Royal Caribbean Cruises Ltd. (RCL) CEO Richard Fain on Q1 2016 Results - Earnings Call Transcript

| About: Royal Caribbean (RCL)

Royal Caribbean Cruises Ltd. (NYSE:RCL)

Q1 2016 Earnings Conference Call

April 29, 2016 10:00 AM ET

Executives

Jason Liberty – Chief Financial Officer

Richard Fain – Chairman & Chief Executive Officer

Michael Bayley – President & Chief Executive Officer

Adam Goldstein – President & Chief Operating Officer

Analysts

Gregory Badishkanian – Citigroup Global Markets, Inc.

Kevin Milota – JPMorgan Securities

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Felicia Hendrix – Barclays Capital, Inc.

Harry Curtis – Nomura Securities International, Inc.

Tim Conder – Wells Fargo Securities

Robin Farley – UBS Securities

Steven Kent – Goldman Sachs & Co.

Sharon Zackfia – William Blair & Co.

Stuart Gordon – Joh. Berenberg, Gossler & Co.

Vince Ciepiel – Cleveland Research Co.

Jaime Katz – Morningstar, Inc.

Assia Georgieva – Infinity Research Ltd.

Jared Shojaian – Wolfe Research

James Hardiman – Wedbush Securities, Inc.

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Royal Caribbean Cruises Limited First Quarter 2016 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]

It now my pleasure to turn the floor over to Jason Liberty, Chief Financial Officer. Please go ahead, sir.

Jason Liberty

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

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

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

Before we get started, I 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 filing and other disclosures.

Also, we will be discussing certain non-GAAP financial measures which are adjusted as defined, and a reconciliation of these items can be found on our website.

Richard will begin by providing a strategic overview of the business. I will follow with a recap of our first quarter results, provide an update on the booking environment and then provide an update on our full-year and second quarter guidance for 2016. We will then open up the call for your questions. Richard?

Richard Fain

Thanks, Jason, and good morning, everybody. It is a pleasure to have the chance to provide more color on the quarter and to talk about our direction going forward. Internally, we start almost every meeting talking about the Double-Double and I'm going to follow that practice here as well. Obviously, it's gratifying to report results that are so much higher than we have ever enjoyed in any winter quarter in our history and that naturally strengthens our confidence in our ability to reach these targets.

As a reminder, our Double-Double program established targets to double our 2014 earnings per share and to reach double-digit ROIC by 2017. That means earnings per share next year in excess of $6.78 and ROIC of 10% or better. The results that we're reporting today not only bring us closer to those goals, but they also demonstrate how powerful our brands are and how well they are doing.

As gratifying as today's results are, I should also reiterate that we manage our business and we assess our performance on an annual basis not on a quarterly one. We always have pluses and minuses affecting different seasons and different itineraries. In today's case, we are in the happy position that just about everything in the quarter that could have gone right did. Ticket revenue was stellar, onboard revenue was terrific, cost were well controlled and even below the line items helped.

While it's impossible to isolate out some things, it is interesting to note that strong, last minute demand helped our bookings at the same time while we were simultaneously enforcing our price integrity program. It's very validating to me that we saw such strong close-in demand for products like the Caribbean, despite our program designed to eliminate last minute discounts.

A key driver of our future success continues to be the success of our executional efforts. Execution is everything and it is going very well indeed. Our brands are firing on all cylinders, costs are well controlled and our new ships are getting rave reviews. As a result, our guests are coming back in ever-increasing numbers and we're raising the demand from those who have never cruised before.

I would like to take this opportunity to express my appreciation to the men and women at Royal Caribbean, at sea and on land, who are working so hard and so well every single day. The key to the Double-Double and the key to our success beyond Double-Double is our ability to execute at the highest level. We are indebted to all of them for doing so.

Of course, as always is the case, some markets do better than others. This year we've seen particularly good results in the U.S. markets. We've seen some weakness in the Mediterranean sailings but strength in the Caribbean, Baltic and Alaska. China continues to be one of our great success stories and now represents 9% of our capacity. The market there has received the Royal Caribbean international brand exceptionally well and that market continues to grow at extraordinary rates. Brand image is particularly important in China and we have been very pleased with the exceptional position Royal Caribbean has earned there.

Total industry capacity in China over just the last two years has more than quadrupled. That's an extraordinary amount for any market to absorb. Against that background, the fact that our yields have held up there as well as they have is powerful evidence of the scale of the opportunity.

Now, in 2017 and 2018 industry capacity growth drops to only about 50% per year and that gives us further comfort about the future there. Most importantly, I believe our unique strategy in China is working very well. Firstly, we have brought to the market the best ships, the biggest, the baddest and the newest. The Chinese appreciate that we have acted so positively towards their country and that has enabled us to establish an unusually strong first mover advantage.

Secondly, we have worked hard to educate and assist the distribution system there. We haven't just taken advantage of existing channels, but we've actively worked to make them more successful. We have the largest team in China dedicated to training and supporting the distribution system. That helps the travel agents be successful, it helps them sell our product.

Lastly, we have aggressively invested in ways to link us more directly with the end consumer and help establish a deeper connection with our guests. All of this has enabled us to communicate successfully what makes Royal Caribbean better, different and special.

A few weeks ago, we took delivery of Ovation of the Seas and in two weeks, we will take delivery of Harmony of the Seas, extraordinary. Ovation is simply magnificent. The reaction has been overwhelming to her numerous innovation such as RipCord by iFLY; VOOM, the fastest Internet at sea; the amazing lounge, 270, and 18 restaurants which our guests can choose amongst.

The Chinese public appreciate the Royal Caribbean took the lead in bringing new hardware to China and Ovation will be the first cruise ship to be named thereby the very famous singer, actress, Fan Bingbing. Delivery of Harmony of the Seas in two weeks should be just as exciting, albeit on this side of the world. She builds on the incredible success of our Oasis series of ships and she's one of the most anticipated new ships of the year.

Lastly, in June, we are very excited to be taking delivery of TUI Cruises' newest ship, Mein Schiff 5. TUI Cruises continue to perform exceptionally well in the German market and this vessel will add to its success.

Before I turn the call back to Jason, there is one last item I wish to cover. For a company to be successful in today's world, it's important that we not only do it right but we also do the right thing. At Royal Caribbean, ethical leadership is an important part of our worldview. It is something that matters to our people but it is a different metric to measure.

Fortunately, there is an organization called the Ethisphere Institute and it was organized specifically for the purpose of encouraging good corporate stewardship. I am therefore extremely pleased that Ethisphere recognized Royal Caribbean in 2016 as one of the World's Most Ethical Companies. We value this honor and we intend to continue following our mantra of continuous improvement.

With that, it is my pleasure to turn the call back to Jason. Jason?

Jason Liberty

Thank you, Richard. I'll begin by talking about our results for the first quarter. Unless I state differently, all metrics will be on a Constant Currency basis. Our first quarter results are summarized on slide two. Adjusted earnings were $0.57 per share, nearly double our guidance of $0.30 and almost triple Q1 of 2015 results.

Net revenue yields are up 7% for the quarter approximately 300 basis points higher than our guidance. This past quarter results were exceptionally good driven by continued strength in both ticket and onboard revenue as well as a weaker dollar and better fuel prices.

On the ticket side, strength in North America resulted in significantly better-than-expected close-in demand and pricing for the Caribbean. Onboard revenue was up 8.7% for the quarter. While we saw a year-over-year improvements in most key onboard revenue areas, beverage and Internet led the majority of the outperformance.

Cost for the quarter were in line with guidance. As we discussed on our last earnings call, cost metrics for the first quarter were expected to be higher year-over-year driven by investments in China, timing of marketing and additional dry-dock days. Below the line, we saw continued outperformance from our equity investments. During the quarter, lower fuel prices and a weaker dollar contributed approximately $0.08 to the improvement.

As previously discussed, we eliminated Pullmantur's two-month accounting lag during the first quarter 2016. The negative impact to earnings of $0.10 per share was in line with the guidance provided on our last earnings call. This represents the results from November and December of 2015 and has been adjusted out of the company's key metrics.

Now, I will turn to the demand environment for the balance of 2016. During our last call, we shared that WAVE was off to a good start. This trend continued through the first quarter and certainly contributed to our strong yield performance in Q1. We are now approximately 80% booked for the year with both load factor and pricing at a similar level at the same time last year. When adjusting for China, which is a much closer-in booking environment, we are ahead in both volume and rate for the balance of 2016.

Additionally, our guests continue to plan their vacations further out. Over the past quarter, our booking window has extended even further and is at its highest levels yet. Our product mix in the back half of the year is weighted more towards the Caribbean and high yield in China itineraries than it was last year, and we also have less exposure to the weaker Latin America market.

Q3 and Q4 include the full benefit of two newbuilds entering the fleet. In May, Ovation of the Seas will begin her 53-day repositioning sailing to her new home in Tianjin, China. Harmony of the Seas will be in the Mediterranean this summer before repositioning to the Caribbean in early Q4.

The China market is highly anticipating the arrival of Ovation of the Seas in Tianjin at the end of June. Overall, trends for China are within our expected range, albeit at the lower end for sailings from Shanghai. That said, we've sold a higher percentage of China inventory over the past three months than we sold during the same period last year.

As a whole, the portfolio is still expected to deliver yields significantly above the average and continues to command a significant premium in the China market. Our winter 2016-2017 Australia sailings have seen strong early demand at rates that are similar to last year, despite continued capacity growth in the market.

Moving to Europe. Demand for Mediterranean sailings has been strong, particularly from European points of sale, and load factor is ahead of last year. However, recent geopolitical events did have an impact on booking volumes in the United States. While bookings have now returned to typical levels, we had to lower pricing and shift sourcing to recover the volume lost during the initial lull in demand.

Our global presence enabled us to quickly adjust our sourcing activities, but our rate has been impacted since North American consumers typically pay more for our European cruises than guest sourced more locally. As a result, we have lowered our yield expectations for these itineraries. Outside of the Mediterranean, European business is far more encouraging with volumes and rate both in a good position for the Baltics.

North American base products account for just over half of our 2016 capacity and are proving to be another bright spot this year.

As I mentioned, we did see a softening in demand for Europe cruises following the events in Brussels. However, overall demand for cruising from North American consumers remains extremely strong, and our Caribbean, Alaska and Bermuda itineraries are each poised to have a strong year and generate nice yield improvements.

The Caribbean performed extraordinary well in Q1, and the balance of the year is also in a strong book position. There is particularly strong interest in Harmony of the Seas, which begins her sailings in the Caribbean during the fourth quarter. Alaska and Bermuda are booked nicely ahead of same time last year in both occupancy and pricing. Anthem of the Seas will sail to Bermuda from Cape Liberty throughout the summer and is receiving strong demand at superior prices, and we are also trending towards a record-yielding Alaska season.

If you turn to slide three, you will see our updated guidance for full year 2016. Net revenue yields are expected to grow 2.5% to 4%, an increase relative to previous expectations. This guidance incorporates the robust Q1 performance, partially offset by a reduction in expectations for the Mediterranean.

As is always the case, performance will vary a bit across products and by quarter. But on the whole, the balance of the portfolio is relatively on par with previous expectations. From a cost perspective, we are anticipating net cruise cost excluding fuel to be up approximately 1% which is slightly higher than previous expectations driven mainly by the delay in the start date of Empress of the Seas.

We anticipate fuel expense of $734 million for the year and we are 65% hedged. Since our last earnings call, fuel prices have modestly increased while the dollar has weakened relative to our basket of currencies. The combination of these two factors is contributing approximately $0.15 to our full year earnings of which $0.08 was realized in Q1.

Based on current fuel prices, interest rates and currency exchange rates, our adjusted earnings per share are expected to be in the range of $6.15 to $6.35, $0.25 higher than the previous guidance. The $6.25 midpoint represents a 33% improvement in earnings per share, further strengthening our position to reach Double-Double next year.

Before we discuss second quarter guidance, I would like to give you an update on our $500 million share repurchase program. As of this call, we have repurchased $450 million in shares under the current authorization leaving $50 million which will be spent opportunistically this year. We remain focused on improving shareholder returns and we will remain balanced between those efforts on our target to obtain an investment-grade rating.

Now we can turn to our guidance for the second quarter, which is on slide four. We expect net revenue yields used to be up approximately 1% for the second quarter. There are several factors limiting yield growth for the quarter. While booking volumes for the Mediterranean have recovered since the attacks in Brussels, promotional activities were necessary to stimulate demand for closer-in sailings. These weaker trends of the Mediterranean are having a disproportionate impact especially in the second quarter.

From a structural standpoint, there is a drag on Q2 yields from the high-yielding Holy Week sailings which took place in March this year versus April last year. Also, we are introducing two new ships during the quarter which involve a ramp up of occupancy and a lower yielding long positioning sailing. As a result, we expect yield growth to be smaller in Q2 than in the back half of the year.

Net Cruise Costs, excluding fuel, are expected to be up approximately 2%. Based on current fuel prices interest rates and currency exchange rates, our adjusted earnings per share for the quarter are expected to be approximately $1.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Greg Badishkanian of Citi.

Gregory Badishkanian

Great. Thank you. Just first question with respect to the strength in the North American itineraries, Caribbean and Alaska. How much of that do you think is – you said the close-in bookings were very strong but you didn't discount heavily like you've done maybe in the past. So how much of that is due to passengers who otherwise would have went to Europe are staying at home versus maybe improved marketing or they were just waiting for these discounts, they never came, so they decided to book anyway?

Michael Bayley

Hi, Greg, it's Michael. Good question. I think it's difficult to pinpoint one of these different elements. But I think it's a combination of several factors. Certainly, some of the softness that we see in Europe, I think, the Caribbean is the beneficiary of that. A lot of the Americans that previously were planning on going to Europe are now going to the Caribbean. So that's great. They're also going to Alaska.

We've got great hardware in the Caribbean and the American market this year. So we've moved some of our ships around with Anthem in New York and Harmony in Port Canaveral in the fourth quarter with Allure in Port Canaveral, Oasis in Port Canaveral, Liberty that we've just revitalized sailing out of Galveston. So I think the combination of the quality of the brands, the hardware, some of the softness in Europe has really buoyed up the demand from the American market for the products in the Caribbean.

Gregory Badishkanian

And just on China, if you look at kind of apples to apples or comparable sailings, how comfortable are you? I know you probably expect a bit of degradation due to all the capacity coming in, but how comfortable and how in line are those with what you've been kind of expecting, let's say, even if you go back to last year?

Michael Bayley

Yeah. I think – it's Michael, again. I think we had said that we had an expectation that China yields would be down in 2016 versus 2015. And we just finished the first quarter, and everything came in as we expected for this first quarter. So we're feeling quite comfortable that we will come in against our expectations.

Gregory Badishkanian

Okay. All right. That's helpful. And just one final on Cuba. What do you think the opportunity is for Royal to take advantage of that market and maybe potential timing of benefits?

Michael Bayley

Yeah. I think, obviously, we've been watching all of the news, and we've been doing our own planning. I think the opportunity will be good for Royal when everything opens up appropriately, and we're planning to do just that. But I think it's going to be an interesting opportunity for us. It will be great for our customers, our guests and travel partners. I don't think it's going to have a massive material impact on our overall business. It will just be very positive for us.

Jason Liberty

Just one quick overall. We're going to try to limit the questions to one or two questions. There is a lot of question or individuals in the queue to ask questions. So if we can try to manage it to one or two that would be great.

Gregory Badishkanian

Great. Thanks.

Jason Liberty

Thanks, Greg.

Operator

Your next question comes from the line of Kevin Milota of JPMorgan.

Kevin Milota

Hey. Good morning, everyone. Two questions here for you. First, onboard, just give us some more color on – obviously, you called beverage and internet. But is the trend that you experienced here in the first quarter something that we can look to continue in the second, third and fourth quarters? That being first and then second, on Shanghai, you called that out in your China commentary. Maybe, give a little more color on what you're experiencing in China to take that down to the bottom end of the range? Many thanks.

Jason Liberty

So, on the onboard side, I think, this general trend is something that we do continue to expect to see. Obviously, an 8.7% growth is wonderful, and I don't think we expect that same level of rate going forward because there are some year-over-year comps that become more challenging. But I would say that the brands are adding a lot more to the offering. They're doing more on a pre-cruise sales perspective.

On the Internet side, there will be more and more Royal ships that will have VOOM, as we go into Q2 and beyond. And also in the first quarter, Celebrity introduced Xcelerate, that's with an "X," which is not to the same level as VOOM but is far superior to the Internet capabilities relative to the competitive set. So I think overall the trends – and we've had several years now, positive trends should continue.

Michael Bayley

Hi, Kevin. On the question on Shanghai, I mean, obviously we look at China typically everybody looks at it as one market but really, of course, it's three markets it's the North and it's the South and it's Shanghai and we have presence in all three of those regional markets. Shanghai is the biggest market for us. I think it's about 50% to 60% of our total China business. Capacity is up in the Shanghai market in 2016, quite a lot. I think what we are seeing there and we've talked about that is we expect yields to be down moderately and that's certainly true and in Shanghai that's what we are seeing it's a little bit towards the lower end of the range that we expected.

Operator

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

Steven Wieczynski

Hey. Good morning, guys. So first question I guess, if you go back to – If I look at your commentary from the fourth quarter about your booked load position for non-China itineraries, it seems like based on your commentary today, those itineraries have gotten a good bit better, is that a pretty fair statement?

Jason Liberty

Yes, Steve. I think that's the booking environment – so first, just to kind of tee it up, is two-thirds of our capacity growth this year is going into China, which is a much closer-in booking environment. So the year-over-year comp is a little bit more challenging because you have more of a closer-in environment in your mix. When you take that out as you said, even going into the fourth quarter call, as well as what we have seen through WAVE, we have seen strength and we are in a very good booked position on both the load factor and APD basis.

Richard Fain

Stephen, it's Richard. If I could add one comment on that, I think it's important to understand that we have a fair amount of flexibility in terms of managing that to the level that we want it to be. And last year and this year, we really had record levels of capacity booked at this time and at the end of last year.

And as a practical matter, we probably don't want to have much more than that. And so that's a revenue management question. A lot depends on how we're managing our price integrity program, how we expect bookings to be in the later period. So it's not only an indicator of how strong demand is, it's also something that we manage to get to a level that we want.

So going forward I wouldn't really expect us to be looking for higher levels of capacity booked than we've been seeing over last year and this year.

Steven Wieczynski

Okay, thanks. And appreciate the commentary. Then second question, I don't know if you'll be able to answer this but in terms of the Easter shift and Holy Week, how much – I know there's a way to quantify how much that benefited 1Q and then how much is it taking out of 2Q in terms of yields?

Jason Liberty

Yeah, Steve, I would, it's approximately 20 basis points to 30 basis points that would swap from one quarter to another. And also the strength that happened in the first quarter was really across the entire quarter. It wasn't necessarily isolated to one this Holy Week sailings. So I think that's just something else I wanted to point out that it was close-in strength for really all North American products during that quarter.

Steven Wieczynski

Okay, great. Thanks guys.

Jason Liberty

You got it.

Operator

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

Felicia Hendrix

Hi. Thanks a lot. Jason, as we think about the second half, I know this isn't really necessarily a time when you give guidance for third quarter, but just given some of the misunderstandings about the second quarter, I was just wondering if you could help us understand the cadence of the quarters for third and fourth quarters, because I think if you look at consensus now it looks like it's kind of evenly split. And then – and for your yield guidance for the remainder of the year, how much of that is coming from your new ships and how much is coming from the core?

Jason Liberty

Okay. So, cadence-wise as it relates to Q3 and Q4 and I think taking into account some of our commentary around the Med, you guys should consider that Q4 should be higher than Q3 as it relates to the cadence.

And also take into account that we're going to have much more Caribbean product mix in the fourth quarter and we talked about the strength of North American market and the book position that's relative to that.

As it relates to the core, I would say the majority of the yields growth, well, I would say majority meaning greater than 50% of the yield growth is coming from the new hardware that's coming online in the back half of the year. And I do want to stress the back half of the year because though Ovation is now in our environment and Harmony will be in a couple of weeks, those ships do take some time to ramp up and also reposition.

Felicia Hendrix

Okay. So the fourth quarter sounds like normally seasonally not stronger than the third, but just given what's going on now that is what we should see.

Jason Liberty

That's right.

Felicia Hendrix

Okay. And then, my next question for Michael on China, and this is a bigger picture question, but I think almost every investor meeting I have I get asked this question so I think it's worth addressing. I was just wondering if for a moment you could talk about the company's commitment to region and the industry's commitment to the region because there is a lot of investor concern that if pricing doesn't remain its premiums or pricing comes down, we all know with the supply coming on, will the cruise lines back off on their commitment to the region and ultimately could it effect the supply/demand balance that the industry is facing today elsewhere. So I was just wondering if you could talk about how you're thinking about the China investment and is there a realistic scenario where that commitment changes?

Michael Bayley

Yeah. I think it's a great question we've been in the China market now for nearly nine years we've been investing in the market, building distribution, building our sales presence, building our relationship, and more importantly, building the brand, and building a good customer base.

And I think, as we've said, previously, we've done very well in the market in terms of being the recipient of the best cruise line for eight years in a row, the recipient of the best premium cruise line. So we've done a lot of work in building the brand. I think there's this question about supply and demand then, of course, distribution. When you look at supply, obviously, we tend to get at times anxious because more capacity is coming into the market. But I think really the question is, is how much demand is in the marketplace. What we see, if you look at just the sheer size of the outbound market in China, it's the largest outbound market in the world that has been growing at an incredible rate.

Cruise as part of that outbound market is really quite tiny, it's relatively small. We believe that the opportunity for cruise is quite significant in terms of the long-term development and that's why we've been in the market for 9 years. So we are quite optimistic about the future of China as a marketplace and I think we have been quite careful and strategic about the decisions that we have made. I think when we introduced Quantum last year that was really proved to be a successful decision. Customers come into the travel agents and request Quantum, request Ovation and request Royal Caribbean. So our commitment is quite strong to the development of China in the future as a marketplace.

Felicia Hendrix

And as you think about your profitability there, which you have said before is on a per passenger cruise day basis higher than the rest of your regions, when you think about the profitability aligned with the premiums that you are seeing now, where would that breakeven level be?

Michael Bayley

Well, I don't think I could answer that question specifically. I think it's true that China continues to trade at the high end of the ticket yield range and deliver high onboard revenue yields and our Chinese sourcing delivers high profit and returns against all of the global markets. So we feel that that opportunity is very good.

Felicia Hendrix

Okay. Thank you.

Operator

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

Harry Curtis

Hi. Good morning. There has been some discussion about the positive impact that we are seeing from the net effect of FX and fuel, but to what degree are the results this year, particular the cost, somewhat more elevated than they are going to be next year. You are being penalized because of the 50-plus day shift of Ovation, also the delay of Empress. To what degree are there higher costs that you are just not going to see next year?

Jason Liberty

Hi, Harry, I think on the cost side, as we talked about over the long run here, we are managing these costs, I think in a very effective way and certainly a factor in our progress towards the Double-Double target. I don't think that there are specific one-off costs in this year that exist. I think that most of the cost growth that you are seeing relates to things, as an example, would be like the Internet. Putting VOOM or Xcelerate on our ships, there is a cost to that. Improving our footprint, which we will continue to do in China, there's a cost to that. So I don't think that there is something that is specific to this year. I think it's just more in general that this is the investment cost to grow our business.

If you look at over the past three years, our cost on average have been basically flat and I think that's been pretty strong result. But I think, going forward, they're going to be cost that we have to manage, for example, like improving marketing in order to improve yield.

Harry Curtis

Moving on to the second question, with no new ship deliveries next year, what's a reasonable level of cash that should be returned or could be returned to shareholders next year?

Jason Liberty

I think, obviously, capital return is something that will be a discussion with our board. We clearly want to be in a position to balance investing in our growth, which is pretty well planned, being an investment-grade credit and then you are providing capital returns to our shareholders. And I think for us we want to get through the authorization, the $500 million authorization that we still have $50 million left to do and I'm sure we will address that in the future as those decisions are taken.

Harry Curtis

So it's reasonable to think that you're not going to stop at the $50 million left?

Jason Liberty

I would say that it's reasonable to think that our management team and our board will be considering that dividends and share buybacks are mechanisms to return capital to shareholders.

Harry Curtis

Okay. Thanks, Jason.

Jason Liberty

You got it.

Operator

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

Tim Conder

Thank you. First of all, congrats on managing through a lot of moving parts along the way. But I'm going circle back to China here, Adam, Jason or Richard, can you just sort of give us your color on what your net yield range is for China on year-over-year and maybe break that down into the like-for-like itineraries versus the impact of more year around capacity and clearly adding shoulder periods which pulls that average down?

Jason Liberty

Yeah. We don't give specific guidance on our Net Yields in the market but, as Michael commented, it is certainly a significant premium to our fleet average as well as a significant premium to the marketplace there today. We also commented on the fourth quarter call that we expected yields to be down in China and we still expect that.

And as Michael commented I think the only kind of pressure point has been Shanghai, where there has been a lot of capacity in place. But I think that people should look at China as well as Asia in total. It's a market that the average yield is higher than the average and as we add more capacity in, that improves our revenue and that improves our profitability and that's how you should see us continuing our strategy.

Tim Conder

And then net profitability, Jason, again to clarify from prior question is given that on the yield side, is it higher than the balance of the world, is that fair to assume?

Jason Liberty

On a return perspective?

Tim Conder

Yes.

Jason Liberty

Yeah. No, it's both on yield and on returns. It's certainly higher than the average.

Tim Conder

Okay. And then could you expand on your comments about connecting more directly with the Chinese consumer? And then, lastly, how should we think about the cadence of the new ships from Mein Schiff coming in and the impact there on the income from TUI in particular below the line?

Jason Liberty

Hi, Tim. I can talk about how we have been connecting with the customer in China. One of the things that we have been doing is investing more in the consumer marketing direct to customer. So, for example, this year we launched a television campaign in Tianjin and Shanghai with a dedicated Chinese TV commercials and what have we've been spending more time just talking directly to the consumer.

And, of course, over time we've literally built up a loyal database of customers who have sailed with this and they are great advocates for the brand. And, of course, they talk about Royal Caribbean in the marketplace. So it's a gradual process and it's a process we've been engaged in for some time and we will continue to invest in.

Tim Conder

And then TUI?

Jason Liberty

Sorry, Tim. What was the question on TUI?

Tim Conder

Just how should we think about the cadence of the Mein Schiff 5 and then Mein Schiff 6. As those come into the flow here, how should we think about that impacting net equity income line?

Jason Liberty

Well, I think that we do now breakout that profitability line or the equity pickup line in our filing and I think that – I think it's reasonable to consider that that trend change year-over-year will continue as the new ships come onboard.

Tim Conder

Great. Thank you.

Jason Liberty

You got it.

Operator

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

Robin Farley

Great, thanks. Just looking at your full year yield guidance, you know, it's not up by as much as the outperformance in Q1. Should we think about that more as just, it's within the range of being conservative surrounding or is it – do you have a slightly more conservative view over the rest of the year because of your comments about the Med? And I am just thinking about – it sounded like Q2 a little lower than consensus but I would think the Med would be more of a Q3 impact than Q2. So just maybe how to think about that? Thanks.

Jason Liberty

Yeah. So, Robin, to that point, the increase in our yield guidance for the year, which is – gives the midpoint of 3.25%. A lot of that is a read through from Q1 and then from Q2 to Q4 we're taking a – I wouldn't say it's a more conservative posture but a more realistic posture as it relates to the Mediterranean and it's our expectation our yields are going to be lower. It is disproportional in Q2 for a few reasons. One of which is the ships are now repositioning or have repositioned to Europe. So they do have May sailings and June sailings. And as I talked about the lull that we saw after the recent geopolitical events that there was a need to do some price stimulation on some of the more the closer-in bookings that related to the Med in which that lull really occurred with the North American consumer.

Robin Farley

But then you are comfortable with Q3 because after that, sort of, lull post Brussels, in other words you've seen the pickup since then for the med sailings later in Q3?

Jason Liberty

Yeah. It's picked up. Actually our load factors are higher. As I commented in my remarks but we're sourcing more guests from Europe and European consumers do spend a little bit less on ticket and certainly less on onboard and that does weigh in on both Q2 and Q3 yields.

Robin Farley

Okay. Great. And then lastly just a quick clarification, you mentioned sales in China higher in the last three months. Is that just volume higher or did you mean actually like load higher like capacity adjusted volumes higher?

Jason Liberty

It's volume, but the common hold for capacity adjusted.

Robin Farley

Okay. Great. Thank you.

Operator

Your next question comes from the line of Steven Kent of Goldman Sachs.

Steven Kent

Hi. Good morning. Two questions. What percentage of your European summer sailings are typically U.S. sourced and how has that changed this year? I am not sure, if you have addressed it yet but the Empress of the Seas delay, what is causing that?

Michael Bayley

Hi, Steven, I think Jason is looking at the numbers on the European sourcing, I can talk a little bit about Empress of the Seas. We brought Empress back from Pullmantur, it had been over with Pullmantur for approximately 9 years. We obviously had an expectation. We were going to do a certain amount of work with the ship and as we started the work we realized that we simply had more work to do. We wanted to make sure that we brought the ship up to the standard that our customers are used to with Royal Caribbean International, and a lot of that work required just more time to complete it. So, we had to extend the work time. And I think now we've got the ship scheduled to come back into operation at the end of May.

Steven Kent

So, this was customer-facing stuff rather than engineering?

Michael Bayley

No, it was related to customer experience.

Steven Kent

Okay.

Jason Liberty

Yeah. And Steve on the European sourcing side, the European, approximately about two-thirds of our guests for European sailings come from Europe, and this year it will be 3 or 4 percentage points higher as we've shifted that sourcing.

Steven Kent

Okay. Thank you.

Jason Liberty

You got it. Thanks, Steve.

Operator

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

Sharon Zackfia

Hi, good morning. Jason, can you give us for the Mediterranean, what your capacity is over the spring and summer versus last year?

Michael Bayley

Sorry, Med capacity year-over-year is basically flat. It's up about 1% for us year-over-year.

Sharon Zackfia

Okay. And then just to clarify on Robin's question earlier, the lull that you saw from North American demand, that is recovered, I wasn't sure if you were saying you recovered it just with the European sourcing, or if you've seen the North American customer come back to a more normalized, kind of, booking cadence for the Med?

Jason Liberty

The lull is just overall recovery in terms of load factor. As Michael commented before the North American consumer, there was still very interested in Europe, but some of that interest has shifted to the North American products were we've seen a lot of strength.

Sharon Zackfia

Okay. Thank you.

Jason Liberty

You got it. Thanks, Sharon.

Operator

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

Stuart Gordon

Yeah, good afternoon. And I have a couple of questions please. I'm interested on VOOM, I was just wondering how many ships you now have are connected and how will that change over this year and how has it been changing?

And also, could you just give us a flavor for how you think about your guidance? Clearly, the close-in bookings and the onboard spend was extremely strong in the quarter. But how do you think about that when you're putting together your guidance? Is the assumption based on what you are seeing in booking trend at the point in time, or do you try and be more dynamic about it? Thank you.

Michael Bayley

Hi, Stuart, It's Michael. I can answer the question with regards to VOOM. On May the 1st, literally every single ship in the Royal Caribbean International fleet will have VOOM onboard. So, we're literally now implementing it ship-by-ship. I can't recall how many ships have it currently but literally in a few days every single ship will have it.

Jason Liberty

Yeah.

Stuart Gordon

And so what pace was that? Sorry Michael, is it – how many – I mean, is that evenly spread over the last 12 to 18 months?

Michael Bayley

I can't recall, Stuart, how many ships we had about a couple of months ago. This has literally happened over about a 90 day to 120-day period that we've implemented the entire fleet. So it's literally gone from 5, 6, 7 ships to 23 ships, 24 ships over the past 90 days.

Stuart Gordon

Okay. Thanks.

Jason Liberty

And then, Stuart, as it relates to how we think about guidance, certainly our guidance is really a reflection of what we're seeing in the booking environment prior to the call and certainly we've seen patterns on close-in. We would certainly be taking that to account in our guidance.

There was particular strength in the first quarter from the North American consumer for the Caribbean. And on the onboard, as we continue to rollout VOOM, as Michael indicated, or Xcelerate on Celebrity, those are new things we are introducing that not all the time you create the results that we saw, as we introduced new things but clearly that worked well for us in the first quarter.

Stuart Gordon

Okay. That's great. Thanks very much.

Jason Liberty

Thanks, Stuart.

Operator

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

Vince Ciepiel

Hi. I had a question on the new pricing policy. On a prior call, you mentioned there would be some residual impact in 2016, maybe some cabins going empty. Could you comment on how you've seen this trend year-to-date? And I think you also mentioned that by 2017 the impact would be positive. Do you think you're still tracking in line with that target?

Richard Fain

Yeah. I think it's still playing out pretty much as we expected. We do think that there is some impact on capacity or on occupancy in 2016. But as we said we don't think the effect has been huge, and we think that by 2017 it will be positive. So nothing has changed in our perspective as to how that would play out.

Vince Ciepiel

Great. Thank you. And then, secondly, on Net Cruise Costs, I know you guys have mentioned they tend to be a little lumpy on a quarterly basis. But I think there was the thought that the fourth quarter would be lower. And the guidance seems to imply the second half maybe turns negative year-over-year. So if you could just comment on the quarterly cadence 3Q versus 4Q in terms of Net Cruise Costs?

Jason Liberty

Yeah. So I think cost for the third quarter will be lower than they are in the fourth quarter should be the expectation. What drives that is, obviously, there is the new capacity coming online. But also we don't have any dry dock days in the third quarter, and last year we did. And so that makes that year-over-year comp more achievable. So that should be how you kind of think about the cadence for the back half of the year.

Vince Ciepiel

Thank you.

Jason Liberty

You got it.

Operator

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

Jaime Katz

Good morning. Thanks for taking my question. I'm actually curious about some of the smaller brands. First, the performance of Pullmantur over the last few months in light of the Mediterranean environment. And then I think it's been some time since we've heard anything about the relationship with Ctrip. So I'm curious if we can learn more about any of the read-throughs that you've gotten from them about the Chinese consumer or anything that's changed with that relationship. Thanks.

Richard Fain

Sure. I'll comment on Pullmantur. As you know, we did take a change in strategy. We decided that it would be better to pull back a bit and focus on the Spanish and French markets. That actually seems to be doing well. And actually Pullmantur ironically has had some of the more positive variances in our company.

At the same time, as I know it's been said publicly, we periodically look at strategic opportunities and we would do that for any of our enterprises, but we'll see where that takes us. But, right now, ironically, Spain, in particular, is proving itself to be turning around quite strongly. Now, it's doing so from a very low base, but it does appear to be doing so. And so I think we're feeling better about that market than we have in a long time. I'll ask Adam to talk on the Ctrip.

Adam Goldstein

Hi, Jaime. So Ctrip is our partner in SkySea and we are very, very pleased to be in partnership with them. They are an excellent company, forward-looking, very much a fundamental part of the growing Chinese travel market and good partners we think for the long-term.

SkySea, the name of the cruise line that is our venture with Ctrip will be coming up on its first anniversary in about three weeks. And so, she is a very, very young cruise line with one ship and doesn't have the kind of presence yet in the Chinese market that would even compare to Royal Caribbean International, as Michael has been discussing.

So, we hope to build a different profile of client, the client that understands that this is a primarily Chinese-owned venture and we'll offer certain opportunities whether through technology or in the guest experience that will be differentiating in the marketplace. But it's very early days still. We'll have to see how the second season goes and we hope to be able to grow SkySea in the future.

Jaime Katz

Thank you.

Operator

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

Assia Georgieva

Good morning. Congratulations on a great Q1. I had a couple of quick questions. So, in terms of the European sourced passengers, they tend to book closer in than the North American passenger. Do think that there still may be an opportunity in May, in June, to where that lull post-Brussels kind of gets taken away from people's minds and we might see some close-in pick up?

Michael Bayley

Hi, Assia. The European markets have been quite good. So, the lull was more impact to the North American customer than it impacted the European customer. European sourcing has been pretty good. And there is this kind of transition point that occurs around May, June in terms of a natural shift between demand between the North American market and the European market. As you've pointed out, it's more of a late booking market for the European. So, it's going to pick up anyway out of the European markets, but the European markets are in pretty good condition.

Assia Georgieva

Okay. Thank you, Michael. And, Richard, quick question for you. I think in your opening remarks you mentioned $6.78 EPS target for 2017. I may have missed something, but somehow I had a $7 figure stuck in my mind.

Richard Fain

I didn't actually – maybe I should have been clear, that is the Double-Double number. So, our EPS in 2014 – our adjusted EPS was $3.39 and our Double-Double target is simply double that and if my math is right, and I sure hope it is, that's $6.78.

I think people may have sort of been rounding that to $7 and I know some people think that we're doing better than the Double-Double, but we set out the Double-Double. It was an aggressive target when we set it out. The objective was to mobilize the people in the company to that goal. It served that purpose very well. And, obviously, if we do better than the $6.78 that would be terrific too. So I don't think we've – we're not giving guidance for 2017 but that is literally the target that we set a year or two ago when we set those targets.

Assia Georgieva

Thank you, Richard, for the clarification, again. Great job on Q1.

Richard Fain

Thanks, Assia.

Operator

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

Jared Shojaian

Hi. Good morning. Just want to follow up on that yield and discounting commentary. I know last year you talked pretty regularly about how eliminating these last minute discounts was a headwind and just judging by the close-in strength you're seeing right now, it looks like it's a nice tailwind here in 2016.

So can you quantify how much of your yield guidance for the remainder of the year is attributable to any of these tailwinds? And I am specifically trying to think about this in the context of 2017. Is there any reason why the yields we're seeing this year can't be repeated again next year? Anything you can share on early 2017 booking yields will be helpful. Thanks, guys.

Richard Fain

Okay. So, Jared, as it relates to 2017 we'll be addressing that as we move into future quarters because it's really kind of too early to provide any kind of forecast on things going forward.

But I would say that, the impact we talk about as it relates to price improvement program, those are, to us, quantifiable things. For example, number of cabins that go empty.

What's not quantifiable is really us continuing to build a better book of business, at higher load factors, higher rates, and a window that keeps extending. And so, in that are more quality bookings and some of that is because of the reconditioning of the consumer knowing that we're not going to be discounting close in. Those benefits are very difficult to measure. But we do think on a volume perspective that that kind of turns itself around into next year. And as we've always done in the past, we'll give color on 2017 as we move more towards the back half of the year.

Jared Shojaian

Okay. Thanks. And then, as a follow-up, what are your expectations for timing on Cuba? Caribbean, obviously has been very strong this past fourth and first quarter. And I think some people are wondering how you can drive incremental yield off some of these comps. So do you think Cuba could be that source of incremental yield growth as we head into 1Q 2017 or is it too soon to be talking about it?

Adam Goldstein

Hi. Sorry. Jared, it's Adam. So, we have a keen desire, I think Michael might have expressed this before too, to take our guest to Cuba. Obviously, if you think about what we've been doing since 1970, our ships keep cruising on a giant circle around Cuba without going there.

And we're excited about it, but this is the dialogue that continues with the Cuban government and the timing of permission to go is unclear, although we're optimistic. And so it's hard to predict when any involvement in Cuba would have become part of our business.

And as we've tried to express on previous dialogues, the Cuba's infrastructure is very, very limited in terms of the overall amounts of capacity that it can take. If it develops well over the years coming, eventually it probably can become one of the mainstay marquee Caribbean regions but that's a long way off. So we hope to be there in the short term, but it would be on a fairly limited presence.

Richard Fain

Yeah. And I think we've made it pretty clear that we don't think even when it is operational it will be a major part of our business. So I wouldn't have thought that per se looked at in isolation would be a driver. However, I think two things. It actually will help generally yields in the area because I think it does raise interest. The publicity about Cuba, the discussions about Cuba raises interest in Caribbean cruising.

The other thing is I wanted to spell any notion that we think that the yield improvement that we are getting today is particularly high. We've got some terrific new vessels; we've got really very strong market position of our brands, of our operations. So we need the big driver and we think it will continue. It has been a driver and we think will be a driver is actually how powerful our brands are doing in the marketplace.

Jared Shojaian

Okay. Thank you.

Jason Liberty

Operator, we have time for one question.

Operator

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

James Hardiman

Hi, good morning. Thanks for taking my call. So just – and you may have already answered this but I wanted to be 100% clear on sort of the China dynamic. Obviously, yields for China itself are down versus last year but Chinese yields are significantly higher than your average. Net-net, is China helping your yields this year and as I think about next year I know you're not going to get into 2017 guidance but should we expect a similar impact to overall yields next year?

I think there is some fear among investors that there is a delayed impact based on the way that the charter process works and that we still haven't felt all of the fallout from some of the charters losing money on some of the cruises last year?

Michael Bayley

Hi, James, this is Michael. Yeah, I think some of the charters lost money for a period of time in 2015 because of the South Korea MERS and the typhoons. But sometimes I think we should get that those very same charters made a lot of money over the past eight years and continue to make money and they are chartering spaces they previously had done. So I think it was a glitch that impacted some of the charters during that period and I think a lot of them now have recovered from that.

Certainly the China business is very positive for our overall business and as I think we've already commented, it's a high-yielding market and it contributes nicely to our overall yield. It's above average. So when we look into 2017, for example I think Richard had mentioned that growth for the industry in 2017 is closer to 50% versus close to 100% over the past few years.

So capacity is slightly – overall growth is slowing a little bit in 2017. For Royal Caribbean International, we've already announced our deployment for 2017 and overall I think we are up about 8% or 9% in the market in 2017.

James Hardiman

Great. And then just last question for me, on the other income line there's a lot of moving parts there. I think if you add back the Pullmantur accounting. It was about a $20 million positive. Any way you could give us guidance on that line for the full year and maybe how to think about the puts and the takes there?

Jason Liberty

Yeah. Well, I think that if you were to take our yield and cost, the differential is the other income line and the element of the other income line that really changes outside of ineffectiveness and those type of things is the improvement in our equity investments.

So, I think, if you look at the year-over-year growth especially in the back half of the year before we disclosed in our filing for TUI that is a good proxy to think about how other income and expense will grow for the back half of the year because if you take an account interest, you take into account TUI that should get you pretty close.

Jason Liberty

Great. Thank you for your assistance, Laurie, with the call today and we thank you all for your participation and interest in the company. Carol will be available for any follow-up you might have today and I wish you all a very great day.

Operator

Thank you. That does conclude the Royal Caribbean Cruises Limited first quarter 2016 earnings conference call. You may now disconnect.

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