皇家加勒比遊輪 (RCL) 2003 Q4 法說會逐字稿

Good morning and welcome to Royal Caribbean's year-end 2003 conference call.

Mr. Luis Leon, Chief Financial Officer, will lead today's call. (Operator Instructions) Mr. Leon, you may begin your conference.

Thank you Theresa, and good morning, everyone.

I'm Luis Leon, Executive Vice President and Chief Financial Officer of Royal Caribbean Cruises Ltd. and I would like to welcome you to our fourth quarter conference call.

With me here today is Richard Fain, our Chairman and CEO, Jack Williams, our President and COO, Bonnie Biumi, our SVP and Treasurer, and Dan Matthews, our Manager of 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's important to note that in accordance with the SEC's Regulation G, we have provided reconciliations between gross and net yields and gross and net cruise costs for the fourth quarter of 2003 and 2002 in our press release.

This information, along with certain historical reconciliations, 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 a review of the operating performance and at that point, we will open the call up for your questions.

Richard?

Thanks, Luis, and good morning, everyone.

As always, it's a pleasure to have a chance to comment on the results and to give some views on the current state of the market.

The last year has certainly proven to be an extraordinary one on many levels.

Most importantly, yields for the year declined 1.1%.

This is on top of seven-tenths of a percent decline in 2002.

While obviously any decline is unpleasant, I believe that this kind of result is very good in the face of the perfect storm that we had faced, consisting of war, terrorism, SARS, neuroviruses, et cetera.

This results in function of four factors - a resilient industry, as we've said many times, our very strong brands, great support from the travel agent community and excellent performance of our on-board revenue departments.

Cumulatively, in the two years since 9-11, our company managed to hold yields to within 2% of their '01 levels.

I think that our ability to do that amply demonstrates the strength of our industry and the strength of our company.

On the cost side, we're certainly not satisfied with the final figures.

For tactical reasons, we always intended that many of these expenses would be backend loaded.

But we had expected fuel costs to be lower than they were and we experienced some higher costs in other areas as well.

This is an area that we'll be focusing heavily on during 2004.

Looking to the forward booking picture, it's been the most exciting booking pattern we've seen in a long time.

Bookings are good in almost every market we serve and this has enabled us to predict that we will have yield improvements in the order of 5-7%, both in the first quarter and for the year as a whole.

Obviously, we feel most confident about predicting the first quarter and, to a slightly lesser extent, the second quarter.

But a 5-7% yield improvement is an exciting prospect for the year as a whole.

I'd like to clarify that our optimism is not based purely on the so-called wave period.

The wave period is an important period, no question about it.

But our revenue picture really depends on consistent performance throughout the year.

We've seen a steadily improving market since soon after our last conference call.

It continued to get better during the period and began stabilizing at this same strong plateau at about mid-November.

Most encouraging has been our ability to begin making some price increases, while maintaining the volume of bookings.

One factor that we've looked at closely is the shape of the booking curve.

As we've commented before, the booking curve got progressively shorter in the period following 9-11.

However, I would like to emphasize that from a revenue management point of view, there really is no such thing as a correct booking pattern.

More close-in bookings don't necessarily mean lower prices.

And longer booking curves don't necessarily mean higher prices.

The issue really is out ability to anticipate the proper shape of the booking curve so that we can price in the optimal way to match that curve.

Fortunately, I think our revenue management gurus have responded extremely well to the sharp changes we've seen in both directions.

However, I think that the somewhat longer booking curve that we're experiencing today is a hopeful sign for two reasons.

First of all, it gives us a strong base and it makes our extrapolations easier.

But secondly, it appears to reflect a better sense of confidence and of optimism by our customers.

Another possible indicator of sentiment is our on-board revenue figures.

Many people expected them to suffer significantly following 9-11, but they've actually performed very well and their recent trends have been particularly strong.

This is partially due to some rearranging of concession arrangements, but mostly it's due to simply better operations.

We have been following a policy, which we've described before, of trying to do more of what we call strategic pricing, where we set more realistic levels of pricing early, trying to build up a stronger base of bookings so that we don't have to drop our pricing later on.

We think that gives us better overall pricing but in addition, to the extent that we can avoid a rug bazaar-type atmosphere of last minute price drops, we also make our customers much happier.

And that, I think, will pay off in the long run.

This year, we have a higher proportion of our inventory booked.

That has been the case for the last couple of years.

The function of both the changing consumer booking patterns and our strategic pricing.

If, in fact, there's a lot of last minute demand, we do have to acknowledge that we may find that we've left something on the table.

However, with the kind of yield increases that we're already looking at, we really don't think that we'll have left a lot there.

Overall, we've been working hard to solidify our brand positioning in the market and it seems to be taking hold in a very dramatic way.

The Royal Caribbean International brand continues to demonstrate its strength as a brand that had proven its delivery to the customer over a very long number of years, as well as its delivery to the travel agents.

We've also made some fairly dramatic strides on the Celebrity brand and I'm quite excited about those.

The quite large number of steps we've taken to revitalize the product have been well received in the marketplace.

And we think we'll help Celebrity achieve the premium pricing it needs.

In addition, we're really very excited about the potential for the Celebrity expeditions venture that we just announced.

We think that this program will help solidify Celebrity's position in the market for the savvy cruiser mindset.

As you all know, the last three years have been very difficult, both for our industry and for our company.

But overall, I'm proud of how our team has weathered this perfect storm.

And we feel quite confident and quite good about the very positive evolution into 2004.

I must admit that it's very gratifying that in providing guidance for 2004, we now have to assume, for the first time, that our zeros will be dilutive.

With that, I'd like to turn it back to Luis to talk in more details about the figures.

And then Jack will give more color on the operations and the individual markets.

Luis?

Thank you, Richard.

Our full-year results are summarized on slide two and our fourth quarter results are summarized on slide number three.

The net loss for the fourth quarter of 2003 was $20 million or 10 cents per share.

This compares with net income of $38.3 million or 20 cents per share for the fourth quarter of 2002.

Included in the fourth quarter of 2002 are net proceeds of $33 million or 17 cents per share related to the termination of the proposed merger with TNO Princess.

Revenues for the quarter were $878 million, up 12.4% from the prior year.

The increase in revenues is attributable to an increase in our capacity of 12.4%.

While gross yields for the quarter were flat, net yields for the quarter were down .4%, which is better than our original estimate of down in the range of 1-3%.

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

Net cruise costs for the quarter increased 5.5% on an available passenger cruise day basis.

As we discussed during the third quarter conference call, we expected an increase attributable to higher fuel prices and an increase in sales and marketing spending.

Fuel continues to be more expensive than last year and represented approximately 5.9% of revenues in the fourth quarter of 2003, which compares to 5.5% for the same quarter last year.

This equates to an increase of 8% on an available passenger cruise day basis.

For the year, fuel expenses represented 5.2% of revenues in 2003, compared to 4.4% in 2002, or an increase of 15% on an available passenger cruise day basis.

On a per barrel basis, our average cost increased 16% in 2003 from approximately $26.22 to $30.44.

From an SG&A standpoint, the cost driver discussed during the third quarter conference call also came to fruition.

A portion of the increase was attributable to a shift in timing of sales and marketing expenses.

This portion of our sales and marketing budget that was not spent earlier in the year due to the Iraq war, was spent in the fourth quarter in preparation for the wave season.

While these items explain a portion of the increase in net cruise costs, it is also important to note that during the fourth quarter, we recorded additional charges in connection with information technology software and the expanded repairs and refurbishment of certain vessels.

These two items are the primary drivers behind the difference between our expected increase in net cruise costs for the fourth quarter and those costs which are actually incurred.

For the full year 2003, net cruise costs on a per available passenger cruise day basis increased 3.9% from the prior year.

Turning to our balance sheet, at December 31, 2003, our cash balance was $330 million.

Property plant and equipment net of accumulated depreciation was 9.9 billion.

Total debt was 5.8 billion, which consisted of 360 million as current and 5.5 billion as long-term.

Customer deposits were 730 million and shareholders' equity was 4.3 billion.

The net debt to capital ratio was 56.4% at year-end.

From a full year 2003 cash flow perspective, net cash provided by operating activities was 857.8 million and our capital expenditures were $1 billion.

As you can see on slide number four, our liquidity as of December 31, 2003, was 1.1 billion.

This is comprised of $330 million in cash and cash equivalents and $780 million available under the company's revolving credit facility.

In November, we issued $350 million in six and seven-eighths (inaudible) to 2013.

Also, since September 30, we have received additional commitments through our revolving credit facility, bringing the amount available under this facility to $845 million.

We have also decided not to use the OECD (ph) secured financing previously available for use on the delivery of the Jewel of the Seas.

Instead, we have negotiated an eight-year, $200 million unsecured term loan, which can be drawn anytime prior to July 1, 2004.

Including these facilities, we estimate that our total liquidity as of January 31 will be approximately $1.4 billion.

Looking into 2004, from the time of the company's last update on October 28 of last year, bookings and pricing levels have continued to strengthen.

As the start of what has been characterized as the industry's wave period, the company has broken several booking records for both Royal Caribbean International and Celebrity Cruises.

The company had previously reported that the booking curve had stabilized.

The company is now seeing initial signs that the booking curve may be lengthening.

For example, as you can see on slide number five, the level of close-in bookings, i.e. those within 90 days of sailing, constituted about 38% of bookings during the fourth quarter, which has improved from its peak levels of 45-50%.

As a result, visibility for the first half of 2004 has improved somewhat to prior periods.

However, it remains limited for the second half of the year.

The company currently forecasts that net yields for the first quarter of 2004 will increase in the range of 5-7%.

Limited visibility and prior-year comparisons make forecasting net yields for the full year difficult.

However, assuming no external events and continued positive booking trends, management projects that net yields for the full year of 2004 will increase in the range of 5-7%.

And Jack will provide more details of those booking trends in a few minutes.

Although some of our competitors have a significant exposure to changes in foreign exchange rates, our exposure, from a net revenue basis, is diminimous.

For example, a 10% move in the Euro, Canadian dollar and British pound has less than a 1% impact in our net revenue yields.

While our revenue outlook is positive at this time, we're also focusing on the ways to reduce net cruise costs as a method to maximize our profitability.

For the current year, management anticipates a full year increase in net cruise costs on an available passenger cruise day basis of approximately 1-2%.

The increase in net cruise cost is primarily attributable to increases in fuel prices, insurance expense and port expenses, the latter of which is associated with increased occupancy levels, itinerary changes and other miscellaneous increases.

As you know, the company does not - the company does have a fuel hedging program.

We currently are 20% hedged for the first half of the year and closer to 10% for the second half of the year.

Based upon the current forward curve, we estimate that fuel expenses will be in the range of 5.5% to 6% of revenues in 2004, which represents an increase of approximately 15% on an available passenger cruise day basis.

We also expect to consume approximately 7.4 million barrels of fuel in 2004.

Therefore, a $1.00 increase in the price per barrel of fuel for the year would result in an additional $7.4 million in fuel expenses for the full year.

However, after taking into account the hedges that we currently have in place, this exposure would drop to roughly $6.3 million.

Although fuel is anticipated to be higher in each quarter of 2004, a shift in the timing of our marketing spend and year-over-year cost comparisons caused management to expect that net cruise costs on an available passenger cruise day basis will increase in the first half of the year and decrease in the second half of the year.

While we have historically been focused on cost controls and cost efficiencies, which have been reflected in our guidance of an increase in net cruise cost for a variable passenger cruise day basis of 1-2% in 2004, we are taking a fresh look to see if there are any further actions that we can take.

All cost reduction programs that focus on the long-term cost savings and operating efficiencies contain multiple implementation phases and incorporate all levels of management.

The importance of such an approach is emphasized in a scenario such as ours.

While we are anxious to focus on cost reductions, we also have to maintain brand image.

We will focus on obtaining these efficiencies in savings without impacting the quality of our product or the image of our brands.

Generally speaking, we are early in implementation phases of our new cost reduction efforts, while our Royal Caribbean International brand has established a team to champion cost savings initiatives and has successfully implemented certain ones over the past year, it remains in the initial phase in multiple areas.

Our Celebrity brand is in the very early stages of our cost reduction program, with a newly formed cross-functional team to focus on cost savings programs.

In both brands, we intend on applying best practices where applicable.

These initiatives will not be limited to operating activities.

We are also currently in the process of benchmarking our SG&A expenses and will work to apply best practices as appropriate.

Given that we are early in the process, however, we are unable to provide any specific guidance regarding anticipated cost savings from these initiatives.

As we move forward and are better able to gauge our successes, we will provide updates on our quarterly conference calls.

Consistent with net revenue yields, our exposure to foreign exchange fluctuations from a net cruise cost basis are also diminimous.

A 10% move in the Euro, Canadian dollar, Norwegian krone and British pound would have less than a 1% impact on net cruise costs per available passenger cruise day.

Depreciation and amortization is expected to be in the range of $395-405 million and net interest expense is expected to be in the range of $315-325 million.

Although the company is still in the process of analyzing the impact of the final regulations under Internal Revenue Code Section 883, the company has not changed its estimates that the application of the final regulations will reduce 2004 earnings by approximately four to five cents a share.

Another important factor to keep in mind is that the company's May 2001 zero coupon convertible notes become convertible during the first quarter, if the share price of our common stock closes above $34.27 for 20 out of the last 30 trading days of the quarter.

If the notes become convertible during the quarter, earnings per share for the quarter would be reduced by approximately one cent per share.

If the notes continue to be convertible for the remainder of the year, full year earnings per share would be reduced by approximately six cents.

Assuming this dilution occurs and there is no change in the revenue picture, management expects 2004 earnings per share to be in the range of $2.10-2.30.

It is also worth noting that two other things could affect our dilutive share count in 2004.

In addition to the May 2001 zero coupon convertible notes, the company's February 2001 liquid yield option notes become convertible during the first quarter if the share price closes above $45.52 for 20 out of the last 30 trading days of the quarter.

If these notes remain convertible for the remainder of the year, earnings per share would be reduced by an additional three cents.

Also, any stock option exercise would also affect our dilutive share accounts.

On slide number six, you can see the company estimates that capital expenditures for 2004, five, and six will be approximately $700 million, $300 million, and $900 million respectively.

These estimates include the Ultra Voyager ship order, scheduled for delivery in the second quarter of 2006.

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

Slide seven and eight show our 2004 and 2005 capacity information and our 2004 fleet appointment, respectively.

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

Jack?

Thank you, Luis and good morning ladies and gentlemen.

I will spend the next few minutes briefly discussing the general tone of bookings and pricing, primarily focusing my comments on what has been a very solid start to the wave period.

And then I will also provide some additional highlights by major market.

The demand that we have been experiencing during wave has significantly outpaced last year's demand and it's clearly exceeding our expectations.

As Luis mentioned, we have already had several record booking days in the first few weeks of the wave period for both brands.

Call volume has been up 17% in January and gross bookings up 22%.

Net is on a projected full year capacity increase of just 11%.

Q1 book load tractor is ahead of where we last year, allowing pricing to move upwards over the last three weeks.

And despite the raise in pricing, our conversion rates are up as well.

During our last call I talked quite a bit about our strategic pricing effort and Richard covered it somewhat in his comments as well, which is really an attempt to get more realistic pricing in the marketplace and to create demand and then to be able to raise pricing based on the strength of that demand.

So far that strategy seems to be working well, and as Luis mentioned in his comment our booking curve is now beginning to shift a little further out than last year for the first three weeks in January.

Thirty-eight percent of our bookings were within 90 days and that's versus 45% same time last year.

There's question that prices have recovered from the discounts seen last year caused by the challenges of the war, SARS, and reports of a Norwalk virus.

And as well, I think it's worth mentioning that both brands have excellent marketing and sales campaigns in the market and they are resonating very well with both the trade and the consumer.

We are getting some very good premiums versus our competition, a trend that we have seen in our pricing surveys over the last many months.

Pricing has consistently been at a premium to same time last year since September 2003.

And for the last four weeks our net APD goal has been up quite a bit over same time last year.

The more realistic pricing, as I mentioned, has helped us to drive higher provision rates.

And given the very strong demand that we're experiencing right now, we anticipate the pricing will continue to be stable to up and of course up above 2003 levels.

Let me just comment a little bit more in detail on the first quarter.

Q1 capacity will be up 13%.

Our total book load factor for Q1 is above same time last year by about four points right now.

Our book to APD is about flat to where we were last year but well ahead of where we finished the first quarter of 2003.

And given the very strong demand environment right now at this stage, we are quite confident that we will get through the rest of the first quarter without the dramatic churn and deep discounts that were related to the incidents of the past couple of years.

All this should result in a nice yield improvement of between 5 to 7% in the first quarter and that will be on a capacity increase of about 13% for the first quarter.

Before I comment on the individual products, I would just like to make a brief comment on the slide that's on the screen right now, slide number nine about the Conde Nast survey in which Celebrity's seven ships finished in the top 10 best ship category and they also got the top in service, which was the Summit and the top in cuisine, which was the Century.

So it's really, really nice to get this kind of recognition and it really does validate that all the things that we're doing to transform the brand are having a real good impact with the consumer.

Let me turn and just talk a little bit about the major product specifics for 2004.

The seven-night Caribbean will represent 41% of our total capacity, that is a 7% increase in year-over-year capacity for the seven-night Caribbean.

Book load factor right now is well ahead of where we were same time last year.

And our book to APD right now is quite a bit ahead of where we finished 2003.

So we're expecting to see a pretty good improvement in our yields in the seven-night Caribbean product.

The short Caribbean, a Bahamas product, 12% of our total capacity for 2004 that will represent a 3% increase in capacity on the year-over-year basis, our book load factor is ahead again of last year.

And our book to APD is slightly higher than same time last year and getting quite a bit higher than we saw final year 2003, and that we expect somewhat of a modest increase in our yield performance for that product in 2004.

Milan Caribbean will represent seven percent of our total capacity, which is a 4% year-over-year increase.

Load factor is just slightly behind where we were last year at this time by about two load factor points.

Our book to APD is down slightly but again like - with most of these products, still higher than we finished in 2003.

And we'll probably turn somewhere to flat to a modest increase in yields on this product.

Alaska has been very, very strong.

Quite pleased with what we're seeing right now.

It represents 7% of our total capacity.

That is a 5% change in year-over-year capacity.

Our book load factor right now is well ahead of where we were last year.

Book to APD is also up and substantially higher than where we finished in 2003.

Both the round trip Alaska and the open draw Alaska are performing quite well right now.

And our new 12 night ultimate Alaska sailings on the Mercury out of San Francisco are also doing quite well.

And so overall we're expecting to see a pretty good improvement in our yields for Alaska in 2004.

Bermuda just represents 4% of our total capacity, which is a two percent change in year-over-year capacity.

Book load factors again are up versus same time last year by about three points.

And we're expecting we'll some modest yield improvement in Bermuda for 2004.

As we look at the Canal, again, just 4% of our total capacity.

That's a 19% change in year-over-year capacity.

Book load factor right where we were at the same time last year, APD is just slightly ahead of last year and again, probably some modest yield improvement in the Canal for 2004.

Europe is a very, very (inaudible) area right now.

Very pleased with what we're seeing.

It represents 8% of our total capacity.

That's an 18% increase in year-over-year capacity.

Book load factor right now is significantly higher than where it was the same time last year due to the effects that the war was having on the European market.

The strong demand is really allowing us to take broad price increases across all of our European sailings.

And we're expecting to see a very, very good increase on our yields in Europe for 2004.

So that gives you some pretty good product highlights and with that, I think we'll turn it back to the operator and open it up for Q and A.

(Operator Instructions) Your first question comes from the line of David Anders of Merrill Lynch.

Great.

Can you comment on the Celebrity brand making headway?

What kind of metrics are we looking at?

I mean obviously Conde Nast was a real coup but from a pricing perspective, how much further do you have to go before you're really satisfied with where that brand is?

Greg, I'm not sure that we'll ever be satisfied with where the brand's at.

We have to continually manage the brands so that we - to get continuous improvement out of the brand.

What I can say is directionally right now the metrics that we're looking at in terms of the APD build on celebrity are quite encouraging.

The marketing and advertising campaigns that we've put into the marketplace are really resonating with the trade and the consumer.

Our guests are telling us that they're having the best on-board experience with the brand than they've ever had, based upon all the brand transformation initiatives that took place over the last 14 to 15 months.

And so we're really quite encouraged with everything that we're seeing.

And as I said I don't think we'll ever be satisfied with it, but we have to continually improve both on the price and on the cost front.

But it's really looking quite good right now.

OK.

Thank you.

Your next question comes from Brian Egger of Harris Nesbit.

Yes, good morning.

Can you comment a little bit on maybe some of the booking patterns for some of your new homeport itineraries?

I'm thinking in particular of the Bayonne, New Jersey home porting in the Royal Caribbean ship.

And also maybe if you could tell us with respect to the European and Mediterranean market, I know last year is kind of a difficult year to make the comparison, but maybe even relative to 2002, are you seeing bookings taking place at volumes that earlier were more robust than would typically be this much in advance of the summer season?

Why don't I take the first part of that and I'll ask Jack to answer the second part.

With respect to the home porting, we've said fairly consistently that we think that has been a good move for us.

It was something that was happening even before 9-11.

Serendipity is that 9-11 forced us to accelerate that process.

And we found, much to our pleasant surprise, just how powerful it was to be able to move our ships closer to where many people live.

Half of all Americans live within driving distance of one - of a port.

So we actually found that has been quite productive.

You mentioned specifically Bayonne.

From our point of view, Bayonne really isn't a change in the same genre.

Bayonne is simply slightly shifting, that's a little bit comparable to moving from Miami to Fort Lauderdale.

It's the same catchment area.

We're still talking about the New York Harbor, beautiful view of the Statue of Liberty, et cetera.

And actually Bayonne has some other advantages in that it is quite close to the Newark Airport, shorter pilotage both in and out, and so that's actually an exciting development.

But it is not a change in our basic home porting strategy.

And just to recap a little bit again, Brian, on the European market and your comments about whether or not it's performing better than 2002.

As you will recall, as we went into the European season in '02 we did scale back due to the events of 9-11, had an OK European season in '02 given everything that we were facing.

Clearly what we're seeing right now in Europe is the strongest demand that we've seen over the last couple of years.

As I mentioned, our book load factor is up significantly, talking by about 15 to 18 points right now over last year.

So it's up quite a bit.

And the APD that we have booked right now is substantially higher than what we ended up last year.

So if that plan continues, we should have a very solid European season.

Right now we've experienced good demand and we see no reason for that to change.

OK.

Thanks very much.

Your next question comes from Steve Kent of Goldman Sachs.

Hi.

Good morning.

Not to ask maybe too obvious of a question, but why not raise your forecast for '04 more aggressively?

I mean it seems to me like your net yield forecast is pretty aggressive.

As you've talked about some cost-cutting proposals, Richard you've talked about the operating leverage of this business.

It just seems to me like the estimates could go much, much higher.

I don't know if it because you're being conservative.

I don't know if it's because of the convertibility and the lines and some of that.

I guess I just wanted to hear a little bit more as to are we missing something?

Is there maybe some more marketing or some other expense in there that we haven't captured yet?

Steve, no I'm - I didn't actually expect to be asked if we could be doing better.

I think the - there's a bunch of things that are coming together here that worked against, if you will, the increase in the yield, a very strong increase in the yield.

There is the convertibility, which wasn't that long ago we didn't think was really a relevant factor and now we've incorporated it into our base forecast.

There is the 80, 83, et cetera.

Fuel, frankly, is a lot more expensive than we had hoped it would be.

So it is a series of things.

I think on balance, we don't think that we've been conservative in this.

We've really put this forward in what we think has been the way the picture looks today.

Now I think you know well that these things change.

To give you a perfect example, our forecast for the fourth quarter, last year at the end of the second quarter we were a little more bullish about the fourth quarter.

Then as soon as the conference call ended, the market actually got a little bit softer on us.

And so at the end of the third quarter we were a little bit more pessimistic about the fourth quarter.

And as soon as that conference call ended, the market got a little bit better.

So I'm hoping we repeat that pattern here.

But the market does change.

These factors do change.

But we really studied this forecast quite closely and we don't think that we have been either particularly conservative, or I'm not sure what the opposite of conservative is, particularly liberal or particularly optimistic, in terms of going forward.

We think that based on the bookings that we're seeing, based on the cost that we're seeing, we really think that that's our best estimate of where we're going to be.

OK.

Thanks.

Your next question comes from Jill Krutick of Smith Barney.

Thanks very much.

Good morning.

You talk about a 5 to 7% yield increase for 2004.

Based on continuation of strong trends, are we to assume that you are saying that if we plateau at the current strong level that that would derive that 5 to 7% kind of growth rate?

Or should we, are you thinking of it in terms of increasing from here or continuing to gather strength as the year progresses?

I think, Jill, at this stage as we mentioned in the comments, we're far more confident that five to seven percent yield projection in the first quarter given everything that we see now and if bookings remain and pricing remain or stabilizes where it's at right now.

And hopefully we'll be able to raise prices going forward, we could end the year in the 5 to 7% range as well.

But again, we're far more confident on the first quarter projection than we are on the latter.

Sure.

Given sort of the very positive pricing outlook that you guys have for 2004, does that sort of change your thinking in terms of longer-term capacity expansion plans with the prospect of pricing gathering potentially even more strength in years out as supply growth continues to ebb?

Jill I think you know we've always been expecting the market to do better.

We were disappointed that it was down in '03.

And so we think we're still playing catch-up.

One of the reasons that we think that the second quarter will be even better than the first is because the comparables make it easy.

It was such as lousy second quarter last year.

Whereas, when we look later in the year the comparables to the previous year is more normal, if I can use that term.

So I think that frankly, this is what we've been expecting.

And we had hoped - or I say we've been expecting.

I think a little while ago I was more pessimistic about '04.

But in general for the industry, we were expecting good trends going forward.

And so our views on new buildings and our views on capacity and our views on where we are really have always been predicated on the fundamental strength and this doesn't change that.

Great.

Thanks so much.

Your next question comes from Robin Farley of UBS.

Great.

Thanks.

Thanks very much for the detailed level of guidance here.

This is really helpful.

I do have three questions.

One is can you give us a little bit more specific on on-board revenues, what they did in the quarter and for the year versus the prior year?

Also, in terms of marketing spent, I know you mentioned how things will be shifting back to the first half this year.

But I wondered if you could - overall, roughly what you're expecting your SG&A spend to increase?

And then the third question is on the Ultra Voyager II and whether, what keeps you from exercising that option?

Is it the dollar's weakness right now?

And with that expiration in September, you'd really, it looks like if you went past that option expiration date that you would have to push back delivery later in '06.

And I guess just what your thought process is now on that.

OK.

On the Ultra Voyager, I'll just answer that first and then Luis will answer your first two questions.

I'm not quite sure what to say.

We never like to look at, even start to consider that, before we get near the option expiration date.

There's no reason to do it.

But in this particular case, this option is denominated in Euro.

And as you've noticed, the Euro has really moved from the time that we placed these orders.

So that's an important factor and obviously we'd like to see what happens there.

And so, that's a fairly dramatic change since the time we placed the firm order for Ultra Voyager I.

Robin, on the other questions that you had, with regard to onboard revenue, we certainly have an expectation that those will be increasing as we have seen that trend over the last few years.

We really don't break those revenues down, but I think that we can comment on the fact that we do expect those to rise.

With regard to the SG&A expenses, we do, in essence give you a total net cruise cost forecast, and we'd like to keep it at that.

As I mentioned earlier, we are in the process of reviewing all of our costs, in particular, our SG&A costs, but we really can't give you the guidance at this point in time, because of the preliminary stages of benchmarking ourselves.

So we would like stay with that particular guidance.

You also had a comment on marketing costs, and in essence, the reason that you're going to see a shift is just because those costs are so back end loaded in 2003, that they're going to be spread out a little bit more evenly in 2004, so you're going to see that go more into balance and that's what going to cause the various, on a comparable basis year to year.

Sure, just to follow up on your on board revenue comment, and I realize you don't want to break anything out too specifically, but when you look at what your competitors break out in terms of on board revenue increases, it looks like annually it's been within the range of 2 to 3%.

Is that comparable to what Royal Caribbean is seeing or will they be even seeing a little bit higher than that, given the Voyager cruise ship?

Well, I think all that I'll say is basically, we are seeing an increase, and it's a comfortable increase.

But I don't think we're going to comment on specifics.

Okay, great, thanks very much.

Robin, I'll just remind you that last year we did tell you that we had been changing some of our concession arrangements.

And that is part of the increase, is that we will now show some, we will now have some of those things as our revenues, and then some expenses down below.

And that would boost it as well.

Great, thank you.

Your next question comes from Scott Berry of Credit Suisse First Boston.

Great, thanks, couple questions.

One, maybe Jack, this one for you, a couple for you actually.

We're hearing the very favorable response to the cruising power product.

Maybe you can talk about the growth trends in bookings through automated channels?

And secondly, it appears you're obviously not particularly concerned about what we see as some pretty aggressive incentives relative to what you're offering out there in the marketplace by some of your competitors.

And then lastly for Luis, could you just remind us (inaudible) deployment priorities here in the near term, and maybe some target leverage ratios over the next couple years?

Thanks.

Yeah, Scott, I'd be happy to comment on both of those.

In terms of the favorable cruising power stuff, that tool has been well received by the agents.

We continue to grow our bookings through our automated channels.

We're a little bit above 30% right now, that will continue to grow as we continue to focus on those types of tools and build incentives with our agency community to use those channels.

We get very high percentage in the European market right now in terms of the automated channels booking.

So we have a lot of focus on that, it's a very efficient way to book, both from the travel agent and clearly more efficient for us as well.

In terms of the aggressive incentives that you mentioned that are in the marketplace, we continue to monitor our competitive pricing on a weekly basis.

And we've been, as I mentioned in my opening comments, quite pleased with our ability to sustain some premiums versus the competition, so I think there's a lot of reason for that.

Obviously we have two of the best brands out there today.

Clearly the voyager class ships are in a league of their own, and the preferred ship of choice of the Caribbean, and quite helpful in maintaining those premiums, and all the things that we talked about in the last few conference calls.

And I touched upon, in this call, as it relates to the Celebrity brand transformation starting to reflect and better ATEs (ph) on the Celebrity.

So all that's coming together to allow us to keep a pretty good premium right now, and hopefully that will continue on.

Scott, with regard to your other question, our objective is to get to investment grade.

And hopefully 2004 will be on the road to accomplish that or get closer to investment grade.

We're focusing on all the fundamentals, (inaudible) get you there, which is looking at costs, looking at revenue, and also given our CAPEX program for the next few years the guidance that we gave you, we expect to generate a lot of free cash flow.

So I think from that perspective, that should all hopefully get us to investment grade, and we should do that sometime in the future.

Great, thanks very much.

Your next question comes from David Leibowitz of Burnham.

Congratulations on a marvelous presentation, especially in the outlook sector.

A few brief unrelated questions.

One, with the pricing you're seeing right now as well as the anticipated yield gain of five to seven percent, are you ahead of the pace that was looked at as we exited 2000 into 2001, or are we still trailing those numbers?

My recollection David, and maybe wanted to expand that for the call, my recollection is that we're still trailing those numbers right now.

Okay, second of all, in terms of upgrading the credit rating, can you force conversion of your zeros?

Hi David, on the zeros, the first time we can call would be in '06, after the anniversary in '06.

And so the way you would force it is to call them and offer to pay them back.

But since we don't have that probability until '06, we're a little bit far from that.

Next question, what is the current status of the lawsuit over the Agipart (ph) systems.

Is that still out, or has that been resolved?

The $300 million or whatever that large number was?

Right, David, no that's wending its way through the legal system and I think you can reasonably assume that's not a short process.

And I think you'll understand we really can't make much comment on it.

Understood.

There's nothing dramatic that has happened and I think it will be a number of these calls before we have something, before the legal system does anything.

Okay, and the last question if I may, Jack, could you go through the economics of Celebrity expeditions and why it was formed and what sort of returns we might expect from it?

David, I can't get into the detail on the economics of the expeditions.

Clearly the Galapagos initiative was to launch a whole series of expeditions to provide, primarily focused on our loyalty guest base of Celebrity to provide them an opportunity to have some really exotic, once in a lifetime type of experiences.

And this program is going to grow based upon the kind of demand that we generate.

We do a lot of research with our loyalty guest base and what they would like to do, so far as we've introduced the expedition down in the Galapagos, I mentioned the first Celebrity brand exposition will be in the June time frame, right around June 11.

It's been very well received by our loyalty guest base, and if we continue to offer these programs, we'll continue to monitor ones that are very successful and modify, as we have to, going forward.

But it was really a chance and an opportunity to provide, not just a fabulous premium onboard service to our guests, but to really buy the superior kind of offshore experience as well, the expedition program.

So we're really excited about it, had a good feedback so far, the trade seems to like it, and as I mentioned, we're getting a lot of good feedback from our staff and club members, that they're real excited about this program.

David Leibowitz.

Could you, share with us what your expectations are, as to those who are taking it on a stand-alone basis, and those who might take it, as part of a cruise on Celebrity?

In other words, as a pre- or a post- versus those who are just going to take the expedition as their vacation or holiday?

Well, I haven't really looked at it in that way.

The ultimate goal is to get enough expedition offering out there, that we would be able to have an expedition offering with all the major itineraries on Celebrity.

And that's kind of the plan, and that's going to take a couple years to roll out (inaudible) now, as we mentioned in our press conference, we've already got the Galapagos as our lead expedition, and then we plan to make some announcements here in the next 30 to 45 days about the possibilities in the Antarctic and the Arctic and a number of other things that we've discussed.

But most of them will end up being offshore kind of experiences, often major itineraries of the Celebrity brand.

They will not be the independent kind of expedition excursion of the Galapagos is going to provide.

Thank you very much.

You're welcome.

Your next question comes from Bob Simonson of William Blair.

Good morning, Jack, one question for you, and then a couple for Luis.

Given the weakness in the dollar, have you seen a change in the domestic international customer mix of your new booking coming in in the first quarter in the Caribbean, and if so, could you quantify how it's changes?

I can't quantify precisely - you can call us again after this call and maybe I'll give you a little bit more detail - but I can't tell you with the weakness of the dollar that clearly, I think that benefiting a European season right now.

We're seeing a much larger mix of North Americans on the European itineraries for '04 summer, but Dan can perhaps give you a little bit more insight after the call and how that might be impacted in the Caribbean.

Okay, and secondly for Luis, to what degree are you now hedged, as much as you want to be, on the currency on the first Ultra Voyager, and secondly, you talked about potential percentage changes in your outlook based on currency changes of 10%.

Do you have in front of you a number as to the number, as to the currency impact, the net currency impact on your fourth quarter results?

Let me answer the one on the Ultra Voyager first on the hedging.

We are presently fully hedged on the Ultra Voyager, this is on the order that we have the delivery in second quarter of 2006.

So we have no concerns about fluctuations.

With regard to the next question, for the fourth quarter, I really can't quantify that, but I think that the issue is that it's really so diminimous.

If you look at the impact on revenues, it's less than one percent impact on costs of less than one percent.

So all of that is completely neutralized.

But we feel that even in the fourth quarter this year, it was quite less than one percent.

And one follow on, on your yields in the fourth quarter, obviously some of the modest decline was due to what you had booked before the start of the quarter.

How were the yields that you booked during the quarter, or used during the fourth quarter compared the prior year?

Or spot yields, might be a way of putting it?

I don't think that we understand the question.

The pricing on the cruises that you sold in the fourth quarter, or used in the fourth quarter, as opposed to the early bookings, were those yields up or down versus the fourth quarter the prior year?

All I can tell you Bob is that, as I mentioned in my comments from September 2003, our pricing has been up over the same time last year, consistently up.

If you want to give me a call after the call, we'll try to research how that might relate to the previous fourth quarter, I don't have that number right now.

Okay, thanks very much.

Actually Bob, I think I can refer back to something I think Jack said during the last conference call with respect to the fourth quarter.

There's also, I think why we're struggling with your question, is that there's a balance here between the volume and the pricing.

And one of the issues we had was that we were getting some sailings that were actually quite low on volume, so part of the pickup was that we're able to fill in without having to trash the rates.

We will fill in those with later bookings than we expect.

Okay, thank you very much.

We would just like to mention that we would like to open up for just one last question.

Thank you sir.

Your final question comes from Tim Condor of AG Edwards.

Thank you, and let me first of all, again, offer my congratulations to the whole management team.

Couple questions here.

Could you talk a little bit about, Luis, the Celebrity cost opportunities versus the RCI brand.

Obviously it sounded like RCI is a little bit ahead of the curve there.

But, percentage wise, there's still a lot of low hanging fruit with Celebrity and then some modest low hanging fruit with RCI?

And then, along that same line, I know you're just implementing the programs and so forth.

When would you anticipate both of these cost programs or individually getting a full head of steam and getting really rolling here?

Okay, with regard to Celebrity, Celebrity does have a lot of cost opportunities.

The main focus on celebrity has been on the revenue side, and while that continues to be a focus, there now has been kind of a cross functional piece to impress celebrities (ph).

Royal Caribbean is a little bit further ahead in their program, and they have been implementing some programs throughout the years.

But that continues to be in the initial stages.

A lot of the opportunities that you talk about, let's just say, for example, our low hanging fruit, or perhaps the application of best practices.

There's certain things that Celebrity offers that Royal Caribbean does not.

You have to be careful about that you don't hurt the brand's image.

But then there's other areas in terms of the management of the vessel, and those are areas that you could have more commonality.

And we're being very, very focused on the imitation of best practices.

As you well know, when you implement a cost reduction program, you have to go through a measurement phase, then you have to go through the analysis of the cost, the implementation and then the control.

I can tell you there were probably more of us in the measurement phase of that program with maybe being slightly into the implementation phase at Royal Caribbean.

In terms of your question as to how quickly we can implement these things, I think we need to get through the process of the measurement phase.

Also as we look at SG&A, we have to go through the measurement phase and I think at that point, I can probably better respond to you in terms of the time.

Okay, and let me ask two other ones here.

How has the events with Festival, the severe problems they are having, and the disruption given NCL's new builds and having to shift around a lot of ships to compensate for that.

How do you see that impacting your business?

And then also, is there a level on oil where you would look to accelerate your hedging for the balance of the year?

I'll answer the first part of that, and let Luis answer the second part.

With respect to NCL, I think those are relatively, although I have sympathy for them, I know if you're in the middle of that, it's very distracting and it causes a lot of problems.

It's not really a major change in terms of the marketplace.

So I don't think that we've seen much impact effect to the marketplace.

And with respect to Festival, that's basically an entire European operator, and we've had almost no impact on our marketing, our situation because of that.

With regard to your question on oil, we have, internally, we have a hedge committee that we use hedges on oil currency and other things.

I think it's very difficult to answer your question because we are constantly consulting with experts, and we meet on a very regular basis.

But I don't know if we could really set a price, where we would say that we're going to accelerate our hedges with oil at a given level.

All I could tell you is that we've looked at that on a very frequent basis, as a committee, and also with consultation of outside experts.

And if I may, one quick follow-on on that, in relation to the Voyager II question, and I guess as it gets into hedging here in Euro, what level, Richard, of the Euro, do the returns start to look more attractive as it relates to that option that expires in September?

Sorry, I (inaudible) losses on the phone here.

I don't actually know the answer, literally, one of the nice things about having an option is it's entirely an option and you have neither the downside risk or the upside risk.

I think I would prefer not to answer that, I think we'll continue to watch it.

I will say that at this kind of Euro rate, she's a very expensive ship.

Okay, thank you.

Ladies and gentlemen, we have reached the end of the allotted time for question and answers, I will now turn the call back over to Royal Caribbean's Management for closing remarks.

Okay, well, I'll thank you all for participating in the call, and if you do have more questions you can call Dan and we'll try and give you the best information we can.

Thank you all.

Thank you for participating in today's Royal Caribbean Cruises conference call, you may now disconnect.