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Q1 2015 · Earnings Call Transcript

Apr 20, 2015

Executives

Jason Liberty - CFO Richard Fain - Chairman, CEO Michael Bayley - President & CEO, Royal Caribbean International

Analysts

Tim Conder - Wells Fargo Securities Steve Wieczynski - Stifel Felicia Hendrix - Barclays Robin Farley - UBS Harry Curtis - Nomura James Hardiman - Wedbush Securities Steven Kent - Goldman Sachs Jaime Katz - Morningstar Assia Georgieva - Infinity Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Royal Caribbean Cruises Ltd. 2015 first-quarter earnings conference call.

[Operator Instructions]. Thank you.

I would now like to turn the conference over to Mr. Jason Liberty, Chief Financial Officer.

You may begin your conference.

Jason Liberty

Good morning, I would like to thank you for joining us today for our first-quarter earnings call. Joining me here from the spectacular Anthem of the Seas, are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, our President and Chief Operating Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Laura Hodges, our Vice President of Investor Relations.

During this call we will be referring to a few slides which have been posted on our investor website, www.rclinvestor.com. Before we get started I would like to refer you to our notice about forward-looking statements which is on our first slide.

During this call we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risk and uncertainties.

Examples are described in our SEC filings and other disclosures. Also we will be discussing non-GAAP financial measures which are adjusted as defined and a reconciliation of these items can be found on our website.

Richard will begin by providing a strategic overview the business. I will follow up with a recap of our first-quarter results, provide an update on the booking environment, and then provide an update on our full-year and second-quarter guidance for 2015.

We will then open the call for your questions. Richard?

Richard Fain

Thank you, Jason, and thanks to all of you for joining us this morning. As always, it is a pleasure to provide color on the progress we are making and I do appreciate your interest.

As Jason mentioned, we are talking to you from onboard Anthem of the Seas, Royal Caribbean International's newest vessel, and I have to say she is an absolute marvel. All of the industry firsts that were introduced on Quantum of the Seas are equally as dramatic onboard her sister ship, Anthem.

The wows span every spectrum from technology with the fastest Internet bandwidth in the industry to entertainment with dynamic activities like RipCord by iFLY to dining featuring partnerships with renowned chefs such as Jamie Oliver. While all of the attributes I mentioned create a powerful experience for our guests, the most impressive feature of Anthem of the Seas is her crew.

The ship is truly a marvel, but the men and women who produce such a wonderful vacation for so many are truly an inspiration to us all. And the result of all that this is that the ship is quite profitable and produces strong returns.

Quantum in New York has been amazingly well received. Anthem in the UK has also been attracting disproportionately high pricing.

And the bookings for Quantum in China are nothing less than heartwarming. All in all this class of ship is proving to be a terrific investment and well worth all the effort that went into designing and building her.

The profitability of our new ships, coupled with the power of our family of brands, is enabling us to deliver step change performance again in 2015. On our last earnings call we were pleased to report that earnings for 2014 were up 40% over the previous year.

We were then pleased to give guidance that projected a further 40% increase in our earnings this year. Unfortunately the currency markets have not cooperated and, as a result of the weakness in Sterling, Aussie dollars, Euros, etc., we now expect 34% earnings growth year over your.

Not quite 40% but definitely not bad. Our consistent focus remains solidly on the Double-Double program and we remain committed to achieve the 2017 goals of double-digit ROIC and double our record 2014 profitability.

Now there will always be ebbs and flows in our business and we don't see this year as any different. Last year the story revolved around a weak Caribbean and a strong euro.

This year the Caribbean is strong but foreign currencies are weak. When you remove the clutter the common denominator is our performance.

The fundamentals of our business are intact and we continue to deliver on the plans we have communicated, in particular those embodied in our Double-Double program. And we are taking specific steps that I'd like to comment on to ensure the success of that program.

Our new ships, the upgrading of our older ships and the strengthening of our brand positioning are all helping us drive better returns. Similarly, our investment in China and the Asia-Pacific region are paying handsome dividends.

In just 2 weeks Quantum of the Seas leaves for China where she will join our 3 other ships in that market. Royal Caribbean International is already seen as the preeminent brand in China.

And Quantum helps secure that position further. China now represents 6% of our capacity but at a higher percentage of our profitability.

And we have recently announced that Ovation of the Seas will move to that market next year. Another specific step we are taking relates to price integrity.

Here we have moved on 2 fronts to improve the reliability and the consistency of our pricing model. As previously described, we have extended our booking curve by opening deployments earlier, by starting marketing sailings earlier and by enhancing our yield management systems.

The objective is to fill our ships earlier and reduce the number of state rooms we have to fill closer in. With fewer staterooms to fill at the last minute there is less need to offer the kind of drastic last-minute discounts that are so disruptive.

That approach has been working and is amply demonstrated by our higher book load factors and our higher APDs. But more recently we have adopted policies designed specifically to deal with the last-minute discounts that are so disruptive to the system.

I am referring specifically to the special discounts offered in the last days before sailing, often at significant discount. Now these may represent only a small percentage of our business, but their influence is more significant.

They upset many of our most loyal customers by creating an uncertainty about the prices that they pay. They cause headaches for our travel agency partners who don't know what price they should rely on and they undermine our brand image.

As a result, in March we adopted a new policy that we would not do any last-minute discounts on bookings in North America. Depending on the type of cruise that last-minute may be 10, 20, or 30 days out.

But from that point on we will hold our price at the prior level. Obviously this may cost us some bookings in the short-term and our guidance reflects that.

But we believe that the long-term advantage for our brands is worth the small short-term cost. Over time we think this will lead to happier guests, happier agents and better branding.

The only exception to this rule is for very short-term cruises, i.e. 2 to 4 nights where last-minute bookings is more a reflection of the decision process.

Lastly, I'd like to comment on one of the other foundations of our business and that is our cost structure. Achieving the Double-Double goals requires a strong cost posture and I am impressed with the cost leadership that our brands have demonstrated over the last few years.

Although we originally guided towards a good expense control in 2015, the further reduction in our cost guidance is more evidence of our consistent and determined efforts to identify and deliver efficiencies throughout the business to ensure we drive strong shareholder returns without impacting our product or investment in our future. With that I will turn it back to you, Jason.

Jason Liberty

Thank you, Richard. I will begin by talking about our results for the first quarter.

So unless I state differently, all metrics will be in a constant currency basis. Our first-quarter results are summarized on slide 2.

The first quarter exceeded our expectations with all metrics above the top end of guidance. We generated earnings of $0.20 per share which exceeded the midpoint of our guidance by approximately $0.08.

This outperformance was in spite of a negative $0.05 in earnings impact due to the stronger dollar and in increase in fuel prices relative to our January guidance. Net revenue yields were down 1% for the quarter, which was considerably higher than the top end of the range.

The strength in closed in pricing on Caribbean sailings more than offset some weakness in onboard spending from our non-US guests. The majority of our onboard offerings are denominated in US dollars and the significant strengthening of the dollar has slightly weakened the purchasing power of many of our international guests.

As a reminder, the revenue and cost per ration change made in the third quarter of 2014 makes Q1 a tougher comparable. So a portion of the revenue for our high yielding New Year sailing was recognized in the fourth quarter of 2014.

So under the previous policy these sailings would have been recognized in Q1 of 2015. Yields for the first quarter would have been up slightly were it not for the proration change.

The Caribbean, which accounted for 69% of the capacity in our first quarter came in with better revenue yields than we initially expected. So the remaining Q1 inventory was mostly in Australia, Asia and South America.

Combined yields for all non-Caribbean itineraries were up low-single-digits. So Q1 was the first full quarter of operations for Quantum of the Seas and yields were exceptionally strong.

Quantum sailed a series of the Caribbean and Bahamas itineraries from Cape Liberty and generated premiums similar to our Oasis class vessels and significantly higher premiums compared to the fleet average. Net cruise cost, excluding fuel, was up 0.9%, which was 160 basis points better than the midpoint of guidance.

The majority of the favorability is attributed to further efficiencies that are within our non-guest facing areas. It is truly gratifying to see the consistent effort of our shipboard and shore side employees to put forth to identify and implement cost savings.

There is no one major initiative or large example that would drive these continued cost savings. It is a thousand little things throughout the business that are continuously identified and then implemented.

These savings have allowed us to continue to invest in our product and in growing markets like China, while still keeping costs below the rate of inflation. I am truly proud of the cost culture we have built.

Now I would like to update you on what we are seeing in the booking environment. Overall, we have had a good [wave] period with both booking volumes and pricing exceeding last year's levels.

As you will recall, we began the year with a higher percent of inventory booked than ever before. This translated into better overall pricing during the wave season which in turn has increased our book to APD premium at the same time last year.

At this point booked APDs and load factors are higher relative to same time last year for the full year and in each remaining quarter of 2015. Trends during wave were particularly strong relative to expectations at same time last year for Caribbean itineraries.

As previously noted, closed in pricing for Q1 sailings was better than we forecasted. However, our previous guidance already incorporated a much healthier Caribbean pricing environment for Q2 through Q4 sailings when industry capacity returns to more typical levels and our own capacity in the region is down slightly.

The strong wave looking period has given us more confidence in our forward-looking assumptions, particularly since we now have a higher portion of Caribbean inventory sold than ever before. Given this level of visibility we continue to expect a low-single-digit yield increase for Q2 to Q4 Caribbean sailings.

Moving on to Europe – we have increased our European capacity by about 5% as we are replacing slightly smaller vessels with Anthem of the Seas and Allure of the Seas. Overall we have a solid looking period for Europe sailings with volume slightly down versus 2014, but up significantly compared to other previous wave periods.

We are seeing consistently strong booking trends for guests from North America. As a result we now have slightly less inventory left to sell in Europe than at this point last year despite the capacity increase.

Western Mediterranean and Baltic itineraries, which account for more than 70% of our European capacity, have been enjoying strong demand at better prices than last year. On the other hand, we have experienced some softness in trends for the Eastern Mediterranean, particularly for the voyages that turn in Turkey.

Taking all of this into account, we are still expecting to see record yield in Europe this summer with a year-over-year increase in the mid-single-digits. In the Asia-Pacific region we offer a wide variety of itineraries that range from 3 night sailings tailored to the Chinese market to 18 night Australia/New Zealand sailings that are sourced globally.

In 2015 our capacity has jumped from 12% to 15% for this product grouping. While trends vary by itinerary level the Asia product as a whole has been trending quite well.

Quantum of the Seas will arrive in China in about 2 months and, as expected, is commanding significant premiums. Quantum's early success, with over 80% of her revenue currently booked for the inaugural China season, provided us with the necessary confidence to place her sister, Ovation of the Seas, into the China market when she debuts in 2016.

We continue to expect yield increases in the low- to mid-single-digits for the Asia-Pacific product. Taking into account all we have just told you, I would now like to summarize our guidance for the full year and second quarter.

If you turn to slide 3 you will see our updated guidance for 2015. We expect net revenue yields for the year to increase 2.5% to 4% for the full year.

The guidance contemplates slightly softer than expected onboard revenue spend from our non-US guests due to a reduction in their purchasing power as a result of the stronger dollar. It also incorporates a moderate reduction in expectations for sailings in the Eastern Mediterranean as well as the close in discounting policy that Richard referred to.

Each of these changes are small but the change in our yield the guidance is small. While there are some puts and takes in ticket revenue expectations for – all other itineraries are generally in line with our previous expectations.

On the cost front we expect to continue the momentum realized in the first quarter. Net cruise costs excluding fuel are expected to be flat to down 1% for the year versus our previous guidance of up 1% or better.

Since our January earnings call the dollar has strengthened 3.5% versus our basket of currencies and fuel prices have increased approximately 14%. Together these 2 factors represent a $0.36 headwind to earnings per share.

The table on slide 4, which will be in our upcoming 10-Q, ranks the impact of our main currencies to net income by quarter along with our usual sensitivities. This is to enable better modeling on a quarterly basis.

Our fuel costs for the year have increased to $834 million from $806 million during our January earnings call. While this is an increase from the previous guidance, fuel costs remain down year-over-year by $104 million.

Consumption is down approximately 18,000 tons from previous guidance driven by better-than-expected results from a laundry list of fuel consumption initiatives. We are 52% hedged for the remainder of the year and that is a price of $638 per metric ton.

Taking into account all we've just told you, and based on current fuel prices, interest rates and currency exchange rates, we have updated our adjusted earnings per share guidance to be between $4.45 and $4.65 for the year. On slide 5 we have provided guidance for the second quarter.

Our capacity in the second quarter shifts significantly versus Q1 and same time last year. 37% of capacity is in the Caribbean, 25% is in Europe, 10% is sailing repositioning cruises and 10% is in both China and Alaska.

The quarter is booked nicely ahead of last year in both APD and load factor and we currently expect a yield increase of approximately 3.5%. So I also wanted to mention 2 structural elements going on in Q2.

Quantum of the Sea spends the majority of the quarter on a repositioning cruise and the Allure of the Seas will be repositioning to Europe. Net cruise costs excluding fuel are expected to be up approximately 4.5% and we have included $213 million of fuel expense for the quarter.

The year-over-year increase is mainly related to supporting the growth in China. We expect adjusted earnings per share to be approximately $0.70 for the quarter.

Before opening up the call for questions I wanted to just take a moment to comment on our Double-Double goals. These goals are ingrained in our culture and help govern our day-to-day decision-making.

While the ongoing volatility in the currency and fuel markets provides its challenges, we remain solidly on track towards these goals. With that I will ask our operator, Brandy, to open up the call for a question-and-answer session.

Operator

[Operator Instructions]. And your first question comes from Tim Conder of Wells Fargo Securities.

Tim Conder

Thank you. And just a couple things here.

One, Jason, I think you mentioned that the Asia yields are expected to be up low- to mid-single-digits. In the past – I know China is just a piece of Asia, but in the past China has been growing at 15%.

So maybe help bridge that a little bit. And then secondly, I think you guys had mentioned earlier that you were starting to take some steps to mitigate the onboard exposure of non-dollar-denominated guests.

Maybe give us a little bit of color on that progress. And then just the magnitude of your onboard revenues that are exposed to consumers who would have to pay in dollars yet are not dollar denominated as their home currency.

Jason Liberty

Right. Oh, good morning, Tim.

I will take the issue question and I will pass it over to Michael to take the onboard one. On the Asia side, which also includes Southeast Asia as well as Australia, we still see the strength with – there is 66% more capacity in China and we still see significant strength happening in the yields, but not at that double-digit level that we had experienced last year, but still very strong.

And then the other products are really Southeast Asia, which is a mix of international guests which are basically kind of more on the flattish side. And then Australia, as we talked about, with a lot a capacity that has come into that market, is up slightly.

And so, that balance gets you to that mid-single-digit or low- to mid-single-digit range.

Tim Conder

Okay, okay.

Michael Bayley

Hi, Tim, it is Michael. On the question of onboard revenue, we started to see a little bit of softness in the first quarter as it relates to the international guests.

And we think that is related to price sensitivity as a result of the degradation of these various currencies. We started to look at pricing actions in US dollar that don't necessarily impact the US customer.

And we have had some good fortune with some of the pricing actions that we have taken and we started to change the way that we bundle products and how we are communicating these bundled products into the marketplace, both in the international markets and the US market. It is early days yet, but some of the actions that we have taken we think are proving to be successful in relation to the mitigation for the international.

Tim Conder

And I guess, Michael, just to clarify a little bit more then, so is the consumer's bundle they pay in pounds or Euros correct? But then are you changing anything for the non-bundled portion or are they still paying in US dollars or does that have an opportunity to change also here?

Michael Bayley

Well, pre-cruise they are paying in their local currency. Obviously when they board our ships they are paying in US dollars.

So it is the pre-cruise opportunity that we are currently exploring. On the US dollar pricing, the opportunity there is more with our US customers.

And just to make one comment, our onboard revenue, even though we have got this slight softness in relation to international guests, we are still heading for a record year as it relates to onboard revenue.

Tim Conder

Okay, okay. Okay, thank you.

Michael Bayley

You’re welcome.

Operator

Your next question comes Steve Wieczynski of Stifel.

Steve Wieczynski

Hey. Good morning, guys.

So if you look at your reduction in your yield guidance, and I know you talked about the onboard spend from European or from internationally sourced guests. If that wasn't the case and the dollar was basically unchanged versus where we were 3 months ago, would you have been able to hold your yield guidance?

Jason Liberty

Hi, Steve, it is Jason. Yes, if those factors did not come into play we would have held our yield guidance for the year.

Steve Wieczynski

So nothing has really changed on the pricing side of that? That is what I am really trying to get at.

Jason Liberty

Yes, that is right. And I think an important point on it, Steve, is when we went into our call in January, we had already experienced several weeks of strength in the booking environment.

And I think as we commented, that strength was really seen for Q2 through Q4. And what we saw, which was more surprising after the call, is some of those trends to bake themselves into the first quarter.

So the trends – the strength of those trends that we have seen outside of the Eastern Mediterranean have really continued forward.

Steve Wieczynski

Okay, got you. And then second question – a little bit bigger picture question might be for Richard.

But when you look at Australia over the next couple years, there is just a ton of capacity not only from you guys being in there but also your competitors. I guess at the end of the day do you guys feel comfortable enough that that market will be able to absorb the amount of – ?

I mean you are looking at basically mid-double-digits kind of capacity growth over the next couple of years.

Richard Fain

Yes, hi, Steve. Actually that is something we have been watching for a while.

And I guess I would have to say we have been pleased with how well it has held up over the last several years actually with a large amount of new capacity. I think what has happened and what's giving us some comfort is that we are seeing more and better ships and more and better kinds of itineraries to offer.

So it has held up. But as Jason pointed out in the earlier part of it, to some extent when we look at our overall yields in the Pan Asian region, that is offsetting the very strong yields out of China.

Steve Wieczynski

Okay, great. Thanks, guys.

Operator

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

Felicia Hendrix

Jason, just – I think what would be helpful, you have given us some qualitative reasons why your net yield guidance came down a bit at the midpoint. I was just wondering if maybe you could quantify or help bridge us to the yield reduction.

So some was coming from your new yield strategy maintaining prices, some was from the Eastern Med, some is from the FX impact of onboards. Just helping – wondering if you could help us think about the different pieces.

Jason Liberty

Happy to, Felicia. So the way that I would kind of frame it is about – so the – approximately 50 basis point change from Q2 through Q4, which would be the implied change in that range or the midpoint of that range, half of it is really our anticipation on the effect of the non-US guest's spend on the ship.

And then the balance of that is a mix of the Eastern Mediterranean and then some impact from the price integrity policy that Richard had referred to. I mean it is really small changes overall.

Felicia Hendrix

Okay, thanks. And then on the price integrity side, I know it is early and you are talking about this now, but do you have a sense if your competitors are going to kind of join the party?

Richard Fain

I think we have said that this is the right policy for us independent of anyone else and I think that is really the approach we took in deciding. It was really important to strengthen our brand because in the long run it is our brand that is going to drive our yield improvements.

And so, no, I can't comment on anybody else's. But I think I really would emphasize we think this is going to help us out regardless of what anyone else does.

Felicia Hendrix

Yes, it makes sense. Thank you.

And then just final question. Jason, as we think through the rest of the year, so the net yield guidance looks a little more back end loaded than we anticipated.

Just wondering if you can discuss how having the Quantum and Allure move to revenue generating cruises and then also how the prorating of cruises affects – for the fourth quarter affects your yields in the second half.

Jason Liberty

Sure, thanks, Felicia. So as it relates to the second quarter, Quantum is about to go on a 54 – 55-day voyage from New York to Shanghai.

So it really takes up the majority of the second quarter, so that obviously has an impact on the yield because there is – the repositioning of sailings, though they are actually quite good for Quantum relative to other repos are still lower relative to the average. And then you have a lower – it takes several weeks to get over to Europe and that will also happen.

And actually she has already left, and that will also take effect on the second quarter. And then to your point, we had about 120 basis points or so of revenue that transferred in from Q1 of 2015 into Q4.

And so that, on a year-over-year comp, will make the Q4 comp – if you don't take that out will lead you to it being a higher number.

Felicia Hendrix

Okay, helpful. These repositioning cruises, I'm just getting some questions, are they – do you guys make – are they profitable?

Michael Bayley

Yes, Felicia, I can answer that. Yes, they are profitable.

I mean I think the kind of deals that we are generating out of the New York market and the Shanghai market are higher than the yields we generate on these long trans-Atlantic/trans-Pacific voyages. So it is quite a journey, 55 days, 3 different segments to Europe through to the Indian Ocean into Singapore and then Shanghai.

And those voyages just generate a lower yield than we typically see in New York and Shanghai. But still a good yield and it is profitable – all 3 voyages are profitable.

Just to also add to Jason's point, the Allure has actually left on Sunday from Fort Lauderdale on the way to Europe and then goes into a dry dock until May 19 when it starts sailing out of Barcelona. And then it is performing very well in the European market.

So we are pleased with what we are saying with Allure in Europe, but it is obviously in dry dock for a couple of weeks.

Q - Felicia Hendrix

Great, thank you so much.

Richard Fain

Felicia, it is Richard, if I could just add a comment because I think as we are looking at these things we recognize this ends up causing a lot of confusion between the quarters. Because as Jason and Michael have said, we have these voyages which are doing less.

But when we look in total we are very happy with the way that develops. But it certainly does confuse any given quarter and the second quarter does have, particularly this year, those extra positioning voyages which bring down the average then.

And we have taken that into account, we have always had that in our own forecasts.

Felicia Hendrix

Okay, thanks for the clarity.

Operator

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

Robin Farley

Questions. I wonder if – I know this policy of eliminating the last minute discounting just started in March.

But can you comment on how that may have impacted occupancy just in sort of the first 2 weeks in April, just kind of what the early impact of that has been?

Richard Fain

Robin, it's Richard again. No, it is too early for there to have been any measurable impact at this point.

And by the way, it has happened to have occurred – the implementation happened to have occurred during a particularly good time for us. So the impact on occupancy was less than it might in another time.

And we are going to have to follow this policy in times like now where it maybe doesn't have as much impact, maybe in some other quarters it will have more impact. But we think that getting our customers out of this sort of used car salesman kind of mentality will be overall good for the brand, good for their experience and therefore lead to longer yields in the long run.

But so far it is too early for us to see a measurable impact.

Robin Farley

Great, that is helpful, thanks. And then also to follow up on China, because I thought it was interesting that you were sending Ovation there next year before Quantum had even arrived.

And in your opening comments you mentioned that you were 80% booked for the accrual season. Can you give us a little bit more color on sort of what – are you seeing the season kind of starting with Quantum's arrival in June?

Or how should we think about that 80% kind of versus how far booked in advance your itineraries typically would be. And then also, I assume a lot of what your – when you say 80% booked for the inaugural season, I assume at this point that is to the tour operators.

And I am wondering if you know how booked it is at the cruise or at the consumer level.

A - Michael Bayley

Hi, Robin, it's Michael. I am not quite sure I understood the second part of your question.

But the first part of your question the answer is for this – for 2015 summer we are 80% sold. We are feeling very confident about where we are with Quantum and 2016 is looking good as well.

So one of the reasons we took for Ovation was the fact that we were very confident with what we are seeing with Quantum and that is why we decided to move Ovation there in 2016.

Robin Farley

I guess it was really the comment about 80% for the inaugural season, it sounds like that was just summer. I guess I was thinking about the winter – staying there through the winter since that is maybe kind of a new period for you to be sourcing year round in China.

How booked are you for the winter at this point I guess for Quantum in terms of your visibility?

Michael Bayley

I don't have the number in front of me, Robin, but, as I say, from what we are seeing we are confident and it is that confidence that really allowed us to make the decision on Ovation.

Robin Farley

And then the other question that I was asking about, how sold you are, was – is that when you charter a block to a tour operator that it is sold in your – when you think about how booked you are or is it not until the tour operator actually has sold that to a cruise or – few of your sales are direct there? Just trying to make sure I understand when you say that you are sold kind of at what level that is.

Michael Bayley

Yes, I mean when we say we are sold, obviously it is committed sailings where we have gotten money paid for those sailings. So it is really a combination of FIT groups, charters, charter for resale – it is the combination, the blend of all of these things that we have and we have got money deposited for that.

Robin Farley

Okay, great. Thank you.

That is helpful.

Operator

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

Harry Curtis

Hey. Good morning.

Wanted to get back to the cost side of things. It sounds to me that, based on comments I am getting back from investors, that the lift in costs in the second quarter caught them a bit off guard.

And can you walk us through just sequentially how we go from a modest lift in the first quarter to such a bulge in the second quarter? And then the implied – there has got to be I think an implied decline per berth in the second half of 4% plus.

So if you could walk us through those numbers that would be helpful.

Jason Liberty

Hey, Harry, it is Jason. So the way you laid that out I think is the right way where you would see a broader decline in the second half of the year.

What is driving the cost increase in Q2 which we alluded to at the latter part of last year as well as in the first quarter, that the investments we were making in China really – the undercurrent for the launch of Quantum is what is driving those costs up. And they would actually be higher than that amount if not for the underlying cost efficiencies that we've identified and have been implementing.

And so, once that upfront cost goes away our costs get significantly better in Q3 and in Q4.

Harry Curtis

But how are they upfront costs? Maybe you can explain how those work.

In other words, why aren't they reoccurring costs?

Jason Liberty

I didn't call them out to be necessarily recurring. It's if you are launching a ship, for example, when we launched the ship Quantum in the fourth quarter of last year the buildup, the sales and marketing efforts, the set ups of the offices and the campaigning is really what drives those up and they are not.

Now sometimes you can see them as being reoccurring. For example, when we launch Ovation next year, we will probably have similar costs for Ovation.

But on a like-for-like basis, it is not like we just keep upping the game. As new ship comes up, there is a portion that increases as we add new ships, but it is not proportional to the capacity.

Harry Curtis

So do you pretty much accumulate these costs and then expense them in the quarter that Quantum is started in in China? Or are these – have there been prior quarters where these, say, set up costs have also included some expenses related to the anticipation of the opening?

Jason Liberty

Sure. There is definitely some in the previous quarters.

Not necessarily where you kind of build up or hang it up in any way. It is really just that is really where you are spending the kind of core part of that money.

And that just happens to be taking place in Q2 as the ship launches, at the very end of Q2 in Shanghai.

Harry Curtis

Okay.

Jason Liberty

There is also obviously costs around repositioning the ship and other things as well that make it a little bit higher than the average during that period.

Harry Curtis

And then my last question is related to the second half as far as bookings are concerned in your traditional markets in the Caribbean and Europe. Can you give us a sense of how well you are booked in the second half in both of those markets?

Jason Liberty

Yes, we don't go in specifically in terms of how we are booked per quarter. But as I commented, we are in a very good book position for Q2 going forward, and that would also be discretely for each quarter.

We are in a good book position and at a good rate for the periods, which also gives us confidence. And obviously, in the back half of the year Q2 forward, it implies that you need a higher yield and that is based off of the pricing and book position that we are in.

Harry Curtis

So you feel confident that based on what you have on the books in the Caribbean and Europe in the second half, I mean it looks to us like you are going to need to see north of 5% yield growth to accomplish your goal for the year. And is it fair to say that you feel strongly that your booked position is that strong?

Jason Liberty

Yes. Well, I would – obviously, we would not be giving guidance unless we felt comfortable with it.

And I would say the book position, the rates and so forth we feel good about, realizing that's the journey of basically a – close to a mid-digit yield improvement, which includes both ticket and onboard in order to achieve the midpoint of the yield guidance.

Harry Curtis

Okay, thanks, Jason.

Jason Liberty

You got it.

Operator

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

James Hardiman

Hi. Good morning.

A couple clarification questions for me. The $0.36 number that you gave in terms of combined fuel and FX, I think that was an absolute number as opposed to an incremental one since the fourth quarter guide.

Remind us what that number looked like 3 months ago.

Jason Liberty

So in Q1 we had said relative to the – our guidance in October of last year fuel was a 59 – I'm sorry, currency was a $0.59 bad guy and oil was a $0.55 – $0.54 good guy. And then as – relative to that point, on our January guidance that gets you to $0.36.

And a breakdown of approximately is – about $0.16 of that is due to the increase in fuel prices and about $0.20 is due to the strengthening of the dollar relative to our basket of currencies. So you have got to factor those onto the other ones if you wanted to bridge yourself to October.

James Hardiman

Got it, got it.

Richard Fain

So maybe putting it another way, we had given the guidance of $4.75 at the end of January and, if nothing else changed, that number would have dropped by $0.36 as a result of foreign exchange and fuel.

James Hardiman

Got it. Very helpful.

And then the onboard issue – obviously you talked about some of the international customers and the currency impact there. I guess looking at it from the other side, are there any benefits to your business from US consumers that might see international travel as more appealing?

Obviously not onboard or ticket prices, but pre-and post stays or shore excursions, were there any offsets to what we are seeing on the negative front in terms of the onboard?

Michael Bayley

Hi, James, it is Michael. Yes, I think that is a good observation and that is true.

I mean, the strength of the US dollar, the weakness of currencies like the euro makes certainly Europe more attractive for travel. And obviously what we are seeing in the US market is pretty healthy.

And so, we are seeing that both in what people are buying, pre-, post-, during and then also what they are willing to spend onboard. So I think that is quite a healthy – I think we feel like we are in a healthy place with the US market so there is some opportunity there.

James Hardiman

Very helpful. And then just last question for me.

The Double-Double program, no need to back off of that despite a $0.20 reduction from FX. That would seem to suggest that either you are assuming some normalization of currency, you have built in a significant amount of cushion or you have identified some other opportunities.

How should we think about that and how bad would FX and fuel need to get for that Double-Double goal to be in jeopardy? Thanks.

Jason Liberty

Well, I'm not going to get into – I mean obviously the mix of whatever happens with currency and fuel can change what could impact that. I think our view is we have obviously a clear commitment toward that Double-Double goal.

And as we've said in the past, you need aggressive but achievable yield improvement in order to get it to it. And you need to have good cost control.

And I think as you can see in our efforts this year to improve our cost basis, we continue to make movements and actions in order to keep ourselves on that track. And so, we are still very confident in the ability to reach those 2017 goals.

Obviously also what we commented on our last call is that we historically have seen a very strong inverse relationship between fuel and currency. That decoupled a little bit in the first quarter, but, as we said, it is not something that is perfect day by day but it generally aligns itself over time.

But at this point based on where currency is, where fuel is at and the underlying performance of the business we feel good about the Double-Double program.

James Hardiman

Got it, very helpful. Thanks, guys.

Jason Liberty

Thanks, James.

Operator

Your next question comes from Steven Kent of Goldman Sachs.

Steven Kent

Hi. Good morning.

Can you hear me?

Jason Liberty

Yes, we can, Steve. Good morning.

Steven Kent

Okay. Hi.

So, just to go back to the pricing integrity program, which I think is – I think people are going to be thrilled with, both your customers ultimately and also your travel partners. But I don't understand why it would reduce net yields.

It seems like letting people book earlier and marketing to people earlier should ultimately lead to higher yields. And then on the same front, have you considered rather than outright discounting giving people programs like maybe a free onboard drinking package or a excursion or a $100 onboard credit?

Is that one of the other ways to handle this? And then one final thing.

Just on the FX impact, what percentage – just what percentage of the onboard spend for international guests would have gone to as a result in a 25 basis point impact on net yield guidance? I am not sure you have said they yet.

Richard Fain

Hi, Steve, I will start on the pricing integrity thing. First of all, the reason it hasn't impacted – in the short-term – sorry, in the long-term I absolutely agree with you.

I think everybody is going to find this to be a better and more – less disruptive and less unpleasant way of handling it. So I think in the long-term that is going to help us.

I think that it helps solidify the image of our branding and in the long run the branding is what drives the pricing. And we have a lot of other steps in place to enhance the branding of our products and that actually has been improving over the last few years.

We think this will be one more big step. And so, in the long-term I agree with you, that will have only a positive impact.

In the short-term it has a negative impact because obviously the reason that we have been doing last minute discounts is because the ship wouldn't otherwise be absolutely full. And so, while the number is small we have used it to top up.

And so there is less topping up so you don't get the revenue from those last passengers. And it may take a little while for travel agents and consumers to understand just how serious we are about this.

But in the short-term it has that impact. On the other comment that you asked about which was the value added, that is something that we have been quite aggressive about over a while.

And in fact in the past I have pointed out that it is going to make it a little more difficult to judge between onboard and other revenue because sometimes – onboard and ticket revenue, because sometimes we do – we will offer what we call a value added package. So instead of lowering our price we might give them a special promotion, we might give them drinks, we might give them a bath robe, we might give them a cabin upgrade, whatever it is.

And so, there becomes an interplay between the ticket pricing and the onboard revenue. And one of the things that I've commented on is that when we talk about enhancing our revenue management systems, part of the objective, and I think part of something that will be paying off for us, is the integration of onboard revenue into our revenue management system.

So that those 2 things can work in tandem as opposed to being treated as totally independent variables. And so I think you do see – and sometimes you see – Celebrity had a very successful promotion, which is 123 Go!.

And we basically gave the consumer the option of different kinds of ancillary packages to support the ticket pricing. Very successful, very popular.

But it does blur the line between ticket and onboard. And I think that is something we want to enhance and expand on.

We think it is a real opportunity. So, I agree with you.

Jason Liberty

And, Steve, on your question on the onboard, just to make sure – I will address it how I understood it, but the question might be different. Our commentary on the onboard side is what we have experienced from non-US guests who have seen the value of their currency devalue relative to the dollar really over the past 6 to 9 months.

And that has – we have seen signs and evidence of them spending less on the ship as they purchase things or try to purchase things in US dollar. We have a very small portion of our total revenue – onboard revenue that is priced in local dollars, that is really just related to the Chinese sailings.

Steven Kent

Okay, thank you.

Operator

Your next question comes from the line of Jaime Katz of Morningstar.

Jaime Katz

Good morning. Thanks for taking my question.

So for the Double-Double, it would imply that the cost side of the equation would have to rise either flat to very low-single-digits over the next couple years assuming that net revenue yields tick up somewhere in the low-single-digits. Can you talk about the best opportunities you guys have to capture operating efficiency as in maybe how you think about that figure growing over the next year or two?

Jason Liberty

Hi, Jaime. I think we have said for some time that yield was being cost-conscious and having moderate capacity growth is really our formula to get to the Double-Double number.

Obviously over the next several years we have a good amount of capacity coming online. And I think our efforts, whether it is on the shared service side or across the brands, to realize scale during that time is what is relevant to ensure that our costs stay in a moderate growth pattern.

Jaime Katz

Okay. And that is lower than inflation we could assume?

Jason Liberty

I am not going to get into assumptions. But I think we have had a pretty good track record over the past several years of keeping our cost probably moderate, but I would probably say below moderate situation with our costs being flat to down 1 this year and our costs coming in down 0.6 last year.

Jaime Katz

Okay. And then on the price integrity program, I think you guys said that it was only for North American itineraries and that it wasn't for 2 to 4 day cruises.

So can you give us an estimate of approximately maybe what percentage of itineraries it actually affects?

Richard Fain

I don't think we have a number in that context because it is a long-term program. But obviously North America is our dominant market and the 2 to 4 night is a smaller percentage of the total.

So it is the dominant factor in our pricing matrix.

Jaime Katz

Okay, thanks.

Operator

Your next question comes from the line of Assia Georgieva of Infinity Research.

Assia Georgieva

Good morning. Can I follow up on the question of onboard spend?

So the 25 basis points, is that something that you expect to see more in Q2 and Q3? Or is that something that is going to affect the entire year?

Jason Liberty

I think our expectation, because there is a different mix here – over the summertime you are much more indexed towards the European consumer, so you are really pound and euro. And you can see in that currency chart pound is where we are more effective on a net perspective, but there could be noise between onboarding and cost as an example.

And then as you switch over into Q4 you move more South to like Brazil and you move more to Australia and other markets where they have taken quite a hit on their currency. So I think we look at that anticipation as what it could be for the balance of the year.

Assia Georgieva

Okay, so it is not just the euro, we are also – I'm sorry, Jason.

Jason Liberty

It is a portion of the [indiscernible] 25 basis points. Yes, no, I was going to say, as I talked about, it is a portion of that 25 basis points.

Assia Georgieva

Okay, thank you, Jason.

Operator

And there are no other questions at this time. I would like to turn the floor back over to Jason for any closing comments.

Jason Liberty

Great. Thank you for your assistance, Brandy, with the call today.

And we thank all of you for your participation and interest in the Company. Laura will be available for any follow-ups you might have and we really wish you all a great day.

Thank you.

Operator

And thank you. That does conclude today's conference call.

You may now disconnect.

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