Royal Caribbean Cruises Ltd

NYSE:RCL

Earnings Call Analysis

Company Nears 2019 Margins, Reduces Debt

The company has stated it is approaching the strong margin levels of 2019, which was a record year, while not yet achieving its longer-term 'Trifecta' goals. It ended the quarter with $3.3 billion in liquidity and is prioritizing balance sheet strength. Over $3.5 billion of debt will be repaid, lowering leverage to mid-4x by year-end and reducing interest expenses. This reduction in high cost debt and successful credit facility refinancing demonstrates growing credit agency and market confidence, contributing to future earnings growth.

Bright Future with Record Aspirations

The Royal Caribbean Group exudes a sense of optimism about its prospects, positioning itself to create lifetime vacation experiences and aiming to reach new financial records. This strong future is supported by a solid platform and strategic moves that have historically proven effective.

Financial Performance and Guidance

The company has reported an adjusted earnings per share of $3.85, surpassing the midpoint of their July guidance by 12%. Net cruise costs excluding fuel are anticipated to increase by 7% to 7.5% for the full year, with an expected adjusted earnings per share ranging from $6.68 to $6.63, inclusive of certain negative impacts. The fourth-quarter yields are projected to rise by about 16.2% to 16.7%, with a corresponding adjusted earnings per share forecasted to be between $1.05 to $1.10.

Fleet Expansion and Guest Experiences

Looking ahead to 2024, the group aims to boost its capacity by 8%, with new ships like Icon, Utopia, and Silver Ray joining the fleet, and 3 million guests are expected to experience their Perfect Day at CocoCay, a marked increase from 2.5 million this year. The company's Caribbean capacity will also see a significant increase of around 13%.

Liquidity, Leverage, and Credit Ratings

The group concluded the quarter with a liquidity position of $3.3 billion. With better than expected cash flows, the company has accelerated debt reduction, repaying $775 million during the quarter and aiming to pay off over $3.5 billion of debt by year-end, reducing leverage to mid-4x. This proactive financial management is recognized by rating agencies, with S&P and Moody's upgrading their credit ratings, signaling confidence in the company's balance sheet and financial strategies.

Demand Strength and Geographic Strategy

The increase in demand for the company's brands is a global phenomenon, not concentrated in one specific market or product. The majority of the 2024 capacity will be focused in North America, where the company expects continued consumer interest.

Strategic Focus on Value Proposition

The company's strategy emphasizes the value proposition of cruising as a vacation alternative to land-based destinations. With bookings extending into 2025 and 2026, the visibility of consumer demand and willingness to commit to future cruise vacations appears strong.

Yield Growth Outpacing Costs

The brand's strategy aims to consistently grow yields more than costs, with expectations of at least $9 per share moving forward. This approach, combined with disciplined cost management, is expected to maintain profitability and efficient capital allocation.

Market Dynamics and New Experiences

Demand surge is attributed to a combination of factors, including onboard spending, demand for new ships, and the appeal of destinations such as Perfect Day. The company has experienced significant yield improvements across all brands, with load factors returning to normal more quickly than anticipated. Demand continues to be robust as the European booking season commences.

Revenue Management and Yield Optimization

The Royal Caribbean Group prides itself on having advanced revenue management systems backed by AI, focusing on optimizing yields by balancing price and volume and adapting to consumer behavior. The forthcoming European season is looking favorable, and the team is adept at managing inventory to maximize profitability.

Ambitions for Higher Margins

The company's profit margins in 2019 will match that of this year, which was a record year. Nevertheless, they maintain their sights on surpassing these numbers as part of their 'Trifecta' goals, expressing confidence in their ability to grow the business, control costs, and allocate capital effectively, thereby driving margins higher.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Group Third Quarter 2023 and Business Update Earnings Call. [Operator Instructions] I would now like to introduce Michael McCarthy, Vice President of Investor Relations. Mr. McCarthy, the floor is yours.

[Michael McCarthy, executive]

Good morning, everyone, and thank you for joining us today for our third quarter 2023 earnings call. Joining me here in Miami are Jason Liberty, our Chief Executive Officer; Naftali Holtz, our Chief Financial Officer; and Michael Bayley, President and CEO of Royal Caribbean International.

Before we get started, I'd like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements 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 items can be found on our Investor Relations website and in our earnings release. Unless we state otherwise, all metrics are on a constant currency adjusted basis.

Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our third quarter and an update on our latest actions and on the current booking environment. We will then open the call for your questions. With that, I'm pleased to turn the call over to Jason.

[Jason Liberty, executive]

Thank you, Michael, and good morning, everyone. Before we begin today, I would like to first acknowledge the devastating events taking place in the Middle East. The horrific terrorist attacks on Israel over two weeks ago have no place in a civilized society. The scale and the barbarity of those attacks should shock us all and brings the situation in the Middle East to a very dangerous low.

We are heartbroken at the loss of so many innocent lives then and in the war that continues this day. Our thoughts are with all who have been impacted, including many members of our own team.

I would also like to recognize the incredible effort from our shoreside teams and crew, aboard Rhapsody of the Seas, who have been working tirelessly with the U.S. Department of State to help safely evacuate Americans from Israel. My heartfelt gratitude goes out to all involved.

As it relates to the impact of these events on our business, about 1.5% of our capacity in the fourth quarter had planned to visit Israel. Most of the impacted deployment was quickly adjusted, including a few sailings that were home porting in Haifa. The evacuation services of Rhapsody of the Seas will provided pro bono to the U.S. government and these costs are included in our financial forecasts. Combined with canceled and adjusted itineraries in the region for the remainder of the year, the impact amounts to about $0.05 in earnings per share.

Now moving on to the business. Our teams have done an outstanding job delivering on another strong quarter as we delivered a yield improvement of close to 17% and beat the midpoint of our EPS guidance by 12%. This beat is further solidifying 2023 as a banner year in positioning us extremely well for 2024 and beyond. I want to thank the entire Royal Caribbean Group team whose enthusiasm and dedication enables us to deliver the very best vacation experiences responsibly while generating strong financial results.

During the third quarter, all key itineraries exceeded our already elevated expectations as we delivered a record 2 million memorable vacations and exceptional guest satisfaction scores. As you can see on Slide 3, we had record yields for the quarter driven by new hardware, record pricing in the Caribbean and Europe as well as onboard revenue rates that were up about 30%.

While the performance of our Caribbean itineraries has been excellent throughout the year, we were particularly pleased with the double-digit yield growth achieved on our European itineraries in the third quarter. As we look to the full year, the strong performance in the third quarter and continued acceleration in the booking environment is positioning us well to deliver over 13% yield growth for the year and earnings per share that is twice our original guidance for the year.

The unprecedented acceleration in demand and pricing for our leading brands, combined with stronger demand for onboard experiences were certainly the main drivers of our outperformance. Adding to that, our strong focus on cost has been an important contributing factor to our elevated 2023 results. The healthy demand environment is very encouraging as we continue to build the business for 2024 and beyond.

A year ago, we announced a 3-year financial performance program, Trifecta. Our teams have rallied around to Trifecta targets, focusing on generating strong quality demand enhancing margins, building for the future and most of all, delivering the best vacations in the world.

As you can see from our results, we are well on our way to achieving Trifecta. Our proven formula for success remains unchanged. Moderate capacity growth, moderate yield growth, although I would not describe this year as moderate, and strong cost controls lead to enhanced margins, profitability and superior financial performance.

As I've said in the past, Trifecta creates the pathway back to what we internally describe as base camp. However, base camp is not our final destination, and our ambitions go well beyond it. As we think about 2024 for the Royal Caribbean Group from a consumer demand standpoint, we look to both macro trends and data points from the millions of daily customer interactions.

On a macro level, some of the economic indicators continue to provide some conflicting signals. However, when we look closer at these trends, and indicators related to our customers and their related behaviors and strong propensity to cruise, we see that many of these macro indicators are less relevant to our business.

We have more than 130,000 guests sailing on our ships every day and millions more who book or engage with us throughout our commercial platforms. What we continue to see across all markets, brands and products is an exceptionally engaged consumer that is looking to book their dream vacations with us. The positioning of our brands attract guests across broad demographics, psychographics and at a median household income of at least $125,000.

Our customers' sentiment is bolstered by strong labor markets, high wages, surplus savings, and elevated wealth levels. Even better for us is the fact that overall spend on experiences continue to grow and is currently up 25% compared to 2019, with twice the amount spent on goods.

Cruising remains an exceptional value proposition with strong demographics and secular tailwinds, allowing us to outperform the broader leisure travel industry. Our goal is to further narrow the gap to land-based vacations as we attract even more satisfied customers to our vacation ecosystem. I believe that is why when people are raising concerns in other industries like hotel, airline, real estate. Our commercial apparatus is firing on all cylinders with visits to our websites in the third quarter, doubling that of 2019.

Our travel partners are also delivering meaningfully more bookings than 2019 levels and even beating our elevated expectations. Our brand's global appeal and nimble sourcing model allows us to attract the highest yielding guests and partially mitigate the impact from the stronger dollar. Now I'll focus on 2024, which is shaping up to be another incredible year for the Royal Caribbean Group.

Our capacity is growing by 8% and our deployment across markets is relatively consistent with 2023 with slightly more Caribbean, slightly less Europe and a return to China for the first time in 4 years. Demand for 2024 has continued to accelerate with bookings consistently outpacing 2019 levels by a wide margin. This has resulted in a booked position that is ahead of all prior years at higher rates further positioning us for another year of strong yield and earnings growth.

While still early, we anticipate making significant progress towards our trifecta goals in 2024. And based on current fuel FX and interest rates, we anticipate earnings that will start with at least a $9 handle.

Our operating platform is larger and stronger than it has ever been with the best brands, the most innovative fleet and destinations and the best people. Each of our brand is the leader within their category. Royal Caribbean International dominates the contemporary market Celebrity Cruises has redefined the premium travel space and no one delivers ultra-luxury and expedition at sea like Silversea.

By combining their unique strengths, we have created an attractive vacation ecosystem in which the sum is greater than the parts. Essentially, we are turning our delivery of a vacation of a lifetime into a lifetime of vacations. We will continue to ensure that each brand has what it needs to continue doing what it does best, while leveraging our enhanced commercial capabilities to capture and keep customers in our ecosystem. From young families to empty nesters as they seek to return to us time and time again for the best vacation experiences. Our innovative new ships and onboard experiences allow us to continue to differentiate our offerings as well as deliver superior yields and margins.

In August, we welcomed Silver Nova, the first of the new evolution class for our Silversea brand. In the next few weeks, Celebrity Cruises will take delivery of Celebrity Ascent. And Royal Caribbean International will take delivery of the game-changing Icon of the Seas later this quarter with revenue sailings beginning at the end of January.

In 2024, we plan to take delivery of Utopia of the Seas for Royal Caribbean International and Silver Ray for Silversea. With each new ship, we raised the bar in the travel industry while enhancing what our guests already know and love.

Also debuting in January 2024, just in time for the arrival of Icon of the Seas is Hideaway Beach. Hideaway Beach is our newest adult-only ultimate beachfront paradise at Perfect Day at CocoCay. Pre-cruise sales for Hideaway Beach and premium offerings are exceeding our expectations. We are further enhancing our commerce capabilities to optimize our distribution channels, build even more customer loyalty and lower our acquisition costs.

We have seen a significant increase in new to brand and new-to-cruise customers this year. In fact, in the third quarter, approximately 2/3 of our guests were new to cruise or new to brand, all while also doubling the repeat booking rate, indicating strong loyalty and satisfaction. We've continued to remove friction and make it easier than ever for guests to prebook their activities with about 1/3 of those purchases now coming through the mobile app.

In the third quarter, about 70% of guests made pre-cruise purchases at much higher APDs than in prior years. In the third quarter, customers who purchased onboard experiences before their cruise spend 2.5x more than those who only bought once on board.

As we look into 2024, we have booked over double the amount of pre-cruise revenue compared to this year with more guests engaging before their cruise and at higher prices. We will continue to excel in the core and drive business excellence in order to increase yields and capture efficiencies across our platform.

I said it before, but it's worth mentioning again, our formula for success remains unchanged. We moderate capacity growth, moderate yield growth and strong cost controls will lead to enhanced margins, profitability and superior financial performance. Our sustainability ambitions help inform our strategic and financial decisions on a daily basis, ensuring that we always act responsibly while achieving our long-term profitability goals. We are making progress on our SEA the Future commitments to sustain the planet, energize communities and accelerate innovation.

We are also progressing towards a double-digit reduction in carbon intensity versus 2019 by 2025 and are exploring multiple options for low carbon-based solutions for our existing fleet while we design the fleet of the future with flexibility in mind.

This past quarter, we concluded a 12-week biofuel trial program in Europe, a first in the industry to cover multiple fuel types in multiple operating areas. The trials resulted in a 20% carbon reduction while also helping to better understand supply chain dynamics. The decision that we are making now will help position us to deliver a net zero ship by 2035 and achieve our climate strategy of Destination Net Zero.

Our business is performing exceptionally well, and we are making significant progress towards achieving Trifecta goals. The future of the Royal Caribbean Group is bright with our strong platform and proven strategies, we are creating a lifetime of vacation experiences for our customers while also delivering long-term shareholder value that allows us to reach new financial records. With that, I will turn it over to Naftali. Naf?

[Naftali Holtz, executive]

Thank you, Jason, and good morning, everyone. Let me start with third quarter results. Our teams delivered another strong performance with adjusted earnings per share of $3.85, 12% higher than the midpoint of our July guidance. We finished the third quarter with a load factor of 110% and with net yields, they were up almost 17% versus 2019, about 300 basis points higher than the midpoint of our July guidance. Overall, about 50% of the better-than-expected yield performance was driven by European itineraries with the remainder mainly driven by Caribbean and Alaska.

Rates were up approximately 18% in the third quarter compared to '19 and onboard APDs have been consistently higher even as load factors return to historical levels.

NCC, excluding fuel, increased 10.3% compared to the third quarter of 2019, 100 basis points lower than our July guidance. Lower operating costs as well as favorable timing contributed to the better-than-expected costs. Our teams continue to deliver strong top line growth while maintaining focus on costs to expand our margin.

We delivered an EBITDA margin of nearly 42% in the third quarter, on par with 2019 levels. Over 100% of the revenue outperformance during the quarter dropped to the broad bottom line, leading to higher adjusted EBITDA and earnings versus expectations.

We continue to see strong demand and pricing for both 2023 and 2024 sailings. This has resulted in higher-than-expected load factors and record yields in the third quarter, along with a record booked position on a forward-looking basis. Now that we are in the fourth quarter, many of our ships have transitioned from their summer to their winter itineraries.

In the fourth quarter, about 55% of our capacity will be in the Caribbean, 11% in Europe, and about 13% in the Asia Pacific region. The remaining capacity is spread across a number of other itineraries, including repositionings, South America and Expedition Cruises.

Now let's turn to Slide 6 to talk about our guidance for the full year 2023. We now expect net yield growth of 12.9% to 13.4% for the full year, a 140 basis point increase from the midpoint of our prior guidance. Net cruise costs, excluding fuel, are expected to be up 7% to 7.5% for the full year as compared to '19.

Our cost outlook has not changed from our July guidance. We do, however, have slightly fewer APCDs due to the canceled sailings that included Israel impacting NCCx by approximately 30 basis points. Our cost outlook reflects the continued benefit from all the actions we have taken over the last several years to support enhanced margins.

We continue to expect record adjusted EBITDA per APCD for the year and an EBITDA margin that is back to our previous record in 2019. So in summary, we expect adjusted earnings per share of $6.58 to $6.63 and it includes approximately $0.21 negative impact from FX and fuel rates as well as sailings that included Israel.

Now turning to Slide 7. I will discuss our fourth quarter guidance. Fourth quarter yields are expected to be up approximately 16.2% to 16.7%, driven by our incredible new hardware and a significant increase in rates, both ticket and chipboard for like-for-like ships. This range also includes about 200 basis points negative impact from the elimination of the reporting lag related to Silversea.

NCC, excluding fuel, is expected to be up 3.9% to 4.4% and including 60 basis points impact from sailings that included Israel related to reduced APCDs. As for adjusted earnings per share, we expect a range of $1.05 to $1.10 for the fourth quarter. This also includes $0.18 negative impact from FX and fuel rates as well as sailings that included Israel. Now I will share insights for 2024, which while still early, is shaping up to be another exciting year for the company.

2024 capacity is expected to be up 8% as we introduce Icon, Utopia and Silver Ray and benefit from a full year of Ascent and Silver Nova. Capacity growth is most pronounced in the first and the third quarters due to the timing of new ship deliveries and timing of dry docks. Our Caribbean capacity is growing about 13% in 2024 and will represent about 55% of overall deployment.

We are adding a full year of Icon of the Seas and about 7 months of short Caribbean sailings on Utopia. We also expect to increase the number of guests experiencing Perfect Day at CocoCay with the addition of Hideaway Beach. As a result, we expect a total of 3 million guests will experience Perfect Day in 2024, up from 2.5 million this year.

European itineraries will account for 15% of our capacity in 2024. Alaska will account for about 6% and Asia Pacific itineraries will account for 10%, marking our return to China with Spectrum of the Seas in Q2 of next year. Capacity for itineraries to visit Israel account for less than 1.5% in 2024. As Jason mentioned, both our booked load factors and APDs are higher than all previous years. This is despite having more short Caribbean itineraries in China, which typically book closer in.

There are a few factors that are expected to influence the cadence of our yield growth throughout 2024. In addition to the typical variability driven by the timing of new ship deliveries, the return to normal load factors in the first half of the year will bolster our year-over-year yield growth in comparison to the back half. The first quarter will also benefit from the annualization of pricing power that accelerated during wave this year.

Now moving to costs. Our focus remains to control costs as we seek to grow our revenue and margins. We also continue to benefit from all the actions that we have taken in the last few years to reshape our cost structure. In 2024, we expect to have double the dry dock days compared to this year because of timing of dry docks throughout the pandemic.

In addition, we are launching Hideaway Beach at Perfect Day at CocoCay that while it is accretive to margin, has no APCDs associated with it, further impacting cost comparisons. We expect the increased dry dock days and the opening of Hideaway Beach to negatively impact NCCx by approximately 300 basis points next year.

Outside of that, we expect cost to increase very low single digits, consistent with our proven formula. We will provide more details on the financial impact of these items during our fourth quarter earnings call. The combination of our strong book position and an accelerating demand environment is certainly pointing to another year of solid yield growth and a step change in earnings growth as we accelerate towards our Trifecta goals.

Turning to our balance sheet. We ended the quarter with $3.3 billion in liquidity. Strengthening the balance sheet continues to be a top priority. Better-than-expected cash flow generation and our disciplined capital allocation has allowed us to accelerate reduction in leverage and debt levels with the goal of achieving investment-grade balance sheet metrics.

Utilizing cash flow from operations, we repaid $775 million of debt during the quarter, including $500 million of our 11.5% senior secured notes due June 2025.

In October, we refinanced our $3 billion revolving credit facility and $500 million term loan into a new $3.5 billion multiyear revolving credit facility. The successful execution of the new credit facility demonstrates the continued support and confidence in the company's financial position and credit improvement.

Also in October, we issued a redemption notice for the remaining $500 million of our 11.5% secured notes due June 2025. This redemption will be funded with existing liquidity. With that, we expect to pay off over $3.5 billion of debt and reduce leverage to mid 4x by the end of the year. Debt paydown actions reduced interest expense by close to $100 million in 2023 compared to our initial expectations and contribute to further increase in earnings going forward as we chip away at our high-cost debt.

Our commitment to strengthening the balance sheet is also being recognized by the credit agencies. In the third quarter, S&P upgraded our credit rating by 2 notches to BB- and Moody's upgraded our credit rating by 1 notch to B1 with a positive outlook. As the business accelerates and generates more cash flow, we'll continue to proactively and methodically pay down debt and pursue opportunistic refinancings in support of our Trifecta goals.

In closing, we remain committed and focused on executing on our strategy and delivering our mission while achieving our Trifecta goals. With that, I will ask our operator to open the call for a question-and-answer session.

[Operator]

[Operator Instructions] Our first question will come from the line of Steven Wieczynski with Stifel.

[Steven Wieczynski, analyst]

So Jason, you essentially just provided us with some kind of guidance for 2024, which is much appreciated. And I would also say probably much better, I think, than anybody would have expected given the higher fuel costs and kind of those fears out there around your cost structure.

So as we think about that spread between the yields and costs, I mean, normally, we be expecting that spread to be whatever, 200, 300, maybe 400 basis points. But you guys are on pace this year to see your yields outpace your cost by, let's call it, close to 900 basis points. So I guess what I'm getting at here is we think about next year, based on our math to get to that EPS number north of $9, you probably need to see that spread be pretty wide again, given the fact that Naf just talked about cost being up let's call it, 300 to 400 basis points.

So saying all that another way is that I'm guessing your yield expectations for next year must be pretty high at this point. So I hope that all makes sense.

[Jason Liberty, executive]

So obviously, we are feeling very good about the business, the demand for our brands, the demand for our ships and destinations, and we're seeing that as I noted in my remarks, not only in terms of the daily interactions with our guests, but also just the high level of booking activity and the strength we're seeing in bookings where we have been booking at an accelerated pace really since early this year.

And of course, as we've been booking, not just for 2023, but we've also been booking for 2024. And when we look at our book of business, we see a lot of strength in volume. And of course, with strength in volume allows us to continue to improve on the rate side. And you combine all that with incredible hardware coming into place next year, especially Icon of the Seas as well as more volume on to places like Perfect day because of Hideaway, we feel very good about our yield projections for next year.

Now it's still early so we're not in a place where we're going to guide, but as our general internal ambition is always to make sure that our yields are meaningfully outpacing our costs. And of course, most of our costs, as Naf pointed out, growth next year on a per unit basis is really just driven by additional dry dock days and of course, Hideaway, which delivers incredible margins which will improve our yield profile but also has cost in no APCDs.

So all in all, we feel very good. And I think it's important to just stress that my comment on the earnings side was that we expected to at least start with a $9. And not only that, we also expect to continue to improve on an ROIC basis on the overall organization.

[Steven Wieczynski, analyst]

And then again, as we kind of think about next year. Clearly, there's a lot of disruption going on with Israel right now. And I think Naf talked about it's less than -- or you talked about that's less than 1.5% of capacity for next year. But as we think about the rest of the Med, just maybe how you guys are thinking about customer demand for the rest of Europe next year. And obviously, it's probably a little bit too early to really understand that. But do you expect to see some kind of pullback whether it's Eastern Med, Western Med or a combination of both? Or have you pretty much kind of moved your ships and your capacity around enough where you don't think there really will be much pushback from your customer base?

[Jason Liberty, executive]

Well, next year, we'll have a little bit less capacity in Europe. About half of our guests for European sailings come from the U.S. and the other half come from around the world. We commented on the 1.5%, and we'll continue to look at that. I think we need to remember, we have a pretty nimble sourcing platform if we're worried about that risk.

I do think it's a little bit too early in all of this to have any kind of outlook on what we're seeing or expectations for Europe next year. But our commentary around the strength and the acceleration in demand is not just about one market, it's really about all of our markets. It's not just about one product, it's really about all of our products.

And obviously, if these horrific situation continues to occur, that could potentially weigh on a consumer psyche, but that's not something that we're seeing at this point in time. And historically, when we see that, we typically just see our guests shift in terms of where they want to go. And of course, the vast majority of our capacity in 2024 is going to be in North America.

[Steven Wieczynski, analyst]

And sorry, Jason, one more. Just to be 100% clear, your cost guidance for the remainder of this year is unchanged from an APCD -- I mean, essentially all that's happening here is just the APCDs are dropping?

[Jason Liberty, executive]

That's correct.

[Operator]

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

[Robin Farley, analyst]

My two questions are actually on the same two topics. One is just circling back to changes with -- I know you mentioned it's only that 1.5% that touches on. I think there are some out there where it's a tiny, but it's still obviously just single digit for all the major companies. But are you seeing any ships where -- not necessarily your ships, but other ships moving into your markets? I know if it's just a port of [ call ] getting dropped, you wouldn't have to redo an itinerary. But if there are ships moving in where you have existing supply that you're seeing any kind of impact? Or would you say that you're still continuing to see demand for Europe next year at the same level, kind of regardless of what's going on with other shipments?

[Jason Liberty, executive]

I would probably just start off, Robin, with how you started that off, which is at least from what we can tell, this is pretty low single digit, personal of capacity of not just us, but also our competitors have a little bit more than we do. And I think a shift of that magnitude is pretty immaterial. So if a ship is moving further maybe into the Eastern Med in terms of heading West or it's heading into the Western Mediterranean or some change in -- modified in the deployment, it's a pretty immaterial shift for the broader industry.

And I think for us, I mean, just our commentary about first to cruise, first to brand, the power we're getting out of our ecosystem and our loyalty base that's not -- we are actually much, much more focused on how do we close the gap to land-based vacation, then we think that things like small ships like this would impact our business.

[Robin Farley, analyst]

And then just on the expense piece for next year. It was very helpful. Thank you for sort of breaking out say, I don't know if there's any further breakout of the dry dock and what that piece is of the 300 basis points just because in some ways, the timing of that is sort of you have a nonrecurring kind of increase. So I don't know if there's any more breakdown on that 300 bps.

And then if there's any way to sort of help quantify, I know you're not giving full year yield guidance. But to whatever degree there is some bps there of expense from Hideaway. What you would expect the offsetting, I would think you would clearly be more than offsetting that. So just to sort of help investors think about what's really ongoing here, which is, I guess, probably closer to the 100 bps range.

[Naftali Holtz, executive]

Hi Robin, it's Naftali. So just on the cost, so as I mentioned, roughly 300 basis points related to dry docks and Hideaway, the vast majority. So think about like 80% of it is the dry docks and the remainder is really about Hideaway Beach. It's a nice way to ask it again, but I'll just say what Jason said, we're very excited about next year. Our formula, we always strive to drive and grow yields more than cost. And definitely, that's what we're intending to do next year.

[Michael Bayley, executive]

I have to jump in for a second. It's Michael. Just to update you on Hideaway because I was there last weekend, and I have to tell you, we are incredibly impressed it's a spectacular new destination for Royal Caribbean. And we opened for sale for this one product about 3 weeks ago, and it's going gangbusters. I mean, we're delighted with the product. It's going to be really a game changer and the demand has been exceptional. We've already started pushing up the pricing for that experience.

And of course, all of that comes online with Icon of the Seas, which is by far the best-selling product we've ever launched in the history of our business, and it continues to perform at an exceptionally high level.

So the combo of Icon with Hideaway is really for us exceptionally exciting. And then, of course, we've got Utopia going straight into the shorts market, to Perfect Day in the summer. And that, again, is already selling at record rates, and record volume. So we're kind of pretty switched on about what's happening in the next year in '24.

[Operator]

Your next question will come from the line of Brandt Montour with Barclays.

[Brandt Montour, analyst]

Congratulations on a strong report. I think I'll take a shot at the second part of the 2024 cost comments from you Naf. I think when we think about very low single digits, that's pretty cut and dry, and we all know your history of what you were doing pre-COVID on the cost line.

When we think about what is in there, though, right, there's China, and then there's Icon. I would think Icon is -- push it down, right? Because of all the APCDs that come along with Icon. But China, I would expect to have a rollout of more sort of cost base over there? How should we sort of think about those two factors when we try and model very low single digits?

[Naftali Holtz, executive]

Yes. I just think there's other things, too, right? First of all, Icon actually is -- there's a lot of venues on it. So yes, there's a lot of APCDs, but we also offer a lot of experiences on board. And you're right, China is a market that we're coming back. And obviously, we're not there today, we're just ramping up. But there's a lot of things that are going into it. And the commentary is we manage our cost across the board and we are very comfortable with the very low single digits as we go into next year.

[Jason Liberty, executive]

And Brandt, it's Jason. I just want to add in. Obviously, our capacity is growing at 8% next year. And so that's certainly helping making sure we're getting more and more efficient, which is a critical objective of the organization.

We're also beginning very much to benefit from new disruptive technology and employing them in different parts of our business that can lower service calls and improve process efficiencies. And that's kind of an overall objective is how do we get better each and every year. And that's why we believe that excluding the dry docks and Hideaway, which are structural, we were able to continue to produce low single-digit costs -- sorry, very low single digits, yes, Naf just reminded me.

[Brandt Montour, analyst]

And then just as a follow-up, the $9 starting point for the EPS figure tells us a lot, obviously. Just to get a sense of getting your guys' heads when you are in your budget process and you're thinking about that figure. Do you think you're starting at $9 in any current economic environment? Or do you think you're starting at $9 in the current economic environment?

[Jason Liberty, executive]

So I think one of the things I would say, Brandt, is that we're saying it's going to start with -- that it will at least start with the $9. So I wouldn't necessarily peg it to $9, it's just that we're seeing at a $9 handle, which I think is just an important thing.

And obviously, it's impossible to predict what the environment will look like 6 months from now or a year from now or 5 years from now. But we have a pretty nimble platform. There is a significant value proposition or value differential to land-based vacation. Pre-COVID, we were, call it, 10% or 15%. Today, we're somewhere around 35%, 40%. So there's a lot of value for the consumer to get if there are changes the operating theaters that we're in.

I would also keep in mind that we're pretty well booked, and we will cross this year in a very strong booked position. And so we will have a lot of that already on our books, the consumer has already made those decisions. But I will say, which I think is an important thing when we look at the consumer, is as we're here on the call, we have thousands of people making bookings for experiences that are at least 6 to 8 months from today. They're making bookings into 2025, they're even making bookings into 2026. So our visibility in terms of how the consumer is looking at things going forward, at least on a vacation experience on our incredible brands, is pretty good based off of where the consumer is standing today.

[Operator]

Your next question comes from the line of Vince Ciepiel with Cleveland Research.

[Vince Ciepiel, analyst]

Big picture question. Curious your perspective on the supply/demand kind of dynamic in this industry over the next few years, what you're seeing in the order book, and then on the demand side, it seems like you and some peers as well are really seeing strong performance out of the new to cruise. So what that could mean for the trajectory of demand growth in years ahead as well.

[Jason Liberty, executive]

So on the order book side, at least what we can see kind of five years out here is the industry is going to grow on a gross basis around 4%, it could potentially be a little bit lighter that if there's going to be some potential more exits over time. That's not a number that can really be changed at this point in time. And we really haven't seen a lot of new orders come on the books as of late. So I think we have a pretty good view on the supply side.

I think when we think about on the demand side, I don't think it's just new to cruise. I mean, new to cruise has been very strong us being indexed more into the short, brings in a lot more new to cruise. But I also think the point about new to brand, I think, has really significantly grown coming here out of COVID, which we think is another strength. And then I think our point about how focused we are about getting more reps out of our guests through loyalty, through having a recognition of our kind of family of brands, we think is also really strong.

And the last point I'll make is, I know we really focus these conversations on the industry, but I really think we need more and more focus the conversation on land -- or just overall vacation experiences. The cruise industry is a flavor of overall vacation and travel and leisure, 1% shift towards cruise is worth, I think it's like 10 or 11 Oasis-class ships.

So we're focused on how do we continue to be more competitive with land. And we're seeing that with the younger generations who really look at us very much similar to how they look to go to Orlando or Vegas or skiing, et cetera. And if we can close that gap, we can close half of that gap and get back to where we were, that's also worth probably about 10 Oasis-class ships. So we're heavily focused on trying to do that.

[Vince Ciepiel, analyst]

Great. And then just digging a little bit deeper into this year on the yield side, I think you started around to 2% to 4% or something like that and now you're looking for yield up about 13%. So kind of two parts. What's been the biggest positive surprise that has led to that? And then how would you slice up that 13-ish percent growth in terms of new hardware contribution, CocoCay and core price?

[Jason Liberty, executive]

What you're really seeing across the board, right, onboard spend is meaningfully higher than we expected. Demand for our new ships is certainly there. But of course, that would have been in our original guidance for the year, our expectations on that. And then like-for-like is up significantly.

So it's not one thing, I think there's been really starting in the wave of this year. Demand for our brands has been at an exceptional level. Demand for ships going to places like Perfect Day have been at exceptional levels and has put us in a position to be able to continue to increase rate bringing us closer to that value gap that's out there versus land-based vacation. Now I think keep in mind, like crews kind of lagged everybody else coming back from COVID. And so I think we're also benefiting from that.

[Operator]

Your next question will come from the line of Dan Politzer with Wells Fargo.

[Daniel Politzer, analyst]

I was wondering if you could talk maybe a little bit about pricing trends and maybe the difference between contemporary and luxury brands and what you're seeing? And similarly, as we think about Europe and next year, I know it's only 15% of your capacity but you're coming off a pretty strong year. Obviously, that skews a little bit more luxury. And then as we think about consumer willingness to book a European or Mediterranean cruise, any kind of thoughts as we should think about 2024 as it relates to those kind of two subsegments?

[Jason Liberty, executive]

Sure. Well, at least in terms of what we've been experiencing is there's been strong demand on a pricing standpoint whether it's contemporary, whether it's in the premium space, luxury or expedition space. I think there's been a little, I would say, more elevated demand that we have seen, especially for Royal and ships, especially going to Perfect Day has been at an elevated level.

But the yield improvement that you've seen through the course of this year, which is significant, has really been across all of our brands. And I'd also add that our load factor expectations also rose to the course of this year. We returned to normal load factors much earlier than we had anticipated for that.

You are right that on the European side, it does skew a little bit more on the premium and luxury side of things. But I think we think overall, at least what we have seen demand pattern-wise, that continues to be very strong. And we typically as we start to get towards the end of this year and early January is when we start to really see the elevation in European bookings as it gets into that 6- to 8-month booking window, which is what we have historically seen.

[Naftali Holtz, executive]

And I'll just add something that also across the markets, what we've seen this year is pretty strong demand. Caribbean, as we said, has been strong all along, but we were very, very pleased with the summer season in Europe, right, with double-digit yield growth.

[Daniel Politzer, analyst]

Got it. And then pivoting to China a bit. I know you don't have full capacity having a return that yet there relative to 2019. But as you think about the Baltic capacity coming off Eastern Med, is there a willingness or maybe incentive at this point to shift more of your capacity to China? And maybe can you just give an update on demand trends there?

[Michael Bayley, executive]

Dan, it's Michael. We have a China product Spectrum selling out of Shanghai in April of next year. And so far, the bookings, both volume and rate. Very good, much better than our '19 performance, which, of course, was a record for the brand. So we're feeling quite optimistic about the China product.

I'm not sure there's any need to shift any capacity at this point from the Baltic or from the Eastern Med. So I think we're in a good position with our China product. We'll be one of the first Western brands operating in China. And the indications are very positive. So we'll see how it goes for next year.

[Operator]

Your next question will come from the line of Matthew Boss with JPMorgan.

[Matthew Boss, analyst]

So Jason, maybe on the accelerating demand, the book position and the pricing relative to prior years as you cited as we look to '24. I guess, maybe larger picture, how are you balancing pricing power relative to the multiyear market share opportunity relative to land-based alternatives? And then just in the strength in bookings that you cited, have you seen any near-term moderation to note related to the recent overseas conflicts?

[Jason Liberty, executive]

Yes, sure. So we feel -- of course, they're always getting better that we have the best kind of yield management systems and the best revenue managers in the world. And so they are very much looking at volume versus price. And we have significantly automated that using AI and so forth to be able to make sure that we have an understanding on the elasticity and the behaviors of the consumer minute by minute. And so what we do try to do is obviously continue to increase price and then build volumes.

And historically, there's been questions about on the book position. You plan to be at the same level when you turn the year as previous years. You want to be higher, you want to be lower. The answer really is, it all depends on our ability to continue to drive pricing and then optimizing our yields. And so optimizing our yields is key. And of course, we're -- and these yield management tools, we're also very focused on what we're seeing in behavior on the [ WAN-basefication ] side.

Going on the European side, I think, again, we're just coming out of the Europe season, and we're beginning to book for next year, trends continue to be very strong. But it is early in the European season for us to start calling out that there's no impact from Israel. It's not something that we're seeing today, and of course, we don't know how long this war, conflict is going to go on for, which could very much inform where the consumer wants to go next year.

I think what's important is what we're getting is a very sticky consumer who wants to be sailing with us, staying within our ecosystem. And so sometimes it's not a question of where they're going to go. It could be a question of where they're going to go, but they're going to go somewhere with us, and that's what we're focused on making sure they're doing.

[Matthew Boss, analyst]

Great. And then maybe just a follow-up. Naftali, on the EBITDA margin profile as we think multiyear, and just looking back to prior peak levels, how would you size up where we stand today relative to the Trifecta plan, which I think calls for low 30s? Just maybe as we think about the puts and takes as you see it today.

[Naftali Holtz, executive]

Yes. So I think I said it in my prepared remarks, but our goal, first of all, is to obviously increase the profitability as we continue to grow the business. But this year, we will be back basically to our margin that we had in 2019, which was a record year. But if you kind of do the math, we're not yet in our Trifecta goal. And by the way, Trifecta for us is just base camp, right? So we -- our ambitions are beyond that. So that just leads you to -- and our ambitions are to continue to grow the margin much more than we had in 2019, and that will go through with our proven formula, right? We continue to grow the business, to capacity growth, moderate year growth, and really strong control cost controls and disciplined capital allocation, we think will deliver more margin.

[Operator]

With that, I'll turn the conference back over to Naftali Holtz, CFO, for closing remarks.

[Naftali Holtz, executive]

Thank you. We thank you all for your participation and interest in the company. Michael will be available for any follow-up. I wish you all a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.