Royal Caribbean Cruises Ltd. (RCL) Q4 2016 Earnings Report, Transcript and Summary

Good morning my name is Kwashia and I will be your conference operator today. At this time I would like to welcome everyone to the Royal Caribbean Cruises Limited Fourth Quarter 2016 Earnings 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. You may 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 Carol Cabezas, our Vice President of Investor Relations. During this call, we will be referring to a few slides, which have been posted on our Investor website, www.rclinvestor.com. Before we get started, I would like to refer you to our notice about forward-looking statements which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filing 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 with a recap of our fourth quarter and full year results. I will then provide an update on the current booking environment and we’ll end with full-year and first quarter guidance for 2016. We will then open up the call for your questions. Richard?

Thank you Jason and good morning everybody. I'm really excited to have finally arrived here at our DOUBLE-DOUBLE year. We've worked long and hard to get here and I can't say enough about the commitment of our people that has brought us to this auspicious position. As you know the whole purpose of the DOUBLE-DOUBLE Program was to coalesce everyone's efforts to raise our performance to new heights. It's not easy to get 67,000 employees all pulling in the same direction towards the same goal, but this program has done that better than we dare hope. I'm not ready to break out the champagne until the year is over, but I am extremely grateful to each of the men and women who give their all every day. Now before I provide more color on 2017, I’d like to take a moment to review just a few of some of the noteworthy items in 2016. Our focus on the numbers for a moment as they illustrate the level of commitment and focus and our organization is placed on delivering consistent results in spite of unforeseen events that many times have clouded our forecast. First we shared an illustration with you on a last call, which is now complete. On slide 2, you can see that our final results for each of the last five years are remarkably consistent with the guidance that we provided at the beginning of each year. I don't have to remind you that these last five years have not been easy. The period has been marked by significant geopolitical upheaval and significant foreign exchange challenges. I would be surprised if many of the companies that you follow can show a track record as steady or as resilient as this one. This doesn't mean that we are simply great predictors. On the contrary, we suffered from a number of unexpected challenges. However, over this long period and with the help of our DOUBLE-DOUBLE Program our team has shown a very strong capability to make adjustments when the circumstances dictate. No one can forecast of future, but we hope you take comfort in our track record of predicting and/or adjusting to overcome obstacles. As I look back on these years, I couldn't help but notice that we've reached several significant milestones that are worth sharing. On slide 3 you can see the figures that I'm referring to we have tripled our earnings, delivered four consecutive years of double digit earnings growth, grown the dividends by five times and now exceeded $6 in earnings per share. I'm very proud of the employees, both ship or into our site, who have enabled our organization to thrive in this manner. Now these financial results are extraordinary, but we firmly believe that happy employees lead to happy guests and better yields. For that reason I would be remiss if I didn't point out that our employee engagement is at a record high as is their overall satisfaction working here. We remain steadfastly committed to making Royal Caribbean a great place to work so our formulaic for success continues to have a common denominator of happy employees. The second part of the formula, happy guests has also improved. This past year our guests indicated the highest satisfaction levels on record. This is a result of many factors including our many innovations in vessel design and product delivery. But first and foremost, it is due to our fantastic crew, who impressed me every day. But we now stand at a threshold of what promises to be a sensational year, so let's get to that. In our business the beginning of the year starts on a dynamic fashion with what we call WAVE Period. We define that as the first two months of the year and it's important both as a key booking period and as a harbinger of how the year might unfold. We’re half way through wave and so far it's been quite strong. Now you know we're driven by data and the sheer volume of that data is captured by our pricings and our revenue management system is daunting. Interpreting it is as much an art as it is a science. There always seem to be items that indicate one view or the other, but the total picture could probably be summarized by simply pointing out that our book position is better than any time in our history, with higher load factors and at higher rates. However, while we focus mainly on the science part of the process for our forecast, I also take some comfort from the tone or a vibe I get from the people who run our brands and how they interpret all that information. While the numbers have been impressive, I would say that their feelings for 2017 have been even more so. Over the last few months, we have built a tone, which is as good or better than I can ever remember seeing it. Life is good. Long may it continue. Now there are two important points I want to make as it relates to this forecast. First of all, this good booking picture is the basis for the 2017 yield guidance that we’ve provided today and the guidance does take into account all the information we have available now. Secondly, over the last several years our book position has gotten better and better. As we've noted this year sets yet another record, but this process doesn't and won't continue forever. A good market helps drive more early bookings. But it is our revenue management team that have a great deal of control over it as well. My sense is that the booking window has stretched as far as they will ever want it to do. Future years are likely to show the same or lower levels of bookings, as they work to optimize with broad pattern of when and at what level to take more bookings. It’s going to depend on a large number of factors, but I don't expect to announce another record level of bookings a year from today. In addition to industry-wide trends, there are several unique factors that are goosing our numbers this year. Our new ships Harmony of the Seas and Ovation of the Seas are beating the band the team continues to innovate in other ways too, including streaming WiFi and customized destination experiences. VOOM and Xcelerate continue to provide the best WiFi experience of sea, which is the not only a boon to our guest. But also allows unusual onboard digital enhancements. Our ship upgrades are really paying off. Since 2014, we have added over 1,000 over berths, 24 restaurants, 7 bars, refreshed our retail spaces fleet wide and added boutiques such as Kate Spade, Michael Kors and even Tiffany. I won't go into all the other experiential enhancements we've made, but suffice it to say, that you no longer have to choose between playing in the water and watching a big screen movie on most of our ships. No one contributor though small has received quite a lot of attention and that is the approval to sail to Cuba. I admit adding Havana has generated super booking activity for those few lucky itineraries. But the scale is trivial representing less than 1% of our capacity. We are encouraged that future prospects remain positive, but it is time the impact on our financials is marginal and it will be quite some time before this is even remotely material. Before I wrap up and hand it back to Jason, I want to touch on one other topic that I know you will not consider marginal by any means. For some time we have defined our three core financial objectives of improving shareholder returns, being an investment grade company and moderate growth. We continue following that path. Starting with shareholder returns, this is an area where we have made great strides and where we expect to continue. Besides a significant improvement in our financial results since 2012 we engraved dividends by five times and we have repurchased close to $750 million in shares. While these actions are board level decisions, we expect the board will continue to focus on improving shareholder returns as a priority. We will continue to behave like an investment grade company, but as our free cash flow increases, it is reasonable to assume that we will focus more on that. As the final item as you've seen from our new building orders, our growth trajectory has been balanced and remains in a similar range over the coming years. As I said at the beginning of my comments, this coming year is shaping up nicely. But I want to emphasize that the goals of our DOUBLE-DOUBLE Program are not and end in off themselves, but means to an end. Our goal was and is to push ourselves to reach and to maintain a powerful trajectory that helps 2017, but is also focused on 2018 and 2019 and beyond. You can see that we've already taken many steps that aren’t so positive in the short-term, but buttress us for the longer term. We will continue to make such trade-offs if they are in the best interest of our shareholders. I believe that the success of the DOUBLE-DOUBLE Program is not only the boost it has given us to-date. But the powerful focus it has given us that will continue to generate good returns in the future. There’s a lot to look forward to and we are excited to see progress as the year unfolds. With that, I get to turn it back over to Jason. Jason?

Thank you Richard. I will begin by taking you to our results for the fourth quarter. Unless, I state otherwise, all metrics are on a constant-currency basis. We have summarized our fourth quarter results on slide 4. For the quarter, we generated adjusted net income of $1.23 per share, which was $0.03 above our October guidance. This was driven primarily by better than expected costs and the outperformance of our joint ventures. Net revenue yields were up 5.3%, which was below our October guidance. Softer close in pricing, combined with lower onboard retail sales, drove most of the yield in this for the quarter. While onboard revenue was slightly lower than expected, yields for the quarter were up 9.5%. costs were better than guidance for the quarter with net cruise cost excluding fuel down 1.9%. We are very proud of the continued effort of our team to identify cost efficiencies throughout the business. I will now discuss full year results which we have summarized on slide 5. This year we set another record in earnings, exceeding the $1.3 billion mark, resulting in adjusted earnings per share of $6.08, which exceeds the midpoint of both our initial guidance and latest guidance. As Richard mentioned, these record earnings also mark a fourth consecutive year of double digit percent growth in earnings. Revenue yield increased 3.9% for the full year. As we look back on to 2016, strong demand from North American products, more than offset weakness in the Eastern Mediterranean and Shanghai. Beverage packaging, high speed internet and additional onboard revenue venues drove up a 7.8% year-over-year increase in ship order revenue. Our focus of effective cost management continue throughout 2016. Costs came in better than expected ending the year up 0.9%. One time launch costs associated with the deliveries of Ovation of the Seas and Harmony of the Seas combined with additional drydock days and investments in growth markets were key drivers of the year-over-year cost growth. Now, I’d like to update you of what we are seeing in a demand environment. Over the past three months, bookings have been well above last year's levels and as a result, we’ve turned the year at a record book position. Our book load factors in APDs are nicely higher that same time last year, the booking window continues to extend and we have fewer stay rooms left to sell for the year. The WAVE Period is off to a strong start with bookings trending nicely higher than last year. While trends have been strong from our key sourcing regions, we are particularly encouraged by what we are seeing in North America. Our full year capacity is decreasing by 2% due to the deconsolidation of Pullmantur with most of the decline occurring in Europe and Brazil. Our capacity is up in North America and is up slightly in the Asia Pacific region as we benefit from a full year of both Harmony of the Seas and Ovation of the Seas in each of these markets respectively. North American products will represent close to 60% of our portfolio in 2017, while we are seeing strong trends across the group, Alaska continues to experience exceptional demand building on a record season in 2016. The Caribbean will account for close to 50% of our full year capacity, up from 2016, mainly due to a full year deployment of Harmony of the Seas and Celebrity Equinox in South Florida. Demand for the Caribbean has been quite strong with bookings trending well ahead of last year and nicely up pacing capacity growth. At this point, our full year Caribbean load factors in APDs are higher than last year. The rate of capacity growth in the Asia Pacific region is slowing considerably in 2017 for both us and the industry. Our capacity will be up by 5% with the combination of China, Southeast Asia and Australia itineraries accounting for 21% of our total deployment. In China, our capacity is down because of the exit of Legend of the Seas and industry capacity is expected to be up approximately 20% compared to 100% in 2016. Overall, we are in a strong book position for the region, particularly in China and Australia with APDs up modestly for the region. We have made several changes to our European deployment, resulting in an overall capacity reduction of 23%. While a portion of this decline is the result of the Pullmantur deconsolidation, we have also significantly reduced our deployment in the challenging Eastern Med, while maintaining the same capacity in the Western Med and slightly increasing our Northern European offerings. Demand for Europe sailings have been very strong thus far particularly from North America. We are now booked at a much higher load factors than last year in both the Mediterranean and Baltics and APDs are also up nicely even though we no longer have the high yielding Harmony of the Seas in Barcelona. Now I’d like to update you in the booking environment for the first quarter. Our overall capacity is up 1% year-over-year as the addition of Harmony of the Seas and Ovation of the Seas is offsetting the reduction associated with Pullmantur. Two-thirds of our Q1 inventories is in the Caribbean, 16% is in Australia and 12% is in China and Southeast Asia. The balance of our capacity is in several other markets, including Dubai in South America. As a reminder, the first quarter of 2016 was very strong with robust trends in the Caribbean and early Easter and our first winter season in China. Despite the challenging year-over-year comparable, our book position is currently higher than same time last year. Now taking all this into account, if you turn to slide 6, you will see our guidance for 2017. As I just described, demand across all key market is trending positively, supporting a robust yield improvement in 2017. Net yields are expected be up in the range of 4% to 6%, which is our eighth consecutive year of yield growth. Our new builds Harmony of the Seas and Ovation of the Seas have been very well received in their respective markets and are significant contributors to the yield improvement in 2017. These two ships combined with further onboard packaging pre-cruise sales, streaming WiFi and enhanced store excursions are expected to help drive another year of strong onboard revenue performance. Net cruise cost excluding fuel are expected to be flat for the year as the teams continue to identify further operational efficiencies. I wanted to provide some color on the expected cadence of yield and cost growth for the year. We anticipate higher yields and lower costs in the first half of the year. This is mainly driven by the timing of last year's new ship deliveries, the exit of older hardware and the timing of the deconsolidation of Pullmantur, which took place in the back half of 2016. We anticipate fuel expense of $704 million for the year and we are 60% hedged. Since our last call, fuel prices have increased and the U.S. dollar has continued to strengthen versus our basket of currencies. The combination of these two factors has resulted in a $0.10 per share headwind to our 2017 earnings. Based on current fuel prices, current exchange rates and interest rates, we expect another record breaking year with adjusted earnings per share between $6.90 and $7.10 in 2017. This represents our fifth consecutive year of double digit earnings growth. Now I’d like to walk you through our first quarter guidance on slide 7. Net yields are expected to be up in the range of 4.5% to 5% for the first quarter, supported by very strong demand for Harmony of the Seas in the Caribbean and Ovation of the Seas in Australia. This improvement, which is in part driven by the deconsolidation of Pullmantur is particularly noteworthy considering a very high bar set last year, but we had a 7% yield improvement during the first quarter. Net cruise cost excluding fuel are expected to be down approximately 4.5% for the quarter. Taking all this into account, we expect adjusted earnings per share for the quarter to be approximately $0.90. With that I will ask our operator to open up the call for a question-and-answer session.

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

Jason, I have a couple of questions for you. The first one is you gave us a lot of detail about your position by region. Clearly North American demand is higher year-over-year kind of recovering from terrible host of terrorist events last year. Just wondering as you put together your guidance and you think about 2017, how did you think about Europe, particularly North American demand for Europe.

Sure, so I think we always talk about different kind of waves of demand and really even on the last call we talked specifically about seeing strong demand overall. But a lot of that was mainly driven by North America as they looking in that typical window when they started to book for the summer, as well as for the first half of the year. Now going into this, you still have a lot of strong North American demand is what we be overall see is a consistent pattern, actually an elevated pattern over the past three months for North American demand and of course a lot of that demand is specific for Europe as well as, partially to Caribbean and Alaska and so forth.

So, I guess my question was really though getting to given the sensitivity of the consumers to events in Europe or wherever they may be, as you sorted out the full year. Did you kind of state that into your consideration despite the strength that you're seeing right now?

Well, we never build the forecast for perfection, I mean there are events that happened throughout the period, but what was in our consideration set is really, what is our book position on both the rate and volume basis and then also looking at different market dynamics in terms of what’s happening in internal pricing and overall demand, I guess, taken into consideration in terms of what we expect to take place in a product like Europe. As I said those demand trends have been quite positive.

Okay. And then just moving, you gave us a very strong commentary on the Caribbean and how that’s kind of coming together for this year. That said we do get a lot of investor questions on capacity growth and with the Caribbean up mid-single digits in 2017 over some are level in 2016 and within the quarters, there’s some quarters that are growing nicely. Despite your booking position now, can you talk to us about how comfortable you are that the supply in the Caribbean won't ultimately become an issue?

I think we have, obviously we have very good visibility on what the capacity increases are going to be by quarter and by the way the increase in 2017 is a little bit higher than what the increase in the Caribbean was in 2016 past. And I think the way that we look at it is we have an opportunity to get ahead of that and we’ve gone ahead of that and that's kind of based on the commentary of us being ahead on both the rate and volume basis overall as well as, for the product of the Caribbean.

Okay. Final question just Cuba is small part of your business, but given that current administration is of the agreements that you have, Cuba could be a risk.

Hi Felicia, it's Michael. Yeah, I mean, obviously we're used to – we do business all around the world and we flex as the dynamics change. So we've got a couple - a few sailings open to Cuba at the moment, which is doing very well and we’ve got more coming and we'll just adapt to what comes towards us.

Okay, thank you so much.

Thank you.

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

So first question I guess, Jason, it’s probably for you, we've got some questions about the fourth quarter close in pricing issues and I know you tried to explain that a little bit in your prepared remarks. But can you maybe dig into that a little bit more, I know you called out some softer retail sales and maybe what drove that and has that reversed in 2017? Is there something else that we’re not thinking about, did you guys, basically try to hold price a little bit better than what you've done in the past?

Yeah sure. Well, I mean, first to start off is the overall revenue in this year was, but we were talking about $8 million or $9 million on a very large number. So and this year is really small and it's not really material. Close in demand I think you've seen this before some quarters, close in is better than we expected and sometimes it's as we expected and sometimes it’s a little bit little bit softer. We did see a little bit of further challenges with our short product as it relates to Empress, as we have rolled that out in a smaller period of time in terms of the days to be able to book it. Also what we saw in the quarter, which I think is also in our - is kind of baked into our commentary about 2017 and the first quarter is we saw kind of a beginning of a shift in focus from Q4 and into 2017. Then the other thing before I kind of just talk about retail for a second is we’ve also instituted, as you know last year this price integrity program and what we're now willing to do is really sacrifice more price in a significant way in order to deal with volumes and we think that is helping us and that's also helping us build a better book of business. The one comment I would say on the retail side the holiday sailings were a little bit awkward in terms of this time of the year and so the mix in guests were a little bit different. I think that resulted in and lower retail and also I mean this has been a little bit of a consistent trend as we see more and more people trading stuff i.e. retail for experiences and we typically see areas like short excursion and beverage and so forth tick up and retail has been a little bit more challenging.

Okay, got you. Then second question, it’s a two part bigger picture question. I know you guys are going to say that, we still have 11 months until in the DOUBLE-DOUBLE Program is behind you. But you can you help us start to think about maybe what comes post-DOUBLE-DOUBLE, if anything, if you would even that? Then the second part of that question is backwards looking. I mean, when DOUBLE-DOUBLE was introduced in 2014 what did surprise meaning, what did you get wrong with your forecasting? And that may not be saying the right way, but what areas did you, so much underestimate and then overestimate as well.

Hi, Steve, this is Richard. With respect to come the DOUBLE-DOUBLE, I’ll take the second part of the question. First, I think overall it I think worked out very well for us. I think the thing that perhaps we underestimated on the positive side was just how well the organization would respond to the push and how that really lead to everybody moving in the same way and that's been very effective. So I think that’s helped us on the positive side. I think the thing that's been the biggest problem for us may surprise many, but the biggest has been foreign exchange, if we had the same exchange rates today that we had then, our bottom line would be higher by well more than, by close to, in fact, well more than $400 million, that is one hell of an unexpected hit. The positives on fuel offset a little less than half of that, but to have that kind of an FX change that’s unquestionably been the biggest negative throughout. With respect to what comes next, I think we are still the maniacal focused on this and I think, I would to our people who are focused on this and do this whole process of the service by talking about what's next. I think there is a lot of people look at the DOUBLE-DOUBLE and say well, that's been great, why don't you just replicate that or clone it in some way, I think that's unlikely. But I think at this point, we aren't done yet, we’re still focusing on it and I would really like to continue to focus on just the DOUBLE-DOUBLE.

Okay. Great. Thank guys. Thanks for that.

And your next question comes from the line of Robin Farley with UBS.

Thanks. Two questions. One is, can you give a sense of how much share repurchases factored into your 2017 EPS guidance? Then I also do you have a question on the 2017 outlook and it’s kind of tying it to understanding the Q4. You mentioned some of the closer end was tied to the short product, the Empress and that was kind of specific to last minute changes in the itinerary there. Are you sort of factoring in any kind of close in softer or it really was just that short product on the Empress. You mentioned holding price and – but your occupancy I think was up like 250 basis points. So it doesn't seem apparent if there were more cabins empty to preserve price or just sort of if you could help us how to think about what happened there with the close and in the end. Thank you.

Sure. So just to take the repurchase side of it. Obviously, as Richard mentioned in his remarks, share repurchase is something that would be contemplated by the board, and would need to be approved by the board into our forecasts, don't contemplate decisions of the board hasn’t taken yet, so hopefully that answers the question on share repurchase. As it relates on 2017 outlook and how that rolls forward for the fourth quarter. One on the occupancy side, the important thing to remember is the deconsolidation of Pullmantur is a factor and an improvement on the occupancy aside. Just on average because the shift at operating Pullmantur have very few thirds and fourths that are available on those vessels. Empress as we said was a component of that and I think that - I wouldn’t read too much into – and again we’re talking about some really small numbers, I wouldn’t read too much into what we saw close in. I do think Empress, I do think there were some awkward, the holiday sailings were a little bit awkward, and yeah, I do think that the consumer as well as, the trade really kind of began to focus their attention and obviously in a very serious way based on for the elevated levels we've been seeing for 2017 on the fourth picture.

Okay, great. Thank you very much.

Thanks Robin.

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

Thank you and congrats to the whole team, Richard. A couple of things if I may, a little bit of updated color or thoughts, I know it hasn’t changed materially, but just on global industry capacity. I know some folks are still concerned about that, as you see the gross capacity versus the net capacity for the industry and for yourself looking out through, let's just say 2021. Then Jason you gave us a little bit of color on 2017 cadence, just may be a little bit more Pullmantur benefits in the front half, I think Ovation and Harmony. But then I think you get another TUI ship and a TUI JV, but maybe have a little more difficult cost compares in the back half. So just maybe a little bit of more there. Then finally Richard or whoever wants to take this on technology. We’re seeing some accelerated adoption and enhancements of data analytics, CRM both in the cruise industry and theme park industry. Can you kind of just recap for us where you are, what you’ve implemented over the last couple of years? Maybe what we can see in 2017 and beyond from oil or your thoughts on the industry in particular?

Well, thanks Tim. I think first on the industry side, I think we see, industry capacity during the period of time that you're talking about growing at about 5% or a little bit south of that we’re closer to 4% over that period of time and that's on a gross basis. But at least for us, for example we've been selling about a ship a year, a ship every other year and as we talked about before. I mean, as shift to age and we now have ships going into more the 30 plus year category, we do think that there will be opportunity for the gross number to be reduced, as retirements come into play. Of course, most of our ships that we have sold are going into markets in which we don't – or segments that we don't directly compete in. On the cadence side for the year, and as I said most of our yield in our cost benefit is front loaded this year. You were correct that we do take delivery of another main ship vessel, for three cruises, which does fantastically well. I think to your point in terms of cadence on, I think fourth quarter has a tougher comp on both the yield, as well as, on a cost perspective and so like I said, I think that – what you’ll see is – obviously the guidance on the first quarter and in Q2 will be at an elevated level. Q3 is probably something similar or around the range where you would see in Q1 and Q4 and probably be a little bit lower. Again, that's just based off of the comps.

Maybe I’ll takes the question on technology as you've heard me say before I think this is a very appropriate topic, you’ve heard me say that I think the pace of exchange that we're finding in our industry and then the world in general is simply slower today then we will ever see again. We need to reflect that in what we're doing. Technology can be used to help attack what is really our biggest single problem, which is that not enough people understand about cruising anything we can do to make the experience better and easier, particularly easier for our guests and for the people who haven't yet been our guest is very helpful. Obviously the question is quite apt in light of Carnival's announcement earlier this year, I view that as really a very positive thing for our industry. It’s a terrific roll-out and got a lot of publicity, which I think again inures to the benefit of all of us. As you mentioned we started a project with what we call our WOWbands a couple of years ago. That's been extremely effective in simplifying the process for our guests. But it's also obvious that the technology has improved a lot in the last two years and what we can all do today is much better than we could have two years ago. So I think you will continue to see us and I hope the rest of the industry continue to move forward with that. We call our internal project Excalibur. But we would expect to be coming out this summer with a new and upgraded new app that does reflect the technologies that are available today. Over this next year we would expect to roll this out to them 6 to 11 new vessels. Then the next year we would expect to be rolling it out at a rate of one to two a month over the period. But I remember at the time that we ruled out WOWbands Lisa Lutoff-Perlo’s comment was we want to give people their first day back. I think that's really a very good way to look at it. More that we can do to ease that process, not only makes it more comfortable for them, but gives them the time to do the other stuff and one of the benefits is not only more on ticket revenue, but also on the onboard revenue as we facilitate those types of processes. So I think this is a trend that's happening in our industry, but it’s happening throughout industry and I think it will enhance the cruise experience and therefore be good for all of us.

Okay. Great. Thank you both for all the color. Much appreciated.

And your next audio question comes from the line of Harry Curtis from Nomura Instinet.

Hi, good morning. Richard going back to a comment that you just made about the booking windows being stretched about as far as it can go. Can you give a little bit more color on that comment? Are there technical reasons for that? To what degree if at all, might it limit upside and pricing power in future periods?

Thanks Harry. I appreciate the question because I think it's helpful to understand, it’s not a question that it's limited. I don't think it limits our capability in future. On the contrary, I think that's a reflection of how strong we think the situation is and will be. Really what happens is if we take too many bookings today, it’s hard to imagine that. But if you take too many bookings today, what it really means is that somebody who decides a month from today that she or he wants to take a cruise. And frankly is willing to pay more, it's simply not available. So our revenue management people are really and I do think there is the best around and there and we’re quite sophisticated in this, but depending on the time and depending on the circumstances you don't want to take too few bookings. But taking too many is just as bad as thinking too few and it's getting that balance, the price integrity program has probably extended out more to take earlier. But in any given time you look at the pattern of one they're coming. When people are calling the book and you want to get it right, not just the most you can get. So if we feel that we're taking too many bookings at a point in time, we will raise our pricing. Obviously that will lower the pace of bookings. I think it's important for people to understand that while obviously more bookings is a good thing, we actually have a great deal of discretion. Our revenue management people have a great deal of control over that pace. So I think we just feel in general that probably we're asked at the point where it shouldn't be much faster than it has been. But of course, look at the circumstances at the time and it could well be different year from now.

That's interesting and follow-up for Jason on China. You guys mentioned that both – that your pricing in bookings are encouraging there. Can you maybe give us a little bit more color or break out the difference between the booking levels amongst your travel agents versus where they may be booked because there tends to be a difference or can be a difference?

Harry, it's Michael, I have to congratulate you its 43 minutes into the call and that’s our first China question, so that's quite unusual. Yeah, I think we’ve said in the past that China very much it’s a developmental market. We've been in the market for a number of years, we've been working on the distribution and certainly we've been accelerating our investments in that distribution over the past couple of years. This year in 2017 we see a different kind of picture as it relates to capacity in each of the regional markets. So if you recall last year, it was a big year for capacity overall in China and certainly in Shanghai, which was about 60% of the overall China market. There was as close to 100% increase in capacity. This year that number is close to flat, so it's a different type of environment. We've worked with our major distributors in terms of helping them develop the cadence of their marketing and the way they go-to-markets and their selling techniques in terms of the cruise product. We've also worked on opening up the other channels just as we have channels in the European and American markets and we’ve put a lot of time and energy into that. So we're seeing good traction in terms of these channels that we’re opening and we’re seeing good traction with our major wholesalers in terms of where they are with their bookings for 2017. So I think it was Jason that commented earlier when we look at our 2017 position versus 2016 we’re in a significantly better place.

Very good. Thanks guys.

Thank you.

And you next question comes from the line of David Beckel with Bernstein.

Hey, thanks a lot. For my first question I was wondering if I could dig in a little bit on pricing in Asia by region mentioned that APDs are up modestly. Could you give us a little bit better color in terms of what that looks like in China, Australia and the rest of Asia? Then second question I have relates, it’s a bit bigger picture, I guess, just what trends you saw in 2016 with respect to the customer mix in North America, specifically. Was there any notable trend in the mix of repeat versus new to cruise versus new to brand?

On the Asia Pac question, we don't break it down by market, but what I would tell you is that that the trend that we talked about in terms of the book position and rate and volume is a similar description of what's happening, but especially in Australia and China.

Hi, David, on the second question with regards to the customer mix in North America we saw our change in 2016 and we’re accelerating that change in 2017 in terms of new to cruise, first to cruise. So we’ve put a lot of our time and energy and resources and growing that segment of the market and we've seen. For the first time in 2016 we saw a really positive uptick in the first to cruise to both the Royal brand and the Celebrity brand. And in 2017 we continue to see that uptick in terms of new to cruise. A lot of that’s supported by changes that are occurring in our marketing strategies, both in terms of how we go traditionally to market, but also a shift more into digital marketing and we've had some success with that.

Thanks so much.

And your next question comes from the line of Jared Shojaian with Wolfe Research.

Hi, good morning. Thanks for taking my question. Jason, I think you said Europe is booked ahead on rate and volume and this time last year it was generally prior to the step down that we saw in demand just from all the concerns on terrorism. So does that mean Europe has fully recovered or do you feel booking activity is still not as strong as where it was before the event?

Well, I think it's tough to say especially relative to last year because don't forget the Paris attack that happened in the fourth quarter of 2015. I think that demand from North America has certainly rebounded, I don't know if I would describe it as rebounded to how strong it was in the 2014 and 2015 timeframe. But clearly we see strong demand coming from North America, we see very good demand also coming from Europe. I think the other component to that is we’ve got about half of the capacity that we had last year in the Eastern Mediterranean and it seems to be very good demand, obviously, that itineraries are more West than they were East before and the other itineraries like the Western Med and the Baltics, which did well last year are brushing an uptick in demand from North America there.

Okay Jason. And then just switching gears here on this potential cash deployment. Is 3.75 times net debt-to-EBITDA is that the starting point? If so I mean, you're almost there that's going to leave a lot of discretionary cash for buyback is that the way that we should think about that? I know you said it’s a board decision, but how should we think about the timing here? Thanks.

Yeah, well I mean in terms of the provided threshold 3.75 times debt to EBITDA is of the threshold for investment grade as well as to the metrics themselves. Our goal is to be a solid investment grade credit, so I would that’s probably somewhere in the range of 3 times to 3.5 times debt-to-EBITDA and I think we’re certainly looking to balance, getting to become an investment grade credit, as well as, investing moderately in our growth and improving shareholder return. So keeping that balance is important, but also acting like an investment company as Richard mentioned is critical, and we will likely be at that 3.75 threshold at the end of the quarter and then we would obviously, be considering other action as it relates to cash.

Okay, thank you and if I could sneak one, quick one in real quick. You gave guidance on most line items, what about the JV income. Is there anything that's going to offset that number in the non-op line?

Well, I think we’ve said in the past actually, it’s been said by our partner, is on average, as a ship, gets added on, they typically add about $20 million to $25 million in income each year that the ship comes on for full year for each of us, that’s our show [ph].

Okay. Thank you.

Thank you.

And your next question comes from the line of James Hardiman with Wedbush Securities.

Hi good morning. Thanks for taking my call. Harry broke the ice on China, so I'm going to stay that down that path. You've given us a number bread crumbs with respect to the Chinese market. A year ago I think on this call you basically said the Chinese yields were going to be down low single digits. I guess my question is should we come away from this call thinking that Chinese yields are likely to be up this year? Or is it too early to really say definitively just given how late in the year a lot of itineraries look out.

Okay, well I think, I've never heard our commentary described as bread crumbs, so that’s good. So, thank you. I think that the way that you should take is that we are in good position for China. I do think to your comment that it is a little bit too early to provide specific guidance to what we believe our China yields will be. But we are encouraged by what we’re seeing in the booking environment and we’re also encouraged as Michael noted in terms of the progress we've been making in diversifying our distribution.

Got it. And then I was hoping you could just give us maybe a little bit more color on how close in pricing trended over the course of the fourth quarter. It seems to me that you know there were a couple of major events in the fourth quarter, A; you had the election, which was you know smack dab in the middle of the quarter. B; you had the opening up of Cuba officially and I know you say Cuba was not going to be very material for you. But it seems like the uncertainty around Empress in the lead up to that decision was very material. So I guess, using those is sort of key points. How should we think about how that close in price trended over the course of the quarter?

Obviously, on the quarter the first month, it was at the end of the month that we gave guidance, since we had a pretty good sense of the month of October. I think as we got into the November around the election time. I think that again we saw people really kind of focus their plans on to 2017. I think it was August when we actually put out the deployment for Empress for the fourth quarter. And so I think that again, that was a little bit more of a challenge than we had expected it to be. But again I would really chalk it up more to people focusing more on the following year. I do want to stress that every quarter, there’s a little bit of a different story on the close in pricing side and I think that in combination with our price integrity program, we can sometimes make that a little bit less predictable. But again, I mean, there were several quarters last year where close in pricing was stronger than we expected and in the fourth quarter it was a little bit softer than we expected and the difference is really insignificant.

Maybe just a quick follow-up there. So again Cuba is not very material for you guys in 2016 or not material at all or 2017 I should say. But Empress can you quantify how much of an issue Empress was to your bottom line? Do you get that back in 2017?

Well, I don't have the specific number and we don’t talk about what it is on a ship basis. I mean, it was a more challenging vessel for us in 2016, just because ship was in drydock for an extended period of time. We kept delaying the deployment of the ship, hoping that we were going to get the approvals for Cuba. And as we mentioned on our last call, there were very strong signals that we were. So I think that certainly as we look into 2017, we have the proper windows in periods of time to sell and market the product and we don't expect there to be a few negative impact as it relates to Empress in 2017 in terms of what we saw in 2016.

Got it. Thanks.

Thank you.

And your next question comes from the line of Gregory Badishkanian from Citi.

Two questions. The first just on China. What do you attribute to the improved outlook relative to last year that in your answer to James. How much of it is due to capacity growth slowing?

Hi, Greg, it's Michael. I think like many things its many factors. Certainly capacity in Shanghai is a contributing factor because if you recall we had big increase in 2016 and another increase in 2015. So I think there was a little bit of an issue with the distribution being able to absorb that kind of capacity in an emerging market, so the capacity is helpful. And then the other element was if you recall back in 2015 there were a couple of knocks in terms of MERS. And then we had those particularly difficult typhoons, which really did impact the wholesalers, so I think they were a little shy. So I think those factors and then, of course, as I have mentioned earlier we’ve really invested in building out all of the channels. So I think it's all of those factors coming together, better stability, less capacity and evolving, maturing market. Certainly not mature obviously, but maturing in terms of the relationship between the wholesalers, distributors and our company and the investment we’re putting in the market in terms of developing these channels.

Okay, thank you. And then just in terms of the shrink of North American traveling around Europe, taking cruises in Europe. How long do we see [indiscernible] easy comparison, how much do you think the underlying trends is actually improved to drive that strength?

Greg, I think, again I think it's a couple of things, it does. Jason had mentioned earlier capacity is down in Europe and down in Eastern Med, so that's been one of the driving factors. The dollar is strong against the euro, so I think people are more interested in going to Europe because they get more for their vacation dollar. People, sort of incredibly popular destination with or without cruise and I think we're seeing some of that. Then also I think there's just more consumer confidence, certainly in Q4 where we saw the stock market increasing nicely. I think we've seen really uptick in cadence in terms of the bookings of North Americans wanting to go to Europe. So I think all of those factors come together and has contributed to what we’re seeing in with the European bookings.

Thanks very much.

Thanks, Greg.

And your next question comes from the line of Assia Georgieva with Infiniti Research.

The first one with Pullmantur making a little bit more difficult as we saw just now even on occupancy the comparisons we’re looking at. Jason, could you give us a little more detail as to what organic growth would have been in Q4 and Q1? Also if we can exclude the very positive impact from Ovation and Harmony that we're seeing?

Well, as it relates to the Pullmantur and itself organically for Q4, it was worth about 275 basis points of the yield growth in the fourth quarter. In Q1, we expect it to be about 225 basis points as relates to yield. There’s a little bit of a headwind on the cost side, but it's 20 basis points or 30 basis points. On the hardware side as we kind of look into 2017, certainly Harmony and Ovation drive significant yield premium and that minus Legend coming out, helps us by 125 basis points to 130 basis points.

Okay. Great. That is very helpful. My last question, at the time of the prior call, you were 94% book, if I recall correctly. For Q1 at this point, I imagine it's a number that’s just slightly lower than that?

Well, I think we said that we’re booked in a better position on both rate and volume. For the year, we’ve said it for the quarter and we are in a better position than we were in Q4.

Okay. Great. Thank you Jason.

Thank you Assia.

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

Thanks. Jamie Rollo from Morgan Stanley. Just following up from the last quarter, the hardware mix benefit of 125 basis points. Was that the full year or the sort of an anniversary impact for the first five months please?

No, that's for the full year Jamie.

So that implied about 250 basis points for Q1 and Pullmantur you said was 225 for Q1, so does that imply underlying yield of broadly flat year-on-year on basically a tough comp?

It’s a little bit lower in Q1. Like-for-like for the year is about 250 basis points.

Okay. Then just a quick one on cost, the statement talks about benefit from setting Legend. Is that in that cruise or EPS numbers or will that be separated out please.

No. That is in the net cruise cost and the main benefit of it is it's less efficient vessel to operate. But there’s several other things driving cost benefits in 2017 one of that is the exit of Legend.

No, I meant, is the capital gain relative on a benefit to average cruise costs?

Yeah, there is a small gain on it, but it's not a material number.

Okay. Thanks.

Thanks, Jamie. Okay. Well, thank you for your assistance Kwashia with the call today and we will thank you for your participation and interest in the company. Carol will be available for any follow-ups you might have and I wish you all a great day.

And ladies and gentlemen, as Mr. Liberty stated, that does concludes today’ conference call. You may now disconnect your lines.