皇家加勒比遊輪 (RCL) 2005 Q2 法說會逐字稿

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

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

(OPERATOR INSTRUCTIONS)

As a reminder, ladies and gentlemen, this conference is being recorded today, July 27, 2005.

Thank you.

Mr. Leon, you may begin your conference.

Thank you, Judy and good morning, everyone.

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

Joining me here today are Richard Fain, our Chairman and Chief Executive Officer, Adam Goldstein, President of Royal Caribbean International, Dan Hanrahan, President of Celebrity Cruises and Dan Matthews, our Associate Vice President of Investor Relations.

As a normal course of these conference calls, I need to refer you to the first slide of our presentation which can be found on our website, rclinvestor.com.

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

First, Richard is going to be providing us a brief business and revenue overview.

After that, I will go through some of the details on the quarter's financial results.

Then Richard, Adam, Dan, and I will open the call for all of your questions.

Richard?

Thank you, Luis and good morning, everyone.

As you can see in the press release, we did have an excellent second quarter and we have a lot of good things to talk about.

Obviously, we're most pleased to be able to report such a large improvement in results during this period.

Normally, capacity increase is a major factor in driving earnings growth, and therefore, we're particularly pleased to be able to report such growth driven exclusively by operating performance.

The demand environment continues to be very robust and supported a significant 6.3% increase in net yields.

Even more pleasing, from our point of view, is the fact that it was mirrored in both revenues, ticket revenues, and onboard spending.

While it's hard to complain about record earnings, the quarter was not perfect.

The quarter was marred by another huge increase in fuel prices, as well as costs associated with vessel incidents.

Our management team has worked hard to mitigate all our costs and have concentrated especially on reducing energy usage and improving how we buy fuel.

But it's impossible to overcome completely such enormous price hikes.

As you know, we've given up trying to predict prices into the future and essentially wimped out on the subject.

And now we just tell you how current price levels would impact us.

At today's price level, the impact is huge.

Our strong yield growth was more than sufficient to offset these costs so far, but it's still tough to realize how much harder these costs have made all of our jobs.

On the other hand, it's important to keep in perspective that even at these high fuel levels, our oil costs represent only about 7% of revenue.

Looking out to the rest of the year, we still see a very strong demand environment for both Royal Caribbean and Celebrity Cruises, with net yields still estimated to increase in the range of 6% to 7%.

This should make 2005 the second highest year for yield growth in our history as far back as we have been tracking these numbers.

The booking curve remains positive and appears to have stabilized.

You can see this on slide two, where approximately 36% of our bookings are coming within 90 days, similar to the level that we reached in the same quarter last year.

As you know, we've also taken a number of steps to help further stimulate this demand and to improve our bottom line.

These include improvements in our product offerings on both brands and revitalizations of the enchantment of the seas and shortly, the Century.

They also include the no rebating policies that we adopted last year and our new easy group policies on group bookings, which we adopted earlier this year.

These policies are both proving to be very popular with our travel partners -- at least the majority of our travel partners-- and helping our revenue management systems quite nicely.

Looking at the next five slides we have in the presentation gives you a better perspective on how the enchantment project works.

I still find that a remarkable project and think the pictures give you some sense of what it entails.

On another exciting front, the company recently entered into a letter of intent to launch a new class of landmark ships for Celebrity Cruises.

This new design includes a number of innovative features for Celebrity, including extremely large cabins and especially, an unusually high ratio of balcony cabins.

We've also announced that First Choice Holiday is today redeeming its convertible preferred shares.

Our original agreement with First Choice, provided they could do this any time between now and 2010.

The fact that they have decided to do so now is an indication of how well they are doing.

We continue to be impressed with First Choice and pleased with our strong relationship with them, which is also growing, as is our joint venture cruise line.

Lastly, I'd like to make a few comments about 2006.

While we only have limited information concerning next year, our products continue to generate very solid demand.

As a result, all our brands have a higher percentage booked today than they did at the same time last year and at a higher price level than they did at the same time last year.

Since 2005 appears itself to be such a gangbuster year, this is all very encouraging.

And although we don't have enough visibility to be more specific about yield guidance for 2006, the strong demand that we're currently seeing makes us very optimistic.

These early indicators do point to another year of positive year -- positive yield environment.

Now I'd like to turn this back to Luis.

There are a lot of good things happening, and Luis will go through them in more detail.

Afterwards, Adam and Dan will help Luis and I in answering your questions.

Luis?

Thank you, Richard.

Our second quarter results are summarized on slide eight.

As can you see, we reported record second quarter net income in 2005 of $154.5 million or $0.71 per share.

This compares to net income of $122.2 million or $0.58 per share during the second quarter of 2004.

This represents a 26% increase or improvement in net income versus Q2 of '04 and outpaced our last EPS guidance of $0.50 to $0.55.

We're particularly pleased with the performance, as it was accomplished in spite of a significant spike in fuel prices, no increase in capacity and also the cancellation of two Celebrity Cruises.

The primary driver over earnings growth is attributable to our ability to increase pricing.

Consistent with what we have seen over the past 15 months, our net yields continue to be very strong and in the second quarter, increased 6.3%.

The strength in pricing was seen in both ticket prices and also on onboard spending.

While our net yields were good and contributed to our healthy performance, the main reason for beating our forecasts relate to expenses.

In particular, lower than anticipated increases in net cruise costs were the primary driver in our better than expected EPS figures for the second quarter of 2005.

In addition, interest was also lower than forecast.

Compared to the same quarter in 2004, net cruise costs for APCD increased 5.7% versus previous guidance of an increase of approximately 8%.

Consistent with general market trends and what I suspect is no surprise to anyone, fuel continues to be the primary driver of these increases.

During the quarter, at the pump prices increased 37%.

After benefits realized from fuel hedges, this translates into an increase of approximately $23 million year over year.

When it's all said and done, fuel expenses accounted for 4.1% points of the increase in net cruise costs.

This equates to approximately 7.3% of total revenues in the second quarter of this year, which compares to 5.6% of total revenues in the second quarter of last year.

Nonfuel net cruise costs were better than expected during the quarter, but much of this variance was driven by a shift in certain expenses into the second half of the year.

In addition, we are doing very well with our $50 million cost control initiatives that we announced in February.

For the second quarter of 2005, we came in slightly ahead of our track and saved approximately $17 million.

Year to date, we have saved approximately $32 million.

These items were partially offset with general inflationary operating costs and expenses associated with vessel incidents that we announced earlier.

In addition to net cruise costs increasing less than originally expected, interest expense also benefited from improved terms on our revolving credit facility, paydown of debt, and lower than anticipated interest rate.

Cruise operating income for APCD also showed a healthy improvement in the second quarter of this year.

Despite the significant spike in fuel, we were able to increase operating income for APCD by 10% to $40 in the second quarter of 2005 from $37 in the second quarter of 2004.

Now, before I go through our costs and earnings outlook for the year, I would like to touch base on some general information.

We have seen some real improvement in the strength of our balance sheet.

As of July -- excuse me.

As of June 30, our outstanding debt balance since the end of 2004 has been reduced by approximately $1 billion, which has contributed to our net debt to cap ratio, improving to 46.5%.

Projected capital expenditures have also changed from our previous guidance.

For 2005, 2006, 2007, and 2008, we estimate the capital expenditures will be approximately $500 million, $1.1 billion, $1.1 billion, and $1.6 billion respectively.

And really, the only change is the inclusion of the new Celebrity vessel.

Slides nine and ten show our 2005 to 2008 estimated capacity information and our 2005 fleet deployment respectively.

Looking ahead at costs for the balance of the year, we now expect net cruise costs for 2005 to increase in the range of 6% to 7% when compared to 2004.

While this does represent a 1% increase from our previous guidance, this entire increase is attributable to higher fuel costs.

Due to the unpredictability of fuel costs, we will be consistent with our previous methodology, and we're not going to try to predict where fuel prices will possibly go over the next six months, nor will we rely on the forward curve.

Our cost outlook simply assumes that fuel prices remain at their current levels for the remainder of the year.

Since our last update, prices have continued to rise and are currently about 30% higher than the average price for the second half of 2004.

Obviously, this is a significant increase.

I think quantifying that kind of increase gives everyone a better understanding of the impact fuel has had on 2005.

If fuel prices for the remainder of the year remain at today's level, our 2005 fuel costs -- this is net of hedging and the fuel savings initiatives -- would increase $96 million as compared to 2004, which would represent an increase of 36% on an APCD basis.

Looking at this increase from another perspective, this represents a $32 million increase in fuel costs compared to our last conference call just three months ago.

On an EPS basis, fuel costs since our last update would negatively impact earnings per share by $0.14.

Now inclusive in this $0.14 are changes in capacity, hedging and consumption levels.

Such an increase in fuel costs would account for approximately four percentage points of the overall 6% to 7% increase in net cruise costs for ABCD.

We have taken advantage of some of the fuel hedging opportunities seen in the market, we still have less consumption hedged in 2005 than we did in 2004, and certainly at less favorable rates.

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

For 2005, we have hedged approximately 16%.

Currently, we expect that this hedging difference between the two years will account for approximately $6.4 million in additional fuel costs.

For 2006, we only have hedged 10% of our consumption.

Excuse me, the Q-4 consumption.

As we have previously communicated, we continue to strive for ways to mitigate rising fuel costs that are exclusive of hedging.

Such initiatives have included everything from focusing on utilizing less expensive fuel for our gas turbine engines to be more fuel efficient.

On the fuel efficiency side, we have implemented a number of programs allowing us to decrease our capacity adjusted year over year fuel consumption through June by approximately 4%.

This process continually evolves, as we identify best practices and incorporate them across the fleet.

Ultimately, we believe that our consumption for 2005 will be approximately 7.2 million barrels or slightly less than 1.1 million metric tons.

Fuel is expected to represent approximately 7% of total revenues.

The remaining 2% to 3% increase in net cruise costs is primarily attributable to expense items previously communicated and is in align with our previous guidance, despite incurring associated costs with vessel incidents.

Prior year comparisons, especially for fuel, and the shift in timing of certain expenditures, will cause the anticipated increase to be higher in the third quarter than the fourth quarter.

Given the aforementioned assumption for fuel, we expect net cruise costs for the third quarter of 2005 to increase by approximately 9%.

It's expected that approximately 5 percentage points of the 9% increase will be attributable fuel.

We're also lowering our expectations for depreciation and amortization expense for 2005 by $5 million.

We now expect that depreciation and amortization expense to be in the range of $405 million to $415 million.

We also anticipate interest expenses to be $15 million lower than our previous guidance and to be in the range of $285 million to $295 million.

When it comes to interest expense, it's really important to note that it does not necessarily correlate directly into an impact to earnings per share.

This is due to the fact that the portion of interest expense associated with our zero coupon convertible debt instruments is already taken into consideration and diluted EPS calculations.

Therefore, any decrease in interest expense associated with our zero coupon convertible notes will not impact our earnings per share.

Through June 30, we have had roughly 253,000 notes convert into approximately 3.9 million shares.

As you noticed in the release, there are a number of other items that are going on and that are going to impact the back half of the year, and also going forward into 2006.

Effective today, First Choice Holidays, our joint venture partner, and Island Cruises, called for the redemption in full of its 6.75 convertible preferred shares for a one-time cash payment of $348 million.

Now, as a result of this transaction, we will be recognizing a gain of approximately $44 million or $0.19 per share.

This also means that the company will no longer receive dividends associated with these convertible preferred shares, which were roughly $6 million on a quarterly basis.

Now, while the decrease in dividend income is expected to negatively impact 2005 earnings per share by approximately $0.04, the decrease in dividend income will be partially offset by interest benefits resulting from the additional liquidity provided by the redemption.

By the way, the receipt of these dividends was included in our previous EPS guide.

The net impact of the redemption, inclusive of reception resulting from the use of proceeds, is expected to be $0.17 overall in 2005.

We also announce today that we have made a partial call on some of the outstanding LYONS or the liquid yield option notes, which are due in 2021.

Given the current stock price, we expect that most holders of the LYONS would choose to convert their portion of the LYONS to be redeemed into common stock.

If all of the LYONS called for redemption were to be converted into common shares of the company's stock, this would result in the issuance of approximately 4.5 million shares.

Now, for those holders of the LYONS who choose not to convert, we will pay the redemption price of $474.64 per LYON in cash, which essentially equates to $40.51 for common share equivalent.

The Company also announced today that following the redemption date of the LYONS, it expects to repurchase, on an orderly basis, up to $250 million of its common stock, which would include open market purchases, accelerated share repurchase program, or even a tender offer.

Such a stock purchase can take several months to execute.

Therefore, the benefit that we would expect in 2005 would be diminutive.

The total impact of the first choice redemption, LYONS called, and any share repurchase are really not expected to have any kind of a significant impact in the 2006 earnings per share.

Now based upon these estimates, the fuel assumption that we just made and the revenue outlook that Richard discussed, we expect 2005 EPS to be in the range of $2.70 to $2.80.

Third quarter 2005 EPS is expected to be in the change of $1.45 to $1.50.

Well, we have just thrown an awful lot of numbers at you.

Given everything that's transpiring in the back half of the year, I think it helps to take a step back and review our estimates before I turn the call over to the operator.

When you look at our full year EPS estimate, it is basically consistent with our last guidance.

Obviously, there is a lot of noise in the figures now, but to help everybody clarify the impact of the different items that we discussed, I thought it would be helpful to review the primary changes in our figures.

On our last call, we estimated 2005 EPS to be in the range of 265 to 285.

Subsequent to our call, we had an unplanned emergency dry dock associate with the summit(ph) that ultimately caused deterioration to 2005 EPS of approximately $0.03.

On top of this impact, higher fuel costs would negatively impact 2005 EPS by an additional $0.14.

So in total, these two items result in a $0.17 deterioration to our previous guidance.

Now, almost exactly offsetting this deterioration is the first choice redemption, the whole transaction, which is expected to be accretive in 2005 EPS by approximately $0.17.

Thus, the first choice redemption essentially offsets the increase in fuel ,as well as the unexpected vessel incident.

Hopefully this is helpful in understanding our outlook for the balance of the year.

I guess at this point I would like to turn the call over to the operator to take any of your questions.

(OPERATOR INSTRUCTIONS)

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

Hi guys.

Very helpful, clear conference call there.

A couple questions I have for you.

A lot of them are mainly just housekeeping.

You talked about the hedges.

Is there a way that we could get quarterly hedging information and then also the barrels being used per quarter?

I will tell you what.

I don't think I could give you the barrels used by quarter, but I could tell you a little bit about the hedging.

If you want any more information than this, you might want to call Dan after the call.

But as we look at 2005, we're hedged about 25%.

We were hedged 25% in the first quarter, 10% in the second quarter, 16% in the third quarter, and 11% in the fourth.

And then for '06, do you have that broken down in quarters yet?

It's about 10% in the fourth quarter.

Okay.

And then you had mentioned that your DNA was declining.

Can you just explain why that would be?

For depreciation and amortization?

Yes.

You know, I just think it's just fine tuning our numbers.

It's also the timing of certain capital expenditures and I think that's all it is.

It's not a very large number.

Should we shift it out to '06?

No.

Okay.

And then with First Choice, you had mentioned that the -- there is a benefit because of the increased liquidity.

I'm wondering what kind of interest income assumptions you're making.

The issue is that there is going to be some interest assumptions.

But what we're going to be doing with the funds is basically buying back a portion of the LYONS.

So to kind of look at the benefit, it's going to be kind of difficult because you're going to have the timing of the buyback shares.

It's very difficult to quantify, but all we're saying is, look we're getting this cash, we're going to have some sort of an offset.

We'll benefit from it.

But it's all going to depend on the timing of the buyback of the share.

Okay.

And then do you think that the rating agencies are going to have an issue with your buyback announcement?

No, we do not.

We have had some discussions with them, and we have (inaudible).

And then finally, would you say that the remainder of the year is fully booked by now?

Adam, Dan?

Hi, this is Adam Goldstein.

We continue to book a little bit for the third quarter and a little bit more than that for the fourth quarter, which is typical for being in late July.

We have substantially all of our business booked for the year.

As Richard and Luis have said, we're in a generally robust market condition.

But we continue to book late business throughout the year.

And how much would you say is booked for 2006?

We don't normally give out those numbers, Felicia.

But I would like to come back to something you asked earlier.

While I think the numbers on the bunkers you asked in terms of volume, it is pretty even throughout the year in terms of the variance between quarters, between the third and fourth quarter, is really very small.

So I think if you assume for your model purposes they are pretty much even, with a little less actually in the first quarter of the year.

But otherwise, we're pretty straight throughout the year in terms of volume.

And if I could also add on the -- you asked about the buyback of the converts and the impact on the rating agencies --

No, the buyback of stock.

Sorry.

Right.

As Luis says, we did talk to them.

I point out that we have -- as Luis mentioned, we've had cumulative buy -- not buybacks, conversions of almost four million shares to date, converted into four million shares, where in effect forcing the conversion of another 4.5 million shares.

And so that means that we will have increased our equity by about 8.5 million shares and obviously $250 million buyback program buys back only a portion of that increased equity.

So what that really means is that we have -- we will have already and will continue to strengthen our balance sheet, expect to end the year below a 45% debt to equity ratio.

Who would have imagined that not so long ago?

So obviously, what we are saying, rating agencies is that our overall credit position has now continued to improve quite dramatically, actually, and we would hope and expect of course they would note that accordingly.

Great.

I appreciate it.

Thank you.

Our next question comes from the line of Robin Farley with UBS.

Thanks.

I have three questions.

One is, I wonder if you can give a little more color on what expenses are shifting from Q2 to Q3 here?

Secondly, in the past you have given out where your load factor was relative to the prior year.

I wonder if you'd be willing to give a little more clarification on the load factor.

And then thirdly, just to clarify, since there are so many moving parts here, it sounds like the share to purchase and loss to dividends maybe offset each other.

But net-net when you look at your guidance versus a quarter ago, if you took out the non-operating gain here from First Choice, it's lower operating earnings and you're attributing most of that to the fuel increase.

I just want to clarify that the gains included in your full year earnings now was not the case a quarter ago.

I just want to clarify that.

Why don't I try two of your questions.

The load factor, I will defer to somebody else on.

With regard to the expenses or shifting, we have several expenses that are shifted.

It's largely, we've got SBNA(ph) expenses, we have dry-docking expenses, other things of that sort that are shifting into the third and also the fourth quarter.

It's kind of a combination, a variety of different expenses.

With regard to the share repurchase, Robin, I think the way to look at it is essentially yes, we do have a one-time gain.

There is no question about that.

The fact is that our earnings are deteriorating, primarily by the increase in fuel.

The transactions we're talking about, with regard to First Choice, are offsetting that increase.

We're not seeing an increase in other net cruise costs or anything else relating to the business.

It really is all related to the fuels.

Okay.

The fuel and the incidents.

So I think in fact our guidance has not reduced except for those two things, offset by the First Choice gain.

And then the load factor in the past.

You have been willing to talk about load factor versus the same time last year.

I think we have said we have given relative and we continue to say that we are relatively -- I don't think we've given numbers out on that.

Maybe I'm wrong.

Dan is sort of telling me we have not given the numbers.

At least we don't remember it.

But what we've said is obviously at this point, we have a major portion of our bookings in for the rest of this year.

We're still low in terms of bookings for next year.

The percentage is relatively low.

But it's higher than it was last year at this time.

It's still not a huge number.

For this year, there is still some space available, as Adam pointed out.

But our load factors are high compared to our ability to give forward visibility, and that's why we've given rather than arrange an approximate figure for the third quarter and a relatively narrow range for the full year.

I don't know too many businesses that would give you a range of only 1% in yield for the year at this stage.

Okay.

Great.

Thanks very much.

Your next question comes from the line of Scott Barry with CSFB.

Yes, just a quick questions.

You mentioned SGNA(ph) being deferred.

SGNA continues to grow well in excess of capacity growth for you guys.

Is it ever reasonable to think that in the future that GNA would grow more in line with capacity?

I think that that's a correct assumption, Scott.

Some of the things that we did this year, as you may recall, we talked about some of the IT projects that we're investing in.

It's not been a whole lot since 9/11.

Also we talked about splitting of the sales force, which has impacted SGNA.

And then finally we have made investment in international operations.

Those investments were roughly about $15 million, which is what we announced.

I think that as soon as we get those things, we're obviously going to go for some payback with our international investment, also our investments in IT.

If you look at SGNA relative to those statistics as a percentage of revenues, hopefully, we expect it going forward (inaudible).

Okay.

I guess what's surprising is you have a huge cost-driven beat here in the Q2.

None of it appears to be really flowing through to the full year.

All of that spending has now been deferred into the back half.

So your operating income per berth for the full year, the growth contracts pretty substantially.

How important is it to you guys to improve operating income per berth on a going forward basis?

Oh, it's very important.

I think that's our primary driver and an important part of our bonus program, which makes everybody here quite focused on that.

On the other hand, a good example is splitting of the sales force.

Clearly, our bonuses would have been higher if we had not done that, but we think that that will pay off fairly quickly in terms of higher revenues.

And so --clearly we're very focused on that.

That's our primary measure here.

Okay.

Thanks.

Your next question comes from the line of Liz Ozure (ph) with Citigroup.

Thanks.

Just a couple of quick questions.

First with regard to the international sales force, can you tell us what percent of capacity is being sourced in Europe now and how that might have changed?

Can you guys hear me?

The percent -- I don't have the figure.

We're kind of looking if we have the figure right in front of us.

The percent outside the U.S. is a little less than 20%, and that has been growing.

I think a year or two ago it was 15%.

Europe is a prime driver of the increase.

Although we're also getting good increases in South America as well.

But I think we are seeing disproportionate growth in Europe, and that's a reflection of the strategy of getting more international growth.

I think that will -- we expect that will continue.

Okay.

Thanks.

Second, just from a housekeeping perspective, can you tell us what annual shares outstanding you're using for your EPS guidance?

It's about $236 million, roughly.

Thanks.

Then just finally, you have talked a lot about fuel efficiency and driving down the use of fuel and the cost of fuel.

Can you just be a little more specific on how you're going about that?

Okay.

Well, we've done a lot of things -- we've commented on some of these, Liz, on some of our other conference calls.

I think maybe what I would like to do is maybe have Dan talk about them.

Hi, Liz, it's Dan.

There are a number of things we're doing, all the way from looking at our itineraries very carefully and sometimes it isn't even a change in itinerary, but it's just the way the itinerary flows.

So maybe the crews -- the staff that came first would then come at the end or vice versa.

We have looked at those things.

We have actually even gone to the point where we're actually looking at lighting on the ships and if there are more fuel-efficient lights with our marine department.

We monitor each and every ship on every single cruise and we get a fuel report back from them.

We know how they operate the ships as they are docking, as they are leaving the port.

There are things along those lines that we're doing on an ongoing basis to make sure that we're doing everything we can to mitigate fuel.

We're watching very carefully where we buy fuel as we work our way through a cruise.

If the prices are cheaper in a certain port, we'll buy fuel in that port versus someplace else.

That's a few examples of what we're doing.

Thanks, that's helpful.

Can I assume sort of an order of magnitude that where you buy the fuel is sort of the most -- the most significant driver?

Run that one by me again.

I'm sorry.

If we were just to try to rank what the most significant driver was of lower fuel.

The most significant driver of lower fuel is probably what we're doing with monitoring each and every week, how our captains use fuel and what they are -- they have become very, very competitive, and they like to, week on week, beat the fuel that they used on the previous cruise.

So it's probably operating the ships just as efficiently as possible.

Prices change in the ports all the time, so I couldn't say where we buy the fuel is the most efficient way to do it.

Okay.

Thanks a lot.

Your next question comes from the line of David Anders with Merrill Lynch.

I have two questions.

First, Leon, could you comment on the selling expense?

Was some of that pushed into the third quarter?

And is it pushed just because demand is so strong you didn't need to spend it into the second and maybe you won't need to spend it in the third and fourth?

That's one.

And then number two, Richard, could you comment-- is there any update on the passport issue with respect to the Caribbean?

Have you heard anything from Washington?

Okay, I will address your first question.

And then we'll have Richard answer your other question.

The selling expenses, that's kind of an interesting -- an interesting one.

Every year we kind of go through things, we put on a plan, we give you projections with regard to selling and marketing expenses.

It depends on demand and it depends on our advertising program, it depends on the need, back and forth.

We still intend to spend the amount of selling, have the selling and marketing expense for the year that we originally planned.

It's just the fact that some of it just did not take place in the first and second quarter, and those will be shifting probably more heavily in the third quarter than in the fourth quarter.

With respect to the passport issue, for those that are not aware of it, there is a proposed regulation that would require U.S. citizens to have passports to take cruises into the Caribbean, whereas until now, they could go on other forms of documentation like birth certificate, voter registration cards, et cetera.

And today about half of our customers use their passports and about half do not and there is obviously some concern that adding a requirement that they have a passport to take the cruise has the potential for discouraging some business.

There is a proposed regulation out there.

It would take effect at the beginning of '06.

We are hopeful that that will be deferred for another year and I think it's always dangerous to try and -- to try and guess what Washington will do in the end.

But we think there is a quite good chance that they will, in fact, defer it for a year.

But, of course, that's not certain.

On the other hand, I should point out that it would simply be a deferral, and we think it's -- it's a small enough part of what people do that we don't believe that it would have a terribly dramatic impact on our bookings.

Great.

Thanks.

Your next question comes from the line of Assia Georgieva with Infinity Research.

Good morning.

Congratulations on an excellent quarter.

I had a quick question.

Given that you outperformed initial guidance and despite the cancellation of one full cruise and then one that partly fell in Q1 and Q2, is it possible that the 6% to 7% guidance that you have currently given us for all of 2005 is at the low end of the range?

And again, I understand the expense considerations, but just talking about the yields.

We have been fortunate this year that the pattern of demand and our ability to turn that demand into revenue has sustained us through some of the incidents that we have faced.

And so we're still within that range that we've given.

We're confident that we will continue to be right in that range.

So despite the fact that in Q2, you again outperformed by 30 basis points.

You do not believe that there would be an upside to the current guidance?

I think it's raised our confidence level about the guidance we have been giving and I suspect that will continue for the balance of the year.

And in terms of the chances of a break even or a slightly positive Q4 this year, is that something that's possible or we should still expect a slight loss?

I think that similar to the last year, we could expect a slight loss for the fourth quarter.

And once again, the buyback at current levels, $46 to let's say $48.

That doesn't seem accretive, at least according to my model.

Do you see it as accretive or neutral?

We essentially are looking at all of this as being somewhat neutral.

Okay.

All right.

Well, thank you so much.

Your next question comes from the line of Steve Kent with Goldman Sachs.

Mr. Kent, your line is open.

Can you hear me?

Yes, we hear you now, Steve.

Richard, could you just give me a little bit more color on this passport issue?

I guess I'm trying to figure out why you think it's not material or not significant if 50% of your customers roughly don't have passports.

Sort of how all this would roll out.

I guess the other question is -- because I know we've talked about it a little bit.

If you roughly defer $20 million on marketing and advertising, I guess I'm still puzzled how you can spend $20 million in six months, so quickly above your current pace, which we've all forecast.

So I guess I'm still struggling with those two issues.

I will start with the first question on the passports.

It is difficult to say.

This is something that is going to affect a lot of people.

It affects all travel.

It clearly affects the Caribbean nations.

And I didn't mean to say it wouldn't have any impact on us.

I think it's something we all think will add one more burden to the traveling public and, of course, you hate to see any burden to the traveling public.

But I think in the scheme of things and given all the other burdens that have already been added, I don't think we necessarily see that as being that dramatic an impact.

To the extent it does have an impact, we think it will be more focused on the shorter cruises than on the longer ones i.e., sort of the three and four-night cruises would be potentially more impacted.

But we think that particularly with more time to get used to it, we think Americans will acclimate to that as unfortunately, we've all had to do to so many others.

Do you have any special programs, though, with your travel agents to help them out or compensate first time cruisers?

What kinds of things are you doing to maybe offset this?

Well, at this point it is largely an educational campaign.

If you go on our cruisingpower.com for travel agents, which is a system that basically helps facilitate what they communicate to their customers and advises them in advance so they have a little bit of time to gear up to it.

I think given some time to acclimate to it, the need to get a passport can be marketed as even something that adds a little twinge of novelty to the experience.

And as I say, half our passengers already use passports, even though they don't have to.

And that's obviously much higher percentage than the percent of the U.S. population that has bothered to get passports in the past.

So we have started an educational campaign.

We have done so with direct information to the travel agents.

And on our -- it's also -- it will be part of our insight program, reminding them of exactly what's needed.

I think that's all we can do, and of course, we are working with the federal government and with other people who are affected by this to hopefully get the rule delayed.

I will answer the other question.

I guess, Steve, your question was how are we going to defer all this marketing and are we going to spend all this marketing?

I think, first of all, it's not all marketing defenses are being deferred.

These include a variety of different things, certain repairs of maintenance that we have assumed.

There is GNA, there is some of our international initiatives that we're doing, some of those things which have been deferred.

So it's a whole myriad of different expenses.

Yes, the guidance we're giving you is we expect to see things (inaudible).

By the way, Steve, we should also mention.

This comes back to something Scott asked earlier.

The guidance on cost hasn't changed, but we also had to incur the costs on some of these special incidents.

And so that is actually in it.

So the non-incident costs actually would be -- would be better in our guidance than it was previously.

Okay.

Thank you.

Your next question comes from the line of David Liebowitz with Burnham.

Let me add my congratulations for a fine quarter.

A brief question on the preferred with First Choice.

That's a convertible preferred.

In reading the press release, it appears you're accepting cash instead of converting to equity.

Is that an accurate statement?

Yes.

Is there a reason why you have chosen not to convert?

Yes.

By pure coincidence, as these things go, the conversion price is almost exactly equal to their share price today.

And so especially when you're given the costs and uncertainties of that position, in fact we're better off taking the cash.

That's right.

I think, Dave, to expand on that a little bit.

If you look at it, even if it was a little bit higher, you have the issue that there would be a lot of shares and the liquidity may not be there.

It would be very difficult to sell these shares.

We're not really interested in having big shareholders.

And I think this was consistent with our discussions with First Choice.

This worked out to be beneficial to both of us.

Another question.

Do you own shares in First Choice, aside from the convertible?

No.

Okay.

So the -- but now then the last thing would be you do have a joint venture with Island Cruises or is that also changed with this redemption?

Oh, not at all.

The redemption, as I mentioned in my remarks, you know, this was something that was anticipated when we originally did this transaction years ago, that this might well be happening, particularly if their performance was good.

And the joint venture with First Choice is an important part of our relationship, it continues, and in fact, later this year they will -- that joint venture will be taking over the horizon and operating it in the joint venture.

So we're expanding the joint venture.

And what percentage of the joint venture do you own?

It's 50-50.

Thank you very much.

Your next question comes from the line of Helane Becker with Benchmark.

Thank you very much, operator.

Hi, everybody.

Luis, I think you were talking about some IT spend.

Did you break out how much there will be -- how much of your cap ex is IT versus other?

My second question is probably for Adam.

With respect to booking, are you noticing -- I know you said you are very strong and sold out.

But is there any specific weakness with people being concerned about hurricanes in the Caribbean later this summer, that maybe August and September are lower or booked lower than you would have expected?

Thank you.

Okay.

Let me go ahead and answer your first question with regard to the IT spend.

The IT spend, we don't really break that down independently in terms of what our cap ex is.

We do have a capital portion related to IT and also expense portion.

We don't bring that -- we don't really break that out.

The only reason that we comment on it is the fact that we did not spend a lot on information technology after 9/11.

I guess in a sense we're making up for lost time.

But we have a lot of programs in effect.

It's a large expense but I would not say it's something that we're going to be breaking down.

Okay.

I think it would be a little bit of an embellishment to say that before we said we were sold out for the remainder of the year.

We are booking in accordance with our expectations and the guidance that we've given you.

If you look at the statistics we give about how many people book within 90 days of a quarter, you can kind of see the pattern that we would be in.

We do think that the hurricanes have probably had an impact in two ways.

One is the carryover effect from the four hurricanes in the Florida area last year having some influence on people's view of this year.

And the second thing is that we had early hurricanes in this season, earlier than normal, which may also have an influence.

It's hard to pick that out of the overall booking equation, but we do suspect that there has been some negative affect associated with those two hurricane-related phenomenon.

Okay.

Thank you.

Operator, we'll accept two more questions.

Okay.

Your next question comes from Bob Simonson with William Blair.

Good morning.

Is it possible to summarize on a cash flow basis the impact on equity, the share buyback plus the conversion, what that will look like in the cash flow in terms of the retained earnings?

And secondly, do you have -- Richard, I think you said your debt might be down under 45%.

Do you have an estimate for the debt levels that you're in?

A dollar limit or the dollar amount?

Okay.

Let me try to address your first question.

The debt obviously is going to decline by $182 million.

The call of the line.

Equity at the same time, will increase by (inaudible).

And then we have a share buyback .

The maximum $250.

And no, we haven't given a more specific figure for the end of the year.

Except that we said that we expected it to be better than 45% net to capital.

Okay.

And historically, you haven't commented on it but I will try it anyway.

How are the yields at Celebrity doing in this year and as your outlook is for the rest of the year versus how Royal is doing?

Is there much difference in the improvements?

The yield in Celebrity continues to improve.

I think the comments that we have made, the yield increase that we're seeing -- commented publicly is that we're seeing higher yield growth on the Celebrity side.

Very good.

I can add to that maybe, Bob.

As you can, that's a real focus of mine.

And that we are pleased with the results so far but by no means declaring victory and very, very focused on improving yields further.

Last one is you will pay a tax on the first -- on the conversion of the preferred?

No.

So there is no taxes due on any of these changes?

Correct.

Ok.

Thank you

We do pay some taxes in different issues, but everything about taxes is included in our guidance.

Operator, this will be the last question.

We'll take our final question from Dean Gianoukos with JP Morgan.

I guess mine has been answered.

You did include the $0.17 one-time event in the guidance, so your guidance is on an operating basis down, correct?

I know the way you winded up.

But you did beat the quarter by $0.11 of $0.16 cents of your previous guidance.

You didn't raise the number in your accounting one-time item.

Effectively guidance is on an operating basis down, is that correct?

That's correct.

It's basically the increase in the fuel costs.

Okay.

Thanks.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

I will now turn the call back over to management for any closing comments.

We would like to thank everybody for participating in the call.

As you well know, Dan Matthews will be available for any further questions that you have.

The management team at Royal Caribbean thanks you.

We look forward to our next conference call.

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

You may now disconnect.