皇家加勒比遊輪 (RCL) 2018 Q3 法說會逐字稿

Good morning.

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

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

Third 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 third quarter earnings call.

Joining me here in Miami are Richard Fain, our Chairman and Chief Executive 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'd like to refer you to our notice about forward-looking statements, which is on our first slide.

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

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

Examples are described in our SEC filings and other disclosures.

Please note that we do not undertake to update the information in our 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 third quarter results.

I will then provide an update on the current booking environment, provide guidance for the full year and the fourth quarter of 2018, and then close with some early thoughts on 2019.

We will then open up the call for your questions.

Richard?

Thank you, Jason, and good morning, everyone.

After a rough week in the stock market, we're happy to share some good news.

Our business remains healthy across our major source markets and onboard spend continues to grow.

We are particularly pleased to continue increasing our yield guidance, which is now almost 100 basis points higher than our January estimate, and that's on a like-for-like basis.

As a matter of fact, since our January guidance, we have offset more than $115 million or $0.55 per share of headwinds from foreign exchange and fuel and we still raised our guidance.

I have to say that I'm both frustrated and impressed.

Frustrated that we've had to overcome such headwinds, and impressed that our fundamentals are so strong that we can face such hurdles and still exceed our forecast.

As it pertains to this past third quarter, we generated an adjusted EPS of $3.98, which was 14% higher than last year's figure.

In fact, it's an all-time record.

Given the concerns about weather, politics, trade wars and supply, this result definitely strengthens our confidence in the continued health of the cruise market.

Part of the reason our business remains so strong is that we evolve our product to meet the evolving demands of our guests.

The trend of people looking for experiences instead of buying things continues to be a defining characteristic and it is a characteristic that we at Royal Caribbean pay close attention to.

Fortunately, providing experiences and memories is already our sweet spot.

Satisfying that new consumer preference is a constant focus of ours and one where we continue to innovate.

In previous calls, you've heard me talk about our investments in Excalibur, our digital transformation platform.

Today, I thought it would help to show you just how aggressively we are rolling out these capabilities to our guests.

I would emphasize that our guest capabilities represent just one dimension of the program, but it's a highly visible one and I wanted to share it with you today.

Slide 2 shows the planned launch schedule.

The guest app in its current form includes features such as accelerated check-in, the daily planner, onboard accounts, shore excursions as well as the ability to book various items, such as shore excursions, specialty restaurants and other onboard activities.

You can see in the slide that we have highlighted 3 milestones that represent the way we make the app available to our guests.

We call them crawl, walk, run.

The first phase, crawl, refers to testing mode.

In crawl mode, the app is up and running, but we keep it very quiet so we can test it out with a small group of participants.

When we are comfortable that the functionality has reached an acceptable level, we shift to the walk stage.

When we get to walk, we allow everyone who wishes to do so to use the app, but we don't aggressively push it.

This is roughly equivalent to the beta stage of most apps.

It gives us a chance to test it under real-life conditions, but only with a limited group of users.

Lastly, when we get to the run phase, we want as many guests engaged as possible.

The app is then available to anyone and we vigorously publicize it, so that as many guests as possible use it.

When we get to the run stage, the app has been thoroughly vetted and most of our guests use it and love it.

Our initial priority for the app capabilities has been on easing the process of boarding and disembarking.

We've also prioritized other things that our guests most want.

Next will come more bells and whistles, such as facial recognition, the ability to easily book your onboard activities before sailing, your chat capabilities and an innovative digital stateroom key.

Again, I want to repeat that this only refers to the capabilities our guests use.

A lot of focus has also been on the capabilities that make our employees more efficient and more effective.

Now one question I'm sometimes asked is how we can scale this so quickly out to our fleet.

The reason is that over the years, we have built and maintained our fleet to take maximum advantage of technology.

As a result, we already have a lot of technology on the ships and that can be used to provide some of these capabilities.

We need to add more, but this gives us a definite leg up.

Through this type of investment, we are not only expanding and improving the product offering, but also attracting new segments to cruise.

We find that using such technology to reduce the hassle factor behind traveling increases the demand for our products.

As our businesses grow, technology isn't the only area where we have exciting things happening.

We're well underway in the buildup a Perfect Day at CocoCay in the Bahamas, and we're very excited about what that does for enhancing the experiences of our guests and thereby raising our yields.

Perfect Day will be a nice boost to our bottom line because it will increase our revenues nicely, while only increasing our expenses a bit.

That also serves as a reminder that our business grows -- that, as our business grows geographically, and in complexity, it impacts some of our metrics in unexpected ways.

For example, last year, in the third quarter, it was ironic that the hurricanes, which hurt our bottom line so much, actually improved our yield metrics.

That came about because while we lost a lot of revenue -- unfortunately, a very lot of revenue from canceled sailings, those sailings had lower APDs than our average; thus, limiting those sailings slightly improved our average yield.

Another example is our marvelous new terminal here in Miami.

Besides being beautiful, Terminal A is economically better for us than what we had been doing previously.

However, the new way we have structured the financings means that we will have higher revenues and higher expenses.

The net is positive, but it will raise both revenue and expense.

The impact on our metrics may be counterintuitive, but the impact on our bottom line is unequivocally positive.

The one other example I'd like to mention.

Actually, I don't think I need another example, but this is one I'm quite pleased about, so I thought I would share it.

You may recall that last year after successfully completing the Double-Double Program, we gave equity awards to every employee in the company.

We called it a Thank You, Thank You Bonus.

Our financials always assume that we will have a certain amount of employee turnover.

And for 2018, we assumed that our normal attrition rate would continue.

However, in the aftermath of the Thank You, Thank You boost, we've actually experienced a reduction in employee turnover.

Personally, I view that as a terrific success.

It will reduce our cost and improve our performance going forward, but in the short run, it does mean higher compensation expense due to a lower rate of forfeiture on the equity awards.

That is a great outcome.

And lastly, before I turn the call back to Jason, I want to talk about the new Celebrity Edge that will be launched in November, sailing out of Fort Lauderdale.

Every time Lisa and I visit the yard to review progress, we get more and more thrilled about the exquisite work that the teams have done.

I know you will all be blown away at Celebrity Edge, and I'm happy to say that we are seeing that impact in our bookings.

Demand for cruising is booming, and guests are willing to pay for innovation, quality and design.

The timing of this ship could not be better.

With that, I'm pleased to turn the call back over to Jason.

Jason?

Thank you, Richard.

I will begin by talking about our results for the third quarter of 2018.

These results are summarized on Slide 3. For the quarter, we generated adjusted earnings of $3.98 per share, which is approximately $0.05 higher than the midpoint of our guidance and 14% higher than the same time last year.

Better close-in demand for our core products, better onboard revenues and better-than-expected results from our joint ventures drove the beat in the quarter.

Our net revenue yield increased 2.6% year-over-year, which was 60 basis points better than our guidance.

Strong close-in demand, particularly from our Asia Pacific, Europe and Alaska products, combined with stronger beverage and shore excursion revenue, mainly drove the outperformance.

Net cruise costs, excluding fuel, were down 0.1% for the quarter, which was 90 basis points higher than our guidance, driven mainly by timing.

On the shareholder return front, we repurchased $162 million of share in early Q3.

And last month, we announced a 17% increase in our quarterly dividends.

Now I'd like to share trends we are seeing in the demand environment for the balance of 2018.

As we move forward in the fourth quarter, many of our ships transition out of Europe, Alaska and Bermuda and begin their winter season.

As such, about 55% of our capacity will be in the Caribbean, 18% will be in the Asia Pacific region and 12% will be in Europe.

While the addition of Silversea to our family of brands does bring a number of new itineraries to our portfolio, it doesn't have a significant impact on our overall capacity distribution for the fourth quarter nor for 2019.

Despite our increased mix of short Caribbean itineraries, Q4 sailings are booked nicely ahead of same time last year in both rate and volume.

As you would expect, the Caribbean accounts for most of our remaining inventory and we are in a strong booked position for the product, both including and excluding new hardware.

We are also very excited to welcome Celebrity Edge into the fleet next month.

It's been 6 long years since a new ship joined the Celebrity fleet, and she's clearly worth the wait.

Edge has been booking at significant premiums for the winter Caribbean season and for our European season next year.

Now let's turn to Slide 4 to talk about our guidance for the full year.

We are narrowing our guidance to $8.75 to $8.85 per share.

This guidance includes the negative impact of approximately $0.10 per share from currency and fuels since our previous guidance.

Also, as Richard mentioned, since providing our initial guidance in January, the stronger dollar and higher fuel prices have negatively impacted earnings by approximately $115 million or $0.55 per share.

These changes have also impacted our 2019 earnings by a similar amount.

Also to note, our guidance now includes Silversea's operations.

As previously announced, Silversea's operations will be incorporated into our financials on a quarter lag.

And for 2018, we do not expect the results to have a material impact on our bottom line.

As it relates to our key metrics, we expect our net revenue yields to increase in the range of 4% to 4.5% for the year.

This represents an improvement of approximately 100 basis points versus our previous expectation.

The consolidation of Silversea's operation is contributing approximately 80 basis points and the remaining 20 basis points improvement is being driven by the outperformance in the third quarter and an increase in the revenue outlook for the fourth quarter.

From a cost perspective, we expect net cruise costs, excluding fuel, to be up approximately 4.5%.

The consolidation of Silversea is contributing approximately 140 basis points.

This updated guidance also reflects an increase in our costs that relate to the acceleration of technology-related investments.

We anticipate fuel expense of $706 million for the year, and we are 54% hedged at a price of $434 per metric ton.

In summary, based on the current business outlook, along with current fuel prices, interest and currency exchange rates, our adjusted earnings per share are expected to be in the range of $8.75 to $8.85.

Now we can turn to our guidance for the fourth quarter, which is on Slide 5. Net yields are expected to be up in the range of 6.5% to 7%, with the addition of Silversea driving approximately 350 basis points of the year-over-year improvement.

As such, we are reporting Silversea on a 1 quarter lag, so Q4 includes the results of Silversea's higher-yielding August and September sailings.

Net cruise costs, excluding fuel, for the fourth quarter are expected to increase in the range of 6% to 6.5%, which includes approximately 500 basis points from the Silversea consolidation.

As mentioned above, this guidance also reflects the increase in our cost that relates to the acceleration of technology-related investments.

Additionally, the consolidation of Silversea is negatively impacting our depreciation for the quarter and the full year by approximately $0.06 per share and negatively impacting our interest expense for the quarter and the year by approximately $0.04 per share.

Based on current fuel prices, interest and currency exchange rates and the outlook expressed above, our adjusted earnings per share for the quarter are expected to be in the range of $1.45 to $1.50 per share.

Before providing some color on 2019 booking trends, I'd like to highlight some of the key performance drivers for 2019.

We have stunning new hardware.

We are amping up our private destinations with Perfect Day.

We are benefiting from our modernization program.

Our own terminal in the busiest cruise port in the world will be online, and we have a new ultra luxury and expedition cruise line in our portfolio.

It definitely seems that we have more going on in 2019 than in any other year in recent history and I want to make sure that we walk through some of the dynamics that will shape yields and costs next year.

From a hardware standpoint, we'll enjoy our first full year with Celebrity Edge, Symphony of the Seas, and Azamara Pursuit by also welcoming Spectrum of the Seas and Celebrity Flora to the family in the second quarter.

2019 will also benefit from our modernization programs, Royal Amplified, Celebrity Revolution and Silversea's Invictus, which means more drydock days in 2019 than in 2018.

As it relates to other big elements affecting our numbers next year, we will have our first full year with Silversea, we'll launch Perfect Day at CocoCay and the operation of the new Terminal A here at the Port of Miami.

All 3 of these additions will increase both yields and cost metrics.

We will provide more details on the financial impact of these items during our fourth quarter earnings call.

I wanted to spend a moment to discuss some below-the-line considerations for 2019.

The first one is depreciation.

As Richard discussed, we're very excited about our Excalibur program and the very positive feedback we have been receiving.

From a financial perspective, I would note that our investments in significant technology projects, like Excalibur, are becoming a larger mix of the capital program and generally have a shorter useful life than our typical capital investments.

The other area of note will be the impact of Silversea below the line.

Being in the luxury and expedition segment, Silversea's depreciation per berth is significantly higher than our corporate average.

In addition, Silversea's current bond has a coupon of 7.25%, which is significantly higher than our cost of debt.

Now I'll provide you with an update on our 2019 deployment.

Our capacity for 2019 is expected to be up approximately 8.6%, of which approximately 220 basis points are driven by the addition of Silversea.

Just over half of our 2019 capacity will be in the Caribbean, while Europe and Asia PAC will account for approximately 16%.

Our Caribbean capacity is increasing by about 10% driven by the addition of Edge and Symphony.

Combined with an expanded short Caribbean program that includes the newly modernized Mariner of the Seas and soon to be modernized Navigator of the Seas.

Also to note is just over 1/4 of the guests on a Caribbean cruise will get to experience Perfect Day at CocoCay in its first year.

Capacity is about flat year-over-year for Europe and Asia PAC, although both regions will feature one of our new ships.

Celebrity Edge will sail her first summer season in the Mediterranean and Spectrum of the Seas will transition to her new home of Shanghai after her delivery in the spring.

We are also improving our hardware in Alaska with larger ships for both Royal Caribbean and Celebrity plus the addition of Silversea's newest ship, the Silver Muse, and Azamara's first ever Alaska season.

We haven't pointed out capacity numbers for some of our smaller products on these calls before, but with the addition of Silversea and Celebrity Flora, it's worth noting that the high-yielding expedition products will account for approximately 2.5% of our inventory in 2019 versus only 0.5% in 2018.

Now onto some early insight into 2019 booking.

We continue to see strong booking trends for 2019 and are currently booked ahead of same time last year in rate and volume, both including and excluding Silversea.

While each of our larger product groups are in a strong booked position, we're particularly pleased with how the Caribbean is shaping up as it is the region that will absorb the most capacity for our company next year.

Although we don't normally provide guidance for 2019 until our fourth quarter earnings call, these insights certainly point to another year of robust yield and net income growth.

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

(Operator Instructions) Your first question comes from the line of Robin Farley with UBS.

Just kind of looking to get a little more insight into 2019.

I wonder if you could -- you mentioned that the rate and volume are ahead, so it sounds like yield likely to grow.

Can you comment on sort of the rate of how far in advance you're booked versus the same time last year, just so we can think about maybe the magnitude of your growth a little bit?

And then also, I don't know if you have any comments to share about Q1 given how booked you may have been before hurricane season last year.

Is Q1 a particularly tough comp?

Or do you also feel the Q1 would be representative of how the year would look?

Any thoughts around that?

Yes, sure.

So first on 2019.

The acceleration in the bookings for 2019 have been very strong even before and after we left the hurricane comp, and we've been up in both the rate and volume basis.

And really, for the next 12 months, if you look at it on a quarterly basis, we're also up on a rate and volume basis.

So we continue to see the booking window extend and strength as the consumer considers their vacation plans for 2019.

As it relates to the first quarter, as I just commented, yes, we do expect our rate and volume to -- our rate and volume are up.

We do expect yield improvement in the first quarter of next year, and I would also just point you to my commentary and my remarks about the Caribbean, which is a big -- a part of our Q1 picture, and that is also in a very strong booked position.

Okay, great.

And then maybe just lastly, any thoughts with Spectrum going to China next year?

There's been a lot of focus, obviously, about U.S.-China relations and do you have any concerns about as you're selling -- it's, I guess, early to be selling in that market, but are you -- is there any impact in your discussions with travel sellers there?

Robin, it's Michael.

We've been really pleased with the performance of the China market this year.

And as you know, it's a long-term strategy.

We've been in the market for 10 years.

We just recently received another reward as the top cruise line in China.

So we're excited about Spectrum coming into Shanghai in '19.

If you recall, Ovation's coming out of China going to Alaska, which is doing very well in Alaska.

And so our capacity overall next year in China is, fundamentally, flat.

I think the market overall is down slightly in terms of capacity.

We've had a lot of enthusiasm in terms of forward bookings for Spectrum and we're very pleased with where the ship sits already in terms of forward bookings.

In terms of the issues on tariffs and what have you, it's been slightly volatile.

I mean, just as I think we see in the American stock market, there's been some ups and downs in the Chinese stock market.

But everything's -- the fundamentals seem to be still okay.

We've seen nothing coming through in terms of consumer confidence or concerns from our travel partners.

And Robin, I would just add, because also -- I noted in my commentary some of the strength in the close-in business as well as some of the reason for the increase in the outlook in the Q4 has been strength we have seen coming out of the China market.

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

So Jason, I guess, a simple question is, what is your definition of the word robust?

You talked about that around 2019.

Is that -- I know you guys have talked about kind of a 2% to 4% kind of start point for yields, but can you maybe able to say a little bit better about what does robust mean?

Well, I would say the 2019 booking environment has been strong, which is led us to be in a very, I think, good booked position on a rate and volume basis.

And I think that's probably what I would take into those remarks.

There are a lot of tailwinds into our yield profile for next year, whether it's the new hardware, like-for-like improvements.

We talked about the Port of Miami and CocoCay, and of course, Silversea coming in.

But I think when we look at our general business, whether it's -- excluding items like Silversea for a second and excluding the port and CocoCay, the demand for our new hardware, especially for Edge, which has really come high on a -- at a premium, has been very strong and encouraging.

And so far, based off of what we're seeing in the booking environment, we also expect a very good comps for our business on a like-for-like basis.

Okay, got you.

And in terms of -- I know you don't want to give quantitative guidance at this point for next year, but from the cost perspective next year, you helped us think about D&A and interest a little bit in your prepared remarks.

Those technology investments that you are talking about for the fourth quarter, how should we be thinking about those for 2019?

And then, can you also quantify the drydock days in '19 versus '18?

Sure.

So just starting off on the cost as it relates to the technology side.

Yes, there's really kind of 2 components to it, one of which is on the depreciation side.

As a larger mix of our investments are going into technology-related projects, as I said in my remarks, that results in a lower useful life on average for those investments.

And so we do expect, just like we saw from '17 to '18, an elevation in our depreciation as a percent of our revenue, we would expect an increase as well over the '18 to '17, so more '18 to '19 will be even higher as a percent of our revenue for our investments in technology, and also for our investments -- also with depreciation being higher for Silversea.

The other component on the technology side is on the OpEx side.

So a lot of the services are cloud-based services or subscription-based services, and those do put pressure on our operating costs.

And the more that kind of rolls out, the more that it will weigh on our costs for next year but, of course, we continue to look at how do we become more and more efficient within our cost structure.

As it relates for drydock days, let me just pull it up here.

So in 2019, we had about 360 drydock days, and -- no, I'm sorry, in 2018, we have about 280 drydock days.

And in 2019, including Silversea, we have about 360 drydock days.

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

So just to confirm because for '19, your outlook, it sounds like you're looking every quarter higher volumes and higher pricing for the next year?

Yes.

For the next 12 months, we're up in both rate and volume in every quarter.

Great.

And then just the phenomenon of your extending booking curves.

Is that historic -- I mean, not historic, if we look back about 1.5 year -- if you look at the past 1.5 year, maybe this quarter, you beat that yields by over -- by about 100 basis points.

Does the extending booking curve kind of limit your ability to report that kind of upside because there's just less close-in bookings to be had?

Yes, that is -- I mean, obviously, us taking on more business, the purpose of it is we think that we will be optimizing yields by doing so.

But as we get closer to those sailings, that close-in business is more limiting because we have less inventory to sell.

Okay.

And then just on your fourth quarter then, just a couple points of clarification.

So I just want to make sure I'm doing my math right.

It looks like you raised the midpoint of your previously implied guidance by 50 basis points, is that right?

That's correct.

Okay.

And then, so the increase in the cost, you mentioned that was Project Excalibur, we're estimating it's about $0.08 to earnings, is that right?

$0.08, $0.10?

Well, it's a combination of a few things.

One of which is, as I commented on the third quarter, there's some shifting that's going in to the fourth quarter, which may not be obvious because we lost some APCDs in the third quarter due to some incidents around some of our ships -- mechanical incidents on our ships as well as on the hurricane side.

So there are costs that are shifting in from Q3 to Q4, and then the balance of that is Excalibur.

And then also, as Richard commented, we're experiencing lower turnover, lower forfeiture rates, which are increasing our compensation costs mildly.

Felicia, it's Michael.

One other point to bring forward is the nonrefundable deposits that we introduced about a 1.5 year ago for the Royal brand.

And now we have over 60% of our bookings that are nonrefundable and that's really helped with the stickiness of the bookings.

So when we're getting these bookings earlier on, they're staying with us and then they're not churning.

So that's, I think, also been a contributing factor.

That's great.

And then just finally, just for '19, just given all the moving parts in terms of costs, you have a lot of initiatives, which are affecting that ex-Silversea so on a like-for-like basis, can we expect your '19 yields -- the robust '19 yields that you talked about to offset those incremental cost from kind of how we've been thinking about things currently?

Yes.

So we certainly expect on a like-for-like basis for our cost behavior to continue and be very focused on making sure we're as efficient on that as we possibly can.

But I think -- taking into account other things like Silversea and so forth, that will -- the optics around that will -- look like our costs are higher than what you have seen in the past, obviously.

Yes, Felicia, if I could -- it's Richard, and if I could just add to that.

We really think that our heavy emphasis on cost control has been a important constructive factor for us.

And I think we just have these 2 things coming together, which we think will be positive to our bottom line: one is these somewhat mechanical things, and I pointed to Terminal A as an example, where we've done something which is briefly a good operational thing for our bottom line, but it does -- because we're taking over ownership, it moves up our revenue and our expenses; and the other one is some of these investments, like Excalibur.

But overall, we think these things will be positive to the bottom line and we still think that we're going to come out with cost increases which are, for most industries, people would be envious of it.

So we don't intend to take our eye off that important ball.

But the -- as Jason says, the way it comes across as a number is maybe a little bit counterintuitive until you look at the details.

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

Just a clarification.

Earlier in your discussion, you talked about there actually being more drydock days.

And I think when you defined it, it looked like there are less.

I wonder if you can go through those numbers again?

Sure, Harry.

I think you went from like 380 down to 360.

So is it like -- I just want to get that right?

Harry, it was the other way around.

It was 360 -- sorry, 280 to 360.

So 280 in '18 and 360 in '19.

Exactly.

280, okay.

So it's -- obviously, it's difficult when you get older.

So -- okay.

So just -- I'm trying to get a sense of the elevated expenses in the fourth quarter flowing into next year, and if you could give us a sense of what is -- particularly elevated in the fourth quarter that's unlikely to recur in 2019, whether it's -- for example, the development cost begin to come down, some of these bonus accruals, will they come down?

Yes, I don't think there's really a per se timing element of this.

Because, I mean, we are very much trying to accelerate our Excalibur efforts to the point that we can.

And so I wouldn't look at this as we're just shifting some costs from January into December.

This is our ability to have starting capabilities come online a little bit quicker than we had expected them to.

Because as Richard mentioned, we think that -- the investments we're making in Excalibur to decrease friction within the guest experience and increase on-demand capabilities, which we think are table stakes, and the guest experience, and what the customers are looking for.

The sooner we can get that on the ships, we believe that it will lead to better revenue and better guest satisfaction as well as a better employee experience for our crew.

So I wouldn't look at this as a timing element.

I would look at this as our ability to bring on capabilities sooner than we had anticipated.

Okay.

And then last question is, prior to folding in the Silversea acquisition, there was a consensus estimate on consensus metrics for net cruise cost next year.

I think it was probably around 2%, maybe 2.5%.

Just kind of directionally, do you think that the Street was in the right neighborhood with that assumption?

Well, we are still very much in our planning process so it's tough to point -- pinpoint that.

And I would just point to make sure that -- in that consideration besides for Silversea, there is also the cost that we will incur with Perfect Day and also the Port of Miami.

So I wouldn't -- I'm not going to comment specifically on that number, but those will also be elements that will be impacting our cost metric next year.

And just one real final quick question, going back to a comment you just made about the technology application.

Are you -- have you gone from crawling to walking?

Or you going from walking to running?

Well, I would point you to that chart.

I mean, it really does depict the path and the cadence that we're going down, so that I think the chart was on Slide 2 or 3 -- on Slide 2, kind of shows kind of our path on how we plan on this being implemented across our fleet and as they -- and also how the capabilities are expected to grow, and that's how I would look at the cadence of what we're doing.

But certainly, we are leaning in as much as we can to get as much of it done and if we can accelerate that chart, we certainly will because of the benefits that we think that we're going to get out of it.

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

Two questions for you.

In the most recent earnings call, you had -- for Q2 results, had talked about strength in last-minute booking trends.

I wonder if -- what you observed in last-minute booking trends travel in 3Q and today?

Sure.

So I'll just start on that one.

We saw -- also saw similar to Q2, we saw accelerated trends from our close-in bookings.

I think the only thing that was probably a little bit different is we saw some further strength in Asia Pac, specifically, China in the close-in environment in Q3 versus in the second quarter.

Okay, and my next question.

Are you seeing any notable difference in pricing and booking trends by -- whether it's sort of the high-end Silversea or more your past market core brands?

Certainly, the wealth effect has been helping luxury hotels, but I'm wondering if you're also seeing that with your bookings by brand?

Yes, sure.

So I won't comment by brand, but I would just say on the Spectrum that the demand we're seeing for the Royal Caribbean customer is very similar to the demand we're seeing for the Silversea customer.

So that Spectrum is -- or the booking patterns in terms of strength have been quite similar.

Of course, the Silversea customer books much further out.

But as I commented in my remarks, we look at -- on both rate and volume with and without Silversea, we're up on a rate and volume basis in the quarter as well as for next year.

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

One for Richard.

Richard, in the past, you've said that Royal's kind of like a duck on the water, pedaling hard below the surface despite the appearance of a smooth glide on top.

Obviously, a reference to your people, not your ships.

But I mean...

Thank you for that clarification.

Yes, I thought that was needed.

I think part of the concern with investors that's being reflected into stock prices is slowing cycle, obviously.

So at this point, as the cycle extends further, do you feel like your company has to pedal harder than it has in the past to deliver the same result?

No.

I think, actually, the metaphor that you're using that I have used in the past is really a reflection of a cultural norm here that we think there are so many opportunities that we just want to take advantage of them and that means we have to pedal fast.

Our mantra, as you know, is continuous improvement, and we are very focused on that.

We are -- I would not have described the situation today as any different.

We probably -- we always are focused on doing other things.

The travel agent partners that we are working with are always focused on doing other things.

But I don't think I would describe this as that much different.

Maybe the difference today would be, one, we have a lot of new things that I think are coming online that are really very positive for us.

And so we do have a confluence of, for example, of Symphony of the Seas, which will be naming here in about 3 weeks.

We just about 1.5 months ago did Azamara Pursuit and Celebrity Edge coming early December.

It's Flora next year.

So a lot of really quite dramatic new hardware things and we're probably now seeing come into market more of the non-ship things, which are helping us in very many ways.

Obviously, we talked about Excalibur.

We talked about the new terminals, both here in Miami at Terminal A, and up in Fort Lauderdale at Terminal 25, Perfect Day.

So there are a lot of those things going on.

And so I think the simple answer is, there is a lot going on.

There is a lot -- there's always a lot going on here, and I hope that never stops.

Good enough.

And a follow-up question about the booking curve.

Jason, you've given a lot of excellent color on the ways in which you booked ahead at higher prices.

But I was wondering, and maybe just splicing things too finely, but if you were to remove the effects of new hardware, which is a lot, I understand, would you still be booked ahead at higher prices?

Yes, we would.

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

Jason, I want to ask you first about cash deployment for next year.

Is your CapEx is decelerating a bit?

You're guiding $2.6 billion for 2019, and on my math, I'm getting somewhere around $1 billion of free cash flow and that's before taking on additional debt to maintain the target leverage.

So my question is, should we expect all of that cash available to be returned in 2019?

And just to follow up on that, I just want to confirm that when you do give full year guidance, you don't plan on including any buybacks in the EPS, is that correct?

Yes.

So just starting off on the capital allocation front.

As we've said in the past, we do look very much to return capital to shareholders.

We have our leverage ratios of 3x to 3.5x, as we talk about in terms of the target.

And there -- as you said, there is leverage opportunities for us to be within that target that will produce additional cash that's available to shareholders.

So I think what you would continue to see is our CapEx profile is our best thinking at this point in time.

And then outside of that, if there's opportunities to lever, we do believe in continuing to grow the dividend on a moderate basis and buy back shares opportunistically.

As it relates to, do we put buybacks in our guidance or not?

It's not something I would comment on.

There's a lot of factors that kind of go into what our guidance will be at a given point in time.

Okay.

And then just to switch gears here, I think, back to the demand side, I think, would just to try to ask this a little differently.

In the past, you used to talk about a 2% to 4% yield growth as sort of your longer-term annual target.

Excluding Silversea, this year, you're doing about 3.5%.

So for next year, you're saying you're seeing robust demand, and I guess, my question is, excluding Silversea, excluding the terminal, excluding the water park, as you sit here today, is there any reason why we shouldn't feel good about 2% to 4%, that long-term target, for next year, especially considering that you do have these tailwinds on the hardware side?

Yes.

Well, again, we're not going to begin to kind of comment on our yield guidance for next year.

I think the 2% to 4% is, if you look at how our yields have grown over the past several years, that is a kind of the average range of moderate yield growth.

Certainly, these other items, such as CocoCay and Perfect Day, will improve our yield profile as well as increase our cost metrics.

And that's kind of the way that I would look at it.

So again, the environment for 2019, we're very happy based off of where things are today, looking at it on a rate and volume basis.

But I wouldn't, at this point in time, because it's still early in the process to start kind of setting ranges for 2019.

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

I have one quick question on Silversea.

It looks like there is a heavier impact to cost than benefits of revenue side both in 3Q and 4Q.

And I'm curious if there's anything, timing-wise that allows that differential to reverse in the first half?

And then, going forward, as we think about the cost profile of Silversea's and how that impacts Royal, do some of those costs sort of get better managed as they come onto Royal's platform bringing their operating margin or EBITDA margin a little bit more close to yours?

Yes, sure.

So first, I would -- there's no impact on the third quarter because of the quarter lag and since we closed on July 31, their August and September results will be the ones that hit on to the fourth quarter.

And so -- I think some of this is just math.

I mean, obviously, it's a much higher yielding product than our average and that will improve our yield profile.

But on the cost standpoint, because our average cost per APCD is about $100 is -- Silversea's platform is much more inclusive and is much higher than our average.

And so that's going to weigh on our cost metric disproportionately to how we'll weigh our yield metric because our cost -- our yield metric is about twice as much as our cost metric.

So that's point one.

Point two, definitely, as time goes on, as we talked about when we did the acquisition that we thought that there was cost opportunities, efficiencies, them taking advantage of our supply chain and some of those contracts and efficiencies and some of them are technology-related, take some time to work through.

And we would think over a reasonable period of time, we will continue to implement those synergies into Silversea, which will make that comp easier over time.

But I would be less focused on -- I mean, some of that will happen in '19, but more of that will happen in 2020 and beyond.

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

Just a couple here.

Jason, Richard, whoever wants to take this.

The Eastern Med, we've seen folks like TUI start making some comments on their hotel side that they're seeing span for Turkey come back.

We've seeing yourselves and others maybe add some itineraries in '19 and maybe a few folks into early '20.

Just your thoughts what you're seeing from your customer-travel agent demand base for the Eastern Med cranking back up.

And then, Jason, any thoughts at this point here, the IMO 2020, where the forward curve is?

How you anticipate that?

I know it's 2020, but given today, would you anticipate the impact to be flat, neutral or positive?

And how has that changed your hedging approach?

Okay.

So first on the Eastern Med side, we continue to monitor the situation in the Eastern Med.

Obviously, Easter Med, currently and historically, when they were even more ports that were attached to the Eastern Med, definition was very attractive.

And so we continued to watch -- I would say consumer demand or interest.

I would say, comp more interest has perked up a little bit but we're obviously making sure that, that experience can be sustainable before offering too much of the product or increasing what's available within the Eastern Mediterranean area.

As related to the IMO, our scrubber program has been very successful.

We continue to roll it out onto our ships.

Our mix of what we'll be able to burn via MGO versus low-sulfur fuel still will be pretty much the same as it is today.

And so our mix of fuel should pretty much be about the same.

Now as it relates to where the price is and hedging, et cetera, I would say that we'll see what happens with fuel prices, but we do have a bias to hedge a little bit more on the MGO side than on the IFO side, because we'll be able to burn the lower sulfur fuel -- we'll be able to bring the higher sulfur fuel because of the scrubbers, sorry.

Since you're steeling your historical hedge more to the MGO given the higher cost and potentially that going up and the other going down?

Is it...

That's right.

Even though those -- yes, those curves today for all the fuel types are in backwardation.

Okay.

Last question.

A lot of the focus there has been on '19, so continue in that vein.

2019, can you just maybe talk about a little the puts and takes in the equity income line?

TUI is the large part of that obviously, but Pullmantur's folded into there, just any puts and takes from that perspective, '19 versus what we've seen in '18?

Yes, I mean, I think in terms of the core drivers of the equity pickup line, which you said is TUI, which is Pullmantur.

Both those brands are doing well.

TUI is doing exceptionally well.

We continue to expect growth there in both of those brands.

And so that will be something that will help us improve the equity pickup line in 2019.

Outside of that, there are small puts and takes here and there, but those are probably the 2 -- those 2 are definitely the biggest driver.

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

So I think you've probably told us all you'd like to tell us in terms of the full year 2019, but maybe...

That's right.

Yes, well, I'm admittedly fishing a little bit here, but maybe talk about phasing a little bit.

I mean, there's lot of puts and takes, geographic, hardware, drydocks, comparisons.

My experience is it's better to get people aware of those now than in January when models are set.

Should we generally be thinking about fairly sort of even earnings or are there reasons that you'd like to call out at this point that there might be some lumpiness?

Well, I would say, one, again, we're still in our earnings -- in our operating plan process.

So I wouldn't be in a position to start talking about significant ebbs and flows within earnings by quarter.

I think the one thing I would say that's kind of more phased is that CocoCay -- or Perfect Day at CocoCay will be phasing in next year, and so that will be one thing structurally.

I think that's really starting in May as when it really kind of comes online.

So there'll be some impact on the second quarter and beyond that will likely not be in the first quarter.

And then the other thing that I would just mention is, when we do take delivery of Spectrum, it will take about 53 days or 54 days for the ship in the second quarter to go from Europe to China.

And that would be something that would weigh a little bit.

It's a good thing on the earnings side, but it will weigh a little bit on yields and cost as we reposition the ship from Europe into China.

Those probably would be the things that I would call out.

Certainly, when we get into January, we will help focus on the cadences within quarters.

Yes, and James, as we said before, I do understand the desire to understand ahead of time the lumpiness and things that will -- tends to shift things between quarters.

But one of the characteristics of our business is that things tend to come in sort of large blocks.

And some of those, we can try and anticipate and help you all understand in the way Jason has just done.

But a lot of it is either just flukes or just timing for various reasons.

And if we -- I like to use the example of a drydock, if we have an opportunity to shift a drydock between doing it on March 30 or April 1, that could actually have a big change in the quarter.

But we look at that as a minor decision.

And if we can save a few bucks by moving it for a week or 2 in one direction, we'll do that.

And I know that causes issues because, in most companies, you look at a flow, and you assume everything carries out throughout the year.

In our case, we really do try and manage well on an annual basis.

So I think we tried to point out some of the things we already know that will cause lumpiness.

But I think we ought to be in full disclosure telling you that there is a certain degree of lumpiness that we don't always predict.

Yes, it's Michael, sorry.

I just have to jump in because there's only 2 minutes left, and I was hoping in this hour, I'd get an opportunity to talk about Perfect Day for a second.

Because we keep mentioning it, and I've had no opportunity to promote it to you all.

So I just want to really talk a little bit because we're excited about Caribbean next year, for all Caribbean.

Obviously, we've got 4 Oasis class ships and Royal Amplified ships operating in the short cruise market, and all of these ships will be going to Perfect Day after May '19, and we think it's the ultimate mix of thrill and chill with literally the tallest waterslide in North America, the largest wave pool in the Caribbean, 1,600 feet of zip line.

The Oasis Lagoon, which is the largest freshwater pool in the Caribbean, Cabana, sports, you name it.

A balloon ride that takes you 500 feet up into the sky.

And what we're seeing in terms of interest for Perfect Day is really quite special.

So we're kind of excited about the opening of Perfect Day.

And seeing as we're running out of time, I just wanted to quickly promote that to you all.

Well done as an answer.

Thank you very much.

As an answer to lumpiness.

Yes, there you go.

Take that.

And, by the way, this call has been sponsored by Royal Caribbean International.

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

Could you provide a little bit of color on how your booking volumes have trended as you started to see those easier compares beginning in early September?

And maybe even the last few weeks, where it might have been a little bit more normalized on a year-over-year basis?

Yes, sure, Greg.

I tried to hit this in my remarks, but even -- if you look at it before, the easier comp -- or you look at it today, our volumes are -- whether it's load factor, whether it's rate, has been up year-over-year.

So we've seen very positive trends even before it became an easier comparable for us.

Okay, all right.

And even if you look at Europe, and you talked about east versus west.

But how about North American-sourced business going to Europe versus European-sourced business -- European-sourced customers cruising in Europe, how's that changed over the last few months or few quarters?

It's Michael.

I mean, we've seen very good demand for European product from the North American market.

And I think there's -- to a certain degree there has to be a relationship between the strength of the dollar and the weakness of the euro.

So it's been a good couple of years in terms of North American demand for European products.

And it's also been good for the European sourcing as well.

I think if we start seeing a shift in currency, particularly with the euro and the sterling, then we'll probably see an improvement in demand out of European markets as well.

But it's been pretty good.

Okay.

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

Carola will be available for any of your follow-ups that you might have, and I wish you all very good day.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.