Royal Caribbean Group (RCL) — Q3 2016 Earnings Call Transcript

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; Adam Goldstein, President and Chief Operating Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Carol Cabezas, our Vice President of Investor Relations. During this call, we will be referring to a few slides which have been posted on our Investor Web site, 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 Web site. Richard will begin by providing an overview of the business. I will follow with a recap of our third quarter results, provide an update on the current booking environment and provide our early thoughts on 2017. I will close with guidance for the full year and fourth quarter. We will then open the call up for your questions. Richard?

Thanks, Jason, and good morning, everybody. It's a pleasure to have the opportunity to share more about our business and our progress to the Double-Double, so let me get right there. We are quickly coming to the end of 2016 and will shortly be starting the final year of our Double-Double program. Reaching the Double-Double will be a significant accomplishment to the 65,000 women and men who collectively make Royal Caribbean Cruises successful. However, I do want to emphasize that Double-Double is not an end in and of itself. Rather it represents the completion of another step in our continuous journey of improving shareholder returns. The success of the Double-Double rests on three pillars: strengthening revenue yields, controlling costs and moderate growth. Our progress on this journey has been steady. Not only has the slope of the curve been very steep but it's been remarkably strong and predictable. As you can see on Slide 2, both earnings and yields have consistently ended up right around the midpoint of the range that we stated at the beginning of each year. This track record comes despite some unexpected impacts from things like foreign exchange and fuel. For example, our biggest non-dollar market has been the U.K., but Sterling has fallen 30% over the last two years and that got a significant push from the recent Brexit vote. This year is shaping up to deliver in a similar fashion. Our yield guidance today at 4% or better is about the same as it was at the beginning of the year when we adjusted for the deconsolidation of Pullmantur. Earnings per share expectations of $6 to $6.10 are a little better than our original range despite a number of challenges that came our way this year. So the fact that our year is ending above our original guidance in spite of the challenges is a testament to the focus, discipline, and will of the team. To that I express my appreciation. I'd also like to take a moment and step back to discuss some of the developments to our core financial objectives including achieving investment-grade metrics, improving shareholder returns and moderate capacity growth. I know that many of you model our performance outlook diligently, and you can see that we're now reaching the key financial metrics that are the threshold for investment-grade. Getting to this point hasn't been easy, but it is important and we are committed to achieving and maintaining a BBB credit status. In this regard, it was particularly satisfying when Moody's issued its upgrade of our improved outlook. It is rewarding to see progress on all our goals and this is another big one. I also know that many of you are up-to-date on our announcements and have noticed our recent increase in dividends. Our dividend level is an all-time high and is now four times what it was just over three years ago. In the same period, we also executed a significant buyback program. As our earnings continue to grow and as conditions warrant, and by that I include earnings and free cash flow, we will continue to engage in a mix of moderate dividend growth and share buyback programs. These steps are clear evidence of our commitment to improving shareholder returns. Now turning to the third pillar, moderate capacity growth has been a focal point of a lot of conversation. We said before that the pipeline of supply is known and it's very much constrained by limited shipyard capacity. We set our targets at a 3% to 5% growth rate and that's just what we've been doing. Through 2005, our five-year actual capacity growth rate was just under 4% a year and for the coming five years, it's also just under 4%. Now, on the demand side, we've seen some markets contract, such as the Eastern Mediterranean, but we've also seen new markets expand, such as China and Australia. It's important to note that cruising is still under-penetrated in all of our markets including our core markets. We open up new markets like China because they're growing at extraordinary rates, not because of inadequate demand elsewhere. For example, we're aware that some people have been arguing for years that the U.S. market is saturated, but we've been growing here strongly and consistently in both rate and volume, and we expect to continue to do so for years to come. Our task is to continue to make people, especially non-cruisers, aware of all the cruising offers. That takes continued effort, but it is working. This year alone, we've added more than 1.6 million new recruits. That demonstrates our continued strength in this market and positions us for what we believe to be a bright future. Now before I hand the call back over to Jason, I want to touch on one more point related to environmental stewardship. Protecting the environment is a responsibility we take seriously at Royal Caribbean both because of the impact on our environment and because it just makes good business sense. We focus heavily on reducing our carbon footprint and we're proud to publish our energy consumption figures. They consistently show that our burning of fossil fuels shows the lowest figures reported by anyone in our industry. This success comes from a deep focus on finding new and better ways of doing things. For example, our bubble technology, which is more properly called a lubrication system, reduces drag thereby reducing the need for burning fuel. But in keeping with our mantra of continuous improvement, we've gone one step further. Recently, we partnered with the World Wildlife Fund to take our sustainability performance to the next level. Together with WWF, we have announced publicly goals related to greenhouse gas emissions, sustainable food supply, and destination stewardship. This partnership follows exciting progress on a number of other fronts including our advanced wastewater purification systems and our zero landfill policy already implemented on 17 ships. We are also very pleased to be working with the EPA and have their support as we install advanced emissions purification systems on our ships. This is a massive and expensive task but a very impactful one. These AEP systems scrub more than 98% of the sulfur from our ships' exhaust. Lastly, we have recently announced a new class of ships dubbed Icon-class. The ships will be powered by LNG and will also utilize the latest fuel cell technology. Fuel cells are the ultimate in smoke-free exhaust. The only emission from fuel cells is pure water. In conclusion, it's been a good quarter and the future looks very bright. Brexit and other factors have been unexpected blows, but we have more than compensated in other ways. With that, I'll turn the call back over to Jason.

Thank you, Richard. I will begin by taking you through our results for the third quarter. Unless I state otherwise, all metrics are on a constant currency basis. We have summarized our third quarter results on Slide 3. For the quarter we generated adjusted net income of $3.20 per share, $0.10 better than the previous guidance. About half of the outperformance was driven by better revenue, but the other half of the beat was driven by weaker dollar and lower fuel prices. Third quarter net revenue yield was better than expected, up 2.9% year-over-year. Strength in close-in demand for North American products was a primary driver of the outperformance. Onboard revenue deals for the quarter did not disappoint with yields up 4.8% for the quarter. The growth was mainly driven by beverage packages, and an increasing demand for VOOM and Xcelerate, our high-speed Internet offerings for Royal Caribbean International and Celebrity Cruises respectively. Costs were as expected for the quarter with Net Cruise cost excluding fuel down 1.6%. Before I get into discussing booking trends, I would like to discuss deviations between the quarters. Our yield came in slightly better than expected in the third quarter and is expected to be slightly lower than our previous expectations in the fourth quarter. As a result, our yields for the full year are essentially unchanged. We often get asked whether these small aberrations between quarters signify a trend. The answer is no. I would like to explain why. The reality is that we manage a large and diversified portfolio of brands, markets, and products. This complex portfolio obviously has minor deviations especially in a period as short as a quarter. This year is a good example. Something as simple and insignificant as the delay in the deployment of the Empress of the Seas will drive yields to be lower for the fourth quarter than we originally expected. This delay has no long-term significance but it does affect quarterly figures. As Richard mentioned, our track record is pretty good and Slide 2 shows that over the past several years we've been able to deliver annual yield and earning results in line with the original guidance we set for the year. We don't see this immaterial aberration between Q3 and Q4 as a trend, just a reflection of managing a global and diversified portfolio. This is further supported by the 2017 booking trend commentary I will be providing shortly. Now I will share trends in the demand environment for the balance of 2016 and provide early insight into 2017. Let me start off by discussing the fourth quarter where our mix of deployment shifts from the summer. We have more capacity in the Caribbean and Australia and less in the Mediterranean. Our year-over-year growth in fourth quarter Caribbean deployment is driven by the additions of both Harmony of the Seas and Empress of the Seas in South Florida. As a result, Caribbean itineraries will count for half of our Q4 capacity. We expect Caribbean yields to be up mid-single digits for the quarter which, as I previously mentioned, is softer than our previous expectations due to the delay in opening Empress of the Seas for sale. Expectations for the rest of the Caribbean products remain relatively unchanged. Asia-Pacific and Europe itineraries are generally performing in line with our previous outlook. So in summary, we are 94% booked for the fourth quarter and, with the exception of Empress, yields are shaping up as expected. Moving on to 2017, I want to start by providing you an overview of some of the structural factors and deployment changes that play a part in the upcoming year. I will then discuss the early trends we're seeing in the business. We will see a benefit in the first half of the year from the addition of both Harmony of the Seas and Ovation of the Seas. We will have a tailwind to our yield related to the deconsolidation of Pullmantur which is worth a little over 250 basis points for the first half of next year. As a reminder, our portion of Pullmantur's results will be reported as an equity pickup and since we continue to own the vessels you will continue to incur depreciation for the ship. Lastly, our joint venture TUI Cruises will receive another new ship during the second quarter. As we announced earlier this year, Legend of the Seas will exit the fleet at the end of the first quarter. This sale is very much in line with our fleet strategy of opportunistically selling older capacity. We are making several changes to our itinerary mix in 2017 that will reduce exposure to the Eastern Mediterranean while bringing new hardware to the Caribbean and moderately growing the Asia-Pacific region. Our Caribbean deployment will increase in 2017 and will represent just under half of our total capacity. This increase is largely due to the expanded season for both Harmony of the Seas and Celebrity Equinox. Both of these ships will remain in the Caribbean year-round versus sailing in Europe as they did during the summer of 2016. The change in deployment for these ships, combined with the deconsolidation of Pullmantur, is driving a reduction in Mediterranean capacity. As a result, Europe will represent 15% of our overall capacity in 2017 versus 20% in 2016. Asia-Pacific itineraries will account for approximately 20% of our capacity, which is relatively consistent with 2016. Our capacity in China will decrease slightly as a longer season of Ovation of the Seas is only offsetting a portion of the reduction due to the sale of Legend of the Seas. While it's still too early to provide guidance for next year, I will share some preliminary insights. Our booked position is stronger than last year as we are up in both pricing and load factors across all major markets for like deployment. This is particularly noteworthy when you consider that our booked load factor has improved each year for the past several years culminating in a record high for next year. Our Caribbean and Alaska products are trending well despite very difficult comparisons in 2016 and bookings for European sailings are up nicely year-over-year driven by strong demand from North American. We're also pleased with how the Winter Asia-Pacific season is shaping up with both Australia and China sailings booked ahead of prior-year load factors in the first quarter. Although it's still early in the booking window, these insights provide added confidence in our path toward the Double-Double and we expect that 2017 will be our eighth consecutive year of yield improvement. If you turn to Slide 4, you will see our guidance for the full year 2016. Net revenue yields are expected to be up 4% or better, essentially unchanged from last quarter's guidance. Our cost guidance is also unchanged with Net Cruise cost excluding fuel expected to be up approximately 1%. Our fuel cost for the year have decreased since our last call to $720 million driven by rate and we are 68% hedged for the remainder of 2016 at a price of $535 per metric ton. Based on current fuel prices, interest rates, and currency exchange rates, our adjusted earnings per share guidance is expected to be in the range of $6 to $6.10 per share unchanged from previous guidance. To summarize the changes we've made since the last call, we exceeded the third quarter by $0.10 per share, approximately half of which was driven by the outperformance of our North American products. This beat is helping to offset the previously mentioned impact from the delay in the deployment of Empress of the Seas. A weaker U.S. dollar and lower fuel prices contributed the other half of the third-quarter beat. However, this trend reverses itself in the fourth quarter. Now I would like to walk you through our fourth quarter guidance on Slide 5. Net yields are expected to be up approximately 6%. The year-over-year increase is being driven by the deconsolidation of Pullmantur and strong trends on our Caribbean and Australia itineraries. Harmony of the Seas in the Caribbean and Ovation of the Seas in Australia are doing particularly well. Net Cruise costs excluding fuel are expected to be down approximately 1.5% and we have included $189 million of fuel expense for the quarter. Taking all of this into account, we expect adjusted earnings per share to be approximately $1.20 for the quarter which represents nearly 30% growth year-over-year. With that I will ask our operator to open up the call for a question-and-answer.

Hi good morning. Thanks for taking my question. Can you quantify the EPS and yield impact from the delay in deployment for Empress in the fourth quarter, and was that the only reason why your fourth-quarter yields are a little bit lower than your prior forecast?

Sure, Jared. So the impact from the delay in deployment was about $0.06 or $0.07 for the fourth quarter. Outside of that there are small little puts and takes that make up the balance, but it's very immaterial.

Okay. Great, thanks. There have been a lot of concerns about the promotional environment, particularly in the Caribbean. Can you expand on that and what you're seeing right now? And if you feel the need to be a little bit more promotional right now because of some of the incremental capacity or how you are thinking about that?

Jared, it's Michael. Yes, we're feeling pretty good about the Caribbean. Some things looking good both on volume and rate with the capacity increase and '16 shaping up pretty well. It looks very typical in terms of what we’re seeing with booking patterns in Q4 as we've seen in previous years, so everything is looking quite normal. Obviously, promotional activity ebbs and flows. We had Hurricane Matthew blowing through the week before last, so we had about a week of a drop in bookings, which is inevitable as it moved its way up the East Coast. And I think we did and other certainly tried to stimulate the demand by putting in some promotional activity, which then the response was very good. We had a promotion last week which was the second best performing promotion in the brand's history.

Okay, great. Thank you.

Thanks a lot. I was wondering if you could, maybe a little early, but I was wondering if you could talk about net-cruise costs growth for next year. Reminding us of what some of the key puts and takes are when considering modeling cost growth? And as a follow-up to that, what are some of the more significant levers on costs you can pull if yields do come in lighter than expected? Thanks.

Thanks David. We're still going to our planning process for next year but as we've said in the past, we need to continue to control our costs like we have over the past several years. I know early on in our Double-Double program we talked more about some of the chunkier things that we've been doing on the cost side, and really over the past year or so, a lot of this is down to little things that we do to become more efficient across our business. There are always small levers to pull to try to manage yourself if there are yield challenges, but there is nothing specific that I would call out?

But I think I would leave it at this point by saying that I think we've shown over the past several years management's commitment to cost control, and trying to become more efficient year-over-year.

Good morning. I appreciate your response, Jason, regarding next year. I would like to delve a bit deeper to clarify our concerns for the upcoming year. We see three main issues: the risk of ongoing yield pressures in China, supply growth in the Caribbean, and the impact of foreign exchange and fuel costs. You mentioned that your booked position in China is performing well, so could you elaborate on your expectations for yields next year? Are you anticipating continued yield pressure in China? Additionally, how confident are you in growing yields in the Caribbean? Many are considering the current foreign exchange and fuel situation as it relates to next year's impact, so any insights on that would be helpful.

Sure. Well, first half, when we kind of think about next year, it’s obviously too early to provide any guidance on any guidance by products. But we do have, as we have, where we are currently booked, a commentary on Asia-Pac, which really at this point in the year, we have pretty good visibility into the first quarter. It's been encouraging. Hopefully those trends continue on as that product on boards further out here over time. And then when we talk about the Caribbean and I also include Europe in there, at this point in time in the year, a lot of that is driven by the North American consumers, and as I commented in my remarks that we have seen very positive trends on both rate and volume basis for the Caribbean as well as for our European products. And then to answer your question on the currency side, certainly the strength in the dollar relative to the pound has been challenging. If you want to say what has it been since the last call, it's probably hurt us by about $0.12 to $0.15. And so there are always headwinds in our business that we have to focus on and overcome. But that's kind of been the impact since the last time we spoke here in early August.

Okay. Can you provide an update on the factors affecting next year? You mentioned Pullmantur contributing a 250 basis point tailwind from yields in the first half. Will there also be a benefit from the management fee? Could you clarify the complete financial picture for Pullmantur?

Yes, I mean, there is obviously deconsolidation. There is the benefit, and that's respectively kind of included in that estimate of the 250 basis points in the first half of the year. The balance of that for the year is not material as it relates to the management fee. So it's a small contributor, but not something I'll specifically call out in the build-up of the yield.

Thank you. I wanted to ask about the Empress. Our understanding has been that you may not be planning new sailings for Empress since you were expecting a new Caribbean itinerary to be available before the year's end. Can you clarify whether you still anticipate that new itinerary could be launched before the end of the year, or are you planning to keep Empress in service without new sailings until the first quarter?

So obviously, as we were considering the deployment for Empress, we typically deploy a ship or open up the deployment for a ship about 12 months to 18 months ahead of time. I think we have seen or we've obviously been in conversations about what the future deployment of that ship could be and that did not resolve itself in the back half of this year and that's really what caused the impact on Empress because we effectively opened it up for deployment in August. I think we continue to look for that ship to potentially have some other deployment, but I don't think we will be holding back our sailings in the future and we'll deal with it as maybe some of that new deployment comes available.

And then just for my follow-up question, there have been some reports in the current media that China is limiting some tour package travel to Korea for political reasons and just wondering if you are seeing any kind of impact at all since cruises from China are calling on Korean ports. Any impact at all of getting this sense that there is going to be some kind of limit or any you have seen so far for Mainland Chinese visitors going to Korea by cruise?

Hi, Robin, it's Michael. No, we have seen no impact whatsoever. We think it's very much related to the type of package that's offered that really is all about encouraging Chinese customers to go to Korea, specifically for shopping trips. And we think it's related to that. So the packages put into the markets that are incredibly low cost bring the customers over and make the revenue from the retail. So we feel as if that’s very specifically focused. So we haven't seen anything and we don't believe there’ll be any impact to us.

That's very helpful. Thank you.

Good morning, and congrats to the whole team for an on-point execution. Just a couple of things, I wanted to revisit the mix shift with the Harmony and the Equinox, Jason, that you called out. Is that going to be yield accretive, given Europe traditionally has higher yields than the Caribbean? Just on that shift for the similar comparisons year-over-year, a little color on that please? And the fuel, you have been fairly aggressive towards the high end or above the higher end of your 40% to 60% range in hedging, especially you appeared to put on quite a bit when the oil was in the 30s. A little bit more color on where your weighted average hedges are looking into 2017 and 2018? And then if you continue to view as glaring on more aggressively or back off a little bit on that as you lay out 12, 24, 36 months? Thank you.

So Tim, on the first question as relates to Harmony and Equinox, your first deal – trends or demand for Harmony has been exceptional, and we do expect with Harmony being here next year for it to be yield accretive and certainly helps us a lot in the first half of the year. In Equinox mainly was in the Eastern Mediterranean and really kind of in the center of a lot of movements we had to make with some of the geopolitical events that were happening. So we do expect the Equinox to be a yield accretive to the corporation next year. On the fuel side for 2017 we’re hedged about 60%. The average hedge rate there is about $508 and in 2018 we're 45% hedged and we're about $452 as the average hedge. And we continue to feel your focus on having a hedge program to minimize the volatility within our P&L. We also respect that there is typically an inverse relationship between fuel and currency. We also take into consideration the fuel curve, and it has flattened out. So this earlier last year, we did take advantage and put a little bit more hedging on in 2016 and in the outer years, but you should expect us to continue to be pretty consistent with the past of that kind of 40% to 60% side of things and again with the goal of minimizing volatility within the P&L.

Okay. Great. And what my follow-up would be related to Europe. You said you’ve seen very good bookings so far out of North America, given specifically how it books early for Europe. Any color by region? Is it tilted more towards Northern Europe or the Western Med where everything is consolidated in the Med? Any additional color or how the Brits are also booking?

Hi, Tim, it’s Michael. Europe is looking quite good for 2017. When we look at our forward bookings, obviously Eastern Med capacity is down versus last year and the year before. We’ve been aware of that. So it’s pretty all over Europe. Northern Europe obvious is doing quite well and also Western Med. European market typically a later booking than the American market. It’s the American market that seems to be doing quite well at the momentum for Europe. And the British market surprisingly is quite robust. We were thinking that we’d see more of an impact. There is a little bit of an impact in onboard spend, but nothing really material.

Hi, good morning, guys. I want to ask the Double-Double question a little bit differently. One of the questions we get a lot from investors is how are you going to achieve the Double-Double next year without buying back a significant amount of your stock or getting some massive benefit from Pullmantur? Can you help us think about the bridge to get around or get close to the Double-Double range? Meaning if you do a midpoint this year of called $6.05, from a very high level, how do you get up close to that $6.78 or $6.80 number that would be pretty helpful?

Thanks, Steve. Obviously, we won’t kind of talk about any guidance for next year. But really, you need us to continue to through strong cost control and have modest yield improvement and that gets you most of the way. And then obviously there is some benefit we get from the deconsolidation of Pullmantur, but that’s really a small amount of that pie.

Steve, it’s Richard here. One of the things that we’ve tried to emphasize for the last three or four years is we put in place the Double-Double program with the idea that we want to motivate our team and focus our team on a particular target. But it wasn’t something, and we’ve said this before, that required heroic efforts. So, we do need good cost control. We think we have been showing that. We do need moderate yield improvements. We think we’ve been showing that. As you look to the Double-Double year, obviously, it’s a complicated set of all the things that happen in our business, but as we look at where we are today with a moderate kind of yield improvements that we’re looking for, we don’t think we need to do anything heroic to make the Double-Double and we continue to believe we’ll do it.

And just one more comment, Steve, I think just always appreciating the sensitivities because every 1% change in yield is about $70 million and so by just keeping your costs managed, most of that drops to the bottom line and that in itself drives that difference in earnings.

Okay, great. For my second question, and I hope you don’t mind me asking this, but even though we are not yet finished with 2017, have you started considering what comes after 2017 and what follows the Double-Double? Looking back, you have fully embraced it, but is there a possibility for another type of program after this one, similar to the Double-Double?

So the beauty of having Steve, I think we’re not looking any further, and it’s a reasonable question. It’s in fact something that we ask ourselves all the time. The Double-Double was really the focus on a particular phase in our history and I think it served that role very well. As we look at 2018, we do have a couple of things that are quite exciting. We do have the force of the Oasis Class ships. But I’d say even more so 2018 will show Edge Class and the Edge Class is a new class of ships, which I think in its own way will be as innovative and as transformative as Oasis has been. We’re very excited about it. We’ll probably be talking more about that early next year. But Celebrity really has been on a roll and I think we’ll see the benefits of that, if it continues going the way it’s going. We’ll see the benefits of that in 2017 and 2018 and when Edge comes, I think people are really going to be blown away. So I’m very excited about 2018, but the importance of a program like Double-Double is to focus on a particular goal. And one of the things that’s been successful for us is everybody is focused on achieving the Double-Double in 2017 and so that’s our first one and I will be careful not to delve too much on what comes after.

At this point we’re not going to get into providing guidance for next year and I think for us, we’re focused on hitting both targets, the earnings target as well as the ROIC target and we’ll address specifically what we think that earnings range will be in late January, early February when we provide guidance for next year, but a good try.

Good morning. The first question is, historically, when you've headed into wave season and a stronger than normal booked position, do you think you're borrowing from wave, or does that usually lead to stronger incremental pricing because you've just got less inventory to sell?

Hi, Harry. Traditionally, as we’d had a stronger book position, obviously the need is less. But if you were to do it kind of do it on a capacity-adjusted basis, I would say that typically that gives us good tailwinds coming into WAVE as we’re in a stronger position, as we need less. So I don’t think it’s necessarily an indicator, but certainly being in a stronger position allows you to take advantage of the demand as it comes in.

Thank you. I wanted to quickly address China, as it has been a central point of concern. The current consensus is that pricing in China is expected to drop by 10% to 15% next year. Can you share your thoughts on the anticipated demand growth in China for next year? Do you believe that supply growth will be as significant as some suggest, given that much of the new capacity is expected in the latter half of the year?

Hi, Harry, it’s Michael. China is very much a developmental market. It represents about 9% of our overall capacity in 2017. Interestingly, in 2017, for Royal, our overall capacity in the China market is flat to slightly down because of the sale of Legend which takes it out of the secondary cities. Also, for industry capacity in 2017, it’s actually relatively low growth year in relation to the past years, which is probably a good thing. In Shanghai, which is 60% of the China market approximately, the growth in 2017 in Shanghai is less than 10%, which is one of the lowest rates we’ve seen for quite some time. Overall, China is accretive to yield and we’ll continue that way. As Jason commented earlier, our current forward book position if Q1 China is looking good.

That's great. And just a quick follow-up Jason in China. What efficiency measures can you take even if pricing is flat there to improve your profitability?

Hi, Harry. I'm just going to jump in and give some comments on this. I mean we are very much engaged in developing the market. So at the moment we’re investing in China. We’re investing in developing distribution and developing the channel. So at the moment, our focus is developing the market and investing in the market. We believe the opportunity is significant into the future. And we’re not actively pursuing efficiencies from that perspective. We’re looking at investing and developing.

Just a follow-up on the comment that Q1 China is looking good, which is encouraging. How are your negotiations right now with the larger charter companies going for 2017? Any color on when you think those will be completed?

The negotiations are in process. We're feeling quite good about where we are in terms of the major charters and the wholesalers in the market. Obviously, we’ve had a long-term relationship with the key charters, and we’re encouraged by what we’re seeing for '17 in terms of the dialogue and negotiations that we have with them and we feel quite optimistic about that.

Good. I won't ask you to quantify optimistic, but… How about what's driving the strength in the North American passengers going to Europe? Is it just easier comparisons things, maybe people are less concerned about going to Europe, is it less capacity, what do you think is driving that improvement?

Well, I think it's tough to pinpoint one thing. Obviously, I think when there are fewer events that certainly helps bring confidence and confidence of people's travel. But I mean I think as we’ve been saying for some time, we continue to see strength from the North American consumer, and not only do we see that in terms of their current bookings in Q4 and for next year, but also we see it in how they spend each and every day on our shifts. So I don’t know there’s a specific game, but obviously Europe is an incredible destination and there is a lot of demand for it and obviously there were some events last year that maybe caused individuals to pause and looks like they’re revisiting that for next year.

Hi, good morning. Just a couple of questions on the pound specifically. The more recent devaluation, I'm curious if you're doing anything to help bolster onboard spending. I know you said earlier it has remained pretty resilient, but I didn't know if that took into account the more recent step down? Then separately Jason, can you remind us how much you have left on your share repurchase plan at this point?

Sharon, I’ll just talk a little bit about the pound and how we're approaching that from the perspective of onboard spend. We’ve ratcheted that up in our pre-cruise marketing, we’re bundling packages more aggressively than we’ve done in the past and we see a better response pick up rate from the British consumer in terms of the packaging that we put into the market. So I think we see it a little bit, but it’s less than we originally thought we would see in terms of devaluation. And then Sharon on your question on the share repurchase, we did not complete the $500 million share repurchase in the third quarter.

Is there any timing on when the board would discuss another share repurchase program?

The Board is always evaluating things such as share repurchase for capital returned to shareholders, and obviously, recently the 28% increase in the dividend was one of those actions they thought was a good idea to do.

And I would also pay attention to our free cash flow figures, since obviously that is a key factor in the Board's thought process.

Good morning. This is Assia. I had a couple of related questions. First of all, Jason, you mentioned Empress was about $0.06 to $0.07 for Q4. Is that about a 1% yield detriment in the quarter?

It's fairly over 100 basis points for the quarter, so with that, that would be at about 7%. And then also there are some rounding as well in terms of what the implied deal for the fourth quarter.

Okay. Thank you. And given that even for Q1 2017 the ship was opened up relatively late compared to what you have traditionally done, should we expect a similar detriment for Q1?

Assia, it’s Michael. No, I think we opened up earlier; we've got marketing behind it. So I think we really were holding it late in '16 and hoping for some, for the itinerary change, but we’re in a better position for 2017.

Okay. That makes sense. Thank you, Michael. And lastly without having to quantify anything on Q1 because I know you'd rather not do that, we are facing pretty tough comps and I think the industry in general had done very well. Do you expect that on a sequential basis Q1 might be a little bit more challenged than Q4? Just very qualitatively?

I think that there are several factors; obviously Q1 on the yield side will have a positive impact from just a deconsolidation of Pullmantur. But also the strength that we’ve seen for Harmony and Ovation have been quite strong, and Harmony will obviously be in the Caribbean, and Ovation will be in Australia, and demand from both of those markets and for those products have been exceptional. So I wouldn’t necessarily say that it is obviously a tough comp because Q1 was strong. But there were some good tailwinds going into the first quarter.

Good morning and thank you for taking my call. The commentary on 2017 load factors was pretty consistent with what you said coming out of the second quarter. I want to focus on the last few months in both the Caribbean and Europe. I think in the Caribbean a lot of investors have been spooked as of late, as we look at some of the pricing analysis that is out there. Obviously, in the past it's always difficult to know how many rooms are being booked at a given price. But maybe you have seen some of that in-house or at least some of those advertised prices. Maybe help us connect the dots there? Is it the same as normal that it's not a whole lot of rooms being booked at those rates? What are your thoughts there? Then on Europe, it sounds like over the past few months, bookings and pricing have strengthened as we get further and further away from the terrorist activity, but just distill the last three months here rapidly?

Well, I think as you’re going from early August to today, people began to transition and focus on their vacations for 2017. I think some of, as Michael commented, there were some tactical activity that you probably saw on the market and that was driven around Hurricane Matthew and you know probably the best example where you would have seen that. But we’ve actually seen very good booking trends, forward looking for the Caribbean and for Europe, a lot of that at this point in the year is driven by the North American consumer because they book further out, but as Michael said, we’re also seeing positive trends happening for Europe.

That's very helpful. And then I guess just once and for all with respect to this Double-Double, the EPS target is technically $6.78, but I think you mentioned maybe off-line that you're going to need to get to $7 for the ROIC target to still be in play. Which number - as we get closer to 2017 that $0.22 difference becomes pretty material. How should we think about earnings power for next year implied in the Double-Double?

At this point we’re not going to get into providing guidance for next year and I think for us, we’re focused on hitting both targets, the earnings target as well as the ROIC target and we’ll address specifically what we think that earnings range will be in late January, early February when we provide guidance for next year, but a good try.

Good morning. Thanks guys. On the 1.6 million new to cruise, how does that compare to last year? I am trying to get a sense of the implied growth rate here and also how that rate might be trending. That's first. Second, I'm curious what's driving that and what percent of the North American revenue we're talking about here?

Hi Dan, it’s Michael. That 1.6 million new to cruise, that’s for globally and that's hallmark is obviously is disproportionate in terms of new emerging markets, for example, China. In the United States, which of course is a significant percentage of our overall business, approximately 50% and we’ve had a very productive year, this year we need to cruise and in fact over time it’s been slightly on the decline. This year, we've turned that around and we’ve seen a really positive increase in new to cruise and of course that’s very much part of our focus is new to cruise not only in emerging new and developing markets but also in established markets like the U.S. so we are quite encouraged by what we’re seeing. And part of that is the campaign that we launched at the beginning of the year and also Celebrity's campaign; both of those campaigns have components that are very much attractive to new to cruise and when you do the research on how our positioning and how we’re communicating resonates with new to cruise, it’s very positive. So we’re beginning to see that coming through in our bookings.

Dan, this is Richard, and I’ll just add a comment because we often get questions about trends of things that have changed, and it’s clear the questions are geared toward is the world changing, is this the trend in the exogenous variables affecting us. But as Michael pointed out, we actually worked to change trends. So there are periods of time where we, for example, both Royal and Celebrity made a conscious decision this year that there was a stronger opportunity, a good opportunity with first-time cruisers. So they actually focused more of their marketing, focus more on their message and they actually worked to build that. So when you look at a trend, it’s not just is the world changing, but to some extent it's also what we are doing to shift our customer base and then that sometimes messes up nice trend lines when you're trying to extrapolate from external behavior.

Very good. That's very helpful. Thank you. A second question here, wondering how big the impact to net yield is from the new revenue management technology implemented a while back. And I'm wondering what inning we are in with respect to its implementation. And for some perspective, when airlines put in new revenue management they tend to go slow. And I'm curious how you would characterize where we are with respect to that at Royal?

Thanks for the question Dan. I think it's one of those things that's impossible to quantify. We put in new yield management systems several years ago and every day that goes by the yield management systems get stronger because the information from the past and how we read information of what’s happening in local markets and so forth gets better and better. So it’s truly a tailwind to quantify is next to impossible to do but it really I think one of the greatest benefits that gives is the ability to manage demand globally and that allows us to seek the highest yield for every cabin that's available from anyone of the world and that's obviously great on a revenue management standpoint, it’s also great to be able to take advantage of that diversification.

Good afternoon. Couple of questions. The first one is on the return of invested capital, does the Pullmantur change make any difference to the returns you make? And secondly in China, could you talk about how next year the changing proportion of capacity? Is it moving from pure charter to a more direct distribution? Thanks.

So, on the ROIC side, on the invested capital side there really is no difference, because as I said in my remarks, we still own those assets. But surely as we've been talking about for years, Pullmantur was a turnaround opportunity and this allows us to some of those turnaround issues as well as get paid for the ships and services. So it's definitely accretive to ROIC. But it’s on the earnings side, not necessarily on the invested capital side. I’ll let Michael take the China question.

Yes, on the evolution of distribution that something obviously that we’ve been focused on for quite some time and journey that we’re taking. I think what we’re seeing is the beginnings of the development of distribution in terms of starting to narrow and look very much like the North American distribution model in terms of our focus very much is engaged in opening all channels to market and optimizing each channel that includes our wholesalers charter model, which we believe has done exceptionally well up to this point, and we’re going to continue working with our charters, but we’re also developing direct, we’re also developing retail next cruise, and that’s very much what we’ve been engaged in for a while. So I think that’s the journey that we’re taking and over time we’ll see the mix balance out in a very similar way to more developed markets.

Thank you. I apologize for the final alarm here.

We have time for one more question.

Hello. Following up on Europe and the North American consumer, what are you doing this year to encourage those customers to return? Is there any education process or promotions? If so, when did that start, and is that with the travel agents or the customers directly?

Yes, I don’t think it’s a necessary education; I just think it’s - there’s been less events that turned off to consumers last year, and as I said before, it's allowing them to revisit the opportunity to go to beautiful and great destinations in Europe. I think that’s probably more what it is versus anything specifically we’re doing in terms of education.

Got it. Can you remind us what the overall net yield decline was in Europe for 2016 and where you're going to lap next year?

We haven't given that number, but it is down year-over-year.

Okay. Are you going to quantify some of this positive trends that you're referring to with the American consumer coming into Europe?

Well, I mean the only I could quantify is that we’re having both rate and volumes next year relative to the same time last year. Thank you for assisting Victoria with the call today. And we thank you all for your participation and interest in the company. Carol will be available for any follow-up questions you might have, and we all wish you a great day. Take care.