皇家加勒比遊輪 (RCL) 2006 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • At this time I would like to welcome everyone to the Royal Caribbean second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

  • I would like to turn the call over to Mr. Luis Leon, Executive Vice President and Chief Financial Officer.

  • Sir, you may begin your conference.

  • - EVP, CFO

  • Thank you, and good morning, everyone.

  • I'm Luis Leon, Chief Financial Officer, and I would like to welcome you to our second 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, Celebrity Cruises; and Greg Johnson, Associate Vice President of Investor Relations.

  • First our forward-looking statement.

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

  • Additionally, certain financial measures constitute non-GAAP financial measures as defined by Regulation G and a reconciliation of these items can also be found on that website.

  • Richard will now provide a brief business and revenue overview.

  • After that, Adam and Dan will make some comments about their respective brands and then I will go through some of the details of the financial results and future guidance.

  • Finally, we will open the call up for your questions.

  • And now I will turn it over to Richard.

  • - Chairman, CEO

  • Thank you, Luis.

  • Good morning everyone.

  • As always it is a pleasure to have this opportunity to talk with you all about our earnings and to add color.

  • First of all, we were pleasantly surprised by our results this last quarter.

  • In particular, late bookings and very good onboard revenues boosted or yields to 5% -- sorry to 6%, about 1 full percentage point better than we had expected.

  • The occupancy levels were consistent with the second quarter of last year, which means that all of this improvement was driven by ticket price increases, and by higher onboard spending.

  • Together, these strong yields helped us to generate higher-than-expected earnings per share for the quarter of $0.57.

  • Now let's move on to the rest of 2006.

  • As you saw in our release, we've maintained our yield guidance for the full-year 2006 at an increase of 3 to 4%.

  • Despite all of the discussion about difficult market conditions, our internal forecasts have remained essentially unchanged throughout the year.

  • It is always difficult to predict these things to such a fine degree of accuracy but our revenue management group has a good track record and they still believe that this range represents our best estimate of where we will end up for the year.

  • That said, we have seen some softening in the competitive environment for the second half of this year, and booking curves have compressed a bit.

  • This results in additional uncertainty and volatility in our forecast.

  • As a result, while the expected outcome hasn't changed, the level of certainty is definitely lower.

  • The good news is that the softness isn't across the board.

  • Europe and Alaska continue to perform very well.

  • The slowdown in forward bookings is primarily in the Caribbean and Bermuda.

  • But it is interesting to note that despite all of the focus, all of the focus on the Caribbean, our Caribbean yields are still expected to be up year-over-year.

  • Additionally, on board revenues continue to be very robust, and they've exceeded our expectations throughout the year.

  • This strength helped balance some of the potential weakness on the ticket side, and also helps us to maintain our yield range guidance.

  • Remarkably, we've also been able to stay within our previous earnings per share guidance.

  • The only major change being higher fuel costs.

  • We've narrowed our EPS guidance to 2.90 to $3 which is at the lower end of our previous range of 2.91 to 3.11.

  • As you see, the reduction is primarily driven by higher fuel costs.

  • Cost control of course is still a major focus of the entire enterprise.

  • And fuel expenses continue to be a significant and growing component of our cost structure.

  • And of course, we continued to say that we're not going to predict fuel prices, but simply talk about what the impact would be if they remain unchanged.

  • With those prices flirting at $80 a barrel, and no relief in sight, we're continuing to implement energy conservation initiatives and also enhancements in sourcing and types of fuel.

  • We've talked about a number of these over the past years, including the restructuring of our itineraries, new silicon-based hull paint, reflective window treatments, and the upcoming installation of diesel engines on our eight gas turbine ships.

  • Another exciting initiative we have implemented and we're now talking about publicly is the use of bio diesel.

  • This is a renewable energy source and is very environmentally friendly and provides lower harmful emissions.

  • In fact in our tests even cleaner than the fuel we burn in our gas turbines, or have been burning in our gas turbines.

  • I would also mention that the timing of our results continues to vary between quarters.

  • This year, as you can see from our release, we expect our fourth quarter results to be particularly strong.

  • This is due to the timing of revenue increases and when certain expenses happen to fall.

  • But as we've said before, we manage these numbers on an annual basis, not on a quarterly basis.

  • With some trepidation, I would also like to make some comments about 2007.

  • It is still very early.

  • And because the bookings window seems to be shifting closer in booking, forecasting further out becomes even more difficult than normal.

  • Nevertheless, we can say that our current order book for 2007 is consistent with where we were at the same time last year.

  • At this point, we are hopeful for a positive yield performance, especially considering the influences of Freedom of the Seas for a full year, and the sister ship Liberty of the Seas coming into service next year and the impact of the refurbished Century and in general Celebrity's performance.

  • With that, I will ask Adam and Dan to comment on of their respective businesses and then Luis will provide more detail on the financial results.

  • Adam?

  • - President, RC Intl.

  • Thank you, Richard.

  • And good morning, everyone.

  • As Richard indicated, we're very pleased with the 2006 second quarter results.

  • For the balance of 2006, just as we commented three months ago, 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.

  • The obvious highlight for Royal Caribbean International in the second quarter was the remarkably successful introduction of Freedom of the Seas.

  • Although I expressed in our previous call on the Eve of taking delivery, the great anticipation we all felt about the ship, what actually transpired in the ensuing weeks was beyond our aspirations.

  • Most importantly, the reality of the ship backed up the hype of the publicity.

  • In service now for seven weeks, Freedom of the Seas is everything we hoped she would be in terms of guest satisfaction and revenue generation.

  • We certainly look forward to the arrival of Freedom's two sister ships in 2007 and 2008.

  • Subsequent to the first quarter earnings call, we announced that Legend of the Seas would remain in Europe in 2007.

  • Royal Caribbean International will have six ships and over 14,000 berths in Europe in 2007.

  • That's about the same number of berths as our entire fleet had prior to Legends delivery in 1995.

  • One difference between 2007 and 1995 is that a material and growing percentage of our guests on the European sailing are sourced from Europe.

  • Although the mix varies by ship, there are several ships in Europe, including Voyager of the Seas, where the sourcing balance of North Americans and Europeans is nearly equal.

  • It is the strength of the Royal Caribbean brand that we can deliver a highly enjoyable experience to a highly diverse group of guests on the same sailing.

  • This strength facilitates our increasing global presence.

  • Dan?

  • - President, Celebrity Cruises

  • Thank you, Adam.

  • We continue to be pleased with the progress we are making on Celebrity.

  • Our yield performance was strong for the second quarter and continues to be strong for the back half of the year.

  • We are in the midst of the Alaska and European seasons which are very important to Celebrity and we are pleased with the way they are going.

  • Our focus continues to be on managing costs, delivering a clear and concise brand message, and delivering an outstanding product that Celebrity is known for.

  • There are some new updates for Celebrity since our last call.

  • We have completed the $55 million revitalization project for Century.

  • The results have truly been outstanding.

  • The response from our guest, the trade, and the press has exceeded our expectations.

  • Century is currently sailing in Europe out of Amsterdam doing the Scandinavia Russian itinerary and will move into the Mediterranean for the second half of the European season.

  • She will then return to Miami and do a four and five-night pattern that we are very excited about for the Celebrity brand.

  • Finally, we announced a new itinerary which is the first for Celebrity.

  • Beginning late fall, 2007, we will be doing Australia, New Zealand sailing.

  • This move will provide additional opportunity for loyal Celebrity guests to see more of the world on a Celebrity cruise.

  • I continue to be pleased with the progress the Celebrity brand is making and am confident that this will continue.

  • Luis?

  • - EVP, CFO

  • Thanks, Dan.

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

  • Before we get into the details of the quarter and our performance I would like to briefly review our earnings per share guidance.

  • You may recall that in our April conference call, we gave EPS guidance of 2.95 to 3.15 for the full year.

  • Then on May 10, we announced a cancellation of one Alaska cruise on the summit due to a mechanical issue.

  • This cancellation had an adverse impact to our earnings of $0.04.

  • So therefore our guidance became $2.91 to $3.11 for the full year.

  • As we go through our results and current outlook, we will be referring to these adjusted figures as our previous EPS guidance.

  • As we disclosed today, our first quarter net income was $122.4 million or $0.57 per share, compared to net income of 155.2 million, or $0.72 per share back in the second quarter of 2005.

  • This exceeded our previous guidance and was also better than consensus of $0.53.

  • The primary drivers of this positive performance were better-than-expected net yields, and interest income, and lower-than-expected depreciation and amortization.

  • Offset somewhat by an increase in net cruise costs which we will talk about later.

  • Net yields increased by 6% which was 1 percentage point higher than our guidance of approximately 5%.

  • Ticket years were solid.

  • And consistent with expectations.

  • Onboard revenues continue to grow quite nicely and were even better than originally anticipated.

  • Our net cruise costs for APCD increased 14.4%, higher than our guidance of approximately 13%.

  • This was due to higher-than-expected fuel prices, some unanticipated costs, and a shift in the timing of certain expenses.

  • As you may recall, our guidance for fuel assumed an at the pump fuel price of $432 per metric ton.

  • However, we actually averaged $460 per metric ton for the second quarter.

  • Ultimately, fuel accounted for 5.4 percentage points of the increase in net cruise costs, which was about 1 percentage point higher than our guidance of 4.5 percentage points.

  • Looking back at the second quarter of 2005, our at the pump fuel price was $337 for metric ton.

  • So after benefits realized from fuel hedges, our second quarter fuel costs increased approximately $34 million or an adverse impact to EPS of $0.15 per share.

  • Net cruise costs excluding fuel which we will be referring to as nonfuel costs accounted for the remaining 9 percentage points, which was half a percentage point higher than our guidance of up 8.5 percentage points.

  • Two one-time items, expenses, for the Summit cancellation, and legal fees related to Celebrity cruise's successful lawsuit against Essef Corporation accounted for 1.2 percentage points of that increase.

  • So if you exclude these two items, nonfuel costs rose only 7.8 percentage points, or almost a full percentage point better than anticipated.

  • The balance of the increase was consistent with the previous guidance and consisted primarily of items such as the Century revitalization and other ship refurbishment projects, general inflationary pressures, some of which were absorbed, inaugural expenses for the Freedom of the Seas, which Adam talked about, and also the timing of marketing expenses.

  • Additionally, interest income benefited from higher cash balances resulting from our $900 million debt offering, and interest expense benefited from lower-than-expected interest rates.

  • Now, we've gone over these specifics of the quarter.

  • And now, I would like to walk you through a bridge between the second quarter of 2005 and the second quarter of 2006.

  • We saw a 15% decline in EPS between these two periods.

  • The primary components of this change were a 1.5% increase in capacity that generated $0.08, 6% yield growth, gave us 21% improvement, higher fuel prices cost us $0.15, other running and SG&A expenses including timing impacts, cost us $0.25, interest expense and interest income were favorable by $0.03 and dividend income was unfavorable by $0.03 and that is due primarily to the redemption of our first choice investment in the third quarter of 2005.

  • And just to note, while we lost $0.04 due to the Summit cancellation this May, we also had a cancellation on the same ship in the second quarter of 2005 which cost us three ships.

  • Sot the net effect of these two is not material to the quarter over quarter comparison.

  • Now, looking ahead to the remainder of the year, and as Richard mentioned, we are forecasting that net yields for the full year will increase by 3 to 4% over 2005, which is consistent with our previous guidance.

  • Net cruise costs per APCD for all of 2006 are expected to increase by 6 -- between 6 and 7% when compared to 2005, of which approximately 4 percentage points relates to fuel.

  • Our current at the pump fuel price is $448 per metric ton, which is 25% 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 2006 fuel costs, net of hedging and some of the fuel savings initiatives that Richard talked about, will increase approximately 115 million year-over-year, or an adverse impact to EPS of $0.52 per share.

  • This is an increase of $10 million over the previous guidance that we gave you.

  • Ultimately, we believe that our fuel consumption for 2006 will be approximately 1.1 million metric tons.

  • And also by the way, we are currently 58% hedged for the second half of 2006.

  • Nonfuel costs account for the balance of the increase and are slightly higher than previous guidance due primarily to the Summit incident and the legal fees associated with the Celebrity lawsuit against Essef.

  • Depreciation and amortization expense for 2006 is expected to be between 425 to $435 million.

  • And we anticipate that net interest expense will fall between 255 and $265 million.

  • This is an increase from our previous guidance and is due to our redeeming of our lines and our recently completed $900 million bond offering.

  • As we disclose when we announced the offering, this increase in interest expense is neutral to diluted EPS when taken as a whole with the call of the line in zeros in our stock repurchase.

  • Based on these estimate, the fuel assumption, and the revenue outlook that Richard discussed, we expect 2006 EPS to be in the range of $290 to $3.

  • This is at the lower end of our previous guidance primarily due to the higher fuel cost that we just discussed.

  • Looking at capital expenditures, we are projecting 2006, '07, '08, '09, to be 1.2 billion, 1.3 billion, 1.8 billion, and 1.9 billion respectively.

  • Now, I would like to quickly discuss some of the highlights of the third quarter.

  • Net yields are expected to increase 1 to 2% over the third quarter of 2005.

  • Net cruise costs are expected to increase approximately 4% of which approximately 3 percentage points relates to fuel.

  • Our current at the pump fuel prices of 448 per metric ton is 16% higher than our average price for the third quarter of 2005, of $385 per metric ton.

  • Now, if fuel prices for the rest of the year remain at today's level, we estimate that the third quarter 2006 fuel costs net of hedging and fuel initiatives will increase approximately $25 million year-over-year for an adverse impact to EPS of $0.11.

  • The remaining increase is due to growth in full-year net cruise costs that we just discussed, offset somewhat by favorable timing of marketing expenses.

  • As we have been saying throughout the year, the spending pattern for marketing expenses is different in 2006 versus the prior year.

  • They are higher in the first half of 2006 and lower in the second half, so we are now seeing this deceleration in spending beginning in Q3.

  • So in summary, based on everything we just discussed, we expect third quarter 2006 EPS to be in the range of $1.52 to $1.57.

  • At this point, I would like to turn the call over back to Kristen so she can attend to your questions.

  • Operator?

  • Operator

  • [OPERATOR INSTRUCTIONS] Your first question comes from Robin Farley with USB.

  • - Analyst

  • Thanks.

  • I have got three questions.

  • One is just to understand the Q4 yield guidance that's implied, it looks like last year Q3 and Q4 had similar increases in yield yet it looks like the guidance is looking for a much bigger Q4 increase this year, even though you won't really have Alaska, and Europe in there, to drive that.

  • And I guess if you could give us a little color on why you think the Q4 growth is going to be so much better, especially given the decreased visibility, I guess, versus Q3?

  • - Chairman, CEO

  • I think one of the factors here is that remember last year, we had the increase in fuel, the price was going up more rapidly during the year, so the fourth quarter had a bigger hit, and so a lot of what's happened this year is we're getting better revenues, but that's being absorbed by the fuel costs, but back by the fourth quarter we're back more even on the fuel costs.

  • And I think that -- we are expecting a good fourth quarter, we have good solid advanced bookings, and so I think it is the combination of that, had is some general -- there is some general shift in timing of expenses, marketing, and other costs, when dry docks occur, and just add all those things together, and that gives us a much better fourth quarter this year.

  • - Analyst

  • I guess, though, the question about yields, those expense items wouldn't really impact on that yield comparison.

  • And your guidance of kind of 1 to 2% in Q3 kind of implies a 4 to 5% -- 4 if I'm doing the math right.

  • I don't think those factors would affect -- I guess I wasn't clear why that yield curve would be so much greater in Q4 given the year-over-year comparisons?

  • - Chairman, CEO

  • You're asking specifically about yields.

  • Why don't I ask Dan and Adam to comment.

  • - President, Celebrity Cruises

  • Robin, this is is Dan.

  • Celebrity is going to have a good fourth quarter for a couple of reasons.

  • We are staying in Europe longer than we have in the past so we're seeing some of the benefits of that.

  • We also have Century doing four and five-night cruises and we've got great responses for four and five-night cruises in Century, it's the first time in the fourth quarter that we did four and five-night cruises, this year, with Venus, but it is the first time we have had four and five-night cruises for Celebrity, in the fourth quarter.

  • And we're seeing some benefit from that.

  • We're getting great response from the incentive houses on that particular ship being there.

  • So it is a combination of longer European season, the four and five-night, Century, and then just some other itinerary things that we've done, minor things here and there that have helped us grow the yields in the fourth quarter in those levels.

  • - President, RC Intl.

  • From the Royal Caribbean side, two of the factors would be obviously Freedom of the Seas being in the next part throughout this winter season which we didn't have the previous winter, and also regarding some of these European ships that I was mentioning before the expansion of their programs, further into the fourth quarter, that would be beneficial.

  • - Analyst

  • Right.

  • But relative to Q3 because Freedom would also be helping the Q3 comparisons.

  • I was kind of looking for what the relative -- but that's helpful.

  • Thanks.

  • And then the second question was, in terms of airline expense, I realize the air sea mix business is a relatively small part, but just to get some sense of maybe higher airline prices and how that may impact the cost of the cruise to the consumer, can you talk about at least for the portion of air that is negotiated and bought through Royal Caribbean, is that done annually with airlines, and when will that be done again?

  • And are you seeing those prices go up in terms of what you package in with the cruise itself?

  • - Chairman, CEO

  • Robin, we've seen a continued decline in the air/sea mix.

  • And the decline has been pretty much in the area I would say in the low teens, to high single digitals.

  • So we are really not seeing a whole lot of an impact.

  • Obviously, prices have been increasing and we have been passing those costs along to passengers.

  • - Analyst

  • Right so the question is not so much about air/sea mix and changing, but just from what you are able to see of airline prices in the cruises where you do package it, I realize again, that it is a small amount, but what are you seeing specifically in airline prices?

  • Can you quantify a little bit, give us a little bit of color on what you're seeing in terms of those airline price increases?

  • Because what you're seeing on that 10 or 15% of air/sea mix is probably what consumers are seeing on the other 85 to 90% and so if you could give us some color.

  • That's what I was looking for.

  • - EVP, CFO

  • I don't know how much color I can give you on that.

  • Obviously, we have seen across the board increases in pricing for air, we don't really disclose in terms of what exactly that has impacted everybody, but we are seeing that that is not having a significant impact in our bookings.

  • - Chairman, CEO

  • I think, Robin, just to add a little more color to that, while the costs have gone up, and obviously that impacts people's buying decisions, and we also are seeing some of that due to fuel, so if you will, that is more impact from fuel, I think it is also fair to say that alternative vacations are impacted the same way.

  • So we're not sure on the relative basis that's that big a long-term factor.

  • I think from our point of view, the best thing would be stability in pricing.

  • - Analyst

  • Right, yes.

  • And I mean there seems to be a softness in some of the alternative vacations as well.

  • That's why I'm looking to quantify it but--.

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from Felicia Hendricks with Lehman Brothers.

  • - Analyst

  • Hi, good morning, guys.

  • I have a big picture question for you but first is housekeeping.

  • Luis, with the fuel guidance for the second quarter, the 115 million increase year-over-year, is that before or after hedging?

  • - EVP, CFO

  • It is after hedging.

  • - Analyst

  • After hedging, okay.

  • My bigger picture question is probably more for Adam.

  • I was just wondering if you could touch upon what you think is driving the pricing pressure in the Caribbean and Bermuda and then after you answer that, I have a follow-up.

  • - President, RC Intl.

  • I doubt there is one specific cause.

  • I know there has been a lot of speculation about causes, including the fact that there was a very mild winter last year that made the -- may have influenced people's opinions about both last year and this year's winter in terms of cruising out of the northeast and midwest, and there has been tremendous speculation about people's anticipation of an intense hurricane season, which fortunately we've not seen yet, but there is still a long way to go, and could be that there is a relationship to a closer in booking window in terms of people wanting to be sure that there won't be any interference of hurricane activity with their vacation plans.

  • The competitive environment overall is there, as always.

  • And that's typically true for the fourth quarter of every year.

  • And we mentioned I think on the last call that we intended to be earlier if possible and aggressive with our promotional activities and that's in place and I think that's a place, not only for us, but around the industry.

  • So there are probably several different factors that may bring forth the competitive pressure that we are seeing in the Caribbean.

  • But as we have seen in several different times and Richard I think specifically said earlier, the overall yield outlook for the Caribbean in the fourth quarter is still positive.

  • - Analyst

  • Right.

  • Yes.

  • And obviously, we all have been hearing those reasons as well.

  • There is an additional factor that I've been hearing lately and I was just wondering if you could give us your thoughts on that, and that's specifically the changing in kind of how you're adjusting the distribution channel this year, with no rebating and the new group policies.

  • What I've been hearing also is that that strategy is also affecting -- it's obviously affecting the distribution channel which is affecting the agent's ability to reach out to the consumer and that is also causing some of the noise in the -- in these kind of -- in the markets in the Caribbean and Bermuda markets.

  • I was wondering if you could touch upon that.

  • - President, RC Intl.

  • I think you're somehow alluding to what is is the quality of support for our efforts in our distribution system and I don't think it has ever been better.

  • Woe just spent weeks on end on Freedom of the Seas with literally thousands of our best travel agent producers, and their sort of overwhelmingly uniform reaction to our efforts they're easier to do business with, to support their efforts, to express our appreciation to them has never been stronger, so our sense is that the distribution system is very much behind the Royal Caribbean International brand, all seasons of the year, and our intent is to strengthen that bond.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from Brian Egger with BMO Capital Markets.

  • - Analyst

  • Yes, good morning, guys.

  • Kind of two questions.

  • The first is, is it fair to interpret any of the third quarter yields, guidance we're seeing, maybe a little less than we were hoping for, is a function of just the aftermath of a somewhat less than stellar bookings lay season as it relates to the Caribbean overall and maybe obviously not for the Freedom of the Seas but for other ships, for other brands, some need to maybe rein in price increases?

  • That's my first question.

  • - President, Celebrity Cruises

  • This is Dan.

  • The majority of Celebrity's business is in Europe and Alaska in the third quarter, and we're very, very pleased with what we're seeing there.

  • Bermuda has been a little bit softer this year than it has been in past years, but the European and the Alaskan seasons are going extremely well, and we're again, we're very pleased with what we're seeing there and we're seeing great onboard revenue in all those markets as well.

  • - Analyst

  • My follow-up question is -- has there been any more recent change in the tone of bookings for Mediterranean cruises as a result of the recent flare-up of a conflict in the Middle East.

  • I don't know if any of that is captured in your previous comments, but I'm wondering if that has had any effect on late summer season eastern Mediterranean bookings?

  • - President, Celebrity Cruises

  • No.

  • We haven't seen any of that at all.

  • We watch very carefully.

  • But we haven't seen any falloff in Mediterranean bookings as a result of what's going on in the East

  • - Analyst

  • Okay.

  • Thank you.

  • - President, Celebrity Cruises

  • You bet.

  • Operator

  • Your next question comes from Elizabeth Osur with Citigroup.

  • - Analyst

  • Thanks.

  • Just two questions.

  • I was wondering if someone could quantify how much closer in the booking has come?

  • And is there any way to quantify the percentage of '07 bookings that are booked at this time versus last year or even for the fourth quarter?

  • - President, Celebrity Cruises

  • Hi, Liz.

  • I can't give the information to you by quarter, going forward, but I could tell you that we have seen a little bit of a shift in the curve and of course when we talk about the close in bookings we are talking about in bookings within 90 days of sailing, and I think that the last time we gave you that statistic, that it remained relatively flat at roughly about 33%, and what we're seeing that is now it has grown to about 40%.

  • - Analyst

  • Okay.

  • Thanks.

  • That's really helpful.

  • And then the second, can you give us some idea how to think about marketing spend for next year?

  • Just given the ships you have coming on, is there -- can we continue to expect kind of an increase there or do you feel like now that you've already introduced the Freedom class, that people are more familiar with what is is coming on?

  • Can you just give us some kind of a context for next year?

  • - President, Celebrity Cruises

  • Liz, I will tell you what.

  • I think that what we'll -- we are not really going to give guidance for next year in terms of marketing expense.

  • We're still working on our plans.

  • And I think -- Richard gave you some brief comments about bookings, but I think for marketing, that it would be different.

  • - Chairman, CEO

  • I do think those, Liz, you talked about new ships coming on, it is hard to imagine much more than we did with Freedom, and we anticipated her arrival, and that was a major endeavor for us, fortunately a very successful one, but we think that next year is essentially business as usual.

  • - Analyst

  • Okay.

  • Thanks.

  • And maybe just a final question.

  • You mentioned that on boards drove some of the second quarter yield outperformance, can you just talk about how much of the yield guidance comes from onboards versus ticket spend or whether or not your onboard assumptions for the full year has changed?

  • Thanks.

  • - Chairman, CEO

  • We are fairly consistent with giving yield guidance in total, but you can see from our results, which do break out onboard revenue, that the onboard revenue is good.

  • But both onboard and ticket revenue were better than expected in the second quarter.

  • As we mentioned, that's one of the consequences of late -- the late booking curve, we actually got more late bookings than we expected to get.

  • So that actually turned out to be marginally positive for us.

  • But in the second quarter, both ticket revenue and onboard revenue were up.

  • - Analyst

  • Okay.

  • Thanks a lot.

  • - Chairman, CEO

  • I should clarify, up more than our guidance had assumed.

  • Operator

  • Your next question comes from Steve Kent with Goldman Sachs.

  • - Analsyst

  • Hi, good morning.

  • Just two quick questions.

  • One, on those bookings that are coming in closer in, and you said 40% or roughly or so, coming in closer, Luis, are you seeing better pricing on those?

  • Because for a while you were seeing the close in bookings actually getting higher prices, so maybe you could just give some color there.

  • And then also, maybe if you could just talk about the competitive picture, obviously Carnival didn't show as strong of a net yield growth as you are seeing, and I'm just wondering if they are starting to be more aggressive on their own pricing, relative to you and what you're seeing in the market?

  • - President, RC Intl.

  • Well, to start with, the second question, I think this was asked before, about three months ago, we are placing our brands in the market in the most powerful way that we know how.

  • Dan mentioned that the Celebrity brand has been progressing very, very nicely.

  • So our focus is on generating the maximum amount of demand that is available to our cruise brands and our deployments.

  • Fortunately, for our company, that's going well and that's what's allowed us to maintain a guidance of 3 to 4% up even in a competitive environment.

  • Our competitors need to speak for themselves.

  • The bookings that are coming closer in are not necessarily at higher pricing.

  • To the extent that they're generated by promotional activity that we need to do to fill our ships, they may come in lower or higher depending on the program that we're talking about and we're looking into the near-term environment as I mentioned before, we've been earlier and pretty aggressive with our promotions so on certain days that brings pricing into a lower level than earlier on in the booking curve, and that's sometimes what it takes to fill the ships, to maximize revenue.

  • - Analsyst

  • Okay.

  • Thanks.

  • Operator

  • The next question comes from Michael Denmore with USB.

  • - Analyst

  • Hi, good morning.

  • How about a balance sheet-related question, or a couple of questions, actually?

  • First is, if you could provide some update on your liquidity position, particularly the draw on the revolver, if any.

  • And second question is in terms of the higher debt levels you're seeing this quarter, because of the new issuance, and the ship delivery if that is going to be in any way moderated over the next couple of quarters, and if you could be specific about debt paydowns over the next two quarters, that would be helpful.

  • - EVP, CFO

  • Okay.

  • Let me answer the questions.

  • As you know, our debt level has gone up and our debt to total capitalization is about 43.4%.

  • Total debt is about 4.65 billion and it is slightly higher.

  • Of course, some of that has gone into cash, because our cash balance, as you know, is now 323 million, as compared to 125 million at December.

  • So we have -- our liquidity position has gone up, we've -- and so our -- we have well over $1 billion in liquidity.

  • That has not really changed significantly from before.

  • In terms of our reducing debt levels further, I think we will probably be looking at probably being somewhat cash neutral over the next period.

  • - Analyst

  • So that means you're -- how much are you scheduled to pay down over the next two quarters?

  • - EVP, CFO

  • Well, over the next year, we have about $500 million to pay down.

  • - Analyst

  • Is that 50/50 mix between the rest of this year and into next year?

  • - EVP, CFO

  • I don't have the details of that.

  • I think you might want to ask Greg after the call.

  • Ask him for the details of exactly what period that debt is maturing.

  • - Analyst

  • Can you be more specific on the liquidity number?

  • - EVP, CFO

  • Why don't you call Greg on that.

  • I am going to say it is probably slightly over -- maybe 1.1 billion or so, but you maybe want to check with Greg.

  • - Analyst

  • Okay, thanks.

  • Operator

  • Your next question comes from Bob Simonson with William Blair.

  • - Analyst

  • Good morning.

  • First question, and I have one on some numbers, you said in the second quarter there was litigation, or legal expense on the Celebrity settlement.

  • I thought you were going to get money.

  • Can you give us an update on how that is going?

  • - Chairman, CEO

  • Yes.

  • We won the jury verdict but it is subject to appeal, so the accounting rule is that you expense -- you recognize the expense, but you don't recognize the income until the verdict is certain, and you have the money.

  • - Analyst

  • Is there any time for this process?

  • - Chairman, CEO

  • We are talking about litigation here.

  • And this has been going on for 12 years.

  • But hopefully, it won't take too long.

  • - Analyst

  • Okay.

  • And a couple of numbers questions.

  • Louis, do you have some estimates for the third and fourth quarter fully diluted shares outstanding?

  • And the net interest expense that is in the press release, is that net of capitalized interest as well as interest income or just capitalized interest?

  • And then lastly, could you give the -- any revisions to the capacity changes in this year and next year, and next couple?

  • - EVP, CFO

  • I'm sorry, in terms of the quarterly changes, right now, the number of shares, as you know is 228 million.

  • For the full year, we're looking at about 221 million.

  • I don't think I can give it to you by quarter.

  • I can give you the final number, and you can get that detail probably from Greg, but for the full year it's going to be about 221.3 million, and of course the year before that it was 236 million.

  • So that kind of gives you somewhat of the change.

  • The next question, which is on interest expense, and whether it is net of capitalized interest, yes it is.

  • - Analyst

  • But is it also of interest income or that's separate?

  • It's not net of that?

  • - EVP, CFO

  • I would say that is separate.

  • - Analyst

  • And then the capacity number?

  • - EVP, CFO

  • The capacity numbers, that hasn't really changed from the last ones that we gave you.

  • - Analyst

  • Okay.

  • - EVP, CFO

  • So it is 3.6%, for 2006, and 5.9% for 2007.

  • - Analyst

  • Thank you.

  • Operator

  • Your next question comes from Scott Barry with Credit Suisse.

  • - Analyst

  • Thanks.

  • Just a question on the third quarter yield guidance of 1 to 2%.

  • It seems awfully low given that onboard continues to be healthy, you talked about healthier trends in the seasonal markets and then you've got a positive mix benefit from the introduction of the Freedom of the Seas, that would imply some material ticket pricing weakness in the Caribbean.

  • Maybe you could just help us understand how -- you're still looking for fourth quarter yield growth in a more challenging seasonal period and maybe you could talk about the variability in the fourth quarter, maybe just comment on book load factor into the 4Q, whether it is ahead or behind, at lower/higher pricing, thanks.

  • - President, RC Intl.

  • Hi, Scott.

  • It is Adam.

  • Third quarter, one of the things possibly that we're seeing over time is in terms of the months of the quarter is that September has been a traditionally challenging month in this business.

  • It remains so.

  • August, over time, is becoming somewhat more challenging.

  • As school vacation patterns and when school starts can factor seasonality to a degree.

  • And I think we're experiencing some of that in the third quarter this year and I think we did also somewhat last year.

  • Jumping into the fourth quarter, consistent with a more closer in booking situation, we have come in from a favorable ACD standpoint and a more challenging load factor standpoint and we've referenced that in several different -- or at least, I have, with respect to the level of promotional activity that is in the marketplace, generates the load factor to fill the selling and achieve our yield targets for the fourth quarter.

  • So that's the posture in which we're entering the fourth quarter.

  • Operator

  • Your next question comes from John Jaris with Founders Son.

  • - Analyst

  • Good morning, gentlemen.

  • I have a couple of questions for you.

  • First of all, can you tell us how many dry docks you had in the fourth quarter of last year and how many you plan for the fourth quarter of this year?

  • - EVP, CFO

  • John, we don't have the answer to that right off the bat.

  • I think you might want to call Greg afterwards and he can look it up for you.

  • - Analyst

  • Okay.

  • And I guess the other thing that I'm wondering about, is looking at your guidance, it seems to imply that you will make $0.30 in the fourth quarter which typically has been closer to break-even and I'm curious is it possible to shift that much in terms of costs?

  • - EVP, CFO

  • Well, you may recall that last year, we have a -- we had a tremendous shift of costs primarily in the marketing side.

  • The marketing -- sales and marketing expenses for the fourth quarter.

  • What we're seeing this year is that you're seeing more of that in the first half than you are in the back half of the year.

  • So I think that's going to be a big -- a big part of the difference.

  • - Analyst

  • And then last question is, how much did you spend on the inaugural for the Freedom?

  • Can you give us a range there?

  • - EVP, CFO

  • We spent roughly about $7 million.

  • - Analyst

  • That's great.

  • Thank you very much.

  • Operator

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

  • - Analyst

  • Thank you.

  • A couple of questions.

  • First of all, just something again that we've mentioned in our surveys and was asked earlier in the call regarding air fare, and we've heard from travel agents that there may be a little reluctance given some of the seasonal markets during holiday seasons, and/or more lengthily flights that your -- the cost of your airs is as much or more than your cruise, so that could potentially have a negative skewing effect to some of your more profitable European markets.

  • I guess, you said you're not seeing any impact on that in your early bookings, looking out into '07?

  • - President, Celebrity Cruises

  • Tim, this is Dan.

  • No, we're not seeing any impact on that out into early '07.

  • There's a number of things that we've done to mitigate that, not the least of which is where we've placed ships all over the United States and all the different ports so we're within a lot of drive markets.

  • The second thing is, you mentioned Europe, and in Europe, I think you heard Adam say earlier, we're getting a larger mix of our guests from the European markets.

  • So if there is a softness because of the air tickets to Europe, we're not seeing it.

  • Where we've got great demand out of the United States and we've got a higher mix of our guests coming from the European markets so the combination of the two are making it work for us.

  • - Analyst

  • And that will go into one of my other questions, if you could comment from the Company as a whole, for '06 and maybe what you're -- any trends you're looking for for '07, the mix of where you're sourcing passengers from, Europe, North America and maybe other?

  • - President, RC Intl.

  • Tim, this is Adam.

  • There will continue to be an evolutionary growth in our overall mix of customers from Europe and probably from international as a whole, but definitely from Europe.

  • The ship shifts that we've been talking about, some of which are almost solely for the purpose of sourcing Europeans, others which, as I mentioned earlier where there is a nice mix of Europeans, North Americans, and other international guests on board are increasing.

  • So that is probably the most interesting directionality in our mix is the European customers.

  • - Analyst

  • Do you have any specific numbers for the Company as a whole kind of what that is looking like for this year?

  • - President, RC Intl.

  • We have not disclosed that information.

  • I am just telling you the directionality of what's happening.

  • - Analyst

  • Okay.

  • - President, Celebrity Cruises

  • This is is Dan.

  • Let me just add one thing to that.

  • We're also seeing some strong movement on the Latin America part, so we're sourcing more worldwide than it had been in the past.

  • - Analyst

  • Okay.

  • And a couple other questions, if I may.

  • One more, on numbers.

  • Luis, where did you end up as a percent amount hedged in the second quarter?

  • And then what is your overall hedged position for '06?

  • And can you give us any color on what your hedge for '07 and beyond is?

  • - EVP, CFO

  • In the quarter, we were -- in the second quarter, we were 38% hedged, and right now, we're about 58% hedged.

  • - Analyst

  • For the full year of '06?

  • - EVP, CFO

  • That is for the second half.

  • - Analyst

  • And what about looking out into '07, '08?

  • - EVP, CFO

  • We do have hedges into '07, we have not yet disclosed those numbers yet, but it is basically we're hedged going out about 36 months out, and of course, it declines over a period of time, but we just try to disclose just for going into the current year.

  • - Analyst

  • Related to that, your competitor is testing a fuel surcharge in Europe.

  • Any thoughts about that?

  • - Chairman, CEO

  • Yes, obviously, we will watch what anyone does, but so far, I think we have seen that the fuel surcharges are a temporary respite, almost by definition, and have not seen that that's the direction that we want to go in at this point.

  • We do keep looking at it as we look at any other possible way of looking at fuel or other revenue sources, but at at this point, we're not pursuing that.

  • - Analyst

  • Okay.

  • Last question, Luis, I was a little confused, if you could maybe give us a little more color on how D&A was lower versus your expectations?

  • It seems like that is fairly fixed going into a year, you kind of know what that is going to be, if you could maybe give us a little color on how that changed.

  • - EVP, CFO

  • Sure.

  • I think that the only difference that is just there is the fact that it is the timing of when you do the capital expenditures.

  • The -- we give you estimates, we give you most of that relates to the timing of when those capital expenditures are going to take place.

  • And we had shifts in timing.

  • So the differences that you see are just basically timing differences and you actually implement or do the -- put the CapEx in service.

  • - Analyst

  • Okay.

  • Thank you.

  • - EVP, CFO

  • Okay.

  • We are going to take two more calls at this point.

  • Operator

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

  • - Analyst

  • Hi, thanks.

  • Regarding Europe, I would assume that the European itinerary yields are outpacing the U.S. yields even maybe excluding Caribbean.

  • Maybe you could comment on that.

  • And then secondly, what your capacity allocation in Europe is for next year, if you have any thoughts there, and whether you expect to deploy more capacity there, and then lastly, I guess maybe just generally the sustainability of the yield trends on those European itineraries given you are seeing the strengths, you're keeping ships there longer, as you commented about the Celebrity brand.

  • Thanks.

  • - President, RC Intl.

  • Hi, Glen.

  • This is Adam Goldstein.

  • We have indicated pretty clearly throughout the call that we are increasing the amount of our capacity that is dedicated to Europe.

  • We've increased next year's assumption as a percentage of the expense.

  • We see opportunity both in continuing to source North Americans in long haul vacations over there, cruising to the high value proposition, at this point, for North Americans, and keeping some of their spending in dollars, and weakening dollar environment.

  • That's been very beneficial.

  • We talked a lot about our sourcing of Europeans and other international guests on those cruises.

  • We have extended the seasons because we find people are willing to travel to Europe longer into the year, and we can source from the local markets longer into the year than we have in the past.

  • That has the effect of producing some of the Caribbean capacity in the fall season.

  • So this is the direction.

  • In addition to that, we've mentioned that both the Europe and Alaska programs have been strong performers in terms of yield this year.

  • So I think you can infer from that they are competitive, quite competitive with our overall yield performance or our performance from other areas.

  • And so it is a good news story which we expect to continue.

  • - Analyst

  • Okay.

  • Sorry.

  • I missed -- what did you say the percent increase in the capacity for those European itineraries for next year is?

  • - President, RC Intl.

  • It is 16%.

  • - Analyst

  • And--.

  • - President, RC Intl.

  • Sorry, excuse me, 16% of our mix.

  • Excuse me.

  • - Analyst

  • And what was it this year?

  • What is it this year?

  • - President, RC Intl.

  • 14 in '06, to 16 in '07, and that -- one of the key reasons for that, obviously, would be the move of Navigator of the Seas over to the U.K. market, which is a significant capacity upgrade over Legend of the Seas, this year and last year.

  • - Analyst

  • And then sort of given these different dynamics, and the trends you're seeing, do you think you -- the yields on those itineraries would maintain the current pace, show any acceleration or deceleration into next year?

  • - President, RC Intl.

  • Too early to say anything about next year's European yields, or even next year's yields at all, beyond what we've said.

  • But with regard to this year, it has been a good strong yield performance, and an increasing capacity environment for us.

  • - Analyst

  • And then finally, just one sort of tie-in there, in terms of like your marketing efforts to source more European passengers, is that an increased focus, you expect to allocate more dollars there, given the trends you're seeing?

  • - President, RC Intl.

  • We have been increasing over the last few years, we have been pretty clear that it is a corporate strategic priority for us to be very competitive into European theater, and you can tell from our deployment next year that that will continue to be the case.

  • - Analyst

  • Okay.

  • Thanks a lot.

  • - EVP, CFO

  • Okay.

  • Last question, please.

  • Operator

  • Your last question comes from David Liebowitz with Burnham.

  • - Analyst

  • Good afternoon.

  • Last year's second half had several severe hurricanes, Katrina and Wilma amongst them.

  • How much did that impact you?

  • - EVP, CFO

  • The impact of that was relatively minor.

  • The total impact of the hurricanes was $4 million.

  • - Analyst

  • And most of that was second half?

  • If not all of it?

  • - EVP, CFO

  • Well, most of it was probably hurricane Wilma.

  • Because that one came in through the weekend here in Miami and affected some of the embarkations in Miami.

  • - Analyst

  • And all of it was in the second half?

  • Okay.

  • Have you identified how much, and where can we find out how much your hedging program has cost you in terms of out-of-pocket, to put the hedges into place?

  • - EVP, CFO

  • That is something that we don't disclose, David.

  • - Analyst

  • Okay.

  • And Celebrity still has an ongoing lawsuit about their part problem to one of the two original people involved.

  • How is that going at this point?

  • Is there anything you can report?

  • - President, Celebrity Cruises

  • No, David, nothing to report on that.

  • As Richard mentioned earlier, another lawsuit, litigation, it will take time, nothing to report at this point?

  • - Analyst

  • And how much is that litigation costing you?

  • Since have you out-of-pocket legal fees.

  • - President, Celebrity Cruises

  • We don't disclose that.

  • - Analyst

  • Okay.

  • - Chairman, CEO

  • Well, I think we can say, because I know we mentioned specifically the other case, was a large number, that's because it actually went to trial.

  • And once you get into a trial context, your costs zoom up, and we're a ways away from that on this part.

  • And it is a huge case, though, and at some point, that becomes an issue, but not at that kind of a level today.

  • - Analyst

  • And on Celebrity, when you announced the post-Panamax new builds, you indicated your cost for the first vessel and then said based on current currency exchange rates.

  • Does that mean that your costs are going to differ for the second two based on currency at that time of when they wave the keel, et cetera?

  • - Chairman, CEO

  • I think we have a -- quite extensive hedging program in place, and so the first two were the same, the second one -- the third one, rather, was somewhat higher based on the exchange rates.

  • - Analyst

  • Okay.

  • And the last question, the situation, the words you used were the improving -- excuse me.

  • Celebrity is making further progress.

  • Does that mean that we could look for Celebrity perhaps to be at a break even point by the end of this year?

  • - President, Celebrity Cruises

  • David, this is Dan, as you know, we don't break out brands.

  • But we're very pleased with the progress of Celebrity.

  • - Analyst

  • Well, I ask it, because you did break that out when we were on the cruise out of dry dock to San Juan a year ago, and that's why I asked based on what was said at that meeting and in that presentation.

  • - President, Celebrity Cruises

  • I wasn't involved on that particular cruise.

  • We haven't been breaking out separate brands.

  • - Analyst

  • Okay.

  • Thank you very much.

  • - Chairman, CEO

  • Okay.

  • Well, thank you, everybody, for attending the call and we look forward to talking to you in the next quarter.

  • Thank you very much for attending.

  • Operator

  • Ladies and gentlemen, this concludes today's conference call.

  • You may now disconnect.