皇家加勒比遊輪 (RCL) 2007 Q1 法說會逐字稿

Good morning, my name is Joslyn, and I will be your conference operator today.

At this time, I would like to welcome everyone for the first quarter earnings call for Royal Caribbean Cruises, Limited.

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)

Thank you, Mr.

Brian Rice, Chief Financial Officer, you may begin your conference.

Thank you, operator.

Good morning, everyone.

I would like to welcome you to our first 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 Celebrities Cruises, and Greg Johnson, our Associate Vice President of Investor Relations.

We have quite a bit to cover with you today and thought it would be useful to share some slides with you, which we have posted on our Investor website www.RCLInvestor.com.

Before we get into our results and business overview, I would like to remind you of our forward-looking statements which you will see as our first slide.

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

Additionally we will be discussing certain financial measures, which are non-GAAP measures as defined by Regulation G, and a reconciliation of these items can also be found on our website.

To start, I would like to take you through some of the details of our financial results, discuss the current booking environment, and update our forward guidance.

Adam and Dan will then provide some insights into what is happening with the Royal Caribbean international and Celebrity Cruises brands, and then Richard will comment on our evolving global strategy.

Finally we will open up the call for your questions.

As we mentioned in our press release and you will see on Page 2 of the presentation, revenues for the first quarter of 2007 increased to $1.2 billion, from $1.1 billion in the first quarter of 2006.

Net income for the first quarter was $8.8 million, or $0.04 per share compared to our guidance of $0.03 to $0.08 per share.

For the first quarter of 2006, we reported net income of $119.5 million, or $0.55 per share, which included a net gain of $36 million, or $0.16 per share, related to the partial settlement of a lawsuit.

When we compare our results to last year, please bear in mind this is the first quarter this is the first quarter that includes Pullmantur and this really makes the year-over-year comparisons much less meaningful.

As we said an the last call, Pullmantur is being reported on a two-month lag, and because it is highly seasonal it will cause significant swings in our quarterly results.

This effect was materially negative in the first quarter, it will be negative in the second quarter but will be positive in both the third and fourth quarters.

As we talk about the first quarter results, to help keep this simple, I would like to start by going through what we call the comparable results, that is excluding Pullmantur.

I will go through both the revenue and cost sides of the business for Royal Caribbean International and Celebrity Cruises, and talk about Pullmantur and the combined group afterwards.

As you know, we face some demand and pricing challenges in the first quarter, particularly in the Caribbean, and our yields came in lower than we anticipated.

On Page 3 you can see our guidance on a comparable basis for a yield decline of 2% to 3%, and we actually experienced a decline of 4.2%.

As you may recall, we were quite pleased with the strength of close in demand in the fourth quarter last year.

Unfortunately, as the first quarter progressed, call volume and close in bookings proved to be disappointing, particularly for the lower-end Caribbean product, and we responded with more deeply discounted prices.

Demand in pricing was fairly stable for the higher end inventory, but was progressively more disappointing for cruises of shorter duration and lower stateroom categories.

This is a pattern we saw not only with ticket prices but with on-board spending as well.

So that leads us to what happened and do we expect this pattern to continue?

The only definitive pattern we are seeing is weakness in the most price sensitive consumers.

Those customers that on the fringe in terms of being able to afford a cruise vacation, are also the ones most impacted by any weakness in the economy.

Interestingly we did not see as much of an impact in the fourth quarter, which ironically has traditionally been our most price-sensitive.

We think this could have been caused in part by the positioning of our brands.

Our Caribbean product skews toward the upper end of the contemporary and premium segments, which seems to have served us well during this period.

The weakness experienced by others in the fourth quarter appears to have been the leading indicator of a softer economic cycle for the more budget-conscious segment, and this seems to have spilled over into a portion of our customer base in the first quarter.

As we enter the summer season, our target market shifts to a more premium less price sensitive consumer, so in the near term we should be less impacted.

We are also seeing signs that the softness and the more budget-oriented segment could be temporary.

Although it is still relatively early, as we look out for the next fall/winter season, the advanced bookings are much more encouraging.

I will talk a little bit more about that shortly.

Fortunately in the first quarter the revenue picture was only part of the story.

Our cost performance was better than we had planned, and allowed us to deliver earnings per share consistent with our prior guidance.

Net cruise costs per APCD on a comparable basis and excluding fuel increased 2.5% for the quarter, versus previous guidance of an increase of around 4%.

Including fuel, net cruise costs increased 1.5%, better than previous guidance of an increase of 2 to 3%.

Our fuel costs came in higher than guidance, but lower than last year.

Fuel costs on an APCD basis decreased 2.8% last year.

When we gave guidance for the first quarter, we assumed an at the pump price of $361 per metric ton.

Our actual price averaged $372.

Now, let's move on to Pullmantur and the combined group.

We are a little over five months into our integration work and we are making good progress.

We feel very good about the Pullmantur Cruise division, and for the quarter the division performed consistent with the previous guidance.

On a net basis the Tour division also performed consistent with forecast, but we do need to improve the forecasting, we do have the components.

Overall the Tour group generated higher revenue and higher expenses than guidance, and this caused some differences in the measures of the combined group.

But again on a net basis the impact was immaterial.

So including Pullmantur, the Company's net yields decreased 3.4%, and net cruise costs increased 5.4%.

Now, to recap the quarter, I would like to walk you through a bridge between 2006 and 2007 on a per-share basis.

In total, our earnings per share were lower by $0.51.

The key drivers of this were, first, we won a legal settlement in 2006, that was worth about $0.16 per share.

Pullmantur had a negative impact on the quarter, and although we do not provide brand-specific results, we will disclose that the combination of the legal settlement and Pullmantur accounted for more than 50% of the decline in our earnings per share.

The remaining decline was comprised of a positive impact from our 3.3% capacity growth, and negative impact from the 4.2% yield decline, slightly higher net cruise costs, and some timing differences.

Now, I would like to move on to our expectations for the balance of 2007.

As you saw in our press release, despite the first quarter yield decline and higher fuel prices, we are maintaining our earnings per share guidance of $3.05 to $3.20 per share because of cost reductions.

As in the first quarter, our management team is focused on finding opportunities to reduce operating expenses.

On slide 4, you will see our guidance for the second quarter.

Our current forecast is for earnings per share to be in the range of $0.58 to $0.63.

On a comparable basis we will have an increase in capacity of 6.3%, and expect yields to be down around 1%.

Net cruise costs will be down around 3% and excluding fuel, net cruise costs will be down around 1%.

Including Pullmantur, capacity will be up 12.6%, and yields will be about flat.

Net cruise costs will also be about flat and excluding fuel net cruise costs will be up around 3%.

Our current at-the-pump price for fuel is $412 per metric ton, and we are 56% hedged for the second quarter.

In terms of sensitivity, a 10% change in our fuel prices either way equates to about a $5 million impact to the quarter.

On slide 5 you can see our guidance for the year.

We are forecasting that on a comparable basis capacity will be up 5%, and yields will be about flat versus 2006.

This is a slight decline from the guidance we provided back in February of an increase of about 1%.

The softer Caribbean pricing environment continues through the Spring, however, the revenue picture for the balance of the year appears more encouraging.

If you will jump to slide 6 for a minute, we have laid out our current load factor in APDs as compared to the same time last year by quarter.

This graph represents only Royal Caribbean International and Celebrity Cruises.

I would also like to point out that these comparables are impacted somewhat by the introduction of Liberty of the Seas, and the ship swaps we are doing with Pullmantur.

We're not going to disclose the specific numbers, but thought this chart would help show you directionally where we stand with our order book.

The top portion shows the variance in our load factors for the next four quarters, and the bottom illustrates how our pricing compares.

Visually, you can begin to see why we are more encouraged about the demand environment as the year progresses.

In particular, the advanced bookings for the fourth quarter and first quarter of 2008, offers signs that the Caribbean may be recovering and our recent softness is not caused by any structural issues.

Now, turning back to page 5, you will see we are forecasting net cruise costs to be down in a range around 2% for the year on a comparable basis.

Excluding fuel, we expect net cruise costs to be about flat.

Including Pullmantur, capacity will increase 12.2%, and yield should be up in the range around 2%.

We expect net cruise costs to rise in a range around 3% and excluding fuel, net cruise costs will increase in a range around 5%.

Please remember the Pullmantur division adds revenues and costs without any corresponding capacity.

That both the yield and cost figures get inflated.

As I mentioned previously, our at-the-pump price for fuel is $412 per metric ton, and for the year we are 50% hedged for the balance of the year.

Because we do not forecast fuel prices, we thought it would be helpful to show you how our fuel price correlates with WTI.

If you go to slide 7, we have plotted our average fuel price with and without swaps, to the spot price of WTI.

I also want to give you some insight into the sensitivities and fuel prices on our costs.

For the full year, a 10% swing in the price of fuel up or down, would have an $18 million impact.

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

Depreciation and amortization for the year 2007 is expected to be 490 million to 510 million, and for the second quarter it is expected to be between 120 million and 125 million.

Interest expense for the year is expected to be $325 million to $345 million.

In the second quarter, interest expense will be in the range between 83 million and 88 million.

Now switching gears to CapEx.

Not only are we focusing on our operating expenses, but we have made some reductions in our forecasted capital expenditures, as well.

On slide 8 you will see our previous guidance for 2007 CapEx was $1.3 billion.

As you know, back in April we exercised our option for Genesis 2.

We have been able to absorb the first installment and further reduce our forecasted CapEx to 1.2 billion through our savings initiatives.

On slide 9 you will see our projected CapEx for '07, '08, '09, 2010 and 2011, is estimated to be 1.2 billion, 1.8 billion, 2 billion, 2.1 billion, and $300 million respectively.

The 2008 and 2009 numbers also did not change from our previous guidance despite the Genesis 2 order.

As of March 31st our liquidity was $1.2 billion, comprised of $200 million in cash and equivalents, and $1 billion in available credit on our revolver.

And finally on slide 10, our projected capacity increases for the same five years are estimated at 12.2%, 8.4%, 7.5%, 11.6%, and 5.8% respectively.

Now, I would like to turn the call over to Adam.

Thank you, Brian, and good morning, everyone.

On slide 11 we see the new building schedule for our two North American brands, Liberty of the Seas has come off the schedule, as we have successfully taken delivery of her.

More on her in a moment.

Royal Caribbean International recently ordered a second Genesis-class ship, as Brian just mentioned for 2010 delivery, and is making excellent progress on completing the Genesis design.

Dan and our Celebrity colleagues are very excited about the three ships Solstice-class, and will begin to reveal features of the first ship later on this year.

Moving to slide 12 and coming back to Liberty of the Seas, she is now two days away from arrival at Cape Liberty Cruise Port in Bayonne, New Jersey.

We introduced her in South Hampton England last week.

There was a lot of buzz there, given our recent announcement that Liberty's sister ship, Independence of the Seas, will spend the Summer 2008 season after her delivery, offering Mediterranean cruises to U.K.

customers.

She will be the first new Royal Caribbean ship and the largest ship ever to focus on the fast-growing U.K.

cruise market.

In other first quarter developments within the Royal Caribbean brand, we successfully completed Majesty of the Seas revitalization, she has now returned to her Bahamas 3 and 4 night itineraries.

In fact all four of our Royal ships have now been revitalized.

We recently announced that one of those 4, Empress of the Seas, will join the Pullmantur fleet in 2008.

Given the competitive nature of the Caribbean market in 2007, we are pleased that our fleet is excellent shape physically, and that our guest satisfaction levels are at four-year highs.

With regard to business conditions, we have clearly needed to be aggressive in pricing our 3 to 7-night Caribbean products through the Spring.

We have a sharp focus on getting ahead of the curve of Caribbean Fall/Winter season business.

As Brian commented, the outlook for those quarters is more encouraging, but nevertheless challenging.

The substantial strengthening of our relationship with travel agents, together with the growing momentum of our global customer sourcing are contributing positively to our competitiveness.

The outlook for Royal Caribbean International and Europe remains strong, and we are very pleased with Navigator of the Seas performance in her first year in the U.K.

market.

And in fact our sourcing from all of the principal European markets is considerably up on a year-over-year basis.

The outlook for Alaska is solid, although not quite as strong as it is for Europe.

The Royal Celebrity Tours is on-pace to enjoy her best year ever for Alaska and also other tours.

Dan?

Thank you Adam.

Although the pricing environment was challenging for Celebrity in the first quarter, we are looking forward to the approaching summer season and the balance of the year.

Europe is always strong for celebrity and 2007 continues our European momentum.

We have extended the Europe season further into the Fall this year, and are seeing yield improvement as a result.

And as Brian said we are seeing encouraging signs in the fourth quarter and into 2008.

Our cost control initiatives have been successful in contributing to our ability to maintain original guidance for 2007.

We have been able to manage our costs without having to reduce our demand creation, spend and sales and marketing, or have a negative impact on our guest experience.

In addition we have continued to focus our attention on reducing our fuel consumption.

If you go to slide 13 and 14, you will see the work that was recently completed on Millennium, to add the first diesel engine to the eight gas turbine ships in the Celebrity and Royal Caribbean combined fleets.

Adding a diesel engine to a ship after it has been built is nothing short of an engineering miracle.

By the end of 2008, all eight gas turbine ships will have a diesel engine, which will handle the energy demand created by the hotel side of our ships.

There are two fuel benefits to the diesel engines.

First is consumption.

The diesel engines are more efficient and burn less fuel, and second, they burn high ethyl 380, which is a substantially cheaper fuel than MGO.

Based on the current spreads between IFO 380 and MGO, the annual savings per ship is in the 4 to $6 million range.

Moving on to Slide 15, you can see the various fuel initiatives we have taken over the past few years, including silicone bottom paint, LED lights, [Greenham], window film, new software to maximize fuel efficiency for our itineraries, et cetera, have reduced our fuel consumption, resulting in $43 million of cumulative savings since 2004.

It is important to note that many of our fuel saving efforts occur in dry docks.

But we will continue to see further fuel savings as the rest of our ships go to regularly-scheduled dry docks.

Referring to slide 16, you will see the first example of the flexibility the purchase of Pullmantur gives us.

The purchases of Pullmantur allows us to move our ships where they can command the highest return.

Zenith and Empress of the Seas are moving to Pullmantur, where they will give Pullmantur much needed capacity, as they continue to grow in the Spanish market.

We continue to be very excited about Pullmantur's growth opportunity.

The addition of Zenith and Empress of the Seas means a net increase of 33% to Pullmantur's capacity.

This will enable Pullmantur to continue to grow in the Europe and Caribbean itineraries.

It will also allow them to grow in the Brazilian market during the winter season.

As Zenith and Empress of the Seas are moving to Pullmantur, two ships are moving from Pullmantur to Celebrity, Journey and Quest.

Both ships are booking well at strong rates.

Journey completes her revitalization this week, and sails for the first time to Bermuda this coming Saturday.

We will unveil the ship in the marketing approach to the travel agency community, and to the press this Friday in Bayonne.

We are very excited about these additions to the fleet, and pleased with the acceptance they have received thus far.

We at Celebrity continue to be pleased with our progress, and remain focused on managing our costs, building on the marketing and success we are having, and ensuring we deliver a great experience to our guests.

I would now like to turn the call over to Richard for his comments.

Thanks, Dan, and thanks to all of you for joining us on this call this morning.

We do keep looking for new and better ways to provide the information that you need to understand us better.

In the long run, we firmly believe that the better you understand our business, the better off we will be.

And I do hope you like the new format for the call.

We would appreciate any feedback you may have about ways that we can make it even better.

I thank Brian, Adam and Dan for giving good perspective on the overall business today.

And I really would like to take the opportunity to say how proud I am of the way the entire management team has worked cohesively to generate the kinds of results we are now discussing.

Because of our belief in the long term, we continue to be making those strategic investments that we consider so important, and I find it very gratifying that the cost savings initiatives we have implemented do not jeopardize those strategic initiatives.

The cost savings are coming through thousands of small efficiencies throughout the organization, rather than a few high-profile reactive measures that some people might do.

And also I would like to say a few words about some of the strategic implications as we look forward.

The cruise industry continues to demonstrate it's strength and it's resilience in all kinds of situations.

Our growth is a Company and as an industry has not always been as smooth or as linear as we would like it to be.

But it has been steady, and I see nothing that changes my conviction, that we will continue to grow solidly and that we will continue to grow globally, as well.

As we have said before, one can successfully grow internationally with a global brand approach, or with a set of national brands.

Both approaches work, and they can work in combinations to penetrate distinct market segments.

The great example of this is the U.K.

As shown on slide 17, we created Island Cruises in cooperation with First-Choice, back in 2002, as a budget-oriented national brand for the U.K.

And then in '04, Royal Caribbean International created a contemporary higher price British product with Legend of the Seas.

That proved to be so successful that this year we replaced Legend with a Voyager-class ship, and we recently announced that in '08 Independence of the Seas, which is our third Freedom-class ship will debut in South Hampton.

Independence will be the first new building in the brand's history to sail her inaugural season in Europe.

Bottom line: We have seen annual growth rate of 29% per annum in our U.K.

guests since the year 2000.

That is just one example of our evolving global deployment strategy.

But of course, it is not the only one.

If you look at slide 18, what you can see is that most of our growth is in Europe, and in the new emerging markets in South America, Australia, New Zealand and Asia.

The Caribbean is still our largest market, and we expect it to continue to remain so.

Nevertheless on 2005 to '08, our Caribbean capacity is essentially flat.

Alaska, Hawaii, Mexican Riviera, Bermuda, and the Panama Canal, that we have listed here as All Other, they are pretty much unchanged as well.

This doesn't mean that we think they are stale or tired.

On the contrary.

Don't forget that we have upgraded our Caribbean hardware with Freedom of the Seas and Liberty of the Seas, and we will continue to upgrade that hardware.

But the majority of our growth is in markets outside of the United States, or outside North America, I should say.

But while our Caribbean and other deployment has been stable, it has actually been decreasing as a share of the total fleet.

If you look at slide 19, you can see that the Caribbean will be 48% of the mix in 2008.

That is down 10 percentage points from '05 and the first time in our Company's history, that the Caribbean represents less than half of our total capacity.

Europe on the other hand, is growing 13 percentage points, up to 24%, and the new markets will grow to 5%, virtually all of which is new since 2005.

With that, we would like to open up the call for your questions.

In order to make sure we get to as many people as possible, I would like to ask you to limit yourself to two questions at a time.

With that, operator, could you open the call up for questions.

Yes, (OPERATOR INSTRUCTIONS) And your first question comes from Michael Savner with Banc of America Securities.

Just to dig into guidance a little bit more.

You have talked about improving trends in the second part of the year, and now you are talking about seeing a little bit of strength in the first quarter of '08.

There hasn't been much commentary on the more important third quarter, and given that is roughly where two-thirds of the earnings are coming from.

Can you tell me how comfortable you are with the trends you are seeing for Q3.

Because it would seem that you are now skewing more towards the middle to lower end of your guidance, but chose not to change that guidance range at all.

So I don't know if you still feel there is a good likelihood that you could do better, or come in at the high range?

And then, second question, if you could update us on thoughts and plans for share buy-back.

Brian, why don't you take the first one, in fact, take them both.

Michael, I will take your second question first.

We have no current plans for any share buy-backs.

It is not on the radar screen now.

In terms of your question about third quarter guidance, we are not giving any specific guidance, but you will see that we did maintain our guidance for the year.

It is unchanged.

You are correct, the third quarter traditionally has been our strongest.

I think Adam commented on the booking environment for both Europe and Alaska.

We will be deriving more benefit from Pullmantur in the third quarter, as well.

So I think it is fair to say that we would be looking for a very strong third quarter, pretty much consistent with the way we were looking at the third quarter back in February.

That is helpful.

Thanks.

And the likelihood to whether you still feel comfortable you could come in at the higher end of your guidance range?

We have maintained the guidance between 305 and 320, and that is as tight as we are going to offer right now.

Fair enough.

We do try to give a 50-50 estimate, and we've tried to be as transparent as we can be with all our guidance, and I think as you develop your models you will see we're probably coming out right where we have guided you.

Thanks, Brian.

Your next question comes from Robin Farley with UBS.

Thanks.

There was a point where you said you expected Pullmantur to be pretty neutral to earnings in 2007 in your first year.

Is that no longer the case, looking at the some of the changes in your guidance, excluding Pullmantur.

It looks like now maybe it is a $0.10 or $0.15 EPS drag?

Is that a fair calculation?

Robin, as you know, we don't give guidance by brand.

We did say back in February that we thought that Pullmantur would be rather neutral to slightly accretive.

Quite frankly for the full year, Pullmantur is not having a material impact either way, it stays fairly consistent with what we said back in February.

Where Pullmantur really becomes more relevant is when we talk about our quarterly numbers.

Remember Pullmantur is only about 6.5 to 7% of our capacity, and I would not describe it as a drag on earnings as you did.

I guess I will call after this, because the numbers are suggesting this.

The other question is your slide showing load factor and APD versus the prior year.

It is a little bit difficult to read, but I guess if I am reading it correctly I am surprised that the load factor, in what again hard to read but I think it is referring to the June quarter the load factor being down, and given the kind of time of where a few things I want to comment on are, I wonder if you can comment on rather it's, you think, I guess this is a pattern that you are comfortable with at this point, or do you feel that you'll need to do something in the price environment to address that?

Robin, on slide 6, which is I think the one you are referring to, we are showing that load factors, I think you are talking about Q2, are down slightly.

As you can see, our pricing is up slightly.

Our projections on a comparable basis, is that our yields will be down in the range of 1%, so I guess what is we are looking at closing out the second quarter.

I mean, obviously we feel pretty comfortable with the range we are providing at this point in time, and any shortfall on load factor, we have, as you can see on the bottom, the pricing margins to be able to offset that.

We have purposely left the scale off of this, because we don't want to get too specific.

The point is that this slide was really to show you directionally the second and third quarter, you know, pricing is up a little bit, load factors are down a little bit.

But as you look out into Q4 and Q1, when we start returning more ships to the Caribbean, I believe in Q1 of '08 we have about 77% of our inventories in the Caribbean, and then you are seeing a nice increase in our advanced bookings and a reasonable increase in the APDs as well.

The point of this slide was just to really emphasize that we do believe that our brand positionings is serving us well, and that we are not seeing anything structural in the Caribbean, and the early signs are that the recovery is on the way for Q4 and Q1.

Okay.

Great.

Thanks.

Your next question comes from Steve Kent with Goldman Sachs.

Hi, good morning.

Could you just talk a little bit more about the Alaska versus Europe pricing?

You mentioned that Alaska was a little bit weaker than Europe, and I was just wondering if that is because maybe people book the Alaska trips a little bit later in the cycle, and maybe that is why you're not seeing that flow through yet?

And, also, you know, Carnival made a pretty big deal about two big sail days that they had this Winter/Spring, and I was wondering if that was having any impact.

I know they have done some of those before, but this one seemed to have a little bit more muscle behind it, whether that was having some impact on results?

Hi, Steve, it is Dan.

That is a good question about Alaska.

As you heard Brian say earlier the premium markets are the ones that have been doing the best, and obviously Europe is the star performer there.

We also consider Alaska to be a premium market.

And we have seen good results in Alaska, it hasn't been as nearly strong as Europe has.

We think part of this may be the tax, the head tax that was put in last year, although it is still early to tell that.

So we will need to get through the Alaska season and evaluate it fully, before we can tell you if the Alaska tax had any impact.

In regards to the Carnival sails, I don't think that has had any impact in our business.

I saw that, and read what they announced, but we didn't see any impact on our business as a result of their sails.

Okay.

Thank you.

Your next question comes from Felicia Hendrix with Lehman Brothers.

Hi, good morning, guys.

Getting back to your comments about the outlook on fourth quarter and Q1 '08.

I was just wondering if you can tell us how much visibility do you have on those?

Usually at this time of the year, looking that far out, folks comment that the visibility is there, but it is on the light side.

I was wondering if you could talk to that.

Brian, I was just wondering, when you were talking about the reduction in CapEx relative to Genesis 2, I wonder if you can provide us more detail on that, just to understand how you achieve that, and then quickly on your G&A and guidance, it increased slightly, I wonder what was driving that?

Okay.

The D&A guidance I believe could be impacted slightly by some of our purchase accounting, which is still under review.

I can tell you that one of the things you may have seen in some of our disclosures is a valuation on our customer list of Pullmantur, and that was not, that was something that came in higher in the first valuation than we expected, and we're in the process of having an ongoing dialog with our accountants in terms of what that should be.

But we are covered with the amount we have on the balance sheet right now, which I believe is in the $23 million range.

In terms of the guidance for, or the discussion about the advanced bookings for Q4 and Q1, I would describe our visibility as being decent.

We don't disclose the specific order book, but we have reasonably good healthy FIT demand out there.

We are not basing this on a lot of speculative group inventory.

I think we are seeing rather broad-based recovery.

We are seeing strength in our shorter cruises, which had a little bit more of a drag in the first quarter of this year, and we are seeing actually very nice response to some of our new product offerings that Richard alluded to, as well.

And I am sorry, your other question?

Oh, CapEx.

Yes.

The CapEx, you know, we made the payments on, the initial payment on Genesis 2.

We basically have gone back and reviewed where are we spending money, and where do we need to spend it for our strategic initiatives.

We have been able to offset some timing in terms of some of the implementations and some of the things that we are doing on the ship.

We have looked at our IT spending and really understood where we are getting the most value for what we are implementing today, versus what can be deferred to later dates.

I think in essence, as Richard talked about, there is no one thing on the operating side and there is no one thing on the CapEx side.

It is just a lot of real fiscal responsibility in reviewing the project lists, doing a little bit of belt-tightening across the board.

But again, making sure that we are not compromising the services or the product that we are delivering or leading the future in the right way.

Felicia, just to make it clear, because the slide may have been a little confusing on that, it was reduction, the reduction wasn't relating specifically to Genesis, it was actually relating to just about everything else.

Oh, okay.

Great.

Thanks.

Your next question comes from Dean Gianoukos with JPMorgan.

You always have a problem with [your name]-- (laughter)

It is not easy.

I am just wondering when the weakness that you are seeing out there now, is your pricing being impacted by discounting by your competitors, or is it just broad-based weakness and sort of late bookings that is driving everybody down?

Dean, it is Brian.

What we saw in Q4 was in order to top off the ship, the last few load factor points.

We didn't have to do as deep a discounting as we might have otherwise have had to do.

And in Q1, to get those last few bookings were a little more expensive, the consumer just seemed to be a little more price sensitive.

I don't believe that competitor pricing at the end of the day tends to have too much impact on us.

At the end of the day we are all going full, and what we are doing is fighting for the customers who are willing to pay us the most.

So I don't think that this was a domino effect, per se, caused by our competitors, but just a short period of great price sensitivity on the last few customers that we were trying to book.

So when you are looking out and you show us that slide of things improving, I guess you are just assuming that, if you book so much up quick, you won't have the same situation heading there?

Do you feel like the booking curve is lengthening enough now that we are not going to run into short-term discounting, or more significant short term discounting going forward?

I think Q1 was a little bit of an aberration of what we have ben experiencing over the last few years.

I think progressively for the last three years we have been having more of our inventory sold earlier on, and obviously the less you have to sell as you move closer to sailing, the more luxury you have in terms of the way you price your product.

By having a stronger order book into Q4 and Q1, if we can maintain that as we get closer in, it should bode well for our ability to have better pricing leverages as we get close to sailing.

Okay.

Thanks.

Your next question comes from Nick Thomas with AMRO.

Yes, I wonder whether you could just, having given the comments that you have given yourselves, about what you are seeing in the Caribbean, could you just sort of give your thoughts on industry capacity in the Caribbean, and to what extent that is likely to change going into 2008, or back end of this year?

Are we still seeing growth and capacity in the Caribbean, or are we starting to see capacity in the industry moving a little bit from the Caribbean to some of the other locations?

You know, I think we are seeing, frankly everybody in the industry is seeing the same type of phenomenon.

There is these new markets are really opening up very quickly, and I think everybody is taking advantage of it.

So there are limitations on how much new capacity we can add.

I still find it ironic that we don't have enough ships to service the itineraries we wish we did.

And so the growth in the Caribbean, per se, has definitely leveled off.

And I think that is just a phenomenon we are all seeing, and I think we are also seeing new ships going in there, so it is not as though people are giving up on the Caribbean.

It is just that there are newer and better opportunities, and we and others are taking advantage of it.

I think what you are seeing us do, is just similar to what others are doing perhaps a little more aggressively.

Thank you.

Your next question comes from Bob Simonson with William Blair.

Good morning.

Adam, when the Genesis ship comes in, is that a ship that can only be positioned in the Mediterranean, or could it go somewhere else at some point in time?

Hi, Bob.

When you probably recall that in the years leading up to Voyager of the Seas, we had no thought other than she would be leaving from Miami on Caribbean 7-night runs, and now you see Voyager-class cruising begin to spread all over the earth.

So with respect to Genesis, our thinking, while we haven't been specific about what she is doing, she certainly would be a valuable addition to our Caribbean portfolio if that is where she goes.

But we don't have the same restricted view of what Genesis-class cruises might be able to do in the future that we had in advance of Voyager coming into service.

So it doesn't mean that if the Genesis, at least initially, was in the Caribbean, that in that year, the Caribbean capacity would have to come up, you could move another Voyager-class ship to another market to not have it blown up, that is probably the wrong term.

Maybe you could find a different term.

But in any event, we have shown just with our '07-'08 Winter deployment, which is two years in advance of Genesis coming into service, the types of evolution that we are capable of making with Rhapsody of the Seas going across the Pacific, with Splendor of the Seas going to South America, and even inside the Caribbean, Legend of the Seas opening up a program out of the Dominican Republic, that is just as much for internationally sourced guests, if not more than it is for North American sourced guests.

That is in our opinion the beginning of a long-term evolution in search of many opportunities that Richard has been describing today, and so, no, it does not mean, just because Genesis is coming into a Caribbean at a given year, doesn't mean a certain outcome for our Caribbean capacity.

Bob, it is kind of ironic, when you look back, as you will recall, when we first brought out the first Sovereign-class ship, there were many people who raised eyebrows about whether, even in the Caribbean it wasn't too big, and now it's one of our smaller ships.

So we have certainly evolved, and one of the things we have seen is that there is a lot more flexibility than people previously understood.

The second question, not sure who this is for, you commented on the Caribbean being a little bit more competitive, and the yields not being quite up to what you thought they would be.

Versus either three months or maybe nine months ago, is Alaska pricing and European pricing kind of what it was back then, or has that changed?

Bob, it is Dan.

European, as we said, we are very happy with Europe, and the European pricing is strong.

So versus, you know, three to six months ago we are talking about the same season.

So we continue to be pleased with what we're seeing in Europe and as I mentioned earlier, Alaska, we are having a good year in Alaska, but it is not measuring up to the European standards.

And we still, obviously the season hasn't even started yet, so we have got a ways to go before the season is over.

We do think that the Alaska head tax may be having some impact on it, but it is still too early to assess that fully, and we will know that better at the end of the Alaska season.

Is it fair or unfair to say the change in the full-year yield guidance is almost entirely due to what is occurring in the Caribbean, or is it partly Alaska?

Bob, it is Brian.

The majority of the yield guidance change to just reflect back is that we changed it by 1%.

We said that it would be up around 1% back in February, and now we are saying it is about flat.

I think the majority of that is being driven by the first quarter, where we fell short of our guidance, and then just a little bit of softness, probably more into the spring than we had originally anticipated, just as we saw pressures in the first quarter, I think we have said that that has kind of spilled over into April, and possibly some of early May, as well.

But I think Alaska and Europe overall are performing fairly consistently with where we thought they would be back in February.

Very good.

Thanks an awful lot.

Your next question comes from [Aja Jordiava] with Infinity Research.

Good morning.

Couple of questions, can you give outlook for Caribbean in Q3 even though it is not as important of a market in the summer, it is still a significant piece.

Do you see any of the positive changes that you discussed for the Fall/Winter season.

My second question relates to fuel consumption.

It seems to me, based on the numbers you have provided, that consumption on a per-passenger cruise day has gone up a little bit for several quarters now, and I wondered what that is related to?

Thank you.

With respect to the Caribbean in the summer we are generally seeing solid performance.

As you know, Royal Caribbean has both Freedom of the Seas and Liberty of the Seas in the market throughout the Summer, they are both doing very, very well, as we would have anticipated, and the continuation of the encouraging signs that we've been talking about for the Fall and the Winter, seem to ride along from the Summer performance that we are looking at.

And on the question of the fuel consumption, actually our fuel consumption in general is down on an APCD basis.

And I think that may vary between quarters because of changing itineraries which change.

The fuel in any particular quarter, also relates into the whether the quarter ends on a Sunday or on a Wednesday will change, because of the way we account for this.

But I think in general it is going down on a tons per APCD basis, and what I would like you to do is ask you to call Greg and he can go through those numbers in more detail for you.

We have disclosed all of that.

I will do that.

Thank you very much Richard.

Thank you, Brian.

Your next question comes from David Leibowitz with Burnham.

Two questions.

Totally unrelated.

Just on Celebrity with the post-Panamax vessels coming on board, how much incremental profit per passenger, or yield are you expecting versus the Millennium-class?

Well, we are expecting incremental profits.

We don't get into obviously specifics on the brand, and then we won't get into specifics on the ship.

But we have built what, this is a chance for me to do a commercial here, we have built what I think is an fabulous ship.

So it will have a positive impact on the Celebrity brand.

Okay.

Second of all, a different question, if everybody in the Caribbean is hurting, as it were, in terms of what you are yielding, why keep as many 3 and 4-night sailings, and why not make some of them at least, 7-night sailings going forward into next year?

Hi, David, it is Adam.

It is interesting that you ask that question because it hasn't been more than 24 months, I don't think, that people were asking us, why don't we have more capacity in 3, 4, and 5 night cruising, why do we have so many 7-night and longer ships.

One of the things we need to do in the long-term business such as we are in, is make sure that our strategy overall is right, and Royal Caribbean International is going to be a formidable player in Caribbean cruising from 3 nights up through 11 for the long foreseeable future.

We do tweak the balance from time to time, and some of our international moves that we have been discussing affect our Caribbean portfolio, as I just mentioned earlier both inside and outside the Caribbean.

The short-cruise market is a wonderful market for introducing people to the cruise concept.

We believe that it does incent and motivate people to move up into longer cruises over time, because of their high satisfaction with their initial experience.

And it is a way of making sure that our transaction volume between ourselves and the travel agency community stays high, so that we are on their radar screen all of the time.

There are a lot of reasons why we want to remain strong in quarter Caribbean cruises.

Again I am not certain of this but it strikes one that if the 3 and 4-nighters are where you are feeling the most pain, why do you continue to do that, why not take one-third of those 3 and 4-night sailings, and convert them to one week sailings for next year, and see if that might alleviate part of the lingering problems you're having in the Caribbean?

Couple of things: One is that the competitiveness of the Caribbean trading conditions are not completely limited or specific to 3, 4, and 5-night cruisings.

They have also been present in the 7-night market to a certain degree.

So there is an overall balance of factors that go beyond short cruises.

Second thing is that when you look at the evolution of our deployment into '07, '08, you are seeing some changes.

Where we are taking certain of the shorter programs that were being done by ships that are moving out into the world, and so they are not doing short cruises in the Caribbean anymore.

So there is a degree of what you are suggesting that is baked into our near-term deployment.

But overall there we need more of a balance between 3, 4 and 7-night cruising than I believe what you are suggesting.

If I could just add also, because the way you articulated our troubles in the Caribbean, I would like to remind you in Q4, we had better than 3% yield improvement in the quarter, and as we look on the horizon for Q4 of '07 and Q1 into next year, we are seeing a much healthier booking environment.

What we have experienced is some shortcomings in the shorter cruises and the lower inventory in Q1, and I think we want to be careful not to overreact and adjust our strategic portfolio based on the impact of one particular quarter.

Thank you very much.

Operator, we have time, if we could, for two more questions please.

Okay.

Your next question comes from Tim Condor with A.G.

Edwards.

Thank you.

First, let me offer my congratulations to Brian on a good initial start here in a new job.

And a couple of questions here.

The load factor on the APCD data, how is that looking, I'm sorry, the ACD data, how is that looking if you balance discussions about Europe looking into '08, in particular?

And then secondly, your first-year cash on cash returns, and sort of the hurdle rates that you like to get on new builds, how does that compare now to say, versus 3 to 5 years ago.

And then looking out with Solstice and Genesis-class products coming, and then factoring in the Euro.

Tim, on the first, the majority of the advanced bookings information that you are seeing for Q4 and Q1, particularly Q1 of '08, is really being driven by the Caribbean.

It is 77% of our inventory I believe that is just under 50% in Q4, but it is I think what you are seeing directionally, in terms of the APDs and the load factors, is pretty consistent across the board.

If you were to slice this by product, there is not any fundamental outliers out there, if you will.

I guess another way, Brian, to again, what we were seeing obviously and you answered, but looking out for '08, are your European bookings tracking better, or similar, or worse, than for the full year?

There I would say it is way too early to talk about the visibility.

We really, you know, the European season really doesn't get into full swing until late April or May of '08, and we are not really prepared to talk about bookings that far out.

It is really way premature.

Our ships are just now getting over to Europe this year.

So I wouldn't say that there is any cause for us to believe that it would be much different.

We feel very good about the response that we have had to our products there, both Americans going to Europe, as well as the local sourcing as well.

In terms of the hurdle rates, as you know, we don't really publish any public hurdle rates for us.

Our Board is obviously very focused on return on investment.

And we have pretty high hurdle rates internally before we will even take something to our Board, and have to prove out the assumptions that we are putting in there in terms of revenue and cannibalization and operating costs.

But I think everyone on the equity side would be very pleased with what we are setting out to do, and the types of numbers that we hold ourselves accountable to, and any new build that we have out there.

So it's fair to say that those hurdle rates have not changed in any material way over the last few years?

That is correct.

Okay.

Thank you.

Operator, we have time for one more question, if we have one.

Your next question comes from Peter McMullin with Jesup Lamont.

Good morning, I would like to ask about the hiccup in on-board spending that has been a strong secular trend.

Is that a hiccup, or part of a new trend?

I wonder how it sort of played into the second quarter experience so far?

Hi, Peter, it is Adam.

Well, the long-term upward trend in ship-board revenue has been so consistent that it is just no reason, I don't think for us to say that where there was one quarter of relatively flattish on-board revenue that that would signal a newer, different or worse trend.

As Brian mentioned, we believe we have seen that to the extent that there has been any sensitivity to on-board revenue, it is coming from this same stateroom inventory of people who are paying less for their tickets to get on board, seem to have been spending somewhat less when they got on board, and it is in our view far too early to extrapolate from that one quarter that some of our guests, that there is a different trend looking forward.

Thank you.

Okay.

We appreciate you joining us today.

We have tried to share quite a bit with you and understand you have more questions as you sort through this.

And Greg will certainly be available throughout the day for any follow-ups you may have.

Thank you again for joining us and have a terrific day!

This concludes today's conference call.

You may now disconnect.