Royal Caribbean Cruises Ltd

NYSE:RCL

Earnings Call Analysis

Royal Caribbean Group's Strong Q3 Performance and Optimistic 2024 Outlook

In the third quarter, Royal Caribbean Group delivered exceptional results, with adjusted earnings per share reaching $5.20, surpassing guidance by $0.25. Driven by a net yield growth of 7.9% and better revenue management, the company raised its 2024 net yield growth forecast to 10.8%-11.3%. Additionally, it now anticipates earnings per share between $11.57 and $11.62. A net cruise cost increase of 6.2%-6.7% is expected, mainly due to higher noncash stock-based compensation. The outlook for 2025 remains strong, with improved booking patterns and pricing projected to yield a starting earnings figure of $14.

Strong Financial Performance

In the third quarter of 2024, the Royal Caribbean Group reported exceptional results, achieving adjusted earnings per share (EPS) of $5.20. This performance surpassed expectations by $0.25 per share, driven by robust revenue across brands, improved balance sheet management, and a favorable timing of expenses totaling approximately $0.10 per share. The company's net yield growth for the quarter was 7.9%, primarily fueled by stronger Average Passenger Days (APDs) and an expanded fleet.

Promising Guidance for Yield Growth

Looking forward, Royal Caribbean raised its guidance for full-year yield growth to between 10.8% and 11.3% for 2024. This adjustment reflects not only the stronger-than-expected performance in Q3 but also an optimistic outlook for the fourth quarter, despite the anticipated impact from Hurricane Milton. The company projects net yields in Q4 to rise by 5.1% to 5.6%, alongside an adjusted EPS forecast of $11.57 to $11.62, indicating a robust margin expansion of over 300 basis points year-over-year.

Sustaining Growth Amid Costs

Royal Caribbean anticipates net cruise costs, excluding fuel, to increase by 6.2% to 6.7% for the year, marking a revision that reflects a 40 basis point rise due to higher non-cash compensation expenses related to stock price appreciation. Meanwhile, the fuel expense is projected at $1.16 billion with the company hedged at below-market rates for 61% of this exposure. The firm is continuously focused on managing its costs effectively while striving for margin expansion.

Strategic Expansion and Innovations

In addition to financial metrics, Royal Caribbean outlined several strategic expansions. It plans to introduce two new cruise ships in 2025, increasing its capacity by 5%, with a continued emphasis on the Caribbean, which will account for 57% of its deployment. The company is also enhancing customer experiences through new private destinations like the Perfect Day Mexico, set to open in 2027, expected to attract further guests and drive higher yields.

Positive Consumer Trends and Booking Outlook

Consumer sentiment remains favorable, with millennial families and active cruisers showing significant interest in cruise vacations. Royal Caribbean's 2025 bookings are outpacing 2024 levels, supporting expectations of sustained demand. The cruise market is perceived as an attractive value compared to land-based vacations, evidenced by ongoing consumer willingness to invest in leisure travel. The company expects earnings in 2025 to begin with a '14 handle', indicating strong continued growth.

Commitment to Financial Health

Royal Caribbean's financial strength remains a priority. With $3.9 billion in liquidity and completed refinancing for $3.5 billion of debt that lowered rates by 300 basis points, the company has returned to a fully unsecured capital structure. This financial resilience supports growth ambitions and maintains a focus on shareholder value through competitive dividends and share repurchases.

Resilience Against External Challenges

Despite challenges posed by environmental factors like hurricanes, Royal Caribbean's business has shown resilience, with continued strong demand and booking rates remaining robust. Management highlighted that while there may be some temporary softness during such events, the overall consumer desire for travel remains high, contributing to ongoing revenue growth and market share capture.

Conclusion and Future Expectations

The Royal Caribbean Group has demonstrated a solid business model with promising financial returns, strategic expansions, and strong consumer demand. Investors can view the increased yield guidance and robust bookings for 2025 as positive indicators for growth. The company's commitment to innovation, customer experience, and strong operational discipline positions it favorably within the competitive cruise market. Overall, the outlook for Royal Caribbean in the coming years appears strong.

Earnings Call Transcript 2024-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 2024 Earnings Call. [Operator Instructions]

I would now like to introduce Blake Vanier, Vice President of Investor Relations. Mr. Vanier, the floor is yours.

[Blake Vanier, executive]

Good morning, everyone, and thank you for joining us today for our third quarter 2024 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 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, the current booking environment and our updated outlook for 2024. 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, Blake, and good morning, everyone. I'm thrilled to discuss our exceptional third quarter results, updated outlook and all the exciting things happening at the Royal Caribbean Group. This has been an incredible year for us, and the third quarter was no exception, with momentum continuing to build.

As you saw in the press release, we increased our full year yield and earnings guidance, driven by better-than-expected results for the third quarter and an improved outlook for the fourth quarter. Our full year yield is now expected to be up by more than 11% and earnings by more than 70%. In addition, we are on track to deliver more than $3.3 billion of cash flow this year, and have reached a key financial milestone while returning to a fully unsecured capital structure that will support our growth ambitions and expanding capital allocation.

During the quarter, we also announced 2 exciting expansions of our private destinations portfolio, with the incredible Perfect Day Mexico opening in 2027 and Silversea's new hotel in Puerto Williams, Chile, opening in the winter for the '25 '26 Antarctica season.

I want to thank the entire Royal Caribbean Group team for their passion, dedication and commitment that enables us to deliver the best vacation experiences responsibly and to drive exceptional financial results. These strong financial results and the achievement of our Trifecta financial goals, 18 months ahead of schedule, are truly just the beginning for us.

With our industry-leading global brands, the most innovative fleet and private destinations and the best people, we remain focused on winning a greater share of the $1.9 trillion vacation market. Our plan to capitalize on this opportunity is grounded in our proven formula for success, moderate capacity growth, moderate yield growth and strong cost control. We are thrilled to share more details during the upcoming Investor Day in the first quarter of next year.

Before I get into the details of our performance this quarter, I want to acknowledge the storms that impacted our local communities. We are incredibly thankful that our South Florida employees were largely unaffected. But true to the Royal Caribbean Group Spirit, we mobilized relief efforts for those in need. Our thoughts continue to be with those who have been affected.

Now moving on to discuss our results and outlook. Third quarter results exceeded our expectations due to strong close-in demand at higher prices on all of our key itineraries, coupled with continued strength in onboard revenue. As a result, net yields were up 7.9% year-over-year, which was 110 basis points above our guidance.

Better revenue, lower cost due to timing and multiple balance sheet actions resulted in adjusted earnings per share that was higher than our guidance. Naftali will elaborate more about third quarter details and results in a few minutes.

We are increasing full year yield growth expectations to 10.8% to 11.3%, as strong demand for our experiences across itineraries is translating into higher load factors, stronger pricing and continued growth in onboard revenue.

Trends remain strong for the balance of the year, and despite the impact of Hurricane Milton, we now expect net yield growth of 5.1% to 5.6% for the fourth quarter, on top of an increase of close to 18% last year. We also expect strong margin and earnings growth, with adjusted earnings per share expected at $11.57 to $11.62 and EBITDA margins that is more than 300 basis points higher than last year.

We are very pleased with how demand is shaping up for 2025, with bookings outpacing 2024 levels during the third quarter and into October. Our book load factors are in line with prior years at nicely higher rates, allowing us to further optimize pricing and yield growth as we build the book of business for 2025.

Our nimble sourcing model and AI-enabled yield management tools, coupled with our brand's global and multigenerational appeal, allow us to successfully capture quality demand across segments sourced from new and younger consumer bases and attract the highest yielding guests.

The last 2 years saw unprecedented yield growth, and although that created a high bar for comparables, our proven formula for success of moderate capacity growth, moderate yield growth and strong cost control will continue to drive top line growth, margin expansion and substantial cash flow. While still very early in the planning process, we anticipate earnings in 2025 to start with a $14 handle.

We continue to see a very positive sentiment from our customer in a macro environment that favors growing demand for experiences and vacations. American households are wealthier than ever, with continued wage growth and low unemployment driving strong consumer spending. Spend on leisure has grown a lot faster than most other spend categories over the past 12 months, with spend on travel increasing at a faster pace than other leisure categories. Our research suggests that this trend will continue over the next 12 months, with leisure travel spending growing by more than any other leisure category.

Millennials, families and active cruisers are all over-indexing on both leisure travel and specifically cruise travel. Cruise remains an attractive value proposition and cruise purchase intent remains high. Furthermore, the majority of consumers are now actively planning their next vacation, but haven't booked it yet, further supporting demand for crews.

With our exceptional and leading portfolio of brands, innovative and differentiated chips, exciting and exclusive destination experiences and leading commercial and AI-driven capabilities, we are excited to welcome those customers onboard our ships and deliver the best vacation experiences responsibly.

Our addressable market is growing, and we are attracting more new customers into our vacation ecosystem, particularly younger demographics. In fact, the majority of our guests this year are either new to cruise or new to brand, while at the same time, our loyalty guests are up 20% compared to last year.

Once booked, guests are quickly engaged with us and buying onboard experiences at higher APDs, translating into higher satisfaction rates and higher onboard spend. Notably, more than 70% purchase onboard activities before they sail, and they spend more than double compared to those who only make purchases on board. Half of our onboard revenue in the third quarter was purchased through our AI-driven pre-cruise channels.

We deliver vacation experiences that meet the demands of evolving consumer profiles and preferences. A key differentiator for us has always been our hardware, where we are constantly innovating.

This quarter, we launched Utopia of the Seas, a ship that has quickly become a game changer for a short Caribbean product, which serves as an important entry point for new-to-cruise and new to brand. It also skews towards millennials and younger guests. The demand for Utopia has been incredible and has well exceeded our expectations for both ticket prices and onboard revenue.

Following the incredible market response to Icon of the Seas and the anticipation of Star of the Seas, we announced our agreement to build a fourth icon class ship, which will join the Royal Caribbean fleet in 2027. Since its debut, Icon has revolutionized vacation experiences and continue to exceed our expectations in both guest satisfaction and financial performance.

We also continue to build on our exciting collection of private destination experiences. Earlier this month, we announced 2 incredible land-based initiatives that will be truly game changing for our guests. We are incredibly excited for our recent announcement of Perfect Day Mexico, which will combine the adrenaline pumping thrills and ways to chill that Royal Caribbean is known for, with the vibrancy and beauty of Mexico.

Perfect Day in Mexico is strategically located to deliver exceptional vacation experiences in both the Eastern and Western Caribbean, and supports our ambition that every guest on the Royal Caribbean brand will have a perfect day on their Caribbean itinerary. It also allows us to further grow the large and growing Gulf Coast area, including the Texas market, which is larger than Florida, and has a similar cruise consideration, but only half of [indiscernible].

Upon its completion in 2027, Perfect Day Mexico will join our incredible collection of private destinations that include Perfect Day at CocoCay and [indiscernible], Royal Beach Club Paradise Island opening in 2025 and Royal Beach Club and [indiscernible] opening in 2026.

Silversea is developing the world's southernmost hotel in Puerto Williams, Chile, that upon completion in late 2025, will create a unique, seamless journey for guest embarking on Silversea's innovative Antarctica fly cruise program, the most direct route to the white continent, allowing guests to enjoy Silversea's personalized service and warm hospitality throughout their voyage.

We remain committed to our See the Future vision, sustaining the planet energizing communities and accelerating innovation. Last quarter, we achieved our Trifecta financial goals, and we now expect to also achieve a double-digit reduction in carbon intensity compared to 2019, one year ahead of our original expectation. This further solidifies our commitment and focus on advancing the sustainability of our business.

As part of our journey to accelerate innovation to decarbonize our business, we continue to diversify our fuel sources. Our newest ship, Utopia of the Seas, completed her inaugural [ translatic ] crossing using BioLNG in July, Icon will start utilizing shorepower at Port of Miami next week, and Celebrity Xcel will be our first methanol capable ship, which are all important milestones in our energy transition. We have so much to be proud of, and this is just the beginning.

With our industry-leading brands that excel in each of their respective segments, the most innovative fleet and destinations and the best people who are focused on delivering a lifetime of vacations for our guests, we focus on winning share from the large and attractive travel industry while delivering long-term shareholder value.

And with that, I will turn the call over to Naftali. Naf?

[Naftali Holtz, executive]

Thank you, Jason, and good morning, everyone. I will start with third quarter results.

Our team delivered another exceptional performance that exceeded our expectations, resulting in adjusted earnings per share of $5.20. The $0.25 per share outperformance compared to the midpoint of our guidance is driven by better revenue across our brands and key itineraries benefits from multiple balance sheet actions we have taken during the quarter as well as approximately $0.10 per share favorable timing of expenses.

We finished the third quarter with a net yield growth of 7.9%, which was driven mostly by stronger APDs. The strong yield growth was driven by both new ships and like-for-like hardware and across all key itineraries, especially Alaska and Europe.

Net cruise costs, excluding fuel, increased 4% in constant currency. The favorable cost performance compared to our guidance is driven by favorable timing of expenses that more than offset the negative impact of stock compensation, given the appreciation of our share price during the third quarter.

Adjusted EBITDA was $2.1 billion, 24% year-over-year growth, and adjusted EBITDA margin was 44%, 240 basis points higher than last year.

Now let me talk about our increased guidance expectations for 2024. We are set to have another exceptional year of yield growth, with net yield expected to be up 10.8% to 11.3%. The increase in our yield guidance is driven by the stronger-than-expected performance in the third quarter and better outlook in the fourth quarter, which also includes the impact from Hurricane Milton.

Now moving to costs. Full year net cruise costs, excluding fuel, are expected to be up 6.2% to 6.7%. Our cost metric is up 40 basis points compared to our prior guidance, and is driven entirely by higher noncash stock-based compensation given the increase in the stock price since the last earnings call. We anticipate fuel expense of $1.16 billion for the year and we are 61% hedged at below market rates.

We are raising adjusted earnings per share guidance to $11.57 to $11.6.

I want to provide a little more color on the progress of our earnings guidance. We're increasing our guidance by $0.20 for the year, which includes $0.14 negative impact from Hurricane Milton and higher stock-based expense. When excluding that impact, the $0.34 better-than-expected business performance is more than half driven by fourth quarter outlook, and the remainder related to better third quarter results.

Now I will discuss our fourth quarter guidance. Many of the ships have now transitioned from their summer to their winter itineraries. In the fourth quarter, about 63% of our capacity will be in the Caribbean, 9% in Europe and about 13% in the Asia Pacific region. The remaining capacity is spread across several other itineraries, including repositionings, West Coast and Expedition Cruises. We plan to operate 12.8 million APCDs during the fourth quarter.

Net yields are expected to be up 5.1% to 5.6% for the fourth quarter, which includes approximately 40 basis points impact from Hurricane Milton. As our yield growth normalizes, we remain focused on executing on our proven formula of modern capacity growth, moderate yield growth and strong cost control to deliver strong earnings power and cash flow.

Net cruise costs, excluding fuel, are expected to be up 11.6% to 12.1%. The year-over-year increase in costs in the fourth quarter is predominantly driven by elevated drydock days, higher noncash stock compensation and shifting of costs from the third quarter. Without those, our costs would have been in the low single digits.

Taking all this into account, we expect adjusted earnings per share for the quarter to be $1.40 to $1.45. The quarter includes $0.14 impact from Hurricane Milton and higher stock-based comp, in addition to approximately $0.10 of cost shifting from the third quarter.

Now I will share insights for 2025, which while still very early, is shaping up to be another exciting year. 2025 capacity is expected to be up 5% as we introduce Star of the Seas in the third quarter and Celebrity Xcel in the fourth quarter as well as benefit from a full year of Utopia and [ Silver Ray ].

Capacity is most pronounced in the second and fourth quarters due to timing of new ship deliveries and dry docks. We are growing Caribbean capacity about 5% in 2025, and it will represent about 57% of our deployment. We expect the opening of Royal Beach Club Paradise Island in Nassau at the end of 2025, which will benefit our 2026 Caribbean itineraries. European itineraries will account for 15% of our capacity, Alaska will account for about 6% and Asia Pacific will account for 11%.

As Jason mentioned, our booked load factors are in line with previous years and at higher APs. Our book position is exactly where we want it to be to further optimize our yield profile and deliver on our formula for success, moderate capacity growth, moderate yield growth and strong cost discipline. This positions us to continue delivering margin expansion and strong cash flow.

Now moving to costs. Our focus remains to manage costs as we seek to grow our margins. In 2025, we expect to have lower dry dock days compared to this year, but still higher than 2023, partially due to longer dry dock days for several planned modernization projects of our existing ships.

Overall, we expect disciplined cost growth consistent with our proven formula, and we will provide more details during our fourth quarter earnings call. Taking all of this into account, we expect adjusted earnings per share to start with a $14 handle.

Turning to our balance sheet. We ended the quarter with $3.9 billion in liquidity. Over the last 2 years, we have made significant progress in strengthening the balance sheet. And this quarter, we reached a key financial milestone by returning to a fully unsecured capital structure.

During the quarter, we refinanced $3.5 billion of debt, lowering rates by 300 basis points. Our leverage was below 3.5x as of the third quarter on a trailing 12-month basis and when excluding the impact of new ships that were delivered mid-year.

Also this quarter, we opportunistically exchanged $827 million of our outstanding convertible bonds for cash and shares. This transaction allowed us to address a 2025 debt maturity, while also effectively buying back 5.1 million shares at an attractive weighted average price of $154 per share.

Our strong balance sheet position allows us to further support our growth ambitions and expand capital allocation while delivering strong cash flow and maintaining investment-grade balance sheet metrics.

In closing, we remain committed and focused on executing our strategy and delivering on our mission.

With that, I will ask our operator to open the call for a question-and-answer session.

[Operator]

Our first question will come from the line of Brandt Montour with Barclays.

[Brandt Montour, analyst]

Congrats on another really solid quarter. The first question is about pricing and kind of thinking about the exit rate that you're seeing in the fourth quarter. And I want to take a sort of a broader look and think about if you can kind of talk about like-for-like pricing cumulatively from -- versus 2019 and just sort of level set where you think you're at? And if you're still trailing sort of cumulative U.S. inflation, does inflation coming down next year act as some sort of governor a little bit how strong yields can be? Or how do you think about that?

[Jason Liberty, executive]

Sure. [indiscernible] as well. I think, first, just kind of starting off is when you compare to '19 levels, whether it's the fourth quarter is up about 25%. The year is up about 26% versus 2019 levels. And so I think when we look at that, there's a lot of things that's inside of that, which is not only just like-for-like growth. It's not just the new capacity. It's also great assets like Perfect Day, fully normalizing within our business.

And while there has been a lot of growth on the pricing standpoint, a little bit of growth on the occupancy standpoint, the trends show that we continue to be able to elevate demand, elevate pricing each day. And so what you see in the overall trends, is that we continue to see strong volumes, the customer's willingness to pay more.

I don't think this is an inflation-related type of driver. I think the driver is, is that cruise or propensity of cruise is at a significantly high level. I think that the cruise experience is now considered to be a very mainstream vacation product. And there's still a significant value proposition versus land-based vacation.

So I think the combination of really understanding what our guests are looking for and leveling up our business with our brands, meeting those expectations, the ships meet those expectations, the destinations meeting those expectations.

And having the tools and technology that really allow us to harvest quality demand, I think, is all leading to why we keep seeing outperformance on the yield growth side. And we do not, in any way, see anything, any ingredients that say that we're hitting some type of ceiling. If anything, we see continued [indiscernible] in demand for our business.

[Brandt Montour, analyst]

That's super helpful. And then just a follow-up, and you had a pretty exciting announcement here intra-quarter, and I know that Perfect Day Mexico, you'll probably talk a lot about that on the first quarter Investor Day.

There were some conflicting reports out there at how much the capital investment that was going to take. I was wondering if you could maybe give us a little bit of insight into the sort of gross level of spend? And if you want to talk a little bit about sort of the return expectations that you'd expect for that project, that would be helpful.

[Jason Liberty, executive]

Yes, sure. Well, I think just starting off on a cost standpoint, but we're still in the design and planning process for Perfect Day in Mexico. Obviously, we have an incredible foundation of what our guests are looking for and their willingness to spend and experience with Perfect Day at CocoCay.

We did acquire the port, which we'll -- you'll see later in our filing today for $292 million. It's not just the port, but it's also all the land that is surrounding the port. And again, we're still in that design process. But what I would say is we're very mindful of having sizable significant returns associated with these private destinations. But more importantly, we're very focused on making sure that the guest experience is at an all-time high.

Perfect Day CocoCay is our highest rated destination on a Net Promoter Score. So our ability to not only capture additional demand from other markets, but our ability to deliver a perfect day to basically every Royal Caribbean international guests in the Caribbean, I think just drives greater demand for that brand. And I think that's ultimately what we look for because we know that when we can deliver the best vacation in the world, our guests are willing to pay for that. And they're also willing obviously to help us deliver great financial returns on investments like these destinations.

[Naftali Holtz, executive]

Brandt, just one quick thing to add. You'll see obviously in the 10-Q today, that acquisition, and we expect to close that in the first half of 2025. So that will be also included in our capital commentary in the next quarter.

[Operator]

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

[Steven Wieczynski, analyst]

Congrats on another very solid quarter. So Jason, if we think about your 2025 $14 handle earnings comment. And look, I know it's early on in your planning stages for next year, but just wondering how you guys are thinking about what are maybe some of the pillars that are going to get you to that $14-plus in earnings? I assume you're going to tell me the company line of moderate capacity growth, moderate yield growth and strong cost control.

But is there anything else you can help us with as we think about next year based on your current book position? I mean not gave us some really good color on the cost side. But anything we should be thinking about from the yield side or how we should maybe be thinking about interest cost next year? And does that $14 a share plus include any buybacks or would be -- or would buybacks be accretive to that number?

[Jason Liberty, executive]

Sure. Well, Steve, I think you said our company line really well, and it is something, obviously, that we're very religious about.

To get to the, to -- I would say, it's not $14, we're saying it's going to have a $14 handle on it, is you really just need moderate yield growth and you need us to continue to manage our costs effectively.

And of course, we're going to benefit from interest costs. A lot of the great activity we've been able to do over the past couple of quarters to get our balance sheet back to pre-COVID, leverage levels as well as getting to an unsecured state. So I think that will help drive that.

So on the share repurchase standpoint, obviously, we were able to take some action here last quarter in being able to recapture about 5.1 million shares that were dilutive to us. And -- but I would say in that number, that does not contemplate us buying back shares, which, of course, when you look back in time, we've always had when we think about capital returns, a mix of having a competitive dividend and opportunistically buying back shares. So it's -- but that is not something that is in the consideration set in that early guide of the $14 handle.

[Steven Wieczynski, analyst]

Okay. Got you. And then second question, going back to Perfect Day Mexico. Jason, can you help us think about maybe the potential yield uplift you guys might be able to achieve based on what you've learned from CocoCay?

I guess I'm just trying to figure out, as we start to think about 2027, what that yield outlook could look like for your Western Caribbean itineraries? I mean, if we assume based on our math, CocoCay had at least a double-digit impact or yield impact on your Eastern Caribbean itineraries. I mean is there any reason to believe you guys won't see that same type of uplift for your Western Caribbean itineraries?

[Jason Liberty, executive]

Well, I would say what you pointed to is directionally right. I mean I think we certainly see an uplift, not -- there's a piece of it which is the uplift that we get from the onboard side or the on-island revenue that we get, but there's also a lot of things on the island we don't charge for.

And so our guess whether you're paying for some of the more unique experience like [ hideaway ] or the beach club or the slide that you would see on Perfect Data at CocoCay that will, of course, exist in Perfect Day Mexico. People going to those islands or go into Perfect Day at CocoCay pay additional money for access to all the things that we also provide on that island, not just things that you have to pay for.

So I think what you kind of pointed to a double-digit yield opportunity is certainly there in the Western Caribbean. And I don't think we can think of something that would not generate more demand because, of course, we're going to take the learnings from CocoCay and we'll obviously apply things that work exceptionally well. And there's things that we can do better because that's kind of our continuous improvement mantra, we will certainly do so to drive really strong demand.

I think it's also important to add, Steven, and with all of this, too, is we're going to have the world beach clubs, one in Nassau, we're going to have one in Cozumel as well in Vanuatu, which is in the South Pacific. So there are other things that we're doing that will also be value drivers for our shareholders and also improve our yield profile.

[Operator]

Our next question comes from the line of Matthew Boss with JPMorgan.

[Matthew Boss, analyst]

Congrats on another really nice quarter. So Jason, could you elaborate on the continued elevated demand patterns that you cited, maybe just trends across regions through October that you're seeing?

And then for 2025, Naftali, maybe just if you could elaborate on the booked position being exactly where you want to further optimize [indiscernible]. What exactly that means? How it translates to continued margin expansion?

[Jason Liberty, executive]

Yes. So I'll take the first one, of course, team can chime in. We have -- it's -- I think each month that goes by, our expectations rise, and you're seeing that in the close-in demand. And even as we saw through the month of October, we saw that demand continue to rise. We're able to increase pricing as well as being able to successfully build our book position, whether it's for the quarter or whether it is into next year. So that's what our commentary around the elevation is that it continues to strengthen.

And that is despite obviously having a couple of off days around the hurricanes, right? Because when we have hurricanes, there is -- people are concentrated on, I think, more important things like making sure their homes are secured or they're focused on the news. And so there's always a little bit of softness that can come a couple of days in or around a storm.

But we were able to assume when we look at the month, we were at an elevated position. We saw the same thing happen in September, an elevated position above and beyond what had already risen through the course of the year. And I think that helps us kind of build not only a strong quarter but also a strong period into next year.

And I'll let Naf comment on the optimal book position.

[Naftali Holtz, executive]

Yes. So Matt, as you can imagine, every year, we go through this process where we build a book of business for the next year. We tried to maximize yield, right? That's the most important thing that we do, and we try to do, and we, in the last couple of years, have been focused on deploying AI tools and other technology to make sure that we are taking all the information and making the right decisions.

And what it means is that we feel pretty good at where we sit. We built a good -- start to build a good book of business, and we have good runway to continue to drive demand and pricing as we kind of cross the year into wave.

[Jason Liberty, executive]

Yes. And Matt, if I could just add one point to it. Obviously, our yield management tools get smarter and better every day. And when we look back, whether we look back at the same time last year or even the year before, we would obviously look at that and say we had some regret. We left revenue on the table. The tools would have said, we should have slowed a little bit our bookings. But we -- I think we're probably a little bit more conservative in that.

And so I think we're building more and more confidence in these tools we're in line with our book position at the same time last year, way ahead of where we were in 2019. We're at higher rates. And so I think we're not looking to wake up and be able to say, "Oh, look, we're booked ahead of same time last year on a volume standpoint. We're here wanting to make sure that we optimize our revenue for 2025 and beyond. And that's ultimately what's most important is to drive yield growth and strong margin returns.

[Operator]

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

[Vince Ciepiel, analyst]

I wanted to zoom in a little bit more on the bookings trends recently. It sounds like things -- I think you used the term accelerated since the last call, despite maybe a little bit of a hurricane noise within bookings in October. Can you comment on what you expect bookings growth to look like through the course of the quarter? I imagine that pouring out dollars at a time when there's hurricanes or election noise, maybe isn't the best strategy? And how you imagine managing your ad budget through the course of 4Q into early next year as you get a kick in the wave season?

[Jason Liberty, executive]

Well, obviously, our guide for the quarter, we typically try to guide at a 50-50 position. I think what we have not been able -- or it's probably a good problem to have, but when we see demand patterns elevate. And I think that's through really just great advocacy from our guests who are coming off of our ships, having the best vacations of their life. And then, of course, we're seeing them book more frequently on occurring. And then we -- that advocacy is building more demand, and that helps feed all the great marketing that our teams do each and every day.

So I think we continue to expect that we're going to invest in marketing the way that we have, and the types of marketing that we have been doing. And that's driving really healthy demand for our business.

So we're obviously not guiding on the quarters for next year or for next year outside of saying moderate yield growth. But I think that we're focused on generating high-quality demand across our different channels in our different markets.

[Vince Ciepiel, analyst]

Great. And one follow-up on that. You mentioned the hurricane having a small impact here on 4Q yields. Any carry-through into '25 based on what you can see right now? And I think last year, at this time, you called out a little bit on the cadence of the out-years yield growth, anything worth mentioning, still opportunities to drive occupancy? Anything worth calling out for yield growth into next year?

[Naftali Holtz, executive]

Yes. Vince, so not really there hasn't been any impact on -- from the hurricane. So that's not -- and nothing really to call out. I call out some of the capacity growth, right, just given the dry dock days and the delivery of the ship -- the new ships next year?.

[Steven Wieczynski, analyst]

Great.

[Michael Bayley, executive]

Vince, it's Michael. Just to add on the impact of the elections on bookings, we've gone back and done the analysis over literally decades. And it may be -- there may be a little bit of volatility during the week of the election, but over -- when you spread it over a longer period, there's effectively no impact on bookings as a result of elections, no matter which way they go.

[Operator]

Our next question comes from the line of Ben Chaiken with Mizuho.

[Benjamin Chaiken, analyst]

First, I just want to touch on something that, Jason, I think you mentioned that may have been glossed over. Did I hear you correctly? Did you say that Gulf Coast is a similar sized cruise market as Florida, but only half the penetration? And then presumably -- sorry, go ahead.

[Jason Liberty, executive]

Yes. No, actually, I didn't say that. I said Texas is a similar sized marketplace that has half the penetration with a very similar propensity to cruise. So I think that having assets like the Royal Beach Club in Cozumel, Royal Beach Mexico will allow us to drive more and more not only in that market, but also more of the Gulf Coast and other markets that can have an easier [ supply ] cruise experience at a lower cost supply cruise experience.

[Benjamin Chaiken, analyst]

Got it. And I guess the feedback that you've gotten from customers or the work that you guys have done suggest that it's just a lack of destinations. Texas being underpenetrated? Or how do you think about that opportunity? It seems really compelling.

[Michael Bayley, executive]

It's Michael. Just to add to Jason's comments, I mean there's quite a few really positive things that come with Perfect Day Mexico and the Royal Beach Club Cozumel. One is that we can really introduce a much larger volume of short product market out of Texas, Louisiana, North Florida, Tampa.

I mean it really is a great opportunity for us. And we know that, that short product really catches with younger families. And of course, we'll be able to offer really an extraordinary short break from these ports to Perfect Day and Royal Beach Club Cozumel. So we think that's really a huge competitive advantage.

And when you think about the product offering that Royal Caribbean will have, for example, in the Texas market, we opened up our brand-new terminal just around when we came out of the pandemic, that's been a huge success. It's incredibly efficient, and it can handle the large oasis and icon class ships. So when you think about that class of ship operating on short product to Perfect Day Mexico and Royal Beach Club, we think we've really got a great product offering for our customers out of Texas and all of the Gulf ports.

[Benjamin Chaiken, analyst]

Got it. That's very helpful. And then shifting gears a little bit, CocoCay has clearly been a material positive over the last couple of years. As you think about your next private destination, Paradise Island, directionally, will that have a similar level of ancillary uplift per customer? Why or why not? I know it's slightly different than CocoCay geographically.

[Michael Bayley, executive]

Yes, it's slightly different. I mean it's going to be an exclusive beach club experience. It does have -- approximately 4,000 people a day will be able to go to the Royal Beach Club in the Bahamas.

The difference is, is that when you go to Perfect Day, it's a combination of pay for and included in the cruise. You can actually go to Perfect Day and you can have a great day, a perfect day without having to spend additional to experience things.

But with the Royal Beach Club, it will be all for pay. I mean you'll have to literally buy a ticket to go and experience the beach club, and so we see it as a really positive revenue generator with good margins.

[Operator]

Your next question comes from the line of Lizzie Dove with Goldman Sachs.

[Elizabeth Dove, analyst]

I wanted to start off on costs. I was looking back and you've called out favorable timing of costs, I think, every quarter. Just curious if you can share more details there and which kind of cost buckets that hitting in the fourth quarter? And whether there is also a degree of just that strong cost discipline that's also kind of benefiting the cost line?

[Naftali Holtz, executive]

Yes, Lizzie, so this year is a little unique here. We have a lot of dry docks, double what we had last year. So a lot of the cost timing that we have called out this year, and you're right, has been related to those dry docks, specifically around supply chain impacts from the suppliers, and we're trying to work around it and make sure that we kind of get the best timing out of it, but that's always a little tricky, especially today. So that's really what it is.

And we're trying to manage, as you know, cost really, really strongly and really making sure that we are focused on enhancing margin. And at the same time, making sure that we make the right investments into the product, making sure that we are investing for the future. So all of that is kind of how we manage the cost.

[Elizabeth Dove, analyst]

Got it. That makes sense. And then just on the kind of comments around moderate yield growth longer term. A lot of the questions on the call are focused about all these tailwinds you have with the new private islands, private destinations, the new ship premiums that you have. Does that moderate yield growth longer term? Does that bake in the upside from the private islands and the new ships that you have coming online with those big premiums? Or is that more of a kind of like-for-like outlook?

[Jason Liberty, executive]

Lizzie, so I think when we look at moderate yield growth, which has a little bit of a range to it. I think when we think about like-for-like and new hardware, like typically new hardware will contribute 1 point or so a year to our yields. I mean because the base is getting bigger, we do expect there to be a like-for-like growth.

And then you get to the higher -- I mean, again, this is looking at things historically, you get to the higher end of the range when you have the introductions of these private destinations as an example into it. And that's why I think when we look at the outlook, like we're not and we look -- also, we look at the [indiscernible] gap rate opportunity that's ahead of us. When we think about the -- each year, we try to more plan on what we have seen in the past. And that's where we kind of get into that moderate yield growth kind of outlook.

The only thing I would say is that when you're also in the course of a year where your yields keep increasing. We guided at the beginning of the year at 6.5%. As not commented, we're were over 11% this year. And so just the comparable gets a little bit different. But that moderate yield growth is kind of when we look at a long-term run rate is what we have seen generally take place in our business and kind of takes into consideration, market trends and behaviors that we have seen over time.

[Operator]

Our next question will come from the line of Robin Farley with UBS.

[Robin Farley, analyst]

Just hearing your commentary about the 2025 outlook, it sounds like it's sort of off to an above average start. And so if we look at where you guided yields, say, the 5 years before the pandemic, your initial guidance would kind of be in the 3% to 4% range for net yields. Should we think about that as being kind of what is average or typical and maybe you're sort of positioned to be better than that next year?

[Jason Liberty, executive]

Well, I would say first, Rob, I hope you're well. It is still too early for us to guide for next year. But I think how you looked at kind of our historical long run average, that's more or less where we had landed.

I mean we'll see how the book continues to build and our ability to continue to be able to raise prices off of a -- we've already raised them, and that's off of a higher base and see how we continue to close that gap to land-based vacation. But we're not at the point yet, I think where we want to give yield guidance by quarter or for next year. But we are -- we're feeling very good about the strength of our demand patterns that we're seeing in the book position and our ability to continue to optimize our yield profile.

[Robin Farley, analyst]

Okay. Great. And then just as a follow-up, a question on your order book. Can you give us an idea of kind of what period you're sort of done ordering for? In other words -- and I'm counting your options on kind of thinking of them as seeing orders. But anything that you're still thinking about any period? Like have we seen all of your orders for 2028 at this point, but sort of '29 and forward still fair game? Or just how to think about that?

[Jason Liberty, executive]

Yes. I think for the most part, you certainly have seen all of our orders through '27 and maybe even into 2028. But as you commented, we have lots of options that are available to us that we've secured. But I will say that we heavily subscribed to moderate yield growth, moderate capacity growth and good cost control. So on that moderate capacity growth standpoint, we continue to look to moderately grow our fleet, moderately grow each of our brands.

And again, as just a general reminder, when we order ships and we take ships, they're not at all going to the same brand, they're not all going to the same market, they're not all going to the same itinerary. We operate a very large global footprint that we feel very confident about our ability to get yield growth and good yield growth on capacity growth over time.

[Operator]

Our next question comes from the line of Conor Cunningham with Melius Research.

[Conor Cunningham, analyst]

The numbers are obviously very good. Naf, you've done a very good job with the balance sheet. When I look at your debt at this point, not a lot of high cost that left your cash flow is going to start to really ramp. I'm just trying to understand, are you going to continue to lean in the balance sheet? Or are we thinking about cash flow as a potential to really start ramping to shareholders? I realize that may be discussed that at the Investor Day, but just any thoughts there would be helpful.

[Naftali Holtz, executive]

Sure. Yes. So thank you. First, it was very important to us. It was a very important pillar of Trifecta to make sure that we bring the balance sheet back to being an asset. So we obviously crossed a very key milestone this quarter with getting it back to unsecured status. No guarantees, all the guarantees and security that we have granted to everybody during the pandemic to get through are done now. And then we also feel that where we are on the leverage is within our targets.

We will continue to make sure that we have a very strong balance sheet. And while a lot of the higher cost debt is gone, we always continue to find ways to lower the cost of capital, and that will be the focus to make sure that we generate even more cash flow for the company.

And as we think about capital allocation, obviously, we need to maintain a strong balance sheet. We have a great opportunity to invest as we see a large opportunity in an almost $2 trillion market to continue to win share. So we're doing very important things and strategic things like the new ships, the destinations, technology and other things to get closer to the customer and just getting better with our business.

And then we reinitiated the dividend last quarter, and we said that we want to continue to get into a competitive dividend factor. And then historically, there also was capital return through a buyback. We did something this quarter with the converts. So obviously, with a lot of cash generation, will continue to have those opportunities.

[Conor Cunningham, analyst]

Okay. Helpful. And then -- you talk about all these investments that you have underway. And historically, I would think that with investments come, additional cost pressures and so on and so forth. But it seems like this is going to be a regular type of cadence in terms of new product investment, whether it's onboard or private islands and whatnot.

So should we just assume that there's going to be an ongoing cost pressure from investments in your outlook going forward? The point being is this like talk about strong cost management. Is it just -- is that going to be embedded in there over the long haul?

[Naftali Holtz, executive]

Yes. So we managed -- yes, absolutely. So we manage the business and the cost on the holistic basis, right? So we take everything into account, including everything you just said. We continue to grow capacity. We're a large company.

So as we kind of think about prioritization of where we're going to invest, both capital and costs, all of that is into the account. And we're very much subscribed and committed to the formula, moderate capacity growth, moderate deal growth, strong cost control. And we think that a lot of these investments, while they may add some cost to the cost structure, they will have incredible returns and will be margin -- and there will be a margin expansion.

[Jason Liberty, executive]

Yes. I think that's [ one really important ] point, which we've gotten this in the past is -- Our focus, while obviously, we want to grow yields, we want to manage our costs. But our ultimate focus is growing our margins. And by growing our margins, it leads to obviously a higher and higher return profile, higher margins result in more free cash flow and capital that's available to our shareholders, et cetera.

So I think that there are these new things that come up that can sometimes cause a little bit of noise in our numbers as we add more destinations without APCDs as an example. But with that, it would also come, obviously, increasing our yield profile expectations, and all that driving a better guest experience, higher margin and higher returns.

[Operator]

Our next question comes from the line of James Hardiman with Citi.

[James Hardiman, analyst]

I wanted to actually stay on this topic of potential investments. It certainly seems like you have a broader menu of investments available to you, maybe than ever and at high returns -- higher returns, I should say.

I guess maybe speak to why your return profile seems to be so much better than it has been for you, and I would argue maybe better than we've ever seen in this industry. It's one of the questions I continue to get, certainly for new cruise investors who just haven't seen this as a as a viable or a strong return type of an industry. It seems like something has changed meaningfully.

And I guess as we think about moving forward, where do you think returns ultimately settle in over the long term? Is there a ceiling? You're at double-digit return on invested capital. It doesn't seem like it's slowing down necessarily. So just trying to think through sort of what the end game is there or at least the long term?

[Jason Liberty, executive]

Yes. Well, James, I think there's a lot of things that are inside of that. I mean, we for -- is it a long-term business. We've been making very, I think, thoughtful investments for a very long period of time. And I think a lot of it starts with being very discerning about what are the segments we want to be in, building our brands to be leaders in those segments, making sure they're seated with ships and experiences on those ships that are very much tuned into those segments and what are the customers of today and the customers of tomorrow are looking like. And then really looking at how can we enhance the experience and also monetize it. And we've been able to do that on the destination front.

Although, I think, comes down to -- our focus is orienting ourselves as an experienced business and focusing on what's happening in broad travel leisure consumer on the experience side, and then ensuring that we have the wherewithal and the assets to be able to wake up every day and compete with that.

And I think that's not just on things that are very visible like ships, but it's also on technology and how do we take friction out of the experience, how do we be more sophisticated in how we yield manage and how we interact with our customer. And I think all those things combined is why we feel that we are able to continue to enhance our margins and our return profile, which we both think have runway to that.

This is a business with a lot of fixed operating leverage, and so just moderately growing your yields and being mindful of your cost drops a lot of margin opportunity to the bottom line. And I think us being very focused on how do we take share, more share out of that $2 billion -- I'm sorry, $2 trillion travel leisure market is, I think, what's driving us. And I think that you should expect us to continue to think and behave in that way.

[James Hardiman, analyst]

Got it. That's really helpful. And then along those lines, as I think about capital allocation, obviously, returns focus is key. But maybe can you speak to any nonfinancial considerations to that? And by that, I mean an earlier question not talked about, leverage profile, it sounds like there's really no priority that you're putting on, bringing debt down even further outside of just refinancing and sort of improving maybe that interest rate.

But maybe as I think about some of these land-based vacations in the context of the competitive environment, whether it be other cruise lines or other land-based competitors, how do you think about these investments in the context of continuing to push your advantage in those areas and what that brings you longer term?

[Jason Liberty, executive]

Sure. Well, as you said, James, I think we feel really good about the balance sheet. Naf commented there's always opportunity for us to do better. We obviously also returning and being thoughtful about returning capital to our shareholders. I've talked about it, competitive dividend as well as share repurchasing, especially on an opportunistic basis. But of course, that's always a board decision.

And then look, we're focused on how do we keep our customer and our ecosystem, right? And so we're an experience-driven business. And how do we have strong sustainable growth in leverage all the experience and know-how we have internally.

There are other experiences that will -- that are that can keep our customer on our ecosystem. Those are all these things that we'll consider. And that probably doesn't mean we have to buy something. It could mean we could build something. It can mean that we partner, have strategic relationships, but ultimately trying to get more reps out of the customer and doing that because we're delivering the best vacations in the world.

And that's why I know we have bar slogans, but I think that we are the best in the world at delivering a vacation of a lifetime, and we are building more and more of the capabilities to deliver a lifetime of vacations.

[Operator]

That will conclude our question-and-answer session. I will hand the call back to Naftali Holtz, CFO, for closing remarks.

[Naftali Holtz, executive]

We thank you all for your participation and interest in the company. Blake will be available for any follow-ups. We wish you all a great day.

[Operator]

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