皇家加勒比遊輪 (RCL) 2004 Q4 法說會逐字稿

Good morning and welcome to the Royal Caribbean fourth 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, February 1, 2005.

Thank you.

Mr. Leon, you may begin your conference.

Thank you, operator, and good morning, everyone.

I'm Luis Leon, Chief Financial Officer, and I would like to welcome all of you to our fourth quarter conference call.

Joining me here today are Richard Fain our Chairman and CEO;

Jack Williams our President and COO;

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

As is normal course in these presentations, I need to refer you to the first slide of our presentation which can be found at our website RCLinvestor.com.

Some of the comments that we're going to 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.

Before I start going through the details concerning the quarter's results, Richard will provide a brief overview, then Jack will follow me with a review of our operating performance and outlook and then, following him, we will open the call for all of your questions.

Richard?

Thank you, Luis, and good morning, everyone.

As you can see from our release this morning, we're presenting some good news about the year, tempered with bad news about the quarter.

On the plus side, I'm extremely pleased that we can report on an exceptionally healthy year that produced earnings per share up 59 percent, despite hurricanes and other challenges.

I'm especially pleased by the strong revenue improvement, the strength of our brands and of our marketing is ultimately the strongest driver of our success, and these areas have performed brilliantly.

Over the last several months, bookings have provided powerful evidence that these efforts continue to bear fruit.

Bookings during these several months have been very good, and the 2005 wave season is off to an excellent start.

In fact, we felt good enough about these figures and these bookings to feel comfortable predicting yield improvements in the range of 5 to 7 percent for the year.

While this is extremely satisfying, it's dampened by our disappointing results for the fourth quarter.

Last October, we felt quite confident about the forecast we gave you in conjunction with the third quarter earnings call.

Unfortunately, soon after that call, we started to experience some negative impacts.

The biggest surprise was the sudden increase in our fuel costs.

As we described in some detail last October, our at the pump prices for fuel did not rise during 2004 nearly as fast as did the price of crude oil.

In fact, our actual prices, while growing, did so gradually throughout the year, and had been remarkably linear in their trends.

Unfortunately, almost as soon as we hung up from that quarterly conference call, the at the pump price started spiking up.

This was particularly a problem for the price of our MGO fuel that is used in our gas turbine chips.

There are other items as well, which Jack and Luis will comment on further in a few minutes.

One interesting one was onboard revenue.

This continues to be a very successful area for us and it was up again during the fourth quarter.

These revenues were in fact so good during the first nine months that we got spoiled and we expected the continued extraordinary level during the fourth quarter.

But our actual numbers turned out to be merely excellent, and not extraordinary.

By itself, this wouldn't have been significant and we do believe it was an anomaly impacting primarily the casino, actually, and not a change in direction.

But combining with fuel and other factors during the quarter, it was very disappointing.

All these cost issues are a prime focus for 2005 and Jack and Luis will be talking more about them shortly.

Turning to the demand environment, we ended 2004 with a record net yield increase of 9.2 percent.

In a few minutes, Jack will be giving specific market data but we're seeing strong demand across both brand and across virtually all products.

Based on our net yield guidance of up 5 to 7 percent, we expect to end this year, 2005, with net yields that are actually in excess of our historical peak year in 2000.

I also believe that we need to keep the relationship between revenue and costs in perspective.

While we're disappointed in some of these cost issues, we need to remember that a number of these costs have been incurred in a successful effort to generate improved revenue.

The increased investment in our sales force, the new initiatives at Celebrity, the revitalization of the Sovereign and the lengthening of the enchantment all increase costs in the short term but help us in the long term.

We believe these are all examples of actions that have a terrific ROI, and we will continue to evaluate them on their bottom line impact, without separating them so much into their revenue and expense components.

At the same time, we believe that we've already undertaken the major new revenue initiatives that we had intended to take.

And we expect to focus more heavily on the expense side of the equation during 2005.

Looking forward, we're overall pleased with our results for 2004, and we do not believe that even this is the finish line for yields.

On the contrary, the continued strong yield performance of our brands gives us every confidence that the best is yet to come.

With, that I'd like to turn this microphone back to Luis and ask him to provide more information about the figures.

Thank you, Richard.

Our fourth results are summarized on slide 2 and our full year results are summarized on slide 3.

As you saw in our press release, our fourth quarter results felt short of our original expectations.

Net loss for the fourth quarter of 2004 was 25.8 million, or $0.13 per share.

This compares to a net loss of $20 million, or $0.10 per share in the fourth quarter of last year.

As we indicated in our last conference call, the fourth quarter of 2004 includes income of $8.1 million, or approximately $0.04 per share, associated with the reversal of an income tax accrual for section 883, which has been deferred to 2005.

Fuel costs were the primary driver of the additional losses.

During the fourth quarter of this year, of 2004, fuel represented approximately 7.1 percent of total revenue, and that compares to 5.9 percent of total revenues in the fourth quarter of 2003.

This represents an increase of $16.3 million, or 25 percent, per--on an available passenger cruise day basis.

Our largest increase in fuel costs that we have seen in any quarter this year.

As we have mentioned in the past, prices at the pump sometimes lag the prices of crude oil.

Our fuel prices peaked during the month of November and, while we saw these prices begin to decline in December, they did not decline in line with the change in crude oil.

During the quarter, crude oil hit highs in early October in excess of $55 per barrel, but then declined thereafter, and ultimately ended the year at $43 per barrel.

Marine gas oil, which is MGO and is also the fuel that we utilize in our gas turbine engines, or approximately 30 percent of our fleet, was a primary driver of our fuel increase.

For the quarter, MGO rates increased 20 percent from the third quarter of this year and 66 percent from the fourth quarter of last year.

Intermediate fuel oil, which is our diesel oil experienced an increase of 6 percent from the third quarter of 2004 and 15 percent from the same quarter of last year.

For the full year, fuel expenses represented 5.5 percent of revenues which compares to 5.2 percent in 2003, or an increase of 16 percent on an available passenger cruise day basis.

From a metric ton perspective, excluding the benefit of the swaps, our average cost increased 18 percent in 2004 from 2003.

Net cruise costs for the fourth quarter of 2004, per available passenger cruise day basis, increased 6.5 percent compared to the same time last year.

If you exclude fuel, this increase would have been 4.5 percent.

Consistent with our original expectations and guidance, the other main drivers of the increase in net cruise costs were crew payroll expenses, SG&A, and port expenses.

Beyond the original expectations, the fourth quarter was also impacted by higher-than-expected food costs, and the certain -- and the timing of certain repairs and maintenance expenses.

For the full year, net cruise costs increased 5.6 percent and, excluding the fuel costs, they were 4.5 percent.

Fourth quarter 2004 net yields increased 4.4 percent from the prior year.

This growth was in the range of the original expectations and showed healthy increases in both ticket prices as well as onboard spending.

More importantly, however, net yields in the fourth quarter of 2004 have now surpassed the levels achieved in the fourth quarter of the year 2000.

This achievement and the return of our Q4 occupancy above 103 percent is a clear indication of the continuation of strong demand for our product offering.

Now, as you can see on slide 3, revenues for the full-year 2004 grew by approximately 20 percent through a combination of an increase in capacity of 10.3 percent and record growth in in net yields of 9.2 percent.

More importantly, however, this performance translated into improved profitability.

Despite the financial impact associated with increase in fuel costs, hurricanes, and other general cost pressures that we experienced; we were able to increase operating income on an average-- on an available passenger cruise day basis by 30 percent from-- to $35 from $27 in 2003.

Our improved profitability also drove an increase in return on invested capital to approximately 8 percent in 2004, from 5.6 percent in 2003, and helped to reduce our net debt to total capitalization from 56.4 percent to 51.5 at the end of 2003 and 2004, respectively.

Earnings per share for the year increased approximately 60 percent to $2.26 from $1.42 in 2003.

During the fourth quarter, we also adopted EITF 04-8 which requires that all shares that are contingently issuable under our convertible debt instruments be included in the calculation of the diluted earnings per share.

Including the convertible securities in this calculation of earnings per share, EPS for 2004 was reduced by approximately $0.08.

Because we've had numerous questions related to the calculations of EPS under this new rule, we have included a slide on the subject.

So as you can see, slide 4 illustrates the calculation for each quarter and for the full year of 2004.

Taking a look at costs-- our cost outlook, I'd like to make a couple of comments about our estimates for 2005.

During the year, we're going to be undertaking several strategic initiatives that will increase our SG&A expense in the near term but will ultimately benefit the bottom line.

The most significant of these strategic initiatives is an additional investment in our European sales and marketing team.

The European market is the second largest cruise market and we consider our ability to strengthen our position in this market a strategic imperative.

In addition to developing our European passenger base, this investment will work to strengthen our position in Europe with the U.S. passengers.

Additionally, you can recall that we will-- that we split our sales force during the third quarter of 2004 and, as such, the expenses associated with the-- with sales force will not be annualized until the third quarter of 2005.

We currently estimate that these initiatives, combined, will amount to approximately $20 million in additional SG&A costs for 2005.

But again, as Richard mentioned earlier, these are investments in the future that will have costs today.

They should have benefits tomorrow.

On an accounting front, the FASB issued FASB 123, share-based payment, in December of 2004.

The pronouncement, which we expect to adopt in July of this year, requires the expensing of stock options.

We currently expect this change to negatively impact SG&A in the second half of the year, by approximately $5 million in 2005; an expense which we did not have in 2004.

Once again, one of the most difficult expenses it to predict is fuel.

As we've discussed in our previous conference calls, the relationship between the price we pay at the pump and crude oil changed during 2004.

During 2004, average crude oil increased approximately 34 percent and during this time-- the same time period, average price of the fuels that we consume increased only 18 percent.

Because of the unpredictability of fuel prices, for 2005 we are assuming that the yearly average price of fuel at the pump will be the same as the yearly average price at the pump in 2004.

I think that it's also worth noting that January's price of fuel is running a little bit higher than that average.

On a cost per APCD basis, this will translate into an increase in fuel costs.

While we continue to look for opportunistic times to hedge our fuel consumption, we have less consumption hedged in 2005 than we did in 2004 and at less favorable rates.

In 2004, we hedged approximately 32 percent of our exposure.

And for 2005, we are hedged approximately 15 percent, which is most heavily skewed towards the first quarter of the year.

Currently, we expect that this hedging difference will account for approximately $16 million in additional fuel cost.

Our consumption for 2005 is expected to be approximately 7.4 million barrels, or 1.1 metric tons.

As a percentage of revenue, we estimate that fuel expenses will be in the range of 5.5 to 6 percent; which represents an increase of approximately 8 percent per available passenger cruise day.

In addition to increases in SG&A, and fuel expenses, we expect overall inflationary pressures especially with respect to food.

As you might expect, we are making every effort to mitigate these increases and have targeted approximately $50 million in cost savings initiatives.

Some examples of these initiatives include the implementation of more sophisticated inventory systems, initiatives to lower manning costs, the reflagging of 6 ships to the Bahamian registry, and our ongoing ship benchmarking/best practicing initiatives.

While each of these programs are not individually expected to yield tens of millions of savings, in aggregate they should offset some of the inflationary pressures that we are facing.

Many of you had indicated to us that we should have a natural decrease in 2005 costs because 2004 included approximately $11.3 million related to the impact of hurricanes.

It's important to remember that these savings will be mostly offset by costs associated with the stretching of the Enchantment of the Seas, in spring of 2005.

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

In addition, to lost revenue associated with the decrease in APCDs, the Company estimates costs associated with this project that are not capitalizable, that there will be approximately $10 million.

Now, based on the assumptions that we've provided above, we estimate that net cruise costs per APCD for 2005 will increase in the range of 2 to 3 percent.

The timing of marketing spend and the impact of the increased fuel costs are expected to most affect the first half of the year, with the largest increase expected in Q1.

As a result, we expect net cruise costs to increase approximately 7 percent in the first quarter of 2005 and 3 to 4 percent in the second quarter of 2005.

We currently expect net cruise costs to be flat to slightly down in the second half of the year.

It's also important to note that we do manage these costs on a yearly basis and one should not be concerned about certain spikes in individual quarters since we -- a lot of those are timing issues and-- and we must look at the year as a whole.

We also expect depreciation and amortization expense for 2005 to be in the range of 410 to $420 million.

Assuming that our effective interest rates increase from 5.4 percent in 2004 to 6 percent in 2005, interest expense is expected to be in the range of 305 to $315 million.

Also, as we mentioned in our last call, income taxes associated with the final regulations of section 883, which will go into effect in 2005, will impact us approximately $0.04 to $0.05 in 2005.

One additional item to take into consideration is the adoption of EITF 04-8 that I mentioned earlier.

We assume the potential common shares associated with our convertible notes are dilutive to earnings in 2005.

Now, as a result of that, we expect 2005 weighted average shares outstanding to be approximately 237 million.

This has the effect of reducing our earnings per share estimate by approximately $0.14, just by the additional count.

Now, based on these assumptions, management expects 2005 earnings per share to be in the range of $2.70 and $2.90.

First quarter 2005 EPS is expected to be in the range of $0.50 to $0.55.

Moving to slide number 5, that shows our liquidity as of December 31, 2004, which was $1.6 billion.

The Company's $1 billion revolving credit facility still remains undrawn.

As most of you are aware, tomorrow is the expiration of the put associated with our February, 2001 Lions.

The deadline for bondholders to notify the Company was January 29 and we did not see any significant activity with respect to these convertible bonds.

As a result, we'll be utilizing all this excess cash to pay down debt shortly after the day of the put.

On slide 6, you can see that the Company estimates that capital expenditures for 2005, 6 and 7 will be approximately 400 million, 1 billion and 1 billion; respectively.

These estimates include our current firm orders for the Freedom of the Seas, and also a second Freedom class ship which are scheduled for delivery in the second quarter of '06 and '07, respectively.

Slide 7 and 8 shows our 2004/2005 capacity information and also our 2004 fleet deployment.

At this point, I'd like to ask Jack to give us an update on bookings and also our outlook.

Jack?

Okay.

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

I will spend the next few minutes discussing the general tone of bookings and pricing, primarily as it relates to the current wave season that we're in.

I will then provide you, as I always do, with some highlights by major product for 2005.

As it relates to the booking activity, the business environment is very solid given our current situation.

We have had a very, very good wave season.

At the beginning of wave, we were already several load factor points ahead of same time last year and our APDs were also way ahead of last year.

Couple that with the fact that we have currently have 12 percent fewer available cabins to sell than same time last year, the outlook relative to our needs right now has made for a very, very healthy wave period and we couldn't be more pleased with that.

While our absolute call volume is down year-over-year, the ratio of calls to available inventory is consistent and strong, very much like last year; and our conversion rates are also stable and very healthy compared to the same time last year.

On the pricing front, we continue to experience a solid pricing environment with pricing being consistently above same time last year, since September of 2003.

Our net ticket APDs are ahead of last year, and pricing is especially strong on our peak summer seasonal products, that would be Europe and Alaska.

Given our current outlook,directionally it does appear that we will continue in a stable to increasing pricing environment as we move throughout 2005.

The booking curve, as you can see on slide number 9, continues to move further out than last year; with 34 percent of our Q4, 2004 bookings inside 90 days, versus 38 percent in Q4, 2003.

It is now clear that we have returned to the pre-9/11 booking curve.

This is not only true for our booking curve but our percent of forecasted NTR achieved to date is ahead of the last two years, and back to our pre-9/11 pace, and that is also a very good indication of the demand and returning to a normal booking curve.

Let's talk just briefly about Q1 2005 performance.

In Q1, our capacity is up about 3 percent for Q1 versus 2004, all of that being driven by the RCI brand.

Both brands have a solid performance in the first quarter, with both load factors and APDs above same time last year and we're especially pleased with the strength in the APDs that we're billing on the Celebrity brand in the first quarter.

Given this performance in the first quarter, and as Richard mentioned in his comments, we now expect we will end the first quarter with a net revenue yield improvement of approximately 7 percent.

If you look at Q2 to Q4 performance, while we don't have as much visibility for Q2 through Q4, the current outlook is very, very encouraging, and similar to what we're seeing in Q1, 2005.

Capacity will only be up 1.2 percent for this period and book load factors are well above same time last year and, once again, both brands are experiencing a healthy improvement in APDs versus same time last year.

Given our current outlook, at this point in time we are forecasting a net revenue yield improvement in the range of 5 to 7 percent for the full year 2005.

And given the quarterly comparisons for 2004, yield improvement will likely be better in the first half of the year as our Q3 and Q4 2004 yield performance were back to pre-9/11 comparables.

So that gives you a sense of a very strong booking and pricing environment that we're experiencing right now.

Let me turn and just talk a little bit about 2005, our product specifics.

The 7-night Caribbean, one of our core offerings will represent 38 percent of our total capacity in 2005; this is a 5 percent decrease in year-over-year capacity.

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

Booked to APDs are higher than the same time last year and quite a bit higher than where we finished in 2004.

So we're looking for a really nice yield improvement in 2005 on the 7-night Caribbean product.

On the short Caribbean and Bahamas, that will represent 12 percent of our total capacity.

That that will be a 3 percent increase year-over-year.

Booked load factor is just very slightly lower than it was same time last year.

But our booked APDs right now are higher than last year and somewhat higher than what we finished in 2004.

Right now, we look at the short Caribbean product to be somewhat flat to a modest yield improvement in 2005.

Long Caribbean is 8 percent of our total capacity.

That will be up 5 percent year-over-year.

Booked load factor is slightly ahead of where we were last year.

Although booked APDs are quite a bit ahead of where we were last year and, again, quite a bit higher than we finished in 2004.

So we're looking for the long Caribbean products to have a pretty nice yield improvement in 2005.

Alaska, 7 percent of our total capacity.

We will see a 5 percent increase in year-over-year capacity in the Alaska market.

Booked load factor is quite a bit ahead of where we were last year.

Our booked APDs are about the same as last year but, again, quite a bit higher than where we finished in 2004.

So we are looking for a really healthy yield improvement in Alaska for 2005.

If you look at Bermuda, it's been a really strong market for us so far in 2005, it only represents 4 percent of our total capacity, but that is a 9 percent increase in year-over-year capacity.

Booked load factors up about 10 points from where we were last year, and the APDs are up significantly right now at same time last year, and well above where we finished in 2004.

So we are experiencing a very strong Bermuda season and we're going to see a very, very nice yield improvement in 2005 in Bermuda.

The Canal, which is only 5 percent of our total capacity, but we have increased 12 percent on a year-over-year basis.

Booked load factors, again, well ahead of where we were last year, booked APDs well ahead of where we were last year and higher than where we finished last year.

So we're going to see a very strong Canal product now this year and forecasting a good yield improvement for the year.

Mexico, about 8 percent of our total capacity.

That is down about 11 percent year-over-year.

Booked load factor is well ahead of last year, but we're seeing a little bit softening in the APD here, and we're forecasting that we'll be flat to just modestly up in Mexico for 2005.

Europe, as everybody knows, was a real, real pleasant surprise in 2004.

We're having a very, very strong European booking season as we move through the wave period.

It will represent 11 percent of our total capacity, a 35 percent increase year-over-year in capacity.

Booked load factor right now much higher than where we were last year.

Booked APDs are slightly ahead of where we were last year and even higher than where where we finished last year.

As everybody should have heard by now, we are experiencing such a strong European season that we decided in early December to go ahead and redeploy the Century in the Celebrity brand to Europe.

That went out for sale on January 4, right at the beginning of the wave period.

We've had some strong demand on that.

So Europe is shaping up to be a very, very good market for us.

The Legend, which is the first time we have the ex-U.K. product in Europe, as well, this year is doing well and ahead of expectations.

And we expect to see some increase in yields for Europe in 2005.

So that just gives you some major-- highlights of the major products by category.

And I'm going to open it up now to Q&A and we'll be responsive to any questions you might have.

Thank you.

Ladies and gentlemen, we are now ready to begin the Q&A session of the call. [Operator Instructions] Felicia Hendrix, Lehman Brothers.

I have a couple of questions for you.

First, Richard, you kind of snuck that in, I was hoping that you could elaborate a little bit, you said there was a casino-related impact in the fourth quarter.

Kind of hoping you could talk about that a little bit more.

Luis, regarding the 20 million in incremental SG&A costs, I'm just-- I just want to make sure that that's already in the 2 to 3 percent guided increase for net cruise costs.

And then Richard, I guess back to you, this is just a bigger picture question.

With the cost pressures and the effects, you know, basically given the fact that you don't have any -- or you have very minor capacity coming on this year, obviously, you know, the cost is a little bit -- is -- seems to be magnified a little bit.

We're in a situation where, you know, exchange rates are not going our way in terms of ordering new ships.

Now that could be something that is the situation for a long time.

So how are you thinking about your buildout strategy?

I know that currently the Company is absorbing, you know, a large buildout that has been -- program that has gone on for the past several years.

But, you know, as we think forward, at some point there has got to be kind of a breaking point in terms of when you start building new ships.

So I was hoping you could talk about that as well.

And, no I didn't mean to sneak that in.

But thank you for commenting on it.

Actually, when it comes to the casino, I should probably be letting Bonnie do the commenting since she's our -- our expert at least on the consumer side of the casino.

The -- what we did have, it's kind of a funny situation because it's hard to be disappointed when our onboard revenue has just consistently been performing so well.

And I think it's primarily because when we were looking at what happened in the fourth quarter and why our own expectations for the fourth quarter didn't get achieved, that was simply one of the factors.

And it really was over the Christmas sailings and a series of factors.

Bonnie would say people were spending time with their family instead of in the casino.

It just seemed to have been an anomaly that hit us.

We mentioned it in the press release, and not sure there is much we can say about it, other than it caught us a little bit by surprise.

Simply because onboard revenue across the board from shore excursions, from the gift shop, from the-- from the spa.

Just in every single area has been operating on such -- on all cylinders, 16 cylinders in this case, that we were surprised not to be having that continue in the casino in-- particularly the month of December, but throughout the fourth quarter.

So I think I would just say that's an anomaly.

These things do happen.

We have anomalies on these kinds of things all the time.

What happened is that in the fourth quarter, we just had a whole series of relatively minor, smaller things weren't what we expected.

So in other words if I understand correctly people were playing versus it's not a situation where you guys just lost big in the quarter?

No, no.

And, okay, so are you kind of doing any type of programs or, you know, initiatives on the ships to kind of improve that traffic?

I'll let Jack talk, but I think it is important to understand that we're really saying that this just a one-off kind of unusual situation rather than any change.

We were doing well.

We did well.

Yes, I think Richard's right.

He summed it up.

We missed on the forecast side but as he said in his opening comments, it was an excellent performance, it just wasn't extraordinary; and I think that sums it up pretty good.

Having said that Felicia, yes, we are doing things in the casino to improve the overall gaming.

The biggest effort we're gone in right now is we're putting in some of the state-of-the-art slot machines that are card driven as opposed to coin drop, which are far more successful in terms of the take.

And that's is just one example of a number of things that we're doing.

Felicia, you asked about the $20 million in additional SG&A.

All of the things that I went through, all of the expenses, the additional 20 million, and all the cost savings initiatives; all of those things net out to the 2 to 3 percent guidance.

So it's inclusive.

Great.

And of course, Felicia, you're cheating a little bit.

You accused me of sneaking so I have to accuse you of cheating.

I'm sorry, that wasn't the right word, you're right.

Because you went to three questions, but I'm glad you asked it.

It is clear, and it's obvious that when we are not taking delivery of new ships, it's harder to deal with the cost issue when you don't have the increasing economies of scale to absorb that.

It's also obvious that the foreign exchange rates are a concern of ours.

Although I have to admit, we thought that the foreign exchange rates were terribly high when we ordered the two Freedom ships, and we are certainly happy we did that.

And you know, we're very careful that we don't preannounce things until we have something specific to announce, but I think you know that we have said we think that this industry justifies and we need to continue to grow in sort of mid-single-digits.

Less than we have in the past, but we don't think zero growth is a viable strategy for us.

So I think we will continue to be looking at ways to grow at reasonable rates.

Robin Farley, UBS.

Yes, I have a question on guidance.

I guess it's a two-part question.

Can you talk about what your expectations are for onboard revenue increases then in '05?

In other words, what expectation there is factored into your guidance?

And then also, at this time last year, you gave a range of guidance for the first quarter and then, if I recall, the quarter ended up a little bit at the lower end of that yield guidance; which was still a good increase.

But I guess my question has to do with, how likely it is that yield can vary over the next two months from what your expectation is?

In other words, one would have thought that so much of Q1 would have been booked that-- that you had a, you know, I don't know if you can sort of assign a probability, to the visibility on it.

But the 7 percent guidance that you're giving us now for Q1 doesn't give a lot of room to -- if things don't come through strongly as you'd thought in the next month or two, as was the case last year.

So I just wonder if you could give us some -- do you have increased conviction because the load factors, you know, is that why we're not seeing a range this year, and you've got higher conviction than you did at this time last year?

Yes, that's correct, Felicia, we have a much higher conviction right now at this time this year than we did last year.

As I mentioned in my comments, for the year we have 12 percent fewer cabins available.

We've had a solid look now at the first quarter and we're very comfortable that it will be in the range of 7 percent.

Okay.

Great, it's Robin.

And the guidance onion board spending?

On the onboard spending, we don't break that out.

We're obviously looking at an increase from year to year.

But we don't break out the split between ticket revenue and onboard.

But we are expecting increases for the-- for next year.

By the way, Robin, if I could just add on that, because we may have overemphasized the focus on onboard spend.

And our trends so far are all consistent with that 7 percent guidance.

We do want to make it clear that what happened in December does appear to be an anomaly, and everything, including the onboard spend, seems to be on track for that 7 percent yield improvement that we've predicted.

Okay.

And if I could slip in a third question, I'm just curious with, you know, occasionally we see reports about illness in the media, and it gets sort of misportrayed as being tied to cruise ships because of this CDC reporting requirements.

Is there any movement towards changing those CDC reporting requirements so that things don't get misportrayed the way they have been?

Robin, I'm glad you raised that because I think it is a good point and we've been working with the CDC.

There doesn't appear to be any chance that the CDC will change their view in terms of reporting requirements, but we also think that we've done -- as an industry, a much better job with the press in getting across.

And we've been working with the CDC, and they've been quite cooperative, in terms of issuing both factual information supporting us with the media; about the fact that this is such a universal issue across the United States, 23 million Americans last year getting it.

And so I think while there has been some-- those of us, and I include you in that, who are in the industry are perhaps more conscious of it.

And while 2 to 4 years ago, we really felt it was impacting our bookings, I think, at least our feeling is that today, it's simply a non-issue.

And while it gets peripheral exposure in the press, we don't think it today is having any impact on bookings.

Tim Conder, A.G. Edwards.

Luis, could you give us a little bit more color on currently where your hedges for fuel are?

And then to follow on to Robin's question, do you anticipate the trend in onboard spending, the rate of change, kind of holding at the same rates that we've seen here in the past?

And then finally, as it relates to new ship builds, given that Celebrity, you'll have a ship coming out of the fleet in October, moving over to the joint venture, we would expect that over the near future, you would want -- you would be potentially announcing something sometime this year, given the lead time to build ships, and to replace that capacity on -- as you roll out into '06.

Any comments, Richard, that you can talk about or expand there, I guess, again, following a previous question?

With regard to the hedges, you know, as you know, we're not as heavily hedged this year as we were last year.

And the reason for that is we really have not been finding an awful lot of opportunities given the volatile environment.

But if you look -- we just mentioned that we were approximately 15 percent hedged and we're roughly about 25 percent hedged in Q1, and 10 percent hedged in Q2, Q3, and also Q4.

You know, as we talk about your -- your question on the onboard spend, I mean we do think that the trend is going to continue.

If we go back in the past several years, we have seen a continuing increasing trend every -- each and every year, you know, even though we went through 9/11, that trend has continued to rise.

So going into 2005, we continue to see that to increase.

Also, our ships all have a lot, you know, newer,a lot different venues, additional venues for people to spend money.

So we expect that could continue.

And plus all the initiatives that, you know, that Jack, for example, talked about the one initiative with the slot machines, all of those things should help continue that.

Isn't it the rate of increase, Luis, I mean we would anticipate that coming down a little bit, the rate increase, or are you still kind of seeing the -- expecting a similar trajectory of what we saw in 2004?

You know, 2004 was a very strong year.

I mean, we're still continuing a very strong growth and given the fact that also, you know, ticket yields are also growing very rapidly.

So we're doing things to try to continue that same pace.

Obviously the same number is going to be a little bit of a challenge but, you know, that's-- our desire is to have the same level of growth.

And Tim, on your third question, I'll address that, I don't know if Luis and Jack want to add anything.

You're cheating to and trying to sneak in that third question there, but that's fair enough.

I think you're right, Celebrity has had very low growth rate recently.

We went through that huge increase earlier on and it has take an little while to absorb that.

If-- clearly, if you look at its newer ships, they are doing brilliantly.

And we think that the brand, in particular, is doing so much better that we think it clearly needs to grow over time.

But as -- as we always say in these calls, we really don't want to preannounce anything.

We don't have a deal until we have a deal.

And as soon as we do, we will announce something.

But you're right.

Celebrity needs to grow as well, and, in due course, we would expect that to happen, too.

David Anders, Merrill Lynch.

Hey, Jack, could you give us a little more color on the $20 million being spent on the sales force in Europe or for European sales?

What does that actually mean?

Are you hiring more people?

Where is the money going?

Sure, David, I'd be delighted, and as Luis said in his comments, that $20 million is a combination of investment in Europe as well as a split dedicated sales force in the United States.

So it's not all in Europe.

But it really goes across the entire organization.

We are hiring additional sales people in the countries that we're targeting.

We're building up our marketing spend to support the Legend ex-U.K. product and virtually investing in a number areas in Europe to increase our sales and our presence in a number of European countries, and that's a big piece of that $20 million but it's not the entire part.

But would it be safe to say that this is -- I mean kind of the anticipation of additional tonnage being put in that market?

Well, we are looking at some strategic alternatives to supporting that market with some additional tonnage, and I don't want to talk too much about that right now.

But, clearly, we are very, very focused on Europe and building our presence there and part of that is looking at how we may provide some additional capacity out there for the European sales team to fill.

Michael Denver (ph), UBS.

I was wondering if you could provide a little more detail on your prepayment plans.

And kind of give some color as to the timing of those, and then what instruments would be involved.

I assume you're talking about prepayment of the debt.

That's correct.

Okay.

Well, I mean we have -- as you know we have quite a bit of cash on the books.

And we have several maturities coming due this year.

And I think what we may do is prepay some of those things that are coming due this year maybe a little bit beforehand, before the actual maturity date.

So we're looking at prepaying some of the maturities of this year.

Now, there's other debt that we're looking at, you know, depending on our cash flow, depending on our cash availability, and we'll take a look at that, and we may -- we may prepay some of those.

Of the roughly 900 million that you have coming due this year, how much of that do you think would be prepaid in the first half?

Well, we will try to prepay as much as we possibly can.

I mean we have -- I think that you'll see we'll be able to use a lot of the excess cash that we have presently and we'll do something probably in the month of -- this month.

So I think that we have to look at -- be careful of how we dip into the revolver, because, you know, we have to make sure that we prepay any debt that it makes financial sense.

That we're not prepaying debt that is lower cost than what we would be substituting it with, if we have to dip into the revolver.

Okay.

But for now, you're going-- probably going to just take it out of cash flow?

Yes.

Helane Becker, Benchmark.

So you guys have, from what I can tell, a very successful ad campaign that gears up every time there's a storm in the northeast especially.

Can you address at all if you're noticing that translate into increased call volume and conversion rates?

Helane, I'm so pleased you mentioned that.

I'm glad somebody saw that.

That we have a triggered campaign in the northeast, it's the cold weather campaign that we have on the Royal Caribbean brand that we think is meeting with good success right now.

But as with all these campaigns, it takes a little bit of time after they're done to get-- to get all the metrics together and determine how exactly it's doing.

But for right now it looks like we're having a real good success with it.

You know we've had some very, very bad weather up there and as those campaigns are being triggered we clearly do see some increased call volume.

And how that might relate to bookings and conversions, that's something we'll figure out in due time.

But it's been a very successful campaign.

Okay.

And then my follow-up question is with respect to, I think, the Celebrity in the Far East.

Did you talk about that at all?

I guess that's an '06 event.

Yes, we -- we did announce about a week ago, I think it was a week ago last Wednesday, in conjunction with the major expansion of the Celebrity Expedition line of products that we were planning to take a Celebrity ship, in this case it'll be the Summit to the Far East in-- year end '06-- '06/'07 season.

So we're still developing the itinerary for that, should be done in the April/May timeframe and out to sell at that point.

We've had a lot of input from our loyal customers in the Captain Clubs and to a number of online surveys and the Asia market for Celebrity right now is rating very, very high.

There seems to be a lot of interest and demand there, so we're going to see if we can capitalize upon that.

Just to let everybody know, we'd just like to take two more callers.

And then we will probably call it-- call it off.

Liz Ojure (ph), Smith Barney.

Jack, you mentioned before that you guys could be adding some capacity in Europe and I'm wondering if you can just address what would be the more likely route that you'd take?

Whether it be would ordering new ship or whether you're still consider being moving more of the North American fleet over there?

Yes, right now it would be the latter.

We're looking at what we might be able to do with some of the existing fleets, in terms of either ship changeout or whatever to increase some capacity over there in '06.

Okay.

And then second question, if you guys make your targets for this year, and that means that you're at or above peak pricing levels, does that mean that we're restrained to more inflationary level increases in yields in the years beyond that, so low single-digit rates?

I don't think that's necessarily true, no, not at all.

I think that there's still some upside there, even if we hit the peaks here.

We're seeing some really, really good demand out there, and you know, how we set the future itineraries, how we learn from this demand, in terms of our revenue management folks and that.

I don't see any reason why we're going to be constrained to just inflationary kind of increases at all.

Last question, please.

David Liebowitz (ph), Barnum.

Briefly two questions, if I may.

One, the capacity issue later in the year, do we have any quarter during the year where capacity will be below 2004?

David, I'm check that for you right now.

My recollection is that we don't have any quarter where the capacity will be below 2004.

But we're getting close to where it would be relatively flat.

Hold on one second here.

No, we don't.

We're growing in every quarter, 3.4 in the first quarter, 0.5 percent in the second, 1.6 in the third and 1-- 1 percent in the fourth quarter.

Okay.

And second of all, if one reads the bulletin boards, it appears that the agreement in work with Cirque du Soleil has not produced revenue for the Company to date.

Are you going forward with converting the second vessel this year?

Or is that on hold until we have a workable format?

No, absolutely not.

The Summit is in dry dock right now, The Bar at the Edge of the Earth, they will convert that during this week, and then they have some inservice work to do on that as it goes.

The-- I'm not sure -- I think you're probably referring to some of the bulletin boards on the Internet.

Correct.

We clearly have seen improved demand on the Constellation.

Cirque experience has, in my opinion, everything we expected it to be.

There may be some expectations out there that we needed to reset.

But every single week, they go through a stabilization period, the Cirque do.

That particular experience at The Bar at the Edge of the Earth is getting significantly better ratings from our customers and I'm every bit as bullish on the Cirque relationship today as the day we signed it.

This is a really, really, really a good move for the brand.

Do we have any target date when we're going to be able to start charging the passengers again during the big show during the sailing?

Well, we-- I'm not sure -- I'm not sure-- in fact I know we don't have a date right now and I'm not-- we're not really focused on a date of doing that right now.

What we're doing is we're getting the show to where we want it to be, and I think we are there, even with this last voyage, in terms of the ratings that we were getting and the kind of bar revenues that we're seeing.

We're starting to get back where I thought we would be at this time.

So we haven't contemplated reinstituting that fee at this time, and as soon as we do, we'll let you know.

Okay.

And the last question, what is the cost of converting a lounge and putting in Cirque, to the Company?

David, I'm not sure.

I mean I-- we can maybe get back to you on that but I'm in the quite sure.

It's -- you know, the cost, the cost is not that significant.

Yes, it was -- it wasn't that significant.

Okay.

And very little was said about your joint venture in Europe.

Can you tell us how that is doing at this time and what you are anticipating for '05 since you've given us your company's '05?

What sort of contribution we're going too see from Europe?

You're talking about island cruises?

Correct.

And David, it's been doing very well.

And in fact, well enough that we have just charted a new ship to it.

So I'm glad you mentioned it, because it's performed very much to our expectations.

It turned profitable remarkably quickly after a difficult start.

In fact, it's unusual to be this profitable in a new venture like that as quickly as we have been.

But no, we're very pleased and I believe First Choice is very pleased and have said so in their public announcement.

It just-- and I'm glad you mentioned it, David, because it does tend to get buried in all of the other results.

I guess with that, we should thank everybody for their participation.

We appreciate your attention and your time.

Have a good day.

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

You may now disconnect.