皇家加勒比遊輪 (RCL) 2004 Q2 法說會逐字稿

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

Mr. Luis Leon, Executive Vice President 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 to ask a question during this time, please press star then the number one on your telephone keypad.

Should anyone need assistance at any time during this conference, please press star then zero and an operator will assist you.

As a reminder, ladies and gentlemen, this conference is being recorded today, July 28, 2004.

Thank you.

Mr. Leon, you may begin your conference.

Thank you, Lynn, and good morning, everyone.

I am Luis Leon, Executive Vice President and CFO of Royal Caribbean and I would like to welcome you to our second quarter conference call.

With me here today is Richard Fain, our Chairman and CEO, Jack Williams, our President and Chief Operating Officer, Bonnie Biumi, our Senior Vice President and Treasurer and Dan Matthews, our Director of Investor Relations.

Before we start, I need to refer you to the first slide of our presentation which can be found on our website, RCLinvestor.com.

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

Additionally it is important to note that in accordance with the SECs Reg G we have provided reconciliations between gross and net yields and gross and net cruise costs for the second quarter of 2004 and 2003 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 quarters results, Richard will provide a brief overview, Jack will follow me with the review of the operating performance and at that point with will open the call up for questions.

Richard?

Thanks, Luis, and good morning, everyone.

I think most of you know I always enjoy the chance to talk about our business during these conference calls but I have to admit that today is particular enjoyable being able to talk about good news.

And I have to say I usually hate using cliches but I can't risk saying, what a difference a year makes.

Everyone recalls the second quarter of last year is was the quarter where we were most affected by the War in Iraq.

Our yields were down 3.9% and earnings per share was down 18%.

Even those these were disappointing results we were already seeing the initial signs of improvement, both in bookings and in pricing.

Now with a year later and strength that we've been describing for some time has really sustained itself.

As the press release says our net yields for the second quarter surpassed everyone's most bullish expectations and increased by 12.6%.

Obviously that's the main driver of this quarters 111% increase in earnings per share.

In discussing our pricing strategies this year, one of our top revenue management executives used the metaphor of a race and I thought the metaphor was particularly apt, especially right now after the Tour du France.

Before the start of any race you have to sit down and decide what strategy you are going to use for the race.

Essentially you have two options.

You can ride hard from the very beginning and try and establish a strong early position,.

If you use this strategy you hope to get a good head start but expect to lose a little ground near the finish line.

Alternatively you can start out steady and attain a measured pace throughout the race which leaves you with more oomph, for a very strong sprint to the finish.

Our strategic pricing program that we've talked about for some time now, akin to following the first strategy.

We've been going full speed in the beginning in order to fill the ships early so that we will be less dependent on demand during the home stretch.

What's been so exciting about this year is that after sprinting during the early part of the race and filling the ships early, we have found that there's still plenty of demand left over as we approach the finish line.

Essentially we have been able to generate strong sales volume early in the period and still have enough demand near the finish to hold our prices up at the end.

This is part of the reason that we've achieved not own good pricing but improved occupancy as well as good pricing.

At the same time onboard sales have continued to do exceptionally well.

Looking forward, as you saw in the release, we also remain very excited about the opportunities for the rest of the year.

Assuming there are no external shocks we now expect net yields to increase in the range of 9 to 11% for the full year, 2004.

I do have to insert one caveat, sorry.

I do have to insert one caveat.

Because of the last few points of our yield come from the last few bookings in the home stretch, we do have less assurance about those last few points.

Now as we look at how we are managing our business in order to capitalize on these market trends we remain committed to sustaining the position of our brands and improving the position of our brand in the cruise industry.

Celebrity, our premium brands continues to offer guests vacation opportunities that cannot be found in any other cruise brands.

As you know, one of our new initiatives is Expeditions, which is a series of special excursions and sailings, with itineraries ranging all over from the Galapagos to the Arctic, and is proving to be an excellent addition to the brand.

Celebrity has followed this with an exclusive deal with Cirque Du Soleil, that deal will offer guests one of a kind entertainment experience.

We are very excited about both of them and both of these initiatives have created exactly the type of buzz that we need from the Celebrity brand.

Same time for the Royal Caribbean International brands we just an announced the lengthening and refurbishing of Enchantment of the Seas.

I know it sounds bizarre but they will build a new 73-foot midsection in Finland.

When the midsection is ready, they will float that section down to Rotterdam where they will cut the ship in half, they will insert the new midsection and then they will glue the new ship back together again.

Royal Caribbean did the first lengthening of that type in history in 1978 with the sawing of Norway.

And we believe that this lengthening will be just as successful as that lengthening was.

The capital cost for additional berth in this lengthening is a little below what we would expect to pay for a new building but the economics are in fact much better.

Firstly, the new cabins have much lower incremental costs.

For example, there's no extra fuel for the new beds and there's essentially no extra marine crew that we need for the new beds.

Thus we get one-hundred percent of the normal revenue but not 100% of the normal costs associated with these berths.

At the same time the refurbishing enhancements we are adding to the ship should increase the attractiveness of the existing berths.

As a result, the addition of the extra revenue from the new berth we also expect to get additional revenue from the existing berths at no incremental costs.

Doing this type of projects does cost us in the short run, not only in the capital cost but in out of service time and other expenses, but it should give us an excellent ROI.

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

Thank you, Richard.

Our second quarter results are summarized on Slide two.

As you can see we reported record second quarter net income in 2004 of 122.2 million, or 59 cents per share, compared to net income of 55.7 million, or 28 cents per share for the second quarter of 2003.

Our zero coupon convertible notes reduced earnings per share for the second quarter of this year by approximately 1 penny.

Revenues for the second quarter of 2004 increasing 26% to $1.1 billion, from revenues of $905.8 million in the second quarter of 2003.

The increase in revenues was due to a 12.4% increase in capacity, coupled with an increase in cruise ticket prices, occupancies levels and onboard revenues.

Gross yields for the second quarter of 2004 increased 12.3% from the second quarter of 2003.

Net yields which the company considers to be better measure of revenue performance increased 12.6% for the same period.

This is above our previous guidance of up 9 to 11%.

Gross yields increased less than net yields due to a lower percentage of passengers choosing to book their air transportation through the company.

Our air/sea mix decreased to 13.9% from 15.1% in the same quarter last year.

Although second quarter of 2003 was the most impacted by the Iraq War, our net yield performance in the second quarter of '04 has more than recovered last year's decline of 3.9% and has put us ahead of the net yield we achieved in the second quarter of 2001.

The net yield performance has also driven our improved profitability.

Compared to 2003, our EBITDA for available passenger cruise dates increased approximately 25 percent, to $56, from $45.

Another key measure that we look to in respect of profitability is return on invested capital.

Return on invested capital on a quarter over quarter basis improved by approximately 2.6 percentage points and is in line with our goals for ROIC improvements.

Our investments in growing our market awareness and interest in our brands are paying off.

Particularly for the Celebrity brand.

Last year we rolled out a series of product enhancements in the Celebrity brand under the brands Rejuvenation and Frontiers class banners.

This year we are continuing our brand development investments including the launch of Celebrity expedition in the Galapagos Islands, the formation of a partnership with Cirque du Soleil and the development of dedicated sales, reservations and customer service for each of our brands.

Gross cruise costs and net cruise costs on a per available passenger cruise day basis for the second quarter of 2004 increased 8.1% and 6.6% respectively compared to the same quarter in 2003.

Consistent with industry and market trend, year over year cost comparisons were negatively impacted by increases in fuel prices, marketing, selling and administrative expenses, as well as crew and port expenses.

The increase in marketing, selling and administrative is primarily attributable to the delay in these activities in 2003 as a result of the Iraq War.

Fuel continues to be expensive.

During the second quarter of 2004 fuel represented approximately 5.6% of total revenues, which compares to 5.1% of total revenues for the second quarter of 2003.

This equates to an increase of 24% on an available passenger cruise day basis.

While we noted in the first quarter that prices at the pump had not increased in proportion to WTI, or West Texas Intermediate, during the second quarter we did see our costs at the pump increase.

Most of this increase was attributable to our marine gas oil and light pipe oil fuel price, which essentially is power or gas driven engines, and accounts for approximately 33% of our fuel consumption.

As we have discussed in multiple occasions in the past, from a P&L standpoint, we do not have significant exposure to movements in foreign exchange rates.

For the second quarter of 2004, fluctuations in key foreign exchange rates, which affect us, had roughly a half a percent impact on net yields and net cruise costs and virtually no impact on the bottom line.

Turning to our balance sheet, at June 30 of this year, our cash balance was $706 million.

Property, plant, and equipment net of accumulated depreciation was 10.2 billion.

Total debt was 6 billion.

Customer deposits, increased to a record of 1 billion, and shareholders equity was $4.5 billion.

The net debt to capital ratio was 54% at the end of June.

The current portion of long-term debt is now at 1.1 billion, up from 315 million at year end 2003.

From a cash-flow perspective, net cash provided by operating activities for the six months ended June 30, was $710 million and our Cap Expenditures were 476 million.

The basic contributor there being the delivery of the Jewel of the Seas.

As you can see on Slide 3, our liquidity as of June 30 was 1.7 billion.

During June we drew our $225 million term loan and the company's $1 billion credit facility remains undrawn as of the end of that period.

The bookings environment continues to be strong as evidenced by widespread improvement in pricing and occupancy.

As a result, the company currently forecasts that net yields for the third and fourth quarters of 2004 will increase in the range of 10 to 11 percent, and 1 to 3% respectively, compared to the same periods last year.

Assuming that there is no external shock and current bookings trends continue, the company expects net yields for the full year, 2004, will increase in the range of 7 to 9% from the prior prior year.

Although the increase that we expect for the fourth quarter is lower than the levels we achieved in Q1 and Q2, and lower than our estimates for Q3, it is important to remember that net yields in the fourth quarter have a tougher comparison as yields in Q4, 2003, were only down by .1%.

So at this point we are happy with the consensus that's already out there for the fourth quarter.

As you can see on Slide Number 4, the level of close end bookings, those within 90 days of sailing, increased by a small amount to 38% during the second quarter of 2004, and that compares to 34% in the first quarter of this year.

Although there was a slight increase this quarter, this movement is consistent with the historical trends for the second quarter and remains lower than our peak levels in 2003 of 45 to 50%.

For the full year 2004, the company estimates that net cruise costs on a per available passenger cruise day basis will increase approximately 3% from the prior year.

Included in net cruise costs is approximately $35 million associated with the Brilliance of the Seas operating lease.

The company estimates that net cruise costs on a per available passenger cruise day basis for the third quarter of 2004 will increase in the range of 4 to 5%.

This is primarily due to costs associated with anticipated increases in fuel, and an increase in marketing expense.

Also remember, included in the prior year was a $5.8 million reduction in net cruise costs associated with the resolution of litigation.

So if you put these three items together, they are expected to account for approximately 80% of the total increase that I just mentioned.

The company estimates that net cruise costs and available passenger cruise day basis for the fourth quarter, 2004, are expected to be flat to down 2% compared to the same period in 2003.

While the company continues to be very cross focused, the company is unwilling to take any actions that could have a long-term detrimental impact on its brands or the perception of our product.

We will therefore continue to invest in maintaining product quality and in aggressively selling and marketing our brands.

We will continue to strive to mitigate these costs pressures by looking at resourceful methods to lower costs without impacting the experience or satisfaction of our guests.

Now in some cases achieving longer term efficiencies will require near term investments, particularly in the area of technology.

So looking ahead we expect our costs will grow at a rate that is lower than the overall price inflation.

We are hedged on fuel by approximately 40% for the third quarter and closer do 45% for the fourth quarter.

We estimate that fuel expense will be in the range of 5 to 6% of revenues in 2004.

During the last six months of 2004, we expect could consume approximately 3.6 million barrels of fuel.

Therefore after taking into the the hedges we currently have in place, a 1 dollar increase in our price of fuel per barrel for the remainder of the year will result in an additional $2.1 million fuel expense for the remaining six months of the year.

Depreciation and amortization for 2004 is expected to be in the range of $395, to $405 million, and interest expense net of capitalized interest, is expected to be in the range of $350, to $325 million.

Based on the above assumptions, management expects 2004 earnings per share to be in the range of $2.25, to $2.40.

This earnings per share estimate assumes that our zero coupon convertible notes due May, 2021, remain convertible throughout the year and will dilute earnings in the range of 6 to 7 cents per share.

However, the 2004 earnings per share estimate does not assume that our liquid yield option notes become convertible.

In the event that these notes become convertible for the remainder of the year diluted earnings per share will be further reduced by approximately 2 cents.

As you probably know, these emerging issues task force reached a tentative conclusion on EITF 4-8, which will require all shares that are issuable under our convertible debt instrument to be included in our calculation of diluted earnings per share.

If adopted this would reduce the aforementioned 2004 earnings per share estimate of $2.25 to $2.40, by approximately 2 to 3 cents.

If you're really interested on this, additional information concerning this can be read in our quarterly report that we will be filing today, which is our form 6K. with the SEC.

On Slide Number 5 you can see that the company estimates that capital expenditures for 2004, 2005 and 2006 will be approximately $700 million, $400 million, and $900 million respectively.

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

As you all know we currently have an option to purchase an additional Ultra Voyager in 2007 and this option is exercisable through August of this year.

Slides 6 and 6, our 2004, 2005 capacity information and our 2004 fleet deployment respectively.

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

Jack?

Thank you, Lewis, and good morning, ladies and gentlemen.

It's a pleasure to have an opportunity to speak to you, again.

As in the past I will spend the next few minutes briefly discussing the general tone of bookings and pricing and again provide some additional highlights and insights by major products.

Of course as you've heard from Richard and Luis, and in our press release the news on the booking and price front continues to to be very, very good.

As I've reported on the last several calls, demands continues to significantly outpace last year and we continue to see nice year over year improvements in our net yields.

Our book load factor, if I can just direct your attention to Slide Number 8, for 2004, significantly ahead of where we were at the same time last year and this is what we talk about our strategical pricing initiative early in the year, get out of th gate somewhat early to use Richard's metaphor.

You can see on this chart since early January when the wait period began, our load factor did outpace quite nicely to the same time last year, the same time as we all mentioned we've been able to improve pricing, our conversions are up as well.

Louis also noted that the booking curve continues to move further out as 38% of our Q2 bookings were within 90 days of sailing, versus 34% if the first quarter and 42% in the second quarter of '04.

The pricing environment also continues to be very strong.

As we all have noted net yields in Q2 increased 12.6% versus 2003, and we are now forecasting another double digit improvement in net yield for Q3, 2004, clearly a very solid price environment that we are find ourselves in.

Both of the brands I'm pleased to announce are really turning excellent year over year improvements in their yields.

However, I am particularly please with the Celebrity brands performance in the solid year over year improvement in net yields for the brand for the second quarter.

Clearly all the work we have done to transform the brand and reposition it is beginning to have a very favorable impact on the yields at Celebrity.

Overall pricing continues to be at a premium to same time last year since September of 2003.

The strength in our rate has continued even as we now move beyond the annualization of the Iraq War impact in March and April of last year and that is very encouraging.

Again at Richard pointed out our realistic pricing strategies are working well in the marketplace and we are very, very pleased with that.

But given the solid demand that we have been experiencing I don't see any reason that the pricing won't continue to be stable and steadily above the 2003 levels as we go throughout the remainder of 2004.

Currently we are pursuing a forecast of net ticket revenue achieved to date is ahead of the last two years and now more in line with 2001, pre-9/11 and I mentioned that on our last call and that phenomena continues on.

ACDs can put load factor solidly ahead at the same time as last year and we currently have 25% less available state rooms to sell, to last year, this despite an overall capacity increase of 12% in both brands in '04.

So, again, very, very encouraging news.

Let me briefly give you some highlights by major markets.

Clearly the solid demands we have been experiencing is across all the products but not a single product forecasted at this time to have a yield decline in 2004.

Our 7-night Caribbean, our bread and butter product represents 40% of our total capacity, book load factor is ahead of same time last year by about 6points.

Our booked ACD is also higher and we are forecasting to have a very nice yield improvement in the 7-night Caribbean product for 2004.

The short Caribbean and Bahamas, which represent 12% of our total capacity, that's a 3% increase in capacity year over year.

Quick load factor well ahead of same time last year, ACD is higher than same time last year and quite a bit higher than where we ended up in 2003.

And this is one product that is really strengthened quite significantly since our last call and I think on the last call I said we would have a modest yield improvement in the short product but now it looks like well have a very good LP yield on the short Caribbean and Bahamas product.

Our long Caribbean, 70% of our total capacity is up about 5% year over year.

Booked ACD. is slightly down while quick load factor is ahead same time last year and this is the one product where we just right now are forecasting our yields to be flat, just modestly up for two from 2003.

Alaska's been a very, very pleasant surprise for us this year. 7% of our total capacity we increased capacity 5% year over year.

Book load passenger ahead of last year.

Booked ACD is also up and well ahead of where we finished in 2003.

Our cruise per guest are expected to increase by about 21% over the '03 season and that is primarily due to improved rail leg usage on our cars and overall we expect a really news yield improvement for the Alaska season on both brands.

Bermuda also which is 4% of our capacity, a slight 2% capacity increase year over year and has also strengthened quite significantly in the last couple months.

Book load factor is also up, booked ACDs are up and we are forecasting a real nice yield improvement year over year as well.

The Canal, only 4% of our total capacity but a 19% change or increase capacity year over year.

Again with solid performance in the Canal this year and we are forecasting nice yield improvements there.

Mexico, just 9% of our total capacity, but, again, 68% change year over year.

Book load factors ahead of last year, same with ACDs and we are forecasting just a modest increase in Mexico given the capacity year over year but we still are forecasting modest yield improvements.

And, of course, save the best for last, Europe has just been an unbelievable story for 2004 for us, represents 8% of our total capacity, 18% change or increases year over year capacity, quick load factor well above where we were last year.

ACD is as well, well above where we were last year.

And we are expecting a very, very significant yield in our products nor 2004.

So that's been very, very encouraging for us, improvement in the third quarter for the company.

So that gives you just some brief insight by major product line of where we're at today.

Again as Richard has said and Louis has said, pricing environment as well as the bookings environment is very, very strong, very encouraging.

With that good news I think we will turn it over for Q&A.

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

If you would like to 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.

Thanks very much, good morning.

In terms of the outlook for the fourth quarter, is there still an expectation that earnings could be on the negative side?

And if you could also provide a little more descriptive on the fleet deployment plans for next year and what kind of increase we are looking for in Europe?

Thank you.

Hi, Jill.

I will answer the first question and then ask Jack to answer the second question.

As we look at the outlook for fourth quarter I think that's correct, we are still looking at a loss for the fourth quarter.

We do have a pick up, slight pick up.

However, we have other costs that are going up, depreciation and amortization is going up in the fourth quarter.

If you looked at the consensus out there I think we are pretty pleased with what's out there at the present time.

Jill , in terms of the 2005 deployment we are looking right now and keep in mind me we still have some times that need to deal with dry dock, but right now we are looking at about an 8/10 to a 1% increase in overall capacity for the year.

We are not taking any new ships for the first time in a long time in 2005.

European deployment is going to be pretty stable throughout 2004, pretty much the same.

Great.

Thank you.

Your next question comes from Brian Egger with Harris Nesbitt.

Good morning.

Two quick questions.

The first is can you just articulate what your fuel cost assumptions might be for the balance of the fiscal year in terms of your earning guidance?

And with respect to the ship lengthening that you announced any other plan or thoughts in general to perhaps do something with respect to stretching some of your older berth capacity going forward?

Hi, Brian.

Let me answer your first question and Rick will answer your second question.

With regard to the first question, it's kind of difficult to answer.

And the reason it's difficult is because of the fact that you by so many different types of fuel.

We by IFO, fuel oil, we buy marine gas oil and we buy light pipe oil.

And all of those range in cost significantly.

We do expect fuel costs to go up.

At the present if you look at the West Texas Intermediate curve where it's at and where IFOs has been this has been an increasing gas level.

I think that the best way that we want to defray cost is by giving you the sensitivity that we gave you earlier, basically by saying kind of on a rule of thumb basis that based on our swaps and everything else that a dollar increase in oil prices will result in about $2.1 million.

And Brian, I'll address the second part of your question.

The Seas Enchantment of the Seas offered a particular opportunity to do both the lengthening and upgrading.

I think it's fair to characterize that as part of a program of trying to improve our vessels and to take advantage of the lessons we've learned on some of the new building, particularly on things that are of interest to people like alternate dining.

I think lengthening a vessel is not trivial to do.

I always fine it amazing that they can do it at all and it very much depend on the physical characteristics whether that is feasible at a reasonable cost.

I think that will be more lengthening and more upgradings.

I don't think that we are on any kind of a mission to do a lot more lengthening.

I think there will probably be some of them but I think we will take that in a case-by-case basis in a carefully measured way.

And I do say I have to point out that physically all ships are quite different and some ships are more conducive to conversion than others, or lengthening than others.

Thank you.

Next question comes from Robin Farley with UBS.

Thanks.

I had two questions and I also wanted to clarify a comment, Jack, you talked about being particularly happy with an increase in the yields of the Celebrity brands.

So was the Celebrity brand increase greater?

I just wanted to clarify that you are saying the increase is greater in the Celebrity brand than overall.

Obviously [INAUDIBLE- static] , is that what you were saying?

Yes, Robin, that's what I was saying.

The Celebrity brand yields were good.

I'm sorry, were greater than average?

I don't know what you mean by the average.

Than the average that we reported?

Yes.

Yes.

Okay.

Great.

Two questions, the onboard revenue trends are very strong here and I believe that you an versus read this change in onboard concessions so it looks like this increase is all just clearly driven by an improvement in your onboard performance.

I wonder if you could give a little color on that?

Yes, Robin, we've been doing a lot on the onboard side, offering different types of services, [INAUDIBLE - static] using a couple examples at the top of my mind, the Celebrity brand, have excellent at the commuter, have better, quite compelling and are being received quite well by the guests.

We have taken some rate increases across the board on the on oard service categories and an overall good, strong spending environment onboard right now.

A lot of management action to say drive these results.

And we've also noticed that the occupancies are up and that helps, too.

Even on a per passenger basis.

And last question is on the [INAUDIBLE-static] side it sounds like it would not be reasonable to think expenses should be down on the per unit basis outside of fuel costs for next year in '05, it sounds like expenses even upside, fuel will be up?

Robin, we are not really giving any guidance yet into next year.

I think that I made a general statement which is obviously what we are going to strive for and that's basically that will we are going to keep cost increases to lower than price of inflation and what that basically is, you are going to have a lot of thing that are going to impact you as a result of inflation which would be higher costs that are uncontrollable but all of the cost initiatives that we have will basically mitigate those increases.

So at the end of the day the increases will be less.

Okay.

Great.

Thank you.

Your next question comes from Scott Barry with Credit Suisse First Boston.

Good morning.

Just a follow up on the load factor.

It looks to me like Q2 load factor is at an all time high.

Obviously demand is impacting that.

But Jack, maybe you could comment on whether we can get beyond the prior annual 105% levels?

Is there something in the fleet profile, for example, Voyager class vessels or the itinerary mix versus the late 90s that would influence load factor going forward?

And maybe comment on what contribution to yield improvement you expect from the load factor and sticker pricing mix going forward.

Thanks.

Yes, Scott, right now I don't see anything that can allow to us really get the load factor much higher than we have in the forecast.

The thing we are going to be able to do is get a better yield with the kind of load factors that we have on board by driving better rates.

That's currently what's happening right now.

If you look forward to yield performance as we are speaking right now most of them is driven by rates, not occupancy.

Very encouraging.

As going through the remainder of '04 and early into '05 right now we really see the upside rate driven.

Although we are seeing very high load factors.

And Scott, you mentioned the physical characteristics.

I think you are right.

The newer ships, our newer ships have larger cabins, they have more, and more of them are equipped with third and fourth.

Also it was late in the 1990s that we essentially invented the new type of pullman berth that requires less space in the cabin and gives a better experience for the passengers.

So those factors allow us to increase the occupancy levels but we are there now.

And so I think we won't see any incremental change from that.

We've already got those.

Just a follow up if I might.

Louis maybe you could take us through that the major components of that $400 million Capex number?

It's a little higher than I anticipated even included the lengthening?

You are talking about the 400 million that we've had so far this quarter.

No, no, the guidance for next year.

The guidance for next year is, there is not a lot of specific projects but we are making investments in our technology and IT.

And then we will be doing some work on the lengthening of the Enchantment.

And then, as you know, our ships are getting older, and as they get older, they all are going to need facelifts.

That's essentially what we are going to be doing for our fleet.

The number that we gave you includes some of that.

Thanks a lot.

Next question comes from Tim Conder with A.G. Edwards.

Thank you and congratulations on a very good quarter and good performance.

A couple things here.

Could you comment, if you want to look at it from a basis point spread, could you comment on the returns on a lengthening of the ship versus a new build?

I know that you alluded that the costs per berth is a little bit less than a new build but when you factor it out and do your modeling, looking at it from a return on invested capital, what type of spread do you have there?

And then maybe just give us an update and granted the currencies haven't moved that much but in evaluating that option out there for the second Ultra Voyager, is there a point or how close are we to a point of potentially making the returns attractive for pulling the trigger on that?

And then finally, Luis, could you maybe give us an update?

You alluded to it a little bit earlier in some of the questions on cost, but where do you stand as far as implementing cost programs somewhat ingraining that within the overall organization and getting the organizations to fully buy into that and that becoming more of a mindset?

I guess, Tim, Richard speaking and I will take the first two points and Louis will take the third.

I'm not sure how to compare, how to respond on lengthening versus returns on new buildings.

There are so many factors that go into it that it's very difficult one to look at.

A lot depends on the specifics of the ships and the itinerary.

I don't think we look at it specifically like that.

We have found that the lengthenings are attractive both financially and to our guests.

So I think if and when we think there are really good opportunities to do that we will take advantage of it.

But I'm not sure I would make specific comparisons between the two.

They are so much different both in qualitative and quantitative factors.

With respect to updates on Ultra Voyager 2 and our new building in general I think we have seen the benefit of how powerful yield improvements are and we expect them to really try and do our best to build by getting better pricing going on on an ongoing basis.

We are, we do have the option for Ultra Voyager 2.

The products change is a problem at the moment.

And we will obviously be looking at that.

I think we have also seen that once you make the decision that you are going to a post panamax size vessel, i.e., you are no longer constrained to the narrow width of the traditional panamax size ship, once you go into that you actually have a lot of alternatives as to how you design a new vessel.

So I think that will enter into our thinking as well.

But I think we are taking it one day at a time and we will be looking at it as we approach the option date and beyond.

I think on the cost side, Luis has some comments.

On the cost side, I don't think there's anybody in this company that is not fully focused on cost.

As you know we are going into next year with a very, very limited amount of growth in terms of capacity and the focus becomes even stronger.

We are starting our planning process at this point and everyone is certainly very, very focused.

Now the one thing that we do have is we are also looking at a variety of different ways to do that.

As I mentioned in my discussion earlier is that we are investing in technology and I think that technology should help us in that.

But in terms of a mindset, I think that everybody is very, very focused.

We have clearly spent a lot of time on that either joint meetings, separate meetings, but there is a continued focus on that.

And the two other brief ones, if you could just remind us of the typical cost of a ship refurbishment, number one and number two, just remind us looking '07 and beyond, what would you anticipate your average annual capacity growth in '07 and beyond?

Luis, why don't you take the first part and I will take the second?

Okay.

You know, the ships, the costs vary.

And they vary based on the amount of work that we do on them.

But they can vary from $10 to $35 million, depending on the amount of work.

Obviously the lengthening is not just a refurbishment, it's a lot more.

And then going forward, it is a difficult one.

Obviously our -- strategically we intend to maintain our market share.

But we think the number of 4 to 6% is probably the way these things will be going for us in the future.

And I think what we've seen is as I mentioned earlier just how powerful yield improvements go and so with a more moderate growth for the industry going forward, I think that augers well for our bottom line and return on investment performance.

Thank you.

Your next question comes from Felicia Kantor with Lehman Brothers.

Hi, guys.

Just wondering, I think Jack, this is probably a question for you, as thing continue to improve and as we continue to look at pre-2002 levels as a bogey, if you will, I'm wondering how sensitive do you think that the consumer is at this point to pricing?

In other words should we be looking at 2004 pricing as a bogey that might be difficult to pass through as consumer appetite for price increases or is the momentum that you're seeing now indicating that we can actually pass through that bogey perhaps at some point next year?

I have a follow-up question.

Felicia, an excellent question.

I think, look at the consumer confidence index that was put out, it's exceeded 100 for the first in a long time, so generally the economy is strengthened quite nicely.

Consumer confidence is building.

We are seeing good reaction to pricing that we have out there today and every week that goes by, we continue to take some more modest pricing increases.

As long as all that stays in place I think the 2000, that we think the 2000, I really do.

Having said that there is always the caveat that are out there factors that are out there in terms of, what may or may not disrupt that kind of thing.

Confidence right now points to healthy price environment.

That's great.

My next question is actually for Luis, and Louis if you already answered this question I might have missed it so just tell me and I will look it up you don't need to go through it again, did you mention how much the increase fuel hedge cost the company in the quarter?

No, we did not say how much it costs us, what we said, Felicia was basically we were hedged 40, 45% for the balance of the year.

Can you quantify how that might have flowed through the costs in the quarter?

I really don't have any of those numbers at hand.

But you might want to call Dan afterwards to go through some of that detail with you but frankly I don't have that in front of me.

Okay.

Thanks.

You know, Felicia, we can't help but point out, you mentioned about the 2000 bogey, and that's not our bogey, but we can't help but point out that if in fact we reach the top ends of the ranges for the third and the fourth quarter, that we would in fact surpass the figures in 2000.

It's an interesting observation.

Absolutely.

I was just wondering if there is a psychological hurdle from the consumers perspective and it seems like there's not.

I think the other thing to remember is there's a big difference to begin with, the ticket prices and the onboard and other expenditures as well.

Great.

Thanks.

Next question comes from Steve Kent with Goldman Sachs.

Hi, good morning.

Could you talk about ratcheting down or are you planning on ratcheting down some of the expenses of the marketing or anything associated with the aggressive launch schedule of the past three, four years?

Can you just talk about what the plans are for that and should we expect that to offset some of the other expenses that you've talked about this morning?

Right now, Steve, I think it's pretty fair to say that both of brands have two marketing plans, really resonate within the trade as well as within the consumer mind sets that we are targeting and our spending is pretty much in line with our capacity growth.

And we are quite pleased with the levels we are at today.

That's not to say there won't be room in '05 for some efficiencies to be gaining in the marketing spend but we are really in the marking early stages are the making that.

I am reluctant at this point to give any kind of strategy change, especially the Celebrity brand because we have a lot of momentum and we need to allow that momentum to continue on and really solidify Celebrity as the best premium in the industry today.

In ideal growth environment, revenue is going to be extremely important to our bottom line results.

So if I had to answer you today, I would tell you I am very bullish on keeping the marketing spend levels where we can continue to build the brands and implement the brands reference in the marketplace.

And broadly just on any over head associated with the level of launch activity beyond marketing.

As Luis said in his comments, we focus on every line of expense to drive efficiencies everywhere we can throughout the enterprise.

We are moving into a fairly flat growth environment next year and so it's going to be a little bit more difficult in some ways.

But we have a lot of thing that we are working through right now on the technology side that are going to help us drive results that we otherwise would drive year end '05, well into '06 and I can sit here for an hour and talk about all the additions that are going in across the enterprise right now to create more efficiency not only in the remainder of '04, but certainly into '05.

I am just going to say, sum that up is we will continue to focus very strongly on and we are very focused on it and as Louis said we expect '05's unit costs our expense increases below the level of inflation.

Thanks.

Next question comes from Bob Simonson with William Blair.

Good morning.

Two questions, one a quick one.

Could you repeat what your interest expense assumption was for this year, Luis?

Hello?

I'm sorry.

It's between 315 to $325 million.

Okay.

And secondly, when does the Enchantment actually come out of service?

How long will it be out?

Did you mention a total cost?

The second quarter, I think it comes out in April and goes back to service the beginning of July.

And the number I don't have it in front of me.

I do have to say I am just shocked that they do that in that short period of time.

And in terms of total cost, the shipyard has mentioned a number I think of 45 million Euro.

That's the contract price you had on top of our costs.

Overall it's sort of a little under the cost of, the building costs, a little under $200,000 a berth I also mentioned Bob that there are some other costs which are a large part of the capital.

It's very hard to sell cruises during a period the that ship is cut in half, so you do lose those revenues.

There are some other costs in our P&L for that process.

And I assume that the capacity numbers that are in the slides are adjusted for this coming out?

That is correct.

Thank you very much.

Next question comes from Rino Bianchi with Citigroup.

Yes, good morning, everyone.

I have three questions.

One general question and two detail questions.

The broad question is, it's not that much better visibility in earning but wondering, you obviously are going to generate a lot of excess cash-flow this year and next year.

Are you still committed use most of the excess cash-flow to pay down debt?

Yes, that's correct.

As you know one of our objectives is to become investment grade and we have about one point, a little over $1 billion worth of debt occurring in the next 12 months and we will be -- our focus will be to pay down debt.

That was my detailed question, the $1.1 billion, I was wondering if you can help me out with the composition.

I believe in July you paid down $125 million of the 8 1/8, you have a 8 1/4 municipal bond maturing next year.

What is the rest?

I think if you look at the difference year on year, we have a $625 million term loan that comes due in June and then we also have a senior note, our 8 3/4 senior note, that's about $141 million.

That kind of gives you the delta from the beginning of the year to now.

The term loan can be extended.

Well, the term loan can probably be renegotiated.

But we have to as you know from an accounting perspective we have not done that yet and we have to look at it as a current portion of debt.

Final question I have a with respect to the debt, after you've given fair price to all the potential swap that you have right now how much of the debt of the $6 billion is figured, how much is variable rate?

Right now of our total debt we have roughly about 60% is fixed.

Is fixed through either contractual, swaps or some other, about 60% is fixed.

And the rest I assume is debt, though.

Yes.

Thank you.

Your next question comes from Assia Georgieva with Sanford Group.

Good morning.

I wanted to add my congratulations on an excellent quarter.

I had one question related to expenses in the past quarter.

Crew and payroll seemed to be a pretty significant portion of the increase, payroll expenses were up 6.4%.

I realize that some of the comparisons may be difficult.

Can you discuss that in more detail, Luis, probably you would know the detail?

I can give you some of the detail.

Obviously we are not going to go into too much detail.

But we had, some of our payroll costs are obviously just increases year on year.

A lot of it is, some of it is, we talked a little bit about the small impact on foreign exchange, a little bit of that in there in the payroll.

But also we have crew planes and crew planes come about, we've added 14 ships since 1999.

We also took over about 9,000 employees from accounts payable from the concessionaire, the people that were handling the service at Celebrity.

And all of those things are beginning impact us.

So that, that would be the primary drivers as to why that figure went up.

Okay.

Quick question, what is the actual have expiration date for the Voyager option?

You said in August.

Do you have the date?

The -- it's the 29th of August.

Okay.

Great.

Thank you so much and congratulations again.

Okay.

One thing I'd like to add is well have two more questions and then we will sign off.

Your next question comes from Selene Becker with the Sketchmar Company.

Thank you very much, operator.

Hi, everybody.

Just a question on the service, can you just talk, Jack or Richard, how well that's been received and if the operation is going as smoothly as it would have if it stayed in New York?

What travel agents are thinking and what your customers are thinking about that?

Actually that's been terrific.

It's, the response has been terrific from the authority.

In New Jersey they have worked very hard to make it very smooth.

And so although it was a little hard to get organized in the beginning it's probably some of the smoothest turnarounds we've had up in that area forever.

And it turns out that it's just beautifully located, easy to get to.

Most of our passengers now can come into Newark Airport, which is right next to the pier, so it's one of the best piers in terms of logistics.

It's very good for people coming from Pennsylvania, et cetera.

And even people flying into Kennedy or La Guardia have found it to be easier to get to.

So it's just been a home run for us and we think it will go very well.

The travel agents seem to like it.

They very much liked it.

They like the logistics better and they are telling us that customers like it.

Can I just ask one follow up?

Do you know there's a train that goes from Penn Station in New York to Newark Airport.

Have you talked to the officials out there about a rail link to your pier?

From that train line?

No.

Jack says, that's a good idea.

But the proportion of our customers coming from Manhattan is quite small.

Okay.

So I think it's so much easier to avoid going into Manhattan that, but Jack is quickly writing down.

Okay.

Well, thank you very much for your help.

Okay.

Last question.

Your next question comes from Dean Gianoukous from JP Morgan.

Just a couple of questions, Richard you mentioned you wanted to maintain market share, which I completely understand.

At what point would somebody have to build quicker than you that you would respond?

You just look at next year, Carnival is growing a bit faster than you?

Does that trouble you?

At what point would you see a competitor starting to build and feel that you need to do respond?

Dean, I love your comment, I love the operators pronunciation of your name, but I'm not quite sure how to answer that.

I'm sure we don't look at these things in one year increments.

The fact that we have no capacity increase next year and Carnival has a big one is something we've known about and looked at I guess for years now.

And I'm not talking about, and I don't think management would look at these things on a one-year basis, I think I'm really talking about an expectation.

I think overall I expect that the whole industry grew at a very rapid rate, double-digit sort of rate during a period.

We at least did that in a fairly significant sense because we felt that we needed to do achieve critical mass for our brands.

In particular for the Celebrity brand.

That really had been a quite small operator in the business.

You've heard me say before that I don't think that was a viable position for Celebrity to be in.

It was a painful growth process to so dramatically increase the brand during there period but have I to say thank goodness we have that capacity today.

But looking forward, I at least don't see and I don't think any of the team here sees a need to grow for purposes of critical mass or anything else.

So I think my comment in terms of market share is nothing more than any prudent manager would say, that he expects over time to maintain their market position.

And I think, again, as a more general comment that that will lead us to about, not that will lead us, but that our own view is that a 4 to 6% type increase gives us both the ability to grow and earnings growth comes from both profitability of existing assets and from the growth of your capacity.

So I think 4 to 6% gives us a very good balance between the growth of our business, which we need to continue to grow earnings, and maintaining market share.

So I think they are more general guidelines than anything more specific than that.

Thanks a lot.

At this time there are no further questions.

Are there any closing remarks?

No, not at all.

I want to thank everybody for participating in the call.

And we look forward to our third quarter conference call.

Thank you very much for attending.

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

Thank you.