皇家加勒比遊輪 (RCL) 2005 Q1 法說會逐字稿

Good morning and welcome to the Royal Caribbean first quarter 2005 earnings release conference call.

Mr. Luis Leon, Executive Vice President and CFO will lead today’s call.

All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks there will be a question-and-answer session.

If you would like to ask a question during this time--[Operator Instructions].

Mr. Leon, you may begin your conference.

Thank you Anisa (ph) and good morning everyone.

I’m Luis Leon, Chief Financial Officer and I would like to welcome you to our first quarter conference call.

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

Bonnie Biumi, our Treasurer;

Dan Mathewes, our Director Investor Relations; and also joining us here today are Adam Goldstein, our President of Royal Caribbean International; and Dan Hanrahan, President of Celebrity Cruises.

As in the normal course of these conference calls, 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 we’ll be making are forward-looking statements and are subject to changes based on the items listed on this slide and disclosures on our SEC filings.

Before I go through the course of these financial results, Richard will be providing a brief Company and revenue overview and then at that point we will open the call up for your questions.

Richard?

Thank you Luis and good morning everyone.

As always, it’s a pleasure to have this opportunity to speak with you all.

That’s especially true when we’re reporting such a good quarter.

But before I make comments about the business, I’d like to take a moment and make some comments on changes in our senior management.

This is our first conference call since Jack Williams announced his retirement.

Jack has been a dynamic force for change here and we wanted to take a moment to thank him for all of his efforts and his achievements throughout his tenure with Royal Caribbean and Celebrity.

It’s interesting to note that Jack is only the second president in Royal Caribbean’s 35-year history.

Jack leaves behind a strong legacy during a period of fast growth and transformation.

Part of that legacy is a very strong team headed by Adam and Dan.

I believe many of you have met them, but I wanted to use this opportunity to formally introduce them in their new roles.

While they won’t necessarily be a permanent participant in these quarterly calls, we thought it would be helpful to have them participate at least this once.

I’ve known Adam for almost 20 years, the last 17 he’s worked at Royal Caribbean holding a myriad of top positions in the company in legal, sales, and marketing, international, total guest satisfaction, and brand operations.

He’s consistently demonstrated a commitment to innovation and to excellence.

And he’s been one of the driving forces behind the success of Royal Caribbean International.

Dan joined the company in 1999, having previously held executive positions at Reebok and at Polaroid.

At RCI he was Senior Vice President for marketing and sales and it was he who developed the get-out-there marketing campaign which has been so successful.

Every marketing person dreams of changing the perception of his or her industry.

Many marketing people take credit for doing so.

But Dan is one of the few people who has actually done it.

Now let’s move on to another pleasant topic, our results.

Net income for the quarter was up 41% and earnings-per-share was up 34%.

As you saw in our press release the first quarter was characterized by a very strong demand environment which covered both brand and virtually all products (ph).

Although we still believe that pricing represents an excellent value to our customers, in fact perhaps too much of a value, it’s very satisfying to see the public respond so well to the initiatives we’ve undertaken over the last couple of years.

In a couple of minutes Luis will elaborate on the details concerning cost, but I need to make a few comments about fuel.

As you know, we’ve given up trying to forecast fuel prices.

Instead, we’ve wimped out and we just provide you with figures based on current conditions.

This gives a clear benchmark and allows you to adjust the figures based on different levels of prices.

You have absolutely no idea how frustrating it is to generate very good results, only to watch so much of these good results burn up, literally I should say, to higher fuel costs.

Today’s fuel prices are about 20% above last year’s average.

And fuel costs alone will increase our costs by almost $64 million.

This is the equivalent of almost 2% increase in net yields.

The one hand, it’s important to remember that these cost increases, even at a 6 ½ % of revenue level, are not so great that they change the fundamental soundness of our business model.

On the other hand, we work incredibly hard to earn a 2% improvement in yield and we fight tooth and nail for every single decimal point of that improvement.

To lose all of that just due to fuel is incredibly painful.

We’ve already done a lot to reduce our fuel expenses, both last year and this year.

We’re attacking this with a new urgency, but it’s important to recognize that there is no silver bullet.

We can and we have saved tens of millions of dollars, but even that only mitigates the problem.

It doesn’t eliminate it.

Some of our fuel efficiency efforts have an immediate impact, like scrubbing the hulls or minor adjustments of itineraries.

But some take longer to be filled, like more significant itinerary changes; we’re changing the technical equipment on the ships.

But all of these are being worked on with an increased focus and a new tenacity.

Turning to the more important issue of revenues, booking trends continue to remain strong and they’re on track with our expectations.

In fact our first quarter performance has allowed us to up the low end of our yield estimates for the year, thus improving the range to 6 to 7%.

That’s a very healthy raising of prices in any context.

As you can see on slide 2, the close-in booking levels appear to have stabilized at approximately 35%.

In addition, we now have 10% fewer cabins left to sell than we did at the same time last year, and our pricing is higher.

All in all, it’s a nice position to be in.

All these demand characteristics indicate that we are no longer in recovery but we are truly in a more normalized demand environment.

I’d like to also mention that we recently made some important changes in our group booking programs that we think will be very beneficial.

We call the program ‘easy groups’ and it encourages more efficient group booking programs by our travel agent partners.

The name is corny, it stands for E for eliminate deposits;

A for access to inventory;

S for sell and promote for 90 days; and Yes to match sales for 30 days.

Though a little detailed, but it basically rewards agencies whose group booking actions are helpful to our goals.

And it discourages those who needlessly and unprofitably buy up our group space.

It’s probably one of the most comprehensive restructuring of group-booking structures in decades.

And we’re really very excited about it.

It will take a while for these changes to be filled.

But we think that this will make our agency partners more productive and profitable, while they’re importantly lowering our costs, especially for poor-performing groups.

At this point I’d like to turn the call over to Adam, who’ll give some more comments on Royal Caribbean International.

Adam?

Thank you Richard, and good morning.

It’s a pleasure to be on this call today, especially since it’s an exciting time for the Royal Caribbean International brand.

As you have already heard today from Richard, overall business conditions are favorable and the demand environment for our brand is favorable.

Our marketing methods continue to resonate with consumers and travel agents, attracting both first-time and repeat cruisers.

In updating you about the status of Royal Caribbean International, I’d like to note four current events that in our opinion bode well for our future.

First, two weeks from today Enchantment of the Seas will leave Fort Lauderdale for Rotterdam to be lengthened and revitalized.

In our view this is a unique opportunity to improve the performance of an already successful asset as well as another expression of our commitment to keep all of our ships in a strong position to deliver on our brand promise.

Second, 12 days from today Legend of the Seas will commence X-UK’s (ph) summer service from South Hampton for primarily British guests.

While Royal Caribbean International has been actively marketing and selling in the UK for over 30 years, the Legend program represents a clear statement of our commitment to strengthen our presence in the UK and Europe going forward.

It also reflects the inherent versatility of our brand.

We are pleased with Legend’s booking outlook for the summer.

Third, 2 weeks from today we will begin to communicate in earnest some of the exciting new features on Freedom of the Seas.

The 3 Freedom-class ships on order for delivery over the next 3 years are obviously a cause for great excitement about the ongoing evolution of Royal Caribbean International.

Finally, our leadership team is placing considerable focus on identifying additional opportunities to operate more efficiently even as we continue to deliver gold-anchor service to nearly 3 million guests per year.

These opportunities clearly exist in both hotel and marine operations and we will take advantage of them as we go forward.

Now in turning this over to Dan, I’d like to echo Richard in acknowledging Dan’s great contribution to the success of Royal Caribbean International over the last 6 years.

Thank you Adam and good morning everyone.

As Richard mentioned, I’ve been a Royal Caribbean employee for the past 6 years and I’ve witnessed a substantial progress the Celebrity brand has made, particularly in the past 2 years.

The brand transformation efforts have helped establish Celebrity as a leading premium brand in the cruise industry.

Concierge-class upgrades in particular have helped set the brand apart and the consumer has reacted well and has demonstrated a willingness to pay more for concierge-class.

Conde Nast readers rated all of our millennium and Century-class ships in the top 10 in the luxury premium ship category.

We clearly have a winning formula with our hardware and the product experience we deliver to our guests.

And although we have made substantial progress in telling our story, there is still a lot of opportunity to reach more people.

So after my first 57 days on the job, I can tell you I’m happy with the experience we deliver to our guests.

We need to make more people aware of it.

To do that, we’ll focus on the basics, our strengths, and we’ll capitalize on opportunities as they present themselves.

First on the basics, we need to continue to deliver a very clear and concise messaging to the consumer about our brand.

We need to have a very, very strong partnership with the travel trade we rely on to deliver a high percentage of our guests.

With our strengths we’ll continue to build on the brand transformation efforts I already mentioned and continue to do a better job communicating that message.

And in terms of opportunities, we’re very pleased with the results we’ve seen in South America and we’ll expand in that market in a way that optimizes the demand.

So, it’s been a great 2 months and I’m looking forward to great things for Celebrity brand.

And now I’d like to turn it over to Luis Leon.

Thank you Dan.

Our first quarter results are summarized on slide 3.

As you can see we reported record first-quarter net income at 2005 with $135.3 million or $0.63 per share, and this compares to net income of $95.8 million or $0.47 per share for the first quarter of 2004.

Despite only a 3.3% increase in capacity, this represents a 41% improvement in our earnings.

The primary driver behind this exceptional earnings growth continues to be our ability to achieve strong revenue yield performance.

For the first quarter of 2005 net yields increased 8.2%.

This is more than 1% higher than the guidance that we gave you on March 14th in our 10K report.

The year-over-year increase in net yield is primarily driven by higher cruise ticket prices, occupancy levels, and also amounts on on-board spending.

Occupancy reached a record for the first quarter of 105.7, and this is up from 104.2 in the first quarter of last year.

Turning now to costs for the first quarter of 2005, net cruise costs for APCD, which is available passenger cruise day, increased 6% compared to the same quarter in 2004.

This increase in net cruise cost is primarily attributable to increased fuel costs.

During the first quarter of this year at-the-pump prices of fuel used by the Company were in line with our previous guidance of up approximately 11% over the 2004 yearly average.

As you will recall however, 2004 was a period of rising fuel prices.

As such, at-the-pump prices during the first quarter of 2005 compared to those of the first quarter of last year were 30% higher.

Fuel expenses represented 6.1% of total revenues in the first quarter, which compares to 5.2% of total revenues for the same quarter last year.

At the end of the day, higher fuel costs accounted for approximately 3 percentage points of the increase in net cruise costs.

While this increase in net cruise costs was partially offset by a shifting of certain expenses including marketing spend to later in the year, the company also experienced higher than expected payroll and related expenses in costs incurred in connection with the cancellation of attained Knight (ph) Hawaiian Cruise.

Despite these unexpected expenses, the increase in net cruise costs was in line with the Company’s previous guidance.

We also continue to focus on our ability to transform solid-yield performance into improved profitability.

Not withstanding the financial impact of higher fuel costs and other cost pressure, we were able to increase operating and income for APCD by 20% to $37 in the first quarter of 2005 from $30 in the first quarter of last year.

Looking ahead to the cost outlook for the remainder of the year, we now expect 2005 net cruise cost to increase in the range of 5 to 6% when compared to 2004.

Obviously the driving force behind this increase in our expectation for net cruise costs is fuel.

Fuel costs continue to present a dichotomy.

While they are an extremely important variable when forecasting our net cruise costs, uncertainties surrounding fuel movements makes forecasting fuel nearly impossible.

A clear example of the difficulties surrounding forecasting fuel is easily illustrated by simply reviewing the forward curve for fuel on a weekly basis.

On a weekly and even on a daily basis the forward curve for fuel has shown wide variations.

In fact, when applied to our consumption levels, it can show tens of millions of dollar swings both either positive or negative.

As such, we’re not trying to predict where fuel prices are going to go over the next 9 months, nor are we willing to rely on the forward curve.

We’re simply giving you a data point or a benchmark that says that if fuel prices for the remainder of 2005 continue at the current levels, fuel costs will increase on a year-over-year basis by approximately $64 million, or 24% per APCD.

Now this increase of $64 million is comprised of the $26 million (ph) increase which we mentioned in today’s press release; the increase of $23 million, which we identified in the 10K report; and changes in capacity, hedging and also some offsets that we have with regard to consumption levels.

Such an increase in fuel costs will account for approximately 3 percentage points of the overall 5 to 6% increase in net cruise costs per APCD.

Ultimately, fuel would represent approximately 6 to 7% of total revenue.

Now while we continue to look for opportunities to hedge our fuel consumption, we have less consumption hedged in 2005 than we did in 2004 and at less favorable rates.

As you may recall, what we’ve told you in our last conference call was that in 2004 we hedged approximately 32% of our exposure, and for 2005 we have approximately 15% hedged.

Of course a big portion of that is skewed towards the first quarter, so as we look for the balance of the 3 quarters it’s 10% in each of the quarters.

Currently we expect that this hedging difference between the two years will account for approximately $10 million in additional fuel costs.

In addition to our hedging we continue to look for ways to mitigate rising costs.

Methods for mitigating fuel costs include everything from focusing on utilizing less expensive fuel for our gas turbine engines, to being more fuel efficient.

On the fuel efficiency side we’re doing everything from using a single gas turbine rather than using both; to optimizing itineraries; to adjusting temperatures and lighting levels on parts of the vessel during non-use hours.

As fuel has been increasing for some time now, these initiatives are not entirely new.

As you can imagine this process continually evolves and we identify best practices and incorporate them across the fleet as we develop them.

During the first quarter these efforts allowed us to decrease our capacity adjusted year-over-year fuel consumption by approximately 2%.

Our consumption for 2005 will be approximately 7.2 million barrels or slightly less than 1.1 million metric tons (ph).

It should be noted that we also continue to make every effort to mitigate cost increases and we’re on target to achieve the $50 million of cost-savings initiatives that we discussed in our last call.

Due primarily to higher fuel costs and the timing of certain SG&A expenses, the expected increase in net cruise costs of 5 to 6% will not be spread evenly throughout the year.

For example, higher fuel costs, the timing of SG&A expenses including marketing spend and costs associated with the stretch of the Enchantment of the Seas will lead to net cruise costs per APCD for the second quarter of 2005 to increase at approximately 8%.

It’s expected that approximately 3 percentage points of the 8% increase in the second quarter of net cruise costs will be attributable to fuel.

We expect the depreciation and amortization expense for 2005 to be in the range of $410 to $420 million and interest expense to be in the range of $300 to $310 million.

Based upon these estimates, the fuel assumption, and the revenue outlook that Richard discussed, we expect 2005 earning per share to be in the range of $2.65 to $2.85 which is only slightly lower than the previous guidance.

Second quarter 2005 EPS is expected to be in the range of $0.55 to $0.60.

Slide number 4 shows our liquidity as of March 31st was $1.3 billion.

During the quarter we utilized the cash on hand to prepay our $575 million outstanding on a term loan that was originally scheduled to mature in June of this year.

As of March 31st, our debt was $5.1 million, resulting in a net debt to total CAP ratio which is now below 50%,

On slide number 5 you can see the Company estimates that capital expenditures for 2005 will be approximately $400 million.

For 2006 through 2008 we estimate the capital expenditures to be $1.1 billion each year.

These estimates include our current firm orders for 3 Freedom-class vessels and are scheduled for delivery in 2006, 2007, and 2008 respectively.

Slide 6 and 7 show our 2005 and 2006 capacity information and also our 2005 fleet deployment respectively.

At this point I would like to open the call up for questions.

Anisa?

Ladies and gentlemen, we are now ready to begin the Q-and-A session of the call. [Operator Instructions]

Your first question will come from Steve Kent with Goldman Sachs.

Hi good morning, a couple of things.

You know you’ve talked quite a bit about energy but I guess I’m still struggling with why not hedge more of it now just to give you some more stability.

And I don’t think you really addressed that and I just was wondering your thought process there.

And also you mentioned that there were some new initiatives on group bookings but how significant really is that to lowering your costs, and do you have other things like that – especially Luis you’ve talked about them in the past, some of those initiatives that you have in place or are beginning to work into place over the next 12 to 18 months.

Let me, I’ll address your hedge question and the initiatives and then probably the group question, Richard will respond to that.

With regard to hedging more, this is kind of a struggle for us.

You know we started to look at the opportunities to hedge – I think that last year for example it was easier because we found some significant costs in the fuel prices and we found some good opportunities to hedge.

You know here the fuel prices just change from one day to the next and of course of late we’ve seen a decline in fuel.

So of course in hindsight you can say that we should have done some more, but just for us it is really, really difficult to determine.

And we meet on a very regular basis to determine when is the right time to hedge, and we just have not found that right time.

It is so difficult to predict movements in fuel.

With regard to the other initiatives, you know we have done a lot of other initiatives.

And one of the things that we talked about in the last conference call was this $50 million that we put into initiatives.

And we are on track to achieve those initiatives.

As of the first quarter we’ve achieved about $14.5 million.

But we are on track to either meet or exceed that amount.

Okay, thank you.

Steve, good morning and I’ll comment and then I think Adam might want to as well on the group booking initiatives.

I think part of the question was when and how much that might impact us and I think these things take a while and we obviously have a large number of our bookings on the books and group bookings definition are further out.

So this will have more of an impact in 2006 and beyond I think than in this year.

I think also it’s important to recognize that – we think this will lower our costs but because those costs are commissioned cost and are deducted to arrive at our net revenue, this actually appears when we talk about our costs not as an actual lowering of cost, but as an improvement in net revenue.

And that is actually true of a number of initiatives that we have undertaken that reduce our costs or things like transportation and commissions and etc. but show up as actually an improvement in net revenue.

But we are excited about this program.

I think Dan wants to add something.

Hi Steve.

We are excited about the new group program.

It gives us a couple of benefits, one being we are going to get more attention from travel agents focused on taking group space and then marketing it and promoting it, rather than taking group space and holding it and hoping that prices will go up and then having a lower price to sell into the marketplace after our prices have gone up.

So that’s the big one is this idea that the travel agents that take it and hold that space, they’re going to be marketing it much more aggressively than they have in the past and we think that that will be good for our business.

Okay, thank you.

Your next question is from Bob Simonson with William Blair.

Good morning, two questions, first could you talk a little bit Luis on the cash flows?

What – obviously there’s a lot of different estimates for what your earnings will be over the next – through 2008, but the need to raise additional funds to fund your CapEx – what’s a normal cash level at whatever your cash from operation estimate becomes, how much cash has to be left on a normalized basis each year?

Well Bob if you look at this year cash flows have been quite considerable but I think the free cash flow that we have is quite high which is the reason that you’re seeing us paying debt down quite considerably.

We have no ship orders this year.

Now if you start looking in the years to come you know we’re not really predicting cash flows going forward, but you know we’ve been exceeding our cash flows levels by over $1 billion and if you look at our CapEx situation, interest and everything else, I’m sure that we’ll have some small funding requirements.

But there is also a good chance that we may be able to help fund our capital needs.

But --

What’s your comfort level with how low an ongoing cash balance could go to but not below?

Well I think that the cash balance is not the factor; it’s the availability of liquidity.

And as you know we have a revolver out there of $1 billion and that’s undrawn at the present time so that’s entirely available to us in addition to the other cash that we have on hand.

But that’s what we look at as we measure by (ph) liquidity.

And I think that we have more than enough liquidity at this point.

Okay, and the second question is you’ve raised your estimate for fuel costs to $23 million and $26 million, that’s $49 million.

That’s about $0.20 per share since you gave your initial 270 to 290 guidance for the year.

But you’ve only cut the range by 5 cents.

Is the difference all yield, or could you break down essentially what you’ve raised by 15 cents, is it mostly yield or is it some other issues within your cost structure?

Well, we’ve raised the yield guidance.

We went from 5 to 7 to 6 to 7, so that right there has certainly had some advantage.

The other thing that we have done as well is we have – we do have a lot of other things that we’re trying to do on the cost side and some of those to reduce consumption of fuel.

And then of course we also just reduced interest expense.

Our guidance on interest expense, actually we were giving you guidance of $300 to $$310 million and the last time we talked it was $305 to $315 million.

Very good, thanks a lot.

Your next question comes from the line of Tim Conder with A.G. Edwards.

Thank you.

A couple of questions, Luis on the incremental cost guidance you indicated that of the 5 to 6% for the year about 3% of that would be related to fuel for the full year.

Are the incremental parts – you’re raising it up to that 5 to 6% range is incremental part from your 10K; again about half of it is fuel?

If you could just confirm that and then could you break down how much is rated the Infinity and I think there were some costs related to Jack’s retirement exiting – and then if there is anything else in there as it relates to that change in your incremental cost guidance, that’s question number 1.

Question number 2 is just a little bit more clarification and Adam maybe, you touched on this a little bit – it sounds like the change in the group rate is going to help your – somewhat the flow back of inventory that groups have taken and then by the time they have to put their deposit down if they haven’t sold it they have to give it up or put the deposit down.

So again that will help you manage your yield process more effectively and enhance those yields?

If you could maybe expand on that a little bit, and then finally if you could maybe give us a little bit of updated guidance on the fourth quarter.

At this point in time, and granted it’s the furthest out there, are you still anticipating – would you anticipate break-even or could you have a loss in that quarter?

Okay, that’s a lot of questions there Tim.

With regard to the cost guidance what we’re saying is 5 to 6%.

Now of the 5 to 6%, 3% of that is fuel so other costs are going to be in the range of 2 to 3% up.

In those costs are pretty much the guidance that we had given you the last time.

I think that the additional thing – and I think that you hit the nail right on the head there is the fact that we did have certain severance or compensation for Jack on his departure.

We also had the cancellation of the cruise and of course that impacted us in the first quarter and there should be kind of an equal impact I believe in the second quarter for that.

We had a couple of other compensation and other benefits that also you have to remember the sales force that was split – so that’s what’s increasing some of those costs.

But I think that the reason for the increment is primarily driven by those factors.

Now before I turn this over to Adam to answer the question let me talk a little bit about the fourth quarter.

The fourth quarter; we’re not really giving any guidance yet for the fourth quarter.

I think that traditionally that’s our worst quarter and traditionally we also had a loss in that quarter, so I’m not going to give you any different guidance than that.

It’s just not a good quarter for us.

It probably won’t be a good quarter for us this year as well.

Okay and Luis, just to clarify of the incremental change in your cost guidance, it’s all accounted for by about half of it is fuel, then there’s the Infinity, and then there’s the severance cost for Jack.

Those are the 3 main pieces?

That’s pretty much it.

Adam?

Good morning Tim.

Just to elaborate on some of Dan’s comments earlier on the question of our new group’s policies.

I think the number one objective which we forget about is generating more demand for doing group business with both of our brands because the policies that we have in the marketplace are now cleaner and more attractive and so we think that they’ll draw attention and demand.

The second thing is that is will allow us to provide better service to travel agents and part of that is because our people will spend a lot less of their time in our estimation doing administration work for groups that will never actually materialize.

And there was an earlier question with respect to cost reduction opportunities and while the main focus of our new policy is to generate better demand and to raise yield, we certainly have an opportunity in terms of having our people work on groups that are actually going to sail.

And then the third point I would mention which I think you touched on Tim is that there will be cleaner inventory for our revenue management team to work with because we will have far less speculative groups brought on the books.

And it’s always better to work with demand that you understand better.

And if I may, one other question, Luis on the fuel side, can you just refresh us as it stands now your mix between bunker MGO and LCO as it’s looking for the full year?

Sorry [inaudible].

I don’t go through a lot of that but if we look at the mix as you know about 33% is MGO and LCO, the balance is IFO (ph).

At the present time the use of LCO is probably somewhat limited and in terms of our total metric tons I would say it is probably of our total consumption, I would say it’s less than probably 8% or so.

Okay, thank you.

Your next question comes from the line of Felicia Hendrix with Lehman Brothers.

Hi guys and good quarter.

A lot of my questions have been asked but I’ve been struggling with this question and I’m hoping that you can help me understand it.

Richard, at the beginning of the call I just want to make sure I have the right number – you said that the fuel cost this year, or maybe Luis you said this – will increase at $64 million this year?

Yes, I did.

That’s the total cost and I think either or both of us made the point that that includes price but it also includes itinerary changes, we’ve got the Jewel of the Seas in this year and last year, it includes hedging, so it includes all of those things and that’s different than when we tried to isolate out just the direct impact of the price.

Okay, so there’s some other stuff if there but if I look at that on a per PPCD basis – just that incremental cost and granted it’s not all driven by higher fuel cost – but if I look at on a per PPCD basis, that’s like $3 per PPCD.

Ooh, that hurts.

You just remind me of how painful this is.

Well what I’m struggling with and it’s probably because I’m not looking at this the right way, but what I’m struggling with is – to you it seem like a lot, to me it doesn’t seem like a lot.

And why can’t that just be captured in slightly higher pricing.

I mean to me $3 per passenger per cruise day doesn’t seem like a lot.

Well actually, Felicia I’m glad that you said that because I think it’s a good point.

And it’s a little bit the conundrum because we do tend to focus on it because it’s sort of the marginal item when you look at what’s happening in the year.

And people are looking at these things independently so our yield is sort of a given and then the fuel is what fuel is.

And I think over time there is more of a relationship.

I think you are right.

I also think that $3 in the scheme of things is – that’s why I keep emphasizing it doesn’t change our fundamental business model.

On the other hand, it’s a huge sum of money in absolute terms and so we fight for every tenth of every penny.

And $3 requires a lot of fighting on our part.

So it’s a little bit of a hard thing to describe because on the one hand it doesn’t – it’s not fundamental to the business and in fact it’s dramatically over-compensated for by our yield improvements.

On the other, in absolute terms, quite dramatic and at these price levels it behooves us to put an amazing amount of effort into fuel conservation efforts.

So it’s sort of a two-edged sword and that’s what we have been trying to communicate.

But is it being too simplistic to look at it this way and say well, if you have incremental costs, call it $64 million, why you can’t just absorb that from raising some top-line pricing?

Like a fuel surcharge?

But it wouldn’t even have – it could be pretty transparent right, because it’s not that much?

Well, I guess a little hard to answer that without saying, basically we do everything we can to get our prices as high as we can with or without this $3.

And if we could get a $3 increase in our prices, if we get a 3 cent increase in our prices we would do it.

We scrounge heavily to get those kinds of increases.

So we can’t just kind of make up our minds that we would like to get another $3 and go out and get it.

But we do think that there are things that we can do and have done.

And you see this when people are willing to pay more because their alternatives are higher, so their costs of driving or their airfare is higher.

Okay.

Just switching gears for a second – you also said that you have 10% fewer cabins to sell at this time last year and pricing was higher.

Maybe not in that magnitude but are you seeing that directionally in – obviously you’re seeing it in the second quarter.

Are you seeing it also in the third and fourth quarters?

This is Adam speaking Felicia.

Yes, in connection with our stated yield guidance for the balance of the year we continue to see positive occupancy development and positive pricing development for each of the remaining quarters.

Okay, so just in light of the question before that Luis answered that you didn’t really want to touch on the fourth quarter, it is fair to say though that we could see some nice improvement in the fourth quarter year-over-year?

Yeah, I think though that you do need to understand that’s it’s always our weakest quarter and a lot of the real good things that are happening this year are in our seasonal deployment, particularly Europe, Alaska, etc.

And that’s more of a third-quarter phenomenon.

Okay, thanks a lot.

Your next question is from the line of Robin Farley with UBS.

Thanks, I have a question about your marketing spend.

You talked about because of the excellent bookings that you are deferring some of those expenses.

But if you’re continuing to see the year well-booked and kind of raising guidance at least within the range, do you need to move that marketing spend into later quarters or can that marketing spend just be eliminated for the year?

In other words, if it’s going as well in the forward quarters why will that marketing spend appear?

And then also can you just give a little color on the – in this quarter higher than expected payroll and benefit?

I don’t know if that was, if this is part of Jack’s severance in the March quarter or if there is something else that’s making it higher than expected.

Robin this is Dan Hanrahan from Celebrity.

We did spend a little less on marketing than we had originally planned in the first quarter because bookings were coming in strong but if you remember in my opening comments what I did say is that although we’ve done a good job of getting our message across to the consumer the opportunity is still there to do an even better job and continue to build awareness and preference for the Celebrity brand.

So we will continue to spend at the planned rate for the year.

Felicia I’ll take your other question here.

It’s Robin.

I’m sorry Robin.

Robin, the difference that occurred there is due to a couple of things.

First of all you have a split sales force so as you compare year-over-year the sales force requires more and more payroll and more benefits.

Also this is the time of year that we implement merit raises for our employees so you have that impact.

And then the third one is obviously the one that you mentioned was Jack.

Okay but are you close to specifically asking about what was the higher than expected issue because some of those factors would have been expected.

Well, you know Jack has been talking about retiring but it was really unexpected –

Right, in other words, that’s the only element that’s unexpected is what I’m trying to clarify.

Yeah, pretty much so, yes.

Okay, then last question is I don’t know if you have any thoughts on two of your competitors are now doing something or planning to do something in the next year in the winter New York City market and I’m just curious if that’s a market you’re keeping an eye on now or what your thoughts are about that.

This is Adam speaking Robin.

Obviously we are constantly looking at all of the developments in the market regarding potential deployments and our brand is going to grow by 3 ships in the next 3 years so we’re going to have more opportunities to deploy ships and different classes of ships in different destinations and having year-round deployments in new parts of North America is clearly on our radar screen.

It’s too early for us to say anything about that particular opportunity or any others but it’s pretty clear that the significant market in the Northeast of the United States is interested to have the opportunity to cruise year-round without a lot of plane travel involved if they can.

And so we are very mindful of that opportunity.

But right now we are very, very pleased with December time deployment of voyager-class cruising out of Liberty (ph) Bay in New Jersey and that’s our base of operations for now and we will continue to focus on our summer program while we look for other opportunities.

Robin, the question gives me the opportunity to add the comment that we made before about how much of the US population – the fact that more than 60% of Americans today live within 250 miles of one of our ports.

And so that gives us a number of opportunities as Adam said to look at more of what we’ve come to be calling home-porting.

Okay, great, thanks.

Your next question is from Assia Georgieva with Infinity.

Good morning, congratulations on the very good yield performance this quarter and I had two questions.

I think my first one is for Dan.

Basically Dan can you give us an update on the summit in Asia and then today you also mentioned some increases to South America itineraries given the fact that you’re looking at adjustments to itineraries to save fuel I would think that those are somewhat less efficient itineraries.

And my second question is for Adam.

Could you talk a little bit about yield improvements both in terms of on-board spend following the relatively low level in the Casino last quarter and then the Sovereign refurbishment, whether that has also yielded much better pricing, thank you?

This is Dan, Assia.

The summit in Asia we continue to study which is the best way to go to Asia.

You’re right that there are fuel considerations and we will look at those very carefully and make sure that what we do in Asia is optimal to create the best revenue opportunities for us as well as to manage our costs efficiently.

And looking at South America with – we’ve been very successful in South America.

So you’re right it’s a long ways down there and we use fuel but we’re very careful to make sure that we do everything that we can to optimize our fuel usage and as a result of the great demand that we have had for South America we do see some opportunities to expand the length of time we’re down there, not different kinds of cruises but just the length of time we’re down there.

But we’ll be very cognizant of the impact fuel has.

Length of time, you mean – do you mean days?

Just the number of cruises.

Okay, thank you.

Hi Assia, this is Adam.

If you look at the development of onboard spend over time, and this is going quite far back, both before and after September 11th, there has been a long-term consistent attractive increase in what customers are spending onboard per day.

And we continue to see that.

You mentioned the Casino spending I think in the fourth quarter of last year.

And I believe we qualified at the time that the issue wasn’t that there really was a problem.

There was no problem with Casino spending on board it’s just that we had gotten a little bit exuberant with our forecasting for the quarter.

And in the end it turned out that the Casino spending wasn’t quite in line with where we thought it would be during the middle of the year let’s say.

But the pattern of spending over time has been and continues to be attractive and bodes well for the future.

Okay, and could you also comment on the Sovereign after the refurbishment whether you are seeing a significant yield improvement there?

Yes, the Sovereign is doing well.

We think that’s in part because of the revitalization that she underwent which has worked very, very well.

It’s also consistent with the very positive state of short cruising in general which is a benefit to our brand because we have a substantial presence in 3,4, and 5-night cruising with a number of different ships and Sovereign is performing very well within that context.

Great, thank you so much.

Your next question is from the line of Liz Osur with Citigroup.

Thanks, I’m still thinking (ph) you could address a little bit more detail on specific markets and also what you’re learning about the difference between European cruisers as you sort of enter the UK market more aggressively.

And then a separate question just on the balance sheet, if you could speak to any kind of a target leverage ratio.

I know you guys have talked in the past about trying to return to investment grade, but if there is a more specific balance-sheet target, thanks.

Hi, this is Adam, Liz.

In terms of the markets in general maybe one of the reasons why we haven’t provided much in the way of market-specific commentary is that when you look across all of the markets this year for the balance of the year, they’re in a pretty consistent positive position which is consistent with our yield guidance that we’ve given.

So there’s not a tremendous amount of variation from market to market.

It’s overall positive and of course the development of Europe this year has been very, very positive for both of our brands and so has Alaska.

I think it was mentioned before.

The core seasonal programs for this summer are shaping up very nicely and meanwhile the year-round programs mostly Caribbean warm-weather cruising have held up nicely as well.

With regard to your question on our balance sheet in what our optimal debt-to-total capitalization is, we focus on being investment grade.

And we would like to be ultimately probably a mid-range to upper-range triple-B and basically it’s whatever ratio gets you there which I think is probably -- is in the 40’s to mid-40’s in terms of debt-to-total capitalization.

By that being said, you know we also continue to look for opportunities and we want to make sure that we don’t have a – strictly a focus on that and that we focus on the business itself, but that’s really our target.

Okay, thanks.

Your next question is from David Leibowitz with Burnham.

Congratulations on a great quarter.

A few key questions if I may – totally unrelated one to another.

How much longer do we have to wait for a ruling on your lawsuit about part (ph) problems?

Any guess on that?

Hi Dave, if we’re going to take these as you ask them –

Yeah, I think it’s easier that way.

It is a lawsuit and I think that means we don’t have any idea.

There is no formal rule as to how long that takes so we are simply waiting.

At this point we’re waiting for an important ruling from the judge but beyond that we don’t know.

Okay, a second question, when you expand a vessel by putting in the new section and the bungee cords and whatever, how do you do the accounting for the expenses of the new – of the building of that section, etc?

What we do is, anything that adds to the life or is something new to the vessel is capitalized.

Everything else is usually expensed.

When you say capitalized, roughly is that 80% of out-of-pocket, or 90% or 20% of your out-of-pocket expense that gets capitalized?

It varies on every project.

For example, there is more being capitalized on the Enchantment because it’s a stretch and you’re adding a lot of new features –

But David, I don’t know about the proportions but we have given the numbers and maybe if you call Dan later he can give you the exact numbers.

I don’t know what they are in percentage terms and I think that probably varies from project to project.

But on the Enchantment we’ve given specific numbers.

Okay, third question, how many more vessels are there in the fleet that might be able to successfully undergo a stretch or expansion?

It’s not black and white.

There are – at some price almost any of the ships could be lengthened.

It would be most efficient on the sister ship to the Enchantment and modestly efficient to do it on at least two if not all of the other four Vision ships.

And after that it gets less efficient and therefore you may get to a point where the cost doesn’t pay for the work.

And you have to look at that on a case-by-case basis.

Okay, we’re only at one more question.

Okay, one more question.

One more question after you David.

I didn’t know you had a follow up.

Okay, the statement early on that bookings were running I believe 10% ahead of last year at this point.

Actually David, just to clarify, what we said was we have 10% less inventory than at the same time last year.

Could you share with us how much inventory we’re actually talking about?

In other words if last year we had 10% of the total capacity was unsold at this point so that this year it’s 9%?

If you could promise us that this word wouldn’t get back to any of our competitors I might share it –

Well given how many people are on the line – that’s not a very good bet.

We don’t normally give that kind of information out.

But obviously we have more capacity this year and to have less inventory left to sell, we’re doing a lot better than last year.

And we mentioned that both in terms of the number of bookings, but also in terms of pricing.

And the last point- the best year of pricing that the company had or that the industry had I believe was either ‘99 or 2000?

Is that correct?

Yes.

How far off of those rates are you right now, or are you actually running ahead of that?

David this is Bonnie.

We said that at the end of ’04 we were approximately 2% of our peak yields and that’s the total yield basis.

And on a ticket basis it was a little bit more than 7%.

Based on the guidance we’re given you at the end of ’05 we will be ahead of those big yields.

Excellent, thank you very much.

Thanks David, and operator we’ll take one more question.

Certainly, your final question will come from Michael Abramson (ph) with Bridger (ph).

Hi, my question has actually been answered, thank you.

Let’s go for one more.

Sure, we’ll take that from Siree Madison (ph) with Wachovia.

Thank you, just decided to sneak that in. [Picture on a] balance sheet you paid down a significant amount of debt- over $600 million in the quarter and I think that’s out of the $725 million that’s coming due this year.

But you still have significant free cash flow for the rest of the year.

So you now have much more flexibility in terms of returning capital to shareholders if you were to do so.

Can you update us on how you would prioritize this free cash flow and cash usage over the size of your debt maturities getting smaller?

Well I think, obviously this year we will have considerable debt paid down.

And our objective still remains to get to the investment grade arena- which we’re not there yet.

And so we will be focusing on continuing to pay down debt until we get there.

After that then obviously you have options to do a variety of different things, but you do need to keep in mind that we have 3 ships on order and we need to fund those as well.

But as we develop free cash flow as we get to investment grade and as we look at what our capital expenditures are, we will certainly look at the various options available.

Bonnie said I think in response to your question that roughly your target debt-to-capital ratio would be something like 40 percent.

I sort of quickly calculated that at current equity levels- that sort of implies the debt reduction of about $1.8 billion.

That means that -- it will always be overstating it, you only have about $850 million or so of scheduled debt maturity over the next 3 years including this year.

My question relates to your lines that are now in the money and that are callable.

In the past even though your stock has been at a level where you could comfortably call those securities, you have chosen not to do that.

But I think you said that the rating agencies give you some equity credit for that because it’s in the money as well as the fact that there are some dividend issues and high dividend costs associated with converting them.

But given your debt reduction goals would it make sense for you to convert that security into stock, not necessarily now but when stock gets back up maybe to the 48 level?

Well what we’ll do is we’ll certainly look at it at that time.

We look at this periodically.

We made the decision not to do that at this point, so we’ll constantly look at that.

Okay, thank you very much.

[Inaudible] I think we also ought to make – cause I think you may be misunderstood something.

Luis didn’t say that the objective was to be at 40%, he said to be in the 40’s which is a 10% range.

So I just wanted to be clear that we’re not setting the target –

It’s whatever gets you to the level of a Triple-B.

Once we get there, once we’re comfortably in that range, that’s the level we’re comfortable with.

Thank you for clarifying.

Well thank you very much everybody and we look forward to talking to all of you on our second quarter conference call.

Thank you.

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