Royal Caribbean Cruises Ltd. (RCL) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruises Ltd. 2014 Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jason Liberty, you may begin your conference.

Thank you, operator. Good morning, and thank you for joining us today for our third quarter earnings call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and Chief Operating Officer; Michael Bayley, President and CEO of Celebrity Cruises; and Laura Hodges, our Vice President of Investor Relations. During this call, we will be referring to a few slides which have been posted on our investor website, www.rclinvestor.com. Before we get started, I would like to refer you to our notice about forward-looking statements, which is on our first slide. During the 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. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, a reconciliation of these items can be found on our website. Richard will begin by providing an overview of the business. I will follow up with a recap of the third quarter results, provide an update on the current booking environment and our early thoughts on 2015. I will close with our outlook for the full year and fourth quarter. We will then open the call for your questions. Richard?

Thanks, Jason, and good morning, everybody. It's always a pleasure to have the opportunity to provide additional color on our progress. As you know, our most important initiative is our Double-Double Program. This program reflects our determination to reach double-digit returns on investment and to double our earnings by 2017. We are pleased with the progress to date, and we continue to see this as the right goal at the right time. One objective of publicly announcing the program was, of course, increased transparency to the investment community. However, the more important objective is actually to inform and motivate our employees around both our EPS and our ROIC targets. Each employee plays a role in reaching these targets, and it's important that each of them understand how crucial they are in the successful achievement of the Double-Double goals. In this context, we have been showing our internal teams a short 2-minute video that we thought we would post on our website so you could see it, too. I must tell you that the announcement of our program was even better received by our people than we anticipated. It's worked its way through the fabric of our organization in a very positive way, and it's proven to be a remarkably effective way to get all of our people to rally around our goals of aggressively improving our returns. We are on a roll. As the video explains, the 3 main drivers of our Double-Double success are: improving revenue yields, maintaining cost consciousness and moderate capacity growth. Taking these in reverse order, our capacity growth is set to at least 2017. Our cost-conscious culture is well established and we had numerous tailwinds on the revenue side, that I'll expand upon briefly. Addressing the revenue opportunity, let me start with the power of our brands. Royal Caribbean's International takes delivery of the Quantum of the Seas in just a few days. She is truly a marvel and I will comment more on her in a moment. Celebrity Cruises market segmentation strategy has also changed the trajectory of this brand, and we look forward to continued improvement in Celebrity's results. Pullmantur, our Spanish brand, has faced enormous challenges for the last few years but that's shifting. The management there is adding a focus on Latin America and this strategy is well underway. Azamara continues its dramatic upward trend based on its very successful destination immersion programs. And lastly, TUI Cruises continues to deliver exceptional returns but below the line. With the addition of 3 more new builds on -- over the next 3 years, the TUI Cruises venture will continue to be accretive to our earnings, as we work towards our long-term goals. In addition to our brands, we have a myriad of other initiatives that are supporting our success. Our growth in China, our global footprint and our investment and yield management tools are only a few of the other reasons why we remain confident about our Double-Double Program. Looking specifically into 2015, we are very encouraged by what we see, although our first quarter will be tougher than the rest of the year. There's continued capacity growth in the Caribbean during this first quarter, and we don't get to easier comps until next April. However, after that, essentially all of our markets are looking robust, and we expect a notably better operating environment for the last 9 months of 2015. We're also starting the period with more bookings in the end and at higher prices. Amazingly, despite the addition of 2 new vessels, we actually have fewer cabins to sell in the U.S. and Europe, even in absolute terms, than we had at the same time a year ago. With fewer cabins to sell, we have less pressure to do such last-minute discounts. This not only should help our yields but it should increase guest satisfaction as last-minute discounting is a significant source of discontent to many of our early booking guests. We're in this favorable condition because of our strong order book and because China is growing a massive 68% in 2015, including the introduction of Quantum of the Seas. We therefore decided to take a more consistent approach on pricing. This may well result in slightly lower load factors, but we think it will raise the satisfaction level of our guests and strengthen the perception of our brands' superiority. Strong brands are the best guarantor of our future performance, and we will keep working to continually enhance the strength of our brands. On the cost side, it's way too early to give specific forecast as we're still in the midst of our planning cycle. That said, 2 areas we are investing heavily in are Internet bandwidth for our ships and developing the market in China. These investments are costly but they are critical to the long-term success of our company and they should provide very short paybacks. We maintain our commitment to strong cost discipline, and we will be measuring any cost undertaking against the criteria of rapid payback. Given all of the above, and emphasizing that it's still early days, we are pleased to confirm that we're comfortable with the current Street consensus of $4.55 per share in 2015. That would represent another 30-plus percent increase in earnings. It also represents another step towards our Double-Double goals. Of course, while I may wish to do so, I can't ignore the topic of Ebola. As I've consistently said, there's no such thing as perfect safety but there is a perfect dedication to safety. That perfect dedication to safety encompasses the safety of our guests and crew to public health concerns like Ebola. From what we've seen and heard, the probability of a serious outbreak in the United States approaches 0, but the probability of an epidemic of fear approaches 100%. The CDC and CLIA have extensive protocols in place designed to contain the disease. While there have been some new steps in the early stages, the fact remains that the CDC is one of the strongest and most professional organizations in America. We are lucky to have them leading this effort, and I am confident that they will contain it successfully. Unfortunately, it is hard to assess the fear factor. So far, we've not experienced any big impact on our bookings. Furthermore, the hysteria over the issue seems to have abated even over the last few days. The closest parallel we could think of was the fear over SARS some 12 years ago. Although that was a more contagious disease, the fear factor was then, similarly, more relevant than the actual danger. In that case, we experienced a sudden negative impact on our bookings. But fortunately, the reversal of the impact was just as rapid and the recovery was very swift. Returning to the delivery of Quantum of the Seas, we are excited by the unprecedented interest this ship has generated. I've just returned from a visit to the ship and I'm even more confident that everyone will find that the excitement was justified. Personally, I find it interesting to reflect on what differentiates unique new vessels. Voyager and Freedom class ships were notable for creating a new style of ship, with more wows than ever before. Oasis of the Seas was notable for her scale and her grand spaces. Celebrity Solstice was known for the beauty of her architecture and for the uniqueness of her special features. After all these spectacular new ships, I can't help but sit here and wonder what Quantum will be known for. There's been much publicity about the physical features on Quantum like North Star, SeaPlex and Two70°. These features are indeed dramatic and they alone justify much of the excitement. But part of the reason we're so enthusiastic about Quantum is because it also has so many additional nonphysical elements that have never been seen before. For example, Dynamic Dining is the most radical change in our culinary offering since the company was founded over 40 years ago. The entertainment on board is dramatically different, both in scale and diversity. And the use of technology is undergoing ambitious transformation that exceeds the cumulative change of any previous decade. For us as a company, one of the best parts of the new technology is that it's fungible. If these features are as impactful as we hope, we can roll them out to the rest of the fleet more quickly and in a more easy way that you can hardware elements. For example, our exclusive partnership with O3B brings super Internet bandwidth. There's also a no check-in check-in, where you don't even have to go through the check-in process at the terminal, just show your boarding pass and passport and you're off. Our new luggage tracking technology allows you to track the progress of your luggage from the curb to your stateroom, utilizing RFID technology. And if that wasn't enough, our new Royal iQ app will allow you to manage your entire vacation experience from your mobile device. No more standing in line to book your entertainment, change your spa appointments or make a reservation in specialty restaurants. I believe all of this technology will be a huge differentiator for Quantum, but the fact that it could be installed in our other ships in the fleet make it especially beneficial for the brand. All of these elements are game-changing, but the aspect that I think observers will be most surprised about is Quantum's elegance. People are expecting the wows. Certainly, we've done our best to generate the publicity. But I think everybody will be pleasantly surprised by how elegant the total package is. This is probably one of the most sophisticated and elegant ships Royal Caribbean International has ever built. So yes, we are excited to be finally able to show off this amazing vessel, and we believe she will help our drive for better returns on investment. Just before turning the call back to Jason, I have to acknowledge the men and women who have worked so hard to make this ship a reality. The passion of our people to complete this work and implement these game-changing features is fantastic. I continue to be in awe of the teams working so hard to get Quantum of the Seas ready for her debut. And I can't wait until their efforts become apparent to everyone. With that, it's my pleasure to turn the microphone back to Jason.

Thank you, Richard. I will begin by taking you through our results for the third quarter. So unless I state otherwise, all metrics are on a constant currency basis. We have summarized our third quarter results on Slide 2. For the quarter, we generated adjusted net income of $2.20 per share, which was in line with our previous guidance. The business performed as expected. Net revenue yields were up 4.2% for the quarter, which is right on our guidance of approximately 4%. Europe, Asia and Alaska itineraries delivered double-digit yield improvement, while the Caribbean yields were down year-over-year. Onboard revenue was up 4.4%, which marks the 11th quarter in a row of growth. Increased load factors, coupled with strong beverage programs, mainly drove the year-over-year improvement. Costs were better than expected for the quarter, with net cruise costs excluding fuel down 1.2%. About half of these savings are timing-related and are expected to be spent during the balance of the year. During the quarter, the combination of the stronger U.S. dollar and improvement in fuel prices resulted in a net negative of approximately $0.03 per share. To be consistent with how we have presented adjusted earnings, the loss on the sale of the Century and the voyage proration impact as described in the press release are not included in our adjusted earnings for the quarter. On the capital front, we increased the quarterly dividend by 20%. We continue to remain focused on our 3 core financial objectives of reaching investment grade metrics, moderate capacity growth and improving shareholder returns. As we progress towards our Double-Double target, we expect to continue to return capital through dividend distribution and by possibly buying back shares. Now I would like to update you on the booking environment for the balance of the year, including our early thoughts for 2015. In the fourth quarter, just under half of our capacity is in the Caribbean, with the balance mainly split between Europe and Asia Pacific. While pricing in the Caribbean remains challenging, we feel we have a good handle on the types of tactical actions that resonate well to drive demand. This has resulted in a bit more discounting but is driving better-than-expected load factors, which help compensate for lower prices and further benefits shipboard revenue. The tail end of our Europe season is close to being sold out, and this will be our third consecutive quarter of double-digit yield growth for this product. Yields for this season are expected to be about 5% higher than the 2008 peak. We've seen strong demand trends from Europe sailings from all key sourcing regions throughout the year. And the anticipated challenges in the Black Sea and Holy Land were not material to our yield performance. Asia and Australia remain key during the winter, and despite an 11% year-over-year increase, these products continue to deliver superior yields relative to our other winter deployment. As Richard mentioned, based on current booking trends, we are very encouraged by the outlook for 2015. Before digging into the booking trends, I wanted to provide the landscape for deployment next year. We have made a number of deployment changes in 2015 that we expect to benefit yields and performance. Our most significant capacity growth will be in the Asia Pacific region with the entry of Quantum of the Seas in China during the summer. Asia Pacific will increase from 12% of capacity in 2014 to 15% in 2015, with China representing approximately 10% of our capacity in the summer months. European capacity will be up mid-single digits in 2015, that will represent 22% of total capacity. In the spring of 2015, we will take delivery of Quantum of the Seas' sister, the Anthem of the Seas, which will sail out of Southampton for the summer. The Allure of the Seas is another significant capacity change in Europe. She will be taking European vacation and will be spending the entire summer out of Barcelona and Rome. Both of these ships will be replaced by smaller vessels with [ph] established itineraries. So Caribbean capacity will be up slightly in 2015, driven by Quantum of the Seas in the Northeast this winter, that will represent 44% of our total capacity. Caribbean capacity in Q2 and beyond will be down year-over-year, with summer capacity down approximately 5%. So now I'm going to discuss the current 2015 booking environment. We have been experiencing very healthy demands for 2015 sailings, with bookings consistently trending ahead of same time last year levels and outpacing capacity growth by a considerable margin. So as a result, our booked load factors and APDs are higher than same time last year. So our Caribbean load factors are higher in all 4 quarters versus same time last year, and they are materially better beginning in Q2; which is a point in which the industry capacity begins to decrease. We are also seeing strong bookings and pricing trends from both North America and Europe for our European itineraries. As we expected, Anthem of the Seas and Allure of the Seas are each seeing particularly strong demand for the summer season. Also, the remainder of the fleet sailing in Europe is also trending ahead. As Richard mentioned, we are very excited about the delivery of Quantum of the Seas and Anthem of the Seas. As we expected, both ships are seeing particularly strong demand with pricing similar to the Oasis class. We expect Q1 to be our toughest quarter next year, as industry Caribbean capacity is at an elevated level through April, and we are seeing the promotional environment continue throughout the first few months of the year. First quarter Caribbean sailings, which account for close to 70% of the capacity for the quarter, are booked at higher load factors than at this point last year but at lower prices. We expect to offset the Caribbean pressures in the first quarter with capacity increases in our Asian, Australian and South American products, all of which are performing well. While the accounting change related to the voyage proration will have a negative impact on Q1 comparables, we do expect to see yield improvement in the quarter. It's still too early in the booking window to provide specific guidance, however, 2015 is expected to be our sixth consecutive year of yield improvement. Also, we expect our 2015 yield improvement increase to be higher than the yield increase we are experiencing in 2014. While it is still early in the booking cycle, we are pleased to confirm that we are comfortable with the current Street consensus of $4.55 per share for 2015. This would represent a year-over-year increase of over 30% on top of 2014; which would be a record earning year for the company. If you turn to Slide 3, you will see our guidance for the full year 2014. Net revenue yields are expected to be up approximately 2.5%, which is consistent with the midpoint of our previous guidance of 2% to 3%. Net cruise costs excluding fuel are also expected to be consistent with our previous guidance of flat to slightly down. The factors impacting our business have remained consistent since our last earnings call. Europe and Asia itineraries as well as on-board revenue continue to outperform, more than offsetting the weakness in the Caribbean. Our fuel costs for the year have decreased slightly since our July call to $943 million, driven mainly by rate, and we are 52% hedged for the remainder of 2014 at a price of $614 per metric ton. Based on current fuel prices, interest rates and currency exchange rates, our adjusted earnings per share guidance is expected to be approximately $3.45. While this is the midpoint of our previous guidance, there are puts and takes in the numbers that shifted during the third quarter. The net negative impact of the strong U.S. dollar, partially offset by reduced fuel prices, did impact our earnings guidance for the full year by approximately $0.10 per share. Also, as we described in our press release, we did make 1 change in how we recognize shorter voyages at the end of each quarter. Historically, we would only prorate revenues and related expenses for sailings of greater than 10 days that crossed over the end of a quarter. Starting September 30, 2014, we are prorating all voyages to recognize revenue and related expenses in the period in which they are incurred. Included in our adjusted earnings guidance for the year is a benefit of approximately $0.07 per share that's related mainly to the additional capacity from the Quantum of the Seas holiday sailing that would have previously been recognized in Q1 of 2015. Now I would like to walk you through our fourth quarter guidance on Slide 4. Net yields are expected to be up approximately 3.5%. Our deployment mix shifts substantially again in Q4, with the Caribbean becoming an increasingly important product for the remainder of the year. As a result, the Caribbean pricing environment is a little bit more influential than it was in Q3. Net cruise costs excluding fuel are expected to be up in the range of 2% to 3%, and we have included $225 million of fuel expense for the quarter. Taking all of this into account, we expect adjusted earnings per share to be in the range of $0.35 to $0.40 for the quarter. With that, I will ask our operator to open the call up for questions-and-answers.

[Operator Instructions] Your first question comes from the line of Felicia Hendrix of Barclays.

Jason, you said, in your prepared remarks regarding the Double-Double Program and how you are on track, you made a comment about potentially being able to or contemplating buying back shares. I was wondering if you can comment on that, particularly, given where you are with the rating agencies.

Ladies and gentlemen, I do apologize but there will be a slight delay in today's conference. [Technical Difficulty]

Felicia, are you there?

I'm here. Are you there?

Yes, sorry about that. We had some type of technical difficulty.

But did you hear my question or shall I repeat it?

We heard the question. Maybe that was the problem, you asked about share buybacks. I don't know if that offended Jason.

Yes, maybe, yes so -- I'm on pins and needles waiting for your answer.

Yes. So obviously, as we progress through the Double-Double period, we generated a lot of free cash flow. And while it is obviously a Board of Directors' decision in terms of how we deploy that capital, we do think share buyback is a feasible way, as well as through the traditional dividend distribution process that we've done in the past.

Felicia, you also asked us how that impacted on our objective of being investment-grade. And clearly, that's a part of our thought process. We continue to intend to be investment-grade, but we think we are well on the track to do so. We're already getting essentially investment-grade type pricing and type covenants. And so we think that any decision we made in terms of share buyback would keep that objective fairly in mind and would not be a really big factor in that progression.

Okay, great, very helpful. And then Jason, my follow-up question is just regarding the accounting changes that you made in the release. You -- I believe you're pretty clear in how you listed them out in the release, but we are getting a lot of questions this morning regarding why you called out the impacts from the Quantum of the Seas when it was already contemplated in your prior guidance. So I was just wondering if you could talk to that for a moment.

Yes, we were just calling it out. So this has always kind of been anticipated in our guidance. And so we were pointing it out as it relates to the fourth quarter because those few days that would typically be sitting in Q1 will be sitting in Q4. And we just thought it was important to point it out. But overall, this is really an immaterial change to our key statistics for the year.

But just to make sure I understand, so that $0.07 is not incremental to your fourth quarter. That was already in there before?

That was already in there before, that's correct.

Your next question comes from the line of Greg Badishkanian from Citigroup.

This is Greg. Just first question is, it's very encouraging about your 2015 bookings. In the press release, you mentioned strong, robust, up year-over-year. And I'm just wondering maybe if you could parse out volume and pricing. In my book, maybe that's mid to high single-digit robust. Maybe if you wanted to give a little color, that would be great. If not, I understand.

The latter part of that was probably good to hear, that you would understand. It is very early in the cycle. But overall, we are -- and it's generally and it's across all products -- seeing good demand, so strong volumes, good pricing. I also, in my opening remarks, talked a little bit about for the Caribbean, that were really -- Q2 and beyond -- seeing that promotional activity that we've seen over the past several quarters dissipate as well.

Yes, and then I think we did give a little color. Jason commented that we expected the increase to be better than the 2% to 3% that we have been looking forward to this year. And I think it's very encouraging to see a really very different tone in the market. And I think that's part of what we've been seeing, that's part of what you all have been seeing on your calls out to travel agents and others. The tone for 2015 is just very different. On the other hand, as you well know, we are -- we tend not to have big swings in terms of yield improvement. So that tends to ameliorate downswings when we have a bad year and it tends to put a governor on big upswings. But overall, the tone of the market is simply very encouraging for us. And that's why we went to the fairly unusual length of reaffirming -- or not reaffirming but confirming that we were comfortable with the Street's estimates for '15 and we don't usually do that this early.

Yes, I would agree, I mean, that's what we're hearing, too. So it's good to see that. And just if I could ask a question on hedging. I know you typically like to do that more just to mitigate upswings in fuel, but could you opportunistically maybe hedge some more? Is that something that you'd consider, strategically, or not?

So we're always looking at trends and -- as it relates to both fuel and currency. And as we've talked about it in the past, we typically see, especially over the medium and long term, a kind of inverse relationship between currency and fuel. And so we're kind of maintaining that kind of 40% to 60% range on the fuel hedging, but it tends to kind of bode well over time relative to currency trends. But it is something that we are consistently watching.

Okay. So opportunistically, if you think, fuel is low now, you might consider maybe going a little bit to the upper end of that range?

It's definitely something in the consideration. But again, in that conversation, there is also taking a look at what's happening in the different currency markets relative to the U.S. dollar.

You're next question comes from the line of Tim Conder of Wells Fargo Securities.

A little more color if you could, again within the context of how much you're -- it's early and how much you're comfortable sharing, but I think you've alluded to that you expect China to be up again double digit in yields for '15. Any color, should we see similar acceleration or maybe a little bit deceleration from the performance that we've seen in Europe this year? And then any directional comments you want to give in relation to Europe or China as it relates to the Caribbean as far as yields for '15.

Tim, it's Adam. We didn't make any specific projection about yields for next year in China. We obviously have a significant capacity increase, which is reflecting the optimism that we have about the continued development of the market and the position of Royal Caribbean International in it and specifically, the arrival of Quantum of the Seas right around midyear to China, which is clearly one of the more dramatic strategic steps that we have taken, really, over the course of our history. And having just been there last week at their big conference, it's clear that the arrival of a state-of-the-art cruise ship is being incredibly well received in the marketplace. The Chinese feel like they should have access -- immediate local access to the best cruise ships in the world, and now they're going to have that. So there's a lot of excitement, but it's early. China is a historically late booking market. There's a lot of group business that needs to be accomplished and so forth, so it will be until later quarters before we can comment on yield performance specifically.

And then, Tim, talking about your other questions, Europe was a particularly good year this year, but part of that was compared to the prior year. Next year, we have relatively modest capacity increases in, sort of, the 5-odd percent range; which is I think -- we think quite manageable, and as I mentioned, the tone of the market is very good. We also have Anthem of the Seas starting up; which -- it's not only the Chinese who are excited about Anthem, it's also the U.S. market and the European market. It's really doing very well. Allure of the Seas is going over there next year for the summer, and that should be a positive move. And so -- and then if you look at -- your other question was, sort of, how that all interrelates into the Caribbean, Caribbean capacity, once we get past the first quarter is also doing fairly well. We actually have a decline in capacity next year as opposed to the 13% spike in capacity this year. So overall, I think all of those things are coming together to produce this very nice tone as we're looking into 2015.

Okay. And then in relation to your booking curve commentary, are you seeing that extend in all geographic regions? I guess, as just a follow on to that. And then finally, TUI, with ongoing growth in the TUI Mein Schiff fleet, can you just give us some -- how we should think about the incremental impact of each ship to the profitability from TUI and then as it relates, of course, to your portion of those profits?

Tim, it's Jason. Just to comment real quick on the booking window. We have -- we've been talking about this for some time: An ongoing expansion in each key market of the booking curve.

And, Tim, in relation to your question about TUI Cruises, TUI Cruises has been a very solid performer. I dearly wish it were included in our yield stats, because it would make them look very good. TUI Cruises has done an exceptional job of positioning itself in a very good way in a very good market. And the addition of these new vessels is really quite a powerful driver. The ships themselves are exceptional as the first ship's proven to be. And the fuel consumption is a fraction of what it was with the older ships. So that continues to be -- the new ships will continue to be powerful drivers, albeit below the line.

And Tim, just to add to your -- per your question, in terms of how to think about it. Obviously, this business performance improves every year. But I would look at as these ships are coming in on a pretty consistent basis, or about the same time, you can look at that year-over-year change as a way of thinking about the forward-looking years.

Your next question comes from the line of James Hardiman of Longbow Research.

So obviously, a number of ships moving out of the Caribbean next year, and I think you spoke to trends commensurately getting better post 1Q. Can we maybe peel back the layers on that a little bit? Do you think that aggregate demand for the Caribbean market is getting any better? I think the comparisons probably get better post 1Q as well for the Caribbean. Or are you in fact seeing literally as ships leave that market, pricing firming up? And I guess, on the flip side of that, as some of the ships leave the Caribbean and go into other global markets, are you seeing any negative impact on pricing in those markets as that capacity gets added?

James, so I think looking at the Caribbean in itself, obviously, in the first quarter, there is some additional capacity there, for the industry and for us. There's also additional capacity with Quantum out of the Northeast. So that has some level of stress in the first quarter. But then as us and our competitors are taking capacity out, we are seeing the need for promotional activities to really be modified in terms of us having to do anything tactically. What we're not seeing is, as the capacity is going into other markets like Europe and Asia, a need for that environment to act in any way like the Caribbean environment did this past year. So we're not seeing a need to be promotional or do any unusual tactics in order to stimulate demand.

Very helpful. And then just to follow up on the whole Ebola issue. It sounds like in spite of that, you feel pretty good about next year, but how should we think about that? Do you think that it's having any discernible impact on your business for the fourth quarter and '15? Or would things have just looked all the better, had you not run into the Ebola hiccup here. You spoke to what SARS did to your business. Are you seeing a similar impact from Ebola?

We're not seeing anything like the situation we had with SARS. I think the impact, so far, has been very small, and in fact, if anything, the press seems to have changed, so there's much more discussion of why we overreacted rather than the actual overreaction. So no, we're not seeing anything -- so far, we're not seeing anything like the situation with SARS. I gave that parallel because I think we've had a lot of questions as to how should one look at these things and if there had been an issue. But at this point, we're not seeing anything like that. The impact has been quite small.

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

Just a quick follow-up on Europe. So I'm a little bit surprised by the strength of the comments that you made with respect to Europe, given that there is a 5%, 5.5% capacity growth and still a relatively soft economy. Can you give us a little bit more color on where you're seeing that strength? What is the source of it?

Hi Harry. It's Jason. Similarly, last year, we saw very strong demands pattern coming from North America as well as from Europe. And those are very similar demand patterns, actually, probably slightly elevated demand patterns that we're seeing from the North American consumer for European itineraries as well as for European -- selling European itineraries. It's obviously still very early in the cycle, especially for the European consumer. But those trends are continuing to bode well.

Harry, I think also -- sorry, it's Richard. If you could also -- your comment was more addressed, sort of, in a macro sense. And part of what we're seeing is the strength of our brands. And I think people always underestimate the importance of brand and the brand strength, how that gets communicated to the consumer, both directly and through the travel agents. And we have done a lot that has strengthened the role of our brands. I think that is being seen, as I say, both by the public individually but also the travel agents who continue to be an important driver. And so that also helps us do perhaps a little better than might be seen, purely looked at it from a macro point of view. And that's why we've put a lot of focus on developing our brands.

So then the follow-up question would be, can you remind me what the mix of North American passengers is typically in Europe?

Hi Harry. About 1/3 -- well, 2/3 of the guests for European sailings come from Europe, with the balance coming mainly from North America.

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

Two questions. One is just to clarify, since I think there were some questions about Q4. If you could just tell me if I'm thinking about the math right. Really, even without the $0.07 of benefit from the accounting change, the only thing really changing are some expenses shifting between quarters, and of course, FX and fuel, which we knew about before today. But on a fundamental basis, it looks like your guidance for Q4 is just the midpoint of what you talked about before. So tell me if I'm doing the math right, but I don't actually see a change in any of the drivers. So I would -- it looks like it's, kind of, relatively in line. And then my second question is when you sold the ship to Ctrip, you really didn't say much about it, but Ctrip's talked about having discussions with you to do a joint venture. So I wonder if you could talk a little bit about how soon Ctrip's -- this startup cruise line could be operating and selling in China?

Robin, just taking on Q4. The proration was always in our guidance, or even in the implied guidance previously. So our business is actually slightly better in Q4 than we had anticipated. Some of that comes from cost, but some of that's also top line, and some is also below the line. But in general, it's slightly better. Unfortunately, currency has been a headwind for us, with mainly the strengthening of the pound, the Australian dollar and the Canadian dollar during that period which is more exposed to those currencies.

And Robin, to answer your second question, as you pointed out, we haven't said a lot about that. Ctrip did make some comments. But our practice has been not to really talk about things unless they are firm. And while we did enter into a letter of intent with them and are pursuing those conversations, we really feel that these are the sorts of things any prudent businessperson looks at. But until they're final, they're not final, and we don't speculate on where that might lead.

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

A couple of questions on the cost side. Jason, you mentioned that half of the decline in Q3 was due to timing, and so that will be spent in Q4. What would be the biggest item there? Is it the advertising? I don't imagine it's drydocks at this point.

Hi Assia. Yes, so in terms of the cost side, the things that are shifting, it's really a sundry of different things. It's not one specific thing within the quarter. But some of that is -- it's mainly timing things around the things that we're doing on the ships.

And overall, when you look at the full year, has your advertising spend been higher than you anticipated or pretty much in line?

I would say largely in line.

Okay. And the second question relates to scrubber technology. Do you anticipate a more accelerated drydock schedule over the next couple of years to be complying with the ECA regulations?

Hi Assia. In terms of our schedules, our capacity numbers, our CapEx numbers, all -- forward-looking, all contemplate the implementation of the Advanced Emissions Purification systems; which we call them scrubbers.

Okay. And in terms of the actual cost of the drydock, we should expect possibly a slight increase in net cruise cost over the next 12 months, 18-month period, is that fair?

We've -- all of that has been in our figures, we've been working on the AEP for a long time. And it's in all of our projections. We've been doing some of that. We have -- the first working scrubber came out 6 months ago. We had the first working scrubber on a new building 6 months ago. Quantum of the Seas has -- I'm sorry, AEP. Quantum of the Seas has and will next week, when she comes out, will have a good, working AEP system. We think we also have the only working prototype on an existing ship that I'm aware of. And that's been operating for quite a while for us. So we think we understand the cost. We've incorporated them in our guidance, and we're just moving forward. It is, of course, a new technology and new technology can bring surprises. But so far, we are moving along the trajectory that we set forth a while ago.

Okay. And one last question. In terms of the booking curve and how far you're booked during 2015, is it fair to say that you're at about 25%?

We're not going to be specific on our exact book position. Typically, we have said in the past that we cross the year at about 50% booked, and that's traditionally pretty linear. So you can try to work in the math from there.

Your next question comes from the line of Steven Kent of Goldman Sachs. Okay. Your next question comes from Jaime Katz of Morningstar.

So the guidance for next year sounds like it implies that yields will be slightly higher at least; which has some implications for the cost, at least on an as-reported basis, perhaps they could tick up. So can you talk a little bit about the best opportunities you have to control those costs or maybe where you might see some headwinds in the year ahead?

First, I mean, just to point out, we really pointed to that we were comfortable with that number. So you can imply different -- people can have different scenarios in terms of what the key statistics will look like. There are always headwinds in which we're facing, investments in new opportunities, there's inflationary costs and so forth. And then there are also opportunities; which we try to balance in that conversation as it relates to scale and as it relates to just general continuous improvement activities; which is why we still maintain very committed to our cost-conscious culture. But there aren't -- there isn't anything in particular that is a serious headwind. But as Richard commented in his remarks, we are looking -- there is possible spend on things that we would see a quick turnaround in terms of bottom line performance on that we're always considering.

Your next question comes from the line of Jamie Rollo of Morgan Stanley.

First question was just on the pricing approach. I think you said you're going to take a more consistent approach that could offset load factors. It sounds like a price increase, but could you just talk a bit about that, please?

Well, I think it's pretty dramatic for us to be in a position where despite a quite considerable amount of -- 2 new ships coming on next year, in our core markets, U.S. and Europe, we actually have fewer beds to sell. And I think that's a testament to the strength of the market. We've also indicated that they are on the books at higher pricing. And one of the comments that we made, and I think everybody is aware of, is that it is a significant de-motivator and source of quite a bit of upset when somebody books the cruise early and then the price goes down as we approach the end. So clearly, we feel that we're in a position to hold the price and not to give the kind of last-minute discounts that were more a feature, particularly this year in the Caribbean. And we think we're in a position to do that, and that's our plan going forward. And I think that's part of the reason why we feel so confident in what we said, the specific guidance we have given for 2015. I think it is also more generally a positive indicator for the achievement of our Double-Double Program.

So is this, sort of, a change in the strategy away from maximizing occupancy or is it just a function of the stronger demand environment?

I don't -- I think it is a realization that our objective is always to maximize our total revenue -- total net revenue. And it's our view is to the best way to accomplish that. So it is a bit of a change, and it's a change that's enabled by the better markets. So I'm not sure which comes first, but it does reflect a change, and in my mind, not a trivial one.

Okay. And then could you help us understand this, sort of, yield benefits from Quantum and Anthem next year. In the past you've said these newer vessels generate at least a 20% yield premium. And I think together, those 2 are about 6% of your capacity. So is it fair for us to say that the mix benefits about or at least 1% to the group from those ships next year?

I won't comment specifically, Jamie. But what we have said, for ships that are post 2006, that those ships were delivering yields that were 25% higher than ships from previous periods. I do think it's -- you kind of using that as a default is a prudent way of looking at the contribution for Quantum and Anthem. Obviously, ships post 2006 have Oasis and Solstice and Freedom class and so forth in there. And obviously, with Quantum coming out and our commentary about their booking similarly to Oasis and Allure can, kind of, help you index to where that probably settles out.

Okay. And then just final one. On the TUI JV, the other income line was very big, $18 million, $19 million. How much of that was TUI, please?

We don't specifically call out TUI, but a large percentage of that is related to TUI.

Your final question comes from the line of Sharon Zackfia of William Blair. Sharon Zackfia - William Blair & Company L.L.C., Research Division: I wanted to delve a little bit more into the Chinese, kind of, opportunity that you have because it's obviously becoming much more important. So could you, kind of, update us on what the distribution structure looks like in China and then how that passenger really behaves on the ship relative to what we see in North America or in Europe?

Sharon, it's Adam. So as we've said many times, and probably will continue to say for a while, as excited as we are about the strategic opportunity, this entire market situation is very much still in its infancy. And one of our biggest responsibility as an industry leader is to develop the kind of distribution fidelity in China that we have earned over the years in North America and in Europe. It is there to a degree. It's particularly concentrated today in the large coastal population centers in and around Shanghai and in and around Beijing and Tianjin. It clearly has the opportunity to go over more of the country as time goes on. I suspect we're going to see new forms of distribution emerging in China; not only different from what there is today, where some of the traditional distributors from earlier times remain relatively visible in the distribution equation, to possibly, forms of distribution that we haven't seen anywhere, because China is just such a novel and different proposition. But what's interesting is that as travel agents are learning more about our products and services and beginning to experience them for themselves. They are apparently forming the same type of enthusiasm to explain them to prospective customers as we've seen in other markets. So the second part of your question about the experience on board, the Chinese clearly love the product. We get very strong ratings from a satisfaction standpoint. Interestingly, for the Royal Caribbean International brand, which anyway has sort of been focusing in recent years on multigenerational family travel, and I would say excelling at that, that's a very relevant proposition to the Chinese consumer, with the single child policy and a lot of vacations taking place in the form of grandparents, parents, and child and all generations of the family enjoying themselves on our ships. We are trying to introduce them to Western experiences, at the same time as tweaking culinary and entertainment and activities to make sure they can, sort of, go in and out of their Chinese comfort zone into Western experiences as they see fit. It's hard to generalize about a whole nationality, but clearly, the Chinese customers enjoy being where the action is on board, in terms of activities and culinary and -- or maybe not as much in the outdoor areas as they are -- as we see in other markets. But overall, they love their cruises just like pretty much everybody else in the world. Sharon Zackfia - William Blair & Company L.L.C., Research Division: And Adam, I think I was kind of gearing towards, is the on-board spending profile similar to what we see in other regions?

There are differences from line to line compared to other nationalities; which we prefer to keep that differentiation to ourselves. But overall, it's a very positive on-board revenue environment compared to our norm.

Thank you for your assistance, Brandy, with the call today, and we thank all of you for your participation and interest in the company. Laura will be available for any follow-ups you may have, and we all wish you a great day.

Thank you. That does conclude today's conference call. You may now disconnect.