Jason T. Liberty - Royal Caribbean Cruises Ltd. Richard D. Fain - Royal Caribbean Cruises Ltd. Michael W. Bayley - Royal Caribbean International.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc. Felicia Hendrix - Barclays Capital, Inc. Assia Georgieva - Infinity Research Ltd. Tim A. Conder - Wells Fargo Securities LLC Harry C. Curtis - Nomura Securities International, Inc. Gregory Robert Badishkanian - Citigroup Global Markets, Inc. (Broker) Robin M.

Farley - UBS Securities LLC Jaime Katz - Morningstar, Inc. (Research).

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruises Limited Second Quarter 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.

I would now like to hand the conference over to Mr. Jason Liberty. Please go ahead, sir..

Good morning, and thank you for joining us today for our second quarter earnings call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and Chief Operating Officer, and Carol Cabezas, our Vice President of Investor Relations.

We also have Michael Bayley, President and CEO, Royal Caribbean International, joining us via telephone from the UK. 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.

Additionally, we will be discussing certain 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 an overview of the business.

I will follow with a recap of our second quarter results, provide an update on the business environment and then provide an update on our full year and third quarter guidance for 2016. We will then open the call up for your questions.

Richard?.

yield improvement, effective cost control and modest capacity growth. The Double-Double program is working for us. And as we approach the final year of the program, our confidence in these targets remains firm. Personally, I like to focus on the numbers. There, of course, needs to be good qualitative reasons for the numbers.

But, in the end, it's the numbers that speak for themselves. The story behind the numbers is important, but the figures remain our beacon. And the figures are encouraging. Capacity growth is pretty much fixed, and our brands are satisfying our customers and attracting new ones at the best rate in our history.

In order to meet our Double-Double objective next year, what we need is low single digit yield improvement and moderate spending. That's a formula we have been delivering, and that is a formula we believe we can continue to deliver. One other factor that comes into play recently is our sale of 51% of the Pullmantur Group.

Jason will take you through more details in a moment, so I will simply say that this move is a step in a more profitable direction, and we are optimistic about the future for this new venture.

Now, given the enormous attention that's being focused on China, I think it's worth spending a little time on the development of this market and comparing it to some other markets.

As it happens, I have the history of having been personally involved with the development of so many of the cruise markets around the world, and I'd like to comment on how the historical evolution of those markets compares with how China has developed so far and how it appears that China will be developing for the foreseeable future.

First of all, it is striking how many parallels there are in China's evolution today compared to other places in other times where we have developed a market for cruising. For example, today, we view North America as a developed marketplace for cruises with a strong awareness level and a well-established sales and marketing network.

However, when I first got involved with cruising, none of that was true. Rather, it looked a lot like what China looks like today. It was poorly known to the population at large. Distribution was through a small number of specialist agencies. There was little choice of itineraries, and growth was episodic and dictated by the arrival of new ships.

An observer today would say virtually the same thing about the China market as it is now. The percent of Chinese, even the percent of middle class Chinese who have cruised remains infinitesimal. And just like the States, the main way we attract new customers is by thrilling the old customers.

In the States, the reputation of cruising grew because people came back from their holiday and raved about their experience. We advertise, of course, but most people tried it for the first time because their neighbor pushed them to do so, or their co-worker did, or maybe it was their brother-in-law.

The point is that once somebody cruise, he or she became an advocate for cruising, and the market grew the same way a snowball grows. That snowballing effect was also key to developing new markets, new markets like Britain, and then Italy, and then Germany. That same phenomena is occurring today in China.

It may be happening more quickly in China, but the process is remarkably similar. The second key dynamic is the role of a travel agent. In the States, Europe, et cetera, cruises were initially sold through niche travel agents who knew the business and were able to provide knowledge and assurance to a cautious public.

It took a while for cruising to become a mainstream activity for travel agents, but when it did, the industry really took off.

These travel agents were the people who could inform and guide a nervous customer on what cruising was all about, and they could help the customer make the myriad important decisions that would be critical to their valuable vacation. That crucial travel agent link, that important part of cruise industry's success, is still embryonic in China.

But it too is growing, and I believe it will be key to our success there, as it always has been here. And then, there was the issue of where to go. Originally, cruises had a very limited selection of routes and destinations.

When Royal Caribbean was contemplating its fourth vessel, I recall that the board engaged in a great deal of hand-wringing about whether there would be enough itinerary and source markets in the US for the addition of that fourth ship.

We were worried that the interest in cruising would not grow beyond the established group of then popular destinations. Eventually, we decided there would be enough destinations, but it wasn't without trepidation. Today, we all look back on that concern and find it laughable, but then, it was a real concern.

Similarly in China, our attachment area today for customers is small and our itineraries are limited, but a quick look at the map shows just how enormous the potential really is. But the biggest question in the Western markets then, just like the biggest question in the China market today, is how quickly it can grow.

The market growth rate in North America and Europe overall exceeded our expectations, but it certainly wasn't linear and we frequently experienced periods of higher or lower demand growth matched, or in some cases not matched, by higher or lower periods of supply growth.

These periods of matching or non-matching growth naturally led to better or worse periods of revenue generation. In China, we have also seen such periods and I expect we will continue to do so.

But like the early days in the United States, the periods of oversupply or under-demand quickly got eliminated by the inexorable development of knowledge of the industry and the strong growth of the distribution system. But China is not the same as the US and it's not the same as Europe.

For one thing, everything that happens in China happens at China's speed. So where it took many years for Western travel agents to develop the infrastructure, the expertise and the breadth that we enjoy today, we're already seeing that process happening in China at a faster speed.

For example, today we work with three times as many tour operator partners as we did just three years ago. And in the same three-year period, we have quadrupled the number of independent agencies we work with from 200 to 800. That's nearly one quarter of all the travel agents in China with a license to sell outbound travel.

And the scale in China is different. In the West, we found that the market can grow quickly. But when we tried to introduce new capacity well into double digits, the market had trouble keeping up. In China, we've been growing at 40% and 50% growth rates without any difficulty. Those are pretty extraordinary levels.

But this year, we as an industry have pushed those figures into triple digits. Even China has trouble growing at that pace. Fortunately, the softness in China is being driven mainly by this huge capacity growth rather than by faltering demand. That should make it an easier correction to make and we are optimistic about our future there.

I view the ability of China to fill twice as many cruise berths this year as it is last year as a sign of great strength. The fact that it can do so with only modest softness should be seen as evidence of strength, not weakness. Everybody knows the pace of change in the world today is exceptional. We have never seen a pace like this in history.

And I'd like to point out that we never will again. The pace of change today is slower than we will ever see it again. Let me repeat that. The pace of change today is slower than we will ever see again. This is true in many areas and it is nowhere as evident as it is in China.

Overall, we're very pleased with the way our cruises have been received by the consumers in China. We are also very pleased by the recognition that the Chinese government has given to the value of the cruise economy to China's overall economic expansion.

We're particularly pleased by the very powerful brand presence and preference that Royal Caribbean International has achieved there. We expect to see this market continue to grow and we expect to continue to grow with it. Now before I turn it over to Jason, I'd like to touch on one last point related to capacity growth.

As I've just discussed, much of the capacity in the industry is being allocated to the Asia Pacific region. It stands to reason that growth of the industry in the Atlantic theater is more modest next year.

From our own standpoint, there are significant declines in the European market driven by the deconsolidation of the Pullmantur Group, the Harmony of the Seas' deployment back to the Caribbean year-round, the sale of Legend of the Seas and keeping Celebrity Equinox in the Caribbean year-round.

We also take comfort knowing that in the past when our growth has been driven by the introduction of an Oasis Class ship, as it is this coming year, our yields have not disappointed. With that, it's a pleasure to turn it back over to Jason.

Jason?.

Thank you, Richard. I will begin by taking you through our results for the second quarter. Unless I say differently, all metrics will be on a constant currency basis. Second quarter results are summarized on slide two. For the quarter, we generated adjusted earnings of $1.09, which is $0.09 higher than guidance and 25% higher than same time last year.

The outperformance was driven primarily by favorable fuel expenses and outperformance by TUI Cruises. Lower fuel rates were a key factor. However, lower consumption also contributed to the overall favorability. Net revenue yields were up 1.1%, which were in line with guidance.

Onboard revenue yields continued to increase, with beverage packaged sales and the expansion of streaming Internet products, like Voom and Xcelerate, driving an 8.7% year-over-year increase. Net cruise costs excluding fuel were also in line with guidance, at 1.9% for the quarter.

As discussed previously, we sustained higher costs in the first half of the year related to new-build launch initiatives, investments in China and more dry dock activity. Now I would like to walk you through current booking trends. Overall, trends are consistent with those discussed during our last call.

And in the aggregate, our portfolio of products remains about the same. However, just like in any portfolio, there have been some puts and takes at the itinerary level.

Demand for North American products, which make up half of our capacity for the year, is unwavering in its strength, contributing to better than expected performance in the Caribbean, Alaska and Bermuda.

On the other hand, geopolitical events in Europe continue to stress the Eastern Mediterranean yields and close-in demand trends in the Shanghai market are softer than anticipated. At this point, we are over 93% booked for the year, with booked load factor and APD in a strong position.

Beginning with Europe, yields has held up nicely for Northern Europe and Western Mediterranean sailings this year, partially driven by the consistent strength in demand that we have seen from European markets. The U.K. is a key sourcing market for our Europe sailings, and we have been closely monitoring demand since the Brexit decision.

To date, we have not seen any softening in demand from the UK since the vote. And, in fact, the UK remains one of our strongest markets this summer. Eastern Mediterranean itineraries, however, have experienced further weakness, stemming from the multiple geopolitical events that have occurred in Europe.

Not only have these put a strain on close-in demand and pricing, but they have also led us to make operational changes such as shipping embarkation out of Istanbul for several sailings. Turning to China, we introduced Ovation of the Seas to Tianjin just over a month ago, and she is generating superior yields even by China standards.

Overall, the pace of bookings for the remainder of the China season has mostly been within the expected range and above last year. However, there has been some softness in close-in demand in Shanghai in recent weeks.

sNevertheless, our China sailings, which represent 9% of our capacity, continue to generate yields that are above average, has occupancy levels that are in line with the fleet average and the market is accretive to our yields and return on invested capital. Moving on to North America.

Our Caribbean, Alaska and Bermuda itineraries account for about 50% of our full year capacity and continue to trend very well. We expect each of these products to generate nice yield improvements this year and also expect to see record yields in Alaska.

We are generally seeing solid trends for our entire Caribbean portfolio which ranges from three nights Bahamas sailings to 14 nights Southern Caribbean itineraries. With the summer season coming to a close in the next few weeks, the focus will shift to the winter season which is currently in a very strong book position.

Harmony of the Seas continues to impress and is garnering strong demand at increasing prices throughout Q4 and well into 2017. It is still very early in the booking cycle for 2017 sailings. However, I will share that we are encouraged by recent booking trends in our current book position.

We are booked ahead of same time last year in both load factor and APD, for the next 12 months. Before I update you on our guidance for the year in the third quarter, I would like to touch on the recent sale of 51% of the Pullmantur Group to Springwater Capital.

The Pullmantur Group operates a more value-based product which delivers yields and costs that are lower than our fleet average. Consequently, the deconsolidation of Pullmantur has increased our yield to cost metrics and has an immaterial impact on earnings for this year.

Now, we can turn to our updated guidance for full year 2016, which is on slide four. Net revenue yields are expected to grow 4% to 4.5%, an increase versus prior guidance, driven by the deconsolidation of the Pullmantur Group.

Strong demand for North American products is helping to offset some slightly weaker trends in Eastern Mediterranean and Shanghai. These product level trends are stressing Q3 yield growth, but are providing strong tailwinds for Q4, where our mix of itineraries more closely resembles the first quarter.

Net cruise costs, excluding fuel, are unchanged and are expected to be up approximately 1%. Cost savings in the third and fourth quarters are offsetting the increase driven by the Pullmantur deconsolidation. During the first quarter, foreign currencies rose versus the dollar but since then, have declined and fuel prices have increased modestly.

Since we last gave guidance, this has resulted in a $0.27 negative impact to earnings in the back half of the year. To put it in perspective, since the beginning of the year, FX and fuel movements have cost us $0.11. Since our last call, our basket of currencies has declined by 5.5%.

The key driver of this decrease is the significant weakening of the British pound, which represents approximately 30% of our foreign currency exposure. We anticipate fuel expense of $724.5 million, down $10 million in part due to the deconsolidation of Pullmantur. Excluding the deconsolidation, reduced consumption is offsetting higher fuel rates.

We are currently 64% hedged for the remainder of the year at a price of $535 per metric ton. Based on current fuel prices, interest rates and currency exchange rates, our adjusted earnings per share is in the range of $6 and $6.10 for the year.

Before moving on to the third quarter guidance, I thought it might be useful if I put the movement of our guidance in perspective. Slide 5 shows how we got from our original guidance for the year to our revised guidance in April and to our current guidance. As you can see, we originally projected $6 for the year.

Over the last six months, our operations, excluding FX and fuel, improved by about $0.16. FX and fuel got better during the first quarter by about $0.16, but reversed itself until now, and now looks to be a net cost of about $0.11. All of that brings us to our current forecast of a midpoint of $6.05 for the year.

Now, we can turn to our guidance for the third quarter, which is on slide 6. We anticipate a net yield increase of approximately 2%. The year-over-year improvement is primarily driven by the deconsolidation of the Pullmantur Group.

As I previously mentioned, itinerary changes and weakness for Eastern Mediterranean cruises combined with some softness in close in demand for our Shanghai sailings is disproportionately impacting the third quarter and offsetting improvements driven by new hardware and North American products.

Net cruise costs, excluding fuel, are expected to be down approximately 1.5% on a constant currency basis, which includes an increase related to the deconsolidation of the Pullmantur Group. Taking all this into account, we expect adjusted earnings per share to be approximately $3.10 per share.

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

We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Steven Wieczynski with Stifel..

Hey, guys. Good morning. So, I guess, the first question would be around the Double-Double. If you still think, at this point, earnings next year will be somewhere around let's call it $6.00 $6.70, $6.80, even up to $7. That's assuming earnings growth of around 12% to 15%.

So, I guess, the question is, what gives you confidence you can grow earnings that much in light of some of the issues the industry is facing right now coupled with the fact next year you won't have any new ship launches?.

Hi, Steve, and good morning, everyone. I think the confidence comes in several ways. First, as Richard mentioned, what you need to get to Double-Double is low-single-digit yield growth and for us to continue our path on good cost control.

And then when you start getting into what's going to drive year-over-year growth, well, I think, you have several things. One is dealing with strong demand trends. And so, when we talk about our book position over the next 12 months, we're ahead on both rate and volume.

Also, next year, we don't have new capacity in terms of new ships coming in, but we do benefit from half a year of Ovation, as well as Harmony coming into the broader fleet.

And then, obviously, we're taking out some capacity as it relates to Pullmantur as we deconsolidate them, which is also a good tailwind for yields, as well as for earnings next year..

Okay. Got you. Thanks. And then, second question would be kind of a broader-based question around the Caribbean.

I know that Caribbean continues to hold up very well at this point, but I know the fear out there from a lot of investors is if Europe continues to be impacted for the next, let's call it the next year or so, you'll start to continue to see more capacity that brought back into the Caribbean.

How do you guys view that and how do you think that market will hold up if capacity starts to pick back up there?.

Yeah. Well, in terms of industry expectations for next year, I think we expect there to be low-single digit around 4% growth in capacity. This year, we saw about 3% growth in capacity, and we're seeing yields in the high-single digits in that market. I think a lot of that is driven by North Americans' focus on staying closer to home.

And I think we see those trends continue as we look at our bookings on a day-to-day basis..

Okay. Great. Thanks, guys. Appreciate it..

Thanks, Steve. Appreciate it..

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

Hi. Thanks and good morning.

So, Jason, just the standard Double-Double topic for a second, for the EPS goal of at least $6.78, I was just wondering, does that include any assumptions for buyback activities going forward?.

Hi, Felicia. No. Those goals which again were stated back in 2014, we don't – as we look forward, we don't contemplate share buybacks in those equations..

And then – but you're going to generate a fair amount of free cash flow next year because you don't have any new ship deliveries.

So, can you just talk about your view of what you would do with that free cash flow?.

Hi, Felicia. It's Richard. I think we said before, we look at that sort of independently. If it's the right thing to do, we would consider it. We did one starting at the end of last year and we're basically finished with that. So, I think, we would look at it opportunistically and depending on the cash flows.

But we don't project it and we don't publish an expectation on that partially because that's the sort of thing the board will look at on a case-by-case basis..

Okay. That's helpful. And then, just also, I don't know if Richard or Jason, we got a lot of questions this morning about the inclusion of the Double-Double definition in the press release. I don't believe I've seen that before.

So, just wondering why that was added to the release?.

Yes. No problem. Recently, Felicia, the SEC has published Q&As on non-GAAP disclosures. And as we talk about Double-Double pretty frequently, we felt that it fell in the definition of a non-GAAP disclosure. And to just ensure that we met the spirit of what the SEC is looking for, we decided to add that in as a definition.

I would not read anything more into the fact that we're just improving our disclosure..

Felicia, two things, if I may. First, I think we should wish Michael Bayley a happy birthday because this is his birthday..

Thank you..

And secondly, on the Double-Double, I think one of the things that maybe we should emphasize is when we established it and we established both the goal for EPS and for ROIC, we felt those were reasonable targets for us to shoot for.

And I think as we're getting closer to 2017 and start to get insight into 2017 bookings, et cetera, we continue to feel comfortable with that. I think what may be a bit of confusion is some people would assume that that requires a heroic performance in 2017.

And I think part of what we tried to convey this morning is, no, heroic performance would result in really outstanding 2017. But to get to the Double-Double, all we need are moderate capacity growth, which is locked in. Nothing is really going to change that now.

Good cost control, which we think we have in good shape, and really quite modest yield improvement. And we think that all that is realistic and continues to be. And I feel, obviously, the closer you get to it and the more information you have, the more you eliminate those kinds of variations.

So I think it is important to understand to get to that, we'd like to have heroic yield improvements, but we don't need heroic yield improvements..

That's helpful. And then, Jason, finally on Pullmantur to help us with modeling. I believe you said that Pullmantur has a neutral effect to earnings for the rest of the year. Is that....

For this year, yes..

Yeah. I mean, for the rest of this year, right.

But can you lay out for us perhaps the impact of deconsolidating Pullmantur on yields for the rest of this year? And then as we think to next year, how much could that perhaps benefit yield?.

Sure. So for this year, it's about 1 point in terms of the yield improvement it gives. And so that's why we raised our guidance from a mid-point of 3.25% to a mid-point of 4.25%. When you look at the cadence of yields and so for Q2, for example, it's worth approximately 200 basis points. In Q4, that's worth approximately 300 basis points.

And it's about the same, about 300 basis points per quarter, in Q1 and in Q2 of 2017. And it's worth about 1.5 points to the full year in 2017. To give you some color on the cost side, it's worth about 20 basis points to 25 basis points per quarter over the next 12 months..

Okay. Just because you misspoke it, you started with second quarter was....

I'm sorry, it's Q3. Yes, third quarter. Sorry..

Okay. 3Q is the 200 basis points and the 4Q was 300 basis points..

Q3 is the 200 basis points, right..

Yep. Okay..

Approximately..

But Pullmantur now is going to be in that other line, right?.

Right. So, the earnings from Pullmantur now will be recorded below the line..

But the way that you guys record it, will you break it out as a minority interest or will you keep putting in that other line?.

No. It will be the same as how TUI Cruises and SkySea is recorded. So that will be in our other income and expense..

Okay. Thank you so much..

You're welcome. Thanks, Felicia..

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

Good morning. And happy birthday, Michael..

Thank you..

I have a couple of questions.

Celebrity Equinox's recent move over the past 10 days back into the Caribbean, is that something that was driven by Turkey to a greater extent, or is it something that you in general were considering for next year to reduce European exposure, given all the other events that are happening?.

Yeah, Assia, I think it's, of course, everything that you've mentioned. But I think perhaps maybe more important is the importance to Celebrity of being in this key market year-round. Celebrity wasn't here in the summertime. Its customers wanted it. We have the Edge project coming out relatively soon.

And so I would consider this a very normal tweak to our itineraries that we do every year..

Okay. And it does seem that European pricing close in has actually held up surprisingly well, I would say.

Is that because of the typically more resilient European passenger that we've seen in the past?.

Yeah. Actually, that's right. On a trend perspective, we have seen, and we've even said this on the last call, that we've seen really strong demand trends from the European consumer for European cruises.

Now, I think it's important to point out that typically the European consumers spend a little bit less than the North American consumer on their holiday or their cruise holiday in Europe..

I think it's interesting. We are sometimes surprised by these things. After the Brexit vote, I think we expected, for example, it's nothing else the distraction of all the dialogue about it to impact bookings, and we saw nothing. And so a lot of what we're doing isn't so much hypothesizing why things are happening.

Because we rely so much on forward bookings, we really observe what is happening. Whether we can explain it or not is another question. But we tend to focus on what the numbers are and they simply lead us in a certain direction..

And the leave voters may not exactly be your key demographic there..

I don't know. I frankly just expected that it was such an interesting thing. It was on the news and everybody was focused on that. And as I said, we would have expected, if only from the distraction, to have an impact on bookings, and we saw literally nothing. We're not complaining..

Great. Thank you. Thank you so much..

Thanks, Assia..

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

Thank you. Gentlemen, a few things here. One, Jason, if you could or Richard, China. I think your expectations were for the industry to see modestly down yield. And I know China is really a volume story over time. The end demand is holding up. It's just some digestion of capacity and growing pains, let's say, with the distribution of that.

But just an update for the industry or what your thoughts are on yields for this year? And then, from a capacity perspective, for 2017, any commentary that you would have for the industry, and then yourself by the major geographic regions. I think Carnival mentioned that they anticipate the Caribbean to be up 5% in 2017.

Just want to get your color on that and for you in particular, and then the other major geographic regions, China, Europe and so forth..

Tim, let me just – it's Michael, let me just respond to the question with regards to China yields. I think the way you described it is spot on. That's exactly how we do see it but this is kind of a digestion challenge as it relates to capacity and the growth of this market was just being quite extraordinary. We had plan for yield declines in 2016.

If you may recall, we're expecting to see some decline and that has been the case. When you look at capacity, certainly in the Shanghai region.

When we think of China, we think of it as one market, but, of course, it's really three distinct markets, the north Shenzhen, the south in Hong Kong and south China and, of course, the East which is Shanghai the main market. And most of the capacity is in Shanghai. It's about 65% of the total China business. This year, Shanghai was up around 100%.

So, I think your comments were spot on. So, we did expect to see those yield declines and we are dealing with the distribution opportunity.

I think when we look into 2017 in relation to capacity, the good news that we see at the moment in terms of 2017 and Shanghai is that growth rates are lot more moderate and some were in the region of 15% to 20% as opposed to 100% this year. And I think maybe Jason could talk to you a little bit about the other markets..

Yes. Great. Thanks, Michael. So, just kind of putting into perspective around the major products. We do expect Caribbean yield to be up around 4% next year for the industry..

The yield or capacity, Jason?.

I'm sorry, capacity around 4% next year and Europe to be about down 5% for the industry. And then, as Michael pointed out, we expect China to be up about 50%, a little bit less than 50% for the entire market going into 2017..

Okay. Okay.

And then, in general, just maybe a slight range where you thought China yields would be 90 days ago for this year and then where they're looking at now?.

Well, I'm not going to give a range, but we thought that China yields would be down for the year as we talked about for the past several quarters, and I would say we're a little bit worse than that..

Okay. Okay. And then, on Pullmantur, Jason, maybe a little more on the accounting there because I think you guys are doing a marine management agreement and a lease.

Can you maybe talk where those flow into? And then your 49%, I think it was discussed earlier, that's going to flow in the other income similar to what TUI does, but maybe just on some of the those other components?.

Yeah. Sure, Tim. Yeah. So, as we ramp up our management services, as well as the leases, those revenues will hit onboard and other revenue line item. Keep in mind, we still have the depreciation of the ships. So, depreciation really doesn't change.

And then the earnings of Pullmantur, we will get 49% of, and that will take place with our other joint ventures below the line..

Okay. So, you just keep the assets. You have the depreciation, and then you're leasing those and you get that up in the onboard and other line as well as the management fee that was driving part of the yield as well. Pullmantur's yields to begin with were lower than the fleet..

Yeah. They were much lower than the fleet average..

Okay. Okay. Thank you, gentlemen..

Thanks, Tim..

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

Hi. Good morning. Just a quick follow-up please on China.

Jason, when you mentioned that pricing in China is down moderately and this is also a question with respect to Europe, it would be helpful to get a sense of if roughly, is down 5% the number for each market this year, is that a reasonable ballpark for both markets?.

I think as a relates to giving a specific number, it's not something that we're going to give kind of by product, but I think that as we started off in the beginning of the year, we expected China yields to be down and we expect them to be down more. And Europe, really, Northern Europe and Western Med, that combination is accretive.

It's really challenged yields in the Eastern Mediterranean that is driving that product to be – the overall Europe product to be down for the year..

When you look into 2017 for China, given the incremental capacity in China, is it reasonable to think that we'll see a decline in yields next year although not the same magnitude?.

Hey, Harry. It's Michael. One of the things that I think Richard had commented on earlier is the journey of this market. Certainly, we're optimistic about the overall future in terms of the market potential and we've been very actively engaged in the broadening and the opening of channels in the marketplace.

So, I think the comment that I think Tim had made earlier with regards to digestion problems, I think we're working quite actively and we believe our competition is doing the same thing in kind of dealing with this in terms of opening distribution. There is no issue with demand.

The demands there in the markets there is the building of the distribution quickly enough to handle the capacity. So, at the moment, we're still working through what we think 2017 would look like and I'm sure we'll be able to talk more about that later on..

Yeah. And Harry, I just like to add, I think it's hard for me to imagine an industry where you in one year suddenly double capacity and you have – you fill all that new capacity and only have to make a relatively small reduction in your pricing to do it.

Again, I simply look at that and say, wow, that shows how strong the situation is, and I think to extrapolate that and say, well, if you have any weakness in the face of doubling of capacity even though the capacity growth is half as much next year and in the future, you'd still expect to see the same result.

I just don't think is a logical inference..

So let me just ask – I'm 0 for 2 so far, so....

That happens to me all the time, Harry..

Maybe a little differently. One of the fears is that the industry will be moving capacity out of China back into these markets – the more traditional markets..

No way. Excuse me for interrupting you, but the itineraries are, first of all, if we're looking 2017, itineraries are largely fixed. It's very unlikely you will substantial change in the capacity in the different regions. And we are a long-term industry. This is an industry where our horizon is long term. We plan long term.

We see a very powerful market, and I don't see any real change in that. So, the idea that because of relatively modest discounting in one year and in the face of, as Jason earlier said, a more profitable environment, even with that discounting, that we would suddenly change the way we've operated forever in the industry.

It just doesn't seem to me to again be realistic. So, I think what I'm saying, Harry, is you're over three..

Okay. No. I got half an answer. Thank you, guys..

Thanks, Harry..

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

Great. Thanks. Two questions. So, first one, I think you mentioned that you saw some – you started seeing softness in recent weeks in China.

If you could clarify that and is that within the typical volatility range that you'll see in the China market which is not a developed market?.

Yeah, Greg. Hi. It's Michael. This really is something that we're seeing in Shanghai as we said earlier. We think of China really in these three different distinct markets. And we're seeing it more in Shanghai. We're seeing it in Shanghai, rather.

And that's, we think, pretty much related to the significant 100% plus capacity increase that come into the marketplace. What we've seen is it's been challenging maintaining the really peak pricing as we're moving through this period.

And of course, we'd expected to see some drop off in terms of the pricing, but we're obviously working with our partners in terms of developing promotional strategies and what have you to stimulate the demand at the right price. What we are seeing is that load factor percentages are exceeding our expectations..

Okay. And then just with respect to Europe and looking specifically at the North American tourist passenger, I think that's like around a third of the passengers that are sailing in Europe, two-thirds are European tourists.

So I'm just wondering how have those passengers been – how's the behavior been since you had the coup in Turkey attempt, you had Nice.

Is that having a continued impact on that passenger wanting to go to Europe? And when would you expect that passenger group, the North Americans going to Europe, when would you expect that group to start strengthening in terms of demand to go into Europe?.

Well. Greg, it's Michael again. In terms of the North American source market for the European product, we reached a point around June actually, June into July, where the North America demand starts to naturally drop off for European product.

So, the latest issues have had not such profound impact on the North Americans because we see the drop-off coming. It's a decline over time. But with the European market, I think Richard had mentioned it or Jason had mentioned it earlier. Particularly after Brexit, we've seen no drop-off at all in the demand.

And, certainly, from the European markets, we've been pleased with the demand that we've seen and the European market seems to be particularly resilient. Normally, after we see an incident, an event, a terrorist event, you get this drop-off with bookings from both European and America markets.

And what we're beginning to see is the recovery is a lot more rapid in both markets, and certainly in the European market..

Right. Okay. Thanks..

You're welcome..

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

Great. Thanks.

So just thinking about your guidance and the change in guidance before Pullmantur, since the deconsolidated Pullmantur guidance is that 50 basis point range and your previous guidance was 150 basis points, should we think about your guidance excluding the Pullmantur deconsolidation being more of a narrowing of the range of the 2.5 to 4 going to kind of a 3 to 3.5? And I'm obviously just taking a 100 basis point yield off of the range.

And then I just want to think about what that might mean to Q4, because I think some investors are saying this implies your Q4 yields would be up 3% to 9%, but if you're narrowing the range, then it's really just more like 6% yield growth that you're looking for, which I guess would be less than your Q1 yield growth.

So just trying to think about whether that math is the right way to think about what your guidance is (52:54) in Pullmantur..

Yeah. Well, I think, first, as it relates to the narrowing of the range, as we move towards the back half of the year, we typically narrow the range. Also, as I commented in my opening remarks, we're over 93% booked for the year. And so we are in a very good booked position.

And especially when you focus on North America, which is very heavy in Q4, we're in a very strong position. So I think when you look at Q4 and you say, well, what's going to have yields drive to a high level? The first component you have to consider is about 300 basis points of that is Pullmantur's deconsolidation.

The other thing which I think is important is our commentary about strength in North American products, strength in a mix of products that are very similar to what we had in Q1, which we saw very strong yield improvement for.

And also I think just to comments we've had around Harmony and the attraction to Harmony as well as a lot of strength for Ovation out of Australia, which is where she'll be in the wintertime. Those are, I would say, are the underlying currents that support a sizeable yield growth in the fourth quarter..

Okay. Great. No, that's helpful. Thanks. And then my other question is just on China. If we think about China having capacity increase again next year, if your yields in China were down a similar percentage rate as they were down, and I know you haven't said what that percent rate is.

But if they had a similar rate of decline next year, would that still be accretive to earnings for you, the ships in China? And, I guess, two questions, would it still be accretive to yields and would it still be accretive to earnings?.

Yeah. Robin, it's Michael. Yeah, I think it's a good question. I mean, obviously, I don't think we've mentioned it previously, but with the softness that we've seen, still China continues to generate above-average yields and it's accretive to our business. And that's how we view the China market and I think that's what we'll see in 2017..

Yeah. And I'll just add, in terms of it being accretive to earnings and to returns – first off, it's already a very high returning market. Having another half year of Ovation is a strong tailwind to returns for 2017..

You know, Robin, I know this question has come up and I'll build on it as well as in the way I responded to Harry earlier. I'm aware that there are some concerns that if China doesn't develop, all that capacity will turn left and head towards the Caribbean and saturate the Caribbean.

And it would require an enormous change in the fundamentals of China to even begin to contemplate that. I will just tell you within our company, the subject has literally never arisen in any deployment discussion that I am aware of.

And we are so far from it that we just think that would require a level of change that none of us think is likely or even remotely likely. So I understand the sensitivity on this, but we just aren't seeing those kinds of shifts. And, again, I emphasize, we think long term. And so we're looking at a market that continues to grow, and grow nicely..

Great. That's helpful. Thanks again. The reason I was just asking about this similar decline next year is to sort of triangulate into like, therefore, your yields really can't be much worse than some kind of single-digit decline given that if it's still accretive to next year with a similar rate of decline.

But it sounds like we're not going to get that specific. So, okay. Thank you..

Thanks, Robin. Well, we have time for one more question..

And your final question comes from the line of Jaime Katz with Morningstar..

Hi, guys. Thanks for squeezing me in. Can you guys talk about capacity numbers next year? I know Pullmantur camp is coming out, and Legend.

And is there anything else that we should be thinking about? And then, would you kindly update us on your expectations for capacity growth over the remaining two quarters of the year?.

Sure. So, at this point, there's nothing else, I think, planned as it relates to new additions or deletions from our fleet going in into 2017.

Just to clarify, was your question, capacity just for us or capacity more for the industry?.

No. For you guys, because it swung from up 4 to down 2 next year..

Yes.

So – but you were asking what's our year-over-year capacity change for Q3 and Q4 this year?.

Yes, sir..

Yeah. Okay. So, Q3, our capacity change is about 3%. And in Q4, it's flat..

And then, can you guys also talk about what the other initiative costs you had that you had taken out as a onetime item? Do that have to do with building out in China or something else?.

You mean in terms, for adjusted earnings?.

Yes..

Yeah. Yeah. No, those had more to do with our structural changes that we were doing as it relates mainly to Pullmantur, so closing down offices like, for example, in Brazil is really what most of those costs relate to..

Okay. Great. That's all I have..

Thanks, Jaime..

Okay. Thank you for your assistance, Nicole, with the call today. And we thank you all for your participation and interest in the company. Carol will be available for any follow-up questions you might have, and I wish you all a great day. Thank you..

And this concludes today's conference call. We thank you for your participation and ask that you please disconnect your line..