Royal Caribbean Cruises Ltd. (RCL) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Erica, and I will be your conference operator today. At this time, I'd like to welcome everyone to Royal Caribbean Cruises Limited 2014 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Jason Liberty, CFO for Royal Caribbean, please begin your conference.

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

Thanks, Jason, and thanks to all of you for joining us this morning. As always, I welcome this opportunity to provide a bit more color on our results for the year and on our perspective of the year ahead of us. Before I begin, I’d like to take a moment to acknowledge the recent promotions of two accomplished veterans and leaders; Michael Bayley, who has taken over as President and CEO of Royal Caribbean International; and Lisa Lutoff-Perlo, who has taken over as President and Chief Executive Officer of Celebrity Cruises. It’s been gratifying to watch their careers develop, over the several decades they’ve been with us. They really have differentiated themselves with their passion and their tenacity. One advantage of promoting such experienced talent is that there is no learning curve, they both hit the road running and they were already implementing changes that will drive both brands forward. I say congratulations to them both. It’s also a pleasure to be talking to you as we finished with one very good year, and as we start another exciting one. At Royal Caribbean, we start every discussion with how it will affect our Double-Double goals and I’d like to do that here too. I’m pleased to confirm that the results that we’re announcing for 2014 and the results that we are forecasting for 2015 are very much in line with our Double-Double program. We remain convinced the program has realistic goals and they were on the right track for success. You’ll recall that the three pillars of this program, which we’ve outlined on Slide 2, are growing revenue yields, maintaining cost consciousness and moderate capacity growth. On the revenue front, we continue to be very pleased with the performance of our newest vessel Quantum of the Seas and we’re thrilled to be taking delivery of her sister ship, Anthem of the Seas this spring. Both vessels are experiencing healthy bookings and are large drivers of the positive revenue picture for 2015. Now, the last time I spoke on one of these calls, Quantum of the Seas was still under construction. You may recall, I was optimistic even then about how she would be received, but one can never be certain until the construction is complete. In this case, my expectations have proven accurate and the demand has been simply extraordinary. The reaction in China has been particularly exciting. The Royal Caribbean International brand continues to be synonymous with cruising in China, and the market anxiously awaits the arrival of Quantum. We are thrilled with her booking and pricing performance to-date, but we expect her to help further increase our market share in this important market. Our capacity in China is growing 66% this year, and we look forward to continue yield accretion in this profitable market. At the same time, the Oasis class vessels on the Royal Caribbean International brand and the Solstice class vessels on the Celebrity brand, remain the best in their competitive set and continue to deliver returns, while the rest of our upgraded fleet continues to demonstrate improved performance. Our brands have never been stronger and we will continue to capitalize on their equity as we move through 2015. In this regard, it’s important to note that our guest satisfaction for 2014 was at record levels. Equally important, our employee engagement surveys also reached record levels. Obviously, these factors are related. We continue to believe that a more engaged employee team drives greater guest satisfaction, which in turn, drives greater brand strength, which ultimately drives greater returns on investment for our shareholder. Separately, we are also very pleased that the SkySea cruises will begin operations later this year. SkySea is our joint-venture with Ctrip, and it will begin operating a revitalized Celebrity Century in China in the middle of 2015. This is yet another opportunity for us to broaden our reach and to take an increasing leadership position in this fast growing market. On the cost side, I am impressed with the efforts being made, and congratulate both our finance organization and our operating management on generating solid cost reductions in 2014. I know we originally target cost to be down slightly, and our ultimate result of down 0.6% was better than I had expected. In 2015, we continue our commitment to maintaining a cost-conscious culture. We’re projecting cost being held to 1% or better while still investing in strategic initiatives that drive rapid returns. I think it’s particularly interesting to note that virtually all the unit cost increase in 2015 is attributable to ramping up our operations in China. Lastly, on the capacity component of our Double-Double program, our growth is immutable, at least through 2017. We did recently announce two new additions to the Celebrity Cruises brand under the name Project EDGE, but those vessels won’t join the fleet until 2018 or 2020. We also continue to be open divesting older tonnage as opportunities arise. Now returning to last year’s results, 2014 was happily a record-breaking year for our company. Adjusted earnings per share were $3.39, am increase of 40% over the previous year. And we were pleased in ‘14 to be added in the S&P 500 index, by any measure a great year. I would like to thank the management team, as well as all the employees of Royal Caribbean Cruises Limited for their dedication, their hard work in achieving these milestone results. The year ended on a slightly schizophrenic note. On the one hand, forward bookings were robust and we ended 2014 the best book status in our company’s history. That’s pretty good. Starting the year with fewer berths to fill really helps us raise our yields as the year progresses. On the other hand, closing bookings in the fourth quarter were more sluggish than we expected. The culprit continues to be a stubbornly challenging Caribbean and the dynamics which are driving that situation carry on through the first quarter. Fortunately, lower costs and better performance by our equity investments offset the yields. The big winners on revenue were in Asia, Europe and Alaska, with all products over delivered. Onboard revenue, another positive, with another year of good yield growth. Now looking to ’15 as you know, we are now entering or have entered our Wave period, and we watch the pace of bookings during this period closely. While, it’s still early in the Wave, overall we’re encouraged by what we see. Of course we always want Wave to be especially powerful, but what we have seen is a good, solid and typical start to the Wave period. Looking again at 2015, it remains a tail of two periods. The first period is the first quarter, which as we have said before continues to struggle. This is the tail-end of a period with large capacity additions in the Caribbean, and also has the fallout from 2014’s Caribbean malaise. But the last nine months of the year are a very different story. Once we lap - sorry, once we lap the first quarter, yields on all products are expected to be up in the mid-single digits. As a result, although it’s still early days, we are expecting yields to increase 2.5% to 4.5% in 2015. Given all the above, we’re pleased to provide adjusted earnings guidance in the range of $4.65 to $4.85 per share for the full-year 2015. Midpoint of this range implies another 40% increase in earnings, and another step, good step towards our Double-Double goals. We’re well on our way to doubling our 2014 earnings, as well as reaching double-digit returns on invested capital by 2017. I don’t have to tell you that an added benefit of moving towards the Double-Double is that our free cash flow improves. We believe it is reasonable that are Board would consider returning capital in due course vis-à-vis increasing dividends and/or buying back shares. Everyone knows that the world price of oil dropped precipitously soon after our earnings call at the end of October. But the impact on us from sharp movements in price are a little more complex than many peoples’ world dropped suddenly staring in the early November. The black line on this chart shows that the prices we actually paid at the pump. Over the three months, our price dropped roughly the same 50% that Brent dropped. But just as it does at your local gas station, it took a little longer for the new cheaper oil to wind its way through the supply side of the equation. Another factor is that we don’t instantly use the fuel that we take onboard. We take it onboard, but we use the inventory on a FIFO basis, which causes another slight lag in realizing the impact from rapid fuel improvement - for price improvements. During “normal times”, these lags are immaterial, but when you have as precipitous drop as we experience at the end of last year that delay makes a difference. Looking into 2015, our guidance is based on today’s price of fuel and we continue our historical practice of remaining about 50% hedge. This results in an improvement in our projected fuel bill, as foreign exchange rates. Increasingly, we are a global company and our greatest currency exposures today are to the pound, Canadian dollar, Brazilian real and Australian dollar in that order. We’ve also shown on Slide 3, our foreign exchange rates movements occur during the same three month period. This chart is the strength of the U.S. dollar compared to the weighted basket of our net currency exposure. As you can see over the last three months, the dollar strengthened about 6%. Overall for 2015, the current strength of the dollar is about 9% stronger than the average was for 2014. We’ve taken that differential into our projections. The impact compared to where we were at the end of October is about $0.54 a share. So the net result of those two factors is $0.59 from fuel, offset by $0.54 hit of foreign exchange, a net benefit of about a nickel in 2015. Now on Slide 4, we also take a look at the longer term perspective of fuel and foreign exchange. This slide shows the price of Brent over a decade and the strength of the dollar over the same period. I think the chart shows very nicely the historically inverse correlation between these two features. And it also explains why we believe that there is a natural offset in place. With that, it is my pleasure to turn it back to Jason. Hi, Jason.

Thank you, Richard. I will begin by taking you through our results for the fourth quarter. Unless I state otherwise, all metrics are on a constant current basis. We have summarized our fourth quarter results on Slide 5. For the quarter, we generated adjusted net income of $0.32 per share. While there were several puts and takes from a business perspective, earnings would have been above the midpoint of our guidance if not for the strengthening of the U.S. dollar, net of fuel, which costs us $0.07 for the quarter. Since our October 23 earnings call, the dollar versus our basket of currency has strengthened over 6%, while fuel prices have dramatically declined. As we have discussed in the past, the change in currency impacts our P&L immediately, while there is typically a four to six-week lag for a change in fuel price. Also rapid changes in fuel prices within a period typically results in some ineffectiveness in our fuels cost. The net impact of these changes was $0.07 for the quarter. Net revenue yields were up 2.7% for the quarter, which was lower than guidance due to a slowdown in closing Caribbean demand and subsequent pricing reductions on non-holiday sailing. This was somewhat offset by double-digit yield improvement on Europe, Latin America and repositioning sailing. We were able to offset the balance and the revenue mix through better cost, including taxes, and better performance from our equity investments. Onboard revenue was up 4.9%, which marks the 12th quarter in a row of growth. Strong performance on New Year’s sailing and further demand for our beverage packages showed year-over-year improvement. Cost for better than guidance for the quarter with net cruise costs excluding fuel, up 2.3%. The improvement was mainly driven by a series of programs to reduce crew movement costs and further realize back office efficiency. I will now discuss full-year results, which we have summarized on Slide 6. For the year, we generated record earnings of $756 million in adjusted net income, a 40% year-over-year increase, resulting in $3.39 per share. As I mentioned during my remarks on the fourth quarter, it would have come in ahead of our guidance, if not for the $0.07 impact from the strengthening of U.S. dollar, net of fuel. Revenue yields increased 2.4% for the full-year. The story for the year has been very consistent. Double-digit yield improvement in Europe and China, combined with another year of strong onboard revenue performance, more than offset the weakness in the Caribbean. On the cost front, we executed on our commitment of keeping our costs flat to slight down for the year. Net cruise costs, excluding fuel, were down 0.6% year-over-year. Now, I would like to update you on what we are seeing in a demand environment. I will start by taking you through the first quarter trend. Caribbean capacity is up 8% in the first quarter, and will represent about 70% of our capacity. Over the past few months, the Caribbean has required more than anticipated promotional assistance to stimulate closer end demand. While Quantum has been booking exceptionally well, the short and seven-night Caribbean have been challenging. Increased capacity and our higher yielding itinerary like Australia and Asia are helping offset the yield declines in the Caribbean. Trends for the balance of the year have been far better than those in the first quarter. And our book-load factors and APDs are nicely up versus same time last year for the Q2 to Q4 period. These strong trends have particularly been driven by the shift of capacity from the Caribbean to Europe, China and Australia. In addition, we are doing well across most itineraries on a like-for-like basis. Caribbean capacity for Q2 and beyond will be down 2% for our brand, and approximately 4% for the industry. For the full-year, bookings have exceeded prior year levels over the past three months, cumulating and back-to-back record bookings during the last two weeks. In fact, when we turn the year, we were in a best book position in the company’s history. While all other itineraries are booked ahead of same time last year, our book load factor is farthest ahead for the Caribbean and European sailing. Caribbean capacity is up slightly in 2015, driven by the addition of Quantum of the Seas in Q1, and the product will account 44% of our overall capacity. Booking trends for Q2 and Q4 Caribbean sailings have been very good so far. And as a result, full-year Caribbean load factors are not just higher than same time last year, they are also above levels seen in all other recent years at this point in time. Caribbean yields are expected to be down mid-single digits for the first quarter and up low-single digits for Q2 through Q4. We are slightly increasing capacity in Europe this summer with Anthem of the Seas and Allure of the Seas, replacing smaller vessels on existing itinerary. Our Europe capacity is up 5% versus 2014, while remains well below 2011, 2012 and 2013 level. Bookings over the past three months have more than kept space with capacity gain, and the product has booked well ahead of last year in both rate and volume. Recent demand has been particularly strong for North America and we are also booked well ahead from the U.K. We are expecting yield improvements in the mid-single digit range for Europe this year. Our most significant capacity growth in 2015 is in the Asia Pacific region, with the addition of Quantum of the Seas in China this summer. In total, our Asia Pacific capacity will increase by 33% and it will account for 15% of our total capacity. Despite the fact that we have been increasing capacity in those regions for the past five years, these products continue to generate superior yields. Overall, we expect to see yields up in the low-to-mid single digit range for these product set. Taking all this into account, if you turn to Slide 7, you will our guidance for 2015. In October, we communicated that we expected our 2015 net yields to exceed 2014 level. I am pleased to share that we expect 2015 to be the seventh year in a row of yield improvement for the company, with yields increasing between 2.5% and 4.5% for the full-year with all key market delivering positive yields. I find it even more encouraging that once we lap the top Q1 Caribbean environment, yields are expected to be up approximately mid-single digit. Net cruise cost excluding fuel is expected to be up 1% or better for the full-year. We remain committed to driving efficiencies throughout our business, investing strategically in technology enhancements, and in growing markets like China that provide rapid return, while keeping us firmly on our path to Double-Double target. We have included $806 million of fuel expense for the year, and we are 52% hedged. This is a reduction of a $132 million since our last earnings call. Net of our hedges, 10% change in fuel price equates to approximately $25 million for the year. Based on current fuel prices and currency exchange rate, we expect another record-breaking year with earnings per share between $4.65 to $4.85. The midpoint of this guidance represents a year-over-year increase of 40% on top of the over 40% growth we experienced in 2014. Before I move on to your guidance for Q1 2015, I would like to make you aware of one small change in presentation that we are considering. Historically Pullmantur’s results have been reported with a two months lag. As part of consolidating shared service function for this brand, we are working towards eliminating the two month lag and reporting Pullmantur’s financial as we do for other brands, with the year ending December 31. We anticipate this change becoming affective in the second half of 2015. If so, this would mean that Pullmantur would have two Novembers and two Decembers in 2015. For simplification and comparative purposes, this immaterial adjustment has been excluded from forward guidance for all key statistics and will be excluded from adjust metric once the change is made. Now, I would like to walk you through our first quarter guidance on Slide 8. Net yields are expected to be down between 1.5% and 2% for the first quarter. As a reminder, we began prorating revenue and cost on all voyages starting in the third quarter of last year. As a result, a portion of high-yielding New Year’s business that would have been entirely recognized in Q1 under the previous pro-ration policies was recognized in Q4 of 2014, making the Q1 2015 comparables more difficult. Yields would be slightly down after this change. Net cruise cost excluding fuel are expected to be up 2% to 3%, driven by higher spending on marketing during Wave and investments in China associated with our growth strategy. We have also included $207 million of fuel expense for the quarter. Taking all of this into account, we expect adjusted earnings per share for the quarter to be in the range of $0.10 to $0.15. With that, I’ll ask our operator to open up the call for a question-and-answer session.

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

Hi, good morning. Thanks for taking my questions. Richard, this is a question for both, Richard and Jason. Richard, when you started with your prepared remarks and you were talking about Double-Double and your commitment there, and how the company is still on plan, I mean, on track. And Jason, I believe you touched on that as well. I’m just wondering, now there is another kind of wrinkle in the Double-Double, which is with FX, right. So I’m just wondering if you could help us understand what happens to that plan or to your outlook if FX continues to pressure earnings?

Thanks, Felicia, and good morning. Yes, obviously FX has always been a factor, as has fuel. As we’ve said the two have tender to offset each other, although it’s not perfect. But it’s not a new factor. We knew it was factor when we entered into the Double-Double. It has been a little more dramatic, particularly when you look at the quarter, but if you look over the time, in fact we’ve been raising our projections, and I will tell you that internally we are in a better position vis-à-vis the Double-Double today than I guess with six months ago when we first announced it. So nothing - and what has happened over the last six months or the last three months has been anything other than positive. And I think the two elements that really drive it are the - or will drive it are the yields. And the yields are doing quite nicely and we’re guiding this year 2.5% to 4.5%, which is a pretty good increase on a constant currency basis. And the first quarter is difficult, but we always knew the first quarter would be difficult. Bookings, once you get beyond the first quarter are really very powerful. And so I am - I think my tone - certainly my tone and when I drafting my comments was that we’re in a very good position and I am quite comfortable, particularly as we’re looking forward. The fourth quarter always looks a little awkward, because it’s always the most sensitive quarter to small changes. And this first quarter we know it would really be difficult. The other thing that we look at, and one of the things, that’s very important to us is the Wave period. So we’ve essentially had the first month of Wave. And that is important most because of the absolute amount of bookings that we take during this Wave period and during that first month. But it’s also important because of the tone and sense of the year. And I would have been heck of a lot more concerned if that tone had been negative. Instead the tone is very positive. It’s a very strong typical Wave period, which gives us encouragement that our yields are going to be there. And yes, again we could have another change in foreign exchange. This year over last year, we have 9% weaker other outside currencies, 9% stronger dollar, which is extraordinary. It’s probably one of the biggest changes we see in a long time and we are still reporting 40% increase in profitability. So we’ve always noted it will be an issue. It will continue to result in dips up and down, but it doesn’t make me any less comfortable with the Double-Double. I think I better ask Jason to comment to see his view on it.

Well, I would concur on with that. And so, as Richard commented, that relationship between currency and fuel has really held up over time. And I think when we put a Double-Double program together, we also realize that we need to also be able to play when it rains, and there is always going to be puts and takes in a business, but by keeping that focus so that the business is driving towards that.

Okay, that’s really helpful. And then, Jason just a quick question. You guys said earlier that you are 50% hedged. I was just wondering, would strategically where fuel prices are now - I know historically that’s kind of been where you are, but given where fuel prices are now, why wouldn't you hedge more?

Yes. So it’s for a few reasons, one of which is this relation or this inverse relationship has been really strong over time. And also the forward curves, try to lock in kind of further out are quite steep, because they’re in contango and that’s some of the reasons in the considerations that why not hedge out more further out.

Okay, clear and helpful. Thank you.

Thank you.

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

: Hi, good morning guys. So Jason, you did a pretty good job of breaking down some of the markets, specifically the Caribbean and Europe, but when you look at your yield increase this year of, what you’re saying, 2.5% to 4.5%, can you maybe go into a little more detail of maybe some of the other markets in terms of what you guys are expecting from an yield perspective? And then also, maybe how you guys are thinking about onboard as well?

Sure. Thanks Steve. Maybe just to kind of start off on the onboard side, obviously the entry of Quantum and Anthem, and we’re having a full-year of Quantum and Anthem are really good new stories for the onboard side, as well as Quantum going into Asia, which as we’ve talked about in the past indexed a little bit higher than the average for the onboard side. Also, the investments we’ve made on the technology standpoint as we’ve commented in the past with our - the increase in the bandwidth whether it’s with O3b or Harris CapRock, has really also further engaged the consumer to spend for internet package. So to kind of give you maybe some more color on some other products. We are expecting Alaska to be up nicely. It’s in a good book position, and the pricing is doing quite well. Also I would say on the Australia side, obviously there is a lot more capacity that’s going into Australia which were kind of in my comments around the Asia Pacific. And so there will be some stress on yields. So we do expect it to be positive.

Steve, one other thing I might add. You asked about onboard revenue, and we’ve talked before about the fact that we’re doing more integration between onboard revenue and ticket revenue. As we evolve the sophistication of our revenue management systems, one of the things you’ve seen is that we are doing more and more with value-added versus discounts. We really feel that the consumer prefers that. It works up better for the travel agents. And by combining that - and I think a perfect example to put in tangible terms would be Celebrity’s program last year of 123go! program, very successful program. So instead of offering a discount, we say, well, we will bundle in drinks package or an onboard credit or prepaid gratuities or whatever it was that you wanted to choose. And I think those kinds of value-added packages are proving from the market point of view to be very popular with the consumer. Again as I say it’s popular to travel agent, because it effectively increases their commission because it bundles more into what is commissionable. And it means that instead of touting ourselves on price, we tout ourselves on what we are offering. And we are - we think that the market is ready for, and we are very much focused on trying to upgrade ourselves, the image and do less price fighting, and more, this is why you’re better on this kind of cruise. So I do think that one of the implications of that mathematically is to the extent that there is more bundling that actually could have a little bit reduction in onboard revenue. But the other thing is we have also gotten so much better at what we’re offering, some of the things Jason talked about. So we are looking for a positive momentum in both sides.

Steve, this is Michael. We’ve also invested quite significantly over the past few years on upgrading and revitalization the addition of specialty restaurants and changing out much of our retail offering and changing on bar offering etcetera, etcetera. So I think we’re seeing a nice uplift from the investments that we’ve made over the past few years in terms of the actual onboard revenue options that we have onboard of ships.

Okay, got you. And then, second question is a bigger picture question, more so for Adam. But Adam, I know when you became COO a couple months ago, back in April, one of the areas that you were focused on were these shared services between the brands, and how could you improve those. So could you maybe give us an update on your progress to-date there, and then maybe what kind of opportunities or synergies you’re seeing as you kind of move forward? I guess, we heard a little bit of that this morning with the Pullmantur announcement. Thanks.

Sure, thank you. Well, one of the key elements of course is to work with the brands and their organizations to ensure that we can deliver against our cost commitments over time as we pursue Double-Double goals. But another crucial element is to enable our global aspirations to activate the global footprint through superior approaches to human resources, to information technology, to the supply chain. And these areas are all progressing with a great determination. I’m glad enough that China has taken our shared services to a new and different level from anything that we’ve seen before, while we’ve been expanding our global footprint for many, many years, that was almost entirely on a sales and marketing aspect, was now we’ve got operations involved and the supply chain is in China and everywhere around the world. So the principal payoff of the shared services environment you will see in the yield projections and the yield deliverables and in the cost projections or in the cost deliverables. And there is no question that we have momentum in these areas and that the shared services groups are being challenged and given opportunities in ways that they haven't seen before and we’re trying to be very concrete in terms of the service level agreements and the KPIs that the shared services owe to the respective brand.

Okay, great. Thanks for the color guys.

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

Great, thanks. I just wanted to talk a little bit, or ask some questions on - that you mentioned the last few weeks in January that Wave has been solid. So, I mean that’s really encouraging, but I just wanted to get a little bit more color. Is that primarily the booking volumes, pricing. Also do any regions stand out? And I’m assuming that was an acceleration from the trend that you saw towards the end of the 2014. Correct?

Hi Greg, this is Michael. I think we’ve been pleased with what we’ve seen over the past couple of weeks. The Wave has been quite strong for us. We’re seeing certainly strength in Q2, Q3, Q4. We’re also seeing very good volume coming into Q1. I think we mentioned earlier with the capacity increases in the Caribbean in Q1. There was quite a promotional environment, but the promotions and the pricing stimulation that we put into the market seems to be generating very good volumes. So I think that’s a positive sign. When you look at the different markets performance globally, certainly the North American market seems to be in good shape for us. Europe, we saw a slight little blip after the events in Paris, a couple of weeks ago, which for a few days we saw things slow down, and then about four or five days later, everything started to come back quite nicely. So our European business seems to be in good shape. And that’s also I think as we’ve mentioned previously in Asia Pacific, Australia and China, we’re feeling good about what we’re seeing, particularly out of the Chinese market with the addition of Continental China. So overall, the Wave has been good.

And you would say that is that a good indicator for the next few months or historically. How would you - how should we think about that as kind of a future indicator for 2015?

Well, I think as Richard had mentioned, when we - and both Richard and Jason. When we came into ’15, we were in a particularly strong good booked position. I think were in the best position that we’ve ever been in. So really we’re writing off a good book position, and that bodes well for really getting into an even stronger book position by quarter for each quarter across all of our markets. And that of course means that we’re probably not going to be subject to the kind of discounting that we’ve seen previously, because we’ll be in a much stronger state for our company.

And just finally, Wave for Europe. Does that start sort of mid-February? When do you start seeing the acceleration in bookings for that market?

Well, out of the U.K. market, that’s pretty much similar to the U.S. market in terms of the Wave. And out of the Northern European markets, it’s very similar to the American Wave. We see come a little later out of the seven European markets, and we typically see things strengthen as we get into the beginning of the second quarter, but what we’re seeing is good. And particularly out of the U.K. market, it’s been very good.

And Greg, since you asked about Europe, and to add to Michael’s comments, we had an extraordinary 2014 in Europe. A little bit of frankly of a corollary to the malaise in the Caribbean and for many of the same reasons there was so much capacity that moved from the Caribbean to Europe, It was an extraordinary year. So we were a little bit euphoric about that. This year, it’s a much more balanced view, but if we haven't had 2014, we would be singing the praises of Europe. It’s strong. It’s doing well. It’s not euphoric like last year was, but it is strong and it’s doing well for us. I think that’s part of what’s giving us a good feeling for 2015.

Thank you.

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

Thank you. A couple of questions here, staying on the European question thing first. Can you just give us a framework of how many of your European itineraries, what percent was filled with European-sourced guests versus North Americans in ’14? And then do you see that changing much for 2015 at this point? And then on the currency side, Jason, just maybe refresh us, you gave us the four major currencies of where your exposure is. How much is your net exposure in each of those currencies? And then have you hedged anything either related to your operational exposure or in particular the euro, where you get paid from TUI? And then I have one additional question after that.

Okay, Tim. Thank you. So, just to start off in terms of the mix on Europe. Typically about two-thirds of our guests on European cruises come from Europe and a third from the rest of the world, mainly North America. That tends to vary a little bit based off of demand patterns, because the European product is probably the most leveraged on our global sourcing model, because it is in such demand in so many different markets. So that percentage amount can change here and there. As it relates to currency, we do provide kind of in order, how those currencies impact us. And it does tend to change by quarter. We’re actually going to publish for you guys bi-quarter the order of the impacts of those currencies, but we will not be getting into what the net amount would be. And on a hedging perspective, like we’ve said with fuel, which was pointed out on the slide that natural relationship in our view comes to a hold and so we don’t really do any operational hedging. We do, do hedging currency-wise for our new building specifically.

And then just to the other piece of that, your currency guidance factors in what you receive from TUI on the equity income link?

Yes, it’s part of our net exposures.

Okay. And then, my other question was as it relates to maybe Michael and the changes and responsibilities there, clearly built on the successes at Celebrity. And now coming to Royal and knowing that the prior Royal bosses, that remains is now his boss too. So what do you see going forward there, Michael, as far as opportunities in the Royal brand?

Well, I have to say that my former - the former CEO, acting CEO of Royal did a really good job.

Thank you, Michael. You’re absolutely correct [ph].

And I recommend him for getting everything so well prepared for me. So that’s kind of come back to Royal, but I’d come from Royal, so I’m very familiar with the brand. I feel quite fortunate. It’s genuinely an outstanding brand. We have really high brand awareness. We have a strong global infrastructure. We have winning teams in China, internationally and domestically. We truly have innovative hardware. We’ve got Quantum class and Oasis class coming online in the next few years. We have very passionate loyal guests who genuinely love the brand. We have huge bench strength with our ship board and shore side employees. And probably most importantly, we have very loyal and long-term travel partners who sort of stayed with us through the course of all of these years and who we have a wonderful relationship with. So I’m very fortunate. I am spending obviously a lot of time developing the forward strategy for the brand. And obviously my key focus is leveraging the power of this brand to drive performance forward, and that’s really my focus. That’s where I am. And it’s a great joy to be back in Royal and to be leading the Royal brand team.

Okay, great. Thank you all.

Thank you.

Your next question comes from the line of Steven Kent with Goldman Sachs.

Hi, good morning. A couple questions for you. Can you just talk a little bit more broadly about your strategy on China versus principal [ph], especially in the light of a couple of announcements they’ve made, even just some this week. And what your initiatives are to target that consumer? And then the second thing, and this is I know, a very near-term issue, but given what seems to be the strengthening of the US consumer, the decline in close-in bookings that noted in the fourth quarter seemed counterintuitive. And I just wanted to understand how that plays out. It would seem to me like as the U.S. consumer strengthens, they would be willing to book further in advance and also pay up as they get closer into the bookings. So I'm trying to understand that balance, but also want to understand the longer term issue, which could be a big opportunity for you in China and how you are looking at it versus your competitors?

I’ll start, but I think Adam, Michael may want to chime in on China, Jason on the strengthening the U.S. Although I would emphasize, we will have ups and downs in any given quarter. And I think that’s a point we really - I think I almost emphasize I have seen on every call that it’s remarkable to me that we are as - we have been as accurate as we have been. And I think we may have spoiled ourselves by always seeming to meet those, but the degree of accuracy here can't be that great. I mean this year, our initial forecast for the year was a midpoint of 2.5% constant currency yield improvement. We ended the year with 2.4%. It’s just hard for me to imagine us being able to maintain that kind of accuracy on an ongoing basis, but the others comment more specifically on the strengthening the U.S. because I think you have put your finger on something that’s very important. Our strategy for China is really very clear. We want to be synonymous with cruising in China. We want to have the strongest product that we know how to do. The Chinese consumer are clearly loving the Royal Caribbean product there. And in China, brand is very important. So we are investing heavily, both in terms of management and in terms of hardware, and ensuring that we are continually strengthening the perception of our brand, and educating the Chinese consumer, because it’s still such an embryonic industry there, most consumers don’t know about it, and they don’t have the same kind of infrastructure with travel agents and others that we have in the United States. So we’re working hard to expand that. We’ve been growing at an extraordinary rate. We grew last year at 45%. We’ll grow next year at 66%. And we think this is a market that our product is well suited for, and where the market itself is growing. The middle-class in China is growing at such a fast rate that it won't be long that there are more people in the middle-class in China than there are people in the United States. And so it’s a great potential for us, and we’re working to address that, both through the Royal Caribbean International brand, but also through our partnership with Ctrip, a very aggressive, dynamic, and frankly, inspiring company that’s very strong in the travel industry in China. So we intend to continue to push that. I think there is room for others, I’m not going to comment one or just two, but I think frankly it’s a good thing to see that the overall industry is growing. And then there is not much interest from others, because as I say, part of the issue here is we need to work to make cruising or relevant vacation there. And so we have some of the same problems we faced in the United States 20 years ago in terms of educating the consumer of all that cruising has to offer. We intend to continue to do that.

If you’re just talking about the kind of the counterintuitiveness with the U.S, consumer getting stronger relative to what happened in Q4 and also our thoughts on Q1. Yes, I think going into our last call, we were seeing that the strength in the U.S. consumer on ticket as well as on the onboard side. The onboard piece continued on while the onboard performance was quite good. But the reality is that we don’t operate in the vacuum. And so I think some of the competitive forces and the level of supply that was out there caused the environment to be more promotional than we had thought, outside of the holiday sailings which actually you saw quite a bit of strengths from the U.S.

Steve, it’s Michael. Just to add to that, I think one of the things that suddenly we saw last year, for example some of Europe, we really saw a strong demand out of the U.S. market, at fairly high price points. So I think that speaks about the growing affluence in the American market that we’re seeing more and more Americans wanting to travel, for example, further, and willing to pay a higher price to do that. And I think that’s quite reflective of how we see part of the emerging opportunity in the U.S. market with regards to the growth of affluence in the U.S. And then just a quick comment on China. China is really one of those ultimate opportunities, those infinite possibility because the entire market really is a new to cruise market and therefore our brand as we’ve been in the Chinese market for several years and the recipient each year of the top cruise line in China, I think we’re really well positioned in terms of the opportunity that we see. Just to confirm Richard’s perspective, that competition is always good in the market anyway. So I think we welcome the competition.

Okay. Thank you.

And ladies and gentlemen, due to the time constraints, please - for the rest of the question please remain for one question per person. Your next question comes from the line of Robin Farley with UBS.

Great, thanks. I know you’ve talked about how the percent of Europeans and North Americans on a European cruise can change from year to year, but do you anticipate just there are concerns out there about the European economy, that the demand from Europe, and it sounds like its still early for kind of southern European Wave. But are you kind of anticipating maybe you’ll have to shift some more sourcing, shift kind of more of your inventory to be sold to North American passengers versus last year? And then, even though I know we just keep it to one, just my other one is really quick, which is just, how much did the holiday shift in the calendar add to Q4 yields. You mentioned that what it took out of Q1. I just want to think about what it added to Q4? Thanks.

Hi Robin, it’s Jason. On the European side, I think that watching what’s happening in that market, there is always going to be puts and takes. But we really did enter the year in a very strong book position for our European sailings, and especially with that driven from North America and the U.K. So there might be some shift in the sourcing, but current booking patterns post year-end have been actually quite good recently on the European sailings. And again having that strong book position will limit the need for us to modify sourcing too much as well as to have to take any practical pricing actions. As it relates to the - as we had indicated on the last call, the impact on yields as it relates to pro-ration is really immaterial the basic point or two, but we can - after the call we can get to that in more detail.

But Robin, I think one of the questions is the shifting which has no impact on the year as a whole, but when you do look into first quarter, it has a slightly unfortunate thing because last year’s first quarter had all holiday sailings, and last year, that is the holiday sailings of 2013 were terrific. And so almost all the deterioration this year is because ’13 had holiday sailings, ’14 didn’t. Assuming that ’15 holiday sailings continue to be positive, we simply make it up to the fourth quarter. And frankly that’s probably the right thing that we have done anyhow. So yes, when you look again at the quarter, most of the deterioration in the first quarter is simply because of that.

I guess that’s what I - then I don't know if I understood Jason's comment, because it looked like in the release you were saying that the holiday shift was really most of that sort of 1.5 to 2 points decline in Q1 maybe would have been closer to flat…

That’s what we said. You’re exactly right, Robin. That’s right.

So if it added 150 to 200 - or I'm sorry, if it took 150 to 200 basis points out of Q1, how would it only have added one or two to Q4, is that because of the year-over-year?

No. I think what he was saying was the overall year the impact was immaterial. It just shifted some of the benefit. So instead of having better first quarter, we have a better fourth quarter. But the year as a whole, it’s negligible.

Right, great. And I totally understood that it’s not a meaningful thing. I'm just kind of looking at Q4 results reported today and just wondering what in there was helped by the holiday shift? But maybe I can follow-up after.

We can get back to you after Robin. And also I mean it always contemplated in our guidance.

Yes, understood. And that was a great color on the capacity, really probably not having to shift where you’re targeting, that was helpful. Thank you.

Thanks Robin.

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

Hi. Just to get your perspective on, if there has been incremental weakness in the demand from European customers, reflected in your bookings into the U.S. in the second, third and fourth quarters given the strength of the dollar?

Hi Harry, we haven't seen - as Michael mentioned, there was a little bit of a dip around the tragedy in Paris. But outside of that, the demand patterns from European consumers for the Caribbean or Alaska so forth has remained pretty in line. And also everything we do, we do in local currency. So it’s not necessarily more except at a point where we start raising pricing because of change in the demand environment.

And obviously, there has been the euro, the sterling a lot weaker. And so if you’re British or you’re a Continental then you want to buy a vacation in United States, that’s more expensive. So there is obviously some impact. What we’ve tried to do Harry, is incorporate all that into our guidance, so that we’ve looked at it based on where we are today. And that’s where the guidance is coming from. And yet, we’ve been able as you’ve seen, if we compare where we are overall, ignoring the fuel effects specific impacts, we’re better off today than we were three months ago. And so we think that the general trend has been more positive even though obviously if you look at any particular area there will be puts and takes.

Operator, we have time for one more question.

Certainly. Your last question comes from the line of Jamie Rollo with Morgan and Stanley.

Yes. Thanks for that. Just on the guidance mid-single-digit yield growth for quarters two through four. I think I heard you say the Caribbean will be low-single-digits for that period, Europe mid-single-digits and Asia-Pac low-to-mid-single-digits, which looks overall to be sort of a bit below the sort of 5% figure you need to hit the mid-point of the guidance. And then just the other quick one was on the other financial income from the joint-venture. If I take out the $33.5 million from Spanish tax reform, is it fair to say that the remaining $21 million is pretty much all from the joint-venture with TUI? Thank you.

Hi Jamie. One of the other things that happens like in Q2 and Q3. So our commentary for example about the Caribbean being lower single-digit Q2 and beyond, that also factored some structural changes. So for example Allures is coming out of the Caribbean and going into high-yield in Europe. So a lot of that just a mix change between low yielding products going to higher yielding products through the course of the year. And that’s kind of how you average out for the 5%. If you do take out the tax component, then the majority of that is our joint-venture with TUI Cruises [ph].

Okay, great.

Well, thank you for your assistance, Erica. And we will thank all of you for your participation and interest in the company. Laura will be available for any follow-ups you might have, and I wish you all a very good day.