Royal Caribbean Cruises Ltd. (RCL) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruises Limited Second Quarter 2019 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. I would now like to introduce Chief Financial Officer, Mr. Jason Liberty. Mr. Liberty, the floor is yours.

Thank you, operator. Good morning, and thank you for joining us today for our second quarter earnings call. Joining me here in Miami are; Richard Fain, our Chairman and Chief Executive Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Carola Mengolini, our Vice President of Investor Relations. During this call, we will be referring to a few slides, which have been posted on our investor website www.rclinvestor.com. Before we get started, I would like to refer you to our notice about forward-looking statements, which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Please note that we do not undertake to update the information in our filings as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined and a reconciliation of all non-GAAP historical items can be found on our website. Unless we state otherwise, all metrics are on a constant currency adjusted basis. Richard will begin by providing a strategic overview of the business. I will follow with a recap of our second quarter results, provide an update on the booking environment, and then provide an update on our full year and third quarter guidance for 2019. We will then open-up the call for your questions. Richard?

Thank you, Jason and good morning everybody, and thank you for joining us today. I'm going to take a slightly different tact than usual. Because there's so much happening at Royal Caribbean, I'm going to use my time this morning to philosophize a bit on our strategic focus and positioning. Jason will then come back and provide more color on the near-term results. But I do have a spoiler results. We are very pleased with these results. Last month, I had the pleasure of participating in the inauguration of our newest ship in the Galapagos Celebrity Flora. She is the first ship ever built specifically for sailing in the Galapagos and she is doing extremely well. A beautiful ship with the latest advances in sustainability, magnificent features for our guests and even research capabilities. I also observed one thing in the Galapagos, it's very relevant to how we manage our business. Ever since Darwin published his book, Origin of Species, the Galapagos have been a symbol of the concept of evolution. What you notice there is that the species that thrive are not the strongest, not the smartest, not the fastest. The species that survive there are those that are most able to adapt. That's true for animal species and we believe it's true for corporate species as well. We believe that to succeed in today's world, you need to adapt to an ever-changing environment. The ability to adapt is often called innovation, but innovation is really adapting to and/or leading change in a rapidly evolving world. I'm proud of the people at Royal Caribbean who continue to innovate and to adapt to that fast-changing world. We continue to do well because we continue to adapt our product to the changing desires of our current and future guests and the changing environment which we operate. Innovation has been and is a central tenet of our ability to drive change and to respond to change. Itineraries are just one example. They remain one of the most important considerations for our guests and it is both our duty and our opportunity to satisfy that demand in the best way possible. The most recent manifestation of that is Perfect Day at CocoCay. To describe Perfect Day as a home run wouldn't do it justice. It really resets the bar in the short cruise market. But it's important to note that Perfect Day wasn't designed to steal customers from other cruise lines it was designed to attract customers who otherwise wouldn't be taking a cruise and it's doing that beautifully. I think this makes an important point about our industry and why the industry has grown and why it continues to grow so nicely. I know that many of you on this call follow other industries and that many of them have a highly inelastic demand curve. If I have a property in Dallas, there's really very little I can do to attract more visitors to Dallas. And so my focus is on getting a bigger share of those who are already there. Since the demand facilities in Dallas is inelastic and in the short term the supply is inelastic, the only short-term strategy is trying to get a bigger piece of that pie. In the cruise industry, the demand curve even in the short-term is highly elastic. We can and we do attract new visitors to travel to our ships from far-flung places. Furthermore, over the years the cruise industry has innovated i.e. adapted to better cater to what people want in their vacations. Simply put the industry has created better mousetraps and the world is beating a path to our door. As a result, the demand for cruising is growing faster than might otherwise have been expected and as such as the cruise lines that are adapting and innovating. Travel advisers are our dominant distribution channel. And while the industry has grown and adapted so too have our travel partners. The role of the advisor of today is as different from the travel agent of yesterday as the cruise industry of today is as different from the cruise of yesterday. It is no accident that this year even with a significant industry supply growth and even with significant company supply, we are enjoying one of the largest levels of price increases. As our industry continues to adapt the industry, the entire industry will continue to grow. Part of that adaptation is the changing desires of the vacationing public. I've long talked about how cruising has become more relevant to a public that now craves experiences over material goods. That message has now become so ubiquitous that the other day I heard a ball-bearing manufacturer talk about the experiential aspects of his product. I can only imagine. But in the cruise industry the phenomenon is very real and the focus on experiences plays beautifully to our sweet spot. For as long as I can remember, people have worried about overcapacity in our industry. More correctly, I think, we should be talking about the balance between supply and demand. It's a balance not a question of one or the other and the distinction isn't mere semantics. Talking about overcapacity implies that there is a fixed amount of demand, but a changing amount of capacity. In fact the situation is almost exactly the reverse with a relatively fixed amount of capacity and a highly variable amount of demand. Fortunately, our industry has been able to adapt to take advantage of this elastic demand curve. That is why it has continued to confound those who expect lower demand growth. One other issue that is often raised, especially recently, is the R word, recession. Our results have unquestionably been buoyed by an amazingly robust and sustained economy and we hear lots of pundits predicting the imminent end of that strong economy. In fact, the only other time in my career when I can recall the predictions being more consistently negative was two years ago, and we all know how that turned out. But a downturn will certainly occur at some point and we are very conscious of that. To my earlier point, when circumstances change, we are prepared to adapt. While no one is recession-proof, looking forward, I think the industry has features that make it recession-resistant. The growing appeal of our product, the relative price attractiveness, the fixed cost component, the portability of our assets, et cetera; all of these things make us better able to do well even in bad times. A good example of that would be China, where Spectrum of the Seas started operating just a few weeks ago. Conventional wisdom suggests that bringing a new ship into a market whose economy is weakening ain't such a good idea. But Spectrum and our other ships there are doing very well, despite the softer economy. The reason, again, is that we are building the market, not taking it as a given. Adaptability and innovation are helping us produce improved results, with more capacity in a poor economy. Again, a good supply/demand balance by improving demand, rather than by trying to live with the supply. So this year is proving to be a very good year on many fronts. However, this month has also seen important milestone in another related area that's important to us and that area is sustainability. As most of you know, in 2016, we launched the partnership with the World Wildlife Fund, to take our sustainability efforts to a new level. At Royal Caribbean, we believe that what gets measured gets better and we established specific goals in three areas of sustainability. We did this in conjunction with WWF, not only to be able to benefit from their expertise, but also because making specific measurable targets provides an accountability that is important to the success of a program like this. The three areas where we established these quantifiable goals were in the areas of carbon footprint, sustainable destinations and sustainable food production. Specifically, we undertook a 35% reduction in carbon footprint from our 2005 base, offering 1,000 tours certified to the GSTC sustainability standard and responsibly sourcing 90% wild caught seafood globally and the 75% of farm seafood in North America and Europe. We set a public goal to reach these objectives by the end of 2020. I'm happy to report that we are on schedule. We achieved our carbon footprint goal earlier this year and just two weeks ago, we certified our 1,000th sustainable tour operation. We're not there yet on our sustainable food sourcing goal, but we're working diligently to do so and hope to reach that target soon. Looking forward, we have progressed rapidly on numerous fronts in this area. Our new ships will use clean LNG as fuel. We have installed Advanced Emission Purification system on most of our fleet, our program to eliminate single-use plastics keeps advancing; more and more of our ships are zero landfill capable, our efforts to reduce food waste is ramping up, our experimentation with zero-emission fuel cells continues, et cetera, et cetera. It's been a terrific year and it looks set to continue to do so. Each quarter, we have been able to announce not only that we're doing well, but that we're doing better than we thought at the end of the prior quarter. We are also looking at 2020 where the early bookings that are exceptionally strong and provide optimism for 2020 as well. We continue to be highly focused on controlling our costs. Obviously, some of our aggressive strategic and innovative moves in areas such as technology and projects like Perfect Day, put pressure on these metrics. But so far, we think the return on these investments has been exceptional and we continue to focus on generating strong returns on our investments going forward. In this update, I have focused more than usual on our strategic focus. As I used to say on the A Team, I love it when a plan comes together. We have a strong alignment throughout the organization on our strategic vision. We see adaptation/innovation as a key driver of success. We see positive momentum favoring a good supply/demand picture for our company and for our industry. We see sustainability as a sine qua non. We see cost discipline as core. And we see a workforce that is passionate about delivering on all of the above. Adaptability/innovation is a complex challenge and as Charles Darwin observed, it's a never-ending one. We are doing our very best and we'll continue to do so. And with that, I'll ask Jason to provide an overview of the results. Jason?

Thank you, Richard. I will be talking about our results for the second quarter of 2019. These results are summarized on slide 2. For the quarter, we generated adjusted earnings of $2.54 per share, which is $0.07 higher than the midpoint of our May guidance and 12% higher than the same time last year. Our net revenue yields were up 9.5% for the second quarter, which was in line with our May guidance, despite the negative impact from the Cuba travel ban. 400 basis points of this year-over-year improvement was driven by the additions of Silversea, Perfect Day and Terminal A, with the remaining 550 basis points being driven by our core business. The abrupt removal of call to Cuba from June sailings on Majesty of the Seas and Empress of the Seas costs us 30 basis points in year-over-year yield for the quarter. While the Cuba policy change was financially and operationally painful, our underlying business remains very strong, as we both outperformed on onboard revenue and saw a further close-in demand for our core products. Net cruise costs, excluding fuel, were up 8.9% for the quarter, which was 110 basis points better than the May guidance, driven by timing. As we often said, we manage our cost an annual basis rather than on a quarterly basis. Therefore, the positive cost variance that occurred in the second quarter will simply reappear as an increase in our cost in the back half of the year. This quarter, we also outperformed below the line, driven mainly by lower interest cost and better performance from our joint ventures. As Richard mentioned this morning, our brands are executing beautifully and demand continues to accelerate, which is evident in our strong book position. We remain nicely ahead in rate and our load factors are in line with the same time last year. At this point in the year, we don't expect to be booked ahead in the volume, given our increased mix of short Caribbean capacity and the impact from the abrupt Cuba itinerary changes. This consistently strong demand isn't a function of one thing, but many. The general economy continues to be strong, consumer trends and demographics are very aligned with our business. Our global footprint allows us to be nimble in adapting to market level trends and we continue to innovate the overall guest experience. Industry-leading hardware like Symphony of the Seas, Celebrity Edge and Celebrity Flora combined with new product innovations, like Perfect Day at CocoCay and Excalibur, as well as the modernization of our fleet is significantly contributing to our top line and earnings growth. Demand trends from North American guests continue to be very strong and that strength is more than offsetting the modest volatility from our European consumers. As a result, all of our core itineraries are performing in line with or better than we expected when we gave guidance three months ago, with Caribbean and China sailings contributing the most to our improved non-Cuba revenue outlook. The strong performing Caribbean accounts for a smaller percent of our capacity for the rest of the year than it did in the first half of the year, at just under 50% of our Q3 and Q4 inventory. We're always happy to see new bookings outpace our expectations, but what has been particularly impressive over the past few months is the pricing we are receiving for sailings, visiting Perfect Day at CocoCay. Pricing on these sailings has consistently been outpacing our lofty expectations, and has been a major contributor to our improved non-Cuba revenue outlook. European itinerary accounts for 16% of our full year capacity about 20% of our capacity for the remainder of the year. These sailings have continued to book in line with our expectations, with Celebrity Edge receiving significant pricing premiums and the overall fleet booked ahead of same time last year in pricing for both the Mediterranean and the Baltics. Demand and pricing for North American guests have remained strong, and as a result, significantly more and more North Americans are sailing with us in Europe this year. On the last call, we discussed the volatility in demand we were seeing from the UK given the ongoing Brexit uncertainty. Since then, we have seen an improvement with bookings from the UK up double-digits over the past three months. Europe remains our second highest yielding summer product, and we are pleased with how this season is shaping up. Our highest yielding summer products, is of course Alaska. Alaska sailings only account for 5% of our full year capacity, but are just over 10% in the third quarter. We've upped our game from a hardware standpoint in Alaska this year with Celebrity Eclipse, Ovation of the Seas and Silver Muse is replacing older hardware along with the first ever Alaska season for Azamara. These hardware changes combined with strong demand from North America, are contributing to our overall yield growth this year. And finally, our Asia-Pacific itineraries account for about 15% of our full year capacity and 14% of the rest of the year. Spectrum of the Seas arrived in Shanghai last month, and is getting very strong demand for sailings from China, which will remain year-round. The addition of Spectrum of the Seas combined with further expansion of distribution channels in China, are driving yield growth for the products. Our Australia and Southeast product account for 6% and 4% of our capacity respectively, and are performing in line with expectations. It's still a little too early in the booking window to comment too specifically on trends for 2020. However, I will note that we are very pleased with the performance thus far. Prior to the recent Cuba-related redeployments, our load factors were in line with last year's record high and rates were and still are up nicely in all four quarters. Now let's turn to slide 3 to talk about our updated guidance for the full year 2019. Overall, we are updating our guidance to $9.55 to $9.65 per share, which includes a $0.15 improvement from our previous guidance due to better second quarter results and an improved revenue outlook for the second half of the year. As it relates to our key metrics, we expect our net revenue yields to increase in the range of 7.75% to 8.25% for the year. This updated guidance includes the negative impact of approximately 70 basis points from compensation in itinerary changes related to the recent travel restrictions at Cuba. Excluding this impact, the midpoint of the company's net yield guidance has improved by approximately 40 basis points versus our May guidance. The improvement in our underlying business is split pretty evenly between Q2, Q3 and Q4. Overall, our net yield guidance on a core basis, whereas when normalizing for Silversea, Perfect Day, the new terminal in Cuba is now more than 5%. This performance is already one of the strongest in our history, and came during a period of more than 6% of capacity growth in the industry. This revenue performance is really a testament to the strength of the demand for our brands and for cruising. From a cost perspective, we expect our net cruise costs excluding fuel to be up 10% to 10.5% in constant currency. This updated guidance reflects an increase in our costs, mainly related to the travel restrictions to Cuba. We expect fuel expense of $703 million for the year, and we are 59% hedged. In summary, based on the current business outlook, along with current fuel prices interest in currency exchange rates, our adjusted earnings per share is expected to be in the range of $9.55 to $9.65 per share. Now we can turn to our guidance for the third quarter, which is on slide 4. We expect net revenue yields to be up approximately 6.5% for the third quarter, including a benefit of approximately 340 basis points from the combination of Silversea, Perfect Day and Terminal A. Yields are also included a negative impact of 110 basis points associated with Cuba. The impact of Cuba and a lower mix of Caribbean deployment combined with the timing of the Silversea consolidation, the launch of Terminal A, and the delivery of new hardware are contributing to a smaller, although still significant yield increase in the second half of the year compared to the first half. Net cruise costs excluding fuel for the quarter are expected to increase approximately 11%. So in summary, based on current fuel prices interest and currency exchange rates and the outlook expressed above, our adjusted earnings per share for the quarter are expected to be approximately $4.35 per share. With that, I will ask the operator to open up the call for question-and-answer.

[Operator Instructions] The first question comes from the line of Steve Wieczynski with Stifel.

Yeah. Hey, guys. Good morning, guys, and Richard well done on getting an A team reference into your prepared remarks. I guess if we go back to January, and we look at your original earnings guidance, which had a midpoint of $9.87, look at your midpoint now which is $9.60. Is it fair to say if you didn't have some of these headwinds you guys have spaced, you would be on a pace for probably a mid-10s kind of year? And I guess what I'm getting in here is you've absorbed $0.30 from Cuba, $0.25 from Oasis. So if my math is right, I think about $0.25 in Q1 FX. Is that the right way we should be thinking about how 2019 could have shaped up?

Hey Steve, first, thanks for the question and thanks for the A-Team. Kudos for Richard.

It's very important that we have cultural literacy as well.

That's right. That's right. But that's exactly right. There's definitely been some real hits this year as it relates to those three elements that you pointed out which are also relatively accurate to what the impact has been for this year. So, if we didn't have Cuba if we didn't have the Grand Bahama incident, and certainly FX in the fuel, we would be talking to a better number that would be at the low to mid-$10 ranges.

Okay. Got you. And then Jason you also back in January you laid out a 350 basis point positive impact from Silversea, CocoCay in the Miami Parking terminal. Has anything changed there in terms of those impacts to yields?

Those impacts are pretty consistent on the yield side as well as on the cost side. Now, of course, when we talk about Perfect Day, we're really specific about the on-island activities. And clearly the strength that we're seeing on the ticket yield side is well ahead of what we could have even imagined. It would be in terms of demand which is also bolstering either strong commentary that we have as it relates to the strength for our business in the Caribbean.

Okay. And the last one for me and I understand it's still early in terms of booking patterns and I don't think you're going to answer this question really. But when we look out to the 2020 and the Caribbean bookings, can we get any color in terms of how they have trended since the Cuba news came out? And I understand you just opened up the booking window for some of those ships, but I think the fear that's out there today in the marketplace is that Caribbean yields will materially roll over in the first half of 2020 given the lack of Cuban premiums?

Steve its Michael, I'll jump in here. On the two ships that we had going to Cuba for 2020, we just opened them up and, of course, one of those ships is going to Perfect Day. So, the demand as Jason had mentioned for Perfect Day has been -- really it's exceeded our expectations and our expectations were pretty high. So, we're kind of pleased with what we're seeing for 2020 in the Perfect Day. It's a key driver for the Caribbean performance. And the ships that we dropped out of Cuba, we're feeling pretty good about how that's performing. I mean its early days, yes, that's we've said.

And Steve just to kind of add on to it, especially as it relates to Perfect Day; one we launched Perfect Day in the middle of the second quarter and of course, there's a ramp-up to that island. And so we also plan to take a lot more guests next year in Q2 and Q3 and Q4 to Perfect Day. And so I think just the general comments that we have around the back half of this year and also my comments on 2020 are generally saying that we continue to see very strong demand trends for the Caribbean.

Okay, great. Thanks guys. Appreciate all the color.

Sure.

Your next question comes from the line of Felicia Hendrix with Barclays.

Hi, thank you so much. So, Jason you guys have raised your net yield by 40 basis points ex-Cuba when you talked about the strong demand that you've seen in the core brands in the second half and because of that how you raised your -- it basically essentially raised your second half guidance. I think you've touched on some of this in your prepared remarks and in your answer to Steve's question. But just wondering if you could just kind of peel back the layers, give us some more granular cover -- color to what's driving that increase for your second half? You've talked about Perfect Day, but how much of it is priced? How much of it is onboard just general strength that sort of thing?

Yes. Sure. Just kind of focusing on the back half of the year thinking of the strength that we're seeing is coming from two elements; so, about half of it is being driven by better ticket; and half of it is being driven by better-than-expected onboard. And on the onboard side it's more of the experiential type of activities which would also include Perfect Day. But on the ticket side, there's really -- all of our core products are seeing very strong demand. And so they're either in line with our expectations or they're doing better. And the two areas that are doing better which I had in my remarks has been the Caribbean and has been China. And those are two areas where we've seen an acceleration in demand.

Great. And that's a perfect segue to my follow-up which is Europe and you talked about the softness there and we all know that you sourced globally and you take the best customer for the best itinerary. But just wondering for those who may have some concerns about Europe and kind of the European source demand if that could be an overhang going forward, can you just talk about your perceived optimism? Or maybe I should say cautious optimistic about Europe?

Yes. Sure. So also what I had commented on was that over the past several -- or really the past two months we've seen much better trends and consistent trends from Europe and also for the U.K. But, of course, because there was some volatility going through WAVE and then going into early second quarter, we recognized much better -- for stronger demand trends coming from North America for European sailings. And as you've pointed out we've got this global very diverse footprint that is supported by yield management tools and systems and people that manages demand globally. And so when we see better demand trends form one market versus another, we shift our sourcing there. And so Europe is in a very good shape and as it relates to the products -- and as I said these demand trends from Europe have now been stabilized, but we've seen increases in their booking activity over the past couple of months.

Felicia, it’s Richard here. And then just to add on to that. You asked for some color on how it's looking going forward. And you recall very well in -- first of all, we never give real guidance for the coming year this early in the process. So, we're doing what we normally do. But if you recall back to 2016, we thought the end of that year and the beginning of 2017, we're unusually good and we might never see such a strong forward picture again. In the year later, we were looking at an even stronger 2017 and then an even stronger 2018 and the same thing happened last year. Now, when we're looking forward, we are -- from a color point of view, we are feeling the strength of the market. The Caribbean and the ability to not only handle the situation in Cuba but essentially the rest of the Caribbean absorbed that without a lot of difficulty. It's really unusual that you continue to see such a positive forward perspective as we're seeing in the market just in terms of general tone and color.

Thank you so much.

Thanks, Felicia.

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

Great. Thanks. And I think you addressed a lot of my questions which had to do with the fact that that Cuba impact you've called out that $0.30 was kind of for half a year. And then when we look into 2020. But I would think a significant part of that would have been sort of compensating people that have booked already, which you don't necessarily have to do for things that weren't sold yet in 2020. And discounting for things that are very close and often not an issue in 2020, maybe the ship going to CocoCay even does better than it was going to Cuba. So is there -- if you had to think about EPS impact from Cuba in 2020, is it fair to say, it will be well less than half of the EPS impact that you had called out in 2019? Like in other word I think people might just feel comfortable that there's not any kind of serious drop from that in 2020?

Thanks, Robin. So on the Cuba front, as you pointed out, yes, there's a few things that come with an abrupt change in an itinerary. So one, as you mentioned was compensation. The second is that of course, you have guests that cancel and of course say an itinerary like Cuba, it's not like just a change in the Caribbean itinerary. This is a itinerary that people specifically had signed up to go and visit. So certainly, that had its financial and operational impacts for this year. As Michael commented, one of those ships is going to go to Perfect Day. And of course, demand for going to Perfect Day is exceptional. And so I think we expect that ship to do well. And the other ship was also on a very good deployment for next year. So we certainly don't expect that $0.30 impact that we've experienced this year to kind of settle in at the long-term. And I don't know if the answer is going to be half of it or better than half of it. But I know Michael and his team and Larry on the Azamara team and the Silversea team that are having impacts from Cuba have put action plans in to try to recover as much of that as possible.

Okay. Great. And then just kind of a housekeeping item, just looking at your CapEx schedule, it looks like it's gone up by about $100 million a year for the next couple of years. And that could just be rounding and not be anything, but I wondered if there was some particular initiative or something that changed that schedule a little bit? Thanks.

Yes. Sure. And I think it is mainly rounding there's a little bit as we ordered Icon 3 that plays into that number. And then of course, your announcement on Holistica and so forth in some of our planning in terms of investments in the coming years.

Okay. Great. Thank you very much.

The next question comes from Greg Badishkanian with Citi.

Great. Thank you. Yes. Just following up on Richard's comments about CocoCay, not primarily competing with other cruise line, but really trying to get from other passengers from other travel segments. What percentage of those passengers are maybe new-to-cruise? And then also from a benefit perspective, are you seeing that primarily help you from a deal perspective? Or is it just the overall demand for cruising and that helps up what you absorbed some of the path that you have said otherwise went to Cuba? So there's some other benefits from just increasing your load from that.

Hi, Greg, it's Michael. In total, in 2019 and through into 2020 11 of the Royal Caribbean ships will be going to Perfect Day at CocoCay. So you can imagine the amount of -- the volume that we're taking to Perfect Day has gone up by a factor of about four and we were already taking a lot of guests to CocoCay before we underwent all of this work and changed the whole experience. It's also a key component of our shore strategy that we introduced a couple of years ago. If you may recall, we put Mariner Navigator Independence through Royal Amplified and we completely changed the product offering in the shorts market and literally put the biggest best ships in that short market, which is about 20-something percent of the entire American cruise market. So we already started to see demand increasing for those products, because they are truly great products. When you combine that with Perfect Day, we've seen a real uptick. Since we opened Perfect Day and people have begun to experience it, I think to date we've taken maybe 350,000 people to Perfect Day since we opened. It's now rated the number one resort globally for Royal Caribbean. It's knocking it out of the park in terms of truly delivering a phenomenal day. The guest satisfaction is extremely high. And so the demand that we're seeing is coming from all segments. It competes very well with Orlando. It's got a truly wonderful day both thrill and chill and it is also driving new-to-cruise, because approximately 40% of the short market is new-to-cruise. So it's really ticked the box across all of these different dimensions. And in terms of the demand that we're seeing since we've opened and people beginning to understand what kind of experience this is, we're seeing both significant increase in volume and of course that's driving rate.

And Greg, just to add. Really, over the past several years and you've heard us talk about this we've talked about this also in our Investor Day. But as the consumer trends and demographic trends point more towards experience in travel and multigenerational and really kind of spans the products that we offer, you combine that with the innovations that we talked about, whether it's Perfect Day at CocoCay or the modernization or the new ships. And then you have just perception of cruising has really accelerated. And all of these things are leading to a real change in mix where there is much more new-to-cruise as a percent of our mix than we have experienced really in decades. And that is because of all these different things in which we're doing and the industry is doing to attract new and fresh demand.

And just add to that Greg, I think Carola is trying to organize an investor trip in November to Perfect Day. Hopefully, you'll get an opportunity to come and see it, because when you've seen it and experienced it, you're going to truly understand what a game-changer this product and experience is.

Yeah. That’s a good Investor Day. Thank you. Great color. Appreciate it.

Your next question comes from the line of Jaime Katz with MorningStar.

Hi, good morning. What you guys have talked about in the past is Excalibur quite a bit which wasn't really mentioned very much on this call. And I'm curious how the rollout has really helped facilitated the outperformance, any insight maybe that could help us quantify that or what you guys expect going forward would be helpful? Thanks.

So it's Richard and the Excalibur rollout has been excellent. It's now -- our objective was to get at/or close to across almost all of our fleet before the end of this year and that continues to be on track. The -- it's really worked out very well for doing two things: It improves the experience to our guests, it makes it easier to board, it makes it easier to do what you want; most importantly it really simplifies the process. When we started this kind of technology process Lisa talked about giving people back the first day of their vacation, because they didn't have to spend that time to orchestrate themselves. And with the approximately, with the photo recognition, you're going from a lengthy process to essentially no process. That helps improve the experience and then that, of course, helps us with our ticket sales. But it also helps our onboard revenue because it makes it easier for people to get to the experiences, to do the activities that they want to do. It makes it easier for them to do so in advance and people who book in advance tend to spend more onboard when they get there. So it's been a home run for us. The Excalibur team has been exceptional and really put together something that people really like. And we're building on it. So what you see so far is really a platform that you can build on. And so we didn't talk about it, we have so much to talk about, so we always have to make choices.

Of course. And then regarding Spectrum, it sounds like the launch has been slightly more successful than some of the prior launches into the China market. Has onboard spend been trending any differently for passengers on the ship relative to ships in the past? Have you guys been able to generate more revenue maybe than previous?

Yeah. Hi, Jaime it's Michael. Yes Spectrum's launch was really good. It was a great event. We've got massive coverage. Demand for the product has been very strong. We've made great progress with the evolution of the distribution channels and we're feeling pretty good about where we currently are in the journey that we're on. The product has been exceptionally well received. We've got a very -- I'd say a fairly significant price gap between competitors and the market. And we've seen a real uptick in the onboard revenue. I think we've got the right product and we're attracting the right demographics. And we're seeing that with the onboard spend. So I would say we're certainly seeing a recovery from a couple years ago. We're feeling good about Spectrum. We're feeling good about China.

Operator, next caller.

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

Hi, good morning, everyone. Thanks for taking my question. So I want to drill down a little bit more in the 2020 booking commentary, which you referred to as exceptionally strong. But can you also provide us a little bit more of a quantitative context? Because I think you've said prior to the Cuba, the load factors were in line and rates were up in all four quarters. So is the implication that since the Cuba travel ban here in the last 1.5 month call it that the load factors are now down in 2020? And I guess help me just to reconcile that with some of the positive tone you have here on the booking commentary? And then any differences in brands or regions that you would call out as well?

Yeah. Sure Jared. And I try to address it in my remarks probably I'll try to be a little more specific about it. So our load factors for next year are, I mean very slightly down year-over-year, which is really what you would expect and what we do expect because of two things, one of which is we have more short products on next year and that short product is closer in booking product, so that would be one thing; and second is we just redeployed the Cuba ships and so you're somewhat kind of starting over again on those ships. And so that had a little bit of an impact on our load factor. But what I also said was that our pricing was nicely up. And that includes no longer having a high yielding Cuba as part of that mix. And so we are quite encouraged about the booking environment for 2020 whether it's the booking volumes, whether it's the pricing that we're seeing and the load factor change is what we very much expected it would be. And, of course, as we've talked about in the past if we would like to, we could have that load factor be higher. But we are always trying to optimize and maximize our revenue.

Okay. Thank you. And then just two quick housekeeping questions for me, I mean you've absorbed a lot of CapEx in the last few quarters and obviously haven't repurchased stock. Are you still expecting to repurchase stock in the back half of this year when CapEx decelerates here a little bit? And then separately for next year as you think about fuel expense, your hedged dollar value goes up from this year to next year. But I think some of that might just be you're now hedging the higher dollar MGO instead of IFO, so correct me if I'm wrong on that? And any color you can provide on how we should be thinking about fuel expense next year. Just with all the puts and takes on the hedges, I think make it a little bit difficult to try to forecast that for us.

Yeah sure. So I'll talk about the fuel first and then I'll talk about stock repo for a second. On the fuel side that's -- what you said was exactly right. If you look at our fuel mix as it relates to our hedging program, we are indexed higher to MGO relative to our historical mix. And now we've also talked about in the past that our expectations is generally the mix of fuel that we burn today. IFO versus MGO should remain more or less the same because of our investments and great execution of implementing our AEP systems on the ships, which will allow us to continue to burn the higher sulfur IFO fuel. And so I would -- I think that's how we set our hedge portfolio for next year. As it relates on the stock repo side, as we said we're going to do it opportunistically and also to kind of make sure that we're in line with our credit metrics of 3 to 3.5 times and we certainly get to that location here in the back half of the year. And so we will be looking at that as we always have opportunistically.

Okay. Thank you.

You got it.

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

Thank you and congrats to the team on that continued strong execution. Just a couple gentlemen here, looking to 2020 just -- is it fair to say, you're not really seeing any change in the trends that have been exhibited so far in 2019, as far as the regional demand and sourcing? In particular, also you haven't really commented that much on Germany. So if you can just remind us the percentage you sourced out of Germany of it global? And then -- and specifically what you're seeing out of TUI, just an update there in the trends that we're seeing given softening economic outlook? And of course what's been out there in the markets from other competitors?

Yes. Sure. So, first as it relates to 2020, I'm not going to start kind of breaking this down by region or by market in any way. But I think as Richard pointed out which I think is really the case is, each year we talk about how strong the demand environment is as we look into the future year and it ends up being that or better. And as we look at 2019 which is another very strong year as I talked about in my remarks, if you kind of strip out the Perfect Day's and the part of Miami in Silverseas in Cuba 5-plus percent yield improvement on a pretty larger capacity growth year. Those trends that we have seen this year are very much what we're seeing as we're going into 2020. And so I'll kind of leave it there versus -- I'm not going to get into the different markets and the products at this time because it is too early for us to provide specific commentary there. Germany a very small percentage of our overall capacity for our consolidating brands, obviously most of our sourcing for TUI is for TUI cruises. TUI cruises is having another very strong year. The demand for that product even though there's been, I know some reports about concerns around Germany in terms of demand that is not really hitting TUI cruises at least to-date, it's not.

Okay. Thank you. And then secondly, just wanted to ask on the destination development there's been a lot of talks about CocoCay and how exceptionally well that's performing. How are you -- just any update that you can give us Jason or Richard or Michael whoever wants to take this, how you're thinking a potential timeframe for maybe something else elsewhere in the world similar to owned and operated and then anything else and when we should maybe start hearing something out of Holistica JV of some additional projects there? Thank you.

Hi, Tim. I think as Richard had previously stated obviously destination and destination development is now really at the center of our forward-looking strategy. And we've really started to mobilize behind that both with Holistica which of course we announced a month or so ago. And we're now deeply engaged in multiple possible opportunities and particularly the one in Freeport that where the team is working on currently. With regards to Perfect Day, I think we've been genuinely delighted with the demand that we're seeing for Perfect Day and the experience that we're delivering is really at a high level. So I think it's fair to say that we're seeking further opportunities in this space. And when we're ready to make announcements, we'll be happy to let you know.

Thank you.

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

Just as a quick follow-up on that question. Maybe if you can think of put this into perspective at CocoCay, what inning are you and in terms of its ability to drive your long-term growth in the Caribbean? And are the returns on invested capital such that, it really does make sense particularly to either add capacity there? Or to seek just an entirely new opportunity that will drive a 5-year growth in the Caribbean?

Harry, it's really difficult to answer those questions in a detailed way. I think it's pretty obvious that -- and I think we've kind of -- we stated this now at several times, we're generally delighted with the performance of Perfect Day and the response has been outstanding. We feel as if it's going to be a key driver of our future growth. It's certainly demonstrating that to-date with demand from all markets. I think we will pursue opportunities and when we're ready to make announcements we'll be happy to make those announcements. But we're really pleased. I think this idea of really curated outstanding destination experiences that can manage volume for Royal Caribbean is a direction that we're heading in.

And Harry just to kind to Michael's comments, you obviously enhancing the guest experience is kind of a key tenet for us. But also obviously, it's improving shareholder returns. And going into these investments obviously our goal here is to be investing in ways that are improving our return on invested capital and from that improving our shareholder returns. So these are pretty high bar projects. And as we've talked about Perfect Day is doing exceptionally well and exceeding, I think those lofty profiles for returns.

Thanks Jason. And my second question is, in talking with kind of potential non-investors if you will, the issue is always concern over not necessarily this year, but the next year. And so maybe it's pretty good idea to give folks a sense of even though you're booked at roughly the same level so far for next year, give folks a sense of historically at this point in time, how well booked is Royal Caribbean for the first quarter? How well booked is it for the second quarter because there is enough business on the books in the first and the second quarters. Do that sort of lay that fear?

Well I'm not going to start breaking down our book status by each quarter. But the commentary that I would say, the bullishness that we have about the booking environment certainly relates to Q1 and Q2 of next year on which we have a much better visibility into. And I think it's -- for those that are always concerned on the capacity side, I would just I would remind everybody that next year, our capacity is up only about 4% versus this year our capacity was 8%. And if you normalize for Silversea it was a little bit over 6%. And so we feel very good about the book position and we feel very good about what the next four quarter looks like, we feel very good about the next six quarters look like at this point.

I guess my -- maybe if I can just add -- ask a more general way of …

Sure.

… presenting that. If you look at the first half, is it reasonable to think -- I mean, go back five years or seven years, is it -- can you say to investors who are skeptical that you've got 40% of the business in the first half booked already or 50%? I mean, is it -- is there a chunky enough business amount of business on the books, because look we are doing really well? This is not a business that comes in last-minute as evidenced by the business that we have in the first half of 2020 already on the books.

Yeah. Well, I haven't memorized -- or I've lost the data points from five to seven years ago. But what I do know for a fact is that we are in a much stronger book position on a volume or as a percent of our future revenue than we were five to seven years ago. Each year we've talked about being booked ahead and at higher load factors and rates. And so as a book percentage, especially over the next 12 to 18 months we're in a very strong book position.

Harry, I also have to remind you and the others, as we've said a number of times on the call, we decide how much we want to be booked. And there are times when we say for various reasons it ought to be more or less. That's -- to some extent we can drive that number. And I think that the focus on it is it 0.5% more or less than last year? Is -- actually could lead you down the wrong path, because that is something we choose what it should be. The fact is that over the last number of years then -- by the way, I recall on one of these calls several years ago saying we're more booked now than we have been before and I don't think it will wane. I think next year you'll see it to go down, because I think next year we'll want it to be less. And in fact, I was wrong and our revenue management people decided that we could absorb the -- taking more in the beginning. So, I just want to give you a caution that being booked more isn't, per se automatically say the market is stronger, it's much -- it's oftentimes it's just our revenue management people think given the kinds of cruises we offer and the kind of booking patterns that we're seeing that that's a choice we make.

Okay. And I appreciate all that. And my -- the point I was trying to make is somewhat different which is that you do have a significant amount of the first half of next year booked and that should give investors kind of confidence. But I appreciate that.

That is accurate though, Harry. Your statement is accurate.

Okay. That’s all I was trying to get out. Thank you.

You got it.

And we do have time for one more question today. The question will come from the line of Sharon Zackfia with William Blair.

Hi. Good morning. I guess …

Good morning.

… I think Richard mentioned the R word. So, I'm sure as you all sit around and think about there is economic situations you do have plans for how you would address any kind of pervasive economic slowdown, understanding you're not seeing that in your business yet. I mean, how would you characterize the differences today? And how you would think about operating Royal Caribbean through some sort of slowdown versus 2008/2009 when you curtailed the ship orders and all of that? I mean, what's different today in how you would go-to-market?

Yeah. Sure. So, I'll start off by -- Sharon, by saying as it relates to the R word or recession obviously a lot of our plans and we have many scenarios that we would consider depending on what type of a situation that we were in. But, of course, I think we should all remind everybody and this was somewhat in our remarks, in Richard's remarks is we now operate a very kind of global and diverse business that sources guests obviously from different parts of the world, but also on different segments. We also have itineraries that go to a thousand different places. So what's available to our guest is much more diverse than -- and I would say it's unfortunate that we're still quite a value relative to land-based vacations that we of course we keep trying to close. We also have a much stronger balance sheet, much stronger liquidity position. And I think we would evaluate our sets of plans in case there was a change in the wins. But as you had pointed out and as we've talked about here on the call, we are not seeing any of those changes whether it's in our booking -- our daily bookings or whether it's the onboard trading activities as guests are spending with us each and every day.

Okay. Can I just have a follow-up? If you had a do-over, would you have grown throughout the last recession? Would you have canceled -- or not canceled, but curtailed ship orders as much as you did?

Yeah. There is definitely regret that we have in terms of our pullback on our growth. We would all be talking about higher earnings numbers today, better return profile today, if we hadn't slowed down our growth or our investment efforts in expanding our global footprint, investing in different projects that would have put us in an even stronger position than we are today.

Helpful. Thank you.

Great. Well, with that I'll ask the operator -- I'm sorry -- thank you for your assistance today in the call and we thank you all for participating and the interest you have in the company. We would be available all day for follow-ups that you might have -- actually if you have more specific -- you need to ask Carola if you have any follow-ups today. And we wish you all a very great day.

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.