Royal Caribbean Group (RCL) — Q2 2015 Earnings Call Transcript

Good morning, and thank you for joining us today for our second quarter earnings call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and Chief Operating Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Laura Hodges, 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. Additionally, 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 an overview of the business. I will follow with a recap of our second quarter results, provide an update on the business environment, and then provide an update on our full year and third quarter guidance for 2015. We will then open the call for your questions.

Thank you, Jason, and thanks to all of you in the investment community for joining us this morning. There's a lot of good stuff to talk about. Overall the year continues to turn out as expected. Revenues are a little better, costs are up slightly, and our earnings are back to within a nickel of our January guidance. To put this in perspective, foreign exchange and fuel have bounced around during the year and today have cost us a net of a negative $0.21 versus our original guidance. It was on this call a year ago that we first publicly announced our Double-Double program. And that anniversary seems like a great time to update you on our progress. The program is solidly on track to meet our twin goals of doubling our 2014 profit and reaching double-digit ROIC by 2017. The three pillars of the program are modest capacity growth, strong cost controls, and rising revenue yields. These three pillars have not changed, and they remain at the core of everything that we do. Today I would like to focus on the last two of these pillars as moderate capacity growth is firmly in hand. Beginning on the cost side, we remain steadfast in our commitment to maintaining a cost-conscious culture. While our cost guidance is up slightly from April, it's still lower than our initial guidance of up 1% or better. This is due to the diligence of our teams in finding efficiencies and building synergies throughout our business. Most recently, we merged our single branded marine department into one world-class marine organization. The intent of this consolidation was to facilitate the sharing of best practices and to drive further efficiencies throughout our fleet. I look forward to updating you as this develops. We do believe that our cost culture is in place and remains on course. But we are not expecting this to be the main driver of our earnings trajectory. Rather, we expect our focus here will be to continue to hold costs to a realistic level. But the final and the most important pillar in the Double-Double is growing revenue. And one of the key drivers of growing revenue is stimulating quality demand in the marketplace for our products. That's why we're increasing our marketing investment modestly for the back half of the year. As we shared in prior calls, we remain in the best book position in our company's history. And investing in additional marketing now will help us to further seed this healthy position into 2016. Another key driver of revenue growth is our new builds. Quantum of the Seas and Anthem of the Seas have definitely not disappointed. They both received a warm reception in their respective markets of China and the United Kingdom and their performance is nothing short of terrific. With the addition of these new builds to our fleet, as well as Ovation of the Seas and Harmony of the Seas joining us in the quarter two of next year, the growth of our Asia-Pacific region, you will begin to notice somewhat less seasonality in our business and more of an alignment in the supply and demand environments. Speaking of seasonality, it's worth commenting on the timing of our profits. We continually emphasize that we manage our business on an annual basis, not a quarterly one. Traditionally, we have referred to the seasonality of our products, and that is often correlated with the quarters, but that phenomenon is now starting to shift. We are lengthening the European season that's historically solely been in the summer months and we added capacity in the Asia-Pacific region to take advantage of the warm weather in Australia and New Zealand for the winter, as well as repositioning ships for cold-weather cruising in China and growth in the Southeast Asia region. The outcome of all that is that what was historically a low season for demand in North America has become a lower season for supply as well. By placing supply in higher-yielding growth markets in other parts of the world, we get a better balance of the supply-demand equation. And over time that helps mitigate what was traditionally particularly strong pricing pressure in the 'off-season.' I want to emphasize that we are not eliminating seasonality, but we are taking steps to moderate it. You will notice that I refer to seasons and not to quarters. But we've always thought of our business in those terms. There used to be a cool breakdown of when high season started and ended. As our global footprint continues to expand and our product stretches over elongated seasons, it makes it harder to get a full picture of our business in just one quarter. However, doing this provides better yearly results as well as a more balanced cadence to our earnings. We believe that that represents a true benefit to our shareholders, even if it makes quarterly shifts harder to quantify. I would also like to comment, as I have in the past, on the level of accuracy you and we should expect in our revenue forecasts. Frankly, we've all gotten a little bit spoiled by the historical track record from our revenue growers. This year, for example, we focused on deviations of tenths of a percent. We try and interpret these trends from these deviations when the truth is that the deviations are way within our normal margin of error. We will continue to provide our best thinking about the future, but we would also caution that in a business as large and complex as ours, variances, especially between quarters, will be the norm. Now before I turn the call back to Jason, I wanted to update everyone on the early signs that we're seeing from my price integrity policy. As a reminder, we adopted this policy to address the kind of deep last-minute discounts that are so frustrating to our guests and our travel partners and ultimately so damaging to our brands. Depending on the sourcing of the type of cruise, the last-minute might be 10, 20, or 30 days out, but from that point on, our policy is to hold our price at the prior level. We believe that such a policy has to be clear and explicit. Only by setting firm measurable and non-big U.S. terms can we create the kind of credibility that's so important to the program's success. Vague efforts don't provide the kind of consistency that is so important to our guests and our travel partners. We began this new policy in March, and we're sticking to it. It's still early days, but the impact we have seen from a load factor perspective is relatively small and it's in line with our expectations. Our intent with the policy is to achieve happier guests, travel agents, and better branding. It does seem we're on the right track; in fact, during the last period we extended the program. We went for a policy coverage of 10, 20, 30 days before the cruise to covering 10, 20, 30, or 40 days prior to sailing. We recognize that this policy is costing us some money in the short term, but we believe that in the long term it will pay handsome dividends. With that, I'll turn the phone back over to Jason.

Thank you, Richard. I will begin by taking you through our results for the second quarter. Unless I state differently, all metrics will be on a constant currency basis. We have summarized our second quarter results on slide two. For the quarter, we generated adjusted net income of $0.84 per share, which was approximately $0.14 above our guidance. Foreign exchange and fuel rates benefited earnings by $0.07 per share. The balance of the beat was driven by the timing of cost and better than expected close-in pricing in the Caribbean and China. Revenue yields were up 4.2% for the quarter, approximately 70 basis points better than guidance. Strength in the Caribbean and China drove the majority of the upside. Shipboard revenue came in as expected for the second quarter and was up 3.3% year-over-year, driven by improvement in beverage, short excursions, and internet. As we discussed in our April earnings call, the volatility in the currency market led to a modest pullback in onboard spending for our non-U.S. guests in the first quarter. To help mitigate further deterioration in spending, we took additional commercial actions that included bundling onboard amenities in the ticket price, as well as encouraging pre-cruise sales of average short excursions and specialty restaurant packages in local currency. While it's still early, these tactics are being received favorably and are helping us reduce further risk. Net cruise costs excluding fuel were up 3.4% for the quarter, which was 110 basis points better than guidance. This was mainly due to the timing of shipboard projects that will be carried out in the second half of the year. Now I would like to update you on what we are seeing in the booking environment. Overall, while there are always puts and takes at the product level, the back half of the year is shaping up about as we had expected when we provided guidance three months ago. We are seeing a nice year-over-year improvement in the Caribbean pricing, record deals in Europe, and an extremely favorable reaction to Quantum's arrival in China. Our book load factors and APDs are meaningfully higher than the same time last year for the back half of the year. Despite our overall capacity increase, we have significantly fewer staterooms left to sell than at this point last year. This will translate into better pricing on future business. The Caribbean is our largest single product group representing 44% of 2015 capacity. As you will remember, the Caribbean was extremely promotional for most of last year and into Q1 of this year. We're now in a very different pricing environment for these itineraries. In fact, trends have been better than what we were experiencing even a few months ago, and we have slightly increased our overall Caribbean revenue expectations. Prices on new Caribbean bookings have been well above last year for some time and have been exceeding 2013 levels for the past six weeks. This trend is clearly benefiting close-in sales but will be particularly beneficial to the fourth quarter where load factors are up significantly versus the same time last year and rates on booked business also look nice. European itineraries represent about 22% of our overall 2015 capacity. Our Western Mediterranean itineraries continue to attract strong demand and prices exceeding last year's levels. Prices and demand for Lower the Seas in Barcelona and Rome have more than substantiated our decision to place an Oasis-class ship in Europe for the full summer season. And we look forward to welcoming her sister ship, Harmony of the Seas, to Europe when she debuts next summer. Expectations for the Eastern Mediterranean product, on the other hand, are softer than our previous forecast as booking levels were further affected during recent events in the region. Although demand is now back to typical levels, pricing is a bit lower than we were previously expecting for this high-yielding product. Our most significant capacity growth in 2015 is in the Asia-Pacific region. Employment in Asia and Australia is increasing by about 33% year-over-year, with the most significant growth occurring in China, which is now more than 95% booked. Quantum of the Seas has been in China for just over a month and is commanding yields that are far superior to other vessels, validating our decision to send Quantum this year and her sister ship, Ovation of the Seas, to Tianjin next summer. Most of our other itineraries, including Alaskan and Bermuda, are trending in line with our expectations. Our Latin America business operated by our Pullmantur brand has been significantly softer than we had expected. As you know, the economies of Latin America have struggled recently, and their economies have significantly weakened. Thus, all these itineraries only account for a small portion of our capacity; they have struggled to attract quality demand. For the back half of the year, we expect yields to be up more in the fourth quarter than in the third quarter. While there are a number of factors contributing to the strong fourth quarter growth, the key drivers are the additions of the high-yielding Quantum and Anthem of the Seas, robust year yield growth in the Caribbean, and shifts in capacity from lower to higher yielding itineraries. We also have made capacity growth in the Asia-Pacific region in the fourth quarter, with Quantum of the Seas delivering our first winter China product. Additionally, we have a full quarter of Asia-based Voyager of the Seas, which underwent a 35-day dry dock in Q4 of last year. All of these shifts, when taken together, provide strong tailwinds to Q4 yields. It is still relatively early in the sailing cycle for 2016, but we are encouraged by our progress. Our APDs and load factors for Q1 are well ahead of last year, with the Caribbean showing particular strength. While it's still too early to provide specific guidance, we do expect nice yield growth next year. In summary, our booking environment and the cadence by quarter is as expected for the back half of the year. Taking into account all we just told you, I would now like to summarize our updated guidance for the full year and third quarter. If you turn to slide three, you will see our updated guidance for the full year 2015. Net revenue yields are expected to increase in the range of 2.9% to 3.9% versus previous guidance of up to 2.5% to 4%. Our strong revenue performance in Q2 as well as our solid book position of over 94% has helped us mitigate the lower end of the previous range and raise our midpoint accordingly. Net cruise costs excluding fuel are expected to decline better than flat. We made a slight adjustment to previous guidance driven by further expected investments in marketing initiatives to drive additional first-time cruisers and see 2015 business. Since our April earnings call, the dollar has weakened 1.9% versus our basket of currencies and fuel costs have also declined creating a tailwind for earnings. As a result, our earnings for the year are being increased by approximately $0.15 due to currency and fuel expenses, while our revenue strength in Q2 is being reinvested in marketing to help further strengthen our book position in 2016, which looks favorable at this early stage. Our fuel costs for the year have decreased slightly to $818 million, driven mainly by rate, and we're 53% hedged for the remainder of 2015 at a price of $630 per metric ton. Based on current fuel prices, interest rates, and currency exchange rates, we are raising our adjusted earnings per share guidance to be between $4.65 and $4.75 for the year. Now I would like to walk you through our third-quarter guidance on slide four. Our deployment mix shifts substantially in Q3. We have 42% of our capacity in Europe, 25% in the Caribbean, 11% in China, and 9% in Alaska. The quarter is booked nicely ahead of the same time last year, both in APD and load factor. And we expect a net yield increase in the range of 3.5% to 4%. Net cruise costs excluding fuel are expected to decrease in the range of 1% to 1.5%, and we have included $210 million of fuel expense for the quarter. Taking all of this into account, we expect adjusted earnings per share to be approximately $2.70 for the quarter. With that, I will ask our operator to open up the call for a question-and-answer session.

So the Caribbean clearly is firming up. And I don't think you can quantify this but maybe more from a quantitative perspective. I was wondering how much of that closing pricing strength you can tie to your better frontloading practices which have started to implement last year? And then I guess also how do you plan to attack the frontloading again this year in the upfront discounting as we move into the back part of this year for 2016? Thanks.

Hi, Steve, thanks for the questions. In terms of the Caribbean itself, clearly us having a better book position going into the quarter helped us improve pricing as we went through the quarter. I just think that overall we're seeing better demand, especially on the short product. For the Caribbean, which is leading us to those better results.

Yeah, and Steve, I think your question on the philosophy suggests that in general we think it's helpful to have more enhancement. It takes pressure off of the last-minute bookings, aligning with our objective of trying to be more consistent on our pricing. I think there's probably one thing that frustrates the travel agents that we work with as much as anything else is those late last-minute discounts. And we can't afford to frustrate them. And so, by getting more on the books early, we're in a better position to adjust our pricing on the later bookings and achieve a more level kind of pricing policy. So I think, philosophically, you've seen it this year, and you'll see it again next year, where we are trying to get more in hands earlier on.

Okay, great. And then second question around 2016, you gave some pretty good early color there. I know this is a year - there were clearly some moving items that folks didn't properly account for when they were modeling out their respective quarters. As we look into 2016, are there any big picture items that you would point out today that you want folks to be thinking of as a start to get more focused on next year?

Well, Steve, I think the cadence of the quarters will generally be the same. I think the things that I would point out specifically is that we do take delivery in the second quarter next year for Harmony and Ovation. Ovation will take a similar journey that Quantum took over to Tianjin. So that will have a similar impact, but I think there's also the need to account for Harmony, who will come in the second quarter and then will be sailing out of the Mediterranean.

And, Steve, just to add that Harmony will be operating out of Barcelona in the Mediterranean, but also Allure will be returning to the Caribbean. So we'll have some fantastic product in the Caribbean.

Okay, great. Thanks a lot, guys. Appreciate it.

Yeah. Good afternoon, everyone. Just on this extra marketing, could you quantify the amount and what specifically you aim to do with that please?

Hi, Ian. It's really a modest incremental amount on marketing. And, again, we are in a good book position for the future. And I think we're just looking for opportunity to expand that base, and we think we can do that through spending a little bit more on marketing. But it's not in any specific market; it's more general, and again, it's modest.

Okay. Thank you.

Hi, good morning. Richard and Jason, you either can choose who want to take this. But I'm just having a tough time reconciling the comments that the back half is expected with the comments that the Caribbean looks like it's coming in a bit better than expected. And because of what you're seeing, you are expanding your discounting policy now out 40 days. It just seems to me that with your business improving - with the business that might have improved incrementally, you might have been talking about the second half in a little bit of a different way. So while I'm always in favor of conservatism, I was just hoping if you could help me reconcile that.

Well, it's always good to know that you favor conservatism, Felicia. I think the way I would put it into perspective and I tried to address it in my commentary that we're definitely seeing strong demand coming from the Caribbean and as I commented, we would actually expect the back half of the year to be better for the Caribbean in our current thinking. But that is helping really offset some weakening in the Eastern Mediterranean and Pullmantur, which has been struggling in Latin America mainly in Mexico and somewhat also in Brazil. So again, we always see these puts and takes within our environment, which is why we manage this portfolio of products and brands, and that in itself balances out the back half of the year.

Okay. That's helpful, thank you. And then just maybe I'm splitting hairs here, but if you look at your occupancy in the quarter, it was about 20 basis points lower year-over-year, so I was just wondering if that was a function of some of the new policies that you have implemented and your onboard revenue continues to grow nicely with perhaps lower occupancy.

Yeah, actually it really is very much on the margins. The price integrity piece is a small piece of it. Also in the quarter, we feel we had one canceled sailing which was a higher occupancy sailing that also affected a little bit, but it really is on the margins in terms of what affected the load factor for the period.

Okay. And but just getting through the bookings, I mean, can you just elaborate a little bit more about the programs that you've implemented or perhaps stimulate some demand despite the FX headwinds?

Hi, Felicia, it's Michael. Yes, I think we kind of caught onto this quite quickly in the first quarter, so we implemented some commercial actions fairly quickly that included the bundling of value adds, not only in the ticket price in terms of the promotional activity that we put into the marketplace such as including beverages, as well as encouraging the pre-purchase of various onboard products and services, specifically beverage, short excursions, and specialty restaurants in local currency. We put more energy behind the promotion and the marketing of that into the international markets because that was our area of more concern. And, obviously, while it's still early, our tactics have been received well and are helping us mitigate any further risk, so we feel quite good about the actions that we've taken. It's important to note that we still anticipate yield increases in onboard revenue this year and it will be the fourth year in a row where we see those increases. And we've also seen some stars such as Voom, the fastest internet at sea, that we have with Royal Caribbean International. We put a lot of energy behind the promotion of Voom, and we've seen a considerable uptake in how many people are participating and purchasing it.

Great. That was helpful.

Felicia, it's Richard here. And it might be worth adding that Michael referred to the bundling. Again, philosophically speaking, that is a growing trend. We're doing more of that, and that does sometimes tend to cause a little confusion on the numbers because things can shift between ticket revenue and onboard revenue. But we're responding to a desire on the part of our guests and very much on the parts of the travel agents who find it to be a much better way to present something, a much better way to sell it if it's all included in the package. And we started that last year. You saw the 123 program at Celebrity. This year a big shift, probably one of the more dramatic shifts on Celebrity with our Go Big Better Best program. And these are indeed moving us to an even more inclusive packaging, and we think that gets us more net revenue and happier guests, happier travel agents, so I think we will probably see more of that as we go forward.

Thank you.

Hi, good morning. Have you seen any of your competitors following suit on holding the line on last-minute discounting?

Hi, Patrick, it's Michael. We are really focused on what we're doing and we're paying a lot of attention to the feedback that we get from travel partners, distribution, and, of course, our customers. So we feel really positive about the actions that we took back in March and we are feeling good about the direction that it is heading for us.

Okay. I'll leave it at that. Thank you.

Hi. Good morning. A couple of clarifications here, Richard, as you talk about the bundling of certain traditionally onboard items into the ticket price, can you help us figure out how exactly you guys are accounting for those? Is the entirety of that still going to be counted in onboard? It seems like there from the consumer's perspective there might be some blurring of the lines, but how should we think about what has traditionally been onboard being put in the ticket prices and how we should expect that to show up in your numbers?

Hi, James, it's Jason. In terms of the bundling, it really kind of depends on the program itself. And as we've commented in the past, which is why we really guide on a net revenue yield side, depending on the offer, it could be recorded into onboard revenue or ticket revenue. So all I would say is that there's probably going to create more variability between those two lines, but again I think that's why you're consistently seeing us guide on the overall revenue picture.

Got it. And then just another clarification here, you talked about the price integrity policy being a negative in the short term. Just to clarify, is that a comment on the occupancy being negative by itself or is that the net impact of pricing in occupancy that's currently negative, and if so, when do you think that goes from being a negative to hopefully being a positive? Thanks.

Yes, the main impact is on occupancy because what happens is if you can do these last-minute discounts, these big last-minute discounts you end up with a few empty cabins, and so you offer these extraordinary discounts that allow you to fill up at the end. And if you take away that tool, which is essentially what we've done, then you will lose some of those people, obviously. The reason we believe there is an offset is that we get a more consistent and higher pricing during the period. At this stage, those numbers are really quite small. So we're not suggesting that's a major driver of this. But it is there, and it is affecting us in the short-term. And I think that we will feel that for some time, well into 2016. But we think the long-term benefit—and I really do want to emphasize—the benefit isn't just that we will eliminate these people who say let's wait to book at the low price. It's really very important to the branding. It's hard to set yourself out as a brand that is high-quality and high-respect in the industry if you can have us for half-price. So the ability to maintain your image as a higher quality product, which really has to permeate everything you do, is probably a big driver, as big a driver of our thinking as anything else.

That's really helpful. And maybe just a quick follow-up on that last point. I don't know if you've been able to do any consumer research on the psychology of this pricing program. Is there any evidence that tells you that the customer that hasn't bought because prices didn't come down at the last minute, that they are just waiting for those prices to come down, and when they don't, will ultimately buy a cruise, or is there a chance that you've lost that customer longer term?

Well, there's no question that some people do wait to the end. Again, I really want to emphasize, in terms of quantitative analysis, we're just starting on this policy; we have three or four months under our belt. And I think it's something we will continue to look at closely, but we're pretty confident. We have been in the business for a long time, our revenue people understand the dynamics of that, and I think we feel pretty confident that the direction we are going will be well received and will help both in the long run on the revenue side and also on the branding side.

Thank you. First of all, just taking the approach of implementing this policy during a period of strength is key, so kudos on that part. A couple of clarifications: one, the marketing, how much of that is skewed towards building your North American source passenger base? And then, secondly, in Asia, if you can maybe - I don't know if you can just put it into those two buckets. Second question comes from Celebrity versus the Royal Caribbean International brand performance, how that's looking year-to-date and for the year, especially in Europe. And then Pullmantur, you call that out specifically; how much of the drag there has been demand versus euro being the functional currency. And then Jason just remind us of the pending accounting change later on this year with Pullmantur?

On the marketing side, Tim, I think first, again, just to point out, it's a very small amount of money, and we said we are really trying to apply it to further expand a very good book of business we have today for the future and specifically for 2016. So the spread of it is not necessarily key to Western Asia. It's more to further accelerate our position with this very small amount of money. I will just take a real quick on in terms of the pending accounting change, as we said, it's something that is and will continue to be under consideration in terms of the timing of when we make that change. We need to make sure processes and systems are in place before we close at a two-month lag with Pullmantur. But we will certainly advise the timing when we implement that. I just answered the question on Pullmantur regarding demand versus the impact of the euro. It's both. The demand has been a real problem, but so has the currency. And in this case, the currency that's hurting us isn't so much the euro; it's more the Latin American currencies. So the euro has deteriorated versus the dollar, but in Latin America—in Brazil, in Argentina, in Ecuador, in Colombia, etc.—we are looking at closer to 25% drops. So it is both the economy and the currency, which is not what we were hoping to see at this point. And then, Tim, just to comment on Celebrity versus Royal's performance in Europe. I mean, I think as you know, we basically comment on the market and product as a whole, but they are both doing well in Europe. The strength of having Anthem in Europe is definitely a nice tailwind for Royal and the European season for us.

Okay. And then finally, gentlemen, on the bundling for the international market that you've been doing and appears to be helping out there, is that bundle fully commissionable to travel agents, or is it only the ticket component of that bundle?

Hi, Tim, it's Michael. There's really two types of bundling; there's the bundling that goes through in a promotion through the distribution channel which becomes commissionable unless it's a direct booking. And then, there's the bundling that we've been doing in the selling of pre-cruise direct to our customers, which, of course, is not commissionable.

Okay. Thanks for the clarification there.

Great. Thanks. Two questions. One is, one of the nice things here in the release was that China drove some of the close-in bookings. I guess you really kind of think of that as being sold through charters so far in advance that maybe you wouldn't benefit from close-out strength. It would just be the agent that had chartered it. So I wonder if you could kind of just give a little color around how you're getting the benefit of that close-in.

Hi, Robin. It's Michael. That's correct. A lot of our distribution and sales goes through the larger retailers, but we've also started to move a little bit further into FIT and individual sales and bookings as a brand, so we're seeing some benefit because of those changes that we implemented about a year or so ago.

Great. And then, just a housekeeping thing, looking at your capacity guidance. It looks like you actually go out a couple of years; it appears that your capacity growth in 2017 is a little bit lower and in 2018 it's a little higher. Is that just—and you don't have anything getting delivered that would be late, so is it a dock or something that you didn't expect in 2017 that's shifting out a little bit?

Well, 2017, there are no new ships being delivered in that year, so the capacity increase is really related to the flow-over of Harmony and Ovation, which comes in 2016. That's really what drives the lower capacity amount, and in 2018, we do have Oasis 4 coming in.

And just to clarify, I understand you don't have delivery in 2017, and I know the increase is from the carryover, but it's actually, versus your guidance a quarter ago, it's not a full percentage point, but it's a lower rate of increase, not just lower versus 2015, but lower versus your previous for 2017, so I'm just wondering what had changed?

Well, I think one thing that I can think of that has changed, which is Splendour of the Seas was sold to Thomson Cruises and that ship leaves our fleet in 2016.

Okay. Great. That's probably it. And then just the last thing is, especially given Richard's opening comments about variances and guidance and things shifting, I'm just curious why take the 10 basis points off the top of your full year range given that it's a range, and that's not a huge difference at the top end of the range. I'm just wondering if there's something in particular that made you want to just take those 10 basis points off the top?

Yes, it's more, Robin, that typically at this point of the year obviously we have, as we talked about in the call, we have over 94% of our revenue on the books. We typically have a 100 basis point range around the midpoint of our guidance, and so that's really what set the 2.9% to 3.9%.

This really is—it's more that you just have at this point. Okay, great. Thank you very much.

You got it.

Good morning. This is Laura stepping in for Steve this morning. So I was just wondering, it seems that the pricing integrity program negatively impacted your Q2 2015 earnings. Are you seeing consumers getting retrained? But the closing demand was still very strong in the Caribbean. Could you just parse out that dynamic for us, so would the closing demand have been stronger if you didn't have that pricing integrity program? And then my second question was just on China. As we try to understand that mix shift, what sort of pricing premium does that market get, and are you seeing any kind of cannibalization there? Thank you.

On the price integrity side, first off, the price integrity program really addresses certain products that are 10, 20, 30 days out, and where we saw strength in the second quarter was really the short Caribbean product, which is typically the late booking product anyways, and that's kind of what drove the strength in the second quarter. So it's not necessarily, as we talked about, the price integrity program in itself, but the balance for the year was a very small negative impact to our revenue that we had communicated on our last call. If we do see strong closing demand, especially in the short product that will drive it, and then obviously we get guests who will pay the price out there that will also benefit our revenue relative to our expectations. Hi. On the question with regards to China premiums, I think we don't really go into details on premiums, but we're obviously very happy with the performance of our China products this year in 2015 in the market, and I think bringing Quantum into Shanghai has proven to be very successful. It's been exceptionally well-received, and the guests are having a phenomenal time. Our trade partners are really happy with the quality of that product in the market. So we're seeing the kind of premiums that you would expect to get when you put a brand-new asset of that quality into the marketplace.

Great. Thanks. Just pointing to your opening remarks where you mentioned you expect nice yield growth next year. And that does seem to be the general consensus from other cruise lines based on public comments that are out there. What do you think is really the key driver for those short bookings and even pricing for 2016? As we progress throughout 2015 into early 2016, is there any dynamic that you can see that would reverse that? Has everyone pulled forward demand? It doesn't seem like that's the case, but is there anything that we should think about as we get into 2016?

Hi, Greg. First off, it's very early in the bookings cycle for 2016. I think what you're seeing is us just continuing to build on a quality book of business. Clearly, the strength in the Caribbean, which has a further-out booking window, is quite helpful. But, again, it is very early, and what we know is that the patterns we are seeing are good on a load factor basis and good on a rate basis, and that's encouraging for next year. There are a lot of things that could happen that could reverse that position, right? Because this is a global business, but at this point in time, those are the trends that we are seeing, and that basically supports the commentary that we provided.

Okay. Very helpful. Thank you.

Thanks, Greg.

Good morning, everyone. My first question is on your outlook for capacity growth in the traditional markets, Europe and the Caribbean for next year?

Is it just more of what we are expecting or?

I'm sorry, what kind of supply growth do you expect in each of those two markets next year versus this year?

Well, I think in terms of the Caribbean and Europe, you will see very small increases in our capacity for next year. You will see most of the capacity going into the Asia-Pacific market with Ovation and the full year of Quantum of the Seas. But you will see marginal growth for the Caribbean and Europe in 2016 based off of our current deployment that has been published.

And then overall, what are your expectations industry-wide?

I think on the industry side, I would expect it to be higher than we're putting in there. There are some competitors that are having some additional capacity in there. Europe, I think, will be up slightly, and Asia will certainly be up with the entry of some of our competitor ships in there going into 2016.

And have you got any additional thoughts on the Caribbean?

I'm sorry. I do expect the Caribbean to be up probably low to mid-single digits next year, which is quite a bit higher than what we're going to have in the Caribbean for next year.

Okay. My second question is, if you could discuss the visibility that you have from your travel partners in China next year, particularly as you bring the Ovation. Are you feeling optimistic that you will have similar demand trends and occupancies?

Hi, Harry, it's Michael. Yes, we are optimistic. I think Quantum has really done a great job for Royal Caribbean in terms of how people have perceived that product and Royal Caribbean in general. So the reception that we have received from Quantum has really added impetus for Ovation. We are seeing that in terms of the kind of bookings that we are already seeing in 2016 for Ovation. So we feel quite optimistic about performance in China in 2016.

Can you give us how well booked you are for 2016 thus far?

No.

Thank you.

Thanks for trying, Gary.

Yeah. Hey, good morning, guys. I wanted to start with Cuba here. I just wanted to get your sense on how you think this is ultimately going to shape out over the next couple of years. Some of your peers are starting to make some early efforts in that market, and I guess— as it fully opens up, how quickly could you be down there, and could you see direct meaningful capacity in, let's say, 2017 to that opportunity?

Hi, it's Adam. Well, clearly, we're excited about the potential opportunity that Cuba presents. Anything that we do— and hopefully anything that anyone else does— has to be within the confines of the law. As you can imagine, we're actively planning and preparing to incorporate Cuba into our cruise program to the extent that were permitted. We think we have a lot of things going for us as a company at RCL in terms of our track record of delivering quality destination experiences, the way we've demonstrated the ability to create win-win relationships all around the world, our history of operating above and beyond compliance— all of that we think will bode well for us there. We have many brands and a large fleet, and therefore quite a number of different operating opportunities to participate in the Cuba opportunity when it opens up. As you can imagine, our normal course of action would be to announce any plans when they're firmed out before. But we are very enthusiastic about the prospects; we've all been waiting a long time, and we feel like things are beginning to develop in an exciting manner.

And one quick follow-up in China. I know, obviously, we're still very much in early days there, but as you continue to develop these relationships with consumers in that market, and get them signed up in your databases, etc. Are you starting to see any signs of, let's say, outbound inquiry or demand as these consumers look to perhaps maybe stay with you in Europe, for instance?

Hi, Joe, it's Michael. Yes, I mean, we are seeing that. We think that's one of the opportunities. It's not of particular focus at the moment, but we certainly recognize it's a significant opportunity over time. That outbound market is significant, and we do see an increase in our plan to products, certainly into Europe and to the West Coast. So, yes, we think that's a good opportunity.

Good morning. This is Assia. Congratulations on great Q2 results.

Thank you.

And just one quick question; close-in your pricing seems to be doing quite a bit better despite the concerns that we've had over the macro economy. I don't know, Richard, Michael, anyone would you like to comment on what you're seeing?

Hi, it's Michael. We've seen this in the past. Europe can be a fickle market at times, and there are all of these different variables that come into play in the different European markets depending upon what's occurring at the time. We think that the Greek situation did see a slight dip during the whole Greek events, and I think that caused a slowdown a little bit. Generally, in terms of the Europeans, it all started to come back again. So I think it's just ebbing the flow of the psychology of the marketplace.

Just to add to that, Assia, we've commented in the past that we entered the European season with a very strong book of business. And that really has left less inventory on the table for the European consumer, which we also believe is a nice tailwind to the closing pricing that we are seeing within that environment.

Thank you, Jason, and thank you, Michael. It seems that things have actually turned out pretty well as opposed to what expectations would have been.

Thank you.

Hi, good morning, thanks, guys. I believe Royal has been trialing a premium cabin space on the Core Royal brands on enhanced cruise experience and enhanced service levels for a price. I'm wondering if you can share any of the early findings. And then secondly, how would you characterize the revenue opportunities looking ahead, is this a smaller in size or could it perhaps be material?

Hi, Dan, it's Michael. I think you may be referring to the Royal Suite Class program that we are about to introduce. We haven't introduced it yet. We're going to roll that out literally in the coming six to seven weeks, and it's focus very much on inventory in 2016 from spring forward. And that's really part of our focus on segmenting the market and segmenting our distribution and making sure that we can provide the kind of product that we think people are willing and able to pay a premium for. We do have plans on generating an increase in yield in our premium accommodations through the introduction of the Royal Suite Class. That's the program that we are introducing. Celebrity has had the suite class in place now, I guess, for about a year and a quarter, a year and a half. I think they found out to be quite successful in terms of offering the kind of premium space with a premium on it. People are certainly willing and able to pay for it, as long as you can bundle the right products and services into that category. We are looking at other categories within the Royal fleet, and we think there are further opportunities there.

Okay. Thank you, that's helpful. And then, I appreciate oil has collapsed relative to a year ago, but looking further into the future, has Royal made any investments in the biofuel area, and from an engineering standpoint is that just simply too complicated or expensive? I guess, I am beginning to see the airline industry go that direction. But then, related to that, how has the hedge book changed looking ahead through 2018?

Hi, it's Adam. I'll answer the first part. You may not remember, but once upon a time about 8 to 10 years ago, we believe that Royal Caribbean was the single largest user of biodiesel in the world at that time in any industry. We really were robust in our thinking about the potential then, but as it happened over time for a whole series of different reasons, the attractiveness of using the products and services trended away. One of which was that the tax benefit that went to the producer of biodiesel was not passed on at all to the end user, such as ourselves, and we couldn't sustain any economic benefit of the use there. Also, it was a little bit rough on the ships at that time because it was such an immature industry, and I could go on, but I won't. So we don't see at the moment the opportunity to resume that kind of usage. We have been tremendously successful with finding ways of consuming less fuel to get from point A to point B with a whole host of programs. We've been more successful at purchasing fuel, and of course, our hedging program over time has been a great benefit to the company as well. And there's still a lot of opportunities in those areas before we would consider a significant use of biofuel on our ship. And just a comment on our hedge portfolio, which is also outlined in our release, we have increased our position going out. Next year we are 65% hedged and 60% hedged and then 40% and then 10% over the coming years. So we're looking to try and take advantage of this low fuel price environment to help walk in the future.

Thanks for the time, guys.

Thank you.

Hi, guys. How are you? So as more and more people pay upfront for all these packages, whether it's beverages or dining, are you thinking about what you sell them when they bring on more money? Are you thinking about changing what you sell in the stores, adding spa options or classes or different entertainment? I mean, I know this is something that would work out over the next couple of years, but are you thinking about that now?

Yes, hi, Laura. It's Michael. It's a good point, and yes, it's absolutely what we see. Once they pre-purchase the package or whatever the services are that they pre-purchase, everybody seems to forget the pre-purchased items, and then when they come onboard, they bring more dollars or euros or what have you to spend and it does provide more opportunity. In many cases, they consume and purchase many of the products that we have onboard. But if you think about all of our brands, particularly Royal and Celebrity, over the past few years, we've been through quite an extensive process of revitalization. We have added multiple retail units, we've enhanced many of the different services, and we've transformed a lot of the products that we sell onboard and in many cases to higher-margin products. So that evolution, I think, is in place and we're quite cognizant of it.

Okay. But there's nothing else new on the horizon that you can talk about now that would be maybe bigger incremental giving them to spend?

Well, one of the things that we're immensely proud of, and which only Royal Caribbean has, of course, is Voom, which is the fastest Internet at sea. That is something that we think we have a significant advantage over, and certainly for families with kids. If you've got kids and they come onboard and they want to connect and they want to do streaming, they want to play video games, we're the only cruise line that they can do that with because of the significant advantage of Voom. That's something that we're seeing certainly in the revenues being generated today as a further opportunity.

And can you prepay for that Internet right now too?

Yes, you can.

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