Royal Caribbean Group (RCL) — Q1 2018 Earnings Call Transcript

Thank you, operator. Good morning, and thank you for joining us today for our first quarter earnings call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, our President and Chief Operating Officer, who will soon become our Vice Chairman; Michael Bayley, President and CEO of Royal Caribbean International; and Carola Mengolini, our Vice President of Investor Relations. During this call, we will be referring to a few slides, which have been posted on our investor website. Before we get started, I'd like to refer you to our notice about forward-looking statements, which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance, and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Please note that we do not undertake to update the information in our filings as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP historical items can be found on our website. Unless we state otherwise, all metrics are on a constant currency basis. Richard will begin by providing a strategic overview of the business. I will follow with a recap of our first quarter results, provide an update on the booking environment, and then provide an update on our full-year and second-quarter guidance for 2018. We will then open up the call for your questions.

Thanks, Jason, and good morning, everybody. It's been a great first quarter, and it looks like it's going to be another great year, so I'm really happy to be able to talk a little bit more about it. I admit that last year was such an exceptional year that there may have been some slight trepidation about our being able to beat it. Fortunately today, we're really encouraged by the outlook, and we're looking forward to beating even last year by 16% or so. In fact, we're not only feeling very encouraged about 2018, but also about the potential for the longer-term future. Now, last year was somewhat unusual, as the demand from our key markets was pervasively strong. There simply weren't any, or virtually any area of weakness. This year is following a similar pattern, but there are a few more puts and takes. For example, sailings out of Puerto Rico are a little weaker this year due to the perception of the hurricane and to logistic issues in San Juan. Our original guidance for the year anticipated most of this. Regardless, last year was so strong that it's hard to be too disappointed about where we are. On the other hand, demand for European cruises continues to accelerate, even above last year's enviable strengths. These types of aberrations are very typical and they show the true benefits of having a diversified, global sourcing platform and going to over 500 destinations. Overall, our revenues for the year are looking to be even better than we expected. Onboard revenues have been particularly strong, while ticket revenue is generally in line with what we thought. I'd like to point out that our operating costs are also up a bit over our original expectations. As we've said many times, we manage the company to maximize the bottom line, not the middle line. We have identified some specific steps, which we think will increase our future revenue, and we're incurring a small amount of additional costs to realize these expected benefits. Personally, I view that as a highly worthwhile trade-off. While we're pleased that this year continues to be solid, we really focus on the implications of that for the longer term. We focus heavily on the supply/demand balance for our industry, which continues to be robust. The popularity of cruising continues to grow, and we take a lot of comfort from what we're seeing on the demand side of that equation. I am well aware there's a lot of focus on the supply side of the equation and that's appropriate. But the demand side is just as important, and as I've discussed in the past, something which we are fortunate to be in a position to impact positively. That's why we're so encouraged by the growing power of our individual brands, as well as the success we've had with our new ships, with our price integrity program, with our non-refundable deposit structure, and with so many other initiatives across the enterprise. People continue to gravitate towards vacations that give them experiences and memories, and our cruises do precisely that. Our exceptional Internet capabilities, which continue to lead the industry, allow our guests to share these memories with others on social media. I attribute some of the recent healthy growth in demand to our success in the social media environment. Our social media teams are doing an amazing job. Recently, we have revealed more about our new products. You're all familiar with Symphony of the Seas that just started operating in Europe; Azamara Pursuit, which is coming out later this summer; the new Mein Schiff which starts operating in May; and Celebrity Edge, which will start towards the end of the year. The public reaction to Symphony of the Seas was surprising, even to us. Though she's the fourth in the incredible Oasis class series of ships, she has so many new amenities and attractions that our guests and the media were simply blown away. Rarely has a sister ship received such press and rarely has it been so deserving of it. I'm sitting here across from Michael Bayley, and I can tell you that his face is still beaming from the inaugurals. Recently, Lisa Lutoff and I visited Celebrity Edge, which is under construction in France. We've been overwhelmed by the level of interest that this new ship has generated. It really is staggering to see how much talk there is about such a ship, so many months before she delivers. I'm very happy to report that she justifies all the attention, and I think people will be very impressed when they see her later this year. Moving onto another topic that addresses the needs of our customers. This year, we're also amping up the short Caribbean getaway. In past calls, you've heard me talk about changes in consumer preferences and the importance of being able to respond and to adapt quickly. One good example of these changes is that we're seeing more and more people opting for shorter, more frequent vacations. We are responding to that call by modernizing the Mariner of the Seas, which is one of our Voyager class ships. We're raising our game in the short cruise market with this upgraded vessel. We've also announced a major upgrade to our private destination in the Bahamas at CocoCay that we are calling, appropriately, Perfect Day. Perfect Day and that destination will be another great addition to our Caribbean offering. It's thrilling to see the work take shape, and I'm certain that this destination will generate just as much excitement as our new hardware has done. As 2018 develops in a constructive way, we're highly focused on 2019, which is shaping up to be a very exciting year indeed based on the strength of our brands, enhancements to our destination offerings, exciting technological innovations, and the continued focus of our people. With that, I'll turn the microphone back to Jason.

Thank you, Richard. I will begin by talking about our results for the first quarter of 2018. These results are summarized on slide 2. For the quarter, we generated adjusted net income of $1.09 per share, which is approximately $0.14 higher than our guidance and approximately 10% higher than the same time last year. Net revenue yields were up 4.9% for the quarter, which is 165 basis points higher than the midpoint of our guidance. Ticket revenue was better than expected. The main driver of the positive variance in yield was continued strength in onboard revenue, which was up 6.3% for the quarter. This result is notable considering that it follows an 8.9% improvement from the first quarter of 2017. As I've mentioned over the past couple of quarters, guest spend from onboard activities has continued to shift towards experiences rather than purchasing items, and this quarter was no different. Beverage packages, specialty restaurants, and Internet were the main revenue streams driving the quarterly performance. Net cruise costs excluding fuel per APCD were up 11.2% for the quarter, which was slightly above the guidance driven mainly by timing. Depreciation and favorability from outperformance at TUI Cruises helped contribute to the earnings beat in the first quarter. On the shareholder return front, we repurchased $275 million in shares during the quarter, completing our share repurchase program from last year, and paid $128 million in dividends. Now, I'd like to update you on what we are observing in the demand environment. On our last earnings call, we shared that Wave was off to a very good start and that we were booked ahead in both rate and volume. Those trends continued for the remainder of the Wave period, fueled by strong demand for each of our brands and core itineraries. The 2017 Wave period was the strongest in our history, and 2018 has been even better. As a result, we remain booked ahead from the same time last year in both rate and volume. The booking window has continued to extend and Q2 to Q4 continued to book in line with our January guidance. Four of our brands are welcoming new ships in the fleet this year and Symphony of the Seas, Celebrity Edge, Azamara Pursuit, and TUI Cruises' Mein Schiff 1 are each outperforming the rest of the fleet in their respective markets. Demand for Symphony has been strong since we opened the European season for sale, and increased further upon her delivery a few weeks ago. Prices for Symphony have not only exceeded our lofty expectations, they've also been even better than we saw from Harmony last year. Edge will join Celebrity's fleet at the end of the year and has been enjoying very strong demand at very high prices. Outside of our smaller Azamara and Galapagos ships, Edge is our best booked ship for 2019 from both a load factor and price perspective. We just took ownership of Azamara Pursuit and, following a major modernization, she will begin sailing in Europe in August. Despite opening for sale a year later than her sister ships, Pursuit's European sailings are already booked at comparable load factors. Our very successful German joint venture TUI Cruises will take delivery of new Mein Schiff 1 next month. Demand for the TUI Cruises brand is exceptionally strong and continues to accelerate as they further expand their destination offering. I'd like to provide an update on what we're seeing in each of our core products. The Caribbean accounts for just over half of our full-year capacity. In 2018, the Caribbean will feature more Cuba sailings than last year, and an inaugural winter season for both Symphony and Edge. The Caribbean was very strong in 2017, which has provided for a difficult year-over-year comparison. However, demand has been strong, and bookings have been trending ahead of the same time last year. European itineraries account for 17% of our capacity and have been receiving consistently strong demand. As a result, the product is booked ahead of last year at record levels. Trends for North America have remained particularly strong, which not only results in higher ticket prices but also increased onboard spending. Asia-Pacific itineraries account for 17% of our 2018 capacity, and saw particularly strong performance in the first quarter with nice yield growth in Australia, China, and Southeast Asia. These itineraries are in a good booking position for the year, with China trending well, supported by our efforts to expand distribution in the Chinese market. Overall, the booking environment for Q2 through Q4 remains very strong and in line with our previous expectations. If you turn to slide 3, you will see our updated guidance for the full year 2018. We expect net revenue yield growth of 2% to 3.75%, an increase versus January guidance due to the outperformance in the first quarter. Our expectations for Q2 through Q4 remain essentially unchanged. From a cost perspective, we are anticipating net cruise costs, excluding fuel, to be up approximately 2.5%. The updated cost guidance reflects our decision to further invest in demand-generating activities and consider some ship-related costs associated with our joint ventures that were previously expected to benefit operating costs and will now be reflected below the operating profit line. Since our last call, the dollar has strengthened versus our basket of currencies. The combination of a stronger U.S. dollar and higher bunker prices has negatively impacted our earnings per share guidance by approximately $0.10. We expect fuel expense of $678 million for the year and we are 50% hedged. Based on the current business outlook I previously described, along with current fuel prices, interest, and currency exchange rates, our adjusted earnings per share are expected to be in the range of $8.70 to $8.90 per share, $0.15 higher than our previous guidance. Before I move on to the second quarter, I'd like to reiterate the guidance we gave on the last call regarding our yield cadence for the year. Our yield improvement is expected to be higher in the first and last quarter, particularly due to dry dock timing, an earlier Easter, tougher summer comparables, and the timing of new hardware. Now, we can turn to our guidance for the second quarter, which is on slide 4. We expect net revenue yields to be up 1.5% to 2% for the second quarter. Strong net yield growth of 11.5% during Q2 2017, plus the timing of Easter, made for a tougher comparison year-over-year. Net cruise costs, excluding fuel, are expected to be up approximately 5%. Costs for the quarter are impacted by more dry dock days and our decision to increase our investments in demand-generating activities. Based on current fuel prices, interest, and currency exchange rates, and the outlook expressed above, our adjusted earnings per share for the quarter are expected to be in the range of $1.85 to $1.90 per share.

Hey, good morning. Hello.

Good morning.

Hi. So a few questions. I wanted to kind of unpack the comment that you made both in your press release and in your prepared remarks just saying that your second quarter through fourth quarter is basically in line with the previous expectation. Now, we know that the booking curve is out far, and you said that 2018 is better than 2019. So I'm just wondering, is that something – like a performance that you would have expected? Or is it kind of hard to expect upside when you have the booking curve this far out?

Yes. Well, the booking curve, I think, is always a factor in this. But I think when you look at your commentary first in the first quarter, some of the things that we were implementing early on in the year actually took faster than we thought. And we were better in the first quarter on the onboard revenue side, but we had expected those onboard revenue activities to pick up Q2 through Q4. And so the ticket environment, which we had commented on for the first quarter, was basically as we expected – it was a little bit better and those trends have really continued. Of course, we expected the year to be strong based on the booking activities early on in the year, and that has been pretty consistent for the balance of the year to date. So I think our commentary is not something more to read into, except that the year, on the ticket side, is pretty much behaving how we had expected it to.

Okay. And can you just talk about – you said that the demand in bookings were better in the Caribbean. Can you talk about the pricing environment? And if you can, just kind of call through like what you're seeing in the Western Caribbean versus the Eastern. That would be helpful.

Hi, Felicia, it's Michael. Yeah, demand has been strong and we're booking ahead of the same time last year in the Caribbean, so we're quite pleased with the performance. When you look at the differential between the Southern, Eastern, and Western, as we'd commented earlier, Puerto Rico has been slightly sluggish. But then the Western Caribbean and other itineraries have been performing particularly well, including the Cuban itineraries, which we've almost doubled capacity into Cuba this year. So the balance of things is quite good. It's also worth pointing out that when you look at the Caribbean overall, I think it's about 51% of our total capacity in the Caribbean in 2018. The numbers by quarter are quite different. So Q1, over 70% of our total capacity was in the Caribbean, and we had a pretty good quarter as we've just announced. As you move into Q2, it drops down to the mid-40s, and then Q3 just below 40% and Q4 around 57%. So the environment is fairly good. It's meeting our expectations. And in fact, the last couple of weeks, we've seen quite a lot of strength in our bookings for the Caribbean.

That's super helpful. And just finally, Jason, on housekeeping, we're just getting a lot of questions about some of the costs, accounting changes, and moving stuff with the JV. So maybe you could be more specific about that?

Yes. I mean, in terms of the geography, it's really more – first off, our JV has continued to do exceptionally well and there are some small favorability that we had estimated would benefit us on the cost line, but we're actually going to be accounting for it below the line.

Okay. And is there – like you said, is that your choice or is that kind of more of an auditor advice or is...

No. Well, it's a combination of choice and also that's the appropriate way to account for it.

Okay, all right, great. Thank you.

You got it. Thanks, Felicia.

Great, thanks. Two things I wanted to ask about. One is the higher expense from the revenue-generating activity or demand-generating activities. Can you give us a little color about what that might be, just so we can think about the timing? Because typically you would think that if you're just spending on increased TV ads, you'd expect that to maybe impact bookings in the same quarter. So just wondering if the demand-generating spend is focused on something that will impact bookings today or is it more something like a few quarters out? And I do have one other question.

Yeah. Sure. So on the demand-generating, there are lots of different things that we're choosing to invest in to improve demand and attract high-value customers, which are certainly on the rise. Now, keep in mind as we are heavily booked for the year, and a lot of this will help influence 2019 and beyond. But again, I wouldn't go into anything specific yet, except to say that we think that there is an opportunity to continue to accelerate the attraction of high-value customers, and that's what we're looking to invest the money in. But again, this is a small amount of money.

And so it sounds like basically you're saying you're not spending that. You're not having to spend more to hit the yields that you had guided. This spend is really for sort of next year's yield, is that...

Yes. This year, there's – I mean, obviously, there's – you can influence it on the margins, but it's much more about 2019 and beyond.

That's great. Thanks. And then I just wanted to ask about the onboard activity, which you mentioned is driving a lot of the upside here. Is that actually people spending more when they get onboard, deciding to spend more? Or is this all part of the fact that you're pre-selling it and selling it as part of the initial ticket package and pre-selling all this before they actually board? I'm just trying to get a sense of whether it's sort of that you're – it's maybe a package and you're sort of accounting for some of it as those things? Or if it's people getting onboard and getting out their wallets then?

Hi Robin, it's Michael. It's both. I mean, obviously, we've been really pleased with our pre-cruise sales, and we've seen a significant uplift year-over-year that's been increasing for the past couple of years, and is a big driver of onboard spend. I mean, we kind of figure that if we – for every dollar that we earn pre-cruise, we'll see somewhere between a 30% and a 50% uptick in the onboard spend. So it's a really positive environment. And then of course, over the years we've invested quite heavily in new venues and attractions onboard of our ships, and many of those are revenue-generating. We're beginning to see a lot of those now yielding superior revenue because of the kind of services that they provide. So it's really a combination. And then I'd say the third element is, as we've mentioned, people really are seeking experiences. Our Internet has been really selling very well. And then of course, things like shore excursions, etc., we've seen a significant uplift there.

Robin, it's Richard here. Good morning. I'll just add, you're focusing, as I understand, clearly on sort of the marginal change. We're looking at all these things together and more as a total revenue at the margin. But you've also put your finger on something as Michael says, the pre-booking is a real advantage. It increases the spend. It also increases their satisfaction. So it's across the board, it's a terrific thing to do. But there's not only the cost associated with the specifics, but there's also the cost of the technology. We think that is paying off over time this year and next year. But there's no question it's a cost. We think it's a cost that quickly pays for itself.

Okay. Great. No, that's very helpful. And I just think it's helpful to think about how the expense is not really – it's not that you're needing to spend more to maintain your yield guidance. So that's helpful to think about that as being kind of for future. Okay. Thanks.

Great. Thanks, Robin.

Yeah, thanks for the question. Just wanted to drill into the Caribbean environment a little bit. I think it was two calls ago and maybe the last call you mentioned that there was a period of softness after last year's hurricanes. I'm just curious, have you made up that period of softness as of today? And also wanted to confirm, I think Michael said that you are ahead in all parts of the Caribbean or just the Caribbean as a whole? And then I have a follow-up.

Yeah, hi, David, it's Michael. Yeah, we're ahead overall in the Caribbean. I mean we've got obviously a lot of product in the Caribbean, in different parts of the Caribbean. So as usual, the story is mixed across different products. We had commented earlier that the product out of Puerto Rico was softer. Of course, it's only one ship that we have full-year operating out of Puerto Rico in the whole portfolio of ships. Western Caribbean performed extremely well after the hurricanes in September, while Eastern Caribbean was sluggish. We did see a period of quite a few weeks where it took time for the Eastern Caribbean to start coming back, and the same with the Southern Caribbean. It's also worth pointing out that during that entire period, I think we'd mentioned it previously, if you look at those three storms that blew through in September, it was very unique and it really impacted negatively about five or six ports out of a total of around 60 ports. So there's plenty of product and itineraries that have been opened for sale and have done very, very well even during this period.

And, David, the other point that I wanted to add, because I think it's important just to add on to Michael's comment about us being in a strong year-over-year book position in the Caribbean, I would also consider that we have a significant increase this year with – in the short product area with Mariner coming in. And that's a much closer in booking product. So for us to be in a position of strength in combination with the closer-in booked type of product like the short Caribbean really kind of, I think, is a testament to the strength of our position in the Caribbean today.

Great. That's really helpful. And as a follow-up, I wanted to ask about close-in pricing. This is the first quarter in a while that I can remember where that wasn't called out as a surprise to the upside. Is it because you're getting better at forecasting future close-in demand and any upside there? Or is the curve now sort of lapping itself in terms of the extension and the amount that you can push close-in pricing going forward?

Well, I think as it relates to close-in pricing, obviously, we focus in on behavior of the past. And so how we have – those behaviors in the quarters, especially over the past four to six quarters where we saw strength in close-in, that's something that we would be accounting for in how we look at our book position and as well as our guidance.

Yeah. David, I would also say, I kind of share your view. Last year, we were really constantly surprised at how strong the year turned out. We think that this has been a very strong year, but I think we are not seeing the extraordinary pleasant surprises that we had last year.

Got it. Thank you.

Thank you.

Hey, guys. Good morning. So I want to ask – I know everybody is kind of harping on the Caribbean. I want to ask just a little bit differently, maybe a little bit more straightforward for Jason or Michael. But I guess a simple question is if you removed Symphony, Mariner, and Edge from your portfolio, would like-for-like price in the Caribbean still be up year-over-year for all four quarters?

That question is exceptionally difficult to answer because, of course, as one ship comes in, we redeploy other ships. There’s a lot of movement of deployment to accommodate ships that we put into specific products during specific times. I can tell you that when you look at our deployment in the Caribbean in 2018, we're excited about the fact that Symphony of the Seas is coming in the fourth quarter. As we'd previously mentioned, Symphony is doing exceptionally well in terms of booking. It was performing exceptionally before we introduced it. One little statistic: the week after we introduced Symphony of the Seas, our bookings beat track by 50%. That's the week after we introduced the ship. It's performing well. It's coming into our new Terminal A. Celebrity Edge is also performing very well. To Jason's comments about Mariner, we're very excited about Mariner as a product coming into the short market, and that's very much focused on new-to-cruise and millennial, and that really is the on-ramp for that market. That ship is literally like having an Oasis class ship in the short product market because its capacity is just over 3,000, 3,200, 3,400 every three or four days, and the sweet spot for Mariner is just coming up. We're about three months away from launching the ship into the short market, and already sales are good for that product.

Okay. Got you. Thanks for that color. And then the second question would be around buybacks. You bought back $275 million first quarter. You exhausted your repo program. I guess the question is now that you continue to produce pretty good solid results. Looking at your stock today, it's not really working. How should we think about you guys not having a repo program in place and kind of the capital deployment plan you guys see?

Yes. Well, thanks for calling our performance good. But...

I'll change that to great.

Okay. Thank you. So on the capital deployment basis, I think that you're going to continue – first off, it's always something that is at the discretion of our board, whether or not we continue on with a share repurchase program. We have generally believed that a mix of shareholder returns should include the performance of the business, i.e., share price, dividend growth, and also repurchasing shares opportunistically. There is nothing I would say that would say that we would change that behavior at this point in time.

Okay. Great. Thanks, I appreciate it.

You got it.

Hey, good morning. Thanks for taking my call here.

Good morning.

I think we've touched around the edges on a lot of this, but I was hoping we could maybe address the two major bear cases head-on. I guess, first, and obviously, this isn't the first time you've heard any of this, but the notion that Caribbean capacity accelerates particularly in the third quarter. Obviously, we've got guidance for 2Q, but I think the bigger concern this year is 3Q. So any data points or anecdotes about Caribbean pricing once capacity there really accelerates? You gave us the phasing of guidance, 1Q and 4Q the best, 2Q and 3Q not as strong. I don't know if 3Q is expected to be worse than 2Q, but any data points on that front would be helpful. And then as we think about 2019, obviously, the bear case there is that global capacity accelerates. Pretty difficult to disprove that in April of 2018 that that's going to be a big negative on yields. But as we think about that supply-demand, we know that supply is going to accelerate, is there any reason to think that demand will accelerate next year to match it? And if not, should we assume that yield next year – I mean, obviously, I don't expect guidance from you guys, but on an industry-wide basis, this notion that yields are going to be worse next year than this year, is that a valid assumption or do you have any thoughts on that?

Yeah. So first just on the question on the Caribbean side, obviously, we've commented about being in a strong book position and also with bookings accelerating for the Caribbean. I won't get into specifically by product what our book position is, but what I will tell you for the third quarter is that we are in a strong book position on both a rate and volume basis. Yes, we understand where the supply is. I think people should consider our dialogue around the booking window having extended for a period of time, and us being in a very strong position at the turn of the year. We’ve obviously been anticipating the supply that has been coming in to different regions and products of the world. I would say that we are in a very good position for Q3. On the capacity side, there are certainly strong demographic shifts and strong consumer trends of individuals purchasing experiences rather than items. Richard commented in his script about the improving perception of cruise, and we think levers like social media are helping to break through the stereotypes on cruise. We’ve seen a real change in our new-to-cruise volumes, indicating that many past detractors are becoming fans of cruises. We’re continuing to focus on penetrating different global markets and believe these elements will lead to sustained demand levels.

That's really helpful. And then lastly for me, I was hoping you could touch on Cuba. When Cuba first opened up there was a lot of discussion about capacity constraints and infrastructure limitations. And yet, more and more sailing seems to be going to Cuba. I guess, how have you been able to do that? As we look forward, there’s been a leadership change in Cuba; is there the opportunity for sailings to Cuba to continue to go up?

Hi, it's Adam. Yes, we've been commenting over time about the fact that the Cuban market, first of all, has been a good market for us to enter. The customer satisfaction about Havana has been very, very high. But the reality is that there is still just one functioning pier that ships can go to on either side of the pier in Havana; there will have to be considerable infrastructure improvement that takes place over the next several years. That will probably take time. I think what we've been seeing lately is that the Cuban government has gotten a little bit more efficient at maximizing the use of the pier on both sides, and our company has definitely been a beneficiary of that. We've been able to increase the number of sailings on a year-over-year basis, even though their capacity hasn't increased. They've just been better at getting our ships into the berth. So for what it is, it's been terrific. In the overall sense of our portfolio, it's still fairly small. We haven't seen any change in their attitude towards us or their dealings with us as it relates to their change in government up to this point.

Got it. Thank you.

Thanks, James.

Great. Thank you. First, on China. Jason, did you mention that yields were positive in the first quarter? And then would you expect the trend to improve further throughout the year as compares get easier and you just have lessening capacity in the industry?

I did comment that China was quite strong in the first quarter. We didn't comment specifically in terms of what our yield guidance would be for China, but we do expect yields to be up quite nicely in the Asia Pacific area. And of course, China is a contributor to that.

Okay. And in terms of the Med, could you differentiate between what you're seeing in the Eastern Med, the Western Med? And I know you mentioned that Europe overall was strong and North American-sourced business, you called that out. I'm assuming European-sourced passenger demand was also strong as well. How would you characterize the European-sourced passenger demand?

Hi, Greg. Yeah, European demand for European product has been strong. And of course, North American demand for European products has been, I would say, even stronger. So far it's a great season and it's looking good for the year in Europe. With regards to Western and Eastern Med, we are seeing – I think a couple of years ago with all of the geopolitical issues, there was a lot of capacity shift from the Eastern to the Western and Northern. Over the past several months, we've seen an increase in demand and a shift with a lot of the Northern European tour operators in terms of taking people to Eastern Med destinations. So demand is coming back. I think we see more stability in the region and I think that’s translating into increased interest from our customers. We have started to slightly increase our capacity and itineraries into the Eastern Med. We've got some this year and we've got more next year and the demand looks good. If we're lucky and the geopolitical situation stays stable, I think the Eastern Med may be returning.

Hi. Good morning. Could you give us a sense of how much marketing spend is targeted still for this year or to what degree are you able to look ahead and focus on marketing in 2019 now?

Yeah. Sure, Harry. So I commented on this a little bit earlier, but really – and this year is very well booked. Certainly, we can influence this year on the margins by increasing investments in demand-generating activities. But really, what we're focused on is improving demand generation especially for high-value guests further out. So it's more related to 2019 and beyond than it is significantly influencing 2018.

Yeah. Harry, it's Richard, just to add to that. We think this is proving to be a very positive year. It's performing at least as well as we expected it. Overall, we've raised our guidance for the year. Our marketing, technology investments, and other demand-generating investments are really generally fairly long-term kinds of things. So I'll disabuse the notion that in order to keep the yields up, we've had to invest heavily in marketing. Our focus continues to be long-term. As we stated in our prepared remarks, we feel pretty good about 2019 and the future. We've been surprised by so many questions on that topic.

I apologize for covering ground already covered; I've been jumping around between conference calls. So at the risk of doing it again, let me know if it's already...

Harry, you don't have to apologize. The purpose here is to communicate as much as we can, and we welcome all opportunities to that.

Okay. Thank you very much. I did have one other quick question relating to you guys calling out the strength in your onboard spend and the renovation-driven results there. To what degree has your fleet been renovated to the extent that you intended to, as it pertains to improving onboard spend? How much more is yet to go?

Well, Harry, we recently announced significant upgrades and modernization programs both for Celebrity with Celebrity Revolution and Royal Caribbean International with Royal Amplified. For Royal Caribbean, we're literally taking all of our Voyager, Freedom class, and in fact, Oasis and Allure and putting them through significant upgrades and modernization, etc., which includes elements of adding features, attractions, and venues that will further stimulate onboard spend. To answer your question in terms of a percentage, I don't think I could do that. Our focus is always on balancing guest satisfaction and revenue improvement by taking every opportunity that we think will do that for us.

Your question actually gives me the opportunity to amplify a point we've made before. The industry has proven its ability to respond to consumer needs. Some of the things that Michael is talking about that we're doing at Royal, Celebrity, Azamara, and our other joint ventures are responses to the way peoples' tastes and desires have changed, and it's paying off for us. We believe that evolution, upgrading our offerings in terms of standard features, entertainment, and other memory-producing activities, is what is driving increased demand. And that's why we tend to focus on the demand side of the supply-demand balance.

That does it for me. Thank you.

Thanks, Harry.

Thank you. Good morning, gentlemen. I'll maybe look at a couple things here, or maybe, hopefully, a little different angle. But back in November at the Analyst Day, you talked about – Michael, you mentioned, I think especially with Symphony of the Seas, that you had virtually focused the marketing of that ship almost solely via social media. Can you give us an update in general how your marketing is, percentage-wise, shifting to social media, whether that be with Edge, Pursuit, or Symphony? On that note, your millennials, as a percent of your total guests now versus where it was a year or three years ago – any update there?

Tim, if I gave you that information, my entire marketing team would be really unhappy with me. We have made a journey over the past couple of years from traditional to digital marketing, and it's been fairly significant and we continue that journey. We think that there is better targeting and it's a more efficient channel. Our social media presence has positioned us strongly within our space. We recently conducted an independent survey of where we are positioned in the social media universe, and we came out exceptionally well. We're also seeing responses from onboard Internet showing people utilizing the accelerated Internet to promote our brands, which has been quite effective. So it's a good channel for us. It's also preferred by millennials and new-to-cruise guests. Regarding new-to-cruise millennials, the strategy we've started to reveal with the modernization of Mariner of the Seas and its related offerings in conjunction with our investment into Perfect Day CocoCay will accelerate our engagement with millennial and new-to-cruise guests. We’re pushing that heavily through social media. I can't provide you with precise numbers, but we are aggressively moving in that direction and are seeing positive results.

Could we surmise that some of this increased spending or a majority of it is directed in that vein?

I would say that the focus of that spending is, again, more long-term, as Richard noted. Some of those elements would be to further enhance our connectivity and marketing to segments like the millennials.

Okay. And then two last ones here. Related to 2019, do you – or should we think about you're purposely – as a bit of a hedge given the capacity coming that you, the industry, are putting on extending the booking curve a little bit to build that base a little quicker? And then on the Caribbean, in particular, how do you feel you're performing there relative to the industry?

Well, I can't comment on the industry as it relates to what others are doing regarding their booking curve. We are proactively managing demand and using sophisticated yield management tools, considering the supply coming forward to ensure we put ourselves in a posture for success. I do think that the product our Royal Caribbean International brand is offering in the Caribbean, given its capacity, is leading. That's why we're seeing such robust demand. If you look at Harmony and Symphony, as well as Mariner, just our core new products within the Caribbean, performance has been exceptional.

Thank you, gentlemen. Congratulations.

Thanks, Tim.

Hey, good morning, everyone. Thanks for taking my questions. Michael, I just want to follow up on something you said earlier in the call. I think I heard you say that in the last couple weeks, you've seen quite a bit of strength in Caribbean bookings. Can you elaborate on that? Is that an acceleration from what you've been seeing? Is that Puerto Rican and Eastern Caribbean itinerary? Is it specifically for Edge or Symphony or is it something else that's driving that?

Yeah. Obviously, we manage against the track and we're constantly calibrating that track in terms of the expectations of volume, rate, revenue, etc., by product and by brand. We’re constantly engaged with that performance track, and many of our investment marketing decisions are based on that performance. This is interesting when you see things like the 1,000-point drop in the stock market at some point: I think it was a few months ago; you can see the curve drop a little as people concern themselves about what's going on with the stock market, and it soon returns. Over the last couple of weeks, we've seen strength above our expectations in the past two weeks across all our Caribbean products, including the Southern and Eastern Caribbean.

That's interesting. It's very helpful. Thank you. And then I just want to revisit the close-in discounting and pricing integrity topic. I know that this has been an initiative. As this winds down, I'm wondering if this could potentially explain why the close-in yields didn't surprise to the upside this quarter. Where do you stand with your price integrity initiative now? Is there still some discounting going on? Are there still certain markets where this is happening? We'd love to just hear an update.

This wasn't an initiative that had a short timeframe. It was a program and we're continuing on it. We believe it hurt us in the short term but has helped us overall. It's hard to measure these things, but I think it's continuing to help us. In fact, I think I called it out in my comments. We are continuing it. We’re continuing not to make exceptions. We continue to discount, but what the program says is we won't add new discounts in the last 30 days, and we're sticking to that. We believe it's been successful and will continue to be, and it’s not that the initiative has run its course; it’s simply in place and it will continue to be in place.

Okay. Thank you. And then just one last quick one. How much of a tailwind to yields are you expecting when Celebrity Edge comes online?

I'm sorry, I didn't hear the question on the yield side.

Yeah. The question is, how much of a tailwind to yields does Celebrity Edge add when it comes online? I guess maybe to ask it differently, what kind of a premium does Celebrity get to your system average, and then what kind of a premium is Edge going to get to the Celebrity average?

Yeah. Well, Celebrity is definitely higher than our average in terms of yield performance. Edge is certainly higher than the Celebrity average by quite a bit. I would just keep in mind that the benefits from Edge will really help us in 2019, as only a few sailings will take place in 2018, mainly in December.

Okay, thank you.

You got it. Operator, we have time for one more question.

Great. Thanks for fitting me in here at the end. I just had a quick question on the guidance. It sounds like fuel FX was a $0.10 headwind, but there is a $0.15 raise. Is it fair to say things are about $0.25 better on a core basis versus where you thought about the business 90 days ago? Within that, it seems like other income and the JVs are performing better. Is that a significant part of the raise?

Yes. So thanks, Vince, and thank you for pointing that out. That's exactly right. If FX and fuel were what they were at the time of our January guidance, we wouldn't have raised by just $0.15. We would have raised by $0.25. Certainly, the JVs, both TUI and Pullmantur are doing quite well, and they are definitely a part of the contribution. Effectively, these things are offsetting the increase in our costs that we updated here at the time of this call. Yes, they're basically offsetting that. And so that $0.25 raise relates to the Q1 beat. The FX and fuel lowered that down by $0.10. So it would have been $0.25, but it's $0.15.

Great. Thanks. And then I don't know if it’s been mentioned yet, but the SkySea joint venture, could you just talk a little bit about your thinking there? It was announced in March that it ends at the end of the year. What went into that decision?

Yeah. There was an opportunity to sell that ship to TUI AG. We decided to move on from that venture. It will actually help us quite a bit in the forward years as TUI Cruises will hold on to Mein Schiff 2 for the coming years, which will further improve our profitability outlook for 2019 onward.

Great.

You got it. Thank you for your assistance, James, with the call today. We appreciate your participation and interest in the company, and we wish you all a great day. Care to join for follow-ups?