皇家加勒比遊輪 (RCL) 2004 Q3 法說會逐字稿

Good morning and welcome to the Royal Caribbean third 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. (OPERATOR INSTRUCTIONS)

As a reminder, ladies and gentlemen, this conference is being recorded today, Oct. 21st, 2004.

Thank you.

Mr. Leon, you may begin your conference.

Thank you, LaTisha, and good morning everyone.

I'm Luis Leon and I would like to welcome you to our third quarter conference call.

With me today is the usual cast of characters.

Richard Fain;

Jack Williams;

Bonnie Biumi; and Dan Mathewes, our Director of Investor Relations.

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

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

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

This information along with certain historical reconciliations is also available on our investors relations website.

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

Richard.

Thank you, Luis, and good morning, everyone.

As always, it is a pleasure to have this opportunity to talk with you all about our results for the quarter and about the strength that we have been seeing for both of our brands.

Obviously, we are pleased with the results and the dramatic improvement in the market that it demonstrates.

Despite needing to fill an additional 10.8 percent of capacity we enjoyed an excellent pricing environment and were able to increase our net yields by about 12.8 percent.

Net yields for the quarter have now surpassed the levels that we achieved in 1999 and 2000 and those were previously the highest levels in our Company's history.

So we clearly have gone past the effects of 9/11.

Unfortunately, the third quarter of 2004 also holds another record.

It now represents the most costly quarter in the Company's history when it comes to the financial impact of hurricanes.

I don't think anyone would ever have imagined that Florida and the Caribbean would have been walloped by four hurricanes in just six weeks.

We had approximately 13 ships and 4 embarkation ports impacted by the storm.

This affected almost 144,000 of our guests.

Our people, both onboard the ships and in the office, did an amazing job in re-organizing so many vacations during a time of such great uncertainty and they did a terrific job keeping all of our guests and the travel agents informed.

They really did demonstrate their mettle and I'd like to take this opportunity to congratulate them.

However, it is also important to recognize just how unusual this situation was.

It is the first time that four hurricanes have hit one state since 19 -- sorry 1886.

And by the way that state was Texas and it was 1886 and it was so large no one noticed.

But this situation of the four hurricanes hitting us, it was unfortunate, but I have to point out that just like last night's seventh game it was rare and it was unlikely to repeat itself.

Despite the challenges of the quarter, when we finally reached the finish line, we reported record net income of $283 million or $1.33 per share.

As you saw in our release, the outlook for the remainder of the year has also improved.

We've continued to see a lengthening of the booking curve and have been able to further improve occupancy levels and raised cruise ticket prices.

We also done very well in onboard revenue.

Currently, we expect net yields to increase in the range of 4 to 5 percent for the fourth quarter, and for the full year, that would give us a 9 percent yield improvement.

While some of this improvement is due to recovery from the unfortunate previous years, it still represents a record increase in our net yields and leaves us only a smidgen below the highest yields we have ever enjoyed.

And since onboard revenues have been such an important factor in this performance, these figures still leave us room for improvement in ticket yields before we reach 2000 levels.

In addition to the excellent financial quarter, we have remained committed to sustaining the position of our brands in the industry.

The third quarter saw Royal Caribbean International exercise its option to build a second Ultra Voyager ship at the Kvaerner Masa-Yards and this ship will be delivered in the spring of 2007, and is approximately 15 percent larger than its Voyager class predecessor.

Double occupancy capacity is about 3,600 passengers.

Meanwhile, Celebrity continues to make its mark in the premium category.

Just a couple of weeks ago Conde Nast Traveler Readers Choice Award again honored Celebrity Cruises with top honors in the premium category.

This honor from the readers of Conde Nast Traveler really emphasizes how initiatives such as ConciergeClass, Celebrity Expeditions and Cirque de Soleil are making an impact with our actual guests.

We have a lot to talk about today and I'd like to turn it back to Luis to talk in more details about the figures and the outlook.

And then Jack will give you more guidance on the operations and how the individual products are performing.

Luis.

Thank you, Richard.

Our third quarter results are summarized on slide No. 2.

As you can see, we reported record third quarter net income in 2004 of $282.5 million or $1.33 per share compared to net income of $191.9 million or 97 cents per share for the third quarter of 2003.

This represents a 47 percent improvement in our earnings.

In addition to an increase in capacity of 10.8 percent, a primary driver behind our exceptional earnings growth continues to be our ability to achieve strong revenue yield performance.

For the third quarter of 2004, gross yields increased 11.7 percent from the third quarter of 2003.

Net yields, which the Company considers to be a better measure of revenue performance increased, 12.8 percent.

This is better than our original guidance that we gave you of 10 to 11 percent in the second quarter poll in July.

We experienced healthy increases in both ticket prices and also on onboard spending.

The third quarter of 2004 is also the second quarter in a row that we have been able to report a double-digit increase in net yields.

While a portion of the increase is attributable to the prior year being impacted by the Iraq war, our net yield performance in the third quarter of 2004 has more than recovered last year's decline of 1.7 percent.

More importantly, net yields in the third quarter of this year have surpassed the levels achieved in the third quarter of 1999.

The full year 2004 is now on pace to realize the largest increase in net yields in the Company's history since we went public in 1993.

Now while we obviously place a great deal of importance on our revenue performance the more imperative financial measure is our ability to transform this performance into improved profitability.

Despite the financial impact associated with this year's hurricane season. a pod failure and other cost pressures we were able to do just that in the third quarter of this year.

Operating income for available passenger cruise day increased approximately 30 percent to $55 in the third quarter of 2004 from $50 in the third quarter of 2003.

On a year-to-date basis operating income per available passenger cruise day increased 32 percent to $44 from $34 for the same period in 2003.

Another key measure we looked at with respect to possibility is return on investment capital.

Currently, we are on track to increase this metric to approximately 8 percent in 2004 and that's up from 5.6 percent in 2003.

Turning to cost for the third quarter 2004, gross cruise cost and net cruise costs on a pro ratable passenger cruise day basis increased 7.4 percent and 6.7 percent, respectively, compared to the same quarter in 2003.

The increase in net cruise cost of 6.7 percent is greater than the original estimate that we gave you which was in the range of 4 to 5 percent.

Now this is due to three items.

First I do not think that anyone as Richard mentioned could expect or have predicted that the Caribbean or the state of Florida would experience a hurricane season like the one that we had this year.

In addition to lost revenues the hurricanes resulted in approximately $11.3 million in cost for the third quarter of this year.

Second, fuel costs exceeded original expectations by approximately $2.8 million and I assume that is not a surprise to anyone.

Finally, the third quarter of 2004 was impacted by $2.3 million in costs, resulting from the cancellation of an Alaskan Cruise for Celebrity Cruise ship due to the failure of one of its pods.

These three items amounted to approximately $16.4 million and roughly accounted for 3 percentage points of that increase in net cruise cost.

While I have mentioned this almost every quarter for the past year crude oil WGI has now surpassed $50 a barrel making the discussion of fuel even more imperative.

During the third quarter of this year, fuel represented approximately 4.7 percent of total revenues and this compares to 4.4 percent of total revenues in the third quarter of last year.

This equates to an increase of 19 percent on an average passenger cruise day basis.

Now it is important to note, however, that the increase in our price of fuel is still not increased in proportion to the increase the market has seen in the price of crude oil.

We are currently 45 percent hedged for the fourth quarter and roughly 15 that is 1 5 percent hedged for 2005.

The hedging for 2005 is heavily skewed towards the first quarter.

Still although fuel costs keep rising and although it is anyone's guess, we expect greater risk than relief in the near-term.

Also, in an effort to provide you with more timely information, you may have noticed that our quarterly report was filed at the same time as was our press release.

Though we are planning to make this an ongoing practice with our quarterly reports, our year end document is substantially more complicated and will not be filed in connection with our year-end press release.

Now because we have filed our quarter report, I won't be reviewing any balance sheet or cash flow data as part of my comments since you already have the information other than basically just to say, to emphasize the fact that we've had some very strong tax flow generation and that we have been able to reduce our net debt to total capitalization ratio from 56.4 percent at year end 2003 down to 51.6 percent at the end of this third quarter.

Now I'll make a couple of comments with regard to our cost estimates.

The system -- the Company estimates that net cruise cost per available passenger cruise day basis for the fourth quarter of this year will increase by approximately 3 percent.

The cost for the increase in the fourth quarter is primarily attributable to an increase in SG&A expenses, crude payroll expenses and also port expenses.

The increase in SG&A expenses is primarily associated with personnel related expenses and also the recently announced split of our sales force into brand-specific groups.

Depreciation and amortization for 2004 is expected to be approximately $395 million and interest expense, net of capitalized interest is expected to be approximately between $310 intent and $315 million.

During the first nine months of this year, the Company accrued income taxes associated with the final regulations under Section 883 of the Tax Code.

Implementation of the regulations is now expected to be deferred until 2005 and is currently awaiting the president's signature.

If deferred, the accrual will be reversed in the fourth quarter in the amount of approximately 4 cents per share.

Starting in 2005, the Company will accrue this tax on an ongoing basis.

I would also like to make one point on the accounting front.

As you probably know, the emerging issues have for us reached a final consensus on EITF 04-8 which require all shares that are contingently issuable under our convertible debt instrument to be included in our calculations of diluted earnings per share.

Adoption will take effect in the fourth quarter of this year and will be applied retroactively and respectively.

The impact on earnings for the year will be approximately 2 to 3 cents per share.

Now based on the assumptions above, including the impact of the reversal of the Section 883 accrual reversal and our expectations on the fourth quarter net yields increasing in the range of 4 to 5 percent management is comfortable with the consensus estimates for the fourth quarter.

Looking to 2005, we are right in the middle of the planning season and we really have not finalized our operating plan as of yet.

By our next conference call we will have a much clearer picture and we will certainly provide you with additional guidance for the full year on both revenues and cost.

However, we do feel comfortable providing some preliminary guidance and that's on depreciation amortization and interest expense.

We expect depreciation amortization expense for 2005 to be approximately $410 to $420 million.

Interest expense is expected to be in the range of 305 to 315 million.

While we have approximately $1 billion of debt coming due in 2005, you need to keep in mind that the majority of the balance will not be paid off until June.

In addition, this estimate includes our expectations that interest rates will continue to rise in 2005.

All said and done, we expect our respective interest rate will be approximately 6 percent in 2005 and this compares to approximately 5.4 percent in 2004.

Now it is way too early to comment more specifically on either where we expect revenues for 2005 to be or other expense.

Obviously, inflationary pressures will be a factor and we will continue to work to mitigate these.

However the recent dramatic run-up in fuel cost is changing our view on what is likely for next year.

Although the price at the pump for the typical type of fuels used by the Company has risen during 2004, it has not risen as rapidly as has the price of benchmark crude oil.

As a result the crude oil prices remain at their current level and if the relationship between crude oil prices and at pump prices shift towards previous levels the Company would incur substantial cost.

While we are subject to market prices associated with fuel, we could also continue to look at ways to mitigate these rising costs.

One such example is our hedging policy.

We always look for opportunistic times to hedge our fuel consumption.

Additionally we also continue to focus on utilizing less expensive fuel to be more opportunistic as to where we refuel our ships and utilize less expensive grades of fuel.

We will continually evaluate ways to reduce our fleet's fuel consumption through identifying fresh practices throughout our entire fleet.

Also the Enchantments of the Seas is scheduled to be stretched in the spring of 2005 with a new 73 foot section -- midsection.

In connection with this project the ship will be out of service from May until early July.

Now in addition to lost revenue associated with a decrease in available passenger cruise days, the Company estimates the costs associated with this project that are not capitalized will amount to approximately $10 million.

So as you look at the cost picture for next year, and as you build your models, you should probably take all of these variables into consideration.

Slide No. 3 shows our liquidity as of September 30th, 2004, was $1.7 million.

The Company's $1 billion revolver continues to remain undrawn.

On slide 4 you can see the Company estimates capital expenditures for 2004, 5 and 6 will be approximately 700 million, 400 million and 900 million, respectively.

These estimates include our current firm orders for the two Ultra Voyager ships that Richard had mentioned which are scheduled for delivery in the second quarter of 2006 and 2007, respectively.

Slide No. 5 and No. 6 show 2004, 2005 capacity information and our 2004 fleet deployment, respectively.

At this point I will ask Jack to give an update on bookings (indiscernible).

Jack.

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

As with the past calls, I will spend the next few minutes discussing the general tone of both the bookings and the pricing environment, and then provide some highlights at this time by product for 2005 if you look out into next year.

Although as we have already mentioned our visibility into 2005 at this time remains a little bit somewhat limited.

In terms of the booking activity, demand continues to outpace last year and really continues to exceed our expectations -- exceed our expectations as it has done throughout the entire year.

For the remainder of 2004 we now have 16 percent fewer available state rooms to sell then we did same time last year.

So even though our absolute bookings for 2004 levels are somewhat now below last year, they are still very very strong, relative to the available unsold inventory in 2004.

Given the strong demand, we continue to be in a position that allows us to continue moving our pricing upwards and despite the price increases that we have been taking throughout the year our conversion rates are still very very solid and well above same time last year.

We have also seen a continuation of the bookings curve moving further out.

You can see this in the final slide on the website.

During the third quarter 32 percent of our bookings were for sailings inside of 90 days.

The comparable number for third quarter 2003 was 36 percent.

I think this is just another confirmation that our strategic pricing policy just having realistic pricing early into the marketplace is having the desired effect that we wanted it to have.

2004 is quickly coming to a close.

Our total book load factor for Q4 is well above where we were same time last year; and we continue to book APD above same time last year and given this very favorable combination we now forecast to close 2004 with a net yield improvement of approximately 9 percent which as Luis mentioned will be one of the best years in the Company's history.

Turning to the pricing front.

This also continues to be very very good news.

Pricing remains solid and well above the discount seen last year primarily caused by the challenges of the war in Iraq.

Pricing has consistently now been at a premium at the same time last year since September 2003, well over a year now.

So there's very very good sustainability it looks like in the pricing environment.

As I mentioned to you on our last call, the strength in pricing has continued even as we moved beyond the annualization of the direct Iraq war impact in March and April of last year.

The pricing strength as Richard mentioned is impacting both of our brands very favorably and due to the solid demand I don't see any reasons that pricing won't remain stable and above same time last year's levels as we close out 2004 and move into 2005.

While we do not have enough visibility yet to provide any specific yield guidance for 2005, given the current at my end are very very early indications which point to a positive yield environment for 2005 and certainly for the first quarter of 2005.

Let me now give you some very brief highlights of byproducts for your 2005 capacity out there.

Seven Night Caribbean will represent 39 percent of total capacity of 2005.

The 5 percent decrease in year-over-year capacity right now our book load factor is well ahead of the same time last year and to book APD is also higher than same time last year and well above where we finished in 2004 or where we forecasted to finish in 2004.

Shore Caribbean is going to represent 12 percent of our total capacity.

That's about a 3 percent increase in capacity year-over-year.

Book load factor right now ahead of last year and APDs -- although lower than the same time last year still well above where we finished forecast to finish in 2004.

We will be adding about 21 percent capacity to the Long Caribbean and that will represent 9 percent of our total capacity in 2005.

Book load factor, again, ahead of same time last year.

The story which you're going to hear on most of these product lines and book to APD ahead of same time last year and well above, again, where we forecast to finish in 2004.

Alaska will represent 8 percent of our total capacity about a 5 percent increase year-over-year.

Again book (indiscernible) right now ahead of same time last year in the double digits; book to APD is also up.

We had a very strong Alaska 2004 and, despite the strength, in 2004, we do at this point expect to have some marginal improvement in yields in Alaska in 2005.

Bermuda. 4 percent of our total capacity again is strong 2004 that will increase by 9 percent year-over-year in 2005, primarily to adding the Voyager and the Grandeur voyages into Bermuda next year.

Book load factors well above where was at the same time last year right now and APDs are also up over the same time last year.

Panow (ph) is 5 percent of our total capacity for 2005.

That represents a 12 percent change in year-over-year capacity; again book load factor right now well above where we were same time last year with APDs just slightly ahead of where we were same time last year.

Mexico will represent 8 percent of our total capacity.

That will be an 11 percent decrease in capacity year-over-year.

Book load factors again very strong right now; however, the APDs are just slightly behind where we were last year and about flat with where we spend maybe or forecast a finish in '04.

Europe was such a strong story for 2004.

We had an absolutely sensational season in Europe.

Next year it will represent 21 percent of our total capacity year-over-year; book load factors quite a bit ahead of where we were same time last year right now.

Our APDs are higher than they were same time last year, despite a very very strong yield performance in 2004.

We are expecting that we will also see some nice yield improvements in Europe in 2005.

So that gives you some brief look at 2005 by product mix.

I think at this time, we will turn it over to the audience for the Q&A.

(OPERATOR INSTRUCTIONS) Robin Farley, UBS.

Couple of questions.

One is, you mentioned that the yields had recovered and I wondered if you could give us a little more quantified about the rooms filled to recover ticket price and it looks to us like it should be 8 or 9 percentage points more room to recover in ticket price.

Does that sound close to what you would you calculate it as?

Yes.

What we're looking at in terms of ticket prices looking at about 7.5 percent or so that we still have to recover.

You look at it on net revenue basis in terms of our record year we are looking probably about 2 percentage points.

That's about all.

And you mentioned for Q4 that there were some crew payroll issues.

Is that something you expect to continue into '05?

No, a lot of these things that we looked in terms of affecting our basically contract they can do at different times in terms of union contract with the crew.

So it's just a timing issue.

And that actually was in our earlier -- when we had sent out earlier information as to what we expected our cost increases to be that was included in it.

So the variance was all due to the exceptional certain circumstances talk about.

Does that anniversary at some point?

Those crew payroll increases?

I think that the contracts are my understanding -- maybe Jack can correct me on this but I understand the contracts are staggered.

So it comes in at different times.

Yes.

That is correct.

We have a number of contracts with the onboard ship personnel and they are staggered throughout the year.

They come into effect at different times of the year.

We have them for the (indiscernible) in the region and so on and so forth but they are not on a single anniversary date, Robin.

Just clarify two things.

I don't know if you (inaudible) for Q3 and then also for fuel for next year you mentioned what percentage hedged you are.

Can you give us kind of an average price that you're hedged at at the moment for next year?

We don't really give information in terms of the pricing that we do our hedges.

We haven't really made that a practice.

So we are (MULTIPLE SPEAKERS) we are 50 percent hedged and a lot of that is skewed towards the first quarter.

On your question of the air sea mix -- air sea mix this quarter was 11 1/2 percent and that compares to about 13 1/2 or so percent the last year.

Jill Krutick, Smith Barney.

Luis, I recall that you thought that there might be some opportunities to manage costs even better at Royal Caribbean.

Now that, obviously, the fuel prices have been really staggering but beyond that do you sort of envisioned some areas where you could tack on the cost line?

Secondly if you could talk about primary cash uses, just given how the -- specific debts to cap goals are and when you start to return the cash to shareholders and then finally if you could just give a sense of how you think about long-term secular pricing in the cruise industry?

Just given the price differentials to other land-based vacation options?

That's a lot of questions.

In terms of opportunities for cost, I will say this.

We are in the middle of our planning season.

We have had on our next conference call what we will do is we will go through some of our initiatives with you.

I think probably it's not appropriate to do it this time because we don't have them all fully planned out and laid out; and it would probably be unfair to go through those at this point.

But both Jack and I will probably go through those with you in our next call.

On your second question, regarding our cash usage.

As you know, our objective is to get to investment grade so to get to the investment grade, the utilization of cash is going to go towards the repayment of debt and so we will be applying that.

And on your third question, I think I'm going to go ahead and ask Richard to answer that.

I'm glad you asked it, Jill, on the impression of long-term secular pricing.

I think what you are seeing is, as we had said for many years, cruising still represents the ultimate vacation value and the fact that cruising has done so well during the period of enormous capacity increases demonstrates how it's resilient in bad times; but I think it really does, also, lead you to believe that in good times it should go even better.

And I think we're beginning to see that this year as we go forward with more moderate capacity increases.

I think the long-term secular growth is good.

It's also not only this question of the capacity increase it's also a question of getting our message across.

And I think that we are as an industry doing a better job in getting our message across; getting new people to come to it.

We are very proud of our campaigns here (inaudible) the Caribbean campaign, the ad campaign is very effective in overcoming many of the myths that deal with cruising.

And I think that excites a lot of people and I think on the Celebrity side, you look at all the new initiatives that have gone there.

The publicity that they're generating and the way they relate to so many different needs of people on the flexibility that is apparent in all that.

We think that will help continue to make people understand better how good a deal cruising is in general and so I think the long-term, secular pricing to use your term, is very positive.

Bob Simonson.

William Blair.

Two questions.

The first one.

Could you give -- elaborate a little bit on the 10 million in estimated cost for the operating costs that are exclusive of what gets capitalized on the Enchantment stretching?

What does that include?

The accounting rules have changed significantly in terms of what you can capitalize and what you cannot capitalized.

I could probably sit here for about half a day to get to respond to your question but in a nutshell what it is is anything that is considered a revitalization in a ship, anything that adds longer life to it, anything that is something can be capitalized.

And anything that pertains to things like refurbishment has to be expensed.

For example for changing the carpet, things like that, those things have to be expensed.

So that's kind of the difference.

Revitalization is capitalized; refurbishment is expensive.

The ship is going to be out for what?

About 2 1/2 months or something?

Yes, roughly, I think.

How much of the 10 million is just continuing to pay the captain and other running expenses that you would have if the ship wasn't on service?

Is it a chunk of that or is it mostly due to something noncapitalized?

It's very very very small.

I mean we have it's just a whole laundry list of different things I can't give you the list of everything that is involved but that would be a very very small portion.

The second question is, can you tell us how many shares are going to be in the fourth quarter outstanding?

On a fully diluted basis what they might be for the full year and then an estimate for next year?

Roughly about 200 million.

Assuming a loss.

If it becomes accretive by converting them, then you don't do it in the fourth quarter but it hits the full year --

I tell you, you are getting specific on your questions.

Could I ask you to call Dan after the call?

And he could probably go through those in a little more detail because you're going through a lot of numbers because there's a lot of ifs -- if you have a loss; if you don't have a loss and I don't have those numbers in front me.

Sure.

Bob, actually, you touched on some interesting points of this new accounting rule.

Because it doesn't impact the fourth quarter, because it's not accretive and because the (indiscernible) doesn't come into place until approximately the end of the year.

So then you go back and you restate for the whole year and that's the way we take the calculation.

And retroactively.

And retroactively.

So we actually have to go back and restate prior years too.

I think Dan can give you more detail.

It's a little complex.

Assia Georgieva, Stanford Associates.

Good morning and congratulations on an excellent quarter.

I have a couple of questions.

First of all, and Jack maybe you can help me with this, you are splitting to 2 sales forces for each brand and it has been some time now that you've done a lot of work on Celebrity.

Despite the excellent product it doesn't seem to have generated as much of a premium as it potentially could.

Can you give us a progress report if you will on this brand?

And sort of the time frame that you expect the 2 sales forces will begin functioning completely and independently.

Sure I would and you're absolutely right.

We have done a lot of work on Celebrity and we actually made a lot of progress in advance in that brand.

It may be today without question the best premium brand and the category today as Richard mentioned in his opening comments.

That's again validated we think by the Conde Nast Readers Choice Poll Awards two weeks ago which was the second year in a row voted Celebrity the top of their category.

There's a lot of things that we have done to reinvent the brand and get it to where it is today.

And we're quite pleased with all the metrics that we've seen in terms of unaided brand awareness; on board overall vacation; evaluating from our customers at a five-year high; other internal research shows that the product is being received by the customer.

It's really in good shape right now.

The trade is much more excited about the brand and understands what the brand stands for and is doing a really good job right now promoting the overall Celebrity brand.

Split sales force actually went into place on Oct. 4th, and I think it is going to benefit not just the Celebrity brand but also the World Caribbean International brand who for the last five or six years has been the single largest brand in the industry without its own sales force.

And I think the Celebrity brand where we've taken it today is right now ready to have its own sales voice in the trade.

Celebrity is somewhat more independent given the situation in the marketplace right now.

On trade support it gets more of its sales through the trade.

And so to have a fully dedicated voice completely focused on selling the Celebrity brand and what it offers today I think, personally, is going to have a significant impact on the brand's overall performance.

Having said that, a year and a half ago I would've told you that we must be patient and wait for some traction and we'd begin to see an improvement in the APDs and yields.

We are already seeing that but we had a very big good year in terms of yield performance in the third quarter as we mentioned.

Both brands had excellent yield performance.

But I can state Celebrity's performance did outperform its sister brand, Royal, in the third quarter as it did in the second quarter.

We are beginning to see some real good traction on the Celebrity brand and yet we still have a ways to go in my opinion to be able to say that we really optimized and maximized where the yields can be on that brand.

But I think we're doing a lot of things right.

Expeditions, Cirque de Soleil, those types of things have had a tremendous impact on the brand and have resonated well not only in the trade but also with the consumer.

So I think we're on a good road right now with Celebrity.

Another question I have was, on board your spend has gone up significantly and has helped drive yield improvements not only at Royal but also at Carnival.

Can you give us a little bit more detail?

Is it sales of stores?

Is it casinos?

Is it beverage, is it (indiscernible)?

Is it retails?

Is it the combination of those?

You're right.

It is a combination of all of those things, and we did see very good strength with on-board spending with both brands, particularly on the World Caribbean brand a lot of initiatives in place to make that happen.

Some of it even relates to better supply chain, management on board the ships, software we put in is helping us improve the margins in the beverage area on onboard spend.

We've introduced new offerings on the shore excursions site for both brands it's had a very positive impact.

A lot of things -- spa (indiscernible) Celebrity that, again, have had an impact this year as well in the casinos.

We've swapped out a number of our slot machines, put in more advanced machines that are available in the market today that increase play and also increase (indiscernible).

So it's really across the whole spectrum it seems, that has been one of the more bright spots that we have seen throughout 2004.

We got some good plans as we move into 2005.

Both brands are getting much more creative in the onboard offerings.

And we really beginning to see that impact into the onboard spend.

Brian Egger with Harris Nesbitt.

Sounds like Royal Caribbean is at the point where pricing gains are accounting for most of your yield gains.

Occupancy is close to peak here.

I wonder if you have any feeling for the margin outlook for 2005, to the degree that you can push prices against (indiscernible) factors and presumably much of that pricing is going to flow to the bottom line.

Do you have any initial feel even general for the direction of gross operating profit margins for next year?

I'll just comment quickly, Brian, on the issue of pricing and occupancy.

The yield improvement in 2004 has been driven by both rate and occupancy improvements and we are pushing I think the edge on the occupancy side.

And will not get that much benefit in terms of occupancy in 2005.

And have to rely more upon the rate build to see the yield improvements and as I said in my comments it's much too early to give any specific guidance in that area until we get through the white period or well into the white period.

I'm unsure where to have a real clear understanding of exactly how that is going to unfold in 2005.

But having said that and given our very very early indications I think there was (indiscernible) to positive yield environment in 2005 and I think that's good.

But having said that, if we don't have a real clear picture yet and we don't yet on the whole revenue side of the cost side it would be just speculation to even begin to try to give you any idea we think in terms of profitability.

Yes and I think, Brian, as (indiscernible) revenue side and we are unfortunately similarly unable to predict the cost side.

I think we particularly pointed out where we think the oil cost significant risk vis a vis will be what we or you thought of previously.

Understood, yes, sounds like apropos of your previous comments about I think 7 points versus peak ticket fare to recover that but certainly not in the neighborhood of encountering any resistance on pricing.

Got a ways to go there but I understand your point about the cost side.

Tim Conder with A.G. Edwards.

My congratulations on continued good execution.

A couple of items here.

Jack, potentially, on Celebrity.

You've got a couple ships out there that are Zenith and Horizon getting a little older.

And could we see, given the success you're starting to see with the new branding campaign and also potentially as a counter to what Holland has done -- Can we see your next build potentials?

Would it be logical to assume that Celebrity may be the next candidate for new ships?

And then, Luis, on fuel.

To follow-up on a previous question, given where you're currently hedged, is there any type scale you can give us to dollar increase in bunker, dollar increase in crude?

Roughly what that would equate on in earnings per share basis?

I'll comment quickly on the Celebrity issue in terms of future new deals in the Zenith Horizon.

There's no question as you mentioned that Celebrity is starting to strengthen and really takes (indiscernible) to the marketplace and there is every reason to believe it is a candidate for another new build effort and obviously we don't have anything to announce now but we're very very pleased with the progress of the Celebrity brand and we are evaluating the next few build series for that brand.

With regard to fuel.

That's really a tough one and it's a tough one because we have seen the price of crude oil really rise but then we have seen the price of other fuels rise not to the same magnitude.

It's difficult to give you an answer to that and it's because we buy so many different grades of fuel and what I can tell you is we do by 7.5 million barrels of fuel a year.

So obviously a dollar increase in our cost of fuel would equate to $7.5 (inaudible).

Now as we look at the whole picture there's also things for example that we do we try to mitigate the increases by hedging.

We mitigate them also by using different grades of fuel or lower grades of fuel.

And, then, we also try to buy opportunistically at different ports.

I mean for example we have some ports that will be $20 a metric ton difference between the same fuel.

So we have to fine those opportunistic areas.

So to give you an answer to say that this is going to be this kind of an impact to earnings per share is really difficult to do that.

And then maybe also a question here for you or if Bonnie is there.

You have one of your convertibles that can be forced in February.

Assuming you follow along that path would you then potentially indirectly use a way as your cash to repurchase some of those additional shares that may be issued or would that go directly towards retiring remaining amount of debt?

And then once you get to investment grade look to refi a substantial portion of the debt that's left.

Its Bonnie.

I think Luis is pretty clear that our cash flow is scheduled to go to pay down of the debt in $.5 billion next year.

So there is quite a bit of that being paid out of our cash barrel.

With respect to convertibles and, obviously, we will look at the factors of the marketplace and make decisions that make sense for us at the time those opportunities present unto ourselves but we haven't made any (inaudible).

David Anders, Merrill Lynch.

Felix Hendricks with Lehman Brothers.

It's Felicia.

I have a fuel question but I'm going to leave that one second.

Jack --

Felicia, before you continue I want to mention here that this will be the last question that we take will be yours.

Jack?

On the booking curve.

You mentioned that it is now 32 percent of the bookings are inside 90 days vs. 36 percent last year.

I'm wondering what is the normalized rate?

Now I understand the normalized rate might be different because travel has changed, potentially permanently.

So I'm wondering if you agree that travel might have changed travel patterns?

And if so what do you think a normalized booking curve pattern would be?

When we think about 32 percent I'm just trying to think about what we should be benchmarking that against and then, Luis, with the fuel.

Two quick questions.

One is is it still in the range for 5 1/2 to 6 percent through the year of revenues?

I would assume that (indiscernible) think it's more towards the high end of that.

What I really want to know is if it will go over that and then for next year what do think it will be for revenues?

And then in terms of some of the cost mitigation that you've been doing you have talked about using light cycle oil to potentially replace some of the marine gas oil cost.

I'm wondering how much if the ships that you see MGO -- how much of them have you replaced with (indiscernible)?

In terms of the booking curve in the 32 percent rate that I mentioned in my comment.

We are getting back to the 1999 2000 area.

We are somewhere between 30 to 35 percent of our bookings are inside 90 days.

In terms of that benchmark I would say that we're getting pretty normalized.

But even having said that, when we came out of 9/11 and we saw bookings in the higher percent much closer in the 90 days regardless of what the normalized percentage might be, you have to have a revenue management team that captures and understands that booking curve and is pricing against it and optimizing the revenue against whatever that curve might be.

I much prefer it at 32 percent.

There's no question about you get more visibility (inaudible) coming in earlier and you can do a lot more with pricing.

But even as we manage ourselves out of the 911 impact where clearly there is a a definite impact on the purchasing behavior of our consumers.

I think we did a pretty good job in terms of optimizing revenue during that time when we were clearly in a period where the curve was not normalized at all.

But I think it's 32 percent.

We're pretty normalized now and I'm pretty pleased with that in terms of the curve right now.

If I could just add something anecdotally to that.

One of the things that we do see happening in the market is because the market is better and because people are anticipating other people to act.

People are beginning to worry about getting not only on the cruise but getting precisely the cabin that they want?

And all cruise lines have limited numbers of balcony cabins or suites or grand suites.

And so you actually are seeing a phenomenon that we used to see more of, which is people actually saying I have to book early or I'm not going to get the cabin I want.

So there is -- when you talk about an equilibrium write you can't look at the forward booking curve as independent of, in effect, the general strength of the market.

And so as the market has begun to realize that cruising has strengthened, this phenomenon, I think is part of the reason we're back to, as Jack said, the level that we saw in, again, the last decade.

Luis, I guess, is going to answer as the last part.

I'll answer the one regarding the fuel.

Our fuel cost are expected to be about 5 1/2 to 6 percent of gross revenues.

So that is fairly accurate.

With regard to the LCO and MGO, we still -- (inaudible) still a small portion of the amount of fuel that we use and part of the reasons for that is that it is not that difficult, we can't find that type of fuel everywhere so for example in places like Alaska we have difficulty finding it so we have to use MTO.

Also we're making the transition to it relatively slowly.

We use it more in the Caribbean, it's more accessible in the Caribbean.

In Europe, I think there's two ports that we go to that sell it.

So we are opportunistically, obviously, trying to find places where we can do that but it's still not readily available in all the places that we go.

So right now it's still a small part of our fuel consumption.

But we hope to increase that over time.

Richard, the Ultra Voyager ships?

Are they going to be using gas turbine engines that is this fuel?

No the Ultra Voyager ships use --

(MULTIPLE SPEAKERS) -- yes the Ultra Voyager.

I'm sorry.

Right, the Ultra Voyager.

They are going to use the same engines, diesel engines that we are using on Voyager which are very efficient.

In fact that's part of the raison d'etre of the larger ships.

We use literally exactly the same engine room.

And although the ship will carry 15 percent more passengers, it uses almost precisely the same amount of fuel.

So you get an economy of scale on the fuel as well as (inaudible).

Okay, well thank you, everybody, for attending our conference call and we look forward to our next conference call early next year.

Thank you very much.

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

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