皇家加勒比遊輪 (RCL) 2002 Q4 法說會逐字稿

Good morning, and welcome to the Royal Caribbean Cruises fourth quarter earnings conference call.

Mr. Richard Fain, Chairman and Chief Executive Officer will lead today's call.

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Thank you.

Mr. Fain, you may begin your conference.

Thank you very much for joining in our conference call this morning.

With me today is Jack L. Williams, President and Chief Operating Officer of Royal Caribbean and Celebrity Cruises, Bonnie Biumi, Acting Chief Financial Officer, and for the first time today we have Dan Matthews.

Dan, as many of you know, has taken over Erin Williams job, and he will be joining on this call for the first time.

He can be reached at Erin's old number. 305-539-6153.

I think you all know that these are interesting times in which we live and our report on the 2002 year clearly reflects that.

On the one hand, the overall results were better, both in terms of revenue and in terms of expense than we had anticipated throughout the last year.

The year as a whole in fact the company performed far better than we had remotely thought possible a just year ago.

The situation showed continuous improvement throughout the year and we have even exceeded the guidance from last October.

As our press release indicated, yield for the year ended up within 1% of 2001 yields.

Furthermore operating costs performance was even better than the aggressive tarts we set for ourselves.

I would now like to talk about our booking situation for 2003.

Until late in last year, it was really do quite well.

While our capacity is up 12%, our volume was up more than enough to compensate, and our pricing was up, too.

However, from December on, we've seen a clear softening of our bookings, and that's disappointing.

In the beginning, it was clear that it was related to the publicity over the stomach bug.

We believe that the reporting of this was grossly unfair and misleading.

You're probably more likely to get this at the supermarket or at an ATM than on a ship, and of course as so many of you who are on this call who aren't here in Florida, enduring our winter, it's been a bad winter in most of the United States and Europe.

But I think people have begun to realize there was an overreaction to that, and we think the impact of that has reduced, but it has been replaced about concern about a likely war in Iraq and today I think we're feeling the economy really beginning to hurt us.

Interestingly, so far it only seems to be hurting us in the first quarter.

Bookings for the second, third and fourth quarter are actually marginally better than our internal track, and we've not adjusted our forecast for the last three quarters at all.

In a little while, Jack Williams will give you more insight to the details of our bookings and how that pattern has developed.

I would also like to point out there's significant shift in the timing of our expenditures within the year, and Bonnie's going to talk about how the timing of those expenditures will affect our quarterly earnings for 2003.

On the cost side, we really are very pleased with the cost-cutting programs that we put in place during 2002, and we do intend to continue to focus on that, so we don't have any back pedaling.

Part the reason I'm so pleased is that while we did cut costs during the year, we were able to do so without deteriorating our product, and that's really important to our long-term success.

In fact, our ratings have actually gone up during the year despite the cost-cutting.

We intend to continue making efforts in that direction, but we also know there is a limit to what we can do without unduly affecting the product.

We're also facing significant cost increases for things like fuel and insurance, but Bonnie will talk about that in a few minutes.

The other day I told my wife I was becoming manic-depressive.

On the one hand the fundamental strength of our industry and company have been proven in a very dramatic way.

We're growing the market.

Our brand recognition keeps improving.

Our marketing programs are working.

Our ability to hire and retain good people is stronger than ever before, and both the industry and company have weathered an extraordinarily difficult time.

On the other hand we keep getting faced with new challenges to prove this fundamental strength.

The aftermath of 9/11, fears about terrorist activity, overblown publicity about the stomach flu, concerns with the war in Iraq, higher fuel prices etc., all those are getting to be the challenge So I get the highs of great passenger satisfaction and good yields in difficult times, as well as a great company to work for, and then I get the lows and sudden shifts due to bad publicity or back economic turns.

Fortunately, my wife is very supportive, and she tends to look at it as though the cup was half full.

So when I complained of becoming manic-depressive, she pointed out that become a manic-depressive that half the time you're happy.

I would like to point out it's been our practical to provide updates to the community normally in conjunction with our quarterly earnings reports, and we have not provided information between quarter ends, although we have done so during unusual time such as the immediate aftermath of the 9/11 attacks.

These also appear to be somewhat unusual times.

And, we are considering providing mid-quarter update if the circumstances warrant.

We'll have to wait and see, but if the circumstances do warrant, we will consider providing an update on booking patterns as things progress and as we get more insight into what's happened.

With that, I'd like to turn the microphone over to Bonnie Biumi, who can give an more background on the financial side.

Thank you, Richard.

Good morning everyone.

I'm going to review our fourth quarter and full-year financial results and provide some guidance for 2003.

Jack will then give you an update on booking trends.

Before I start, I need to refer you to the first slide of our presentation, and this can be found at www.RCLinvestor.com.

Some of the comments we made or will be making are forward-looking, and are subject to change based upon the items listed on the slide and disclosures in our S.E.C. filings.

Our fourth quarter results are summarized on slide 2.

Revenues for the quarter were $781m, up 19% from 2001.

That yield for the quarter were up 10.6% and capacity was up 12.2%.

Our air/sea mix decreased to 12% from 18%.

Operating expenses for the quarter were $510m, up from $445m in 2001, or 2.2% on a per available passenger cruise day base.

This increase was primarily attributable to higher fuel prices and lease payments of the Brilliance of the Sea.

Fuel continues to be more expensive than last year and was up over 14% over PPCD, and represented approximately 5.5% of revenues.

Excluding these items, operating expenses for the quarter would have been down slightly on a PPCD basis from last year.

SG&A for the quarter were $119m, compared to $110m last year or up 8%.

On a per available passenger cruise day basis, SG&A was down 4%.

Last year included $6.5m of severance payments so on a comparable basis, SG&A was up 2%.

The primary driver of this increase was a shift in the timing of market expenses as previously discussed.

Other income for the quarter was $34m.

This includes $33m of net proceeds related to the termination of the merger with P&O Princess, our first choice dividends offset by other miscellaneous items.

On Slide 3, you can see our full-year relates for 2003.

Revenues were up 9% from 2001 at $3.4b.

The increase in full year revenues is due to a 15% capacity increase, partly offset by the decrease in air/sea mix, our air/sea mix was 14% in 2002 compared to 24% in 2001.

Net yields for the year were down only 0.7%.

Operating expenses were $2.1b, up from $1.9b in 2001, but down 5% on per passenger cruise day basis.

SG&A expenses for the year were $431m compared with $454m in the prior year.

Adjusting for costs associated with September 11th, this represents a decrease of 14% per passenger cruise day.

Running an SG&A expenses for the year, excluding fuel, the Brilliance lease, and the cost associated with September 11th were down 4.8% per PPCD.

For the full year, fuel was up approximately 16% on a PPCD basis and represented approximately 4.5% of revenues.

Looking forward, we are just a few weeks into what has been characterized as the industry's wave period.

While this period continues to be an important period, the trend toward closer end booking has reduced its importance as an indicator for full year pattern while making it more relevant for the first quarter booking.

Bookings over the period have been slower than we would have hoped, especially for sailings earlier in the year.

We believe there is due to the uncertainly with the potential conflict with Iraq, coupled with a weaker economy and the publicity for the stomach flu.

While wave period bookings are lower than last year, we had strong bookings through late 2002, and we do not have the hole created by September 11th to fill.

As a result, the company expects an increase in the yield in the range of 2% to 4%.

Because booking continue to come closer to the sailing date, we have limited visibility past the first quarter of 2003.

However, if we were able to achieve a modest yield increase for 2003, the company believes that the current consensus estimates for the full year of approximately $2.00 per share are reasonable.

On the cost side, we have a more complicated year-over-year comparison because of the change in our concession arrangements in the Celebrity Food Service and we will have the impact of full year operating lease for Brilliance of the Sea.

This comparison will also be impacted by changes in our air/sea mix and commissions.

In addition, consistent with what others are experiencing, we continue to see significant increases in our fuel and insurance costs.

Looking at running an SG&A expenses, excluding fuel, Brilliance of the Sea, concession change and litigation, we expect costs to increase approximately 2% to 3% for the full year.

This increase in cost is expected to be significantly more in the first quarter than any other quarter because of the shift of our marketing spend.

As a result, we expect the earnings growth will be in the middle two quarters which are also the seasonally strongest of the year.

This means we expect significant change in expense patterns to affect our first quarter earnings.

As you recall, post-September 11th, we significantly decreased overall spend in the first quarter of 2002, compared to 2001.

This, coupled with our expectations that yield improvements will be more in the first three quarters than the fourth quarter will affect earnings distribution for the year.

This does not concern us as we manage our business for the best full-year results.

On a going-forward basis, we will talk in terms of operating and SG&A basis on a per passenger crew days basis.

While this measurements is affected by the change in the fuel, air/sea mix, emissions in addition to the other items previously discussed, we believe the new SEC regulations on pro forma financial measurements, it's important to use measurement found in our financial statements.

While there would be complicated comparisons this year, we will try to provide information to help you understand changes in this measurement.

For 2003, we expect operating and SG&A expense to increase in the range of 6% to 8%. 1.5% to 2% of this increase is attributable to fuel, the change in the concession arrangements and operating lease for Brilliance of the Sea.

We expect the first half to have a larger increase than the second half of the year, due to timing of marketing spin, the impact of the lease which started in the second half of 2002, and the expectation that fuel costs will come down as the year progresses.

As you know, the company does have a fuel hedging program.

We currently have about 30% of our fuel hedge for the first half of the year, and closer to 20% for the second half of the year.

Based upon the current forward curve, we currently estimate that that will be 4% to 5% of revenue.

On slide 4, you can see the estimates to capital expenditures for 2003, 2004, and 2005.

They will be approximately $1.1b, $.5b, and $.1b respectively.

Even if we ordered a ship today, we wouldn't get it until mid to late 2005.

As a result, we will have an 18-month period of no significant capital expenditures.

Depreciation and amortization should run between $360m and $370m, and assuming no significant change in interest rates, net interest should be in the neighborhood of $290m to $310m dollars.

Turning to our bs, our net assets to capital was 56.3% at December 31st, 2002.

As you can see on slide 5, our liquidity as of December 31, 2002 was $1.2b.

We also have approximately $600m in OECD available for use on two of our three remain ship deliveries.

One is available on 2003, and one is available on 2004.

As you know, our revolving credit facility expires in June 2003.

We are currently in the process of renewing this facility and hope to have a new facility in place by the end of the first quarter.

While many of you would like to have more details on the new facility, I hope you'll understand that we are in the midst of negotiations, it is not appropriate for me to provide further details at this time.

Slides 6 and 7 show our ship delivery schedule, and our capacity information.

And at this point, I'd like to turn the call over to Jack to give us an update on bookings.

Thank you, Bonnie.

It's good to be here with you on the call.

Prior to me giving a little more detail on the booking situation, I think it would be appropriate to discuss the situation with the Infinity that we have announced or the last couple of days and the problems we're having with the propulsion system with that ship and the consequences of that.

So let me give you a little bit of background what happened.

During the recent cruise from Ft. Lauderdale to San Diego, we began to get readings of metal particles in the oil systems in the ship's propulsion system, and that was on January 21st, obviously we continued those measurements for the next several days and unfortunately the particle readings increased, as did the vibration measurements on the propulsion system.

This eventually led to restrictions being placed on the use of the system by the manufacturer which would greatly reduce our speed of the ship, and as a result, we knew we were going to be heading for an unscheduled dry dock.

We announced the cancellations of two cruises, the February 2nd and February 13th cruise, which is 21 days of cruising.

As the event unfolded, last night we also decided to terminate early the existing cruise in Acapulco, for those of who you read the press release on this, we did announce we felt the impact would be in the neighborhood of $.03 to $.04 on our EPS this year, but due to the early cancellation of the cruise, which we just made the decision last night, it may be a little slightly higher than that.

For those passengers that were disrupted on the canceled cruise we did give a full refund and 50% future cruise certificate.

The ship will be dry docking in either San Francisco or Victoria.

We're finalizing that this morning as we speak.

It's going to take about 11 days to repair the ship, plus the transit time, but right now we do expect the ship back in service on February 23rd in San Diego.

The problem, as we see right now is clearly a pod-bearing failure that we're experiencing with the ship.

As you can imagine, we're very early into the investigation of this situation, so the root cause of the failure is yet to be determined and may very well not be determined until we get the ship in dry dock and get the pod opened up.

Clearly it's been a very unfortunate situation, and we're doing everything we can at this point to minimize the inconvenience to our guests, and will continue to manage the situation as we go forward from here and keep you advised as appropriate.

Back to the discussion about the bookings for '03, I think Bonnie and Richard had some good highlights.

I'd like to re-emphasize, as Bonnie just mentioned that the wait period continues to be a very, very important period for the industry.

However, this close-in booking trend that we have been discussing for a number of calls continues on.

These close booking patterns has reduced somewhat the overall importance of the way period as a major indicator of the full year performance.

If you look at slide number 8, you can really from that slide see what a pronounced impact this close in booking situation has had on our booking pattern.

This represents the bookings stated within 90 days of sailing.

As you can see back in 2000, about 31% of our bookings were coming within 90 days of departure.

We closed out 2002 with 40%, and I suspect if we continue the way we're doing now, we're probably going to be somewhere north of 45% of our bookings within a 90 day window and that's a significant change in our booking patterns.

Having said that, I also think the way period is more relevant now because close-in booking patterns to our Q1 bookings than it has been in previous years and as Richard noted and Bonnie also noted, those bookings have been somewhat slower than what we originally anticipated.

The reasons have also been discussed.

I think most of you are probably aware of those reasons, but the war on Iraq and uncertainty over that war is clearly have an impact on consumer behavior today and until that uncertainty is lifted, we'll probably see ongoing concern.

Richard mentioned the weaker economy as well as the negative impact that we've had on bookings following all the publicity concerning the stomach flu.

That really started right after Thanksgiving of last year and carried on for a couple months, and I think that publicity probably had its major impact on Q1 bookings, as opposed to anything beyond Q1 of '03.

Despite that somewhat bleak background and given the fact that we did have strong bookings and also the fact that we continue to grow the company with a 14% increase in capacity in Q1 of '03, we still expect to achieve an increase in net yields somewhere in the range of 2% to 4%, which I personally think is a pretty solid performance.

At this point, I think I would summarize our 2003 outlook as somewhat as follows, and to kind of give you a little brief overview of what's going to happen with capacity, both brands will grow about 12.4% so we have some good solid growth in '03 again.

Our seven night core Caribbean capacity will increase 13%.

We continue to see nice premiums on the Voyager class ship, even in the first quarter, and as all of you know, this year we redeployed a lot of our assets back into Europe, and we'll see a capacity increase of about 88%.

Our booked APD right now is currently ahead of the same time last year.

Our book load factor is right on par with same time last year.

We are quite pleased with some of the early indications of demand that we are seeing for our seasonal product, primarily in Europe, Alaska and Bermuda.

And I think our overall ability to see some yield improvement in 2003 is going to be dependent upon a few key factors.

First of all, that we see a good stable pricing that continues on past of first quarter.

That in fact the higher yielding of seasonal products in terms of the premiums we expect do materialize, and I'll talk more specifically about some of those markets in a couple minutes.

That we do indeed see a continuation of this close booking curve that we see for some time now.

I personally don't see any reason why we won't.

It's been with us since the 9/11 situation, and it continues to be there, and I don't see any reason why that would change in the near future.

Of course, the big outlying area is any impact about any possible war with the Iraq.

Let me give you some major products and how they're performing.

Our seven-night Caribbean bread and butter product will represent 43% of our total capacity.

That's a 13% increase in year over year capacity in this very important market.

As everybody knows we just introduced an Navigator of the Seas to that market.

We'll see about a 15% increase in the 7 night bookings in Q1 of '03.

Our book load factor right now is ahead of the same time last year despite some volume shortfall that we do see in Q1 and we have addressed in the last week or so, and or booked APD is up slightly from last year.

As I mentioned a little earlier on, we continue to get a very nice premium from our Voyager class series of ships, even in the first quarter.

Our short products are 5, 5 and 4 night itineraries and three and four-night itineraries represents 15% of our total capacity, a very slight decline of less than 1%.

This market does book very, very close in.

Our load factor is below where we were last year by a few load factor points, but our APD is up right now.

Again I'd like to emphasize that we do see a much closer booking in pattern.

Our long [inaudible]is now 7% of our total capacity down slightly year over year, but book load factor is significantly ahead of where we were last year by almost 20 points and our booked APD is also up nicely in this particular market.

Alaska, a very important seasonal market, as all of you know will increase our capacity by 5%, represent 7% of our total capacity in 2003.

Our book load factor is below where we were last year at this time, but that is by design.

We do believe we sold a little too fast last year, so we're holding some inventory back for a better premium and our booked APDs are up nicely in that market in Alaska.

Europe, as I mentioned we're seeing some early indication of good demand in Europe.

We've increased our capacity by 88% on a year-over-year basis.

It represents now 8% of our total capacity.

Our book load factor is a little bit below same time last year, given all the capacity increase, but we're seeing a very nice improvement in yields in this market right now, and clearly this is the one market that will be most impacted depending on what may or may not happen in Iraq, but right now we're pleased with the early demand.

As for Bermuda, that represents 4% of our total capacity, virtually no change year over year.

Our load factor is slightly ahead of last year and APDs are slightly below where we were a year ago at this time.

The canal, not a big market for us, 4% of our total capacity, but that's an increase of 60% year over year, load factor is slightly ahead of where we were last year and APDs are up quite a bit.

Now I'll close out with the Mexican Riviera, just like the canal, 4% of our total capacity, good increase year over year at 23% increase year over year, our book load factor ahead of where we were last year quite a bit, and our APD's just slightly down from where we were last year.

That gives you a little bit of insight of where we are by major product.

I would like now for those of you who are participating with the website show, to take a look at slide 9.

We have a nice shot of the Navigator of the Seas as she comes down the government [inaudible] here in Miami.

I talked a little bit about the ship on our last call as we were about to introduce the ship, but she's in service now, our of Miami, doing an east-west butterfly.

The Navigator has a slightly different look in terms of her Voyager class sister ships.

She has far more exterior glass, offering I think even grander views for our guests from the balcony staterooms.

Other new features on the Navigator of the Seas includes a vintage wine bar, which we partnered with Robert Mondavi.

That replaced the sports bar on the Royal Promenade on the other sister ships.

We've also offered additional specialty dining.

We now have Chops Grill, the steakhouse, that's on the Radiance class of ships is now on the Navigator of the Seas.

We've also added Jade, which is an Asian fusion restaurant.

We have our first Latin jazz bar on board, on deck number 4, called BOLEROS, which has turned out to be one of the hot spots of the ship, and we've added Ben & Jerry's ice cream on the Royal Promenade for our guests, and they seem to be enjoying that.

And of course, it has all the signature elements of the ice skating rink and rock wall.

We introduced the ship in mid-November with the trade, and many of you got to join us on the ship on a couple of our events, and you've seen this ship.

It's been very, very well-received, and it's booking exceptionally well.

We're pleased to have it in the fleet, particularly on the seven-night Caribbean.

With that, we'll open it up for questions and answers.

Ladies and gentlemen, we are now ready to begin the question and answer portion of the call.

If you would like to ask a question, please press star, then the number 1 on your telephone keypad.

If you are using a speakerphone, please pick up your handset before asking your question.

We will pause for a moment to compile the roster.

Your first question comes from Jill Krutick with Salomon Smith Barney.

Thank you very much.

I was trying to understand how realistic parts of net yields might be for this year.

What kinds of assumptions you're building in that come to that -- I know it's not a specific target, but what kinds of assumptions do you need to achieve that kind of yield expanse or sort of flattish or slightly upish yields.

Secondly, are you going to be considering moving some capacity around or reallocating it, and how quickly can you make those decisions and if the long Caribbean is so strong, would you consider moving some of the shorter stays cruises into that category to capitalize on some of that strength?

And finally if you would give us a best guess to capacity growth shaping up for 2005?

Thank you.

Jill, it's Jack, I'll take the first couple.

Then maybe Bonnie can get the industry capacity issues.

In terms of the net yields as I just commented there's a number of factors that are going to impact our ability to see a net yield improvement in 2003.

Bonnie touched upon it in her comments a little bit.

And as Richard mentioned in his opening comment, beyond Q1, we're pretty pleased with what we're seeing, so if that stable pricing remains there beyond Q1, I think that's important to our ability to turn in the kind of performance that would result in a positive net yield improvement.

Europe and Alaska has to perform well for us in terms of the summer in getting the premiums currently we have planned, and I just mentioned in my review, we're pretty pleased with what we're seeing there.

The close-in booking curve, I don't think is a big issue, I think it will continue and does have to stay in place, but the big outlay, of course, is the whole issue with the war on Iraq and what the economy may or may not do as we move forward from here.

Having said that, I think that's a good lead-in into your second question about capacity reallocation.

At this point, our itineraries are quite firm for '03 and beyond, depending on how the war situation might unfold.

We could clearly do something in Europe if we had to do it, but I don't think we're talking about more than a one-ship issue in Europe, regardless of what might happen on that front.

We have five and a half ships over there this year, and depending on what happens, if things aren't as bad as we think they might get, we might wish we had another ship over there, and if things get worse, we probably don't have impact of more than one ship and we could reallocate that if we wanted to.

You saw after 9/11, we did reallocate quite quickly.

That's a possibility, but I don't think that's a major issue for us right now.

Great.

Thank you.

Jill, with respect to the capacity for '05, the orders on the books would tend to indicate a number between 5% and 6% for weighted average throughout the year.

It is unlikely that any orders placed from now on would have a huge impact on that, and I think you'll see -- so I think that's more or less where the numbers would be coming out.

There might be some small increase in that if orders were placed relatively soon, but I think you have seen somewhat of a slowdown in industry capacity growth, and obviously we're watching, and we would intend to be sort of followers in that process rather than as early leaders.

But I this we're see now numbers in the range of five to six percent.

That's great.

Thank you.

Your next question comes from Robin Farley, from UBS Warburg.

To get to the earnings growth in the second quarter you referred to, can you talk about what kind of yield assumption you may be looking for based on what you're seeing now?

Then also, in the other income line, can you talk about what maybe be offsetting the first choice dividend, because net of the termination fee there, if you basically back that out, the first choice dividend looks like it's off, and then I don't know if you gave area/sea mix for the quarter, I know you gave it for the year.

I'll address the first question, and then ask Bonnie to address the second and third.

I think we tried to make it clear, there's an awful lot of uncertainty out there, and although we are giving some reasonable guidance with respect to the year as a whole we really have great trouble in trying to be too precise about that essentially past the first quarter, and I think if circumstances warrant and we think we get into a position where it's appropriate to be able to give more guidance on that, we will, but this is certainly an interesting time to be trying to predict what's going to happen in the geo-political and economic situation.

So I don't think we're in a position to give much guidance on the specific quarters, but I'll ask Bonnie to talk about the second two questions you asked.

The air/sea mix was 12%, compared to 18% for the same quarter in 2001.

In other income there's also miscellaneous items that get recorded.

We do have some infective portions of hedging, we have some pickup of ventures profits or loss and things that flow through there.

For next year, you can expect a little more than $5m per quarter for first choice, there will be offsets, they could go either way.

I think it's safe to assume that somewhere between, you know, $18m and $22m is what we expect to see.

I just can't predict the items that end up there.

It is such a small component of P&L, it shouldn't be an issue.

So it's primarily ineffective hedging before?

No, I want thing like ineffective things go there, like ineffective hedge portions go there, pick-up for joint ventures go there.

We have a number of different small items.

There's nothing big, 10 or so items that gets reported there.

Thank you.

You're welcome.

Your next question coming from the line of Dean Gianoukus from J.P. Morgan.

Some of your really small competitors have started waiving cancellation fees in hopes of getting people to book.

Any thoughts to do that?

On your capacity increases up on the web, does that include the cancelled cruises in the first quarter?

Thanks.

In terms of the first question, in terms of the smaller lines have been waiving cancellation fees, we gave that a thought, momentarily, and decided not to move that way at this time.

We've done some very surgical price actions to try to help us out in the latter part of February and early March where we can use some demand.

Those were put in place about four or five days ago and we've seen good response to that, but at this point we're not going to waive the cancellation fee.

The second question about whether or not the capacity on the slide represents the impact, it does not, it is not adjusted for the Infinity impact at this point.

Can you just tell us what that would be?

Bonnie do you have that.

Dean, we don't have that number, but we'll give you a call and get it for you.

Thanks a lot.

No problem.

Your next question comes from the line of David Leibowitz with Burnham.

Good morning, and congratulations on an excellent year.

A couple unrelated questions.

Bonnie, you mentioned litigation in one of your slides or part of your talk.

Is this a meaningful number at the moment?

The litigation I referred to was the settlement of litigation we had in the third quarter of 2002, and that was $20m, or $.10 per share.

But that has been settled.

That has been settled.

Nothing ongoing?

Right.

That has been settled.

Great.

Where do we stand on pricing vis-à-vis a year ago, are we back to the post September 11th pricing or are we still doing quite well against where pricing was at the end of last year?

David, as I mentioned in my comments right now for '03 our APDs are slightly above where we were same time last year, and that will vary by product, and I tried to give an overview of that.

But right now as we look at '03 for the entire year, our pricing on an APD basis is above where we were same time last year.

And are you having to discount off of that price greater than you did last year?

In some cases on some sailings in the first quarter right now we are taking some pricing, to stimulate demand, primarily in the seven-night Caribbean right now is where we're taking those actions, but we're not doing much beyond the first quarter right now.

And also, is there any much or off-bs liabilities.

The only off-bs transaction that we have is the Brilliance of the Seas operating lease that we completed in July 2002.

As we told you, that was a 25-year financing at a very good rate, and we've disclosed it everywhere, but that's the only financing we have.

That's off-bs.

Right.

Have you identified how large a write-down on your carrying of first choice you have taken in the fourth quarter.

As of right now, we have not taking any write-downs in our investment in first choice.

Even though the pressure there has decline as much as it has.

We don't believe there's been a permanent impairment.

And there's no accounting rules if the stock drops X%, you have no choice of writing it down despite the fact there's no impairment in the core business.

No, the test is permanent impairment, we obviously follow all accounting rules.

Understood obviously I'm not aware of all of them, and that's the way the question was phrased --

That's no problem.

The last thing, in the second and third quarters, when we show our hope for best increases year over year in terms of EPS, will that also be reflected in the top line, or will it be disproportionate bottom line economics to scale?

I don't think it's a question of economics per scale, I think it's a question -- I think yields are better in those quarters as John -- sorry -- as Jack pointed out.

Those are two of our best periods and normally and so those are doing well on a yield basis.

Then costs simply magnifies the effect of the seasonality.

Thank you very much, and again congratulations on a great year.

Thanks, David.

Your next question comes from the line of Helene Becker from Buckingham Research Group.

I want to ask a question with respect to positioning.

One of your competitors is moving ships into New York year-round, and I guess in the faster ships you can be in warmer weather overnight.

Is that something you would consider doing?

Or is there a demand for that?

Helen, we're looking at the New York market, actually as we speak.

I think it's a viable market down the road, and as you mentioned some of the competitors have already come to that conclusion, but we are definitely looking at that market for increased capacity down the road.

By the way, I do think we should point out that I don't think speed is particularly an issue here.

I think our ships are amongst the fastest that are out there today.

I don't think there's any significant difference on that basis.

Okay.

Thank you very much.

Then my only other question is with respect to the estimates that you gave us Bonnie, included in the overall numbers is the 4% to 5% on the fuel.

That's correct.

Thank you very much.

You're welcome.

Your next question comes from the line of Reno Bianchi ph) of Salomon Smith Barney.

First, Bonnie, can you provide us a little more detail about the bs, I know you gave us a number, we might get there but it would save us some time if could you tell us which cash, equity and debt were at the end of the year?

Sure, Reno, no problem.

Our cash was $240m some odd million dollars at December 31st.

Our equity was over $4b.

And what did you want?

Debt?

Debt.

Our long-term debt was $5.3b and our current portion was $122m.

Thank you very much.

You're welcome.

General question here, obviously based upon your current expectation for Cap Ex, until pretty much every single scenario, you're bound to generate cash flow in '04 and '05, what is the plan right now, how do you plan to use that excess cash flow in '04 and '05?

Richard D. Fain That's a really nice problem to have.

I'm glad you asked that, Reno.

I think that's a point we've been making about this business, it is a high cash generator, but at this point we're repaying debt.

Okay.

Thank you very much.

Your next question coming from the line of Peter McMullin with Ryan Beck.

Thank you.

Good morning.

Many have been asked and answered.

Two that I'd like to get a feel for, Jack gave us the capacity in Europe.

Can you break that out to the Med, just so we can assess the risk there?

And, two, just in terms of the fuel prices, have you given us some idea of plus or minus 10% what the sensitivity would be to earnings?

Actually Peter, I didn't hear the last question.

Could you repeat it?

If fuel went up 10% plus or minus 10% from where you have budgeted for 2003, what the impact would be on EPS.

Peter, on your competent about the capacity split in the Med. and northern Europe, I don't have that at my fingertips.

If you can give Dan or I a call afterwards, and I'll get it for you.

On the fuel front, we consume about six million barrels a year so every dollar change in fuel would be $6m, less the hedge portion, which right now is about 27%.

So that would be about $4.3m or m$4m the bottom line for every dollar moment in fuel.

Thank you.

Your next question comes from Neil Wise with Fair Play.

Given the recurring nature of the problem with the Infinity, will you be seeking any financial compensation from Shante'(ph) in France, and you mentioned the third quarter 2000, $20m settlement, I want to confirm that was for the class action, in the U.S. district court of New York?

I don't remember the court, but it was the class action, we've announced it some detail in previous filings, up to six months ago.

I don't actually remember the court that it's in.

But with respect to the Infinity as Jack mentioned, this is something that just happened.

I think obviously I'm sure this is of great concern to the shipyard and to Rolls-Royce, and as we learn more, we'll be talking with them, but I think this is way too early for us, unfortunately, the timing wasn't good both in terms of when during the year and the fact that it happened as an awkward time, vis-à-vis the cruise schedule, but I don't exactly know what the situation is, and I think it would be premature for us to comment on it.

Is it fair to say they have come to the party when this has occurred in the past, financially?

Yes.

I think it would be a mistake to infer anything.

Every situation may well be different, and I just don't know what the facts are.

Thanks very much.

Your next question coming from the line of David Anders with Merrill Lynch.

Bonnie, could you clarify -- I missed the 6% to 8% in increase in operating SG&A.

Was that on a per passenger day, and was up for the first half or full year?

What was the 6% to 8%.

The 6% to 8%, that was on a full-year basis and yes it was on a per passenger cruise day.

And it included fuel and everything.

It includes everything.

Jack, maybe you could comment on success of the Celebrity campaign, are you seeing that translate into pricing gains yet?

Or is it still too early?

Yeah, David.

Quite pleased with the results of the Celebrity campaign.

We've seed a nice bump in our overall unaided brand awareness, as good a bump as I've ever seen over one single campaign.

The T-shirts have become quite a rage and become quite popular.

While we never do give brand guidance in terms of yield by brand, I can say that Celebrity at the end of the year, with a modest increase in yields which we're pleased to see.

So I think we're having some good success there as well as our brand transformation, our on-board service delivery; its being transformed as we speak.

We're getting some excellent surveys from our guests on board those ships where we have improved our service.

So there's a good moment actual going right now with the advertising campaign, and we plan to continue that throughout 2003 and beyond.

David, I think the other thing I would mention here, when you start to look at these things, it's always very confusing when you try to apply yield management systems to a fairly dramatic change in circumstances, and I think the change of people booking -- the change in the trend of people booking later on has important implications for yield management systems.

During 2002, I think we were quite fortunate the way our management systems coped with the problem.

They did reach the conclusion they should do some aggressive pricing at the end of '01, beginning of '02, in order to understand the parameters of that, and that helped with the data that our models used to decide it.

Today, we think we understand that people are booking later, and I think we should say that we think that is not a transitory change.

We think that is -- that it's here to stay, and we have adjusted ourselves accordingly.

Unfortunately that requires a bit more fortitude when it coming to booking and we had delayed lowering our prices, and I think we have benefited this year by doing that, but it also makes some of these comparisons more difficult.

Okay.

Thank you.

Your next question coming from the line of Serene Nadashin(ph) from Wachovia Securities.

I had two questions.

On the loan that's coming due in June of '03, what's the size of that?

And how much is outstanding.

The size of the revolver is $1b and we currently we have nothing outstanding.

The question, unrelated, is what measures are you taking right now to prepared for the possibility there might be military action in the Middle East in terms of preparing to shift ships around?

And also are you taking any additional security precautions either now or in the last year because of higher heightened security concerns?

Yes.

I touched upon a little bit the whole issue about what we may or may not do as if relates to capacity redeployment should a war break out.

That would really just be focused on our capacity in Europe and the likelihood of that will probably see a shift in demand around the system, perhaps more to Alaska or Mexico or whatever, and as I mentioned earlier, I don't see any more than a one-ship possibility, and at this stage I think that's highly doubtful, but we do have some scenarios laid out of what we could do in the event the war escalates, we have a bigger problem than we think we might have.

As far as the heightened security, absolutely.

We have done a lot since 9/11, and continue to do a lot.

In a number of ways, we have our C pass now, which is a positive identification of every passenger on board the ship and the crew member as they enter and exit that ship.

We put increased security on board all of our ships and they're very visible and obvious to the guests on board.

Virtually 100% every all checked luggage and carry-on luggage as well as [inaudible] is either x-rayed or hand-checked or sniffed by a bomb-sniffing dog.

And that is the level we've been at since 9/11, and will continue to be at from here on out.

Thank you.

You know, it's interesting, when you talk about the security I think there's an interesting comparison.

Jack mentioned we're doing 100% screening.

That's throughout the industry, and it is interesting that we instituted 100% screening on September 12th of '01, and the government decided to do 100% screening on air, and it took them a year and a quarter to reach the same level we had reached the next day.

It's also interesting that the person appointed as head of the Transportation Safety Administration is ex-Coast Guard, Admiral Loy, who was previously the commandant of the Coast Guard, and his background there, he had clearly been very focused on that.

So I think we benefited from having that kind of oversight prior to 9/11.

I thought I would throw that trivia in.

Thank you.

Your next question comes from Andrew Berg from Financial Management.

Can you confirm what your Cap Ex was in the fourth quarter and with respect to the Revolver, I now you said that you didn't want to comment on the hold-up, would you be looking to increase the size of it or decrease the size of it by any meaningful amount?

Lastly, I think there was a comment by a gentleman earlier that you guys can generate a significant amount of free cash, I would agree with them, and as a bondholder, I would encourage you to continue to please keep paying down the debt.

I don't have the Cap Ex number with me.

I think last quarter we were expecting it to be $.5b or $600m.

I don't remember the exact number.

If you'd like, you can call Dan afterwards, and he will be glad to give you that number.

On the size of the revolving, I think it's fair on say it could be $700m to $1b, we just have to wait until we get through the process.

At this point, I really don't want to comment on that right now.

At this point, we'd like to open the lines for two more questions operator.

Your next question comes from Mark Kaufman of Royal Bank in Canada.

Your new restaurants that your opening up, how does that work in pricing?

Is that incremental?

Are the passengers free to basically pick and choose?

A little different than what a typical cruise would be?

Mark, what we do in the specialty restaurants, is we charge a fee per guest of $20 in those restaurants.

That's primarily to cover the service tips of the personnel in the restaurant, and that's purely optional.

They do it by reservations in advance of dining, and it seems to work quite well.

So do you have to make a reservation in advance before the ship or basically when you're getting on?

I guess just wondering how it affects your plans for staffing food, supplies, that kind of thing.

No, you make the reservations after you're on board the ship and we have a real good understanding, having been in this special restaurant kind of offering for several years, at least four or five years now of supply situation as well as the demand and staffing situations.

We have that well under control and get very good guest ratings out of those restaurants.

Your final question coming from the line of Bradley Kane with Seneca Capital Management.

One is on your total debt number, Bonnie, if you have an amount that's I guess used for construction and therefore not generating any revenue, and at this point, the other two questions, one is what you're finding from your customers to the reasons, if you've been polling them to why either they're booking late or if there's a trend in what you're finding, the customers' reasoning.

The second question applied to that is you mentioned you're holding pricing a little bit better on the close-in bookings.

Are you finding that the margins are increasing at that same rate?

We do have three ships under construction, so we have made some progress payments on our ships.

Typically, although they do vary by contract, it's roughly 5% down upon signing, then there's two more 5% progress payments and the rest is done upon delivery.

I don't know if you want to say whether that came out debt or cash, I'll leave that to you.

We do have cash on the bs and we do have debt.

I don't know the specifics of how those were paid.

I'd ask Jack to comment on the booking trends.

We are holding off and modifying our pricing actions based on these close had in booking curves.

That's a pretty extensive analysis that we do after the performance period to see whether or not those decisions are improving our revenue and yields on those particular voyages where we're doing it.

Sometimes the answer is yes, and sometimes the answer is no, but right now it's yes more often than no, and I think you can see that in the overall yield performance, so we're quite convinced those curves are here permanently, and our revenue management is adapting accordingly to that change appropriately.

Are you finding the rationale why they're booking today for a three months from now is different from what it was a year ago or two years ago.

I'm not sure I understand the rationale, what I do understand is it is happening, and we see it clearly, we therefore have to react to it from a revenue management point of view and modify our pries accordingly. [inaudible] We haven't done a lot of extensive research on what that rationale might be behind it.

Clearly 9/11 was a shock and changed some consumer behavior, but as I showed you in my chart, in my presentation even prior to 9/11, this close-in booking -- I can't recall I think it went from 31% to 36% of closer-in that might be a result of more capacity in the industry, and less every urgency on behalf of the consumer to book early, because they can get into a cabin now that they otherwise might not have been able to get into.

In earlier years when there was less capacity.

I think there are a lot of things impacting it.

And also we have a general trend in society today where things come soon after they order, so I think people virtually in every industry are seeing a shorter cycle time there.

I think with that, we should just thank you all very much for participating.

We appreciate your interest.

If you have more questions, you can either call Bonnie or Dan.

We certainly want to try to answer them as well as we can.

Thank for you joining us.

Ladies and gentlemen, thank you for participate in today's conference call.

This concludes today's call.

You may now disconnect.