皇家加勒比遊輪 (RCL) 2006 Q3 法說會逐字稿

Good morning.

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

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

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

After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] I will now turn the call over to Mr. Luis Leon, Executive Vice President and Chief Financial Officer.

Sir, you may begin.

Thank you, Cory, and good morning, everyone.

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

With me here today are Richard Fain, our Chairman and Chief Executive Officer;

Adam Goldstein, President of Royal Caribbean International;

Dan Hanrahan, President of Celebrity Cruises;

Brian Rice, Executive Vice President, Revenue Performance; and Greg Johnson, Associate Vice President of Investor Relations.

First, our forward-looking statement.

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, which is RCLInvestor.com, and also disclosures in our SEC filings.

Additionally, certain financial measures constitute non-GAAP financial measures as defined by Reg D, and a reconciliation of these items can be found also on our website.

Richard will now provide a brief business and revenue overview.

After that, Adam and Dan will make some comments about their respective brands.

Then I will go through some details on our financial results, and future guidance.

Finally, we will open up the call to some of your questions.

But first, you may seen an announcement that I will be retiring by the end of the year. just want to mention that I have thoroughly enjoyed my tenure at Royal Caribbean, and I'm very proud to have been a part of a terrific Company, and also a terrific management team.

I am succeeded by my colleague Brian Rice, who brings with him over 18 years of experience at Royal Caribbean.

Richard?

Thank you, Luis, and good morning, everyone.

We have certainly got a lot to talk about this morning.

First, as Luis just mentioned, he will be retiring later this year.

And I have to say that he has been a key player in our Company's growth and financial performance, as well as his strategic direction over the last 3 years.

I'd like to thank him and applaud him for his experience, wisdom and dedication, which have been a great benefit to me and to the Company during that period.

And we all wish him all the best in his retirement.

Now, as you may recall, when we announced our acquisition of Pullmantur back on August 31st, we also, at that time, increased our yield and our earnings per share guidance for the third quarter.

It's particularly gratifying that our third quarter EPS actually exceeded even that higher target, and that despite some challenges, we are essentially maintaining our earnings guidance for the year.

The strong yields that we've experienced help us generate higher than expected earnings per share of $1.63.

If you exclude the one-time First Choice gain last year, this represents a 12% earnings improvement, despite a 27% increase in fuel costs.

The quarter also took a $0.05 hit from the breakdown of the Rolls Royce bearings on Infinity.

If it hadn't been for that hit, the increase in this quarter, even absorbing the fuel costs, would have been 16%.

Part of this improvement was good -- was due to good yield performance, and part was due to essentially flat non-fuel costs.

Looking at the fourth quarter, it's particularly gratifying to be able to talk about our expectations for both very good yield performance, and unusually good earnings performance during the period.

As you know, the Company has traditionally had losses in the fourth quarter.

This year, our bottom line should be in positive territory, and not just modestly in positive territory, but a robust $0.20 to $0.25 a share.

Our full year guidance has consistently implied this kind of strong performance for several quarters now.

And it really does feel good to be able to sit here this morning and directly reaffirm that guidance.

I know some have been skeptical, given our more usual pattern of fourth quarter losses.

But we've always said that we manage our business on a full year basis.

And this year, the drydock schedules and our marketing dynamics and itineraries overlaps, have simply resulted in a somewhat different expenditure pattern.

And that pattern leads to this result.

Now, with that said, we had hoped to do even better with our fourth quarter yields.

During the Q&A for the July call, we talked about a possible yield increase of 1% to 2 % for the third quarter, and 5 % for the fourth.

Frankly, we were pleasantly surprised by the strong third quarter late bookings, and disappointed by the slightly lower indications for the fourth.

But we spent a lot of times instinctively focusing microscopically on every detail.

But the fact is, we are really happy to be taking an overview of the whole situation, and see that yield has grown positively in each of the last 12 straight quarters.

More importantly, our yield forecast has remained remarkably stable from our original guidance, which we gave at the beginning of this year, of yield improvement of 2% to 4%, to the point where we are now in the range today to -- in the range of 3.5%.

We've also narrowed our full year 2006 earnings guidance to $2.90 to $2.95 a share.

When you look at some of the challenges we face, we are actually very pleased with this.

I think it's worth going back and looking how we got here.

If you recall, the initial guidance we gave for the year 2006 back in February was a range of $2.95 to $2.15.

For the sake of argument, let's take the midpoint of that range and say $3.05, and compare that to the midpoint of the current range, $2.93.

Comparing those 2 points shows a decline of $0.12 over the year.

But that doesn't tell the whole story.

And I think it's very interesting to see how the year actually progressed from those early guidance figures.

We had 2 incidents with the Rolls Royce bearings on our Millennium class ships which ended up costing us about $0.09 a share.

And fuel, which we don't predict, we sort of wimped out and given up predicting on, cost us an additional $0.10 per share negative.

And finally, we've now added the impact of the Pullmantur acquisition, which we are now including in our guidance, and saying that it will cost us $0.02 to $0.03 in the fourth quarter.

So excluding these items, our earnings are nearly $0.10 higher than where we thought they would be at the beginning of the year.

I would like to comment shortly on 2007.

This, of course, is the time of year we go through our budget process.

That's still underway, so it's too early to give out specific guidance for '07.

But we are prepared to say that we are optimistic yields will be higher in '07 than they were this year.

And that would make it a fifth straight year of improvement.

Now, the first quarter of '07 is not as robust as we would like.

Increased pricing and booking levels are both down slightly.

However, looking at the rest of the year, advanced bookings show evidence of a healthy demand environment for both Royal Caribbean, Celebrity and Pullmantur.

Overall, booking levels and ticket prices are in line with the levels that we achieved at the same time last year.

So when we look at the year as a whole, we don't expect -- we do expect yield improvement.

And part of what helps that, of course, is the positive influences of the Freedom of the Seas for full a year, her sister ship, the Liberty of the Seas, which coming out this spring, and the impact of some of our other initiatives.

We separately announced this morning that late last night, we received all the necessary government approvals to our Pullmantur deal, and we now expect to close that deal in mid November.

It's been a great process going through the planning for this.

And we are becoming even more confident about the benefits.

We now feel comfortable projecting that it will be accretive in 2007.

The acquisition of Pullmantur gives us a real boost, we think, to our strategic ambitions in Europe.

It makes us immediately the largest operator in Spain and Portugal, which also are 2 of the fastest growing markets in Europe.

We are even more excited about the opportunities to act synergistically together.

For example, we also announced that the benefits of swapping ships between Celebrity and Pullmantur, which gives Pullmantur more capacity while allowing Celebrity to expand its very successful Celebrity Xpeditions product.

With that, I would like to ask Dan and Adam to comment on their businesses.

And then Luis will provide more details on the financial results.

Thank you, Richard.

Good morning, everyone.

We're very pleased with the third quarter results, and we look forward to finishing up a successful 2006 2 months from now, as reflected in the guidance we have provided this morning.

In the absence of hurricane activity this fall, our ships in the Caribbean are delivering a high level of guest satisfaction.

With our flagship Freedom of the Seas continuing to perform very well, and all of the principal warm weather ports of call in good shape, we are looking forward to a strong winter operating season.

This is a very favorable situation in comparison to the aftermath of Wilma's destruction in Cozumel last year.

In theory, this environment should positively influence consumer confidence to book cruises in 2007.

A principal focus for Royal Caribbean International is our effort to be easier to do business with, or ETDBW, for the thousands of travel agents who produce business for us.

We are gratified to have won numerous Best Cruise Line awards this year in the U.S. and around the world.

Recently, we were selected best supplier amongst all travel suppliers by the American Express Retail Network.

We believe our tangible commitment to the travel agency community serves us very well.

With the recent wrap up of the Alaska season, we have concluded 5 successful years of operating Royal Celebrity Tours.

The Tour Company has clearly elevated our standing as a cruise operator in Alaska.

In addition, our guest satisfaction ratings for our tour program are even better than our onboard satisfaction ratings.

Our tour offerings are now expanding beyond to Alaska, to Canada, Europe, and Australia, as our fleet deployment diversifies, enhancing the product offering of both Royal Caribbean International and Celebrity Cruises.

Speaking of Celebrity Cruises, I will now turn it over to Dan.

Thank you, Adam.

As Richard and Adam have commented, we are very pleased with our third quarter results.

Yield improvement was strong again for Celebrity, led by successful Europe and Alaska seasons.

Our close in demand was high quality and helped drive a very successful quarter.

Our fourth quarter is shaping up nicely, and we expect another quarter of strong yield performance.

Our focus continues to be on managing our costs, while building on our successful marketing campaign, and providing an excellent experience for our guests.

I'm very pleased that we received antitrust approval from Spain and Portugal for the acquisition of Pullmantur.

These approvals have allowed us to move forward with the Celebrity Xpedition brand extension.

Our repeat guests and travel agents have been asking us to expand our destination offering.

Our Galapagos product has been very successful, and we have been looking for ways to grow the concept.

The addition of Pullmantur to the Royal Caribbean Group enabled Celebrity to meet these guest and travel agent demands.

We will be adding a very versatile ship to the fleet, allowing us to do a wide variety of interesting and exotic itineraries.

The ship will undergo a 1 month revitalization in drydock to incorporate many of our best product offerings.

We will offer expanded spa and concierge service, including butlers, as well as 2 specialty dining options, and of course, the outstanding service Celebrity is well known for.

We will be naming the ship Celebrity Journey, and she will replace Zenith in the spring of 2007 and take over the Bermuda run.

Details on the itinerary after the Bermuda season will be coming in the next few weeks.

This is an exciting addition for the brand, and allows us to deliver the outstanding Celebrity experience across the wide variety of destinations our guests and travel agents are asking for.

In addition to this exciting news, we have begun production of Celebrity Solstice, and we are looking forward to talking about the details in 2007.

I continue to be very pleased with the progress we are making with Celebrity.

Luis?

Thank you, Dan.

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

Our third quarter net income was $345.4 million, or $1.63 per share, and that compares to net income of $374.7 million or $1.64 per share in the third quarter of 2005.

This exceeded our previous guidance, and was also better than consensus of $1.58.

The primary drivers of this positive performance were better than expected costs.

Richard already talked about revenues and yields, so I will move right on to our expenses.

Our net cruise cost per APCD increased 4.5%, and were mainly driven by higher fuel costs and the cancellation of an Infinity cruise.

As you may recall, our guidance for fuel assumed an at the pump fuel price of $448 per metric ton.

However, we actually averaged $442 per metric ton for the third quarter.

Ultimately, fuel accounted for 3.4 percentage points of the increase in net cruise costs.

Looking back at the third quarter of 2005, our at the pump fuel price was $385 per metric ton.

So net of the effect of our fuel hedges, our third quarter fuel costs increased $27 million.

Net cruise costs, excluding fuel, accounted for the remaining 1.1 percentage points.

Now, the expenses for the cancellation of 1 Infinity cruise to replace one of our propulsioned pods accounted for 1 percentage point of this increase.

So if you exclude this, non-fuel costs were essentially flat, or a 4 percentage point better than our guidance of an increase of 1%.

Additionally, interesting income was higher than we had anticipated due to higher cash balances, resulting from our $900 million debt offering, and the timing of the subsequent uses of these funds.

Interest expense was up year-over-year as we anticipated, due to the high interest rates and also the new debt.

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

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

In the third quarter of 2005, we had a gain of $0.19 related to the redemption of our investment in First Choice Holidays.

Removing this from our as-reported Q3 '05 EPS of 1 point -- $1.64, yields $1.45.

And in Q3 of 2006, our EPS was $1.63, for an increase -- or an increase of $0.18.

So, what were the primary factors that drove this great performance?

First of all, the Infinity incident cost us $0.05, our 5% capacity increase plus our yield growth generated $0.34, higher fuel prices cost us about $0.10, and then a variety other minor offsetting items.

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

We are very pleased to say that we will have earnings instead of traditional losses.

Net cruise costs are expected to decrease approximately 4%, that's a decrease of 4% of which approximately six-tenths of a percentage point relates to fuel.

Our current at the pump fuel price of $388 per metric ton is 9% lower than our average price for the fourth quarter of 2005 of $424 per metric ton.

If fuel prices for the rest of the quarter remain at today's level, we estimate that our fourth quarter 2006 fuel costs will decrease approximately $5 million year-over-year.

This is net of over fuel hedges.

Also, we are currently 64% hedged for the fourth quarter of this year.

The remaining decrease is mainly due to timing shifts for drydock and marketing costs.

A larger share of our annual drydocks occurred in the first and second quarters.

Our marketing spend was also heavier in the earlier part of the year, as we had previously mentioned to you.

And we are now seeing the favorable impact due to these timing shifts.

Shifting gears for a minute, as we previously announced, our acquisition of Pullmantur is on track to close in mid November.

We will be saying more about this upon closing.

But for today, we are providing an estimate of the financial impact for the fourth quarter.

We estimate that this will be negative impact of -- for the fourth quarter of $0.02 to $0.03 per share.

This will be the only impact of -- for the fourth quarter, as we will be recording Pullmantur's operations with a 2 month lag, which means that we will begin consolidating their operations in 2007.

Based on everything we have just discussed, we expect fourth quarter 2006 earnings per share to be in the range of $0.20 to $0.25.

What does this do for our full year outlook?

As Richard mentioned, we are forecasting that net yields for the full year will increase close to the midpoint of our previous range of 3% to 4%.

Net cruise costs per APCD for all of 2006 are expected to increase by approximately 6% when compared to 2005, of which 3.9 percentage points relates to fuel.

Based on today's at the pump prices, we estimate that our 2006 fuel costs, net of hedging and other fuel savings initiatives, will increase approximately $110 million year-over-year, or an adverse impact to EPS of $0.50 per share.

Our fuel consumption has remained flat for the past 2 years at around 1.1 million metric tons, and we expect 2007 to also be around that same level.

This is despite capacity increases each of those years.

Non-fuel costs account for the balance of the increase and are consistent with our previous guidance.

Depreciation and amortization expense for 2006 is expected to be 420 to $425 million, and we anticipate that net interest expense will fall between $265 million and $270 million.

Based upon these estimates, the fuel assumption, and the revenue outlook that Richard discussed, we expect 2006 EPS to be between $2.90 and $2.95.

So that takes us through 2006.

Now, while it's still too early for us to release much information about 2007, I would like to talk about fuel and our hedging program beyond 2006.

We have seen some very welcome reductions in fuel prices lately.

We hope obviously, that this is a sustainable trend.

But of course, things remain pretty volatile and no one knows for sure.

Given this, we continue to layer in fuel hedges as part of our strategy to remove volatility from our earnings.

For 2007 as a whole, 40% of our anticipated consumption is currently hedged.

And as we have discussed before, we do this through a combination of swaps and also fixed price contracts.

Additionally, a 10% swing in fuel prices in 2007 would impact us by $26 million.

This impact takes into account our current hedges, and only considers a portion of our fuel consumption that would float with price changes.

Another component of our many fuel initiatives is the use of alternative fuels in place of MGO, which is marine gas oil, lowering our exposure to this costly fuel.

In fact, in 2005, MGO was about one-third of our consumption.

In 2007, that figure will decrease to 18% and will continue to decline thereafter.

And finally, a few other items.

Projected capital expenditures for 2006, 7, 8, and 9 are estimated at 1.2, 1.3, 1.8, and $2 billion, respectively.

Our projected capacity increases for the same 4 years are estimated at 3.1%, 5%, 8.8%, and 7.2% respectively.

And our liquidity for September 30th was $1 billion, composed of $220 million in cash, plus the availability that we have on our current revolver.

At this point, I would like to turn the call over to Cory, and have you open it up to the audience for questions.

Cory?

[OPERATOR INSTRUCTIONS] David Anders, Merrill Lynch.

Luis, could you maybe tell us -- or, have you filed yet, some historical or back up financials on Pullmantur?

David, no, we have not.

It's going to be such a small portion of our business from a materialities point of view, that we are not going to file separate financials.

Okay.

Thank you.

Michael Dimler, UBS.

Thanks for taking my question.

I was wondering if you could kind of walk through some of the cash sources and uses relating to the Pullmantur acquisition.

And talk a little bit more detail about the bridge loan that you got.

Okay.

In terms of cash flow, one of the things that we mentioned was that we are going to have an impact of about $0.02 to $0.03 in the fourth quarter due to Pullmantur.

What that is, is basically the interest that we are going to be paying on the bridge facility.

As Richard mentioned, we expect to close this transaction in mid November, and the debt will incur interest during that period of time, until the end of the year.

The funds flow essentially, is going to be, on the bridge, is a 700 million Euro financing, and we will be financing that through the bridge facility.

And the bridge facility has a term of 1 year, and it's priced at a margin over LIBOR.

And we will be converting that loan after the first of the year into a more permanent level of financing, such as perhaps a domestic or Euro bond.

Okay.

And over time, do you see this adding to your debt level long term?

Or do you have some kind of plan to kind of ease that down next year?

Well, we should have the cash flow generation from the business.

I've mentioned to you the generation that we are going to have in -- the capital expenditures that we are going to have.

But then we will also have cash generation.

We do not think that we are going to be incurring any more debt than what's needed from a cash flow perspective, and obviously from this Pullmantur transaction.

I'm sorry, how much approximately annual cash flow do you expect out of that?

We don't disclose that.

Thanks.

Brian Egger, BMO Capital Markets.

Just wanted to try to maybe get a little better insight into your full year tightened EPS guidance range.

I realize the quarters aren't that readily [edible] because the share count moves a bit.

But it seems to me that just based on the first 9 months of the year earnings per share performance and your guidance for the fourth quarter, that that $2.90 to $2.95 range seems $0.04 or $0.05 lower than I would have expected, just based on the year-to-date performance, and the fourth quarter guidance.

Brian, I think it's largely consistent.

There's obviously a little bit of shift in that we were a little better in the third quarter and some of the yield in the fourth quarter were a little lower.

Also if you recall, all of our previous guidance for the fourth quarter, we excluded Pullmantur, and so now we are adding in that $0.02 to $0.03.

And we have the change in the share count, which adjusts the numbers, et cetera.

So there has not been any significant change in the direction as we see the year ending up.

Okay.

Thanks.

And maybe just, a quick follow-up, if I could.

If you have had a chance to spend some time looking more at Pullmantur.

How we think about the competitive landscape, in terms of how this fits in with Royal's strategy, which is traditionally not been to have local brands in that market?

And how does it fit in your perspective, just broadly and strategically, and in terms of the efforts to develop more of a European presence?

I think we've always said there are different ways to approach different markets, and we've approached them in different ways.

So when you are talking about Europe in particular, you can either do that with an international-type brand, such as Royal Caribbean International, or a targeted national brand, such as our Island Cruise brand.

You can also go after niche markets, as we've done.

You also see sort of a dichotomy in our strategy, on the one hand going after mass market type brands, such as -- mass market type industry, such as at Royal Caribbean International.

Where, Celebrity, we've gone after the smaller niche player, such as we've done with Xpeditions.

I think, we see those as complementing one another.

There is a role for both.

There are certainly plenty of Spaniards who are today going on our international ships because they want that international flavor.

And there is a role for people who specifically want a highly targeted national cruise, and they have been going on Pullmantur.

And as we see, we think that's worked out very well.

It's okay to be either one, and we've gone after both.

There are also some synergies that come from that, both in terms of positioning and in terms of costs, et cetera.

But we think the 2 complement one another.

But they are different.

Okay.

Thank you.

Robin Farley, UBS.

I want to get clarification on a couple of things.

One is just with the slightly lower yield guidance in Q4, I assume this is that sort of weaker close-in Caribbean booking that's been talked about during the year.

So I guess I'm wondering, when you look at 2007, are you seeing Caribbean bookings up specifically past the first quarter, when you talk about yields past the first quarter looking better, is that in the Caribbean bookings, as well?

And then, secondly, have you seen, since the passport delay was announced 2 or 3 weeks ago, have you seen better Caribbean bookings at all, as a result of that?

Robin, it's Adam.

To address the second question first, we haven't seen a market impact post the announcement of the extension of the time to get passports, nor had we seen a market impact prior to that change, when it seemed that it would come into effect in January of '07.

So neither way did we see a major impact.

Actually, our Caribbean profile is pretty stable.

In Q4, we have, as I think Richard mentioned, our actual performance that we are giving guidance on today isn't quite as robust as the guidance that we had previously given.

That's a combination of onboard revenue, as well as some ticket revenue.

But it's not isolated to 1 major product group in terms of the ticket revenue effect on our expectations.

Except to say that there's been a little bit more softness in the short cruise Caribbean market.

And then in some of the more unusual products that we offer, for example, Transatlantic is coming back to this area after extended European seasons.

And then when we look forward into the full year 2007, I think we've mentioned that our overall booking profile is pretty consistent with where it was a year ago at this time.

A little bit softer for the first quarter, a little bit stronger for the second, third and fourth quarters.

And being that the Caribbean represents just over 50% of our Company's business, the Caribbean profile is in line with that.

Okay.

And then on Pullmantur, I just want to understand, when you talk about yields being up in '07, would that be the case even without Pullmantur?

And also I think you say mildly accretive, or some phrase like that.

And I'm just trying to get a sense of, can you be a little more specific about the degree of accretion in '07 from Pullmantur?

First of all, I think our guidance on the yields, Pullmantur is simply too small to have even a rounding error difference in terms of how that would have impacted our guidance in terms of being positive next year.

We think the Company will be positive yield wide, either with Pullmantur or without Pullmantur.

In terms of how accretive Pullmantur will be to us, we actually just got the approval late last night.

And while we worked diligently, we are not completely -- don't have everything together.

And there were limits to what we could do together prior to receiving that confirmation.

However, when we -- I don't think we've said mildly accretive.

I think what we said was, when we first did it, we said it would be neutral to accretive in '07, and accretive after that.

And in looking at it, we have felt even more positive that it will be accretive.

But I don't think -- I hope we haven't given the impression that we think that even if Pullmantur does extraordinary well in the first year, that it will make that huge a difference to our bottom line.

Okay.

And then last question, and I guess this is more of a housekeeping issue.

But, your capacity increase next year, you're referring to it as 5%.

And previously it had been plus 6%.

Again, is that a Pullmantur issue, or is it just more drydocking?

I guess maybe that's the Zenith coming out, or the ship being transferred from Pullmantur to Celebrity?

Or, is that why the capacity increase is coming in lower?

Well, their are minor differences.

We have the drydock schedules which keep -- which are always fluid.

There may be special reasons why we want to do something at one time versus another.

We are also refining the work that we were going to do.

If you recall, we were going to put some diesel engines in some of the ships to reduce our fuel costs.

We are taking 2 of the ships out of services a little bit to -- as part of the ship swap to refurbish them, and to also change the signage and the naming and provide the nationally-oriented amenities onboard.

So I think that's not representing any significant change.

It's just a lot of teeny things.

[inaudible] percentage point in total is a little bit significant.

But, okay.

All right, thank you.

Obviously, we look at these things very closely.

But the timing of drydocks, we do a fair amount of drydocks.

And they are fluid, and they do change.

And even a, what may otherwise be seen as a small change, especially if we're moving it from the end of one year to the beginning of the next, or vice versa, may change within the year.

But there's nothing significant that's happened.

Okay.

Thank you.

David Leibowitz, Burnham.

A few unrelated questions.

First, the fourth quarter profit of this year, is this going to mark a change, so that going forward we could expect profits in the fourth quarter?

Or is this an one-time blip?

Well, we've obviously improved over the years.

I believe last year we approached breakeven in the fourth quarter, and that came from the year before that, where we had a loss.

And then this year, as Richard said, we're going to have a nice level of profit.

I think to be -- it's going to be difficult to try to predict the fourth quarter of next year, since we are still working on our plan at this point in time.

And obviously, we would not disclose quarterly information at this point.

But I'm not quite sure how to answer the question, other than to say that it certainly is a possibility.

David, there are a couple of things which move - if I could just embellish that.

There are a couple of things that add and make that -- that have helped us.

One is, and we've talked about this in some of the previous calls, we've lengthened some of our summer seasons.

That's a phenomenon which has been very successful for us.

So Europe, Alaska, South America, and some other places which have done very well, by lengthening the shoulder season, that helps the fourth quarter.

We have also had a phenomenon with the fuel price that, for example, last year it peaked in the fourth quarter.

So we had the big uptick in that cost.

And now, our comparables get better.

So we've sort of been running on a treadmill with the cost of fuel has eaten away at our profits.

If it hadn't been for fuel, we would have had profitability last year -- significant profitability last year.

And this year, it's turning out that fuel is actually down.

I can't remember the last time I said that on one of these earnings calls.

So there are some things that mitigate in favor of this being more permanently a fourth quarter positive on an ongoing basis.

But as Luis says, we haven't really refined it and we are not prepared to make predictions exactly when the drydocks are going to be, et cetera.

Okay.

Second question, the swapping of the Zenith for the Dream makes a lot of sense for Pullmantur.

But putting the Dream into Bermuda, isn't that going to cost you a meaningful amount of revenue in earnings, given the smaller capacity of the vessel in what is perceived to be a very profitable run?

David, this is Dan.

Actually, it will work out well for us.

We believe that we will get much higher revenues out of what we are calling Celebrity Journey now, than we were able to get out of Zenith.

And we also believe that non-Bermuda season is where we will really be able to do much better than we can with the Zenith -- with the Celebrity Journey.

So overall, this is a very, very positive move for Celebrity, as well as for Pullmantur.

Okay, and 2 last quick ones.

Given that you now have Pullmantur, given how much capacity has been shifted over to Europe and going into Asia, what percentage of your revenue is now coming from foreign currency?

And whether or not we should be looking forward to foreign currency translation as part of the extra tenth of a point of gain, or narrowing of margins?

David, it's still too small for us to isolate it out.

And there's also a difference here.

If you are looking at a company like Costa, it is purely driven by the Euro, and that's where it's focused.

When you are looking at, for example, Royal Caribbean, which operates both in Europe and it operates there as an international carrier, the pricing, even though we get paid in Euro, is really a function of its normal yields in the United States.

So that is not -- would not generally be thought of as an Euro exposure in the normal sense of the thing, because it really gets driven by the U.S. market.

As we have more and more naturally national markets, such as Island Cruises, and now Pullmantur, then that may become a noticeable number.

But as of today, there's really not enough Euro exposure to pay attention to.

Okay.

And the last question, with the [way] season still 2 months ahead of us, is there any guidance you would like to give us, or words of wisdom regarding how you perceive the overall industry, as well as your Company's [way] season pricing for the Caribbean?

Hi, David.

I think some of our earlier commentary on the call sort of gave our impressions.

We see a 2007 profile that is overall positive.

We've said that we expect to achieve positive yield growth in 2007.

We have also noted that Q1, out of the 4 quarters, is a relatively weaker, Qs 2, 3, and 4, relatively stronger.

I think, as I mentioned before in my comments, the fact that there has been a remarkable absence of major hurricane activity, and that all the ports of call in the Caribbean are in good shape should, in theory, create a positive booking momentum for cruise products in general, particularly Caribbean cruise products, going into next year.

We are all hopeful for cold weather.

That seems to have started to some degree, unusually early.

So based on those types of factors, as well as, I think Robin asked about the passport extension which can only be favorable for our industry, there are a number of factors that appear to be positive with respect to the way period.

Okay.

Thank you very much.

Bob Simonson, William Blair.

Luis, on the Pullmantur results when you begin reporting them, are they going to be any of them shown separately?

Or they will be all merged into the overall numbers?

And it sound like from the fourth quarter, the only -- all of the impact will just be in the interest expense line.

Yes, Bob, that's correct.

All the expenses you are going to see is going to be in the interest expense line.

In terms of their numbers, you are not really going to be able to distinguish them from the rest of the business, because we will be reporting it just like we report Royal Caribbean and Celebrity.

It's all going to be all consolidated.

And the tours part is not big enough to break out separately?

We are still looking into that.

We're still doing the accounting review.

But at this point, I would say I don't believe so.

But I'm not quite sure at this point.

Okay.

Richard, have you got any plans or thoughts on any more major older ship rehabs like you have done in the last couple of years?

Cutting them apart and making them bigger?

Or major redos?

No, we have nothing in the works, and we usually do announce it when we do.

We have -- the revitalizations we've done have been very successful for us, I think I have to say.

We have the Century has really come out very well.

The -- we are going to do smaller ones, not the stretching of things.

But for example, we have the Majesty of the Seas going in, that will be the third of that series -- third and last of that series of ships.

We revitalized the first 2, and that was very productive.

So there's a certain amount of that that is sort of ongoing, but nothing huge as we did with the Enchantment.

Is that decision -- or has that decision been impacted by the ability to move some of those ships over to Europe?

I'm sorry, I don't understand your question.

Making it -- to stay in the North American market, perhaps you think that some ships would need to be enhanced to stay competitive.

Whereas over in Europe, it might be a product that is very equivalent to the marketplace.

No, the ships are very competitive in all those markets.

And also, I think you've seen that we've brought over into the European market some of our newest and fanciest ships.

We had the Voyager over there, and we're bringing the Navigator of the Seas to Europe.

So, we are not -- we don't think it's a question of the caliber of the ship.

Okay.

Last question, is there any update on the Pentair litigation?

Or is that something we will be asking 2 years from now?

Well Bob, I hope we are not asking 2 years about that -- or asking that question again 2 years from now.

But there's no updates from the last time we talked.

We are still waiting for some rulings from the judge.

We anticipate some of that to come out before the end of the year, but nothing at this point.

Very good.

Thanks very much.

Steve Kent, Goldman Sachs.

Just a couple of quick questions. 1 is, I know people have asked this in a couple of different ways, but just on the quarterly progression, any thoughts on timing of drydocking and marketing?

Sort of how that would flow through, especially, last year Freedom was such a -- pretty dramatic increase in marketing expense and some start up expense.

I'm assuming Liberty will be less.

Second question is, just because focusing on some -- maybe your lower end customer or mid market customer, are you seeing any week to week almost, or month to month volatility with lower gas prices?

Maybe any insights on that.

And then third, in the past, you have mentioned that you have seen some discounting strategies from your competition.

I'm wondering if that's heated up or declined?

Your question about volatility of gasoline prices and how that bleeds into the cruise industry, I would say no.

We don't see that kind of volatility, whether it's lower, middle or higher end guests that we have.

The discretionary purchasing of a cruise, I think, is a bigger picture question than just what is the price at the pump.

I'm sorry, I forgot the last question.

Could you repeat that?

Yes, the 2 other questions were just timing of drydocking and marketing, especially with comparing Freedom versus Liberty, the marketing expense difference there, how that could affect, and maybe it will be less next year.

And then, discounting.

In previous conference calls, you mentioned that you were seeing discounting maybe from some of your competition.

And this year, I just wanted to see whether you are still seeing that, whether it's heated up or declined.

Certainly, we continue to see discounting from our competition.

I think that's probably more prevalent at the moment in the shorter cruise market in the Caribbean, as I mentioned earlier.

As Dan and I have mentioned on previous calls, we have a lot of confidence in the strength of our brands, in terms of how they compete in the marketplace against the other cruise lines, and expect that will continue to be the case.

You mentioned the prospect of Liberty's inaugurals versus Freedom's.

It's true that Liberty's program, although it will still be meaningful, will be somewhat less extensive than the Freedom of the Seas program.

And that will require somewhat less investment on our part up front.

On the timing of the drydockings, I'll defer to Luis.

In terms of the timing of the drydock, I don't have much comment on that.

It's going to be somewhat variable.

And we are going to have several drydocks next year as a result of the diesel engine, so that will go into play in terms of longer drydock.

Okay.

Thanks.

Elizabeth Osur, Citigroup.

I have a couple of questions.

Maybe just is a follow-up to the drydock question, could you give us the capacity that you are expecting on a quarter-by-quarter basis for next year?

Okay, I'm just trying to get the paper here.

The capacity quarter-by-quarter, first quarter is 3.8%, second quarter is 7.1, third quarter 6.5, and the fourth quarter is 2.5%.

So the year being 5.

Thanks.

And then just some questions on Pullmantur, I guess a follow-up on the accounting.

If I understood correctly, there's going to be a 2 month lag in the reporting of their operations.

Can you just talk on why that's the case, and if that continues kind of in perpetuity, or if that's just related to the fourth quarter?

And then also, with Pullmantur accounting, should we be expecting greater gross yield improvement than net yield improvement, just on the Pullmantur piece or in general for the Company, related to their tour business?

Or just can you explain how the tour business is gong to be accounted for?

Thanks.

Okay.

The delay in terms of the accounting, is this is a company that is a Spanish reporting company.

It's a private company.

And of course, we are bringing it into our systems here.

There's going to be a transition period.

And until we get all of our systems put together, we are going to account for that on a 2 month lag, which is not really uncommon.

A lot of times when you have foreign subsidiaries, and obviously companies maybe the size of Pullmantur, we will certainly begin to do it that way.

We are upgrading some of our software that we use, that will enable us to begin to basically to modernize them.

And think that -- I don't think that you will see 2 months going into perpetuity.

But you will see it at least during 2007.

And your next question, which was the tour business.

We are still looking at that.

We are in the process of -- we're going to have a closing balance sheet.

We are going to be looking at the materiality of the tour business.

Obviously, if it's material, it will have to be disclosed separately.

At this time, I don't believe it's material.

But I think as I told Bob Simonson, we are going to kind of reserve comment on that until we have more detail.

Thanks, and just one last question, Luis.

Could you let us know what the fuel hedges are on a quarterly basis for next year?

I don't have that number.

You're going to have to call Greg.

Okay.

Thanks a lot.

Scott Barry, Credit Suisse.

Your net cruise cost excluding fuel, if we could focus on that for a second.

It looks like it's going to be up about 3% in '06.

It's been -- it's averaged about 3% over the last 3 years despite the strong demand environment.

Is that a reasonable assumption into '07?

Well, in terms of '06, we are looking at about 2.3%, in terms of an increase.

And in, into -- .

Right, the trailing 3 year average is around 3%.

The trailing 3 year average?

Yes, right.

Well, we haven't given any guidance on cruise costs going into next year.

As Richard mentioned, we are still going through our budgetary process, and really, it's difficult to give you guidance at this point.

Okay.

But you mentioned your net revenue yield expectation for 2007.

We just said it would be positive.

We have not given any specific numbers.

Okay.

So you don't want to answer that question?

I don't know.

I don't have an answer for you, Scott.

I think that we've always gone out there to say that we expect our costs to be lower than the rate of inflation, and I think we'll look at that going into next year, as well.

Okay.

But right now, we'll probably be giving more guidance on that come when we announce our fourth quarter earnings.

But I think at this point, we don't know because we are still putting our budgets together.

Okay.

Fair enough.

Then, the gross yield that outpaced the net yield here in the 3Q by 110 basis points, that's a trend we typically see in a weaker demand environment.

And it typically implies higher use of commissions and bonus incentives to drive demand.

Maybe you could comment specifically, either Adam or Dan, on what you are doing out there to try to stimulate demand.

Scott, let me answer a portion of that, and then I can pass it over to Dan or to Adam.

What you are seeing is that we've had increase in air costs.

But commission costs as a percentage of sales have declined year-over-year in the third quarter.

So you are seeing probably transportation and lodging costs, which inflate that.

So you are saying that's all transport?

Yes, the bulk of it is, yes.

Your air/sea mix in the third quarter was?

Air/sea mix was relatively flat.

At?

About 12%.

12%.

Okay.

Then just lastly, maybe, Richard, there's, I'm sure a bunch of folks who are surprised that Luis is leaving just after 3 years or so.

In the last process you did a lengthy search.

Maybe you could just take us through the timing of Luis' decision and the process you went through in naming Brian Rice as successor.

Thanks.

Before I do that, Scott, I'll just mention, I guess we could look a little more closely.

I don't know that I've ever seen any kind of a statistical correlation between gross yields and net yields.

Well, I mean, your net yield growth has been outpacing your gross yield growth over the past couple of years pretty significantly.

And that reversed last quarter.

And it's widening out here in the third quarter, and it's consistent with what we are picking up in terms of increased promotional activity in the marketplace.

I just wanted to see if you were willing to comment on what you were doing out there to try to stimulate the demand, but -- .

And I think my response is, I'm not aware of a connection there.

I think over time, we have been seeing a drop in our air/sea component.

It may be flat right now, but if you are looking at longer term trends, there's clearly been a drop.

We also have seen this year a significant increase in fuel surcharges from the airlines, which will do that.

I'm not saying there isn't a correlation.

I think we've just never noticed one, and we treat with them independently.

So I think it may be true that the costs have shifted in that way, but I think as a practical matter, it's not a cause and effect.

It's simply a coincidence.

And looking at our numbers, the difference, in fact, appears to be due to differences in our transportation component, not something else.

I think we can convey that.

Fair enough.

In terms of Luis' departure, as you say, one of the things every company looks at, and we would, too, is we would consider going outside and doing a search for somebody outside the company, or outside the industry.

I think when we discussed it here, we looked at this, and we said we had a wonderful candidate internally.

Many of you know Brian, and we'll be looking forward to introducing him around to those of you who don't know him.

But he's had a terrific track record here.

He's very well considered in the industry.

And his knowledge and expertise in finance financial areas is, I think, at the highest caliber.

So we did not seriously consider a need to do anything other that be thanking ourselves that we had such a good candidate here.

Okay.

Great.

Thanks.

With that, I think we have time for 1 more call.

Nick Thomas, ABN AMRO.

I wonder whether you can just outline a little further the comments you've made on outlook for '07, where you talk about overall bookings levels and ticket prices being in line year-on-year.

Can you just confirm as to whether or not that is on a capacity adjusted basis, given the 5% increase in capacity for next year.

And then secondly, if you could just also confirm the capacity growth figures that you've given through until 2009 in the conference call?

Those figures look to me as though they are sort of on a pre-Pullmantur basis, i.e., they don't sort of factor in the higher level of capacity you will have next year at Pullmantur.

And then looking at the capacity growth for the following year.

Could you just confirm those 2 points, if possible?

Yes, I think we can confirm both of those.

On the first point, when we talk about yields, we are talking about it on the capacity adjusted, talking about a per APCD basis.

So that's always capacity adjusted.

And when we have talked about our capacity heretofore, we have been talking about the Company as it stands today, not once we complete the acquisition of Pullmantur.

And at that point, we will adjust both the base and the percentage increase.

But the numbers we gave today are including -- do not include Pullmantur.

Thanks very much.

Very well, Thank you everybody.

This is my last call.

So next time, Brian Rice will be talking to you as a CFO.

I've enjoyed working with everybody, and the Company certainly looks forward to its fourth quarter conference call.

Thank you very much.

This concludes today's teleconference.

You may now disconnect.