皇家加勒比遊輪 (RCL) 2018 Q2 法說會逐字稿

Good morning, my name is Sia, 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 2018 Earnings Call. (Operator Instructions) I would now like to introduce Chief Financial Officer, Mr. Jason Liberty.

Mr. Liberty, the floor is yours.

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; 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 second quarter results, provide an update on the booking environment and then provide an update on our full year and third quarter guidance for 2018. We will then open up the call for your questions.

Richard?

Thank you, Jason, and good morning, everyone. It's been another record-breaking quarter and a record-breaking year, and I'm happy to give some additional color on our business. Simply put, we started the year feeling very optimistic that we could nicely improve over what was an amazingly successful 2017. Since then, we've grown only more positive about our direction and about the prospects for the rest of this year and next. Now while we tend to focus on the year as a whole, it is still interesting to look back on how our internal forecast for the individual quarters have evolved over the last 6 months-or-so. Our current quarterly expectations for 2018 are higher in each of the 4 quarters than they were when we put our initial forecast together last January. I'll tell you that's a nice feeling. Of course, the drivers of that yield strength are always in flux, but the fact that we are seeing overall improvement in each quarter of the year over our original expectations, is a real confidence builder. Looking at the total picture, revenue continues to excel, cost remains firmly under control and our below-the-line items are doing beautifully.

The second quarter benefited from unexpected strength in last-minute bookings. And as usual, some markets performed better and some worse than expected. The second quarter also benefited from some substantial timing differences relating to cost and other items. In fact, roughly half of the quarter's beat was simply due to timing differences, which will reverse in the second half. Again, we manage our business more on an annual basis than a quarterly one, and these types of quarterly swings are irrelevant to our business. This quarter's timing differences on expenses is more than usual, but still within simple operational parameters.

From a business point of view, the story is simply that business is good, and we believe it will continue to be good for reasons we have previously discussed. Having to deal with the headwinds of foreign exchange and fuel rates is extremely frustrating, especially this year when both have moved so strongly against us. As frustrating as it is, we feel very good about the fact that the strength of our business is more than compensating for such powerful negative forces.

Now a year ago, I described the image of a duck seeming to glide calmly through the water while no one sees the fierce peddling activities that goes underneath the surface. I find myself recalling that image once again, since I know how hard our people have worked to deliver the results that we are talking about today. It's particularly gratifying to see how well our brands are performing in their respective marketplaces.

Royal Caribbean International continues to retain its outstanding market position and keeps setting new records for pleasing our guests. The latest example of this is the stellar debut of the Symphony of the Seas in the Mediterranean. Her performance would be spectacular for a first time ship in a new market. For her to perform so amazingly well when she is the fourth of the series, is a testament to the innovations the team has incorporated and the power of the Royal Caribbean International brand. The ship has remarkable new wows, new shows and new activities. But what truly sets her apart is the careful execution and high level of service, which have been pivotal in achieving these record-breaking ratings.

Celebrity Cruises is also on a roll. Her modern luxury platform is resonating very nicely with the cruising public, and has helped propel the brand to record ratings and record prices. Of course, the amazing excitement around Celebrity Edge is not only helping with future bookings on that ship, but is helping on the rest of the Celebrity fleet as well.

And Azamara Club Cruises is enjoying one of the strongest surges in the cruise industry. Her innovative focus on destinations perfectly addresses the growing interest and experiences and is propelling the brand to new heights. And more recently, the Azamara Pursuit is now on her first voyage and doing wonderfully.

TUI Cruises also continues to go from strength to strength. Its unique, high-quality, all-inclusive offering is ideally suited to our German clientele, and TUI Cruises' outstanding implementation gets it top marks from its guests and travel agents. The result is that this cruise line continues to surpass the very tough goals that we and TUI continually set for it.

It's rare for the stars to all align in such an auspicious manner. We often have 1 brand performing particularly well, but today they all are. We often have a strong global cruise market, but today that strength is particularly evident.

As I said before, it is essential with assessing supply and demand dynamics to focus on both sides of the equation, not only looking at half the picture. In this case, we think the very strong picture for demand ought to be very encouraging against the supply side, which is constrained by yard capacity and which is growing at moderate rates, which look to be exceeded by normal demand growth.

One of the factors that continues to drive demand is increasing relevance of cruising as a mainstream vacation choice. In the past, cruising was seen by many as somewhat of a niche market. But today, the industry has increasingly become a mainstream vacation alternative. I attribute a lot of this change to the fact that people are more and more looking for experiences over material goods, and we have been so effective in responding to these changing desires of our consumer base.

Nevertheless, we still have a long way to go before our industry reaches maturity. Penetration rates around the world are still amazingly low. Just to put this in perspective. Last year, about 72 million tourists visited the City of Orlando, and 40 million went to Las Vegas. In the same period, the entire cruise industry carried 26 million tourists around the world. We really do have a ways to go. The result of all this is that demand for cruising, and especially for our brands, continues to grow at an attractive rate. We are determined to continue to do our utmost to be responsive to that growing demand with the best products, features and itineraries.

Looking forward, we have a higher percentage of 2019 booked than we did a year ago for 2018, and they're booked at higher prices. While this sounds very good, and we're very happy about the position, I want to reemphasize that this one metric is far from as important as some people appear to believe. There are 2 reasons for this: First, this metric is often the result of deliberate choices that we make. For example, I recall one year where the market was strong, and we were convinced that it was going to get even better the following year. We deliberately reduced sales of our top category suites so that we would be able to take advantages of higher prices as the market improved. In that case, our booked position looked worse than usual, but it actually reflects optimism on our part. I'm happy to say it's also -- we were right about that.

Another example of possible sources of confusion is structural. For example, next year, we have more of our inventory dedicated to markets that traditionally book later. Obviously, we expect these markets to do well, as well as other markets, but we know that they will simply make their reservations later, and our revenue management systems operate accordingly. This example does reduce our forward-booking stats relevant to last year, but it is definitely not a sign of a problem. Thus, while we're happy that our bookings are higher than prior years, our optimism about 2019 is really based on a combination of many factors. Forecasting revenue yields remains very much an art as well as a science, but it is an art where our track record has been very impressive.

I would now like to give you some further insights on the Silversea's partnership. On the commercial side, the reaction has been extremely strong. Travel agents see how Silverseas can grow and become more efficient, while also making us a more rounded company, and therefore more relevant as a vacation option. As we mentioned when we announced this partnership, we had a gap in our portfolio, and to close it with a brand like Silversea that is at the top of its market segment was an answer to a prayer. We just closed on the deal the day before yesterday and we're eager to work on the integration. Exciting times ahead.

I also want to take this opportunity to update you on Project Excalibur, our digital technology platform. The program is on track and the progress is impressive. We have taken a methodical, agile approach to this implementation, rolling out new upgrades on a monthly basis or even more frequently.

We're finding that this softly-softly approach allows us to move more quickly, but also to correct errors early before they impact a lot of vacations. We continually add features to the app and we remain on our trajectory of having half the fleet connected by the end of this year and most of the rest by the end of next year. The most complete version of the app today is on Symphony of the Seas. And in December, that distinction will be taken over by Celebrity Edge.

One interesting milestone is the introduction of frictionless arrival. We have been rolling this out on a limited basis and expect that it will be operational on a large-scale basis on Symphony of the Seas and on Celebrity Edge later this fall. By the way, we recently trademarked the term frictionless, so don't expect to see that being used by any other cruise line. I would also remind you of our belief that the public-facing aspects of our digital platform are important, but much of our emphasis has been on the behind-the-scenes work, i.e. making life easier and better for our employees and investing in digital data analytic tools, which are essential for our future success.

And lastly, before I turn the call back over to Jason, I wanted to mention the new IMO fuel regulations, which are coming into force in 2020. These regulations require that all ships, cruise or cargo, dramatically reduce the amount of sulfur that they emit into the air. We meet the regulations in 2 ways: by buying fuel that already has the sulfur removed at the refinery; or by removing the sulfur ourselves using advanced emission purification, or AEP systems. Today, about 30% of our fuel has had the sulfur removed before we buy it, and given the success of our AEP systems, we believe that this 30% figure will not change materially even after the 2020 date. In fact, for various technical reasons, many observers believe its new regulations could actually reduce our fuel cost once the regulations come into force. Of course, it's required a massive investment in these AEP systems, but that investment is paying off in both fuel cost and environmental benefits.

I shouldn't leave this topic of fuel without mentioning our energy conservation efforts, because we are enormously proud in the work our teams have done and continue to do to find ways to reduce our energy consumption. We already have the lowest levels in our industry and have partnered with the World Wildlife Fund to improve it even further. While AEP systems and other such measures are good, the best way to reduce our environmental footprint is to use less energy in the first place. We'll continue to work with lower use of energy and lower emissions to generate our remaining energy needs.

And with that, I get to turn the microphone back to Jason. Jason?

Thank you, Richard. I will begin by talking about our results for the second quarter of 2018. These results are summarized on Slide 2. For the quarter, we generated adjusted earnings of $2.27 per share, which is approximately $0.39 higher than the midpoint of our guidance, and 33% higher than same time last year. Our net revenue yields were up 2.8% for the quarter, which is approximately 105 basis points higher than the midpoint of our previous guidance. The beat was driven by stronger-than-anticipated closing demand and better-than-expected onboard revenue spend. Onboard areas, such as beverage, specialty dining and Internet, helped deliver a 5.5% year-over-year increase in onboard revenue. Net cruise costs, excluding fuel, were up 1.1% for the quarter, which is 390 basis points better than the expected, driven mainly by timing. Roughly half of our earnings beat for the quarter was due to the timing differences in costs.

This was an unusually large shift, but as we have often said, we manage our costs on an annual basis rather than a quarterly basis. It just so happens that this quarter had a surfeit of timing changes, but it has little relevance to our view for the full year. So the positive cost variance that occurred in the second quarter will simply reappear as an increase in our costs in the back half of the year.

In addition to better revenue and costs within the quarter, we also experienced the outperformance below the line, which was driven mainly by our joint ventures. A stronger dollar and higher fuel prices negatively impacted the quarter by $0.04 a share.

On the shareholders front, we paid $128 million in dividends during the quarter. And since our last call, we have repurchased $300 million in shares.

So in summary, strong quotes in demand, better onboard spend, better-than-expected results relating to our joint ventures, and the timing of spend drove the $0.39 beat in the quarter.

Now I would like to update you on what we're seeing on the business outlook. The booking environment remains very strong, with demand for each of our core products trending at or above expected levels. We've been particularly impressed with the demand we are seeing for 2019, where we are currently booked at record levels in both rate and volume for the year. 2018 is also very strongly booked, with our load factors in line with last year at record rates. We don't expect to be booked ahead in volume at this point given our increased capacity in the closer and short Caribbean market in the back half of the year. However, load factors for the balance of the year are up nicely, when normalizing for these shifts in deployment.

Now I'll provide you an update on each of our core markets, starting with the Caribbean. Demand for the Caribbean sailings has been strong, with bookings trending ahead of last year's very strong levels. Our Caribbean capacity is up in the back half of the year due mainly to the addition of the reimagined Mariner of the Seas for the short Caribbean market. As Richard mentioned in our last call, our strategy behind modernizing the Mariner of the Seas was to offer the best alternative for a short Caribbean getaway as a response to consumer trends. The younger generations are opting for shorter, more frequent vacations, and the Mariner of the Seas is very well positioned for this segment with onboard activities, dining options and entertainment similar to those on Oasis-class ships. Mariner of the Seas is booked very well and we are particularly excited about 2019. While we generally don't expect to receive many bookings for short Caribbean sailings that are more than 6 months away, Mariner of the Seas load factors in the first half of 2019 are closer to those of 7-night products than they are to shorter products.

On the other side of the Atlantic, European itineraries account for 17% of our total capacity and more than 30% during the summer months. 2018 is turning into another record-breaking season, with strong global demand for European sailings and better pricing than last year from all source markets. Symphony of the Seas has definitely been the star of the show this year, but we also achieved better pricing across the European fleet despite a difficult 2017 comparable.

Regarding our Asia Pacific itineraries, they also account for 17% of our full year 2018 capacity, and we continue to be in a strong booked position for China, Southeast Asia and our winter Australia products. China sailings performed very well in the second quarter, generating strong yield growth and exceeding our overall expectations. In addition, China is booked nicely ahead in both rate and volume for the back half of the year and into 2019. A contributing factor is the exceptional progress our teams have made in expanding the distribution network.

While it's way too early to provide any specific color on next year's performance, I thought I would make a few comments about 2019. As I mentioned earlier, we are in a particularly strong booked position for 2019. We are booked ahead in both rate and volume for each of our core Caribbean, European and Asia Pacific products, and we have no signs of these great demand trends dissipating. Now as Richard mentioned, these metrics are as a result of deliberate choices, and we have to always be mindful when citing them as indicators of performance. While we are talking about 2019, I would also like to highlight that 2019 will be an atypical year, as 2 very innovative and exciting new ventures will start to operate. Our new cruise terminal in Miami and the stunning Perfect Day waterpark and resort on our private island of CocoCay, in the Bahamas. As Richard also mentioned in his remarks, innovation and the creation of new and better destinations to support the company's growth is in our DNA, and these 2 projects are proof of this. As such, these ventures will provide a tailwind for yield and a headwind for our cost in 2019.

Now let's turn to Slide 3 to talk about our updated guidance for the full year 2018. Overall, we are reaffirming our April guidance of $8.70 to $8.90 per share. This updated guidance includes some puts and takes that I would like to highlight. On the puts side, we beat the second quarter by $0.39, approximately half of which relates to the timing of cost that are now planned to be spent in the back half of the year. Also, the strong booking trends, which I previously mentioned, are driving an increase in earnings expectations for the back half of the year. On the take side, the stronger dollar and higher fuel prices have impacted the back half of the year by approximately $0.31 since our April call. Additionally, we have increased our interest expense by approximately $0.06 to account for the purchase price for the Silversea investment.

So in summary, the accelerating strength in our business is helping offset further headwinds from FX in fuel.

As it relates to our key metrics, we expect our net revenue yields to increase in the range of 2.75% to 3.75% for the full year. This is approximately a 50 basis point improvement versus our previous expectations, which is being driven by the outperformance in Q2 and an increase in the revenue outlook for the back half of the year. From a cost perspective, we expect net cruise costs, including fuel, to be up approximately 2.5%, in line with our previous quarterly guidance.

In summary, based on the current business outlook, along with current fuel prices, interest and currency exchange rates, our adjusted earnings per share is expected to be in the range of $8.70 to $8.90, in line with our previous guidance. This represents a 17% year-over-year increase in earnings. We expect fuel expense of $693 million for the year, and we are 50% hedged.

Now we can turn to our guidance for the third quarter, which is on Slide 4. We expect net revenue yields to be up approximately 2% for the third quarter, which is on top of a 5.3% yield increase in the third quarter of 2017. Net cruise costs, excluding fuel, for the third quarter are expected to be down approximately 1%. Based on current fuel prices, interest and currency exchange rates and the outlooks expressed above, our adjusted earnings per share for the quarter are expected to be in the range of $3.90 to $3.95 per share. This guidance includes the negative impact of approximately $0.20 from currency and fuel when compared to rates effective on the last earnings call.

Now before I turn the call back to the operator, I'd like to briefly talk about Silversea, which we closed on earlier this week. Silversea will be reported with a 3-month lag, which means that we will begin consolidating their operations in the fourth quarter of 2018. So for this year, Silversea's August and September results will be presented as part of our fourth quarter results. As I previously commented, our guidance includes $0.06 of financing costs that relates to the purchase price. However, the forecasted results for August and September for Silversea's operations and purchase accounting-related items have not been considered in our guidance. As we noted during the announcement of the Silversea transaction, we do not expect the results to materially impact the corporation's 2018 adjusted earnings per share. For comparative purposes, we plan to adjust onetime related transaction costs and the bulk of the noncash related adjustments as a result of purchase accounting from our adjusted earnings and non-GAAP financial metrics. One visible impact on this year will relate to our yield and cost metrics. Silversea is an ultra-luxury, an expedition brand, that demands higher yields and entails higher cost per berth relative to our other brands. While the bottom line impact in the near term is expected to be immaterial, the consolidation of Silversea will mean higher average yields for the company and higher cost per berth.

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

(Operator Instructions) The first question will come from Steve Wieczynski with Stifel.

I guess, the first question is around your guidance for the back half of the year, and maybe you'll disagree with us here, but it seems like you might be being a little bit conservative around the third quarter yield guide, especially since you just beat the second quarter by 100 basis points at the midpoint, and maybe you're being a little bit more realistic around your fourth quarter implied guide. So I guess the question is, are you being a little cautious here around the Caribbean close-in activity given consumers can be more nervous around weather this fall? Or is there something else we need to be thinking about? But given how much capacity you have in Europe and Alaska in the third quarter, we would've thought that the yield guide for 3Q could have been slightly higher than what it is?

Well, I'll start off, and thank you for the thanks for the second quarter beat. I would say, as it relates to our guidance, whether it's in the quarter or for the fourth quarter or for the balance of the year, this is kind of based off of where we see our booked position, how bookings are coming in. I would not, and I would caution the word conservative, I would just say that we really do try to provide our guidance based off of the best information we have at the time.

Steve, I think -- I'd like to just add. Remember, last year, we had a particularly exuberant third quarter. And when we made our forecast for the quarter, we're ahead actually of the -- the guidance we're giving out now is actually ahead of where we thought we would be at the beginning of the year. So the year's actually progressed very nicely. The second quarter beat was really a surprise to us. And that can happen. You do have quarters where there's a sudden surge in last-minute bookings, and that did happen in this last quarter. And that's lovely. But it's absolutely unpredictable and frankly, it's a little -- it was a surprise to us.

Okay, great. And then second question, I know you bought back $300 million worth of stock since your last call. But can you maybe help us understand how you guys are thinking about using that -- the remaining authorization going forward? And Richard, I'm going to ask you a personal question, but can you help us understand why you unwound your 10b5-1?

I'll start off with a $300 million. As we've said for some time, the way that we look at share repurchasing is opportunistically, and I think you will continue to see us behave in that way, so there's not any type of specific timing. Obviously, we are always conscious about our debt structure or our capital structure and our leverage ratios and kind of making sure that we maintain our discipline as being investment grade credit, but that's kind of more -- that's combined with us just being opportunistic on the share price is how we will continue to proceed on the share repurchase side. And I'll let Richard answer his personal question.

So I don't think -- I don't usually like to comment on these things. But I think it's not a surprise to anybody that I would put in place some sort of regular program to sell as just from a -- on a state point of view. And I put that in place quite a while ago. But when the share price went to levels that, frankly, I couldn't understand, I just couldn't continue to maintain that. Frankly, this has happened in the past. We do see this. The market anticipates things differently than we do. And we've seen the market in the past drop down and do stuff like that. And frankly, a few times that's happened and I've gone in and bought. I can't now. I'm not allowed to, because of the 10b5 -- 10b-something program, but I certainly didn't have to continue to sell, and so I stopped that.

Next question will come from Harry Curtis with Instinet.

Just a follow-up on the first question in the Caribbean the rest of the year. Just overall, do you have a lot left to sell in the third or fourth quarter? I mean, how much variability could there be, for example, if there were storms in the fourth quarter? And I'm assuming that you've built some cushion in for that?

One, Harry, I think, that's exactly right. When you look at, on a quarter, especially at the time of the call, we're certainly north of 95% booked for the third quarter, and it's pretty linear going into the fourth quarter. And so I think, obviously, going into this, our confidence is strong. But again, it's based off of the best information we have at this point in time. And that's why we did take up our yield guidance for the back half of the year by 25 basis points.

Very good. And the second question really looks into supply growth by your major markets next year. When you and I chatted a while back about the Caribbean, for example, you mentioned that the Caribbean supply growth next year is going to be relatively flat to down a little bit, but that Europe was going to be seeing the largest increase. So my question is, particularly in Europe, can you give us some early color on how Europe looks, especially from U.S. customers given that level of capacity growth, are you feeling pretty comfortable that, that will be absorbed?

Yes. So first, as you -- and obviously, you're talking about outward period, especially like 2019, and saying that we're at record levels on a rate and volume basis. Your further out products are certainly in that consideration. And Europe is certainly in that consideration, and the consumer that books further out is really the North American consumer. I would say that if we could probably do 2018 over again, which probably would mean setting our deployment in '16, we would certainly want it to have more capacity in Europe than in other products, because strength in North America and consumers for Europe is exceptionally strong. And we've even seen even further strength year-on-year from the European consumer for European products. So while extra capacity is elevated and Europe relative to the other products, we certainly believe that demand is there to meet that supply. And we'll really exceed -- more exceed that, and that's right, that is in our booked position, very much in the consideration is the North Americans bookings in advance. A lot of time they do that because of airfare, they book in advance for their European vacations for the following year.

The next question will come from Felicia Hendrix with Barclays.

So Jason, you raised the second half net yield guidance by 25 basis points. I'm just wondering, are you seeing -- or was that driven more by the upside you're seeing in the third quarter and the fourth quarter?

Yes, it's actually the balance of both. As Richard said, both quarters are higher than we had anticipated them being. And of course, some of the trends that we're seeing, especially around Europe, is underpinning our confidence in those increases in those quarters. This quarter and next quarter.

Okay. And even though things are better as you just called out here, so I think people are still having kind of conceptual issues with the third quarter in Caribbean given the double-digit increase there. So are you seeing anything that gives you any kind of concern in terms of promotional environment from competitors or is achieving pricing there being even more challenging than you expected?

I mean, it's pretty -- I think it's interesting when you look at the Caribbean. Really, through the course of this year, I know there's been a lot of chatter about it or concern about it, but the Caribbean's really booked as we expected for this year. And I think you have things, obviously, as we add more shorter product, that is something that can weigh on yields. But when you look at the like-for-like outside of what we talked about last time, which is Puerto Rico, it's continued to book in line with our expectations, which we had from earlier this year.

Felicia, it's interesting because you talked about conceptual issues, and we do understand that. So we have to relate back to our own forecast and what our own expectations have been. And we're really just seeing, both for this year, which U.S. -- next year, which I know you're also interested in, we're just looking at really quite strong markets. And we're just not -- our own forecasts just are a little more bullish about how that's doing, and as I say, we're coming in, and you specifically mentioned the third quarter, we're coming in actually a little ahead of where we thought we would be at this time.

And then I just have how some housekeeping, Jason. Just as we think about our modeling for 2019, is there a way you can give us some parameters for what D&A and interest might look like once you -- Silversea is consolidated? And then also, we've just been getting a lot of questions about the other income line in your P&L, it was about $50 million higher than we expected. What was that?

Yes, sure. On the interest and D&A side, the interest side, you can annualize the $0.06, and the $0.06 is based off of the purchase price date, which was July 31. So I think you can annualize it. On the D&A side, it's too early to comment on that because we need to go through the purchase accounting activity to build up the balance sheet for Silversea onto our books, and that is something that will impact on the D&A. So we will come back to everybody, likely in the third quarter call, on some expectations as well as also what yields will look like and cost will look like for the balance of this year and some dialogue about that in the following year. On the other income side, and this really relates to a series of -- or a few gains that relate to our joint ventures and that's really what's driving that year-over-year difference in the other income and expense line.

Is that a onetime thing? Or should we think about that going forward?

I would look at that as mainly a onetime thing in the quarter.

Our next question will come from David Beckel with Bernstein Research.

I was wondering if you can talk a little bit about just consumer sentiment. This is another Caribbean question, so sorry about that. But I think some of the concerns around the consumer were with respect to the perception of the quality of the destinations and then maybe not wanting to be in the Caribbean for fear of another bad hurricane season. Are you seeing a turnaround in terms of consumer sentiment at all about the region and the health of the region? And have you seen any evidence of hesitance to be in the Caribbean during hurricane season?

Yes, David, I think -- and that also comes back to Harry's question about what we would be planning on looking forward. Last year's hurricane season was unusual on several levels, both the amount of storms. But really, particularly the exact places that they went, which were particularly impactful for us. So we had the worst year we've ever had with respect to season -- with respect to hurricanes, and obviously, we're not expecting that to reoccur. But it did have an impact on the consumer sentiment. It also had the impact actually on the forward bookings, because we had a period of time last fall where bookings simply essentially dropped for that one -- for that period, while we're in the midst of the storms and in the midst of the immediate aftermath. And it did begin to recover quite quickly. But then it really did seem to have the kind of impact you're talking about that was more than we anticipated. And so we do think that it has impacted us this year, both -- I think more of the concern would the destinations be less attractive? And also, would there be more storms? I think the -- it took longer to recover, but I think we have now seen, we think, it largely recover. I'm looking forward to lapping that period, which we'll do this fall. But I think you were right. It did take longer. It did have more of an impact, but we think that impact is very much -- not completely gone but very much dissipated as of now.

That's very helpful. And my second question, I just wanted to dig in a little bit on your booking curve commentary from earlier. Given the strength that you see in the market today, which obviously investors -- or maybe, obviously, investors don't agree with, why not sort of pull in the curve a little bit and increase prices at this point?

Well, we are -- and the way that our revenue management practices work, we are constantly measuring our booking activity relative to our curves. So I do think we believe that we are optimally harvesting that demand as it comes in. But it is something that we continue to debate, as Richard has said in his comments, that should we -- especially around certain categories, a push out when we're selling some of this inventory versus bringing in more and more of it onto our books earlier, is something that is constantly debated internally. But I do think that we feel that we are -- it's not perfect, but we're optimally harvesting the demand that's coming in.

The next question will come from Jared with Wolfe Research.

I want to ask about, the fourth quarter yield guidance is implying about 3.5% growth. That seems like a pretty healthy exit rate of growth going into next year as the comps are easing from the hurricane hangover and, as you've called out several times, the demand environment still seems pretty strong. So maybe you can help me just understand, if there's any reason why, as it stands today, that 2019 yield growth can't resemble something similar to 2018, excluding Silversea, obviously? And I know you're not prepared to give any guidance, not necessarily for guidance, but I'm just trying to understand if there's sort of anything that we should be aware of next year as it pertains to maybe some accelerating supply in the back half of the year or any other onetime things that we need to be aware of.

Well, first, I think the 3.4% implied that you're talking about's a little bit higher than I -- at least my math tells me. But I mean, it's somewhat in the ballpark. I think that obviously we're lapping a lot of noise on Q4. We have a little bit more Europe in Q4, and as we talked about China is doing quite well. So I think that's stuff that is underpinning our confidence in the fourth quarter. I think going into the year, there's a lot of great tailwinds, especially as Edge comes in, which comes in the latter part of the fourth quarter. We have more Symphony in the year, and then we have Spectrum and Pursuit coming into the picture. So I think there's a lot of things that are underpinning, just on the hardware standpoint, yield growth. And we're seeing that certainly in terms of the confidence in the first half of the year, where we're obviously have more on the books than we do on the back half of the year on '19.

Got it, that's helpful. And Jason, I guess, just on CapEx, I know you took it up by $2.5 billion. I think $1 billion was for the Silversea purchase, which leaves another $1.5 billion, and I know Silversea has a couple of newbuilds. But it still doesn't really seem like that should bridge the gap, and then obviously FX has weakened, which should help you, I would think. So what else is driving that CapEx increase?

Yes. Sure, sure. Great question. So as you said, there's the $1 billion we investment that we've made in Silversea. There are 2 newbuilds that are on order. And then the balance, which is about around $600 million, really relates to investments and modernization of our fleet, technology-related investments, investments into the destinations, especially things like Perfect Day that we're planning on investing a little more money into. That's really -- and then there's just rounding -- these numbers round, so if you trip over $50 million, you're rounding up.

The next question will be from Jaime Katz with Morningstar.

The commentary on China sounded pretty positive, and you had commented on progress and expanding the distribution network. So I'm curious where you guys are in that process, and what are the key steps ahead that you guys are taking to sort of maintain the momentum you have in the market?

Absolutely. First, we're very fortunate that we have a very strong brand, very strong assets, and we even add more of that strength in assets when we add Spectrum next year. And we have a team that has been there on the ground for a long period of time that's very experienced. And what they've been able to do over the past year or 2 is really diversify the distribution more and more every day, which gives us more ability to manage that inventory, and also sell additional product, like shore excursions that we weren't able to before. And then I think, obviously, we want to continue to evolve that, and we want to continue to evolve the destinations that are in that area. And we've been very successful with getting Chinese consumers to sail for longer periods of time to more marquee ports, for example, like Tokyo. That has been quite helpful and also that team and then that market is also focused on being more fly crews. So all those things kind of combined has put us at a very, I think, enviable position in China for a consumer that really appreciates the brand and appreciates the assets that they're going on. And I think that's -- it has played out well for us so far this year. And as I said, our outlook on '19, again, while still early, in terms of how we're seeing the bookings coming in, has been quite positive.

Okay. And then on Silversea, I guess, what we should be expecting is that, at the end of the third quarter, we'll have better fourth quarter guidance with Silversea embedded in it. So higher yields, higher cost and higher capacity growth than what is currently implied in the press release today?

That's right. That's exactly right. Yes, we will. You got it.

The next question will be from Robin Farley with UBS.

On the Q4 sort of implied guidance, I was going to ask, it looks like the math could be anywhere from sort of a 2% to a 6% increase, but it sounds (inaudible) in the comments that it would be -- just the last quarter is always left so wide by the full year range. And so it sounds like maybe you're taking more kind of a midpoint of that in the 3% to 4% range, just wanted to clarify that. And then also just wanted to clarify, you had mentioned the Silversea interest expense is now in your EPS guidance, but is anything from Silversea in this higher yield guidance? Or is the higher yield guidance entirely from your existing operations?

Okay, yes. So on the Q4 side, I mean, we'll obviously guide when it's time. I was just commenting that the 3.4% was a little bit off my math. I would not in any way point to it being 6% in any way. Now as it relates to Silversea, there is -- the only thing that is in our guidance as it relates to Silversea is the $0.06 in earnings -- impact from interest expense. So that's a negative impact to our earnings that's in our guide. There is nothing in our yield, there is nothing in our cost, there is nothing in our earnings. But as I said in my remarks, we do expect that it's going to improve our yields certainly in the fourth quarter. It will also elevate our yields for the full year as this is a very high-yielding product that will be incorporated into our metrics. So that's how I would -- there's nothing more to read into that. And of course, as we add those things, we will, like we typically do, provide transparency in terms of what those impacts are.

Great. So the increase today in the second half yield is all from Royal Caribbean core stand-alone, pre-Silversea?

100%. There's 0 Silversea contemplated in any of those numbers.

Great, great. And then also just looking at the performance, because your EPS has gone up by more than just the midpoint of the yield guidance raise would suggest, and so you called out some of the things like the JV performance. Is there also some of that, that's yield-driven with the TUI brand, you mentioned there were some gains. But what's happening with the European source demand as well?

So in our yield guidance -- or in our cost guidance, TUI is not consolidated into those numbers, so it's below the line. But what's driving the outperformance on the equity side or the equity pickup side, I mean, TUI is doing significant -- TUI and Pullmantur are doing very well, and of course, those are total European and very nationalistic sourced products, so we're very happy with how they're performing. As I also commented on our broader business, the European consumer is also continuing to show strength for cruise, and they're having to compete with the North American consumer, mainly for that inventory.

And then just a final clarification on that. I know there have been questions about your European capacity next year, but some of what's going to Europe and kind of like new ships for the German market that are so specific in terms of their passenger sourcing that it seems like to even talk about them in the same breath as other Royal Caribbean product in Europe makes things look, I think, different than they are in terms of sourcing. Can you -- I don't know if you have in front of you the difference in your European increase in capacity and then how much of that is driven by the very specific nationalist products versus (inaudible)

I don't have it broken out. We can certainly help do that in terms of nationalistic versus non-nationalistic. But I think what you said was well said. There are lots of cruise lines and markets that really do not impact how Royal Caribbean or Celebrity or Azamara trades on a day-to-day basis. We are obviously very happy with how well TUI cruises is doing, but there is the reality that there is not a passenger on TUI cruises that sails on Royal Caribbean or Celebrity and vice versa. It's a very focused nationalistic product that has really found a great niche for itself. But that is -- I think that's exactly right. There's a lot of the supply growth that's into consideration for the industry that does not really impact us or many of the major players.

And Robin, just to take the corollary of that, while Europe is growing a lot and some of that is, as you say, really not comparable. Within that growth and within when we look at 2019, I think part of the reason that we are feeling so good about '19 is because some of the unusual products that we now have. So Symphony of the Seas, which we will now have for the full year next year, is just a home run. Celebrity Edge is just performing brilliantly, and it comes in at the end of this year. But we get essentially 11 months of a new ship that's going in a very different category than everything else. And Azamara Pursuit, which actually just started working this week, is doing extremely well. So all -- so I think there are 2 factors, even though the total is growing significantly, as you say, part of the growth is noncomparable from a negative side, that is the German or the Pullmantur kind of passenger, but also we have some unique positives that are driving us more than simple normal supply/demand.

The next question will come from James Hardiman with Wedbush Securities.

So most of my questions have been answered. Maybe just a couple of clarifications. On Silversea, I'm assuming we're not ready to talk about the magnitude of the yield mix benefit on next year, but maybe talk a little bit about the geographic mix impact, if that's meaningfully different than your existing fleet? And then on the other income side, obviously, you don't guide to that number, but you've guided to pretty much everything else. So I get to basically a flat other income for the third quarter after a massive increase in 2Q. I guess, I don't know if there was any timing, obviously, there was a big timing shift in cost, I don't know if there was big timing shifts in other income. And I guess, ultimately, did you change the back half guidance for that other income line at all, which is embedded in your full year?

Sure. So one, as it relates to Silversea, yes, we're not -- and we closed on this a few days ago, and obviously, there is Chinese walls that are up during the regulatory process. So we are -- we will be prepared to talk about that more on the next call. They do have a similar mix in terms of where their guests come from and where our guests come from, even though obviously the Royal Caribbean and Celebrity and Azamara source from probably a few more markets today, in which Silversea will be able to certainly be able to take advantage of. So they have a similar mix, but of course, on the deployment standpoint, we today go to about 550 different destinations, and Silversea goes to over 1,000. So there is a -- it's a very different product going to very different destinations, which we're very excited about on having them part of the family now. As it relates to other income and expense, we were expecting those in the quarter. They were a little bit better than we had expected them to be, and they are not contemplated in the back half of the year. But really, what's raised in the guidance over the back half of the year is mainly the improvement expectations and revenue helping offset currency and fuel increases.

Got it. And then I guess, just lastly for me, maybe sort of a weird question, but did you learn anything during last year's hurricane season that might change how you would head into this year's hurricane season, whether it's operationally or some of the perception that it seems like you're fighting. Obviously, every hurricane season is different, but typically, when you overcome a major hurdle, there's going to be some learnings that you factor into what you do going forward. I didn't know if we received similarly awful hurricanes this year if the impact would be any less based on any incremental steps that you've taken.

So while we always learn, it's one of the fun things about our business is we learn from every experience, whether it's good or bad. But I think actually, we felt our response last year was really ended up being quite good, and probably built up a fair amount of goodwill from the way we handled it. And I'm not sure that, from a purely financial point of view, we learned much that would significantly change the outcome, if you had, again, a hurricane that exactly tracked at our ships' itinerary and exactly have the ports of calls on the days that they would be the most impactful. So we constantly try and learn and obviously, there are always some lessons to be learned. But overall, I think we felt that last year we did pretty well. I do think though that people are -- should be impressed with how well the destinations responded afterwards. These were horrific events for them, but now people are reporting back and the travel agents, which are always an important source of information as well as Internet chatter, shows how well they've recovered. And I think that may help us a little bit in terms of assuaging the concern that people had that if they went to some of these destinations afterwards, they would encounter a bad experience. And that simply hasn't been the case. So I think if there is a silver lining, it's that people would understand better that the islands do recover more quickly. On the other hand, if we have another really terrible season, probably that would have a negative simply because what we had last year was so extraordinary, and so you wouldn't want to see anything other than -- that didn't repeat itself.

And James, I just want to add that, as Richard said, certainly, whether it's perception, whether there were some logistical issues and so forth because of the storms, it is remarkable how well it has recovered. And the impact, every dollar to us is painful, but we're really talking on the margins here and it really was kind of more the focus on Puerto Rico than on the broader Caribbean or the broader Eastern Caribbean, and that was a lot of it because it's tough to get everybody in and out all in 1 day because a lot of the hotels were taken up by people who were using them as residence, airfare was a little bit more challenging and that's been restored. But with all that was going on and all the impact to the islands, I think it's pretty remarkable how small the impact has been on the Caribbean.

By the way, it actually gives me a chance to comment, because the one thing that it did, which wasn't news to many of us, but it really reinforced and demonstrated just how amazing the response of our employees was. The crew, the shore-based people in terms of responding to that did an outstanding job. So your question gives me a chance to say thank you to them.

Yes. Okay, we have time for one more question, operator.

Yes, so the final question comes from Greg Badishkanian with Citi.

Richard, you gave some color on 2019, greater percent book for 2019 at higher rate. There were 2 adjustment factors related to basically cabin and retail mix. The retail mix seemed to be you would have to take a positive adjustment that because you're booking in a greater percentage of bookings in market where you book later. I understand you make the adjustment to that, I believe is what you said. And then also, in terms of a cabin mix, what type of adjustment would you need to make to do that because it almost sounds like it's better than just the color that you just gave, which was greater percent booked for '19 at a higher rate, but shouldn't we be more positive in just that -- those comment?

Yes, so Greg, first of all, the 2 examples I gave were not intended to be specific to 2019. They were just examples why relying too much on this one metric can lead you down a wrong path. In fact, if you recall, in both of the last 2 Januarys, I've said that I thought we may have, just from a strategic point of view, booked too much in advance. And then I thought we were at record levels of bookings for the incoming year, and I didn't expect it to rise, and yet it did rise because our revenue management models told us in this environment, that was the right thing. In terms of our making the choice, coming back to the first of those 2, do we hold back inventory more or less because of what we expect? That's a constant give-and-take, and that's a judgment that our revenue managers make on an ongoing basis. And I didn't mean to be talking about that as it related to 2019. The other one though, and it's interesting you mentioned it, is a factor for '19. For example, we do have more short-term bookings, which would -- one would expect to book later. And therefore, actually, you're right, that would be an even more positive factor in terms of our outlook. So other things being equal, given more short-term capacity, you would expect your bookings to be less than last year because short-term books later. And so the fact that we are booked more despite that factor could be read I think appropriately as even a more positive message there. But I do want to emphasize, I was trying to give examples of the kind of reasons why that single metric shouldn't be looked at by itself, but as one of the cornucopia of information that's available to us as we make our forecast about the next year.

Okay, that's helpful. And if we look at the first quarter of 2019 price volume -- I'm about to use the metric that you say could lead you down the wrong direction, but how does that differ for the full year and maybe differentiate with the Caribbean because that's -- you maybe should have easier comparison or arguably, maybe could actually be worse if people haven't been booking for the winter at this point because they're a little bit nervous about it. So maybe give us a little bit of color on how that (inaudible)

I won't go into too much detail on the quarter, but I will say that our commentary on the full year very much relates to what we're seeing in the first quarter of '19 as well.

Okay. Thank you for assistance today, Sia, and we thank all of you 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 very great day.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.