皇家加勒比遊輪 (RCL) 2003 Q3 法說會逐字稿

Good morning and welcome to Royal Caribbean Cruises third quarter earnings release conference call.

Mr. Luis Leon, CFO, will lead today's 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. [operator instructions]

Thank you.

Mr. Leon, you may begin your conference.

Thank you, Mandy.

Good morning everyone.

I am Luis Leon, EVP and CFO of Royal Caribbean Cruises Limited.

I would like to welcome you to our third quarter conference call.

With me here today is Richard Fain, our Chairman and CEO, Jack Williams, our President and COO, Bonnie Biumi, our Senior Vice President and Treasurer and Dan Matthews (ph), our Manager, Investor Relations.

Before we start, I need to refer you to the first slide of our presentation, which can be found at our Web site www.rclinvestor.com.

Some of the comments we'll be making are forward-looking statements and are subject to changes based on the items listed on this slide and disclosures in our SEC filings.

Additionally it is important to note that in accordance with the SEC's regulation G, we have provided reconciliation between gross and net yield and gross and net cruise costs for the third quarter of 2003 and 2002 in our press release.

This information, along with certain historical reconciliation is also available on our Investor Relations Web site.

Before I go through the details concerning the quarter's results, Richard will provide a brief overview, Jack will follow me with review of the operating performance and at that point, we will open the call up to your questions.

I will now turn the call over to Richard.

Thanks, Luis and good morning, everyone.

As always it's a pleasure to have a chance to discuss a little bit about our results for the quarter and the strength we are seeing in our business.

Previously we reported to you bookings took a big hit at the beginning of this year during the build-up of the war and fighting during the war.

We've also indicated, though, that once the war ended, we enjoyed a significant resurgence in booking.

This resurgence is very encouraging, but still hasn't filled a big whole created at the beginning of the year.

That basic resurgence as continued during the second half of '03 and is leading into 2004.

Nothing has changed in our basic view of the direction to market.

Overall, we're coming in with both revenue and cost in line with the guidance we gave, during the last quarterly conference call.

Nevertheless, there are deviations from that projection.

For the third quarter, bookings came in marginally better than we expected.

Our yields were down 2.1%, which was at the top end of the better end of the range of expectations.

The other hand, bookings for the fourth quarter have been softer than expected.

Now we believe we will have yields down 1% to 3% at the bottom end of the worse end of our expectation.

Looking at the year as a whole, this means we will still end up 2003 down between 1% and 2% over 2002.

Again, that same range we had predicted at the end of the second quarter.

Looking forward to 2004, the generally positive trends continue.

We feel quite good about the strength of our forward-booking position.

We do note people are booking later than they have historically and this always makes predictions more difficult.

Fortunately, later bookings appear to have stabilized.

This has allowed us to expect our yields will improve for the first quarter of 2003.

Looking at the two calendar years following September 11, I think it's interesting to note that our company has grown 29% capacity over those two years.

Our industry has experienced similar double-digit increases and of course, two dislocations have racked the travel industry as a whole.

Despite all of this, Royal Caribbean and Celebrity Cruises have been able to fill all the new capacity only suffering combined 2+% drop our yield.

Really hard to imagine more dramatic evidence of the fundamental strength and the fundamental resurgence of our industry.

You have heard me complain before, that I am tired of proving that.

But, this is too important phenomenon.

Lastly, I would like to point out, that 2004 is the last year of the massive capacity entry for our company and for our industry.

As you know, one of the main drivers of that capital program for Royal Caribbean was that, we felt it was important to reach a critical mass.

We have now achieved that objective and it is no longer the driver it was before.

We've also solidified the position of our brand in the marketplace, better performing extremely well.

Therefore, from a market share point of view, we see no need to increase our relative position going forward.

Now, we are looking forward to re cooping the rewards of our strong name during a period of much lower growth.

Other focus of our attention is on the cost side.

We focused mostly on net gross cost for Available Passenger Cruise Day.

We do, however, tend to manage these costs more on an annual basis than a quarterly basis and there are significant timing differences that come up either because of random events that (inaudible) or because of conscious efforts to shift such things as marketing trend from one period to another.

Here as a whole, we expect these costs to be up about 3%, although for the third quarter, costs were essentially flat.

With that, I'd like to turn back over to Luis to provide more background update.

Thank you Richard.

Our third quarter results are summarized on slide two.

Net income for third quarter 2003 was $191.9 million or 97 cents per share.

This compares to $193.5 million or 99 cents per share for the third quarter of 2002.

It is important to note that the diluted shares outstanding for the quarter were $198.7 million or 2.8 million shares higher than the diluted shares outstanding of $195.9 million for the second quarter of 2003.

The increase in the number of shares outstanding was attributable to the accretion of our stock price during the third quarter.

The increase resulted diluting our earnings per share for the third quarter of 2003 by an additional penny.

Included in net income is a reduction in operating expenses of $5.8 million or 3 cents per share reported in connection with a resolution of litigation settlement originally reported as a charge of $20 million or 10 cents per share in the third quarter of 2002.

Also, as you will recall, the third quarter of 2003 was negatively impacted by $8.7 million or 4 cents per share resulting from the cancellation of a Mediterranean cruise for a Celebrity cruise ship.

Revenues for the quarter were $1.1 billion, up 8.6% from 2002.

The increase in revenues was attributable to increase in capacity of 9.4% partially offset by decrease in gross revenue yields of .8%.

Net yields decreased 2.1%, which is at the high end of the range we had originally given at the end of the last quarter.

The decrease in net yields was primarily associated with lower occupancy and cruise ticket prices partially offset by increase in shipboard revenues.

Bookings continue to come and close in and on slide three you can see on September 30 of this year; approximately 47% of our bookings are coming within 90 days.

As we had mentioned before, the close-in nature of bookings restricts our visibility and makes forecasting our net yield performance more difficult than in prior year.

Assuming the booking and pricing trends continue at their current pace, we expect that net yields for the fourth quarter of 2003 will be down 1 to 3% from the same period in 2002.

This would result in 2003 full year net yields being down approximately 1 to 2%, which is consistent with the guidance we had given you in the second quarter call.

Earnings per 2003 are expected to be in the range of $1.42 to $1.46 per share.

Looking forward, the booking period of 2004 is just getting underway and management is encouraged by preliminary indicator and expects the first quarter of 2004 will have positive net yield growth.

Jack will provide you some more details on booking trends in just a few minutes.

Operating expenses for the quarter were $651 million, up from $602 million in 2002, which is a decrease of approximately 1% on an available passenger cruise day basis.

This decrease was primarily attributable to lower commission costs associated with lower ticket prices and the reduction in the litigation settlement previously mentioned partially offset by an increase in our air/sea mix, higher fuel cost and cost associated with cancellation of a celebrity cruise.

Fuel continues to be more expensive than last year and represented approximately 4.4% of revenue in the third quarter of 2003.

This compares to 4.1% for the same quarter last year.

On an available per passenger cruise day basis, this represent an increase of 7%.

We currently estimate that fuel expenses for the full year of 2003 will be roughly 5% of revenues compared to 4.5% of revenues in 2002.

On available passenger cruise day basis; this represents an increase of 13.7% from the prior year.

SG&A expenses for the quarter were $129 million, compared to $103 million last year or up 25%.

On a per available passenger cruise day basis, SG&A expenses increased 15%.

As you will recall, following the events of September 11, we initiated certain cost-reduction initiatives.

During 2003, SG&A has now returned to more normalized basis.

Earlier this year we suspended a significant amount of advertising at the start of the Iraq war and we did not return to normal levels until late May.

This resulted in marketing spend for the first and second quarters of 2003 being lower than originally anticipated.

As we previously stated, we intend to spend our full marketing budget for the year.

We plan on spending the remaining portion in fourth quarter as we prepare for the 2004 wave season.

This will result in increase in SG&A on Available Passenger Cruise Day basis for the fourth quarter of 2003.

I want to point out that we have changed some of our terminology this quarter to simplify things.

We are now using Gross Cruise cost to refer to operating and SG&A expenses and Net Cruise Costs to refer to running and SG&A expenses.

Net Cruise costs were essentially flat on an Available Passenger Cruise Day basis.

This is primarily attributable to higher fuel costs and cost associate with the cancellation of a celebrity cruise partially offset by the effect of the litigation settlement on the respective period.

For the full year 2003, Net Cruise Costs on a per Available Passenger Cruise Day basis are expected to increase approximately 3% from the prior year.

Remember the 2003 was affected by the change in concession arrangement for celebrity cruise service and also the brilliant operating lease.

Our previous guidance for depreciation and amortization of $360 million to $370 million and net interest expense of $265 million to $275 million remains unchanged at this point.

Turning to our balance sheet as of September 30, 2003, our cash balance was $380 million, property and equipment, net of cumulative depreciation was $9.5 billion, total debt was $5.5 billion, which consisted of $300 million of current and $5.2 million of long-term, customer deposit increased to $679 million and shareholders equity was $4.3 billion.

Net debt to capital ratio was 55% at September of this year.

From a cash flow perspective for the first nine months of 2003, net cash provided by operating activity was $691.8 million and our capital expenditures were $535.4 million.

As you can see on slide four, our liquidity as of September 30, 2003, was $1.3 billion.

This is comprised of $380 million of cash and cash equivalents, one full ESD facility of approximately $312 million available for use on the jewel of the seas, which is scheduled for delivery in Q2 of 2004 and $580 million available under the company's revolving credit facility.

Speaking of revolving credit facility, the company received on a subsequent basis an additional $30 million commitment in September which is included in the liquidity as of September 30.

However, as a subsequent event we also received $75 million in additional commitments in October, bringing our total availability under the revolver today to $655 million.

These additional commitments did not offer any of the facilities existing current.

On slide five, you can see the company's estimate, the capital expenditures for 2003, 4 and 5 will be approximately $1.1 billion, $0.6 billion and $0.3 billion respectively.

These estimates have been updated for the Ultra Voyager ship order and other miscellaneous projects.

We currently have an option to purchase an additional Ultra Voyager ship for delivery in 2007 and this option expires in September of 2004.

Slide six and seven show ship delivery schedule and our capacity information.

Before asking Jack to give us an update on bookings, I would like to touch briefly on income tax.

As everyone is most likely aware, the IRS recently issued the final regulation for section 883 of the internal revenue code.

These final rules will be effective started with our 2004 fiscal year.

For those of you are not familiar with section 883, it provides certain foreign corporations and exemption from U.S. income tax on US shores income derive from or incidental to the international operation of our ships.

These regulations indicate that income defined in non-shipping in US shores would be taxable income and they give example of what is considered non-shipping.

Well this would encompass U.S. shore excursion, income derive from the sale of airfare and ancillary items it is by no means significant portion of our business.

Although our analysis on this matter is not yet finalized, we currently estimate that this will negatively impact our 2004 earnings per share by approximately 4 to 5 cents.

At this point, I would like to ask Jack to give us an update on bookings.

Jack.

Thank you, Luis very much and good morning, ladies and gentlemen.

I will spend the next few minutes just briefly discussing general tone of our booking activity and our pricing activity and then provide some additional highlights by major product as we turn the corner and move into 2004.

As I mentioned on the last conference call, we had witnessed a nice recovery in bookings in business since the end of the war in early April.

Since that particular report, bookings continue to be up on a year-over-year basis.

Immediately following the war our bookings were up about 25% year-over-year and this period lasted basically throughout the entire summer and that strength allowed us to erase much of the deficit, volume deficit created by the war.

Since early August, bookings have stabilized to what I call a more normal level, but continue to outpace the increase in capacity on a year-over-year basis.

Our 24-book load are ahead of last year.

So, we no longer need bookings to be dramatically higher than same time last year to fill any gaps or hold on any particular product level.

It was also in August when we began seeing real shift to 2004 in our Q1 '04 book load factor is finally ahead of same time last year and I'll give you little bit more color on the first quarter of '04 in a few moments.

Due to some of the sterically pricing we do have in place for '04, our bookings service beginning to shift a bit further out, but the close-in booking activity is still very high compare to our historical trends.

In terms of the tone of pricing, again, as I mentioned on our last call, I felt that the second quarter yield performance would be the bottom for the year and that is certainly going to be the case now we as close out '03.

Q3 yields were down modest 2.1% as Mr. Fain commented in his remarks.

That was on increase of 9.4% and giving all the challenges and issues we've had to deal with this year I think most everyone would agree that is a pretty remarkable yield performance for the third quarter.

Prices were discounted very heavily during the war, but as demand increased, we were able to increase our pricing.

Recently pricing for remainder of '03 has been very stable and is at a significant premium to same time last year and we had a very, very solid booking week last week and not just for the final quarter of '03 but also into the first quarter of '04.

Now, we have some more realistic pricing out there in the marketplace right now and at least that is helping to drive some higher conversion rates and clearly we're being able to avoid deep discounting in this particular booking period.

In terms of Q4 '03, just a quick couple of comments as we close out '03, our book load factor is ahead of last year by a couple of points over the last several weeks.

Our APD bill has been at a solid premium to same time last year and so, again, we'll be closing out, at this particular quarter performance with a modest decrease in yield in the range of 1% to 3%.

As we look into '01, first quarter of '04, as we mentioned, there is limited visibility given the high necessary terms of close-in booking activity, but the early indicators are quite encouraging.

Our Q1, as you can see on the capacity chart, '04 capacity growth will be up 14%.

Our book load factor in the first quarter is above same time last year and even given the strategic pricing we have in the market place and as we have mentioned Mr. Leon mentioned we do expect to see yield improvement in the first quarter of 2004.

Let me just shift now and give you a little bit of some highlights by our product as we move into 2004.

I will be talking about the numbers are specifically about '04 and the products as we have them planned improvements for '04 and to start with Caribbean, which is, 41% of our total capacity, and I might draw your attention to slide number 8 of the presentation where they do show, the shift in capacity changes by product from '03 to '04.

Again, Caribbean will be 41% of total capacity, that would be an 8% increase in year-over-year capacity.

Book load factor is right now is ahead of same time last year and again I'm talking for the full year of '04 and not just for the first quarter.

We do plan to see some yield improvement in the 7-night Caribbean in '04.

Short Caribbean products performed quite well for this year in '03, will represent 12% of total capacity, which is, just a very slight increase on the year-over-year basis.

We do right now have book load factors ahead of same time last year and we'll see a very -- yields will be in flat to slightly up range for the '04 season.

The Royal Caribbean is 8% of total capacity.

There is virtually no change in year-over-year capacity change.

Book load factor is just slightly behind where it was last year.

We've added two new products from Celebrity to the long Caribbean.

We are looking probably pretty flat to slightly improved yields through 2004.

Alaska is 7% of total capacity, that will be a 5% change in year-over-year capacity and book load factor right now is on par as the same time last year.

Bermuda 4% of total capacity, representing 2% change in year-over-year capacity.

Book load factor is slightly behind where we were last year.

Given some of the pricing we have in the marketplace, we do see a modest improvement in yields contributed last year and as everybody knows we had a pretty soft period this year.

There can now will be 4% of total capacity, which is about 20% change year-over-year in book factor ahead of same time last year, as well.

Europe, of course, very important seasonal market will be 8% of our total capacity.

That will be 12% change in year-over-year capacity.

A Book load factor right now is higher than same time last year and we do expect our '04 European yields to be up from '03 primarily due to the boinski (ph) discounts that were driven when we had to fill the holes due to the war in Iraq.

Finally, Mexico is 9% of total capacity, that's a pretty significant change year-over-year.

Book factor again is slightly ahead of same time last year given some of the more strategic pricing we have in the marketplace.

That gives you little bit of recap of what we're looking for in terms of '04.

Let me close my comments before we go to q- and a- by announcing that next week we'll take delivery of our fifth Voyager class ship.

You can see here on slide nine of the presentation she is a beautiful ship and last of the five Voyager class ships we began to purchase back in 1997.

We are delighted to be debuting this beautiful Voyager class ship out of Port Canaveral where she will be the largest ship sailing out of there.

She will be weltering (ph) at eastern and western butterfly itinerary down into the Caribbean.

Passenger capacity is 3114 deadlock in excess of 3800 passengers when you include this board 1557 state rooms and like all of her sister ships in the category we expect Mariner to really perform quite well at our Port Canaveral and are delighted to be welcoming her to our fleet next week.

With that, we'll go ahead and open up for questions and answers to the audience out there.

So, operator, we'll go ahead and take questions.

Ladies and gentlemen, we are now ready to begin the q- and a- session of the call.

If you would like to ask a question please press "* 1" on your telephone keypad.

To withdraw your question, press "* 2".

One moment while we compile the q-and-a roster.

Your first question comes from the line of Jill Krutick with Smith Barney.

Thanks very much.

Good morning.

I was hoping Jack was very helpful to get your sense of yield outlook for 2004 by brand by market.

How much visibility do you really have into those numbers?

Maybe you could perhaps clarify for us the share of your first quarter that may already be booked and how much are you putting on the books now beyond the first quarter relative to prior years?

Secondly, I'm curious if you have any sense of how the cost outlook is going to look for next year in terms of perhaps improving or same flat versus 2003?

Finally if you have quarterly capacity numbers for next year that would be very helpful.

Thank you very much.

OK Jill we do have the quarterly capacity numbers.

They are part of the presentation, I think it was slide seven, if my recollection says me correctly.

To your first point, I will talk about some of the comments I just made on 2004 and may be Luis and Richard can talk a little bit about the cost.

I keep in mind; we are really in the middle of developing our 2004-operating plan.

In fact, we have a major meeting on that right after this call.

So we don't have a lot of visibility on the cost side and that was clearly how we wanted to characterize my comments for the first quarter.

We have very limited visibility right now due to close-in booking patterns but we can come up with some early indicators and I try to recap them in my comments that we were encouraged by early indicators.

We got good strategic pricing in the market space now and are seeing conversion rates higher.

And those are good early indicators, Jill.

They are not the kind that you want to go ahead and forecast entire years performance on and we'll continue to provide more insight on these calls as we see more and more booking to '04.

As I did tried to make clear in my comments, on most indicators and especially first quarter and beyond that is virtually no visibility at all of any significance, I should say.

Or I would be more definitive on my comments.

But as we look into the first quarter load factors are up and strategic pricing seems to be working quite well. so that encourages me.

With regard to the other question Jill, on cost.

As Jack mentioned we are really on the preliminary stages of going through our annual plan for 2004.

The one thing I will tell you is we are simply are working a lot of cost reduction initiatives and those will always be part of any kind of an annual business.

I think it would be premature for us to comment too much in terms of what our cost outlook is for next year.

Fair enough.

Thank you very much.

Your next question comes from the line of Felicia Kantor of Lehman Brothers.

Hello, good morning, guys.

Jack, first question for you.

I am wondering if you could just elaborate a little bit more on what you mean by good strategic pricing, you mentioned that phrase a lot while you were giving your outlook for '04?

And in line of your comments also that your visibility is still limited, as the industry does heat up next year with the capacity, assuming things are going to get rather competitive, I am wondering what types of programs do you have in mind if any to offsetting any type of pricing pressure you might see in '04?

So that might come in line with you're discussions about the term good strategic pricing?

And then also, secondly, I'm just wondering regarding the close-in booking trend you mentioned on the call that you do see it stabilizing.

I'am wondering if you are seeing that you know, changing that all in terms of do you see it improving?

And is that a function of groups or do you think that there is a shift maybe permanent in how the cruise consumer is planning its vacation going forward?

OK.

In terms of the comments about strategic pricing what I'm try to communicate is that we are trying to get into the marketplace early, what we recall more realistic pricing and this should help us to avoid any major close-in discounting we've had to do for the last several quarters.

As I mentioned on the second quarter call, we are able to generate some demand with as have to go to that real deep discounting close-in.

So, we're trying to get a good built of business and what we were considered to be a more strategic, realistic price decline so that we move closer to the Alaska season and European season and so on and so forth or any season or seasonal are to our year-around core products like 7-night Caribbean, you don't have deep discounting taking place towards the end of the selling period.

And that should relieve, as you mentioned, it is connect whether not we will have pricing pressures throughout '04 that we will have to adjust our sales and marketing strategies too as the strategical pricing eight hold and does what we think it can do and in the absence of any major deals or political events or anything else, at we are with, we hope a lot of that pricing just hope you will evaporate and 04' we will have good healthy selling.

In terms of close-in bookings, I believe it has stabilized, we've seen as we closed up second quarter about 50% of bookings were within the 128-day window, it's now in the neighborhood of 45% to 47%.

If I had to give a good projection, I would say that is probably how we will close out the year.

It is getting to be more stabilized.

But I do believe we are going to see this close-in booking period in terms of historical levels continue with probably for at least the foreseeable future on offer, if not going to be a permanent kind of activity, come out of all these events.

No, we've talked about close-in bookings and on chart three on the slide show, gone from about third of our booking to I'd say, half of our bookings,--, actually see this 9-11.

But, we think this was a general factor to stabilize selling.

Overall, we have a number of occasions tried to -- there is limited pricing in down turn rather due to more bookings at reasonable level and not have to do as much last year bookings.

I think that is important not only in terms of getting the best prices, but actually consumers prefer that, too.

And we've had a couple of initiatives in the last 5 to 10 years and accomplished that.

It's harder when the booking curve is changing, but we think that because due to wonderful tends to be stabilizing and that's one of the reasons the booking feeling fairly good about next year.

Great.

Thanks a lot.

Our next question comes from the line of Dean Gianoukus with J.P. Morgan.

Hello, just a couple of questions.

On the cost side, I know you can't comment on '04 specifically, but just looking forward if you thought capacity was going to be up around 5% and there weren't any abnormal fluctuation in any of your cost, what do you think you can get unit for cost improvement heading forward?

Secondly, when you look at the amount of supply coming on, how nervous, if at all, are you about the Caribbean, given the Princess is going in and there seems to be a bunch of supply coming on?

Finally, it seems like the ships keep getting bigger and bigger.

Understanding from talking to some of the--is that deck space is not proportionally as big as the number of passengers being added.

Is that true and if it is, are you concerned at some point that the quality of the experience could suffer or somebody with smaller ships, I guess, could attack that in some kind of marketing campaign?

Thanks.

Dean, I'll address the first question and then Richard and Jack could address the other two questions.

On the cost side, again, it is very, very preliminary at this point of time because we are going to our plan.

I will tell you that Jack and I have been spending a lot of time also with Richard and we are spend a lot of time focused on the stuffing part and addressing different initiatives and plant implement initiatives.

But, to give you an idea of where our cost will be going, I hope they are going down.

I can't give you presentation in terms of the range at all.

Perhaps we can give you a better indication as we start talking about the end of the year.

OK.

The other question.

Let me comment quickly on your comments about the Caribbean and capacity, as I mentioned, up 8% year-over-year.

This is our core product that has always been very strong.

We have most of the two dual-branded capacity into the Caribbean.

Clearly our greatest asset is the service we've been providing for many, many years across all of our product lines and in particular the Caribbean.

With addition of the Voyager last year, the tapped in ship of choice was introduced into the Caribbean.

We have taken on a good level of dominance there.

We need to continue with our Get Out There campaign has been successful.

Despite the added competition, we are well positioned to continue to dominate and perform quite well.

I'll take the last part of it.

I am surprised by your comment in point of fact look for example in our Voyager class ships they have the largest deck space of virtually any ships with respect to the passengers.

And in effect when you look at Ultra Voyager, because of the extension comes by lengthening the ship as opposed to making it taller or wider, there is actually a disproportionate increase in the deck space.

The Ultra Voyager actually has more deck space per passenger than does even the Voyager classic.

And frankly as we have made ships larger, I think we've been very careful to make sure we preserve their preference and amenities.

So, as the ships have gotten larger, actually added amenities and the Voyager are some of the highest yielding ships around.

OK.

Good info.

Thanks.

Your next question comes from Robin Farley with UBS Warburg.

Great.

Thanks.

I have three questions, actually.

First, I want to confirm -- when you talk about 2004 and the shorter booking.

Is it safe to assume at this point that any hole that was created during the Iraq war only really extended out to Q4 of this year?

There is really no hole heading into 2004 from Iraq?

That is the first question.

The answer is yes.

Great.

The second question, on expenses, if we took out the accrual for litigation in both periods to kind of look at what your operating expenses are, we're coming up to increase something in the 5% to 6% range, increase of 5%, 6% per passenger cruise stay.

In terms of one-time issues in there, is that a fair calculation that accurate?

Yes, it is.

OK.

When you look to, when you talk about cost being up 3% this year, if. we took out impact of litigation that might be closer to 4% for the year?

One other thing, Robin, I mentioned is as other things, (inaudible) arrangements and the fleet.

I don't actually have that number, but if you call Dan we can talk about the run-off type things.

Then, last question is just sounded like there was movement in Congress for potential of U.S. to travel to Cuba.

Can you give us some color on what kind of impact that might mean for royal or for the industry?

Cuba has always been a wonderful, historically was a destination and one that we all hope will be there in the future.

But, I think at this point you don't see that as anything imminent unless there is fairly dramatic change in political funding.

I think it is a really good -- very exciting thing.

That opens up cruise industry will benefit terrifically.

The only issue is and the question is when, not if.

But, I'm not sure at this point anybody would have confidence saying that was likely to happen any time soon.

Great.

Thank you.

Our next question comes from the line of Steve Kent with Goldman Sachs.

Hello, good morning.

Just on your more conservative guidance for Q4, I know it is not the most important quarter from an earnings contribution, but since the booking window is so short, I just wondering whether you could really get better price movement as you move into that period, especially around the holiday season.

Are you essentially sold out for the holiday weeks or is there some ability to raise prices for some last-minute people coming in?

Very good question.

We are not sold out, especially in the Christmas period right now.

We are seeing good strength in the last two weeks and as I mentioned, we had a very good week last week.

I haven't been able to get into the detail yet, but am working with management as early as last week we were getting more of uptick in pricing on some of the Christmas sailing.

There is more upside they're remaining, but it is not real significant, but we believe there is a little bit of upside there.

Thanks.

Your next question comes from the line of Brian Egger with Harris Nesbitt Gerard.

Good morning.

Just a follow-up about the fourth quarter.

Your press release eluded to softer than expected fourth quarter, but nothing in your prepared comments suggested anything that seems to have changed all that much.

Just wondering what specifically you were seeing in terms of characterizing softness?

And general commentary in terms of the promotional environment or pricing in general in terms of where things stand typically to where they usually stand and what might have changed?

Brian, I think, you are right saying, it wasn't all that dramatic, but we had said we thought the fourth quarter would be flat to slightly down.

And instead we're now saying it will be down 1% to 3%.

So, clearly we think there has been some softer than we expected and frankly since we have seen so little out of the general path of trajectory it is not 100% clear why that is.

For example, we do see a stronger New Year sailing than a Christmas sailing that is obvious disparity.

But, I think there is nobody suggesting that we have that degree of accuracy and that's all we're saying is in the range that we had anticipated.

We're at the lower end of the fourth quarter and higher end in the third.

Right.

I guess it is a follow-up, that when you see those some parts of the first may be being overall soft and the expected is that manifested is just the degree of bookings response for certain text pricing or the level of pricing or promotions that seem to be out there in the marketplace or some combination of both or -

Yeah, I would say probably a combination of both as we look at that on a weekly basis we're trying given the demand, that were seeing in any particular booking period to get as much revenue as we possibly can out of that demands will be increasing, price is not just by product, but in many cases that is in category of byproducts was pretty complex situation, as Richard said, we are within the guidance that we have been talking about all long here.

Just that body and -right now are really going different, but nothing significant that we had.

We were stimulating large booking activity after the war to fill those holes that were created during the war, especially in the last in Europe.

All that kind is now, we are seeing more normalized booking and better pricing of bookings coming in at or above capacity.

That is certainly where I would like to be in a much more comfortable with that kind of booking picture out there than the former that I just mentioned.

OK, Thank you.

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

Two questions.

First, Luis, you just can you refresh our memory on the other income line item on the income statement?

What's included in that?

Then, Jack, maybe you can comment about now that we know that there is short booking window, can you ever change a yield management to account for that and get the pricing back or is the fact of the matter that demand is lagging supply just slightly into --so even if the booking window lengthens out a little bit, you shouldn't have to discount to get the last people on?

David, let me address your first question and Jack can address your second question.

With regard to regular income line, that we have several other investments out there, some of which would include First Choice, for example, and that would include the dividend from them and also other investments that we have in ports and other items.

Jack.

Yeah, David, in terms of the short booking window on and how the revenue management people are adapting their pricing to adjust for that.

We have really been doing that over the last many quarters as we kind of witnessed this short booking window emerge.

I mentioned on our last conference call that we are quite pleased for the first time we were able to stimulate bookings inside this window we bought in discounting, that changes on.

So, the models have evolved and are right now prices of those kinds of demand curves.

The only thing that I can think that might impact the change in those curves and I don't think it is not going to be real significant, we are beginning to see the cost of product line is at the strategical pricing that we have an marked price that I talked about earlier.

If that continues to hold, then we will see less of bookings inside or people booking outside of that window or some models will have to adapt to. (inaudible).for that, but, we have, as I said, in the last many many quarters have changed our price into account for the short bookings and realized that we are selling a very competitive marketplace.

Great thank you.

Your next question comes from the line of Robert Simonson with William Blair.

Good morning.

Two questions.

Number one, what's the extent of your hedging on fuel for next year and also on the Euro for the Ultra contract?

Second question is would you care to share what the dollar difference was in net yields or percentage different was in net yields in the third quarter on what you sold during the third quarter for the third quarter use versus what the yields had been on the inventory that you sold going up to the start of the quarter?

On the hedging front, this is Bonnie, we have roughly 12 1/2 % of our fuel hedge for next year a little more waited in the first half of the year than the back half of the year.

On the Ultra Voyager contract, we are fully hedged with options, which allow us to protect against the movement against us in currency, but we can participate if it comes our way.

OK

I'm not really sure I fully understood your question about the third quarter's - a little bit detail, maybe you can give Dan and I'll call afterwards and we can work through you and take your question, but I really didn't get it.

The jest of it is as you look into first half of next year the yields that you might enjoy for the first half may be more influenced by what isn't in there which is the depressed pricing from prior events like Iraq etc, than it is from actual dramatic improvements on pricing on a sequential basis.

I don't think there is any question that in the absence of the kind of events that we have experienced in previous quarters, and bookings for it, are you or the other events associated and so forth and the price constraints-- those are no longer in the marketplace and to(inaudible) they will have any upside influence.

Thank you.

Your next question comes from the line of Timothy Conder with A.G. Edwards.

Thank you.

Couple of questions.

First of all, I think its maybe little to and an earlier question, but just wanted to clarify.

If you could give us some color as to the percent of group bookings that make up of your things that you have on record for the first or second quarter and how that looks on a year-over-year basis?

And then, at this point if you could just sort of remind us of what your capacity growth thoughts are looking at '06 and beyond on a year-over-year basis.

And then, finally Luis, I know your primary focus is on cost reduction and you have already been there just a very short period of time.

How is that plan evolving at this point and at what time would you anticipate maybe late in '04, that being implemented?

Tim, it is Jack.

I will comment on the group bookings.

They do vary by brand and by product.

I have not got specifics for the first quarter in front of me. so if you want to call either Dan or I after the call I will try to give you some more insight to exactly what these percentages are.

As I have gone through weekly revenue, reviews of the group.

Our revenue management people have not seen a significant change in booking activity as it relates to Group versus FIT Group. in the 25 to 30% range of our booking. and I don't think it significantly changed in right there, but I do not have a precisely the first quarter year-over-year change.

OK.

Tim, before I answer your last question, I do want to mention we will take one call after this one because we are running out of time.

To address your question on cost, in terms of the timing of the implementation, I think that there is a lot of things that we can do, that could be implemented almost immediately at the beginning of the year and could have an immediate impact while other things that could have more of a delayed impact.

Certainly our cost initiative could have impact of course.

In terms of your comments then about '06 and beyond capacity, we just take on the Ultra Voyager out an out time period.

It is in the very low single digits, its in increase 3% or 4%.

Dan can give you the exact number on a follow-up call.

Thank you.

Your next question comes from Rino Bianchi (ph) with Citigroup.

Yes, good morning.

I have three questions.

The first question, I didn't catch when you say what was the to end in year sea mix, I don't think you put an any number?

RCL index is up about 2.3 and I don't have the exact number with me, but it was up about 2 points.

2 points.

The second one, looking at the operating cash flow, I noticed that there was currently pretty significant swing in working capital, around $65 million.

I don't remember it was anything unusual last year or any thing unusual this year that is worthwhile reporting?

The answer really is that this basically seasonality, timing and seasonality.

But there is nothing that's part of the ordinary.

OK, final question.

I think you mentioned something about improved onboard revenue.

Can you provide little bit more around the concept, any more numbers?

Though, primarily just concession, onboard revenue includes a variety of different things.

With all the activities on the ship and basically that is they are all doing very well.

Do you have any actual number or percentage rate increase on a unit basis versus last year?

No, we do not provide that.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. Leon, are there closing remarks?

No, I just want to thank everybody for joining us on the call and look forward to talking to you in our fourth quarter and year-end conference call.

Thank you for attending.

Thank you for participating in today's Royal Caribbean Cruises conference call.

You may now disconnect.