皇家加勒比遊輪 (RCL) 2006 Q1 法說會逐字稿

Good morning.

My name is Jocelyn, and I will be your conference operator.

At this time, I would like to welcome everyone to the Royal Caribbean first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Leon, you may begin your conference.

Thank you, Jocelyn, and good morning, everyone.

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

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

Adam Goldstein, President of Royal Caribbean International;

Dan Hanrahan, President, Celebrity Cruises; and Greg Johnson, Associate Vice President of Investor Relations.

During this call, we may be making comments which are forward-looking statements and are subject to change based on the items listed on our website, rclinvestor.com and disclosures in our SEC filings.

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

After that, I will go through some of the details in our financial results and future guidance, and then at that time we'll turn the call over to the Operator for your questions.

Richard?

Thanks, Luis, and good morning, everybody.

As always, it's a pleasure to have this opportunity to speak with you this morning.

As you can see from the press release, yields were up almost 2%.

Ticket yields were flat, driven by a slight increase in prices, offset by a slight decline in occupancy levels.

On-board revenues continued to be strong across all of our products in both brands, and were up nicely year-over-year.

Now, in every quarter, some sectors of our business perform better than others.

And this quarter was no exception.

Yes, the Caribbean was one of the softer markets, but the fact is, overall, the quarter came in at the high end of our expectations.

I know there's been a lot of speculation about the business environment.

We believe that the fact that we continue to expand the business, fill our increased number of berths, and still raise prices demonstrates the health and the strength of our industry.

We base our yield expectations on all these factors taken together in all those markets.

And our latest guidance -- for a 3 to 4% increase in 2006 -- comes on the heels of two terrific yield improvement years.

I'd like -- I think it's also important to describe the dynamics of the booking patterns in our industry, because there's been a lot of talk about this.

Bookings don't come in all together in only the year in which the cruise takes place.

Bookings in any one year cover sailings for that year and for the next year, and vice versa.

So the sailing will have bookings that were made in the previous year.

If our reservations activity were completely flat, one would expect that 16-2/3% of all bookings made in any one year would be made during the first 2 months.

In fact, as you know, booking activities goes up during January and February, which is why we call this period wave season.

But the increase is not as dramatic as some might imagine, and it's really not comparable to the kind of concentration that one sees in retail sales during the Christmas period.

In fact, the percentage of our calls and of our individual bookings, which are made during January and February, is normally in the low 20s.

So, yes, wave is important, but it's not as critical to our performance as it is in some other industries, such as retail.

Now, let me move on to the rest of 2006.

As you saw in our release, the outlook for the year remains essentially on track.

Our advance bookings continue to show evidence of a solid demand in environment for both Royal Caribbean International and Celebrity.

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

Therefore, we have narrowed our yield growth expectations to between 3 and 4%, which is at the high end of our previous guidance.

This will give us another year of record high yields, on top of the records we just set in 2004 and 2005.

We also kept our EPS range unchanged, at 2.95 to $3.15.

Obviously, it becomes harder to achieve this in the face of challenges like increasing fuel prices, higher operating costs in Cozumel, and other uncertain market factors.

We feel we can overcome these challenges, but it does become progressively more difficult, with all of these actual and potential headwinds.

You may have noticed that this call is a bit earlier than normal.

The reason is that we're taking delivery of our new vessel, Freedom of the Seas, next Monday.

We needed to have the call this week so that we could all be over in Europe for all the festivities associated with presenting this new -- wonderful new ship into the market.

Doing this partying is a very tough job, but somebody has to do it.

In trying to -- it's hard to get much sympathy for that.

We have been trying to complete our 10-Q the same day as our earnings release on a consistent basis.

We want to do that to simplify all of your lives.

The early timing of this call means that we won't file our 10-K today, but will next week.

We have been looking forward to this event, the delivery of the Freedom, ever since we ordered this magnificent trail-blazing ship several years ago.

She's already attracted considerable publicity, including the February announcement of the winner of the Godmother selection contest, Louise Calder, who will be foster mother -- who has been foster mother to over 400 children.

And the naming will be on NBC's Today Show.

The show will also broadcast live from Freedom when she debuts in New York Harbor on May 12th.

Adam is going to make some comments on employment opportunities that she provides, and then I'd like to say a couple of words about Celebrity.

On last quarter's call, Dan Hanrahan talked about the brand, its new ad campaign and the many accolades Celebrity's been receiving.

This, and the dedication and excellence of our staff and crew, have really begun to gain traction, to drive celebrity's performance to new levels.

For a while, Celebrity, the premium brand, was selling at a discount to Royal Caribbean International, but this is no longer the case.

In 2005, Celebrity overtook Royal Caribbean International, and for 2006 is now driving higher yields.

Expect Celebrity to continue to grow its yields at a faster pace than Royal Caribbean.

Not to say that Royal Caribbean International is not doing very well, on the contrary, it's driving excellent yield performance.

It's simply to say that Celebrity, our premium brand, is on a trajectory to achieve the kinds of yields we think the product is capable of delivering.

And it's a very nice high-class problem when both brands are doing so well in the market.

With that, I'd like to turn the speaker over to Adam and Dan to comment on their respective companies.

Thank you, Richard, and good morning, everyone.

As Richard indicated, we're pleased with our 2006 first quarter results.

For the balance of 2006, although there are pricing pressures in the Caribbean region, we look forward to a successful year, as reflected in the guidance we have provided this morning.

As Richard also mentioned, next week we begin to introduce our beautiful new Freedom of the Seas to travel agents and media throughout Europe and then in the United States.

Almost every major travel agency group in America will host a meeting or conference on board prior to the June 4th maiden voyage.

Freedom's introduction is clearly the foremost development in the cruise industry in 2006.

We're pleased with the bookings for Freedom of the Seas, and we are very excited to begin operating her every Sunday from Miami.

Last week we announced our deployment for spring of 2007 to spring of 2008.

The introduction of Freedom of the Seas' sister ship, Liberty of the Seas, in 2007 will enable several of our Voyager class ships to branch out and pursue our strategic interests.

For example, Navigator of the Seas will move to Southampton, England for ex-U.K. cruising in the summer, and then she will take the voyage across into the short cruise market in the winter, with a four- and five-night program from Miami.

Explorer of the Seas will commence year-round cruising from Cape Liberty in Bayonne, New Jersey.

And Voyager of the Seas will spend the winter in Galveston, Texas.

Wherever Freedom or Voyager-class ships homeport, they are immediately the preeminent ships in their respective market.

Dan?

Thank you, Adam.

As you have heard, we are very pleased with our first quarter results.

Celebrity performed particularly well, with strong yield performance and continued strong future booking.

Our focus on cost management, a clear and consistent communication platform, and continuing to deliver the excellent product experience our guests expect from us is helping Celebrity gain traction.

We are about to move into the Europe, Alaska, and Bermuda seasons, which is historically the strongest time of the year for Celebrity, and we believe this will help us continue our momentum.

At the end of April, Century will go into dry dock and undergo a $55 million revitalization.

The addition 314 verandas, 24 staterooms, a new specialty restaurant, expanded spa and health club facilities, and the upgrading of her existing staterooms will bring Century up to our Millennium-class standards.

As you know, our Millennium-class ships are consistently rated at the top of the Conde Nast Readers' Poll.

We, too, have announced some of our new deployments for 2007.

Our European season will be particularly exciting.

The revitalized Century will experience a couple of firsts for the brand.

She will visit the Arctic Circle during the first half of the European season and visit Morocco in the fall during her Mediterranean run.

We've extended Galaxy's European season further into the fall.

And she will visit Romania, the Ukraine, Alexandria, and Cypress.

More deployment announcements will be coming in the near future.

I'm very pleased with the progress our team is making and am confident that we will continue to show good progress in the future.

Luis?

Thank you, Dan.

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

As we disclosed today, our first quarter net income was 119.5 million, or $0.55 per share, compared to net income of 189.6 million, or $0.86 per share in the first quarter of 2005.

This exceeded our previous guidance of between $0.45 and $0.50, and was also better than consensus of $0.48.

The primary drivers of this positive performance were Net Yields that came in at the top end of the range, and lower-than-expected Net Cruise Costs, and also Net Interest expense.

Net Yields increased by 1.9%, which was at the top of our 1 to 2% range.

Ticket yields were flat, driven by a slight increase of prices, which was offset by a slight decline in occupancy levels.

On-board revenues continued to be strong across all products in both brands and were up nicely year-over-year.

Our Net Cruise Cost per APCD increased 11.4%, which was better than our guidance of an increase of 12 to 13%.

This was due to slightly lower-than-anticipated fuel prices, and a shift in the timing of certain expenses.

Our guidance for fuel assumed an at-the-pump fuel price of $425 per metric ton.

However, we actually averaged 418 per metric ton for the first quarter.

Ultimately, fuel accounted for 7.6 percentage points of the increase in Net Cruise Costs, which was within the range of our previous guidance of between 7 to 8 percentage points.

Looking back at the first quarter of 2005, our at-the-pump fuel price was $284 per metric ton.

So after benefits realized from fuel hedges, our first quarter fuel costs increased approximately $42 million, or an adverse impact on EPS of $0.18 per share for the current quarter.

Net Cruise Costs, excluding fuel, were up only 3.8 percentage points, which is better than our guidance of up 5 to 6 percentage points.

The growth in our non-fuel costs was mainly due to the following -- The timing of refurbishing expenses were a larger portion of annual dry dock scheduled in the first quarter of this year versus the first quarter of last year; different spending patterns for marketing expenses; and also the expensing -- the commencing of expensing of stock options, which was $3 million for the quarter.

Additionally, interest expense benefited from lower-than-anticipated interest rates, due in part to our January upgrade by Standard and Poor's to investment grade.

We've gone over the specifics of the quarter, and now I'd like to walk through a bridge between the first quarter 2005 and the first quarter of 2006 EPS.

First, we need to talk about some-time items.

In the first quarter of last year, there were two of them.

The first one was a gain of $52.5 million, or $0.22 per share, to recognize a cumulative effect on prior years of a change in our method of accounting for dry dock costs.

And, secondly, there was a break down in our propulsion system on Infinity, and that reduced EPS last year by $0.03.

Removing these from our as reported Q1 '05 EPS of $0.86, that yields us $0.67 per share.

In the first quarter of 2006, as we discussed in last quarter's earning call, we partially settled our pod lawsuit for $38 million or $0.16 per share.

Removing this from our as reported Q1 '06 EPS of $0.56, yields $0.39.

The difference between the adjusted 2005 and 2006 first quarter numbers is a decline of $0.28.

This decline is primarily due to the following -- fuel costs, as noted above, increased $0.18; timing differences for sales, marketing, and general admin expenses drove an increase of $0.10; and, then, we had an interest expense, which was favorable of $0.08 due to reduction in debt levels, partially offset by increase in rates; and, finally, dividend income decreased $0.03 per share, due to the redemption of our First Choice investment in the third quarter of 2005.

Looking ahead to 2006, and as Richard mentioned, we are forecasting that Net Yields for the full year will increase by 3 to 4% over 2005, which is at the high end of our previous guidance.

Net Cruise Costs per APCD for all of 2006 are expected to increase by 5 to 6% when compared to 2005, of which 3.6 percentage points relates to fuel.

Our current at-the-fuel -- our current at-the-pump fuel price is $432 per metric ton, which is 21% higher than our average price for 2005 of $358 per metric ton.

If fuel prices for the rest of the year remain at today's level, we estimate that our '06 fuel costs, net of hedging and fuel savings initiatives, will increase approximately 105 million year-over-year, or an adverse impact to EPS of $0.45 per share.

This is an increase of $12 million over our previous guidance.

Ultimately we believe that our fuel consumption for '06 will be approximately 1.1 million metric tons, and we are currently 46% hedged for 2006.

Non-fuel costs account for the balance of the increase, and are primarily attributable to, for one, expenses related to ship refurbishment and other corporate projects; additional costs of operations in Cozumel resulting from the hurricane damage that occurred there during hurricane Wilma; stock option expense of $12 million; and, finally, general inflationary pressures, which we expect we'll be able to absorb a large portion of these.

Depreciation and amortization expense for 2006 is expected to be 425 to $445 million, and we anticipate net interest expense will fall between 240 and $260 million.

Based upon these estimates, the fuel assumption, and the revenue outlook that Richard discussed, and including the legal settlement of $0.16 per share, we expect 2006 EPS to be in the range of $2.95 and $3.15, which is unchanged from our previous guidance.

Projected capital expenditures for '06, '07, '08, and '09 are estimated at 1.1, 1.1, 1.8, and [$1.9 million], respectively.

Now I'd like to quickly discuss some of the highlights of the second quarter.

Net Yields are expected to increase approximately 5% over the second quarter of 2005.

Net Cruise Costs are expected to increase approximately 13%.

Some of this is due to the increase in Net Cruise Costs discussed above, and some is due to timing of certain expenses.

The primary drivers are as follows -- higher fuel costs account for approximately 4.5 percentage points of the increase.

Again, our current at-the-pump fuel price is $432 per metric ton, which is 28% higher than the average price for the second quarter of 2005, of $337 per metric ton.

If fuel prices for the rest of the quarter remain at today's level, the Company estimates that its second quarter 2006 fuel costs, net of hedging and the savings initiatives, will increase approximately $29 million, or $0.13 per share.

And, lastly, timing of a number of expenses, including refurbishment costs, marketing expenses, and also G&A.

And, as I mentioned previously, our full-year guidance for Net Cruise Cost is for an increase of only 5 to 6%, so these timing impacts will even out later in the year.

We anticipate that this absorption will happen primarily in the fourth quarter; however, we manage the business on a yearly basis, so the quarterly distribution in the latter half of the year could change.

Based upon everything we just discussed, we expect second quarter 2006 earnings per share to be in the range of $0.50 to $0.55.

At this point, I would like to turn the call over to Jocelyn, the Operator, for -- to respond to some of your questions.

Thank you.

[OPERATOR INSTRUCTIONS] Your first question comes from Felicia Hendrix with Lehman Brothers.

Hi.

Good morning, guys.

First question is predictably about the Caribbean.

You guys did mention briefly that you're seeing price pressure in the Caribbean, and it seems like you're offsetting this better than your competition.

I was wondering if you could explain the differences here?

And, also, if you could just elaborate on the pressures that you're seeing?

And if there's been any kind of change at all in the business or any kind of improvement in the second half of March?

I have a follow-up question about the Voyager, but I'll stop here for a second.

Hi, Felicia.

It's Adam.

I can't speak to what our competitors are experiencing.

From our standpoint, the Caribbean is, overall, doing well, and on a year-over-year basis continues to grow, and the yield situation continues to be solid.

But it isn't quite at the level of our expectations that we might have had for it maybe three to six months ago.

And, obviously, our job is to generate as much demand under whatever the market conditions may be.

And we are, generally, seeing good response to our programs and our pricing initiatives.

And we are coming up to a solid summer season, and I think one of the things that we've put some stress on this year is to kind of get ahead of the game as best as we can for meeting some of the challenges that we traditionally experience in the fall, and being a little bit more timely and a little bit more aggressive with our promotions, and expecting to see a good response to that.

So, overall, it's a little bit more challenging environment than, maybe, of the last two years, which you know, were exceptionally strong yield years.

And this may not be at the same level.

But, as Richard stated earlier in his opening comments, I think the overall situation is still reflective of the ongoing growth and health of the industry.

Now, if you're -- just looking at market share for a second, I know that your Company has more -- higher market share than Carnival does in the Caribbean, but if I'm thinking about the shorter cruises and the Royal Caribbean brand versus the Carnival brand.

Who has more market share in the Caribbean for the short cruises?

That I don't know off the top of my head.

I'll simply note that, in terms of our short cruise portfolio, two of our three ships that are in the Caribbean short cruise market are out of the Miami cruise -- Miami, Fort Lauderdale cruise market, which are Sovereign of the Seas, Enchantment of the Seas are two of the ships, as you know, we've revitalized in recent years, and in the case of Enchantment, also stretched her.

And those ships are clearly contributing to a positive development in Miami-based short cruises.

One of our short cruise ships, Grandeur of the Seas, out of Tampa, was placed there two months in advance of the season after Hurricane Katrina affected New Orleans.

And while the yield performance hasn't been, let's say, stellar, it's been remarkably good considering the dislocation and the little amount of time that we had to respond to that exigency.

So, overall, our short cruise portfolio has performed well -- is performing well at this time.

Okay.

And, then, getting to the Freedom, how far out is that ship booked?

Well, I mentioned that we opened up our deployment for all of our products -- or, actually, we are in the course of opening up our deployment for all of our products for both brands from now through early May.

So until last week, you could only book Freedom of the Seas into the spring of 2007.

Now you can book Freedom of the Seas and all the other ships into 2008 as of about three weeks from now.

There is space available in case anybody on the call --

Okay.

And, then, just finally, on the Voyager class, you're redeploying it to different markets that certainly will appreciate the kind of -- a ship that caliber in the market.

Just wondering, though, regarding how those ships are yielding versus their prior deployments?

Well, as I just mentioned, we only just announced that that's what they're going to do last week, and many of those products aren't even open for sale yet, so it's too early to say.

What are your expectations, though?

We always have positive expectations when it comes to Voyager-class cruising and Freedom-class cruising.

I like it when Richard answers the questions better.

Okay.

Thanks, guys.

Bye.

Thank you, Felicia.

That's a point for me, Adam.

Your next question comes from Brian Egger with Harris Nesbitt.

Good morning.

I had two questions.

The first is -- There was a fairly prominent general business article out a few weeks ago suggesting, not only general weakness in the Caribbean in terms of pricing, but suggesting that the Freedom of the Seas deployment was having some negative effects on pricing of other ships in the Caribbean, which the premise didn't seem very intuitive to me, but that was the assertion they made.

Just wanted to know if you had any comments on the impact of the Freedom on pricing dynamics generally on the fleet?

And, then, the second question is just perhaps just a more general update on the status of port repair efforts in Cozumel as they stand now?

And I'll take the first of that.

Just comment -- I think that was listed as one of the possible factors.

There's no question the Freedom of the Seas is going gangbusters.

And, by the way, if we haven't mentioned it, the ship is spectacular and will justify the premiums that we're getting.

When we bring out a new ship like that, there's always an impact in both directions.

There is some cannibalization of everything else because some people will choose that, but there's also a halo effect.

And I think, overall, I would definitely say the Freedom of the Seas is helping our Company overall by creating an overall halo over the whole fleet.

I actually think a little of that is going into the whole industry.

So I do believe that that is -- I think it was mentioned in the article as just one of several things.

I certainly don't think that the introduction of the Freedom is hurting anybody.

And, Adam, do you want to take the second one?

Brian, I believe your second question was about Cozumel?

That's correct.

Yes, as you know, all three of the piers that we're operating on a regular basis prior to Hurricane Wilma were knocked out of service.

One of the three, which normally would take two ships at a time in the past, opened up about two weeks ago for one ship at a time.

Fortunately for us, that's a berth at which we have a preference.

And so many of our ships are now able to dock, not Voyager-class ships, but Radiance-, Vision-class ships are able to dock at that outer berth on an everyday basis now one at a time.

So that is a favorable development.

But we mentioned Cozumel several times this morning, and that's because a lot of tendering is going on -- a lot more tendering is still going on than used to be going on when all three piers were in service for the industry, and the costs of the tendering operation have been, frankly, disappointingly high.

And that's a dialogue that we have been pursuing and continue to pursue with our colleagues in Mexico, and we've been able to make some progress in cost reduction, but we're still not satisfied with where we are.

So from a guest satisfaction and financial standpoint, we hope to have all of our ships able to dock in the near future.

And in the meantime, we are in a dialogue with the Mexican authorities to reduce the costs as much as we possibly can achieve them, which we think is appropriate, given the level of the support that the cruise industry showed for Mexico after the -- after Hurricane Wilma, which I believe was much appreciated at the time.

Is tendering thought to be a better response to the damage in Cozumel than just simply re-routing it to a different Western Caribbean port or a combination of both techniques being used?

There was a fair amount of re-routing early on, but we're at the point now where the recovery by Cozumel and the surrounding area has been absolutely outstanding, given the amount of damage that existed at the time.

And we're quite comfortable with the tendering capacity and delivering and experience in that area today.

Okay.

Thank you.

Your next question comes from Elizabeth Osur with Citigroup.

Thanks.

A couple of questions.

First, when we look at the net per diems, or the Net Yield breakout, it certainly seems like the new contracts that you guys have on some of the on-board items are really pushing yields up in the first quarter.

And if I just look back at last year's numbers, it looks like we're going to stop getting that benefit in the fourth quarter.

Is that true?

And how do you think about the opportunity for positive earnings in the fourth quarter this year?

I assume you mean by positive earnings -- yes --

Yes.

-- rather than break even, yes.

Right.

Sorry.

Well, I think I'll ask Luis to comment on the second part of it.

The new contracts were a factor in it but -- in our improved on-board revenue.

But we've -- I think we've seen improvements across the board in virtually all areas, and I think we took all of that experience and those factors into account in giving the yield guidance.

I think the new contracts are simply one of the factors.

And then I'll ask [Inaudible] to comment on [Inaudible].

Okay.

Hi, Liz.

How are you?

Hi.

I'm good.

We haven't -- really don't give guidance on the [Inaudible].

But what we're seeing is certainly the improvement in terms of yields, our deployment [Inaudible], which Richard just mentioned, [Inaudible] revenues also quite, quite good.

And, also, on the cost side as well.

So that's why we're seeing such positive [Inaudible] Obviously, it's too early to tell, but that's [Inaudible].

Good.

Just to clarify, you are looking for the opportunity for positive earnings in the fourth quarter then?

We are looking for the opportunity.

Okay.

And, then, just second unrelated question.

Any indications you can give us on how bookings are going for the August, September hurricane season?

I know the comments on bookings in general were that bookings are down year-over-year but pricing is up.

Are we seeing the same trends for August, September?

Liz, let me ask Dan to comment on that.

Okay.

Liz, right now, we're very happy with, especially on Celebrity, with where bookings are in August and September.

We are in Alaska and Europe at that time.

But, in general, our -- as we said at the beginning of the call, our outlook for bookings are positive.

We're pleased with the way bookings are coming in.

Our guidance on -- you saw our guidance on our yield performance, and that's indicative of the way we think the year is going to finish up.

So at this time, we feel good about it.

But if I could just follow up.

I'm just curious how Caribbean specifically is booking up for that period of time.

I think, Liz, we haven't seen an overwhelming reaction to it yet.

I think we are concerned and would be particularly concerned if it looks like another bad season, especially if the season starts early.

But so far, while I think it has probably tempered -- otherwise would have been an even better season -- I would not have said that it was so dramatic that it's one of the things that we would have chosen to mention.

So in our laundry list of things so far -- and I do emphasize so far -- it has not been that big a factor.

Okay.

Thank you.

In the Caribbean.

Your next question comes from David Anders with Merrill Lynch.

Great.

Two questions.

Luis, could you maybe comment -- I missed the -- you said if fuel stays where it is right now, you kind of gave us the EPS impact for the second quarter and for the full year.

I missed those.

If you'd give me those again?

And, also, if you'd give me a little more color on the second quarter expenses?

Is that kind of refurbishment and dry docking that really surges in the second quarter?

Just help me understand that a little better.

David, let me -- let me just address the second question first.

The second quarter, what we're looking in terms of other expenses is, as Dan mentioned earlier, that we're taking the Century into dry dock to do a complete refurbishment.

And what occurs during refurbishments like that is that you're taking some things out and putting new things in.

And when you take things out, you have to write them off.

So there's a component of that.

Also there's a component of some of the things that we shifted from quarter to quarter, those are some marketing expenses, and also some more dry docking.

So that's some of the differences that you're seeing in the second quarter.

With regard to your first question on fuel, for the full year, the impact of fuel is going to be $0.45.

And the impact for the second quarter is going to be 13.

I'm sorry.

I missed that last one.

The second quarter is $0.13.

Thank you.

Your next question comes from Robin Farley with UBS.

Thank you.

Yes, I have three questions.

First is, on expenses, on non-fuel expenses, it looks like your guidance prior to today was for the year to be flat to up 1%.

Now it looks like it's going to be up 2 to 3%, and this is outside of fuel.

Aside from the shifting -- you've talked about the shifting of some expenses between quarters.

Can you talk about what else is driving those expense increases from the last time?

Obviously, things like stock options, you -- that's not new information since your last guidance, and a lot of the refurbishments would have already been planned as well, operating Cozumel was already happening.

What's sort of the incremental expenses here that's driving that increase?

Hi, Robin.

A couple things.

First of all, we didn't -- we never said flat up 1%.

The guidance that we gave was to be up 1 to 2%.

And right now, if you actually do the math -- we give you guidance on fuel.

We give you $432 per metric ton.

That's pretty precise.

And, so that kind of gives you 3.6% which means the balance is a range of 1.4 to 2.4.

So there is a little bit of a difference in the range [Inaudible] originally but not much.

It's pretty consistent.

I think that some of the things have changed [Inaudible] fine-tune what you're doing in terms of refurbishments, that's one of the things.

The other thing is that when we originally looked at Cozumel, we certainly anticipated Cozumel coming back to normal a little bit quicker.

And, then, of course [Inaudible] Those are [Inaudible] drivers.

I'm sorry, it cut out there.

You were saying Cozumel and fine tuning the refurbs are driving the expenses?

Did you mention a third item or was just -- ?

No, no.

I just mentioned that those are the two primary ones.

Okay.

That there may be -- that there may be some other miscellaneous things that are small, but those are the primary ones.

And, obviously, the fact that Cozumel is still not up to speed, still paying some higher costs there.

And then, in your yield guidance, it looks like the biggest increase for the year is going to come in the second quarter.

And, given that there's really only a month of Freedom of the Seas in that quarter and that a lot of the Alaska, Europe, the stronger booking itineraries are more focused in Q3, can you talk about what is driving the Q2 yield increase?

Some of it, I guess, was that Infinity and Summit last year were not in service, and so that's making for a little bit of an easier comp in Q2.

Can you talk about what else is driving those increases that is not necessarily driving it in later quarters?

Okay.

Well, one of the things is the Enchantment of the Seas is there for the full season.

And [Inaudible] Enchantment of the Seas was in dry dock being [Inaudible] length of last year.

That's one of the primary ones.

And, then, also, the -- from a calendar, in terms of Spring Breaks season, that's also [Inaudible]

Okay.

And, then, last question is -- if you could talk about any difference you might be seeing or might not be seeing in how Western Caribbean itineraries are booking versus Eastern Caribbean itineraries, just to get a sense of whether the pockets of weakness in the Caribbean -- is it more driven by an overall demand issue?

Or is it specific to some of the hurricane damage?

I don't think it's correct to say it's specific to hurricane-damaged areas.

Cozumel, which was affected last year, and Grand Cayman, which was affected the year before, have both really devoted themselves to recovering their guest experience.

And we're pleased to be able to take our guests there right now.

As it happens, Freedom of the Seas will take her guests to both of those destinations on a regular basis.

Freedom of the Seas is operating exclusively Western Caribbean cruises throughout the next 52 weeks, and, as we've noted previous on this call, is doing exceptionally well.

So those areas which are very important to the cruise business and suffered a lot of damage have recovered nicely and are not being singled out in any way by the marketplace for a disadvantage.

So, then, the sort of overall weaker booking in the Caribbean then, you'd attribute that more to economic conditions or something if it's not more related to the hurricane damage?

What I'm saying is that, to whatever extent, even thinking about the hurricanes might be having an effect on the market, it's not specific to those places that were influenced by past hurricanes.

It would be more of a generic concern, not a specific concern for the Western Caribbean region.

Okay.

And, so, the general concern, would you attribute that to anything in particular?

What I was referring to was that, obviously, there's been a lot of talk about the past two hurricane seasons, saw the projections about what the next hurricane season might be, that it might be an active one, and I think the way the market has interpreted that is, if anyone is concerned about whether or not they should book a cruise because of the possibility of hurricanes, they're not isolating that concern to the Western Caribbean.

They're thinking about booking in general.

Which would be anywhere.

So hurricane concerns, but just not specific to only where it's been before.

Okay.

Correct.

Thank you.

Your next question comes from Assia Georgieva with Infinity Research.

Good morning.

Very good guidance.

And I had a question, actually, on what you're seeing currently for Q3, obviously, the biggest quarter of the year, and it seems that the yields might be closer to the 3% range rather than the 5% you have just given us on Q2.

And I wondered whether you can discuss the different markets, and maybe Celebrity, being in Europe and Alaska is a good example.

It seems Alaska is doing very well and Europe is relatively flat to possibly slightly down on a year -- on a year basis.

Are those fair observations?

I think that's getting a little more specific than we've wanted to do, among other reasons, for competitive reasons.

But you're also looking at fine-tuning within a range.

I'd be surprised if even our revenue management people were that precise within 1 or 2 percentage points.

I think we feel fairly comfortable in looking at all the markets in totality and giving our yield guidance on it in total.

I don't think we feel very comfortable in being that precise in the individual markets.

But, Richard, would you comment on Europe and the trends there?

Europe and Alaska are both doing extremely well, and that's why you've seen, as Adam commented, on deployments that are [Inaudible] there. [Inaudible] a fair amount of the [Inaudible] deployment pattern.

We also think -- we have the Voyager class.

We have focused on Freedom delivery, which we're very excited about and [Inaudible] in two days, we're even more excited.

But, we're also inaugurating the Voyager class in Europe soon, and that is -- we think that will also make a very dramatic statement, as ships in that class and for that market.

But, no.

Those two markets, in particular, are doing [Inaudible].

And, I guess, it's fair to assume that Legend of the Seas ex-U.K. is doing very well if you intend to put the Navigator there next year.

Would Legend come back to the U.S. or be redeployed again in Europe?

As it happens, Legend of the Seas is the only ship in the Company that we didn't specifically announce what it will be doing in '07 and '08.

So we will be back to you on that one.

But the progression from Legend to Navigator of the Seas is clearly reflective of our strategic intent to boost our presence in the U.K. market specifically and in Europe in general.

Great.

Thank you, so much.

Your next question comes from John Jares with Founders Fund.

Good morning, gentlemen.

Luis, I was curious on the hedge.

I think you said you were 46% hedged.

And I was just wondering if that was at a certain level or if you have caps at certain price levels?

We have -- that's -- we are -- in terms of our total consumption, we are 46% hedged.

If you ask me at the level, there are a variety of different levels and a variety of kinds of [Inaudible] I can't give you specifically to say that [Inaudible] prices [Inaudible] disclose that information, but I will tell you that it is a combination [Inaudible] FIFO and combinations of all of those things.

Okay.

Well, thank you.

But it's not capped at a level.

No.

It's not capped.

This will move -- the hedges will presumably move up and down without limit, just as the underlying commodity will move up and down.

Okay.

Well, thank you.

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

Thank you.

A few questions.

Back to the Caribbean pricing.

In an earlier question, you commented -- I think the question was asked regarding the short Caribbean versus some of your competition.

Can you maybe talk in the Caribbean as a whole how you see the long versus short market, the pricing trends there?

And, then, with the upcoming passport issue, any indications that you're seeing that that is going to be a problem or not?

So that's the Caribbean piece.

And then, Luis, back to the hedging question -- and I don't know if it's your phone or whatever, Luis, but it seems when you respond you seem to be fading in and out on multiple responses.

But, on the hedging in particular, can you give us by quarter now what percent you're hedged related to your fuel needs in that quarter?

And, metric tons, you gave it to us for the year.

How should we think about that on a quarterly basis that you're going to be using?

Why don't I answer the last question first and then I'll pass the response on to Adam.

Hopefully you can hear me okay.

Yes, that's much better.

Thank you.

I apologize for having some difficulties here with the microphone.

On the hedging, we are -- on the hedging, we are hedged at 46% for the year.

I really can't get you the specifics in terms of quarterly how much is each quarter, but what we can do is -- I'm sure that you can call Greg after the call.

I don't have actual details --

Okay.

-- with me in terms of exactly where we are for the quarter.

But Greg can certainly get those for you.

In the terms of the metric ton usage, I think you can get those from Greg as well.

Great.

That's detail I don't have.

Okay.

At least, not in front of me here.

Not a problem.

But I think we can say in general it's -- there are deviations between quarters, but it's generally flat or relatively evenly distributed.

Okay.

And, Adam, you want to comment?

Sure.

Tim, because we have acknowledged that there are pricing pressures in the Caribbean and that the overall situation is maybe not as robust as what our expectations would have been three to six months ago, it's very understandable that we would have questions trying to dissect between long, short, and seven nights between Southern, Western, and Eastern Caribbean, all of which is really specificity that we're not intending to give.

Having said that, obviously, the seven-night Caribbean market is the mainstay of our overall Caribbean presence.

So to the extent that there are pricing challenges in the region, the pricing challenges will manifest themselves in that area.

And, then, the rest is really small in proportion -- the individual sectors outside of seven-night Caribbean are small in comparison to that group.

Okay.

And, then, Adam, on the passport issue, any -- I guess relative to Dan, you're a little more impacted there.

Any sense you're not being impacted yet or you are?

Any sense yet or read?

I know, maybe, still it's a little bit early because people typically have, what, 60, 90 days to get a passport, so we're not quite to the push-the-panic-button point yet, but is it going to be an issue or not do you think?

Obviously, anything that acts as even a small hurdle is something we would like to avoid.

But I think we have not seen any evidence of it yet.

There has been -- most of our passengers already use passports, and, obviously, as you say, it will affect -- potentially affect more of the very short cruises than longer ones, but overall, at this point, we think that it won't be that big a factor.

Great.

Hey, Tim, I might add to that, that as you know, about 50% of our passengers present -- in the Caribbean present a passport as identification, so the statistics for people who cruise and have passports is a lot larger than the total U.S. population, which is about 15%.

Okay.

And, again, as you were saying, Luis, they present them now and they really don't have to, but that's showing a good established base relative to the U.S. population.

That's correct.

Thank you, gentlemen.

Your next question comes from Scott Barry with Credit Suisse.

Hi, couple questions.

Historically, you've given general commentary about your current book load factor and your pricing for the remainder of the year.

Wondered if we could get that?

And, then, secondly, comment on your book to departure window.

Historically, we've seen some slides on that?

Is it stable?

Is it shrinking?

Maybe you could comment overall.

And, then, secondly, what it looks like in the Caribbean?

And I've got 1 follow-up question.

Thanks.

I think I did say -- I meant to say that we are slightly lower on volume booked now on slightly higher prices.

That's the basis for our forecast.

Secondly, we didn't show the slide this time because -- we started showing that slide because it showed some dramatic changes as we were going through '03 and '04 and it has stabilized.

So it really doesn't show anything new, and we didn't show it, but I would confirm to you that it really is now showing our normal pattern, and that pattern is relatively stable.

Okay.

There's no change in the Caribbean either?

No.

It's -- I don't -- we don't look at it particularly for the Caribbean, but, in general, it's stable and I am not aware -- and Adam and Dan are both sort of saying neither of them are aware of any deviation in the Caribbean either, Scott.

Okay.

Great.

Just one last question.

Your earnings per share guidance here for the year implies, just back of the envelope, close to 40% growth in the back half.

Now, am I correct in assuming that suggests that you're committing to year-over-year declines in Net Cruise Costs in the back half?

That's something we haven't seen historically.

And just based on plugging the numbers in the model, it looks like that that's what you're going to need to do to get to the midpoint or the high end of that EPS guidance range.

Thanks.

Yes.

I think it's a good point.

We are -- of course, I'm not saying we're committing.

We're more or less predicting as opposed to committing, but we do try and emphasize that we manage on the basis of the year as opposed to the quarter.

And so there's always a lot of timing differences.

This looks to be a year where more of the benefit is in the second half rather than the first half.

So, yes, we are saying that we expect better cost performance second half than the first half.

Okay.

Great.

Thank you.

Scott, just to clarify, that's not because we're saying we have a progression that is getting better and it will continue like that.

That really just happens to be the timing of when we do our dry docks, when we are doing refurbishings, and some of our other costs we continue to manage on the [Inaudible].

Okay.

Great.

Maybe just on that second quarter, if I could, that 8.5% increase in Net Cruise Costs ex-fuel looks to me to be about $45 million.

Is there any way you could quantify maybe where that's going?

Is it G&A?

I mean, I see an uptick in other cruise operating expense?

Is it promotional activity?

Are you -- are we seeing a lot of inaugural expenses for the Freedom, et cetera?

Is there any way we can break that out from a modeling standpoint?

Yes.

I think that the -- just to kind of give you a high-level view, Scott, is you have -- the primary things are going to be the fact that you have the Century that's being revitalized.

And so all the hits on that are going to be taking place in the second quarter.

The other thing is we're doing -- we're going full bore on the Freedom inaugural, and that's going to be all expense.

So that's going to be a very large chunk of it.

You do have miscellaneous things that are, for example, refurb -- excuse me, dry docks, which are going to be higher than what they were last year just because of timing, and the sales and marketing.

You may recall, last year we shifted a lot of our sales and marketing towards the latter part of the year, and we did not do very much in terms of the first and second quarter.

So those are kind of the highlights in terms of what that number encompasses.

Okay.

Fair enough.

Thanks, very much.

Your next question comes from David Katz with the CIBC World Markets.

Hi.

Congrats on a good quarter.

My questions about the Caribbean have pretty much been asked and answered.

But just is there anything -- what are you doing about or what can you do in advance of a prospective hurricane season in terms of PR, marketing, et cetera?

Or what strategies are you thinking about to mitigate what may very well be an active hurricane season?

Well, I wish we could say that there wouldn't be many hurricanes.

I think we have spent a fair amount of time trying to get the message out about just how much better you are on a cruise ship than you are in almost any other vacation.

If you look at the Caribbean, if you go to a land-based destination and a hurricane comes, you basically have no choice.

The beauty of cruise ships is that we can mostly avoid them.

And that is a fairly dramatic differential.

One of the more important factors in getting that message out continues to be the travel agent community.

They are the ones that our customers seem to ask most.

We get some calls, but I think that's the kind of information a travel agent has that is quite helpful to their customers and ours, and they -- they're able to explain that better.

I also think, ironically, we do know that we're in a -- one of these periods, hurricane seasons, apparently, are something which are cyclical, a 30-year cycle of low and 30-year cycle of high.

And we do seem to be in a new cycle of more hurricanes.

And, ironically, as there are more and people become more familiar with them, they'll understand better both the risks and the extent of those risks.

And I think, as in so many things, more knowledge will actually help us.

Great.

Thanks, and good luck.

Your next question comes from Glen Reid with Bear, Stearns.

And I -- Operator, I think we should keep it to this question and one more.

Okay.

Thanks for taking the call.

Yes, just three quick questions.

I guess, first, could you just remind us what percent of your third and fourth quarter capacities, I guess, individually are in the Caribbean?

And, then, secondly your yield guidance -- well, in the first quarter, you saw roughly flat ticket yields but nice uptick in on-board.

How do you expect that mix to look like in your yield guidance for the balance of the year?

And, then, lastly, I know you typically don't break out specifics for brands, but you did mention that the Celebrity brand is doing quite well.

Could you give us maybe a little bit better color on what the contribution of Celebrity is within your yield guidance for the year?

Thanks.

I think, on the specifics by quarter, I'm going to ask you to call Greg directly, and he can give you that.

If anyone else is interested in it, give you the exact numbers.

I'll ask Dan to comment on Celebrity's contribution.

He's clearly dying to do so.

Thank you, Richard.

We've -- without giving out specific numbers, we had a lot of opportunity on the Celebrity brand to perform closer to where the brand should perform and we are seeing good, solid performance across the year.

In the first quarter, we saw good, solid yield performance, which is especially encouraging because, historically, our strengths have been in Alaska, Europe, and Bermuda.

So we're starting to see stronger performance in the Caribbean and also on the West Coast.

We also have seen improvement in the Canal and our round trip sailings to Hawaii.

And what we're doing down in South America with Celebrity Voyage has also being very, very encouraging.

Second and third quarters, we're experiencing very strong European and Alaska seasons.

And as a result, it puts us in real good shape through the end of the third quarter.

Fourth quarter, it's still a little early to say, but indications are, at this point, when we come back into the Caribbean, that we're in pretty good shape.

One of the other things that I just want to mention that we've done is we extended our European season, so we're staying in Europe longer than we have before, and that's also helped our performance.

We'll start -- we'll be in South America earlier this fall than we were last year.

So we're seeing improvement as a result of, I think, getting the message out about the brand better than we have in the past, and I think we're also seeing improvements because we're doing a good job and probably a better job managing our itineraries.

Okay.

So would you say, then, just in general terms that the Celebrity brand's yield growth this year is outpacing that of the Royal Caribbean brand?

Yes, I would.

And coming back to your question about the relationship in our forecast between ticket revenue and on-board and other revenue, the first quarter is really the only one where we expected such a high preponderance of the increase to come from on-board.

For the rest of the year, we expect more of the yield improvement that we talked about to come on the ticket side.

Okay.

Thank you.

Okay.

One more question.

Your final question comes from Chris Brown with Banc of America Securities.

Thank you.

Actually, it's three really short ones.

The first one would be -- I noticed you guys did the financing to fund the new ship, you just took delivery.

And was wondering if you could give a few details of the -- it looked like the rate was pretty attractive, how that rate was that attractive?

Secondly, any conversation -- just later in the year, you have 175 million debt maturity.

Just wondering what your, kind of, capital plans are there?

And, finally, any discussions with Moody's with respect to your potential upgrade?

Okay.

Let's see if I got all your questions here.

Yes, we just completed the financing for the Freedom, and we quoted the rate being at about 3.77%.

What we did is, obviously, working with the yard and also working with the Government of Finland, were able to negotiate this.

And this is something that we do when we purchase ships.

So that was a very favorable rate for us.

With regard to Moody's, we continue to have dialogue, always -- all the agencies.

We saw a movement with Standard & Poor's, but we have not seen any movement with Moody's as of yet.

I guess, finally, was just that late in the year maturity.

Do you have any plans to go to the unsecured markets?

We are constantly looking at financing options.

We still have debt that is coming due this year, and we're looking at all options at this point in time.

Thank you very much.

Thank you, everybody, for the call.

And thanks, all, for attending.

And, also, we're very happy to report a happy -- a good quarter, and we would like to look forward to talking to you in the next [Inaudible].

Thank you.

This concludes today's conference call.

You may now disconnect.