Royal Caribbean Cruises Ltd

NYSE:RCL

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Royal Caribbean Cruises Ltd. Fourth Quarter 2018 Earnings Call. [Operator Instructions]. Thank you. I'd now like to introduce Chief Financial Officer, Mr. Jason Liberty. Mr. Liberty, the floor is yours.

[Jason Liberty, EVP & CFO]

Thank you, Operator. Good morning, and thank you for joining us today for our Fourth Quarter Earnings Call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Carola Mengolini, our Vice President of Investor Relations. During this call, we will be referring to a few slides, which have been posted on our investor website, www.rclinvestor.com.

Before we get started, I'd like to refer you to our notice about forward-looking statements, which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Please note that we do not undertake to update the information in our filings as circumstances change.

Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP historical items can be found on our website. Unless we state otherwise, all metrics are on a constant currency-adjusted basis.

Richard will begin with some color on last year and this year. Then I will go through a bit more detail on the figures followed by a Q&A session. Richard?

[Richard Fain, Chairman & CEO]

Thanks, Jason, and good morning, everyone. I'm pleased to have the opportunity to share more about our 2018 results and our outlook for the coming year. By any measure, 2018 was an unusually busy and successful year. Our teams achieved record financial results, while introducing four new vessels, acquiring a controlling interest in Silversea's cruises, opening two stunning cruise terminals and implementing Excalibur on about half of our fleet. On the financial front, the simple point is that strong fundamentals are driving strong results.

In 2018, we achieved net income of $1.9 billion, with earnings per share growth of 18%. Moreover, our EPS growth would have approached 25% had foreign exchange and fuel rates remained neutral during the year. This outcome should encourage those who watch on the sidelines concerned about weather, politics, trade wars, supplies, whatever. These strong fundamentals should not be a surprise as we have been very vocal about 2 important and positive consumer trends. First, the trend in favor of experiences over material possessions; and second, the favorable demographic shifts. We've been talking for a long time about how people have shifted their focus from buying TVs, cars, et cetera to buying memories or experiences. And that shift has become so powerful that I think it's now obvious to everybody.

At the same time, the demographic makeup of our population keeps shifting in our direction. These two trends have become increasingly powerful, and our company and our brands are well positioned to benefit from these trends. Obviously, no trend is perfectly linear and no trajectory goes forever without interruption, but our direction and our overall progress appears inexorable.

Now, our strong position rests on several pillars. The first is our product, where we have stunning hardware that appeals to the market, overindexes on guest satisfaction and delivers superior profit. The second pillar is technology. As you all know, we are seriously invested in data analytics and in digitizing the guest and crew experience. We believe that the opportunity for growth is strong, but we also believe that the speed with which we need to adapt and evolve continues to accelerate.

Several years ago, as I believe all of you know, when we initiated our Double-Double Program, we emphasized that our objective was not just to improve 2017 profitability. We emphasized then that 2017 was a steppingstone. We wanted to build a base and to solidify a culture that would serve as a springboard going forward. I believe our 2018 results demonstrate unambiguously that our objective was realistic. As we now work to execute on our 20/20 Vision program, I'm looking forward to achieving the same kind of positive momentum. These 2 programs also demonstrate the importance of planting seeds. Ours is a long-term business, and we deem to invest for the future, whether that is new ships, new digital systems or new private destinations. We are reaping the benefits of past investments today, and we will reap the benefits of current investments tomorrow.

Looking forward, we are starting 2019 with some very good cards. Among them is the first full year of operation from Symphony of the Seas, Azamara Pursuit, Celebrity Edge and New Mein Schiff 1 as well as the delivery in 2019 of Celebrity Flora and Spectrum of the Seas. All of these new vessels carry significant premiums and help position 2019 for success. Happily, the record-breaking start to WAVE validates our confidence. And with WAVE off to a wonderful start, our already good book position continues to strengthen. Bookings have been at higher levels than last year, and in fact, we received more bookings during the first week of WAVE than we have in any other week in our history, except for the second week in WAVE, which was even better.

So we are very happy about how the year is shaping up. Despite all the noise in the economy and the volatility of the stock market, we have been impressed with consistent strength in demand from our markets. Actually, in preparing for this morning's call, I looked at how good our guidance has been in the past. As you can see in Slide 2, during the past 5 years, we have consistently delivered or overdelivered on both yield and adjusted EPS guidance. I doubt that many other companies or industries have such a remarkable track record. I'm always impressed by how accurate our revenue management team has been. Of course, the future is always uncertain, but they have demonstrated an impressive ability in the past. And as you also well know, in past years, we have experienced all types of fears and challenges from the Zika virus and global tourism in 2015, to questions about China supply in 2016, weather threats and capacity in 2017, global macro concerns in 2018, et cetera.

Yet during all these periods, we were able to generate record revenue, record operating income and record earnings per share. Amongst the exciting things ahead of us this year, we are getting ready for the deliveries of Celebrity Flora and Spectrum of the Seas and Royal Caribbean International's Perfect Day project, which comes on stream in May. The island development will really shake up the short-term cruise market, and I am confident that our guests will love it.

Now before I turn the call back to Jason, I would like to again express my admiration and my thanks for the amazing people at Royal Caribbean, whose passion and skills enable us to grow and prosper. With that, I turn it back to Jason.

[Jason Liberty, EVP & CFO]

Thank you, Richard. I'll begin by taking you through our results for the fourth quarter of 2018. These results are summarized on Slide 3. For the quarter, we generated adjusted net income of $1.53 per share, beating the midpoint of our guidance by $0.06. Better-than-expected revenue and cost performance from our brands combined with better performance from our joint ventures more than offset a $0.04 headwind from currency and fuel.

Net revenue yields are up 6.8% for the quarter, which was slightly above the midpoint of our guidance. On the cost side, net cruise costs, excluding fuel, per APCD were up 5.1%, better than guidance driven mainly by timing. I will now discuss our full year results, which we have summarized on Slide 4. By all accounts, 2018 was another year of very strong performance. We generated approximately $1.9 billion in adjusted net income, resulting in an earnings per share of $8.86. This was $0.06 higher than the midpoint of our previous guidance and was up 17.5% year-over-year. This result also beat the midpoint of the January guidance by $0.21, despite the unfavorable impact from currency and fuel, which negatively affected earnings by approximately $123 million or $0.58 per share.

Our leading brands supported this strong financial performance with net promoter scores at all-time highs and record employee engagement metrics. To summarize the revenue performance for the year, yields were up by 4.4%. Strong demand from our core products from our key markets, better onboard experiential spend and the addition of Silversea drove the year-over-year outperformance. On the cost side, net cruise costs, excluding fuel, were up 4.1%. The main drivers behind the year-over-year increase were more drydock days, the lapping of hardware changes, investments in technology and the consolidation of Silversea's operations.

Now I'll update you on what we are seeing in the demand environment. Over the past three months, bookings have been higher than same time last year, the positive variance growing further as we entered the all-important WAVE season. In fact, 2 out of the past 3 weeks have been record booking weeks for the company. These strong booking trends have further strengthened our overall book position, and 2019 is at a record high in both rate and volume. We've been particularly pleased with the trends we are seeing in North America. While the bookings from North American guests have been strong for sailings on both sides of the Atlantic, our Caribbean sailings are in particularly strong book position with rate and volume up in all 4 quarters. We have superior hardware in the Caribbean throughout the year, and the addition of Perfect Day to our portfolio has further improved our offering.

The summer Europe season is also shaping up well with Celebrity Edge garnering significant price premiums in the Mediterranean, and the rest of the fleet is also in a good book position. Uncertainty surrounding Brexit has created some inconsistencies in demand from the U.K., however, our global footprint means that booking strength from North America and other key markets is more than compensating.

Our Asia Pacific sailings have also been trending well. China continues to be an important market for us, and we saw significant yield growth for the product throughout 2018. 2019 China sailings are booked ahead of same time last year. Over 0.5 million Chinese guests sail with us each year, mostly on sailings from China. However, we are seeing a significant growth in outbound travel with 75% more Chinese guests on a non-China itinerary in 2019 when compared to just 3 years ago. Cruises in Europe and Alaska have seen the number of Chinese guests more than double.

Now I'll give you a brief overview of our capacity and deployment changes for 2019. Our overall capacity will increase 8.6% year-over-year with the addition of Silversea contributing just over 2% of the growth and the rest driven by our stunning new ships. The bulk of our capacity growth will occur in the Caribbean with Symphony of the Seas sailing year around from Miami and a full year of sailings on two modernized ships, Mariner of the Seas and Navigator of the Seas.

In total, just over half of our capacity will be in the Caribbean. While our European capacity will be similar to 2018, we have made a few changes to our deployment in the region. Most notable is the addition of Celebrity Edge, which will be sailing 7- to 11-night Mediterranean itineraries from both Barcelona and Rome. Europe will account for 16% of our capacity this year.

The Asia Pacific region will account for 15% of our 2019 capacity with sailings in China, Australia and Southeast Asia. China remains a core region for the Royal Caribbean brand with Spectrum of the Seas arriving to join her sister ship Quantum of the Seas in early June. Alaska only accounts for 5% of our full year capacity, but is a key high-yielding product for us in the summer. This year, we are improving our hardware in the region with larger, newer ships for Royal Caribbean, Celebrity and Silversea along with Azamara's first-ever Alaska season.

With 2018 now in the rearview mirror, we have entered what is arguably the busiest and most exciting year in our history. Firstly, 2019 will be our first full year with Silversea. Secondly, we will be welcoming Spectrum of the Seas in the spring and Celebrity Flora in the summer, while also enjoying the first full year of sailings for Celebrity Edge, Symphony of the Seas and Azamara Pursuit.

And finally, we have two exciting land-based initiatives coming to fruition. We are now welcoming guests at our own new terminal here at Port of Miami. And in May of 2019, we will launch Perfect Day at CocoCay, where our guests will experience stunning amenities like the tallest waterslide in North America. As I mentioned in October, the additions of Silversea, the terminal in Miami and Perfect Day each increased both our cost and yield metrics in 2019. To provide transparency, I'll share our year-over-year yield and cost guidance both including and excluding these items. These items combined with the timing of new ship deliveries mean that there are a lot of contributing factors to the cadence of our yield and capacity changes throughout the year.

In some years, we see a lot of variability in yield growth from one quarter to the next, whereas, in 2019, we expect more moderate differences. The majority of our capacity growth will occur in the first half of the year, which is the period where we have the greatest visibility. This position and the level of visibility we have further bolsters our confidence in our yield guidance.

Taking all this into account, if you turn to Slide 5, you will see our guidance for 2019. Our yield outlook for 2019 is quite encouraging. We expect net revenue yields to grow 6.5% to 8.5% for the full year, which makes 2019 our 10th consecutive year of yield growth. This metric includes approximately 350 basis points from the operation of Silversea, the cruise terminal in Miami and the Perfect Day development. When excluding these important elements, the underlying yield improvement is driven by strong demand for our core products, new hardware and continued growth from onboard revenue areas.

Net cruise costs, excluding fuel, are expected to be up 8.5% to 9% for the full year. Cost control continues to be a strong focus of ours. However, this metric includes 650 basis points from the operation of Silversea, the cruise terminal in Miami and the Perfect Day development. As we have shared with you before, we strongly believe that these projects accelerate our competitive differentiation and advantage as well as deliver strong returns.

Our depreciation for the year is growing faster in 2019 than in previous periods. As a reminder, our investments in technology projects like Excalibur are becoming a larger mix of our capital program and generally have a shorter useful life than our typical capital investments.

Moreover, the addition of Silversea is also contributing to the elevated growth rate. As previously discussed, being in the luxury and expedition segment, Silversea's depreciation per berth is significantly higher than our corporate average. We have included $690 million of fuel expense for the year, and we are 58% hedged. Based on current fuel prices, currency exchange and interest rates, we expect another record-breaking year with earnings per share between $9.75 and $10 per share and therefore another year of double-digit EPS growth.

Now I'd like to walk you through our first quarter guidance on Slide 6. Net revenue yields are expected to be up in the range of 7.5% to 8%. This metric includes approximately 375 basis points from the operation of Silversea and the cruise terminal in Miami. As it relates to the core operation, first quarter yield will benefit from the addition of Celebrity Edge, Symphony of the Seas in the Caribbean and improvements in yields for core products.

Net cruise costs, excluding fuel, are expected to be up approximately 10% for the quarter. This metric includes approximately 800 basis points from the operations of Silversea, the cruise terminal in Miami and the start of operations of Perfect Day at CocoCay. As it relates to the core operation, the year-over-year increase is mainly driven by the timing and scope of drydocks, related to our ship modernization programs and some shifts in costs from the previous quarter. Taking all of this into account, we expect adjusted earnings to be approximately $1.10 per share.

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

[Operator]

[Operator Instructions]. And your first question comes from the line of Robin Farley from UBS.

[Robin Farley, UBS Investment Bank]

Obviously, with these results, you're not giving us a lot to worry about, but maybe I could ask you two things in terms of your booking outlook. One is just, with the increase in supply in Alaska and the market in general, I mean, is it fair to say with the kind of yield guidance you're giving, I assume you're seeing increases in yield in all of your major markets? And then I was also going to ask you about other European sourcing. You mentioned that there's a little bit of inconsistent demand in the U.K. I wonder if you have comment on other Europe and even just sort of quantifying. I think U.K. is your biggest European market and don't actually have that much exposure to other Europe, but any comments there?

[Michael Bayley, President & CEO, Royal Caribbean International]

It's Michael. Alaska is and has always been a great market for us. It's a high-yielding market, and it performed exceptionally well last year, and it's looking good for this year as well. So we are quite pleased with how Alaska is shaping up. With European sourcing, I think Jason had mentioned earlier that we have the benefit of really a significant global international structure and that really does allow us to balance any geopolitical issues in any one particular market. So I think we're kind of aware that there would be some volatility in the U.K. market with Brexit, and we planned accordingly, and we are hoping we'll move through it quite quickly, but our sourcing has been good out of all of the other international markets. And including the North American market as well by the way, which has been particularly strong.

[Robin Farley, UBS Investment Bank]

So actually outside of the U.K., there is nothing you'd call out in terms of softness in demand?

[Michael Bayley, President & CEO, Royal Caribbean International]

No. I think it's a U.K. story. I was there last week and watched the news pretty much every night, and there is a huge debate raging. Nobody knows what's going to happen. There is quite a lot of sentiment, and I think that's almost inevitable. So I guess, when March passes, hopefully we'll all be in a better position and know what's going to happen.

[Jason Liberty, EVP & CFO]

And Robin, just to add, just one comment on the U.K. side. I'd mentioned that we've seen volatility. So we have seen volatility, but all in all, it's also been still a very good and strong market for us and the bookings have come in quite well. There's just been more volatility in that market around the new cycle.

[Operator]

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

[Steven Wieczynski, Stifel, Nicolaus & Company]

I guess, the first question is around your guidance. And Jason, you've always kind of talked about that 2% to 4% core yield growth as being a pretty good barometer for the business. But obviously, if we strip out Silversea and all the other stuff you guys have this year going on, you're essentially guiding to us 3% to 5% kind of core yield. So I guess, the question is, what gives you so much confidence in that range? And as we move forward, is that 2% to 4% range still the right way to think about the business? And I guess, another way to ask this is, if we stripped out your new hardware, whether it's Edge or Spectrum, would your like-for-like hardware still be trending better than what you would have thought maybe six months ago, if that makes sense?

[Jason Liberty, EVP & CFO]

Sure. Well, firstly, thank you for the nice comment on the '18 results. We're obviously quite happy about it. So one, just talking a little bit about our guide -- first in terms of our philosophy on guidance, nothing has changed here. And again, I would really point to the chart that Richard was commenting on that we put up on the slide in terms of our consistency to forecast our yield and our earnings. But there's lots been going that bring us confidence into that number. So one, this hasn't happened overnight. We've been building this book of business for quite a long period of time. As I commented on, we are in a very strong book position on both a rate and volume basis, and that continues on for several quarters here into the future. The other thing which I'll comment on is that most of our capacity growth for the year is really in the first half of the year. And so that is where we have the greatest visibility in both how we're booking and the amount we have on our books, which further bolsters our confidence into our outlook for the year. That yield growth is not just coming from new hardware. A portion of it is coming from new hardware, but really what's balancing out that, as you commented, 3% to 5% or approximately 4% is really being driven by the improvement in the like-for-like business.

So I think when you kind of combine all that together, there is a lot that makes us feel very confident for the year based off of everything that we know today. As it relates to the 2% and 4%, I think really it's -- that's kind of how we've trended over the past several years, which is why that range has kind of been out there. The past couple of years, we've obviously been on the higher end of that range going forward. But we think that moderate yield growth, good cost control and being thoughtful in our investments improve our earnings per share at a very healthy rate and also improves our return on invested capital.

[Steven Wieczynski, Stifel, Nicolaus & Company]

Okay. That's great color. And then second question would be on the cost side. And again, if we strip out Silversea, CocoCay, all that stuff, you guys are forecasting kind of that core cost to be up 2% to 3%, which is probably a little bit higher, I think, than what some folks might have expected. And I guess, some of that bump there is kind of more drydock related and probably some technology as well. But I guess, the question is, without that drydock impact and without the technology component, do you still see the business being able to keep that cost pressure relatively low?

[Jason Liberty, EVP & CFO]

Yes. So one, if you back out Silversea, the Port of Miami and CocoCay, our costs are approximately 2%. Certainly there are impacts from having more drydock days in 2019 than we have in 2018, but certainly investments in things like technology, data analytics, et cetera, are weighing more onto our costs, and that's because a lot of these investments or costs are not things that are being capitalized based off of how software providers are selling now into the market. But we do believe and we are very much committed to making sure that we are effectively managing our costs and trying to realize the scale that comes with the growth of our fleet.

[Operator]

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

[Harry Curtis, Instinet]

Jason, you referenced the revenue uplift from Excalibur on 50% of your fleet. Can you give us more detail on the extent of that revenue uplift? And can you share with us any -- are you -- do you have any data on kind of the return that you're getting on the investment that you have been making?

[Jason Liberty, EVP & CFO]

Well, I think I was talking about specifically on Excalibur, was just the additional cost that it brings. Certainly, as we're rolling Excalibur out, what we're definitely seeing that's very tangible is our net promoter scores, our guest satisfaction is rising quickly as we are very focused in delivering on, taking friction out of the guest experience. That, we believe, is what is leading to higher yields for us, and you'll also see coming online ways in which we think it will be much easier for the customer to be doing business with us, making it easier to buy things from us, especially when they are on the ship, pre-cruise as well as when they're on the ship, that we think is going to deliver a very solid return for Excalibur.

[Harry Curtis, Instinet]

Just a follow up on that. Is there a noticeable difference in the revenue uplift from the vessels that had Excalibur versus those that don't in the fourth quarter?

[Jason Liberty, EVP & CFO]

We definitely -- well, it's not just the fourth quarter. We have been seeing -- there is a strong relationship to where guest satisfaction scores go up and people pay more both for their ticket as well as onboard. Certainly ships that we put Excalibur on, we are seeing those benefits.

[Richard Fain, Chairman & CEO]

Harry, if I could just amplify on that. One of the things is, a lot of these initiatives, they're hard to single out. We are a brand, and all of these things add to the brand. Obviously, Excalibur is easier to put on the newer ships, for example, which would otherwise do better anyhow. And so I'm not sure that we are very good at isolating out this initiative on food or this initiative on entertainment or this initiative on technology has such an impact. We're looking at them all in a holistic way, and we think them taking together is what drives improved guest satisfaction, word of mouth, and essentially all of those things are part of a brand. But a brand is an amorphous construct, and it's a little difficult to isolate out on a specific one and say this drove X.

[Harry Curtis, Instinet]

And while I've got you, I noticed that -- not noticed, but in the fourth quarter, you purchased more stock in Royal Caribbean. It would appear that the company didn't, and is that just a reflection of the impact of the Silversea acquisition on the balance sheet that you're more focused on your leverage ratio for the time being?

[Richard Fain, Chairman & CEO]

Jason?

[Jason Liberty, EVP & CFO]

Yes. So I'll let Richard comment on his stock purchase, if he would like. But Harry, that's exactly right. I mean, as we had commented before on the last call that the acquisition of Silversea did stress our credit metrics. We are focused on being an investment-grade credit. We are an investment-grade credit, and there are certain metrics, especially debt to EBITDA, that we focus on looking to maintain, which when you make an investment like Silversea can weigh on that a little bit, but as we burn off on some of that debt and our EBITDA gets better here in the short run, there certainly is opportunity to maintain that leverage and provide opportunity in an opportunistic way to buy back shares.

[Harry Curtis, Instinet]

Probably more in the second half?

[Jason Liberty, EVP & CFO]

There is definitely more headroom in the second half of the year than there is in the first half of the year.

[Operator]

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

[Jared Shojaian, Wolfe Research]

So can you just help me understand the 350 basis point impact that [Technical Difficulty] for 2019 in terms of Silversea, the terminal and the water park? How would you break that out between the 3 components? And I guess, I'm a little bit surprised that the contribution isn't higher for one because I think Silversea contributed about 350 basis points by itself to the fourth quarter with only 2 of the 3 months in the quarter. I know there is some seasonality to it, but can you just help me understand the thought there a little bit better?

[Jason Liberty, EVP & CFO]

So first, just on the seasonality side, what we brought into the fourth quarter were 2 of the probably 4 most highest yielding months for Silversea, especially with August being in that consideration. So that's why it's a little bit more elevated in terms of the impact on the fourth quarter versus the 350 for the full year. I won't sparse out exactly what each one of these things as it relates to our Port of Miami and Perfect Day and Silversea is. Obviously, the vast majority of it is Silversea. What I would say is that the Port of Miami has come online, is doing exceptionally well, the volumes there are building as we will be adding more and more ships to that terminal over time. And obviously, we talked about CocoCay coming online -- or Perfect Day CocoCay, I want to make sure we get the marketing right, coming online in May, and that will ramp up not just in terms of the amenities that we will be offering, but also the number of ships and the volumes of guests that we bring there will be ramping up over time as well.

[Jared Shojaian, Wolfe Research]

Okay. And Jason, I'm going to be really shortsighted here for a second, and I know everything sounds really positive, but I think just given some of the macro concerns, it's relevant. You talked about how 2 of the last 3 weeks were record booking weeks, which, I think, implies that the last most recent week may have decelerated some. Is that just normally a lighter week in WAVE? Or anything else that you'd call out or point to there?

[Jason Liberty, EVP & CFO]

Actually, all three weeks have been very well, have done exceptionally well. It just happens that 2 of the 3, and actually, I think it was the first and the third week were better than the second week. So it's -- I won't read into it that it was the first two. It was actually the first and it was the third. And even if we looked at the second one, it was very close to records that we have seen in the past.

[Operator]

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

[Felicia Hendrix, Barclays Bank]

I just wanted to kind of continue some of the thought that Steve had earlier in the call, just on costs and you explained why you're looking at 2% this year. I'm just trying to understand if we should think about in the kind of medium term if that's the new norm or so, like as we are thinking about our 20/20 model, should we be starting at a base kind of cost of 2%? Or are your investments going to be tailing off by then?

[Jason Liberty, EVP & CFO]

Well, I wouldn't -- I'm not quite sure what to say would be the new normal, but this year they are approximately 2%. What I will tell you is that we are committed to managing effectively our costs. We're always highly focused on it, but of course, there are investments that we're making in some things that pressure some of the optics of our metrics like the Perfect Days of the world that have revenues and costs, but don't necessarily have APCDs associated with them that can elevate that metric a little bit. But I won't give you a specific number just to -- hopefully everybody knows that we continue to be very focused on it.

[Felicia Hendrix, Barclays Bank]

Okay. And then I know you don't want to kind of break out these different buckets of your, kind of, the new aspects or the new drivers on your yield. But can you just -- we get this question a lot and I'm sure you do too. Can you just kind of help us think about Perfect Day. I know a lot of folks are trying to model it. So maybe kind of give us some parameters, number of passengers that might be coming a year, utilization, pricing, just anything that you can help us with our modeling there?

[Michael Bayley, President & CEO, Royal Caribbean International]

Felicia, it's Michael. Yes, I think when you look at the total portfolio for Royal Caribbean Cruises, I think over 50% of our total capacity is in the Caribbean. When you look at Royal Caribbean International, we have, I think, 13 ships operating in the Caribbean during the year. And then when you look at the deployment of those ships to Perfect Day in 2019, I believe that 10 of the 13 ships are calling into Perfect Day. Our projections are that by 2020, so next year, we will be taking just shy of 2 million guests a year to Perfect Day. So -- and certainly what we've seen in our bookings, not only in the Caribbean, but particularly for those ships that are scheduled to go to Perfect Day has been really quite positive, and we haven't officially opened it yet. So I hope that gives some context and paints a clearer picture for you. And then of course, the other element is the sales associated with the experience in Perfect Day, and we've seen our sales of activities and experiences really take off on our pre-cruise sales for the experience. So we're up by a factor of close to 9, I think, for our Perfect Day sales.

[Richard Fain, Chairman & CEO]

Felicia, if I can -- it's Richard, and if I could just add something to try and address your question. When we identify the costs that we've said are associated with Perfect Day and the revenue and we've adjusted our cost, our yield and expense metrics to take that into account, we've only isolated out the actual costs in the -- on -- that are directly related to CocoCay and the revenues that occur on CocoCay. But one of the impacts of doing an initiative like that is that it improves the ticket revenue, and we can't and we don't isolate that out separately. And it's obviously very hard to measure. And that's actually part of what you see going on. We have a lot of things that we think are helping us on the revenue side that we aren't quantifying. We've really isolated these 3 things, Silversea's, Terminal A and Perfect Day, but there are actually others, and it's a little hard to isolate those out. But as Michael said, and he has said even more emphatically on previous calls, we really think Perfect Day is a game changer for us and quite exciting, but it's in more ways than just appear when you isolate it out as a separate expense and a separate revenue.

[Felicia Hendrix, Barclays Bank]

Okay. And then Jason, on Silversea, I know most of the synergies are going to come next year when you can refinance the debt, but have you been able to generate any kind of or do you expect to generate any kind of cost synergies in '19? And then also on the earnings side, when we have time after the call, I'm sure we can sit down and calculate this, but maybe you can help, was there -- what was the impact to EPS? Was it neutral or dilutive?

[Jason Liberty, EVP & CFO]

Yes. Sure. So one, at the same time that we had announced the Silversea deal, we said it was going to take a few years. A lot of that is tied to the financing for it to be accretive to our overall business. So I won't be specific in terms of the amount because it's really immaterial to our bottom line. The cost synergy effort or just synergies in general are going exceptionally well. The Silversea team is very engaged and very focused on growing the business and making the business as efficient and profitable as it can be. We are, I would say, a little bit ahead of schedule on the cost synergy side, and we do have some of the cost synergies accounted for within our guidance for this year.

[Felicia Hendrix, Barclays Bank]

Okay. And then just last question, just more housekeeping, but -- and maybe this is an impact of Silversea. We're just looking at your fuel consumption versus your capacity growth, and typically your fuel consumption is below your capacity growth, excluding some quarters where seasonality might reverse that. But now your guidance implies fuel consumption above capacity growth. So I'm just wondering if Silversea is driving that?

[Jason Liberty, EVP & CFO]

Yes. That's exactly right. Those ships are not as fuel-efficient or really not even close to being as fuel-efficient as our overall fleet. And obviously, they don't benefit from scale as those ships are sailing with passengers between 100 and 600 passengers on them. So that's what's driving the consumption differential.

[Felicia Hendrix, Barclays Bank]

Do we see going forward, is there a rule of thumb that we should use or we just use the pattern that we're seeing this year?

[Jason Liberty, EVP & CFO]

Yes. I think once we get through this year, and obviously we're also very focused as part of the synergies on trying to employ many of the energy-saving initiatives that we have done on our existing fleet, trying to get some of those opportunities onto the Silversea fleet.

[Operator]

Your next question comes from the line of Greg Badishkanian from Citi.

[Gregory Badishkanian, Citigroup]

Great. Just for my first question, just to do with the strength of WAVE, any specific regions that really stood out? Is it just North America sourced? And also, just color on the year-over-year growth from pricing during WAVE? Is -- was the booking surprisingly positive? Or was it the pricing side that was more of a positive for you?

[Jason Liberty, EVP & CFO]

Yes. So first, on the WAVE side, I mean, the only market which we did -- we talked about that had a little bit more volatility to it has been the U.K. Outside of that, we have seen a lot of strength and both volume and benefits on the pricing side as well. So it's -- again, I mean, we're still in the early days of WAVE, but at least what we have seen over the past 3 to 4 weeks is a good news story on both the volume and pricing.

[Gregory Badishkanian, Citigroup]

Good. And then just China, I think you mentioned that bookings were up year-over-year for 2019. How do you think that market performs for you relative to your overall fleet? Is it going to outperform, in line?

[Michael Bayley, President & CEO, Royal Caribbean International]

It's going to outperform. This is Michael, Greg. We're pleased with China. We've had many conversations over China over time. We've been in the market for 10 years, and we continue development. And as Jason mentioned, '18 performance was significantly improved from '17 and '19 is in a really good book position, and we are feeling quite good about the dynamics there at the moment.

[Operator]

Your next question comes from the line of David Beckel from Bernstein Research.

[David Beckel, Sanford C. Bernstein & Co.]

I'll take another stab at the additions of Silversea, CocoCay and Terminal A, if I could. I believe based on your guidance, the math implies all 3 of those will contribute about $15 million of EBITDAR. So first off, is that right? And second, if so, how should we think about how those investments will contribute in 2020? And is there any chance for upside in 2019, I think, as you may have alluded to before?

[Jason Liberty, EVP & CFO]

Yes. So as it relates to the EBITDA, the profitability of it, we are not guiding specifically on these items, but we were comfortable giving how it impacts our yield as well as our cost metrics. I think when you think about, as it goes into 2020, first off, we're into all of these investments for them to be accretive to our business and be high returning and certainly we expect in 2020 there to be more contribution from all 3. The Port of Miami because we'll have more volumes, as Michael commented. On CocoCay, we will have almost 2 million guests going through CocoCay in 2020, and there will be more and more amenities available to those guests on the island. And a lot of our synergies will be implemented through 2020 on Silversea, and Silversea will also take on a new ship in 2020, which will even improve further their scale of their business.

[David Beckel, Sanford C. Bernstein & Co.]

Great. And as a second question, a bit higher level. Looks like you stand a reasonably good chance of hitting double-digit EPS this year, which would be a year ahead of schedule relative to 20/20 Vision. So two quick questions, and please remind us, was the original guidance of double-digit EPS inclusive of a economic disturbance of a material sort? And the second, has the ROIC component of your Vision 20/20 tracked according to your expectations thus far?

[Jason Liberty, EVP & CFO]

Yes. Sure. So first on the 20/20, we did say that we would reach double-digit growth. We didn't say exactly what that double-digit number would be, but as you commented on, we -- the higher end of our guidance is $10 per share, and we'll certainly work as hard as we can to do as well as we possibly can to reach high EPS growth. The ROIC number in general is on track. Obviously, our investment in Silversea weighs on that a little bit, but our other investments have really outperformed, which is allowing us to see our ROIC continue to move north. So I think that's kind of how we see things to continue to evolve. The one comment I would make, just to put something into context, if you look at 2019 and the guide that we've given, if we had the same FX and fuel rates at this time last year, that number would actually be about $0.40 higher than what we're guiding today. And so that is one factor that has changed for us, but trying to project what economic changes there might be going forward, that's not something that we do in our forecasting for the future.

[David Beckel, Sanford C. Bernstein & Co.]

And was the original EPS target inclusive of economic disturbances?

[Jason Liberty, EVP & CFO]

No. It was basically -- it was based off of moderate yield growth, good cost control and being measured in our capital investments.

[Operator]

Your next question comes from the line of James Hardiman from Wedbush Securities.

[James Hardiman, Wedbush Securities]

I wanted to circle back and maybe just get a little bit of a clarification on one of Steve's original questions. Obviously, the core yield guide to start the year is better than at least I can remember. Jason, you sounded pretty positive, and I think Richard has contributed to this as well on the like-for-like trend. I guess, my clarification is, is the like-for-like yield guidance once we, obviously, exclude Silversea and even the new hardware, is that better to start 2019 than it's been in previous years?

[Jason Liberty, EVP & CFO]

Sure. It is higher than what we have seen historically in the past on the like-for-like side. So if we look at just our -- the core, which we're calling out approximately 4%, more than half of that is coming from like-for-like growth and the balance of that is coming from the new hardware.

[James Hardiman, Wedbush Securities]

Got it. That's really helpful and really encouraging. And then just a housekeeping question for me, maybe save Carola some phone calls here. Can you give us the quarterly capacity numbers? And is there any way to give us the nonorganic contribution stuff, the yield contributor, Silversea, CocoCay, Miami Port on a quarterly basis? Obviously, that's going to be a pretty big building block of how we build out our models. Is there any way to give us or at least directionally how to think about that over the course of the year?

[Jason Liberty, EVP & CFO]

Well, one, it is my job and life to make Carola's life easier. I want to make sure that she has a fruitful afternoon. So I'll leave her for more details, but certainly, as I said, most of our capacity growth for the year will take place in the first half of the year. And as I -- also as I commented, our yield or our cadence for our yield is pretty much the same within certain levels of moderation through the course of the year to consider.

[James Hardiman, Wedbush Securities]

And that's on a total basis, it's a similar cadence, not on a organic or inorganic?

[Jason Liberty, EVP & CFO]

That's exactly right. On a total basis, it's the same. On a combined basis, on a gross basis, but also on the core, it's also has a similar cadence to it through the course of the year.

[James Hardiman, Wedbush Securities]

Okay. And then just lastly, way too early question on 2020, but some of these nonorganic contributors, I would assume that Silversea is going to be a wash in terms of yields and costs. I'm guessing that the Miami terminal will as well, but should we also assume some sort of inflation from cost and also an addition to yields for Perfect Day, given the timing in 2019?

[Jason Liberty, EVP & CFO]

Well, I mean, it is -- as you said, it's early days to start thinking about 2020, but I would focus more on the port and CocoCay and even with Silversea. Silversea is going to grow next year. There is going to be more volume coming out of the terminal, and there is going to be more volume coming out of Perfect Day, all of which will have both yield and cost considerations to it in 2020.

[Operator]

Your next question comes from the line of Timothy Conder from Wells Fargo.

[Timothy Conder, Wells Fargo Securities]

I did want to follow up, drilling a little bit more here, maybe James was alluding to on 2020 a little bit and your implications for the current state of bookings also out of Europe. So it appears that Germany is okay, you only called out a little volatility from the U.K., but how are -- it's early obviously, but how are the bookings with the TUI JV out of the Germany. And then considering 2020 and some changes with ships coming in and out the TUI JV fleet, how should we think about the TUI JV contribution in '19 and then '20, just to make sure, as that's become a pretty significant and very nice JV operation obviously?

[Jason Liberty, EVP & CFO]

Yes. Sure. So first just talking on the EU side, which also ties into your comment around Germany. First, on the U.K. piece, we really said that there's just been volatility, but that volatility has certainly stabilized and again the volatility typically happens around the new cycle in the U.K. Broader Europe has actually done quite well. Germany is doing well, typically TUI is also doing well. So we don't comment specifically on TUI's yield guidance or specifically to their profitability. The one thing I would say in '19 is that TUI does take on another ship, which is good for us as it relates to the income that we will get, the equity pickup we will get from TUI. So that will continue to expand our equity pickups. In 2020, they do not have a new ship and so some of that uplift that we've seen now for the past several years will be a little bit lighter. We're more driven off of the margins that they get off of their existing fleet for the next couple of years. And so that's how I would think about those two line items.

[Timothy Conder, Wells Fargo Securities]

Okay. And then, Michael, China, Jason alluded to earlier that China was up in bookings, you responded to the previous question that it's positioned well. How is pricing at this point going year-over-year, if you can have any commentary on that? And then CocoCay, just maybe a little more Perfect Day, how are your bookings and maybe price uptake, so to speak, tracking at this point versus the expectations of what you guys have built into the budget?

[Michael Bayley, President & CEO, Royal Caribbean International]

So we're not going to go into specific details on price increases by products or market, but I can tell you that overall the China market, I think, I mentioned earlier, we've seen good improvement in '18 over '17, and we are seeing similar improvement now coming through into '19. Of course, we've got the addition of our newest ship, Spectrum of the Seas, that's going into the China market. So we're excited about that and the consumer seems to be excited about the introduction of that new product as well as our trade partners. So things are looking quite good in the China market. Of course, overall, there has been an industry capacity decrease of somewhere in the region of 15%, 20%. So China is in good shape, even though there is quite a lot of negativity in terms of the news that we hear with regards to the trade battle that's occurring, but the consumer seems to be quite confident, and things seem to be relatively good in China. In Perfect Day, I think we mentioned earlier that we've been very pleased with the demand that we've seen coming through on the products that have course into Perfect Day, and that's been a real positive driver of our Caribbean overall health in terms of bookings. And we've also seen really good uptake in terms of the pre-cruise sales of experiences and products on Perfect Day. So both of these really are quite positive.

[Timothy Conder, Wells Fargo Securities]

And lastly, Jason, you had alluded to with Excalibur coming on and the trends that you're seeing there, if I remember right, at an Analyst Day, you talked about maybe an enhanced e-commerce engine being laid over top of that in the latter half of '19. Any additional color you can provide there?

[Jason Liberty, EVP & CFO]

Yes. So there is lots of elements and attributes that are being added onto the Excalibur platform. One of that will be for us to be able to be -- it will be easier for the customer as we are able to curate and have recommendation engines to allow our guests to more easily book things before they get onto the ship. And as we know in the past, if we can get the consumer to book ahead of the cruise, we also are able to get them to also spend when they're on the ship. So those capabilities will be coming online through the course of 2019, but I would expect more of a full year impact impacting us in 2020.

[Operator]

Your next question comes from the line of Stephen Grambling from Goldman Sachs.

[Stephen Grambling, Goldman Sachs Group]

I guess, two follow ups. First, I guess, coming at the Perfect Day, terminal and Silversea cost questions from a different angle, what percentage of the costs are onetime versus ongoing expenses? And then as you think about the ultimate ROI on Perfect Day, are there other opportunities or regions you've identified to develop something similar, or is it still early, that could further differentiate and strengthen the brand?

[Jason Liberty, EVP & CFO]

Yes. So as it relates to onetime, I think the only thing that I would call out, because there is nothing really relating to CocoCay or Perfect Day, that is onetime. As we announced many, many months ago when we bought Silversea, we announced Project Invictus, which was really to help modernize their ships. And so they do have more -- they had more drydock activity in the fourth quarter of '18 and of course since it's on a quarter lag, that is inflating our cost metric a little bit in the first quarter, which is why that's -- the highest cost quarter for us on a gross level. I would say that on the Perfect Day side, just to quickly comment, we will -- it is obviously a major focus of ours. We want to get this thing launched, understand how the consumer takes to that and then consider whether or not there are future opportunities for us to consider.

[Stephen Grambling, Goldman Sachs Group]

Nice, helpful. And one other follow-up on China. Can you just give us any update on the efforts to kind of alter the distribution model there and perhaps whether the incremental demand for non-China itineraries could potentially play into that?

[Michael Bayley, President & CEO, Royal Caribbean International]

Yes. Steve, it's Michael. We've been on the journey to develop distribution for the past few years, and we feel pretty pleased with the journey that we are on and the progress that we've been making. And I think that's been part of the success that we're having now in China, is the growth of the distribution system. So we're feeling pretty good about that. And sorry, the second part of your question was?

[Stephen Grambling, Goldman Sachs Group]

It was just, I guess, it plays into it, but whether the non-China itineraries can potentially accelerate that, if you are seeing greater demand there and maybe earlier booking?

[Michael Bayley, President & CEO, Royal Caribbean International]

Yes. I mean, there was few elements to our strategy in China. One was the distribution, the other one was adding longer itineraries for the China market itself, ex China, which has proven to be quite successful. And then, of course, the third element that you pointed out is the focus on outbound. It is the world's largest outbound travel market, and things are changing with regard to visa restrictions and group travel and what have you, and we are starting to see an improvement in terms of the number of Chinese guests who are going through our products in Alaska and the Mediterranean and Europe, and we think that's an opportunity, particularly as the brand becomes more and more well known in the China market and as we establish wider, broader, deeper distribution, then it becomes a really good opportunity for us in terms of that outbound growth.

[Operator]

And your last question comes from the line of Brandt Montour from JPMorgan.

[Brandt Montour, JPMorgan Chase & Co.]

I was just hoping you could maybe unpack your fuel guidance a little bit more and help us understand what you're assuming in terms of at-the-pump pricing, if you're giving full credit for the backwardation of the curve or if your -- what are you assuming for the MGO spread, anything of that would be helpful.

[Jason Liberty, EVP & CFO]

Yes. Sure. So as it relates to our guidance on the fuel side, obviously, we are about 58% hedged for the year and then when you look it as it relates to fuel price, we forecast based off of what fuel prices are today. We don't speculate or pivot off of the forward curve.

[Brandt Montour, JPMorgan Chase & Co.]

And that includes -- sorry, and that includes MGO spreads as well that would be just today.

[Jason Liberty, EVP & CFO]

That's exactly right. That's right. Thank you for your assistance, James, with the call today. And we thank you all for your participation and interest in the company. Carola will be available for any follow up you might have, and I wish you and we wish you all a very great day.

[Operator]

This concludes today's conference call. You may now disconnect.