new -- truly new-to-cruise?

Or is that first-timers on RCL-related brands?

Yes.

So on the first one, Tim, the double-digit is earnings.

We're obviously already at a 10.5% ROIC, so our goal is to continue to improve that ROIC metric and then for our earnings per share in 2020 to be double digits.

It's new-to-cruise as in new-to-cruise, not new to brand.

Okay.

Okay.

And then on the capacity, what I wanted to ask here is, given the admission requirements tightened further in 2020, do you see the potential for second-tier players to have a greater desire for ships that yourselves, Carnival, Norwegian, may sell?

So would they have a longer life of that ship to make those admission investments?

So therefore, could the secondary market get hotter and we see a little bit faster retirements over the next couple of years?

And then related to that, how do you see the Eastern Med potentially rebuilding over the next couple of years, the industry going back there?

Yes.

On the used ship market, I mean, certainly, it's possible that us having ships that can fulfill many of the eco regulations can make those assets more valuable.

I guess we will see how that comes to be over time.

So it's possible -- at this point, I wouldn't say that that's a trend that's out there.

Tim, on the Eastern Med, we -- I think what we're seeing is kind of a stabilization.

And there's certainly a -- it's a relatively small percentage of our total capacity, although in '18, we have increased that number but from a small base.

And we are seeing a lot of the Northern European and European tour operators returning to some of those Eastern Med destinations.

So with the stability, if it continues then, I think we should see the Eastern Med coming back in the next couple of years.

And just along that, Michael, remind me, hasn't that historically been one of the higher-yielding regions, more to Alaska and Northern Europe?

It's done very well for us in the past, yes.

Okay.

Thank you for your assistance, Lorie, with the call today, and we thank you all for your participation and interest in the company.

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

Thank you.

Thank you.

Thank you.

That does conclude today's Royal Caribbean Cruise Lines Fourth Quarter 2017 Earnings Conference Call.

You may now disconnect.