Royal Caribbean Cruises (RCL) Q3 2018 Results - Earnings Call Transcript

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About: Royal Caribbean Cruises Ltd. (RCL)
by: SA Transcripts

Royal Caribbean Cruises Ltd. (NYSE:RCL) Q3 2018 Earnings Call October 25, 2018 10:00 AM ET

Executives

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Richard D. Fain - Royal Caribbean Cruises Ltd.

Michael Bayley - Royal Caribbean International

Analysts

Robin M. Farley - UBS Securities LLC

Steven Moyer Wieczynski - Stifel, Nicolaus & Co., Inc.

Felicia Hendrix - Barclays Capital, Inc.

Harry C. Curtis - Nomura Instinet

Patrick Scholes - SunTrust Robinson Humphrey, Inc.

David James Beckel - Sanford C. Bernstein & Co. LLC

Jared Shojaian - Wolfe Research LLC

Jaime M. Katz - Morningstar, Inc. (Research)

Timothy Andrew Conder - Wells Fargo Securities LLC

James Hardiman - Wedbush Securities, Inc.

Gregory Robert Badishkanian - Citigroup Global Markets, Inc.

Operator

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. After the speakers' remarks, there will be a question-and-answer session.

I would now like to introduce Chief Financial Officer, Mr. Jason Liberty. Mr. Liberty, the floor is yours.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

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 would like to refer you to our notice about forward-looking statements which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Please note that we do not undertake to update the information in our filings as circumstances change.

Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP historical items can be found on our website. Unless we state otherwise, all metrics are on a constant currency adjusted basis.

Richard will begin by providing a strategic overview of the business. I will follow up with a recap of our 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?

Richard D. Fain - Royal Caribbean Cruises Ltd.

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 am 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 forecasts.

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 three 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, new chat capabilities, and an innovative digital stateroom key. Again, I want to remain 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 are well underway in the buildup of Perfect Day at CocoCay in the Bahamas, and we are 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, eliminating 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 would like to mention. Actually, I don't think I need another example, but this is one I am 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 am pleased to turn the call back over to Jason. Jason?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

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 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 would 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 book 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 six 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 fuel 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 our 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 expectations. The consolidation of Silversea's operations 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 one quarter lag, so Q4 includes the results of Silversea's higher-yielding August and September sales.

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 costs that relate 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 cost next year.

From a hardware standpoint, we'll enjoy our first full year with Celebrity Edge, Symphony of the Seas, and Azamara Pursuit while 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 three of these additions will increase both yield 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 are 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 a quarter 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, 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 bookings. 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 book 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 will ask our operator to open up the call for a question-and-answer session.

Question-and-Answer Session

Operator

We'll pause for just a moment to compile the Q&A roster. Your first question comes from line of Robin Farley with UBS. Your line is open.

Robin M. Farley - UBS Securities LLC

Great. Thank you. Just kind of looking to get a little more insight into 2019. I wonder if you could – you mentioned that rate and volume ahead, so sounds like yield's 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 yield 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 that Q1 would be representative of how the year would look; just any thoughts around that? Thank you.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, sure. So first on 2019, the acceleration in the bookings for 2019 have been very strong, even before and after we lapped the hurricane comp. And we have been up in both a 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, 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 part of our Q1 picture, and that is also in a very strong book position.

Robin M. Farley - UBS Securities LLC

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 is there any impact in your discussions with travel sellers there?

Michael Bayley - Royal Caribbean International

Hi, 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 award as the top cruise line in China. So we're excited about Spectrum coming into Shanghai in 2019.

If you recall, Ovation is 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.

Robin M. Farley - UBS Securities LLC

Okay. Great. Thank you.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

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 Q4 has been a strength we have seen coming out of the China market.

Robin M. Farley - UBS Securities LLC

Oh. Great. Interesting. Thank you.

Operator

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

Steven Moyer Wieczynski - Stifel, Nicolaus & Co., Inc.

Yeah, hey. Good morning, guys. So, Jason, I guess the 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% start point for yield, but can you maybe help us think a little bit better about what does robust mean?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Well, I would say the 2019 booking environment has been strong, which has led us to be in a very, I think, good book 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 for the new hardware, like-for-like improvement. 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 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 very good comps for our business on a like-for-like basis.

Steven Moyer Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay. Got you. Thanks. And then in terms of – I know you don't want to give quantitative guidance at this point for next year, but from a 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 2019 versus 2018?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Sure. So just starting off on the cost as it relates to the technology side, there's really kind of two 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 2017 to 2018, an elevation in our depreciation as a percent of our revenue. We would expect an increase as well over the 2018 to 2017, so more 2018 to 2019 will be even higher as a percent of our revenue for our investments in technology and also for our investments with – also with the 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 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 get, pull it up here – so in 2019, we had about 360 drydock days, and – no, I'm sorry, in 2018 we had about 280 drydock days and in 2019, including Silversea, we have about 360 drydock days.

Steven Moyer Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay. Great. Thanks, guys. Appreciate it.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

You got it.

Operator

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

Felicia Hendrix - Barclays Capital, Inc.

Hi. Thank you. So just to confirm because for 2019, your outlook, it sounds like you're looking every quarter higher volumes and higher pricing for the next year?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

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

Felicia Hendrix - Barclays Capital, Inc.

Great. And then just the phenomenon of your extending booking curves, does that historic – I mean not historic – we've looked back about a year-and-a-half, if you look at the past year and a half, ex maybe this quarter, you beat net 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?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, 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.

Felicia Hendrix - Barclays Capital, Inc.

Okay. And then just on your fourth quarter guidance, just a couple of 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?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

That's correct.

Felicia Hendrix - Barclays Capital, Inc.

Okay. And then just the increase in the cost, you mentioned that was project Excalibur. We're estimating that's about $0.08 to earnings? Is that right? $0.08, $0.10?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

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 into 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 competition cost mildly.

Michael Bayley - Royal Caribbean International

Hey, Felicia. It's Michael. One other point to bring forward is the nonrefundable deposits that we introduced about a year and a half 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 they're not churning. So that's I think also been a contributing factor.

Felicia Hendrix - Barclays Capital, Inc.

That's great. And then just finally, just for 2019, just given all the moving parts for – 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 2019 yields, the robust 2019 yields that you talked about, to offset those incremental costs from kind of how we've been thinking about things currently?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yes. 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 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.

Richard D. Fain - Royal Caribbean Cruises Ltd.

Yeah, Felicia, if I could – it's Richard, and if I could just add to that. We're really think that our heavy emphasis on cost control has been an important constructive factor for us, and I think we just have these two 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 recently a good operational thing for our bottom-line, but it does – because we are 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 are 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 as Jason says, the way it comes across in the numbers may be a little bit counterintuitive until you look at the details.

Felicia Hendrix - Barclays Capital, Inc.

Okay. Thank you.

Operator

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

Harry C. Curtis - Nomura Instinet

Hey. Good morning. Just a clarification. Early 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 could go through those numbers again.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Sure, Harry.

Harry C. Curtis - Nomura Instinet

I think you went from like 380 down to 360, so is it like – I just want to get that right.

Michael Bayley - Royal Caribbean International

Harry, it was the other way around. It was 280 to 360. So 280 in 2018 and 360 in 2019.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Exactly.

Harry C. Curtis - Nomura Instinet

280? Okay. So obviously it's difficult when you get older. Okay. So 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, did development costs begin to come down. Some of these bonus accruals – will they come down?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, I don't think there's really a, per se, timing element to 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 certain 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 in the guest experience and what the customers are looking for – the sooner we can get that on the ships, we believe that 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.

Harry C. Curtis - Nomura Instinet

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

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Well, we are still very much in our planning process, so it's tough to pinpoint that. And I would just point to make sure that in that consideration, besides for Silversea, there's also the costs that we will incur with Perfect Day and also the Port of Miami. So 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.

Harry C. Curtis - Nomura Instinet

And just one real final quick question going (37:54) back to a comment you just made about the technology application. Have you gone from crawling to walking? Or are you going from walking to running?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Well, I would point you to that chart. I mean, that really does depict the path and the cadence that we're going down. So I think the chart that was on slide 2 kind of shows our path on how we plan on this being implemented across our fleet 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.

Harry C. Curtis - Nomura Instinet

Okay. Very good. Thanks for your help.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

You got it, Harry. Thank you.

Operator

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

Patrick Scholes - SunTrust Robinson Humphrey, Inc.

Hi. Good morning. Two questions for you. In the most recent earnings call, you had, for 2Q results, had talked about strength in last-minute booking trends. I'm wondering what you observed in last-minute booking trends for travel in 3Q and year-to-date.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Sure. So I'll just start on that one. We 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 and the close-in environment in Q3 versus in the second quarter.

Patrick Scholes - SunTrust Robinson Humphrey, Inc.

Okay. Thank you. Then 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 of your pet (40:04) 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.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, 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 and as well as for next year.

Patrick Scholes - SunTrust Robinson Humphrey, Inc.

Okay. Very good. Thank you.

Operator

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

David James Beckel - Sanford C. Bernstein & Co. LLC

Hey. Thanks for the question. One for Richard. Richard, in the past you've said that Royal is kind of like a duck on the water paddling hard below the surface despite the appearance of a smooth glide on top. Obviously a reference to your people, not your ships. But I'm wondering...

Richard D. Fain - Royal Caribbean Cruises Ltd.

Thank you for that clarification.

David James Beckel - Sanford C. Bernstein & Co. LLC

Yeah, I thought that was needed. I think part of the concern with investors that's being reflected into stock price is slowing cycle obviously. So at this point, as the cycle extends further, do you feel like your company has to paddle harder than it has in the past to deliver the same results?

Richard D. Fain - Royal Caribbean Cruises Ltd.

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 paddle fast. Our mantra, as you know, is continuous improvement and we are very focused on that. I would not have described the situation today as any different. We always are focused on doing other things. The travel agent partners that we're 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, Symphony of the Seas, which we'll be naming here in about three weeks. We just about a month and a half ago did Azamara Pursuit and Celebrity Edge coming early December. It's Flora next year.

So there are a lot of really quite dramatic new hardware things. And we're probably now seeing coming to 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.

David James Beckel - Sanford C. Bernstein & Co. LLC

Fair enough. Thanks. Thanks for that color. And a follow-up question about the booking curve. Jason, you've given a lot of excellent color on the ways in which you're 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?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yes, we would.

David James Beckel - Sanford C. Bernstein & Co. LLC

Okay. Thank you.

Operator

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

Jared Shojaian - Wolfe Research LLC

Hi. Good morning, everyone. Thanks for taking my question. Jason, I want to ask you first about cash deployment for next year because 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?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, 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 3 to 3.5 times, as we talked 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 buyback 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.

Jared Shojaian - Wolfe Research LLC

Okay. And then just to switch gears here, I think back to the demand side, I think I 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 waterpark 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?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, 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.

Jared Shojaian - Wolfe Research LLC

Okay. Thank you.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

You got it.

Operator

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

Jaime M. Katz - Morningstar, Inc. (Research)

Thanks. Good morning. I have one quick question on Silversea. It looks like there's a heavier impact to cost than benefit to the 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 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? Thanks.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, sure. So first, 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 onto the fourth quarter. And so, 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, 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 it will weigh on our yield metric because 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 2019, but more of that will happen in 2020 and beyond.

Jaime M. Katz - Morningstar, Inc. (Research)

Thank you.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

You got it.

Operator

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

Timothy Andrew Conder - Wells Fargo Securities LLC

Thank you. 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, and for Turkey comeback, we're seeing yourselves and others maybe add some itineraries in 2019 and maybe a few folks into early 2020. 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? And I know it's 2020, but given today, would you anticipate the impact to be flat? Neutral? Positive? And how has that changed your hedging approach?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Okay. So first on the Eastern Med side, we continue to monitor the situation in the Eastern Med. Obviously, Eastern Med currently and historically when there are even more ports that were attached to the Eastern Med definition was very attractive, and so we continue to watch, I would say consumer demand or interest, I would say caught more interest has perked up a little bit, but we're obviously making sure that experience can be sustainable before offering too much of the product or increasing what's available within the Eastern Mediterranean area.

As it relates 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 – I mean, we'll be able to burn the higher sulfur fuel because of the scrubbers, sorry.

Timothy Andrew Conder - Wells Fargo Securities LLC

So as you're skewing your historical hedge more to the MGO given the higher cost and potentially that going up and the other going down. Is that...

Jason T. Liberty - Royal Caribbean Cruises Ltd.

That's right. Even though – yeah – those curves today for all the fuel types are in backwardation.

Timothy Andrew Conder - Wells Fargo Securities LLC

Okay. Okay. Last question. I know a lot of the focus here has been on 2019, so continuing in that vein, 2019, could you just maybe talk about a little of the puts and takes in the equity income line? TUI is the large part of that, obviously, but Pullmantur is folded into there. Just any puts and takes from that perspective, 2019 versus what we've seen in 2018?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, I mean, I think in terms of the core drivers of the equity pickup line, which you said is TUI and which is Pullmantur, both those brands are doing well. TUI is doing exceptionally well and 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 two – those two are definitely the biggest drivers.

Timothy Andrew Conder - Wells Fargo Securities LLC

Okay. Thank you.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Sure.

Operator

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

James Hardiman - Wedbush Securities, Inc.

Hey. Good morning. Thanks for taking my call. So I think you've probably told us all you'd like to tell us in terms of the full year 2019, but maybe you can...

Jason T. Liberty - Royal Caribbean Cruises Ltd.

But you'll try again.

James Hardiman - Wedbush Securities, Inc.

Yeah, well, I'm admittedly fishing a little bit here, but...

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Okay.

James Hardiman - Wedbush Securities, Inc.

...maybe talk about phasing a little bit. I mean, there's lots of puts and takes: geographic, hardware, drydocks, comparisons. My experience is it's better to get people where 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?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Well, I would say once again, we're still 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 is when it really kind of comes online. So there will 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 costs as we reposition the ship from Europe into China. Those would probably be the things that I would call out. Certainly when we get into January, we will help – focus on the cadences within quarters.

Richard D. Fain - Royal Caribbean Cruises Ltd.

Yeah, and, James, as we've 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 a week or two in one direction, we'll do that. And I know that causes issues because in most companies you'll look at a flow and you assume everything carries out throughout the year. In our case, we really do try and manage on an annual basis. So I think we've tried to point out some of the things we already know that will cause lumpiness, but I think we ought to sort of be in full disclosure, telling you that there is a certain degree of lumpiness that we don't always predict.

Michael Bayley - Royal Caribbean International

Hi, James.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, just go ahead.

Michael Bayley - Royal Caribbean International

It's Michael. Sorry. I just have to jump in because there's only two 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 Royal Caribbean. Obviously we've got four Oasis-class ships and our Royal Amplified ships operating in the short cruise market and all of these ships will be going to Perfect Day after May of 2019 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's, 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.

Richard D. Fain - Royal Caribbean Cruises Ltd.

Well done.

Michael Bayley - Royal Caribbean International

Thank you very much, yeah.

Richard D. Fain - Royal Caribbean Cruises Ltd.

That's an answer to lumpiness. Yes.

Michael Bayley - Royal Caribbean International

Yeah, there you go. Take that.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

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

Michael Bayley - Royal Caribbean International

Thank you.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Operator, we'll take one more question.

Operator

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

Gregory Robert Badishkanian - Citigroup Global Markets, Inc.

Great. Thank you. 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 a little bit more normalized on a year-over-year basis?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah, 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.

Gregory Robert Badishkanian - Citigroup Global Markets, Inc.

Okay. All right. And then if you look at Europe, I know you talked about east versus west but how about North American sourced business going to Europe versus European sourced business or European sourced customers cruising in Europe. How has that changed over the last few months or few quarters?

Michael Bayley - Royal Caribbean International

Hi. 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 to seeing a shift in currency, particularly with the euro and the sterling, then we'll probably see an improvement in demand out of the European markets as well. But it's been pretty good.

Gregory Robert Badishkanian - Citigroup Global Markets, Inc.

Great.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Okay. Thanks, Greg. 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 a very good day.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.