皇家加勒比遊輪 (RCL) 2004 Q1 法說會逐字稿

Good morning and welcome to the Royal Caribbean first quarter conference call.

Mr. Luis Leon, EVP and 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.

If you would like ask a question during this time, simply press star then the number 1 on your telephone keypad.

If you need any instance at any time during the conference, please press star then 0 and an operator will assist you.

Thank you.

Mr. Leon, you may begin your conference.

Thank you, Tanya and good morning, everyone.

I'm Luis Leon, EVP and CFO for Royal Caribbean and I would like to welcome you to our first quarter conference call.

With me here today is Jack Williams, our President and COO.

Bonnie Biumi, our SVP and Treasurer and Dan Mathewes, our Director of IR.

Joining us from Europe in connection with the delivery of the Jewel of the Seas is Richard Fain, our Chairman and Chief Executive.

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

Some of the comments we will be making are forward-looking statements that are subject to change based on the items listed on this slide and also disclosures in our SEC filing.

Additionally, it is important to note that in accordance to the SEC's Regulation G we have provided reconciliations between gross and net yields and gross and net cruise costs for the first quarter of 2004 and 2003 in our press release.

This information, along with certain historical reconciliations is available on our Investor Relations web site, as well.

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 to your questions.

I would like to now turn it over to Richard.

Thank you, Luis and good morning, everyone.

It's really a pleasure after the myriad events affecting the travel industries over the last couple of years to be able to speak to you in such an improved operating environment.

Throughout this period, we have consistently said that we had faith in our basic business model and that we would see a recovery in the yields that we had lost.

It now appears that our expectations are being fulfilled.

Although we came in at the low end of our net yield guidance for the first quarter, I don't think anyone can complain about a 5% improvement in yields.

That's especially true when you consider that we had over a 4% improvement in the same quarter last year.

Part of the credit goes to a strong market environment and part of the credit goes to the success of our revenue management efforts, particularly our program of strategic pricing which Jack will comment on further in a few minutes.

The market has been steadily strengthening since the second quarter of 2003 and it's remained at the same, strong level since mid-November of last year.

Looking out, the environment remains positive.

Even better, the improved bookings picture is not limited to our seasonal products but is resonating throughout all of our products.

Based on the momentum we're seeing today, we continue to feel comfortable with our previous forecast for full year yields to be between 5 and 7%, up over last year.

This assumes, of course, that there aren't any external shocks, which have to be unpredictable but also cannot be ignored.

In our case, the improved environment couldn't come at a more opportune time.

While we have experienced capital expenditures in excess of a billion dollars for the last several years, we will now have significantly lower capital expenditures, at least to 2006.

This period of lower capex will allow us to utilize excess cash generated from operations for the purpose of debt repayment.

In time, we intend to return to investment grade credit rating.

While the operating environment is comforting, we continue to focus on developing our brands to sustain this healthy recovery.

In 2003, Celebrity's innovative marketing campaign was very successful in raising consumer awareness.

In fact, over the course of the first two phases of the campaign, Celebrity's unaided awareness doubled, which is truly a remarkable accomplishment.

It's really been an exciting period for all the things that Celebrity offers.

In January, Celebrity announced our new Celebrity Xpeditions, which is a series of special excursions and sailings offering itineraries from the exotic Galapagos to the Arctic.

We combine that with Royal Caribbean International's reputation for innovative programs as well as innovative vessels.

We have reinforced our position in the cruise industry and we feel good that we have solidified our position in the vacation market.

Overall, we believe that we are taking the two best brands into what will be a really exciting period for the industry, a period of improving pricing and of moderating supply growth.

With that I'd like to turn it back to Luis to talk in more detail about the figures and Jack will give you more guidance on the operations and how the individual markets are performing.

Thank you, Richard.

Our first quarter results are summarized on slide 2.

Net income for the first quarter of 2004 was $95.8 million or 47 cents per share compared to net income of $53.2 million or 27 cents per share for the first quarter of 2003.

It is important to note that the diluted shares for the quarter were $216 million or 21.1 million shares higher than the diluted shares during the first quarter of 2003, up 194.9 million.

The increase in the number of diluted shares, using the calculation of earnings per share, was primarily attributable to the Company's Zero Coupon Convertible Notes, which are convertible into 13.8 billion shares.

These notes became convertible for the first time in the first quarter of this year.

As a result, earnings per share were reduced by approximately a penny.

Revenues for the first quarter of 2004 increased 21% to $1.1 billion from revenues of $880.2 million in the first quarter of 2003.

The increase in revenues was due to a 13.4% increase in capacity, coupled with an increase in cruise ticket pricing.

Gross yields for the first quarter of 2004 increased 6.3% from the first quarter of 2003.

Net yields, which the Company considers a better measure of revenue performance increased 5.3% from the first quarter of 2003.

As we discussed during the fourth quarter conference call, we do not have the same level of exposure for foreign exchange movement as our competitors.

Accordingly, the affirmation increased in net yields of 5.3% was not significantly impacted by the fluctuation in foreign exchange rate.

Gross yields increased more than net yields due to a higher percentage of passengers choosing to book their air transportation for the Company.

Our air sea mix increased to 17.4% from 15.1% in the same quarter last year.

Compared to the first quarter of 2003, gross cruise costs and net cruise costs on a per-available passenger cruise day basis increased 4.9% and 2.6% respectably.

The timing of gross and net cruise costs incurred during the first quarter of 2003 were impacted by the Iraq War and were therefore lower than the Company's planned spending level.

The increase in net cruise cost is primarily attributable to an increase in general and administrative costs associated with increased booking activities, sales and marketing and information technology projects.

Higher expenses also contributed did to this increase.

Yield continues to be expensive and represented approximately 5.2% of total revenues in the first quarter of this year, which compares to 5.8% for the same quarter last year.

This equates to a decrease of 4.6% on an available passenger cruise day basis.

Although the average WTI or West Texas Intermediate spot rate was approximately $1.50 higher in Q1 of 2004 than the first quarter of 2003, the amount paid at the pump was actually lower.

This was primarily due to the fact that the cost of our bunker did not rise at the same pace as the WTI index.

Historically, the price that we pay moves more in tandem with the WTI.

I'd also like to point out that we continue to look for ways to mitigate the rising cost of fuels.

One such example is our focus on utilizing a less expensive fuel.

We accomplish this through being more opportunistic to where we refuel our ships in utilizing less expensive grades of fuel.

We also continually evaluate ways to reduce our fleet's fuel consumption.

We have been benchmarking all of the ships in our fleet, allowing us to identify best practices in vessel operation, resulting in further opportunities to conserve fuel consumption.

During 2003, these initiatives resulted in fuel savings of approximately $12 million.

We expect that these initiatives and savings will carry into 2004.

These savings are, by the way, reflected in our net cruise cost guidance for 2004.

Additional cost initiatives included the recently-concluded comprehensive review of our SG&A expenses.

While our review indicated that are our costs are in line or better with our industry benchmark, we did note several areas that will require improvements to the process that we currently have in place.

While we cannot, at this time, quantify the benefit of these improvements, their implementation over the next couple of years will mitigate future cost increases and improve efficiencies that will ultimately also benefit operations.

While we are pleased with the 5.3% increase in net yields for the first quarter, we are also very focused on our overall profitability.

One key measure that we look to in this respect is respect is return on invested capital.

Return on invested capital on a quarter-over-quarter basis improved by approximately 1.5 percentage points and is in line with our goals for our return on invested capital improvement.

Needless to say, we are very pleased with this improvement.

Other income for the first quarter of 2004 increased by almost $10 million for $2 million in the first quarter of 2003.

While there is no single explanation for this increase, the primary drivers are a tax benefit and our joint venture island cruises, which is performing better than it did in the prior year.

As you will recall, the new regulations under section 883 became effective during the first quarter of this year.

Additionally, we have continued to grow our tour business.

During the seasonality of these activities, the first quarter resulted in a loss and therefore we recognized a tax benefit.

We expect that these activities will result in a tax provision during the balance of the year.

Turning to our balance sheet at March 31, 2004, our cash balance was $553 million.

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

Total debt was $5.8 billion, which consists of $314 million as current and $5.5 billion as long-term.

Customer deposits were $880 million and shareholders equity was $4.4 billion.

The net debt-to-capital ratio was 54.7% at March 31 of this year.

From a cash flow perspective, net cash provided by operating activities was $314 million and our capital expenditures were $79 million.

As you can see on slide 3, our liquidity, as of March 31 of this year, was $1.8 billion.

This is comprised of $553 million in cash and cash equivalents, $1 billion available under the Company's revolving credit facility and $200 million available under an unsecured term loan.

Looking at the outlook for the balance of the year, in mid-2003, bookings and pricing began to stabilize and set the stage for a strong 2004 way season.

These expectations came to fruition with strong pricing and volume growth across the Royal Caribbean International and Celebrity cruise brand.

As a result of the improved booking environment and favorable prior year comparisons, the Company currently forecasts that net yields for the second quarter of 2004 will increase in the range of 9 to 11% compared to the second quarter of 2003.

Prior year political disruptions and limited visibility makes forecasting net yields for the second half of the year a little bit more difficult.

Assuming there are no external shocks and the current booking trends continue, the Company still expects the net yields for the full year 2004 will increase in the range of 5 to 7% from the prior year.

While visibility does remain limited, the Company continues to see signs that the bookings curve may be modestly lengthening.

For example, as you can see on slide No. 4, the level of close end bookings, i.e., those within 90 days of sailing, constituted about 34% of bookings during the first quarter, which has improved from the last quarter, which was 38% and from its peak levels in 2003 of 45 to 50%.

For the full year 2004, the Company forecast of net cruise costs on a per-available passenger cruise day basis remains unchanged at an increase of 1 to 2% from the prior year.

However, the timing of this increase is not evenly spread throughout the year.

Due primarily to higher marketing and fuel expenses, the Company estimates that net cruise costs on a per-available passenger cruise day basis for the second quarter of 2004 will increase at a rate higher than that experienced in the first quarter of 2004.

The increase in marketing expenses for the second quarter is driven by the fact that the Company suspended a significant amount of advertising activity at the start of the Iraq War and did not return to normal levels until late in the second quarter of 2003.

For the second half of the year, the Company expects net cruise costs per available passenger cruise day to be roughly flat as compared to the same period last year.

As you know, the Company does have a fuel hedging program, we are hedged approximately 15% for the second quarter and closer to 10% for the second half of the year.

We estimate that fuel expenses will be in the range of 5.5% to 6% of revenues in 2004 which represents an increase of 15% on an available passenger cruise day basis.

During the last nine months of 2004, we expect to consume approximately 5.6 million barrels of fuel.

Therefore, after taking into account the hedges that we currently have in place, a $1 increase in our price of fuel per barrel for the remainder of the year would result in an additional $5 million in fuel expenses for the remaining nine months of the year.

Depreciation and amortization for 2004 is expected to be in the range of 395 to $405 million in interest expense net of capitalized interest is expected to be in the range of 315 to $325 million.

Management continues to expect 2004 earnings per share to be in the range of $2.10 and $2.30.

Looking at analyst consensus, refinements resulting from our first quarter performance should be directed to the fourth quarter.

Net yields for the fourth quarter of 2003 were pretty much back to 2000 levels.

This comparison will make it difficult for to us show an improvement year-over-year.

Therefore, it will also make it difficult for us to show a profit at that time.

On slide No. 5, you can see the Company estimates a capital expenditures for 2004, 5 and 6 will be approximately $700 million, $400 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 Ultra-Voyager ship for delivery in 2007 and this option is exercisable through August of 2004.

Slides No. 6 and No. 7 show your 2004 and 2005 capacity information and our 2004 deployment respectively.

At this point, I will ask Jack to give you an update on bookings.

Jack?

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

It's nice to have you with us today.

As in the past calls, I will spend the next few minutes briefly discussing the general tone of the booking activity as well as pricing.

And we'll also provide some additional highlights for you by major market.

In the last call, was I very pleased to report that we had been experiencing a very solid weigh period.

Our business was significantly out pacing last year and clearly exceeding our expectations at that time.

I'm very pleased, today, to be able to report that much of the same is in our call today.

Our current demand continues to significantly outpace last year and continues to exceed our expectations.

Call volume during Q1 was up 20% over same-time last year while gross bookings are up 23%.

This performance is significantly out-pacing our full year capacity increase of 11%.

Additionally, book load factors are well ahead of same-time last year, which has allowed us to continue to improve our pricing period and despite the increasing in pricing, our conversion rate is up, as well and I think this, again, is a very encouraging sign.

The booking curve continues to move a bit further out, as Luis pointed out, with 34% of our Q1 bookings being for sailings inside of the 90 days, versus 45% same time last year and 38% in Q4 of '03 and it does indicate that the strategics that we took earlier this year are taking hold in terms of the booking curve.

On the pricing front we're witnessing the same type of strength we've been seeing with the bookings.

Pricing since September 2003 continues to be at a premium to same time last year.

For the last four weeks, our net APD bill continued to be well above our capacity increase of 11%.

And due to this increased solid demand and it's virtually, ladies and gentlemen, across all of our product lines, I anticipate the pricing will continue to be stable and above 2003 levels.

It is interesting to note that our percent of NTR booked in 2004 is well above where we were in both 2003 and 2002 for the same time period.

This is for all of the three remaining quarters in 2004 and those percentages are remarkably close to where we were pre-9/11 in 2001.

This, I do believe, is yet another strong indication of the recovery of the business from the events of the past.

Another very, very positive sign that bodes well for the remainder of this year is despite an 11% increase in capacity for 2004, our remaining inventory available for sale in 2004 is now 16% lower than same time last year.

Again, I think that's a very, very encouraging sign.

Let me turn and just give you some highlights by-product right now.

As I mentioned earlier, all of our products have been performing quite well throughout this period, since our last call.

Our seven-night Caribbean, our core product which represents 41% of our total capacity, we have a 7% increase in year-over-year capacity in this critical market.

Our bookload factors, right now, are well ahead of last year, some 9 points.

Our book to APDs are also higher and right now we expect we will see a nice yield improvement for the year on the seven-night Caribbean.

On the short Caribbean and Bahamas products, they've been performing quite well for some time now.

They represent 12% of our total capacity.

That's just a 3% increase in capacity year-over-year.

And that's primarily due to the addition of the Nordic Empress three and four-night sailings from San Juan in the fall and the new five-night that departures from Galveston on the [INAUDIBLE].

The book load factor, again, well ahead of where we were same time last year.

APDs, again, higher than same time last year and quite a bit higher than where we ended up in the final APDs for 2003.

And again we're reporting a nice improvement in yields, looks like we will have a good improvement yields in this product line.

Long Caribbean, 7% of our total capacity, it's up about 5% year-over-year.

Load factor slightly ahead of where we were last year.

Our APDs, right now, are down somewhat in this particular market, but still higher than where we finished in 2003 and suspect at this point we'll see, probably, flat to maybe just a modest slight increase in yields in the long Caribbean.

Alaska has been a very good story for us throughout the booking period.

It represents 7% of our total capacity.

We've increased the capacity 5% year-over-year.

Bookload factors, a couple of points ahead of where they were last year, but the APD is up above last year and quite a bit higher than where we ended in 2003.

And so overall we're expecting to see a nice improvement yields for Alaska given the strength that we see right now.

Bermuda, only 4% of our total capacity, which is an increase of 2% year-over-year.

Bookload factors are well, well above last year, some 20 points.

APD is a little bit behind where we were last year, but well above where we finished and so we think we will see just a modest yield improvement in Bermuda as we close up the selling period for that particular product.

The Canal 2 is 4% of our total capacity, but we increased it significantly year-over-year, a 19% increase in capacity.

Bookload factors, again, well ahead of where we were last year.

APDs slightly ahead of where we were last year, but well ahead of where we finished last year and again, we'll see a nice yield improvement in the Canal.

Mexico, 9% of our total capacity, which is up almost 70% year-over-year.

And we're forecasting our yields in this market to be just slightly up for the year.

The big news story is, of course, has been Europe.

That represents 8% of our total capacity, that's an 18% change in capacity increase year-over-year.

Our bookload factors, right now, have been, or are significantly higher from where we were and our current APDs are well above same time last year and well, well above where we ended up 2003, primarily because of all the issues surrounding the Iraq War last year.

And so we're predicting we will have a very, very nice improvement in our yields in Europe as we close out that season.

It's been a very, very encouraging European period for us.

So, that gives you some highlights and where we stand to date.

As I mentioned, that's very much along the same lines as our First Call this year.

Bookings have been very, very solid.

Pricing remains very stable and above same time last year.

And with that good news I think we'll turn it over to q-and-a.

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

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

To withdraw your question, press star, then the number 2.

One moment while we compile the Q&A roster.

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

Thanks very much.

Good morning.

Luis, I was hoping you could delve a little bit more into the cost side of the story.

I think, originally costs were expected to be down a bit on a per birthday basis in the second half.

Now it's looking more flattish.

Can you talk about the factors contributing to that?

And secondly, Jack, if you could perhaps touch on Celebrity and how far that business is from its prior peak performance levels?

Thanks very much.

Jill, hi, good morning.

Jill, we gave guidance on our cost, I think we just gave cost guidance for the year and we did not really discuss how we'd be breaking that down on a quarterly basis.

So the guidance that we're giving you is kind of updated guidance to where we see it, but I don't think the bets have changed from the guidance we have given in the past.

Good morning, Jill.

It's nice to hear from you.

On the Celebrity front, as Richard mentioned, his comments, we're quite pleased with all the things working for Celebrity right now in terms of the marketing campaigns that are out there as well as the Xpedition announcement.

Also we just recently announced that Cirque Du Soleil will take a lead role some in some of the entertainment offerings on board the Millennium Class Ships.

And all of that is really working right now for the Celebrity brand and advancing it, both on the unaided awareness side, both in the trade as well as the consumer mindset and we're beginning to see some real good traction as it relates to an improvement in the APDs on Celebrity, in particular in Q2 and Q3 where there are seasonal products in Bermuda, Europe and Alaska, represent almost the entire product line at that point.

So, I couldn't be more pleased with where it's going right now.

We have a ways to go, no question about it, but certainly there is momentum there that's very encouraging and we have more plans ahead of all the announcements, we'll continue to move that brand along.

Jack, when did that brand last peak in terms of its performance and how far are you from that sort of potential?

I'm not really sure I understand what you mean by in terms of last peak, you know, everything peaked pre-2001, that's for sure.

And so we're going to go back pre-9/11, some time period back there.

I haven't really been focused, Jill, on trying to get it back to where it may have been, I'm trying to get it back to where it can go.

I think that at some point that's going to be higher than it's been.

That I do believe.

Thank you very much.

Your next question comes from David Anders with Merrill Lynch.

Great.

Maybe Luis, can you give us a little more color on the expense growth per unit of capacity in the second quarter?

Is it going to be like 2X the first quarter and then flatten out, or how do they think about that as far as the growth rate goes.

Are you referring to growth rates in our expenses?

Yeah, the growth rate, yes.

I guess that's kind of a complex question that you're asking.

We gave some guidance in terms of where we see costs going and a lot of these changes in our cost guidance are related to what was reactions to what happened last year and where we were last year, especially if you're making comparisons to last year.

Absolutely, I understand that.

And we're just saying that based on those comparisons from last year we are going to be higher and looking at the second half of the year we're going to be flat.

Right, but I'm just trying to - - okay, that's fine.

Thank you.

Your next question comes from Robin Farley with UBS.

Thanks, two or three questions.

One is you talked about your desire of an investment grade rating.

I'm wondering, does that outweigh any desire you have to buy any European brands?

That's my first question.

Do you want us to answer the questions as you did first or do you want to ask all three, Robin?

Okay, the other [INAUDIBLE] question is, one is just based on the dollar strengthening a little bit.

It seems like we may be closer to a point where a new ship order would be viable, but I would be curious what your view is on that?

And then lastly, the announcement earlier this week, Carnival and NCL, investing in New York City piers, does that kind of shut Royal Caribbean out from the New York City, the west side piers and and keep you on the New Jersey piers for the foreseeable future?

No.

Let me take the first two of those questions, Robin and then I will ask Jack to comment on the pier in New York.

Although, actually, I can just say simply the answer is no.

We're very happy with what we have in Bayon and we have not made the decision about Celebrity, which may well stay in New York, as well.

That's something we would be looking at separately.

I'll start with the question of investment grade rating.

I think we've stated pretty clear, we think that the rapid improvement in the cash flows and the runoff of the rapid expansion sort of moves us back into investment grade territory fairly quickly, regardless.

What we're planning to do and what we've been doing is finding a balance, we expect to continue to grow but if we grow at a lesser pace than we did in the past, we think the very strong cash flows that we're generating will move us in that direction.

All the models that I've seen on the street, et cetera, show more than a billion dollars in cash flow this year.

And that along with the strong liquidity position, I think, moves us fairly quickly.

I don't think it is a question of either/or.

It is a question of making sure we balance capital investment with the need to improve the balance sheet and we're working to do both.

We have not said that we're looking to acquire a European brand and, in fact, we're not in discussions to do any such thing at the moment.

Obviously we've made no secret of the in fact we're looking to expand in Europe we've grown there fairly quickly within the brands that we have and we expect to continue to grow one way or the other, but we're not currently in any discussion with the European brand.

That really comes back and also addresses, Robin, a little bit, your second question.

The dollar strengthening, I think we will look at the overall cost of any new building and that is partially a function of the dollar and partially a function of other costs from the ship yard and I think we would balance that.

And what we're really looking to is a return on investment at any time we look at a capital expenditure.

And that's simply the way we'd be looking at it.

And then, Jack, I don't know if you want to add anything about New York and New Jersey?

Richard, I think you covered it pretty well.

Our primary impetus for moving down beyond the course was to find a home for the Voyager of the Seas, which we're delighted to be able to introduce to the New York market here in the next couple of weeks.

We're unable to find adequate cities in New York and Bayon offered an excellent opportunity for us to accommodate that ship as well as the Empress of the Seas down there.

As Richard noted we still have Celebrity operating in New York and will continue to work with the New York officials on that front.

Okay, great.

And I wondered if I could ask one more housekeeping item.

Luis, you mentioned the other income that was driven primarily by the tax benefit from island cruises.

I understand seasonally that would bring a loss, but theoretically would have been the same case last year's Q1.

Is there anything else?

I mean that's a fairly significant increase in the other income line and just trying to understand what that is and what's sustainable or what's one time in there.

I think maybe I wasn't clear in my presentation.

Actually it's a couple of things.

One is the fact that joint venture island cruises is doing a lot better and that's certainly contributed to an increase in our other income.

The next issue is the fact that we did get a tax benefit.

As you know, the section 883 taxes you on U.S. source income and during this part of the year, we really do not have a lot of U.S. source income, because all of our tours occur in the summer months, which is basically the second and third quarter.

So, as you look at all the costs associated with referring for that, that gives you a loss and, in effect that gave us the benefit.

However, what you're going to see in the second and third quarter is it will be a taxable position because that's when all of the programs go into full fruition.

So, those were two distinct things.

Richard, I'm not sure Robin heard the island cruise improvement had nothing to do with taxes.

That's just an operating improvement.

That's right, they're two separate things.

So, most of that $8 million increase was the JV doing better?

A portion of that.

I mean, as I mentioned in my speech, there is just a lot of things that go into that category.

There is, for example, there's the dividends we get from first choice and those are slightly affected by currency and there's a whole slew - -I mean that's kind of a pile where everything is dumped into at the end of the day.

But what I tried to give you is the primary drivers, which is the improvement that we have seen in performance of island cruises and then secondly the tax benefit that we've received from inspection 883 because of timing issues with regard to when those activities come forward.

Okay, great.

Thanks very much for all your answers.

Your next questions comes from Steve Kent with Goldman Sachs.

Mr. Kent, your line is open.

Yeah, hi.

A couple of questions.

First, the Celebrity brand has been spending a lot of money or it seems some modest amount of money differentiating itself over the past couple of months, especially on entertainment offerings from alliances, et cetera.

Sort of when do we start to see the P&L impact?

Is this sort of defensive marketing or capital expenditure spending?

And then also you haven't mentioned much about on board spend.

Has that changed with any of the pricing that you've seen or are you seeing more on board spend with this customer coming back to the market more aggressively, along with net yields?

Thank you, Steve.

This is Jack.

I'll respond to those.

In terms of the Celebrity brand, we're doing anything but defensive marketing.

We've done on the offensive with the grand for the last 15-18 months and talked about it quite a bit on this conference call.

Celebrity brand is now taking the lead in terms of the best premium brand in the industry.

It was validated through the '03, very prestigious, reader's choice poll put out by Conde Nast when they were the best premium brand in the city.

They've had a number of accolades given their reinvention of themselves, so to speak.

We've added the concierge class.

We've invested in the brand.

We are aligning ourselves with some of the best, best brands in the world.

I don't think anybody would suggest that Cirque Du Soleil is anything but that.

There is going to be incredible entertainment offerings on the brand as early as the final quarter this year when the consolation goes into dry dock and we begin to introduce the Cirque Du Soleil entertainment experience.

All the other metrics we're using to gain the success of this brand are very, very positive from unaided awareness to everything else that we're looking at.

And as I mentioned to Jill, when I was responding to some of her questions, they're beginning to see the traction in the APDs, in particular, in the second and third quarter out, that were beginning to see all of that effort begin to impact a pricing in a very favorable way.

So I'm quite encouraged with the trajectory of the brand and will continue to move it along as the best premium brand in the industry with a taste of luxury.

In terms of the on board spend, that's a good point much we have not mentioned that it's been very, very solid for both brands over the last few quarters.

They've done a lot of things, the management teams of both brands, to help move that on board spend along.

We've been quite encouraged, you might recall from previous calls in the past when we were seeing issues with the ticket pricing, that we continued to report that we saw good on board spend and that continues today, we're quite pleased with it.

Jack, when you add in all of the expenses, whether it's Cirque Du Soleil or some of the other things that you've added, or will be adding, how much does that all cost and did you really just - - the way that you get the return on it is a difference in pricing or something else there that you can point to that shows how you will get returns on some of this added expense?

Well, in terms of things that we've done, you might recall the first thing we did was to complete on board brand transformation in terms of the experience on board the Celebrity brand.

And that came along with the introduction of the Concierge Class.

That was a revenue upside.

That was not a cost.

And anything we invest in terms of transferring the service on board was more than offset by the increase in yields that we're getting in the cabinets that we introduced the Concierge Class.

And I'm very much aware of the fact that we need to reinvent the brand, well within a narrow set of economics.

There are a lot of things we're introducing and there's a lot of things we were not doing in the past.

The Celebrity Xpedition, as we introduced the product into the Galapagos over a short period of time that is going to be very, very positive in terms of revenue, but most importantly it had the halo benefit that we expected.

As we introduce some of these once in a life time unique experiences to our Celebrity loyal guest base and potential Celebrity first-timers.

All of that is going to, over a period of time, result, in what I think will significantly improve performance on the Celebrity side.

I can only tell you the metrics that we're looking at, continue to look at, are indicating that that is happening and will continue to happen.

Okay, thanks.

Your next question is from Brian Egger with Harris Nesbitt Gerard.

Bookings for [INAUDIBLE] throughout the way season and if you look at January, February, March in sequence, whether or not there are notable changes in terms of the tone of both booking and pricing increases as you progressed through the way season?

Do you want to repeat the question?

I think we just caught the second part of your question there.

Sure, could you walk us through a little bit, provide more color in terms of the monthly trend in terms has the way season progressed, January through February through March.

Is there notable differences in the year-over-year change in both bookings volumes and pricing as you kind of progress through the quarter?

Yes, I'd be happy to do that.

As we are watching the way period progress throughout, beginning immediately after the holidays in the first week of January, the strength in bookings continued for many, many weeks, in terms of a year-over-year improvement in the bookings, we continue to improve pricing during that period.

So it was all very encouraging news and I tried to relay that message in our last call and of course throughout today.

We're in the double-digits improvement in bookings year-over-year.

We talked about the yields in terms of what happened in Q1, in terms of our final performance versus the guidance and we have very encouraging guidance out there for the second quarter and the remainder of the year.

I think it's worth mentioning one more time that I tried to highlight in my comments that the net ticket revenue and the percent booked at this time versus '03 and '02 is significantly higher and remarkably close to where we were pre-9/11 in 2001 and I think that's very encouraging and will bode well for the remainder of this year.

Thank you.

Your next question comes from Dean Gianoukous with J.P. Morgan.

Hi, when you look into next year on a much smaller capacity increase, what do you think could happen to unit costs?

Do you think you can get unit cost improvement on a 1% increase on supply?

Thanks.

Hi, Dean.

Yeah, I think that we could.

You know, we talked about a lot of initiatives that we're doing.

We talked about our field initiative.

We talked about our SG&A initiative.

And the objective is obviously to keep costs or to mitigate the growth in our cost.

But, you know, we're just at the beginning of looking at some of these things.

Some of the things have already been in place.

I think that there's a lot of opportunities that remain and I think that certainly that would be a likely outcome.

Okay, thanks.

Your next question comes from Felicia Kantor with Lehman Brothers.

Hi, guys.

I have two questions.

One is a dumb question and hopefully the second one isn't as dumb.

My dumb question is when you look at net income and you divide it by your shares outstanding, you don't see 47 cents.

So, I'm assuming that had something to do with the converts, can you just walk us through that math?

Felicia, I'm glad you asked that, I know others had the same question.

Richard, let me take that.

We're getting an echo on that.

Felicia, the thing that you have to take into account is that when they become dilutive, you'll also have to add back the interest that was paid or the interest that was accrued on the zeroes and that was roughly about $4.8 million.

So, you just add that in that should give you the 47 cents.

So, you just add that in kind of after net income?

That's correct.

Okay.

Great.

The concept, Felicia, is very simple , it's as though they were equity and therefore you take the debt off.

Yeah, no, I understand that.

It's below the line and I just wanted to make sure.

And then regarding, you know, everyone is starting to speculate when and if interest rates are going to rise and I guess the market is kind of baking in that could happen at some point this summer or fall.

While you do hedge some of your floating interesting or floating debt, I'm wondering how are you protected against interest rate increases and what are your thoughts about that going forward?

Felicia, this is Bonnie Biumi.

Hello.

How are you?

Good!

Our fixed to floating percentage varies much like we do for oar derivative products, we're looking at the marketplace and using certain guidelines.

Right now we happen to be in the mid- to upper 60% fix.

So, that's one way that we do it.

Another way that we do it is we are constantly watching the market and we're looking for ways to mitigate the cost of our interest.

I think 1% move in interest is worth about $14 million to us on an annual basis, just to give you an order of magnitude.

And so I think that will help you in what you're trying to do.

Our current cost of debt is somewhere in the low 5s area.

So, we're in pretty good shape at this point.

Okay, great, thanks.

Your next question comes from Tim Conder with AG Edwards.

Thank you.

A couple of questions.

Luis, you mentioned that on the fuel side, you're benchmarking and using best practices there, but overall you're using a slightly lower grade of fuel.

Is there any maintenance cost offset to that, using a lower grade of fuel?

That's my first question.

Secondly, as a couple of follow-ups, do you have have the specific on board spending percentage in the current quarter and the year-over-year?

And then in the other income line, back to that, if you could maybe break out the exact tax benefit versus everything else that's lumped in there?

Final question, I promise, fourth quarter, are you implying that's going to be a down year-over-year quarter?

Okay.

You've got a lot of questions here.

Let me answer the first one.

The lower grade of fuel that we're using is primarily in our gas-driven engine run ship and there really is not an additional cost, maybe some finder costs in terms of additional filtration, but that is very, very minimal.

In terms of the tax benefit question that you have, the tax benefit was roughly about $600,000 or so, for this quarter.

And in terms of I guess your other questions, I think that the other questions you have regarding the on board spending, you may want to call Dan afterwards and he can maybe walk you through a little bit of some of the information that we can't disclose at this point.

Can I just clarify, Luis, on the tax benefit, the $600,000 that he gives you is just the 883.

We also had a benefit related to the tour operations, which has grown, obviously, year-over-year.

So, in total there's about 1 million, 7 million, 8 in benefit in that number that wasn't there in the prior year.

Also, in response to your question about the quarter being down year-over-year, that should be relatively flat.

Okay.

And then one last one here.

On the 4X, you actually do have quite a bit less exposure than your competitor, primary competitors, but how much of your revenues or expenses, however way you want to phrase it, as a percent of your revenues, are exposed to foreign exchange?

Just to give you an example, maybe this better answers your question, is for every 17 or so percent change in currency should relate to about a 1% change in revenue.

So it's not much at all.

Great, thank you.

Your next question is from Audra Negar with Nordia Securities.

Thank you, this will be the last question.

Thank you.

I was wondering, as far as I can see, you have changed your definition of the net yield, you're excluding on board in the net yield calculation.

Could you provide us with the historical numbers on net yield with the new definition?

No.

I don't think that's correct.

I think we have not changed the definition.

That is correct.

We have not changed the definition.

I mean, the only things that we have included that are different is just that we are the certain direct expenses related to support fees that can be measured on a cruise basis.

That's probably the only change, but the change from expense to now become on the yield side.

What I would like to do, however, is there is the changes that have occurred and I suggest you call Dan Matthews after the call and he can kind of walk you through it.

Okay, thank you very much.

All right, well, thanks, everybody, for coming.

We certainly look forward to our second quarter conference call and, again, if any of you have any additional questions, please direct those calls to Dan Matthews.

Thank you very much.

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

You may now disconnect.