Royal Caribbean Cruises Ltd.
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Royal Caribbean Cruise Line's Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Mr. Jason Liberty, Chief Financial Officer. Please go ahead, sir.

[Jason T. Liberty:]

Thank you, operator. Good morning and thank you for joining us today for our third quarter earnings call. Joining me here in New York 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 Carola Mengolini, our Vice President of Investor Relations. During this call, we will be referring to a few slides, which have been posted on our investor website, www.rclinvestor.com. Before we get started, I would like to refer you to our notice about forward-looking statements, which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Please note that we do not undertake to update the information in our filings as circumstances change. Also, we will be discussing certain non-GAAP financial metrics, which are adjusted as defined and a reconciliation of all non-GAAP historical items can be found on our website. Unless we state otherwise, all metrics are on a constant-currency adjusted basis. Richard will begin by providing a strategic overview of the business. I will follow with a recap of our third quarter results, provide an update on the current booking environment and then provide guidance for the full year and fourth quarter of 2017. I will then close with our early thoughts for 2018. We will then open the call up for your questions. Richard?

[Richard D. Fain:]

Thank you, Jason, good morning, everyone. It's been an eventful quarter and certainly an eventful year and as always, I am pleased to give some commentary. I'll start by commenting on the unusual set of hurricanes we experienced this summer. I know that most of the country has moved on to other things, but this was such an unusual and such an impactful set of storms that I need to comment on it. Firstly, I would like to emphasize just how unique this series of storms was. It's highly unusual to be hit with five major hurricanes in a row under any circumstances, but these storms were unusual for another reason as well. Each of these storms followed a path that exactly matched our major trade routes. Somehow these storms seemed to know exactly when and exactly where to hit to cause the most destruction and the most misery. The devastation was heartrending. You can't look at all the damage without feeling the pain our friends had to bear and are still experiencing every day. For us, we have estimated that the direct cost of the storms was in excess of $55 million. That makes it by far the most expensive hurricane season in our 45-year history, but we and they are resilient. You can see how hard our friends in the Caribbean and Texas and in Florida have worked to return to normalcy. They have worked tirelessly to rebuild the homes and the communities that were so devastated. Communications in the Caribbeans are now greatly improved and water has largely been restored. We can attest to the living without electricity is a trial, but the situation is getting better every day and is now mainly a problem in the rural and residential areas. Fortunately, everyone seems to appreciate just how important tourism and especially cruise tourism is to the economic recovery that will be so critical going forward. The government and the local people are highly focused on bringing the tourism infrastructure back up to snuff. They know that tourism continues to be the economic driver that will speed the recovery effort and they have pushed us to reinstate our calls as quickly as possible. The travel agent community has also been a very positive force in this effort. They can get the word out better than anyone else and they have done so yet again here. I've had a chance to visit some of the hardest hit areas and I am very impressed with the progress they are making. We resumed operating cruises from San Juan almost a month ago and we returned to the destination as a port of call later this month. This Friday, we returned to St. Thomas, where our partnership to restore and enhance the iconic Magens Bay has already produced dramatic results. St. Maarten has been rapidly rebuilding and we will return there in just a few weeks. Overall, I am happy and frankly very impressed to report that the tourist areas, where our guests go, are largely back to their original state. While many residential areas that were damaged are still under repair, the tourist areas that we visit suffered less damage and have mostly been cleaned up. I am also proud of our industry's response in providing humanitarian assistance to this area. Their needs are so great that our impact is necessarily limited, but it's good to be able to give back a little to the region that has been our partner for so long. I'd like to thank our employees, who worked so hard during this challenging period, in many cases, having to do so while dealing with their own exposures at home. The logistical issues were daunting. For example, we had to make more special working (06

[Jason T. Liberty:]

Thank you, Richard. Before getting into the results, I want to discuss the impact of the unprecedented hurricanes on our key statistics. As we stated in the release this morning, the hurricane impacted our third quarter by $0.20 per share and approximately $0.06 per share for the fourth quarter for a total of $55 million for the full year. The impact from the storms, especially related to the lost APCDs, are causing some noise in our key statistics. While I'll address these aberrations when I talk about the third quarter results and fourth-quarter and full-year guidance, I wanted to recap what is happening in the underlying business. Overall, strong demand for our Europe, North America and China products, combined with strong onboard trends, are expected to offset virtually all the impact from the hurricanes. We had viewed our previous revenue guidance as reasonably aggressive, but we were pleasantly surprised by the additional strength and last-minute demand. Looking at expenses, we are ending the year roughly where we had previously expected except for costs related to the storms, including our humanitarian efforts. However, the metrics may look different for two reasons. Firstly, the storms caused us to shift the timing of some expenses from the third quarter to the fourth and in addition, the storms caused cruise cancellations, which resulted in fewer APCDs. The absolute amount of costs remained as expected, but the cost per APCD went up. I will now walk you through our results for the third quarter. We have summarized our third quarter results on slide 3. For the quarter, we generated adjusted net income of $3.49 per share, which was $0.04 better than previous guidance. These results include a $0.20 negative impact related to the hurricanes. Better-than-expected close-in demand from our core products, combined with the timing of costs, more than offset the impact from the hurricanes. Our net revenue yields increased 5.3%, which was more than 1 point higher than the midpoint of our guidance. Strong close-in demand for China, Europe and North America products drove the outperformance. Onboard revenue yields were up 5% for the quarter, driven mainly by better-than-expected shore excursions and Internet packaging. While the storm-related revenue losses negatively impacted our absolute revenue for the quarter, there were essentially neutral to overall yield as the yield of the impacted sailings were similar to the quarter average. Turning to costs, net cruise costs, excluding fuel, were up 5.7%. Our cost metric came in higher than guidance, driven mainly by the reduction in APCDs. On an absolute basis, cost came in better than expected, driven by timing. Now, I will share trends we are seeing in the demand environment for the balance of 2017. As you would expect, demand for Caribbean sailings softened as the hurricanes moved to the Caribbean and Gulf beginning in late August and while Caribbean bookings are virtually back to normal, we did experience five to six weeks of softer trends. However, demand for all itineraries remained strong throughout and our total bookings have been above last year's levels since the last earnings call, both including and excluding the Caribbean. As such, we remain in a much better book position than at this point last year for the fourth quarter and are up nicely on both rate and volume. Before getting in to our early thoughts for 2018, I will take you through our full-year guidance and fourth-quarter guidance. I will now discuss our full-year guidance for 2017, which is on slide 4. Net revenue yields are expected to be up approximately 6%, an improvement versus prior guidance despite the negative impact of the hurricanes, which is affecting the year by approximately 20 basis points. The combination of the outperformance in Q3 and strength in our underlying Q4 business is driving the increase in our yield guidance for the full year. Net cruise costs, excluding fuel, are expected to be up approximately 2% for the year. As I noted earlier, our actual costs, excluding the hurricane, are generally in line with our previous guidance, but the per-berth figures are distorted by the storms. We anticipate fuel expense of $686 million, down slightly relative to prior guidance. We are 65% hedged for the remainder of the year at a price of $498 per metric ton. Based on current fuel prices, interest rates and currency exchange rates, our adjusted earnings per share is expected to be in the range of $7.35 to $7.40. In summary, we were able to stay within our EPS guidance for the year at a range of $7.35 to $7.40 despite a $0.26 negative impact from the hurricanes. We've been able to accomplish this through a strong book position, solid onboard revenue trends, better fuel prices and better-than-expected performance from our joint ventures. We remain on track to exceed our Double-Double goals, which we established more than three years ago. As Richard mentioned, on a trailing 12-month basis, we have already reached these targets. The culture and disciplines established under the Double-Double program will provide the foundation for our new three-year financial targets that we are terming 2020 Vision. The Double-Double formula for success, our modest yield growth, strong cost control and moderate capacity growth, combined with improving our customer advocacy and employee engagement, is expected to further improve on our double-digit return profile and deliver double-digit earnings per share by the end of 2020. Before I walk you through our fourth-quarter guidance, I would like to elaborate on capital returns. Since our last earnings call, the company increased the quarterly dividend by $0.25 to $0.60 per share and repurchased $125 million in shares. These actions, combined with the upcoming completion of our Double-Double program and our new 2020 Vision, further reflect our commitment to continuously improve our returns for our shareholders. Now, let's turn to our guidance for the fourth quarter, which is on slide 5. We anticipate net yield increase of 2% to 2.5%. While the hurricanes did not negatively impact per-berth figures in the third quarter, the extended period of soft bookings and impact of future crew certificate redemptions is reducing Q4 yield by approximately 50 basis points, mostly on our San Juan departures. Net cruise costs, excluding fuel, are expected to be up approximately 8.5% for the quarter. We have planned significant cost increases in this quarter due to the planned investments and revenue-generating activities. This increase in our cost metric was exasperated by a shifting cost from the third quarter and lower-than-expected APCDs due to the hurricanes. Taking all this into account, we expect adjusted earnings per share to be $1.15 to $1.20 per share for the fourth quarter. Now, I will take you through some preliminary insights for 2018. While it's still too early to provide a lot of commentary on 2018 trends, I will share that our full-year APDs and load factors are currently higher than same time last year. This is particularly encouraging when you consider that we were in a record book position at this point last year and are seeing even better early booking trends for 2018. We will not be providing specific guidance for 2018 until our fourth quarter earnings call, but we do expect 2018 to be our ninth consecutive year of yield improvement. Before moving into some cadence considerations for next year, I wanted to note that 2017 is expected to deliver a yield improvement of approximately 6%, which is not typical and will make for more difficult comparables next year. There are a few factors that will influence the cadence of our yield throughout 2018. In 2018, three of our brands will welcome a new shipment to their fleets, increasing our overall capacity to approximately 4%. We will take delivery of Symphony of the Sea (sic) [Symphony of the Seas] (32

[Operator:]

The floor is now open for your questions. Your first question comes from Steve Wieczynski of Stifel.

[Steven Moyer Wieczynski:]

Yeah. Hey, guys. Good morning. Hope you're all doing well. These are outstanding results. I guess the first question is going to be around the 2020 Vision. When you break it down, I know you're going to hate me saying this, but it does actually seem conservative at the first glance with only kind of 11% to 12% EPS growth through 2020. At this point, I think consensus is already kind of north of $10 a share for 2019. So, can you help us think either what analysts are getting too aggressive with or maybe help us think about some of the drivers you've embedded in your thought-process?

[Jason T. Liberty:]

Hey, Steve. We won't hate you and also not surprised by the question. So, I think, as we look at the 2020 Vision, again, what we're seeing specifically is that we expect our earnings to be in the double-digits by 2020. We're not giving a specific target of a specific number, but I'll tell you, I would say that the foundation which is moderate yield growth, good cost control, moderate capacity growth, that is what we believe from what we've seen in the past is that kind of formula to success. So, I don't think we're trying to guide to a specific number. What we're trying to do is again pivot the organization to coordinates that are based on that formula that get you to double-digit earnings.

[Richard D. Fain:]

Steven, it's Richard, and if I could just add something to that, and yes, we won't hate you, but first of all, I think there aren't many companies that are giving three-year targets with – you said only 11% to 12% growth rates. I think that's pretty good in the first place. But I also think – I like to emphasize that these programs really aren't intended to be financial targets for the investment community. This is something that really that we use for our employees, for ourselves to drive how we manage the business. And it's really intended to focus on the drivers of success, on the good performance of our fleet, the satisfaction of our guests, the engagement of our crew, et cetera. And so, the financial metrics come out of that, but internally, I think that was really the success of the Double- Double, was it got everybody pushing to the things that would make us successful. And so, I would just emphasize that. I understand it needs to have that financial metrics as well and those are important and that's also part of what we need to communicate to our people. But I would just like to say, I think we feel quite good about the 2020 program and think it will drive us to continue to excel.

[Steven Moyer Wieczynski:]

Okay. Got you. And then, second question, I don't know if Rich or Jason wants to take this, but it seems right now there's this perceived notion out there from a bunch of investors that there could be first quarter Caribbean weakness for 2018 given the storm impact. Can you guys address that and maybe help us understand if that's something you're seeing at this point?

[Jason T. Liberty:]

Yeah, sure, Steve. Certainly, as we mentioned in our remarks, yeah, there were five to six weeks of softness in demand and obviously that would be specifically around the Caribbean. So, what I would lead you to that we've said that we expect to be up on both a rate and volume basis for 2018. I would add that we were actually up quite nicely on both rate and volume for the first quarter and the Caribbean is contributing to that.

[Steven Moyer Wieczynski:]

Okay. Got you. And if I can sneak one more quick when in. Richard, you obviously have your pulse on Washington, D.C., and there's obviously been a lot of chatter out there around potential tax policy changes. Can you guys just give us an update in terms of how you're thinking about any potential changes coming down the pike?

[Richard D. Fain:]

I think Adam maybe would comment on that.

[Adam M. Goldstein:]

Hi, Steve. Well, obviously, we, like probably every other company and industry in America, is watching very carefully what's happening in Washington. Our industry association, CLIA, and our tax advisors are clearly spearheading that. We're not expecting any changes at this point, but this is a fluid situation. We have to watch every day. The cruise industry, although we're growing and we're proud of our success and where we've come over the last 50 years is still a very small industry in the scope of the types of things that seem to be on the radar screen for the politicians in Washington. So, at this point, I would say the outlook is positive for us.

[Steven Moyer Wieczynski:]

Thanks, guys. Great results.

[Operator:]

Your next question comes from Robin Farley of UBS.

[Robin M. Farley:]

Great. Thanks. So, I was interested in the commentary that Q3 came in better because of the close-in strength in Europe and China and North America, but one question each on China and Europe. First in China, will you expect yields to actually be positive for the full year or just sort of better than what you had thought? And then, is the lack of capacity growth next year in China changing your conversations there about price with the charter sellers and where those commitments are going? And then, on Europe, I was just curious about the close-in strength, because one would sort of expect that because airfare has to be – in other words, I guess I was going to ask to that (39

[Jason T. Liberty:]

Hey, Robin. I'll just take the first point on China yields for this year and I'll let Michael talk about what he – or his point of view on China with there being lower capacity for next year. Obviously, we haven't and we don't guide specifically by market. So, the comment around strong close-in demand was relative to our expectations and it's a trend that we had been seeing creeping up, but it was even better than we had expected in the third quarter and also with that going into the fourth quarter. And I'll let Michael talk about 2018.

[Michael Bayley:]

Hi, Robin. Yeah, we're kind of encouraged a little bit by the capacity reduction in the China market in 2018 and there's also the rumors with regards to South Korea opening up and we're all waiting to hear if there will be an announcement on that. So, when you combine those two factors together and you look at the work that we've been doing on building distribution and opening up all of the channels, we feel quite good about China in 2018. And we know we have good years and then some bumpy years, but we're feeling as if 2018 is looking quite promising. On Europe, there's always that switchover time on the sourcing for European product. It sources typically very well out of the North American market and the closer you get into sailing, then we tend to source more out of the European markets. One of the things that we've got in 2018, of course, is Symphony of the Seas will be introduced into Europe and will be sailing out of Barcelona. We're very encouraged by the forward bookings for Symphony of the Seas and it's outperforming Harmony at the moment.

[Robin M. Farley:]

Okay. Great. And then, maybe just one final clarification on the double-digit earnings, I just want to make sure that it's really – you mentioned double-digit earnings, not double-digit earnings growth rate. So, I'm assuming that means at least $10 a share, which would actually be above that 10% earnings growth. I just want to clarify that, what you mean by that and I'm curious how much share repo you're including in that. Thanks.

[Jason T. Liberty:]

Yes. So, Robin, as it relates to the target, the target is double-digit earnings per share between now and 2020. Now, to get to double-digit earnings, you need to have double-digit earnings growth rate as well, but the target is specifically around earnings. And then, as it relate to share repurchase, the goal is based off of how we see the underlying performance, a moderate yield growth, good cost control and moderate capacity growth.

[Robin M. Farley:]

Okay. Great. Now, that's helpful. Thanks.

[Jason T. Liberty:]

Thanks.

[Operator:]

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

[Gregory Robert Badishkanian:]

Great. Thanks. Just two questions. The first, so when would you expect booking trends to fully normalize where passengers are maybe not a little bit concerned about going to the Caribbean? And then, sort of the second part to that is some of the other regions were a lot stronger and then – or we started (43

[Michael Bayley:]

Hi, Greg. We're already seeing booking trends return to normal on pre-hurricane levels. So, we've already seen that kind of correction take place. And then, with regards to this, the idea that maybe people are booking other destinations other than Caribbean, I mean that happens in the normal give and take of a year anyway, that people do switch out destinations, but we haven't seen anything noticeable in terms of a trend occurring with regards to that idea.

[Gregory Robert Badishkanian:]

Yeah. Right. And then, the level of also promotional activity, I'm assuming that's elevated to spur demand in the Caribbean for the fourth quarter and first quarter of 2018. How long would you expect that to last assuming that it is elevated? Is that just in the next few months and then, things should be very normalized?

[Michael Bayley:]

Yes. I mean, it's funny you bring that up. I don't feel like our promotional activity has been any greater or any lesser. After the hurricanes passed, we did have more promotional activity for a short period of time, but now, we've gone into our regular kind of promotional calendar cadence that is quite typical as we push into Q4 and as we look at how we're booking into 2018. So, it's really return to its normal levels. And, of course, just as a reminder, we have our price integrity program that we're very pleased with and that's also helping us out.

[Gregory Robert Badishkanian:]

Okay. Perfect. Thank you.

[Michael Bayley:]

You're welcome.

[Operator:]

Your next question comes from Jaime Katz of Morningstar.

[Jaime Katz:]

Hey. Good morning, everybody. I have a question surrounding capital expenditures actually, given that they have bumped up a bit and I know you guys mentioned that, that was going to be mostly surrounding this Royal Amplified and Celebrity Revolution program. And I assume a lot of those efforts tie into some of the evolving consumer behaviors that you discussed earlier. So, will you talk a little bit about what the majority of that delta and spend is going to and then, if maybe some of that is tied into some of the technology that you're planning to launch? Thanks.

[Richard D. Fain:]

So, hi, Jamie. It's Richard. Most of that are the two ship modernization programs that you cited. It's been something and we found we've been very successful with that in some of the ones we've been doing over the last few years. So, this is a continuation of that. Some of the things that we've done on our newer ships are just really very impactful in terms of consumer trends and what they want. And so, that's very much a part of it. So, that's the bulk of it actually. There is also some of it that is related to our technological investments, in particular our digital investments, which we call Excalibur. So, we've talked about that. We have an investment day, where we're going to be talking about that in today or tomorrow in a lot more detail, but we see those technological investments. We've frankly already been making a lot, but I think we see the need increasing. And so, that is part of the increase that you're referring to.

[Jaime Katz:]

Thanks. And then, just out of curiosity, for the high-end consumer, are you guys seeing some better spend there? Obviously, there's a new Azamara ship coming on and I'm wondering if there's any like bifurcation that you guys are seeing between sort of the middle-market consumers and the high-end consumers that are bolstering your confidence in that part of the market. Thanks.

[Michael Bayley:]

Hi, Jamie. It's Michael. I mean we're seeing really all over kind of a lift in onboard spend coming from all segments and we think that's reflected really in consumer confidence and how well the stock market is doing. So, whether it's the higher-end customer or mid-level, everybody is spending a little bit more at the moment.

[Jason T. Liberty:]

And, Jamie, just to add, I mean I think one trend in which we talked about in our remarks is one thing you see across the board is you're seeing people spend much more money on experiences than on things like retail as an example. So, my commentary around shore excursion or Internet or beverage more things that are experiential in nature than something out of the gift shop is where you see this change and that's not just in the higher-end, it's really kind of across all classes.

[Jaime Katz:]

Does that change how you think about allocating the square footage of the ships going forward with the retail space versus with space to do other things versus parks or activities like zip lines?

[Richard D. Fain:]

Hi, Jamie. Yes, it does. Interestingly, when we talk about the two programs, Celebrity Revolution and Royal Amplified, really a lot of the thinking that's going into that is really thinking through how our guests spend is changing and you'll start to see that when we bring these ships out of the modernization, the program that we've really reallocated space to generate better revenues in areas that we see guests now naturally gravitating to.

[Jaime Katz:]

Excellent. Thank you so much. See you tomorrow.

[Richard D. Fain:]

Thank you.

[Operator:]

Your next question comes from David Beckel of Bernstein Research.

[David James Beckel:]

Hey. Thanks for the question. I have kind of a high-level question, maybe for Richard or whoever wants to jump in, but it sounds, Richard, like you're painting a very positive secular picture of the industry in general, spending trends, which would seemingly suggest that yields could continue to improve, maybe not at obviously the rates of this year, because of one-time events, but certainly very strongly. And I'm just wondering, how do you square that strength with what appears to be a long-term internal goal of moderate yield growth? You said you're trying to pivot the organization to certain coordinates. Are you pivoting them to like a 2% to 4% range or you actually trying to get them to push a little bit more aggressively to the higher-end of that range?

[Richard D. Fain:]

Well, David, thank you. I think you summarized my view accurately. I do think that the underlying strength of the industry is powerful and I think that will continue. I just think one needs to be a little bit realistic about how quickly you can move those things. And so, we think, obviously, we are not trying to direct the organization to a level of yield increase. We clearly want to maximize that. What we want to pivot the organization to is to provide the things that will drive consumer to our travel agents and to our website and basically to buy cruises. And hopefully that will result in continued strong yield improvement. So, by saying moderate yield increase, I think we are really trying to telegraph that to get strong results, we don't need staggeringly large yield improvements. We are an industry where if we can get relatively moderate yield increases, that results in really very strong bottom line growth. But obviously if we can break out of the 2% to 4% range, as we did this year, we intend to exercise every effort we know how to accomplish that.

[David James Beckel:]

That's helpful. I appreciate that. And just one quick follow-up on China. You mentioned or you touched on it briefly, but particularly as it relates to recent strength you've seen relative to your expectations, can you pinpoint that strength at all to certain efforts you've made in like widening the distribution channel or anything more directly influential by your activities in that market?

[Michael Bayley:]

Yeah, David. I think we've been actively developing the China market for many years and certainly the last couple of years we increased the intensity of the development of the various channels and we put a lot of focus on that development and we put a lot of resources into the market to do that. We've been quite pleased with the results that we generated, particularly, for example, in the direct channel, it's done very well for us. And then expanding the base of sellers, of course, beyond the typical wholesalers, we've made progress there. So, I think, we've seen – we're beginning to see the results of the work that we've put into the market over the past several years beginning to come, pay back for us.

[David James Beckel:]

Great. Thank you.

[Operator:]

Your next question comes from Felicia Hendrix of Barclays.

[Felicia Hendrix:]

Hi. Thanks. I wanted to follow up on Steve Wieczynski's question that he asked at the beginning of the call and maybe word it a different way. I'm just wondering if there's anything in the 2020 Vision that would preclude you from getting to double-digit earnings by 2019 or maybe said in another way, would it be a stretch for you to get there by then?

[Jason T. Liberty:]

So, we haven't even given guidance yet for 2018, let alone for 2019.

[Felicia Hendrix:]

Very demanding.

[Jason T. Liberty:]

Very demanding, I know. I think we're going to stick to, as we look at our targets, that one of those being that we reach double-digit earnings per share and continuing to improve on our ROIC. Obviously, you can do the sensitivities on yield and on cost that would get you there before, but I think that, again, we'll kind of focus on moderate yield growth and good cost control during the period.

[Felicia Hendrix:]

Okay. Thanks. And sticking with the 2020 Vision, that obviously implies your optimism for the next three years. There's certainly a narrative in the investment community that states that supply increases over that time could limit the growth trajectory of your business. So, I was just wondering can you discuss to what extent supply played a role as a variable in your outlook and how you think it impacts your growth over the next several years?

[Richard D. Fain:]

Yes. Hi, Felicia. It's Richard.

[Felicia Hendrix:]

Hi.

[Richard D. Fain:]

So, obviously, I think that was a point I was trying to emphasize. You have to look at both sides of that. You have to look at the supply side of it and the demand side of it. And I absolutely agree with you, the increase in the supply is clearly a factor in that. I think the reason that I'm expressing confidence is that I believe that the increasing demand more than compensates for that, because the new ships are more attractive and they bring in more people and also they attract higher yields. So, I think we've tried to look at this and we've tried to put the 2020 Vision together, taking into account all that we know about the next year – the next few years and that includes the supply side, which, as you say, is a little bit higher than it has been.

[Felicia Hendrix:]

Thanks. And then, my final is just housekeeping. And, Jason, thank you for giving us the color on the cadence of the quarters. I just wanted to clarify, do you expect yield to be up each quarter next year and then, just that second quarter could be up less because of the dry-docks and then also taking into account kind of a shifting Easter or do you expect the second quarter to be down?

[Jason T. Liberty:]

I would say that we expect yields to be up in all four quarters, but as you pointed out, we expect it in Q1 to be higher than it would be in Q2 because of the shift in Easter and the dry-dock impact.

[Felicia Hendrix:]

Okay. Perfect. Thank you so much.

[Jason T. Liberty:]

You got it.

[Operator:]

Your next question comes from Jared Shojaian of Wolfe Research.

[Jared Shojaian:]

Hey. Good morning, everybody, and thanks for taking my question. If we think about the puts and takes to costs for next year, you called out more dry-dock days and you have the gain on Legend that you're comping against, but then you also have the hurricane tailwind as well. So, is it reasonable to think that next year, costs will look a lot like 2014, 2015 and 2016 as far as the growth rate in terms of NCC, ex-fuel? And then, any thoughts on how we should think about D&A for next year as well?

[Jason T. Liberty:]

All right, Jared, well, again, we're not going to give specific guidance for 2018. I think you did a good job of talking about some of the headwinds and some of the tailwinds. What I can tell you is that we will continue. It is very much ingrained in the DNA of the company for us to strongly manage our costs, but, of course, as you said, there are some headwinds that we're going to have to manage through next year like we do every year. And on the D&A side, I think the key considerations are obviously there's new assets that are coming into play with Symphony, Edge, which is really not in effect because it comes in the latter part of the year and Azamara Pursuit, those are some of the elements that will impact D&A. So I would expect D&A to rise obviously more than 2017, because in 2017, we had no new capacity.

[Jared Shojaian:]

Okay. Thanks. And then, just one housekeeping question. You talked about the cruise credits and the impact that that's having in the fourth quarter. Can you just help me understand how you accounted for those and will we see an impact of future yields in 2018 as well from those credits or is it just an immaterial impact?

[Jason T. Liberty:]

I mean it's all immaterial relative certainly to our revenues. Effectively, if we had a passenger that had changed or had called up because of the impacted sailing and weren't able to take them, we would provide future cruise certificates. So, a lot of that negative impact would have been taken in the third quarter and then as those future – as those certificates get redeemed, they would be – that's when the revenue would be recognized in the future.

[Jared Shojaian:]

Okay. Thanks.

[Operator:]

Your next question comes from Harry Curtis of Nomura Instinet.

[Harry C. Curtis:]

Morning, everyone. Two quick questions, most of my questions have been answered. Jason, you mentioned higher drydock days in the first half. Just from 30,000 feet in 2018, will most of the dry-dock days be, or the comparisons be higher in the first half? Will they trend to more normal levels in the second half? What I'm trying to get a sense of is overall in 2018, will drydock days be relatively close in 2018 versus 2017?

[Jason T. Liberty:]

Yes, hi, Harry. No. So, I would say that in 2018, certainly the dry-dock days are – or most of them are in the first half of the year. But the dry-dock days are more typical to what we saw in 2016 versus 2017, but I mean, those are kind of accounted for in the capacity growth numbers that we provided.

[Harry C. Curtis:]

And then, my other question, we haven't touched on Cuba. Given the travel warnings, have there been any, I would doubt it, but any impact on the inquiries that you're getting for cruises to Cuba and to what degree are those cruises that are touching Cuba getting a pricing lift as a result of it?

[Michael Bayley:]

Hi, Harry. It's Michael. Initially when all of this hit the media, we obviously received a spike in calls and communication from guests and travel partners. Everybody was trying to seek clarity, but after literally a few days, things just returned to normal and the business is very good for our Cuba product.

[Harry C. Curtis:]

All right. Very good. That's it for me. Thanks.

[Michael Bayley:]

Thank you.

[Operator:]

Your next question comes from Tim Conder of Wells Fargo Securities.

[Timothy Andrew Conder:]

Thank you and congratulations, gentlemen, and the whole organization. Just a couple follow-up here, whoever wants to take this. I mean, clearly, the domestic capacity, it's been talked about growing and so forth, but, Richard, you even mentioned that you think going forward here, the demand's more than going to compensate for that looking into 2019 and 2020. Can you give us an update, what's happened the last three years here with first-time cruisers? You've said before that that's has started to grow, and more in particular, the millennial mix? How much that has grown. Maybe we'll get it tomorrow, but I wanted ask the question here. And then, also an update on the fleetwide rollout of the Wi-Fi in the Excalibur. Has that changed in any way or are you accelerating that here looking into 2018 and being into early 2019?

[Michael Bayley:]

Hi, Tim. I'll take the first part of the question with regards to new to cruise and millennial. Certainly for – well, all of the brands, but in particular for Royal, we've got an acute focus on developing the new to cruise and millennial market and we've been very pleased with the progress that we've made over the past three years. And in fact, if you go back before that three-year period, we were actually in a situation where year-over-year, we saw a decline in new to cruise and millennial and over the past three years, we've seen a very good increase year-over-year. So, that's kind of very much part of our marketing and communications focus on new to cruise and millennial and we're seeing good progress and we continue that journey.

[Timothy Andrew Conder:]

Any color you can – I apologize, any color you could give there related to millennials as a percent of the mix versus three years ago?

[Jason T. Liberty:]

Hey, Tim, just to kind of give you a sense, over the past several years, we're carrying about 33% more millennials than we did several years ago.

[Richard D. Fain:]

Tim, on your question on the rollout of Excalibur, the new digital system, it's pretty much going along the path that we had previously said. The hurricanes did mess us up a bit, obviously, disrupted operations for a good six to seven weeks and that probably caused a corresponding delay in some of the detailed rollouts. But overall, we are still expecting to be, and you'll see more of this tomorrow, of course, 12% or 13% by the end of 2017, half by the end of 2018 and almost everything by the end of 2019. So, by and large, as frustrating as the disruption was, that's pretty much going on track.

[Timothy Andrew Conder:]

Great. Thank you, gentlemen.

[Jason T. Liberty:]

Okay. Operator, we have time for one more question.

[Operator:]

Okay. Your final question comes from Sharon Zackfia, William Blair.

[Sharon Zackfia:]

Hi. Good morning, I'm glad to have snuck in.

[Richard D. Fain:]

Good morning.

[Sharon Zackfia:]

Two quick questions. On the equity investment income, that was up a lot year-over-year. So, maybe if you could touch on what was driving that. And secondarily, I feel like you guys cite Internet every quarter now and I don't know if you've given this before, but I don't recall, what percent of passengers now are taking up your option to have the Internet available to them at sea? And have you taken any price on that or is that really a penetration metric that we are looking at?

[Jason T. Liberty:]

Hi, Sharon. On the equity income side, it's really mainly the story around our joint ventures. TUI would obviously be the leader of that, but we also have a joint venture with Pullmantur now and it's really those are the kind of underlying drivers on below the line. And then, on the Internet side, no, we don't give a percent in terms of how that number has grown over time, but it is a combination of both rate and penetration and that it is driving up our Internet as well as we keep introducing new things that attract people to use more bandwidth on the ships.

[Sharon Zackfia:]

Thank you.

[Jason T. Liberty:]

Great. Okay. So, thank you, Paul, for your assistance with the call today and we thank you all for your participation and interest in the company. Carola will be available for any follow-ups you might have and we really wish you all a great day. Take care.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's call. You may now disconnect.