皇家加勒比遊輪 (RCL) 2005 Q4 法說會逐字稿

Good morning.

At this time I would like to welcome everyone to the Royal Caribbean Cruises fourth quarter earnings conference call.

All lines have been placed on mute to prevented background noise.

After the speakers remarks there will be a question and answer session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Leon, you may begin your conference.

Thank you Natasha, and good morning everyone.

I am Luis Leon, Chief Financial Officer, and I would like to welcome you to our fourth quarter conference call.

With 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 Greg Johnson, our Associate Vice President of Investor Relations.

As is normal in these conference calls, I would like to refer you to the first slide of the presentation, which can be found at our website, RCLinvestor.com.

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

Richard will now provide a brief business and revenue overview, and then Adam and Dan will say a few words about their respective brands.

After that, I would go through some of the details of our financial results and future guidance, and then we will open the call up to your questions.

Richard.

Thanks, Luis and good morning, everyone.

It is I admit that it is always more fun to talk about good results, and this last quarter was remarkably good.

Ticket prices were up nicely, on board revenues were very strong, fuel prices came in below expectations, and most importantly our non-fuel costs were really well controlled.

In most quarters some things go right and some things go wrong.

It's a rare quarter indeed, when everything goes totally right or totally wrong.

Last quarter the stars lined up nicely, and everything that could go right did so.

As you can see in the press release, yields were up over 8%, as compared to our earlier guidance of approximately 5%.

We were very pleasantly surprised by an unusual surge in late bookings during the quarter, far better than what we would have predicted.

From a revenue standpoint it really ended the year on a very high note.

Also during the quarter on board revenues were exceptionally strong.

They were very good throughout the year.

The fourth quarter was extraordinary.

Costs again a very nice story.

We did particularly well in controlling our non-fuel expenses across the enterprise.

Can't point to any silver bullet across the board, the team just did a great job of bringing in good cost figures.

Finally, fuel costs and this is I think the first time in a long time I have said that, fuel costs came in lower than we expected.

It is a little complicated to explain why.

I think it is instructive to look at it.

If you look at slide 2 on our website, I think it helps.

It shows the WTI, or crude prices are shown here in red, and compares those crude oil prices, with our average at the pump prices which are shown in blue.

As you can see, crude oil prices fell during the quarter, but our at the pump prices went up.

That was in the third quarter.

Many people believed that that was due to speculation and disruption that followed Hurricane Andrew hitting the Gulf.

As luck would have it, we issued our third quarter guidance in late October, at what turned out to be the actual peak of pump prices.

Hard to get it that perfect, but we did.

Right afterwards prices began to fall dramatically.

Unfortunately more recently both crude oil and our fuel prices at the pump are back up, although they're not back up as much as they were, during and at the end of the third quarter.

We've always pointed out to you, that our fuel prices at the pump move in different directions than crude oil prices, and what you saw at the end of the third quarter, was an extreme example of this.

One thing I do want to emphasize is, that we continue to work on a lot of things to help control fuel costs, and to mitigate our exposure.

This basket of initiatives runs the gamut from purchasing efficiencies, itinerary modifications, other conservation efforts and including the introduction of alternative fuels, and even hardware modifications.

For example, we have recently embarked on an exciting project, to help reduce fuel costs on our gas turbine ships.

Starting at the end of this year, or early next, we'll be adding a new auxiliary diesel engine to the first of these turbine ships.

The new engine will generate a portion of the ship's electricity, and should reduce overall running costs.

The engineering has been very technologically challenging.

Our team has worked hard to overcome the difficulties, and now appears to have succeeded in finding a way to accomplish it.

So to wrap up my comments about 2005, if we go back to the guidance we gave last January for the full year, our original earnings per share estimate was $2.70 to $2.90.

This did not include the impact of two significant one-time items, the impact of the dry docking accounting change, and the gain on the first choice conversion.

If we exclude those two items, our final net income was $2.84 a share, which turns out to be at the high-end of our original range.

Considering the challenges of multiple cancelled voyages during the hurricane season, and due to the propulsion breakdowns, and of course the high fuel cost, we think that is really extraordinary.

Let's move on to 2006.

As you saw in our release the outlook is very positive.

Our advanced bookings continue to show evidence of the solid demand environment, for both Royal Caribbean International and Celebrity Cruises.

Load factors are slightly behind levels achieved at the same time last year, but pricing is up significantly.

It is important to remember our revenue management team manages the level of advanced bookings that they consider to be optimal at any given time.

Each year they try to find a balance, between what they think is then the appropriate level of rate, and volume.

Last year the booking pace was unusually, early and that resulted in exceptionally high book loads.

This year they are focused more on price than volume, and are driving rates somewhat higher, while maintaining healthy but somewhat lower volumes.

On the basis of all of that, we feel comfortable predicting yield improvements in the range of 2 to 4%.

This will give us another year of record high yields, on top of the record we just set in 2005.

In fact, that record was a little bit higher than we expected just a few months ago.

Now Luis will discuss this in more detail, but we do want to point out that there are some dramatic swings in timing during the 2006 year, particularly swings in the first quarter where we are unusually low, in terms of bottom line impact, and the fourth quarter where we would expect to be doing significantly better.

Finally, let me say a few words about our senior management team.

As you may recall, it has been almost exactly a year since Adam Goldstein and Dan Hanrahan assumed their new roles, as the President of Royal Caribbean International, and the Celebrity Cruises respectively.

We've had excellent results to discuss today, due in large part to the extraordinary performance of these two gentlemen.

They've been key to driving our performance on the revenue and expenses, and have championed such initiatives, as the upcoming delivery of Freedom of the Seas, the new advertising campaigns, and spearheading our expansion in Europe.

I would say congratulations and thanks to both of them.

At this point, I would like to ask Adam and Dan to give color on their business.

First, Adam.

Thank you, Richard.

Good morning, everyone.

As Richard indicated, we're very pleased with the 2005 results, and I would like to thank the shipboard and shoreside leadership of Royal Caribbean International for enabling our brand's success in 2005.

We've been looking forward to 2006, ever since we ordered Freedom of the Seas several years ago.

The anticipation is building as we are less than three months from taking delivery of a beautiful trail-blazing ship.

Freedom has attracted considerable publicity already, and that will continue including the announcement of the winner of the Godmother selection contest, during NBC's broadcast of the Winter Olympics.

After an extensive inaugural program in Europe and the U.S., Freedom's maiden voyage will commence June 4th.

We are pleased with the bookings for the ship thus far.

2006 will also mark the continuation of our push into Europe, both for deploying ships and also sourcing European customers.

We will have five of our twenty ships in Europe this summer, including the first season of Voyager class cruising in the Mediterranean.

Splendor of the Seas will debut a Venice-based itinerary that we are marketing primarily to Europeans, and Legend of the Seas will return to South Hampton for the second season of her U.K.-targeted offering.

Overall we're pleased with bookings for the Europe season, and for Alaska as well.

The outlook for the remainder of the winter season is solid following the last two years of strong first quarter yield growth.

The late booking strength we experienced in the fourth quarter, has not yet been as much in evidence this first quarter.

Nevertheless there is a lot of excitement within Royal Caribbean International about Freedom of the Seas, and our overall prospects for 2006.

Dan.

Thanks, Adam.

I am very pleased with the way things are going at Celebrity.

We really have a lot of great things to talk about today.

We finished 2005 on a high note, and are well positioned for continued success in 2006.

Our team has focused on three main areas over the past year, first was managing our day-to-day operating costs effectively.

Second was creating a clear and integrated brand communication platform, and third was insuring we continue to deliver the outstanding experience our guests expect from us.

We are very proud of our new Celebrity treatment advertising campaign that positions Celebrity as a leading premium cruise brand.

The response from the travel agency community has been nothing short of phenomenal.

In one of the ads, the actress thanks for her travel agent.

This has generated literally hundreds of E-mails thanking us for our support of travel agents, and pledging their support to us.

A typical e-mail we're receiving these days says, I know our office will do more than we ever have before to sell Celebrity.

Within the same week of launching our new campaign, Celebrity Cruises swept Conde Nast Traveler's Annual Reader Survey ranking of the best cruise ships in the world.

In the large ship category Constellation, Millennium, Summit, and Infinity ranked first through fourth respectively.

While Celebrity has held the majority of the top rankings in the Annual Survey since its inception, this is the first line the line has held every spot from one through four.

Galaxy ranked seventh, and Mercury ranked ninth, and rounded out the Top 10.

Conde Nast Traveler's Annual Readers Survey is one of the most prestigious polls in the business.

This is particularly meaningful for us.

It's an enormous endorsement of the extraordinary service and experience Celebrity people offer onboard.

Celebrity's Century which sails in Europe during the summer season, and will undergo a $55 million revitalization in May of this year, earned a 12th place rank ranking.

As you know Europe is a core market for us.

Our bookings in Europe this season have been strong, and we believe our investment in Century, will ensure an even better performance in Europe for us.

We believe the combination of strong cost management and exciting new marketing campaign, and a continuation of the outstanding product we deliver to our guests, will drive continued improvement in the financial performance of the Celebrity Cruises brand.

Now I would like to turn it back to Luis.

Thank you, Dan.

As Richard mentioned, we have some great results to talk about.

Before we begin, one thing I would like to mention is our language for discussing costs.

We'll be talking about costs in two different ways.

One is Net Cruise Cost and the other is Net Cruise Cost excluding fuel, we will be referring to the latter as non-fuel related costs.

I am sure everyone has seen the press release, but for your convenience, we have summarized our fourth quarter results on slide 3.

As you can see, our fourth quarter net loss was $3.6 million, or $0.02 per share, compared to a net loss of 25.8 million, or $0.13 per share, back in the fourth quarter of 2004.

This was also significantly better than consensus net loss of $0.25 per share.

Looking at the specifics of the quarter, the primary drivers of this increase were higher than expected net yields, and lower than expected Net Cruise Costs, and also interest expense.

Net yields increased by 8.2% outpacing our previous guidance by over 3 percentage points.

This was due to excellent demand for late bookings which drove higher ticket prices, as well as very strong demand on onboard revenues, and a slight increase in occupancy.

Our Net Cruise Costs per available passenger cruise day increased 7.6%, which was much better than our guidance of an increase of 11 to 12%.

As you can imagine I am very happy to say, this is due to both lower fuel, and also non-fuel expenses.

Our guidance for fuel assumed an at the pump price of $450 per metric ton.

However, we actually average 424 per metric ton for the fourth quarter.

The drop was the result of lower prices as well as our continuing success in conservation efforts.

Fuel accounted for 7 percentage points of the increase in net cruise costs versus guidance of 8 to 8.5 percentage points.

Looking back at the fourth quarter of 2004 our at the pump fuel price was $293 per metric ton.

So after benefits realized from fuel hedges, our fourth quarter fuel costs increased approximately $42 million, or an adverse impact to EPS of $0.20 per share for the quarter.

We were particularly successful in controlling non-fuel expenses during the quarter as well.

They're only up 0.6%, which was significantly better than our guidance of up 3 to 3.5 percentage points.

These savings came across the enterprise, most notably our hotel, vessel, and also some of our indirect operating expenses.

In addition to Net Cruise Cost increasing less than originally expected, interest expense also benefited from both lower debt levels, and lower than anticipated interest rates.

Operating income per available passenger cruise day also showed healthy improvements in the fourth quarter in 2005, despite the significant spike in fuel, we were able to increase operating income per APCD by 38%, to $10.36 in the fourth quarter of '05, from $7.50 in the fourth quarter of '04.

Now I would like to talk about our full year 2005 results, which are summarized on slide 4.

For the year, we reported record net income of $716 million, or $3.26 per share, on revenues of 4.9 billion.

Also our income before the cumulative effect of the change in accounting and this relates to the accounting for dry docking costs, was 663.5 million, or $3.03 per share.

Now we did have two one-time items included in our results, that had a combined positive impact of $0.41 per share, however even excluding these two items, our 2005 earnings were still at a record level.

These items are just referred to, are the following: first of all we had a one-time gain of $52.5 million, or $0.22 per share, to recognize the cumulative effect of prior years of the change in our method of accounting for dry docking costs, and this was recorded in the first quarter of '05.

Secondly, a net gain of $44.2 million or $0.19 per share, related to the redemption of the Company's investment in First Choice Holidays, which was recorded in the third quarter of this year, excuse me, of '05.

The 2005 consensus earning estimates of $2.78 per share, which included the gain of the First Choice resumption, but excluded the impact of the accounting change, is comparable to our earnings before the accounting change impact of $3.03 per share.

Net yields increased 7.4% versus our latest guidance of approximately 6.5%.

The increase is primarily due to higher ticket prices, better onboard revenues, and also better occupancy rates.

Net cruise costs per APCD for the year increased 6.3% compared to 2004.

This compares to our most recent guidance of 7 to 8%.

Fuel accounted for 4.7 percentage points of this increase, or 116 million over the previous year.

Our most recent guidance was for a full year average at the pump fuel price of $365 per metric ton, and we ended up the year at $358 per metric ton.

Considering the challenges of multiple cancelled voyages, due to propulsion unit breakdowns, and a particularly difficult hurricane season, we think these are very good results.

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

We remain committed to a strong balance sheet, and we have seen some real improvement.

Since the end of 2004, we have decreased our net debt balance by 1.1 billion, and improved our net debt to total capitalization ratio from 51.5% to 42%.

More importantly, we have received recognition from at least one of the rating agencies, which recently upgraded us to investment grade.

Projected capital expenditures shown on slide 5, which have really not changed since our previous guidance, for '06 '07 and '08 are estimated to be 1.1 billion, 1.1 billion, and 1.6 billion respectively.

Looking ahead now to 2006, as Richard mentioned, we are forecasting that net yields for the full year will increase by approximately 2 to 4% over 2005.

Net cruise costs per APCD for all of 2006, are expected to increase in the range of 3 to 5%, when compared to 2005 of which 3 to 4 percentage points relates to fuel.

Our current at the pump fuel price is $425 per metric ton, which is 19% higher than our average price for 2005 of $358 per metric ton.

If fuel for the rest of the year remains at today's level, we estimate that our 2006 fuel costs, and this is net of hedging or any fuel savings initiatives, will increase approximately $90 million year-over-year, or an adverse impact to EPS of $0.39.

I do want to point out that this impact is lower than the previous guidance.

The main reason for the improvement include the fall in at the pump pricing, our previous guidance as you may recall was $450 per metric ton, and the anticipated benefits of energy conservation initiatives and enhancements, in types and sourcing of fuels.

As we have previously communicated, we continue to strive for ways to mitigate rising fuel costs through various conservation initiatives, and increasing our use of different and less expensive grades of fuel.

Ultimately we believe that our fuel consumption for 2006 will be approximately 1.13 million metric tons, and for those of you who are interested, we are currently approximately 16% hedged for 2006 on fuel.

Non-fuel costs are anticipated to be up 1 to 2 percentage points, which is primarily attributable to the following.

First, there is inflationary pressures, much of which we believe we will be able to absorb.

Secondly, we continue our domestic and international investments in our sales and marketing efforts.

Third, we have the commencing of the expensing of stock options, which is something that's new this year, and we estimate this expense will be roughly $12 million for the year.

Something to keep many mind for 2006, is it is the last year we're going to have minimal capacity increase.

Slide 7 shows our 2005 to 2008 estimated capacity information, you can see that our growth in 2005 and 2006 was minimal, but increases beginning in 2007.

This is important as it means that in 2006 the Company does not have the benefit of improved economies of scale, to offset normal cost increases.

We'll begin hopefully to be seeing these economies of scale, in 2007 and beyond.

Depreciation and amortization expense for 2006 is expected to be 425 to 445 million, and we are anticipating net interest expense will fall between 245 and 265 million.

As you also saw in our press release, in late January we partially settled our lawsuit against Rolls Royce and Alstom Power conversion, co-producers of the Mermaid Pod propulsion system on the Millennium class ships, for the recurring Mermaid pod failures.

Under the terms of the partial settlement, Alstom paid the company $38 million, or $0.16 per share, and the company released Alstom from the suit, which still remains pending against Rolls Royce.

The settlement will be recorded in the first quarter of 2006.

Based upon these estimates, the fuel assumption, and the revenue outlook that Richard discussed, and also including the legal settlement, which benefits us by $0.16 per share, we expect the 2006 EPS to be in the range of $2.95 and $3.15.

Now I would like to quickly discuss some of the highlights for the first quarter of this year.

Net yields are expected to increase in the range of 1 to 2% over the first quarter of 2005.

Net cruise costs are expected to increase in the range of 12 to 13% compared to the same quarter in 2005.

Now, higher fuel costs account for approximately 7 to 8 percentage points of the increase.

Again, our current at the pump fuel price is $425 per metric ton, which is 50% higher than the average price for the first quarter of 2005, which was $284 per metric ton.

If fuel prices for the rest of the quarter remain at today's level, the Company estimates that the first quarter 2006 fuel costs net of hedging and savings initiatives, will increase approximately 45 million, or $0.19 per share.

We also have the timing of refurbishment costs, due to the fact we have a larger portion of annual dry docks scheduled in the first quarter of this year, and this compares to relatively no dry docks that we had at the same time last year.

Also timing of SG&A expenses, primarily due to the different year-over-year patterns in terms of marketing spend, as you recall last year in the fourth quarter we had very, very low levels of marketing spend.

Also we need to keep in mind, our capacity will decline by 3% this quarter, due to the fact that we are now leasing the Horizon, which is a former Celebrity ship, to defer to our Island Cruises, which is our joint venture with First Choice, and that ship left last October.

As I mentioned previously, our full year guidance for net cruise costs is for an increase of 3 to 5%, so these timing differences will be absorbed later in the year.

We anticipate that this absorption will happen primarily in the fourth quarter.

However, you probably realize that we manage our business on a yearly basis, so the quarterly distribution in the latter half of the year could change.

Based upon the expectations and assumptions contained in this outlook section, and including the legal settlement of $0.16 per share, management expects the first quarter 2006 earnings per share to be in the range of $0.45 to $0.50.

Please keep in mind that the first quarter of 2005 now includes the impact of the dry dock accounting change, which is $0.22 per share.

At this point, I would like the turn over the call to the operator for any questions that the audience may have.

Operator.

[OPERATOR INSTRUCTIONS] Your first question is from Glen Reid.

Hi, this is Joe Holland for Glen Reid.

Cost containment on commissions looked very strong.

Could you discuss what's behind that result, and what we can expect in 2006?

Thanks.

Hi, Joe, this is Adam Goldstein.

We're very proud of our relationships with our travel agency producers, who produce the almost all of the revenue that enabled our strong performance last year, but our commission programs, which are for the most part published and have been consistent over the years, are intact, and the revenue production came in across possibly a wider range of producers than maybe we've seen in the past, so the travel agents were producing for us at all levels of our basic and override programs, and I think that's what drove overall, a solid commissioned expense result for us, but it is very important to us, that our incentive, our compensation programs for travel agents are motivational for them, and that they continue to produce for us, and I think every indication is they will.

It did produce a good result for us in 2005.

Great.

Thank you.

Your next question comes from Elizabeth Osur, Smith Barney Citigroup

Thanks, two lines of questions.

One regarding the new conservation initiatives for fuel, and what savings you can get from the efforts to add auxiliary engines to the gas turbine engines, can you speak more to the timing of the initiative, and what kind of savings you're anticipating getting?

Elizabeth, this is Dan.

We're still working through the logistics on adding the auxiliary diesel engine.

We believe that we'll be able to do that probably at the end of this year, or in the beginning of next year.

We won't achieve any real savings in 2006 as a result of that.

We'll realize them in 2007.

We believe what we will end up being able to do is handle a large part of the hotel load with that,, and depending upon what fuel prices would be, that could be in the 4 to $5 million range, that we could save on a ship, depending on fuel prices and where they are at at the time.

Thanks.

Just two housekeeping questions, could you guys provide us with the hedges by quarter, of what percentage hedge by quarter, and also for the two quarters where we don't have it yet, the second and third quarter, can you speak to the average cost per metric ton of fuel in those quarters?

Thanks.

The question on the hedges we don't what we're going to do is go ahead and if you can call Greg later.

I don't have that information right in front of me.

He will discuss those with you.

Sure.

And the average cost per ton as well?

And the average cost per ton as well.

Thanks.

Next question comes from Bob Simonson.

Good morning.

Two questions.

Do your slides on capacity growth in the CapEx estimates, does that include any major other dry docks for any of the older ships that you haven't announced yet, and may be planning but are already on a number, or if we hear of one we will either add it to the expenses, or take it out of capacity?

It includes what we know of today and we're not anticipating anything that's dramatic in the immediate future.

Okay.

And Luis, do you have an estimate for the primary and the diluted shares for 2006?

Hello.

Bob, I am sorry.

The primary shares would be roughly about 210.5 million, and the diluted would be about 231 million.

Thank you very much.

Your next question comes from Michael Dimler.

Good morning, guys.

Wanted to ask a couple quick questions.

What was your liquidity at the end of the year, and what was the fuel cost as a percent of revenue, and how does that look in '06 as a percent of revenue?

Okay.

In terms of liquidity we had about $1 billion in totally liquidity at this.

With regard to fuel, we're in the process of calculating that right now.

If we can just get back to you as the call progresses, and we'll let you know what that number is.

Fine.

Thanks.

Thank you.

Your next question comes from Brian Egger.

Good morning.

Just a general question about your yield management or pricing strategy.

I know in 2004 and 2005 you talked a lot about this sort of strategic pricing approach, where you had said perhaps somewhat lower prices initially, and avoid having to engage in last minute close-in discounting.

It sounds like this year you might have perhaps tried to maximize your ability to get pricing earlier on, even if it meant keeping a somewhat flatter book of business, in bookings.

I wonder if I correctly framed your strategy toward pricing yield management, if it results in a slight change, in term of your focus on the balance between volume versus pricing, as compared to prior years?

I think Brian that's a fair assessment.

Of course it changes every day, and they monitor it very closely.

I think in terms of book factors, for example, we are lower than we were in '05, but actually higher than we were in '04.

What you're describing as strategic pricing, was probably more a factor in '05 than '04, so we're actually in between those two years, in terms of our load factors today.

Okay.

Thanks.

Also, I would like to comment on the fuel as a percentage of gross revenues that Michael asked.

The fuel percentage of revenues for 2005 was 8%, and based on the estimates that we gave you for '06 it will be about 9.4%.

Your next question is from David Leibowitz with Burnham.

A few questions if I may.

First, Entering '06, when you make your projections, how much are you expecting a set aside for hurricanes, and potential part or other breakdown problems, to cost you during the year?

David, we don't obviously there is some flexibility in our numbers but something like the pods is quite large, and quite unexpected hopefully, and last year, 2005, the hurricanes were not wonderful but they weren't disastrous, where as if we look at 2004 they were really quite exceptional, so while we have some flexibility for some unusual events, there is a limitation to that we can't build in cushions for just about anything that would happen.

How much have you taken into account for your projection that you gave us for '06?

We haven't set aside a specific number that this is what's going to cover unexpected events.

By definition they're unexpected, so what we've tried to do, is give a reasonable estimate based on what we know of the year, and that would encompass a normal type year.

Okay.

Freedom of the Seas, how much up front costs will be taken in this calendar year?

In other words, promotion, whatever else goes into up fronting?

It is all part of our SG&A expenditure which is part of our numbers but we haven't separated that out, and to some extent there is obviously a transfer you can spend marketing, and you can focus on one ship or focus on the brand, and we've sort of gone back and forth.

Overall, the number that we've given you, includes all of that.

Okay.

And in the question of fuel prices, as I recall in the first quarter of '05 you had a successful hedge in place, so when you gave us the cost of bunker fuel this year versus last, did the number for last year include the hedge, and is that is that the actual price you paid, or did you pay a lower price because of the hedge you had in effect?

The price in '05 David, includes all the hedging.

The numbers that we quote to you, include hedging and everything else that would provide a benefit.

Lastly, the settlement with Alstom, and now continuing to pursue a settlement with Rolls Royce, you said you received $0.16 a share from Alstom, and that is their total contribution to the cause, or were there incremental repair features that they will repair going forward, or other codicils to the contract?

We're completely settled.

This is Dan.

We're completely settled with Alstom.

Rolls Royce, is that going to be if you settle with them, are they in for more since we're not privy to how much you sued each of the two parties for?

Is Rolls Royce contribution comparable to the Alstom contribution, were you to settle?

We haven't come to a settlement agreement yet, and I am not able to forecast what that will be.

Okay.

Lastly.

David, I think we can say, because we have said this publicly, that most of the problems that we've actually had with the product, have been on the bearings, the technicians on board, and within the way Alstom and Rolls Royce, it was Rolls Royce that was actually the one building the bearings, the mechanical side, and Alstom was more responsible for the electrical side.

What happens in a litigation is obviously something nobody is likely to predict for you.

We felt very pleased with the partial settlement of that part that was Alstom, and we certainly intend to pursue our case against Rolls Royce aggressively, but we won't predict what that is.

You answered that aspect of the question that Rolls Royce is the bigger piece.

The reason I am asking, if I recall, the amount of charges over the last two or three years, that you had due to pod problems was greatly in excess of $0.16, and I don't have the exact figure, but perhaps you can share with us, since they're all on the public record each time you did have a problem, you told us what the one-time charges were.

How much per share in totality did these problems amount to?

We don't remember the exact number.

You can call us.

We have disclosed that publicly.

We don't have it at our fingertips.

Who should I call, Luis?

Probably Greg, he'd be a better person.

You have a deal.

Thank you very much.

Your next question comes from Steve Kent with Goldman Sachs.

Hi.

Maybe we could switch around a little bit.

Could you just talk a little bit about the onboard spend, which was incredibly robust this quarter?

You talked about it before.

Maybe you could give us a little more color, and if you have some programs in place to sustain that momentum into '06, and then the other thing is I guess, I know you mentioned it was complex, but I still don't fully understand what types and sourcing of fuel mean?

Are you referring to the diesel plant that you want to put on these ships, or is there something else that you're referring to in the press release, and just separately on the diesel plant, or being put on to the ship, would that involve dry docking?

I know it is '06 or '07?

What do you think now.

Steve, I will ask Adam to answer the onboard side, and I will comment on the diesel.

Okay.

Was it Dave?

Steve.

I am sorry.

Excuse me.

Yes, you commented on the strength of the ship board revenues.

It is true that there was strength and we saw this across all of the key areas of ship board revenue, meaning that we saw strength in the beverage area, in gaming, in short excursions, and also in the concession revenue areas, which includes spa, photo, retail, and so forth.

Both brands have programs in place to continue to drive the favorable trend in ship board revenue that we've seen for quite a long time, and it is very pleasing to see that after many years of strength in the area, we continue to generate favorable progress on a year-over-year basis.

The beverage and gaming areas which we run in-house if you will, have multiple initiatives in place, to continue to drive the revenues forward, and we have renewed our ship board concession revenue contracts with our key providers across both brands, and there is a basis there going forward for mutual cooperation between the providers, and both of our brands, to drive the revenues further.

It was a very, very successful year in that area in 2005.

It was a particularly strong fourth quarter after we had been, we had slightly over estimated our forecast for the fourth quarter 2004 revenues, so maybe we were a little bit conservative, and what happened is it came through very well and we hope that that will continue.

Steve, addressing the question of fuel overall I think the operating management has done an amazing job, of looking after every [urg] of energy, every joule of power that they can conserve, both in terms of the propulsion, and in terms of the domestic use, and the savings is really across the board.

It is not as though there are big items, but there is better equipment for the air conditioning, better control systems, better monitoring systems, et cetera, and just a lot more focus, and that's been very successful over the last couple of years.

Also included in that was different types of fuel, different blendings of fuel, and all of those things come together, but I would not point to any one of those as having been responsible for the savings.

In terms of the diesel plants, it does require dry docking the ship.

I think it takes four weeks for the first one, and maybe less for the later ones.

We don't expect any of that to have any significant impact in '06, because we really can't get that organized technically until the end of this year or the beginning of next, and then we will do it progressively on other ships, as rapidly as we can, if it is as effective as we think it will be.

The impact wouldn't be felt until at least '07.

Okay.

Thank you.

Your next question comes from [John Harris, Founders Fund].

Good morning and congratulations on a great quarter and outstanding cost control.

Luis, have a question if you.

When you take delivery of Freedom of the Seas, how much debt to you expect to take on?

Hi, John, the debt that we're looking at for next year is we're looking at probably doing some refinancing, because we have some maturities of debt, so we have to look at this as all as a whole, and we'll probably be doing some probably roughly, I would say maybe 700 to $900 million worth of refinancings, plus debt that would be part of the Freedom.

We have to look at the whole debt pictures, that includes maturities and the deliveries.

Thank you, Luis.

Yes.

Your next question is from Felicia Hendrix with Lehman Brothers.

Hi, guys, I have a few questions.

First, Luis, for the first quarter one thing you didn't mention is that Easter shifts this year to April from March last year.

Wondering if that had an impact at all on your guidance, and if it did, could you quantify that?

Felicia obviously we've included this in our projections.

It has been included, but I can't really quantify that for you.

I don't think that we've really done a separate calculation to see what the impact of that is.

Okay.

You did in the first quarter last year, your net yields were up about 8% a little bit over that, and now this year 1 to 2%.

I would assume that probably a good part of that has something to do with the shift in the holiday?

It is a factor obviously, which is a good point.

And also I know there is lower capacity also.

I don't think we think that is a dramatic factor, but I think it is clearly one of the factors, and of course as you point out last year was a particularly good first quarter.

Okay.

And then Luis, you also mentioned continuing investment in the domestic and international sales efforts.

I was wondering how much you ended up spending in '05?

You did talk about that last year when you decided to increase in spending, and how much you might spend this year?

In terms of total marketing for the year, our spend was probably roughly about I would say, I would have to add up the numbers.

Let me get back to you on that.

Let me reword the question, I think my number might be a little off.

I think last year you talked about increasing --

We increased the international side.

International $15 million.

That's correct.

And basically on budget.

And we're basically on plan, now this year we're doing we have new commercials coming out, and we have the Freedom of the Seas coming out.

We're increasing our deployment into Europe, so all of these things are all to be taken into consideration, in terms of increase that we're talking about for '06.

Okay.

Roughly our spend was in the 270 to 290 range.

Okay.

My next question is the horizon, you are now leasing that to Island Cruises; correct?

Correct.

So where are you booking the lease revenues for that?

On the P&L, where do they go?

The lease revenues come in as other revenue, and then that's the top line, and then we also have the expense of the depreciation.

Okay.

So is that part inclusive of the net yield increase?

Yes, it is.

It is a very, very, very small piece.

Okay.

And then my final question is for Richard, or really for anybody else.

You know what we've all been reading in the trade, and the kind of travel agent outlook on the wave has been mix, some people have thought it was more positive and it's been more positive than others.

Obviously you came out with strong results.

Carnival gave a good outlook.

I am wondering if some of the folks are seeing what they might be perceiving as a less robust wave, or a wave starting a little later, because of maybe the strategy that you've taken this year, that's so different than last year?

Yes, and we have been reading that, and I don't think we're seeing this as so much a question of the strategy.

I think we're also trying it get the pulse of the market, both from we have the advantage of massive amounts of data that our revenue management people try and manage, more so than the anecdotal evidence that we get from the travel agents, but of course we also try and get that anecdotal evidence, and try to use that in it.

I think last year was an unusually buoyant year, the last yew years actually have been really quite terrific at this time, and saw a huge surge at the beginning of the year, and I think this is a more normal solid constructive year, rather than just that buoyancy, and we think that we'll be focusing more on if you will, the length of the wave and the consistency of it, rather than the huge increase.

There are a lot of factors.

One of the things that we're hearing a lot of people say, is that the fact that the new year started in effect on a holiday, that January 2nd was a holiday this year, whereas it wasn't last year was also a factor in getting things off to a slightly slower start from that perspective.

I don't know if Dan or Adam want to add anything to that.

I think it is more just, we think this is a more normal year from that point of view, rather than our revenue management people have driven it to be a more normal year.

I think they think they would say Brian is not here, but I think he would say Doug, that they are following the demand they're get rather than them causing it to be different.

And do you think that again in the reports that we read that it is being made, too much is being made of the warm weather on the East Coast perhaps affecting more robust bookings?

Again, I am sure that is actually a factor, and always people talk about the weather as being either a contributing factor or the other, and now this year they are saying because it is a warmer period maybe that's softening a little bit, I don't think we think that's a very big factor, but it is certainly one of the things that enter into the equation.

That's one of the reasons that why we feel quite happy that we are now, for several years now, quantifying this in terms of the number.

I think 2 to 4% increase is a very healthy increase.

I feel good about that.

It also gives you a sense of how our revenue management people are putting all of those factors into their cauldron, their black box, and how they're coming out, and how they all feel they all interact.

Okay.

Good.

Thank you.

Your next question is from Scott Barry with Credit Suisse.

Just a couple questions.

Do you feel you have better revenue visibility as we sit here today versus a year ago, because of the changes in the group business, and secondly is there a material difference in the amount of group business you have on the books for '06, versus what you had on the books a year ago?

Thanks.

Yes, Scott, it is Dan.

I think we do have better visibility into where our business is this year as a result of the group business that we have on the books, and the policies changes that we made, and even after the policy changes we made, we still have I solid group base and I think the decision we made last year, to change the way we take on group business was a really smart one, and I think as a result we're in pretty good shape.

I think we can actually be fairly specific about that, because while we have less group bookings today, much more of them are named groups, and named people on that group.

So we believe and our models show, that we have many, we actually have a much higher load factor if you will of people who will actually sail, but we have a lot less speculative bookings that we don't think would have amounted to anything, but we have a much more solid base of numerically more people, who are booked now, in our easy group policy who will actually sail, than last year at the same time.

Great.

Richard, if I might, just one follow up since no one asked.

What kind of feedback have you been getting from the trade, regarding all the publicity you've had over the last couple of months?

Scott, it is Adam.

Was wondering when somebody would ask that.

We haven't seen any meaningful impact of publicity on our business, not only in our own experience, but also in the feedback from our best travel agency producers, we feel that people just don't associate the probability of anything as strange and tragic as what happened with what happened, on their own vacation experience.

Having said that, and our view, is clearly the media frenzy isn't helpful to anyone, or in any way.

We will continue to set the factual record straight wherever necessary, and for as long as we need to do.

It is just very unfortunate tragic circumstances, but the people of Royal Caribbean did a very good job under the difficult circumstances in which they found themselves in connection with that event, and we're proud of their efforts to help the FBI and the other investigative authorities, find the answer to what happened.

Understood.

Thanks a lot, guys.

Your next question comes from David Katz with CIBC.

Congratulations.

Great quarter.

Luis, one quick one, as I work through my model it doesn't look like after CapEx there is a whole lot of sort of free cash left over, but if you could just sort of help me think through the prospect of any sort of further debt reduction?

I know you talked earlier about some refinancings, but should we be thinking about any further debt reduction in the next couple of years?

With the program that we have right now, I don't think there will be a lot of debt reduction.

We have a pretty sizable CapEx program.

We are going to do refinancings, and that's basically because we are at investment grade, and we do have some maturities of long-term debt, and we'll be focusing on those.

In terms of a lot of excess fash flow like we generated in 2005, I don't think we'll see that in the next few years.

It will be, our ratios would certainly get better by the fact that although debt is not going up very much, obviously our earnings are going up based on the guidance that we gave you.

So the credit statistics will improve.

But I don't think you will see any meaningful decreases of that.

And so with the refinancings, if you can sort of give us any color on interest expense savings, and when that might hit, and order of magnitude that would be helpful as well.

I don't think I can give that guidance at this point.

This is the beginning of the year.

We're looking at all of our various options, and we have not really signed any commitments to do any refinancings at this point.

I can't really give you the difference in the spreads.

Obviously being an investment grade company now, that will certainly be helpful.

Good enough thank you so much.

If I can add something, conceptually we think we know we've been working hard to improve our balance sheet and strengthen it, and solidify our position as an investment grade issuer, but it is not our objective to only move in one direction.

We think we should get to a solid investment grade rating, but that proper balance of leverage, and so for example, if there are a lot of conversions on the convertibles, or we've done some buying back or those sorts of things, and I think we would try to maintain ourselves at a good balance leverage, rather than automatically want less [leverage].

I agree.

Thanks so much.

Your next question is from Klaus Hatlebrekke, Gjensidige NOR Equities

Thanks my question has been answered.

We'll proceed with the next participant in the queue, your next question comes from Michael Dimler with UBS.

Just one follow up.

In terms of the refinancings that are lined up for next year, are you contemplating any public issuance on those, or are you just going to stay with the loan market on those?

We're going to look at all the markets.

We're going to look at the bank market, and the public markets as well.

We haven't made any decisions yet.

As soon as the time comes, we'll look at the all of those markets, and decide what we will do at that time.

We haven't made a decision right now.

Could you comment on any at all on the quarter by quarter impact of those refinancings.

What we could do is we believe probably tell you the timing of some of the maturities.

What I would like to do is have you call Greg after the call.

We'll do.

Thank you.

You have a follow up question from Elizabeth with Citigroup.

Thanks, my question has been answered thanks.

We'll proceed.

We will like to maybe just take the last question, the last two questions excuse me.

Yes, sir.

Next question comes from Bob Simonson with William Blair.

Yes, regarding the Freedom, are there enough different amenities on there, that you would expect the onboard as a percent of your net yield to be higher or lower than a typical ship?

Or the voyager class?

I would not yes, there are a lot of attractive features that would drive onboard revenue on Freedom of the Seas.

I wouldn't expect the percentages to be materially different than what we're seeing on our Voyager class ships.

A quick follow up, on your yield guidance of 2 to 4 this year, are you assuming much different rates are changed on the onboard or the ticket versus each other?

Similar.

There is no reason to believe there will be a meaningful change in the proportion between the two.

Thank you.

Last question, please.

Your last question from the line of Tim Conder with AG Edwards.

Thank you.

Two here, could you talk more Adam I think you were giving us color on the geographic strength.

Could you maybe break it down, both on the Royal and the Celebrity brands, Alaska, the Caribbean, and Europe, both bookings and pricing, just general trends, and the second question is could you remind us of the percentage of your bookings that come through the travel agents versus your call centers, and I know both yourselves and the industry in general, has been building up the call centers over the last couple of years and wondering if you have seen any material change in that mix?

With respect to your second question, while the percentage of our business that is direct to us from consumers has been growing slightly on a year-over-year basis, travel agents still produce overwhelmingly the business that comes to the Company.

We see that to be the case for the foreseeable future.

90 %, Adam.

I think this is the first year we've run into double digits through the direct.

It is growing incrementally rather than dramatically.

Okay.

You asked a very broad question there at first before about the different regions.

Previously in this call I tried to answer that at a very high level to say that Europe and Alaska, the summer programs that are now approaching the next season in front of us look solid.

We're pleased with the bookings, and beyond that we've commented on our overall yield outlook for the year.

Our sense is that overall we're looking at a solid demand environment throughout the different products and the regions.

Both for the Royal and the Celebrity?

Yes.

Thank you.

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

Are there any closing remarks.

Just want to thank everybody for participating on the call, and certainly if we didn't catch all of the questions that may be out there, if you could please call Greg as a follow up or myself, preferably Greg.

Thanks very much again for participating, and we'll talk to you at the end of the first quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.