皇家加勒比遊輪 (RCL) 2007 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Royal Caribbean Cruises Ltd.

second 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 would now like to turn the call over to Brian Rice, Chief Financial Officer.

Thank you, Kimberly and good morning, everyone.

I would like to thank you for joining us this morning for our second quarter conference call.

With me here today are Richard Fain, our Chairman and Chief Executive Officer, Adam Goldstein, President of Royal Caribbean International, Dan Hanrahan, President of Celebrity Cruises, and Greg Johnson, our Associate Vice President of Investor Relations.

As we did on our last call, we have posted slides on our investor website, www.rclinvestor.com which we will be using during the call and should help facilitate our discussion.

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

During this call we will be making comments which are forward-looking statements and 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 as defined by Regulation G and a reconciliation of these items can 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 provide you with our forward guidance.

Adam and Dan will then provide some insights into what is happening with their brands and then Richard will have some comments before we open 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 second quarter of 2007 increased to $1.5 billion from $1.3 billion in 2006.

Net income for the second quarter increased to $128.7 million or $0.60 per share compared to our previous guidance of $0.58 to $0.63 per share.

For the second quarter of 2006, we reported net income of $122.4 million or $0.57 per share.

As you know, the acquisition of Pullmantur has a significant impact on the timing of our quarterly results.

This effect was materially negative in the first two quarters but will be positive in both the third and fourth quarters.

While Pullmantur does impact our quarterly performance, I would like to remind you that today it accounts for only about 7% of our capacity, and its annual results do not currently have a material effect on our annual earnings.

For the balance of this year we will continue to discuss our performance with and without Pullmantur.

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, Celebrity Cruises, and Azamara Cruises, then talk about Pullmantur and the combined group afterward.

We had a successful quarter with yields and costs except for fuel coming in better than anticipated.

On page 3 you can see our guidance on a comparable basis was for a yield decline of around 1%, and we actually experienced a decline of about 0.2%.

This improvement was driven by the strength in our close-in bookings.

We were particularly pleased to see a bit of a rebound in the pricing for close-in demand, something you may recall hurt us in the first quarter.

On slide four we have graphed the year-over-year price change for bookings made within 90 days of departure for the first and second quarters.

You can see the pricing we built for new business within 90 days of sailing was lower than the same period a year ago for the first four months of the year.

In March we started to see a somewhat improving environment and for May and June departures we were able to achieve year-over-year premiums for close-in bookings.

On our first quarter call we talked about pricing pressures being most prevalent among lower end consumers, namely those customers that purchased standard state rooms.

On slide 5 we illustrated our year-over-year pricing changes by major category type for each of the last three quarters.

Overall you can see higher end consumers, namely those purchasing balcony and deluxe state rooms, have performed better for us in all three quarters.

After a rough first quarter, we saw sound pricing improvement in deluxe and balcony categories and signs of stabilizing prices for standard state rooms.

In the second quarter, while the entry level consumer did not completely return to 2006 levels, we did see a significant improvement from the types of discounting required to attract this segment in the first quarter.

We are seeing patterns similar to this among the various consumer groups with on-board spending as well.

When we talked about the first quarter, we said we did not believe that the weakness we were experiencing was anything structural within our industry.

We want to be just as cautious to not declare victory now but as we monitor our booking trends there are sound signs of stabilization.

I will expand a bit more later about what we are seeing with our forward bookings.

Now if you go back to slide 3, you will see our cost performance also was better than we had planned.

Net cruise costs per APCD on a comparable basis and excluding fuel decreased 3.2% for the quarter versus previous guidance of a decrease around 1%.

Including fuel, net cruise costs decreased 4%, better than our previous guidance of a decrease around 3%.

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

Fuel costs on an APCD basis decreased 7.8% versus last year.

When we gave guidance for the first quarter, our at the pump price was $412 per metric ton.

Our actual price came in at $443 per metric ton.

This equates to approximately $7 million or $0.03 per share in higher fuel expenses than we had in our second quarter guidance.

The nonfuel costs improvement was driven by efficiencies in general and administrative expenses, savings from inaugural activities, and some timing variances in our marketing spend.

As we said on the first quarter call, we are focused on finding efficiencies throughout the organization but do not compromise our strategic initiatives.

Now let's move onto Pullmantur in the combined group.

The Company's all-in net yields increased 0.9% and net cruise costs increased 1.1%.

As was the case in the first quarter, Pullmantur's tour division had higher revenues and higher expenses than forecast.

This was driven by a difference in the classification of conditions in the tour division, which had erroneously been forecasted on a net basis and, unfortunately, causes some noise as we look at the results.

As we have talked about before, Pullmantur is reported on a two-month lag and accordingly our second quarter includes results from February, March and April for Pullmantur, three of the weaker months in the Spanish market.

We were disappointed that the losses for Pullmantur in the quarter were slightly wider than originally expected.

Specifically, the tour division had a weaker than forecasted spring season, and in the cruise division we had to cancel one sailing due to a change in timing of the scheduled dry dock.

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

On slide 6 you will see our guidance for the third quarter.

Our current forecast is for earnings per share to be in the range of $1.75 to $1.80 which compares favorably to the $1.64 we reported for last year's third quarter.

Included in this estimate is the impact of the Celebrity Cruises cancellation of two 12-night Mediterranean sailings aboard Celebrity Millennium due to damage to the ship's propellers.

This incident is expected to have a negative impact on third quarter earnings of approximately $0.14 per share.

While we do not provide brand-specific financials, we do expect Pullmantur to be accretive in the third quarter.

Now for some of the key metrics.

On a comparable basis we will have an increase in capacity of 4.9%, and we expect yields to be around flat.

Based on the current at the pump price for fuel, net cruise costs are expected to be flat to down 1%, and excluding fuel, net cruise costs should be flat to up 1%.

Including Pullmantur, capacity will be up 13.2%, and yields are forecasted to be up 2% to 3%.

Based on current fuel prices, net cruise costs will be up 5% to 6%, and excluding fuel net cruise costs will be up around 7%.

Our current at the pump price for fuel is $486 per metric ton, and we're 57% hedged at this point for the third quarter.

In terms of sensitivity, a 10% change in our fuel price either way equates to about a $6 million impact to the quarter.

On slide 7 you can see our guidance for the year.

Our earnings per share are estimated to be between $2.75 and $2.85.

We do expect Pullmantur to be accretive in both the third and fourth quarters but as we have said before, for the year Pullmantur is not very material to our overall financial performance.

We are forecasting that on a comparable basis capacity will be up 4.6%, and yields will be about flat compared to 2006.

Based on current fuel prices, we expect net cruise costs to be flat to down 1% and net cruise costs excluding fuel to be around flat.

Including Pullmantur, capacity will increase 12% and net yields are expected to be up between 2% and 3%.

At the current price of fuel, net cruise costs are forecasted to be up around 5%, and net cruise costs excluding fuel should be up around 7%.

As I mentioned previously, our at the pump price for fuel is $486 per metric ton, and for the balance of the year we're 53% hedged.

Our fuel price sensitivity for the second half is that a 10% swing in the price of fuel up or down would have about a $12 million impact after taking into account existing hedges.

Now I would like to share some insights into our forward bookings.

On slide 8 we have laid out our current load factor and APDs by quarter as compared to the same time last year.

This graph represents advanced bookings for Royal Caribbean International, Celebrity Cruises, and Azamara Cruises.

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

As you can see our order book is fairly healthy.

Load factors are pretty consistent with last year for the third and fourth quarter and much stronger in the first quarter of 2008.

And at the same time pricing for business on the books is above the same time last year for all three quarters.

On our first quarter call there appeared to be quite a bit of interest in the first quarter of 2008 in how much visibility we actually had that far out.

On slide 9 we have graphed our book load factors for the next three quarters to help you understand our relative position.

While we are not disclosing the specific numbers, you should get a sense of the visibility knowing that the third quarter is heavily booked at this point and close to being wrapped up.

For Pullmantur, pricing for the balance of the year is nicely ahead of the same time in 2006.

Load factors for the third quarter are consistent with a year ago and in the fourth quarter we have actually tried to hold back a bit as we think we sold out too quickly last year.

Overall we're feeling slightly better today about the trading environment than we did three months ago.

Our revenue guidance for the year remains about the same though in part because of the impact of the two canceled Celebrity Millennium cruises which were two of the highest-yielding cruises of the year.

On slide 10 you can see our projected CapEx for '07, '08, '09, 2010, and 2011 is estimated to be $1.3 billion, $1.8 billion, $2 billion, $2.2 billion, and $1 billion respectively.

The increases from our last call are due to the purchase of the Pacific Star for Pullmantur and the order of Solstice 4 for Celebrity.

On slide 11 you will see our projected capacity increases for the same five years are estimated to be 12%, 9.5%, 7.7%, 11.5% and 5.8% respectively.

Lastly, we also revised our revolving credit facility recently increasing the amount from $1 billion to $1.2 billion, lowering the interest rate, and extending the maturity.

As such, our liquidity at June 30th was $1.4 billion comprised of $200 million in cash and equivalents and $1.2 billion available on the revolver.

Now I would like to turn the call over to Adam to talk about the Royal Caribbean International brand.

Adam.

Thank you, Brian.

Good morning, everyone.

Royal Caribbean International has now virtually completed our ship deployment for 2008 next year.

The trends that have emerged over the last several years are evident next year as well, 54% of our brand's capacity will be in the Caribbean next year.

This is down from 61% in 2007 and 69% in 2005.

Conversely, 18% of our capacity will be in Europe next year.

This is up from 16% last year and 8% in 2005.

An increase this year of our mix from 16% to 18% may not sound that significant.

However, our capacity growth in Europe will increase by 22% in absolute terms, and that's after annual increases of 58% in 2007 and 45% in 2006.

New destinations such as Latin America, Asia, and Australia will collectively represent 5% of our deployment in 2008, up from 1% in 2007 and 0% in 2005.

This past weekend we announced that in 2008 smoking will not be permitted in our guest state rooms.

The market reaction to this announcement has been favorable.

This initiative is in conjunction with our healthy lifestyle program called Vitality that we debuted during the launch of Liberty of the Seas and then subsequently implemented on fleet-wide basis.

The Vitality concept is now reflected in product elements such as dining, excursions, spa and fitness and enhances Royal Caribbean International status as a leading contemporary vacation provider.

With regard to business conditions, as Brian noted, we are seeing encouraging strength in close-in bookings.

This phenomenon applies across our various product regions but it's most noticeable in the Caribbean 7-night segment.

Europe and Alaska bookings have remained stable and positive throughout recent months.

Navigator of the Seas is enjoying a successful season in the U.K.

market.

And Royal Celebrity Tours continues to enjoy a highly successful season in Alaska.

Dan?

Thank you, Adam.

The second quarter met our expectations as we moved into the heart of the Alaska and European seasons.

We are encouraged by the quality of the in-season demand we're seeing.

Europe in particular has been strong and season demand has also been good for Alaska but not at the same level as Europe which it usually is.

We believe that some of the demand differences are a result of the Alaska head tax although we're waiting until the end of the Alaska season to fully understand and comment on that.

On the last call I mentioned that we had completed the installation of the first diesel engine on the Millennium.

Since that call we have completed the installation of the diesel engine on Constellation now.

The Millennium is now fully commissioned, and we're excited about the results.

Last call we reported the annual savings would be in the range of $4 million to $6 million per year per ship.

Based on the initial results at current spreads between IFO & MGO, it now looks like we will be on the high side of the range.

These savings are driven both by lower fuel price and lower consumption.

However, the consumption benefit is significantly better than expected as the diesel engines run more efficiently and burn less fuel.

By the end of 2008 we will have completed diesel installations on all eight gas turbine ships on the combined fleets.

I think it is also important that I mention Millennium.

The incident was obviously extremely frustrating for us.

I am pleased we fully understand the computer glitch that caused this problem and have taken steps to prevent this type of incident from happening again in the future.

To close, some good news about Azamara.

Since the last call we have launched our new Azamara brand.

The response from the consumer in the trade has been very good.

Azamara Journey is now sailing weekly to Bermuda, and we are excited about this new brand and are looking forward to launching Azamara Qwest this October.

I would now like to turn it over to Richard.

Thank you, Dan.

Thanks to all of you for joining us on this call.

Brian and Adam and Dan have already covered a lot of ground, and they have done a great job of flushing out the story for the quarter.

I am really pleased to have such a capable and talented team, and more importantly for this morning, it means thankfully I don't need to say as much.

We really are pleased that the business environment has stabilized and that the signs of improvement are there as we move further out.

We're never happy with the kind of performance we saw in the fourth quarter -- the first quarter, rather, and the forward-looking signs are certainly much more encouraging and much more gratifying.

Generally speaking, I would have to say that it is a testament to the strength and the resilience of our North America brands.

Recovery in the Caribbean has been part of the equation as is the success of our continued international expansion.

Our European products, as Adam talked about, and particularly the European guest resourcing for those products, are doing extremely well.

We will be expanding this model further into Latin America and into Asia.

And as I mentioned on our last call, we expect to continue to build aggressively on our non-U.S.

sources of business.

At the same time we continue to be even more cost conscious as an organization.

We've been really focusing on efficiencies without sacrificing our strategic initiatives.

The team has done a terrific job, and I am quite proud of what they've already accomplished, and I am eager to see what they can do going forward.

One particular item to note is the efforts on fuel consumption.

If you look at our fuel costs estimate, while it is still painful, it is lower than it would have been based on our earlier forecast of consumption and today's fuel price.

The reason is simply that we've mitigated the cost increase with our fuel savings program which has proven to be more successful than anticipated, and I would really like to congratulate the team for their efforts on that part.

Moving on to Pullmantur, I think it is fair to say that today we're even more excited about the strategic opportunities than we were when we first bought the Company.

We have already announced three additions to Pullmantur's fleet, the Zenith from Celebrity, the Empress of the Seas for Royal Caribbean International, and the recent purchase of the Pacific Star.

Pullmantur's position in the Spanish market is stronger than ever, and, while we've had some challenges, especially in the tour operation, Pullmantur continues to strengthen and prosper.

That said, overall the Company is still a small component of our total portfolio, and it is not yet material to our earnings or earnings per share.

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

In order to make sure that we get to as many people as possible, I'd like to ask you to limit yourselves to two questions at a time.

Thank you.

Operator?

Your first question comes from the line of Robin Farley with UBS.

Thanks.

I wonder if you can give us a little color.

Your nonfuel expense as mentioned was better than expected.

Looks like some of that was due to maybe some SG&A getting pushed into later quarters.

Can you give us a sense of how much of that was expense not going to show up in later quarters versus what will?

Hi, Robin.

Thank you.

I think it is a combination as I tried to allude into my comments that we do have some savings that we have been able to realize, Dan and Adam particularly in the brands have made a terrific focus in trying to find efficiencies that are not going to compromise us.

We've done a real thorough investigation of our forecast and tried to find out where we are adding value and where there are efficiencies that maybe we could being realizing.

We did have some expenses, particularly in the marketing area that will fall off into the third and into the fourth quarter as well as we've had timing differences.

We're not going to give specific numbers, but I think if you look at the guidance that we provided, particularly on a comparable basis, you can kind of start to see the efficiencies that we're dropping to go the bottom line.

Great.

My other question, and when I was dialing I missed the first sort of minute of the call.

You may have said this, but can you commented on your on board revenue increase ex Pullmantur on a comparable basis because I guess what we see in the release is driven by Pullmantur there, so just to get a sense of what it was on a comparable basis?

Hi, Robin.

It is Adam.

On a comparable basis I think Brian did allude to this somewhere along the line.

The performance of on-board revenues has been quite consistent actually with the performance of ticket revenue both in the sense of us seeing stronger performance from the upper -- the guests in the upper categories, the deluxe, balconies, and also in the overall -- the absolute yield number that is we see.

I did -- that serve qualitative comment, but can you quantify what the increase was on a comparable basis?

No.

We tried to give that indication simply by saying that the on board and the ticket have been quite consistent with each other, and they're essentially what adds up to the overall result.

Right.

Okay.

Thank you.

Your next question comes from the line of Steve Kent with Goldman Sachs.

Hi.

Two quick questions.

One, I don't know if you discussed the $6.9 million of other income, what that was, and recently Carnival Management has alluded sort of on and off that they might be willing to slow down their CapEx program as they get further out.

When I look at your CapEx program, it is pretty heavy up through 2010.

Just give us a sense as to when you slow down the ship building, even with this environment maybe it is stabilizing, but I don't think any of us would characterize it as robust.

Hi, Steve, it is Brian.

I will take the first part and then let Richard comment on the CapEx.

In term of the other income, we did have the gain on a derivative in the second quarter that was related to one of our ship build contracts that had fallen out of compliance, and I think we also had some benefits on the tax side as well which were a little better than than in our forecast.

That's what I know off the top of my head.

You might want to follow up with Greg after the call and he can give you more detail.

Richard.

Hi, Steve.

On the question of slowing the CapEx, in fact, we are running now at a lower capacity increase year-over-year than we were let's say over the previous five years, so there already has been in fact some kind of slowdown.

Fundamentally, and that is of course as other people have commented on partially due to the fact that ship prices have gone up, and demand isn't as robust today as we would like it, but even given today's market, we think that the industry is continues to be strong and resilient, continues to grow, and I think we would expect to see continued modest growth more along the lines of what we've been doing recently, so I don't think we would see a dramatic change in our trajectory in terms of growth.

As long as we're getting the returns that investment.

Today we are.

Okay.

Thanks.

Your next question is from the line of Felicia Hendrix with Lehman Brothers.

Hi, guys.

A few questions for you.

The first is, Brian, getting back to a third quarter guidance, I know we all know that the EPS was in fact of the Millennium cancelation is $0.14, can you just walk us through maybe in the quarter and in the full year the impact was in terms of basis points, I guess for the net yield changes and then I have some questions on (inaudible) that I will follow up with after.

Ok Felicia, the impact of second quarter Millennium on revenue I believe was 70 basis points, and for the full year it was about 30 basis points on the yield change on the corporate level.

Okay.

I also mention since you brought up the third quarter, I do want to reiterate I think as you're looking at the full year guidance on an EPS basis and looking at the third quarter, you can probably do the math and kind of figure out where we're projecting the fourth quarter to be.

I think if you look back to last year where we had $0.22 a share profitability, there was a little skepticism about our ability to deliver those types of earnings in the fourth quarter.

I think we're looking for a healthier fourth quarter in '07 as well, and I would remind you that this year we'll be experiencing the benefit of Pullmantur in that quarter.

Right.

Which actually is a very good segway into my next question with Pullmantur.

I know you're not breaking out separate guidance, but I am wondering if you, and you havent given guidance for the fourth quarter, can give us an idea given the lag how you were reporting Pullmantur and also given the seasonality, if we can get some kind of idea what kind of basis point impact Pullmantur would have on the fourth quarter in terms of yield change science.

Well, we have given the yield change with and without Pullmantur which should help you back into it.

Right.

I guess the other thing I would comment on is that that has been materially negative to the quarterly earnings in Q1 and Q2 and will be accretive in 3 and 4 and for the year we've said all-in it is not really material to us.

Right.

I know that you have been reporting it and gives guidance kind of separate but given the seasonality, I just would think it would be a little bit difficult to make that assumption on a linear basis.

We're trying to be as transparent as we can and I think the best way to look at it would be with and without Pullmantur yield guidance, we said Pullmantur is about 7% of the capacity, and I think we've given you number that is should be able to help you get in the neighborhood of where it it would would be, and this year we've tried to be very transparent because Pullmantur has created a lot of noise, but it is not our intent on a go-forward basis to continue to break out brand performance with when we have apples-to-apples in the future.

Okay.

And then what are you doing in terms of their land tour business to strengthen that.

This is Richard, Felicia.

Good morning, and I will comment.

I think the land tour business has not been a big part of their profitability historically.

It never was, and the events of this year that caused us to have some hiccups, I think we would describe more as hiccups than anything else that wasn't a fundamental change in the business.

It was just a series of small one-off item that is cumulatively added up to be frustrating, but I think overall the business is on the same trajectory it was before, and we're not looking for any dramatic change in the land tour business in either direction.

Okay.

Thanks, guys.

Your next question comes from the line of Michael Savner with Bank of America Securities.

Good morning.

Thanks.

First question, can you just give us a little bit more granularity about your hedging strategy?

Obviously you keep a 50 to 60% hedge on but with this type of volatility you're still getting a lot of movement in your earnings, so is there any thought to changing that strategy, maybe increasing the hedges, and how should we think about what the earnings guidance would like like if you hadn't had those hedge in place?

Is it as simple as double the effect because you were 50% hedged, and then second question completely unrelated is housekeeping, looking at that slide 9, Brian, you talked about, you didn't give us the metrics on the side here.

I guess you said intentionally, but if you said that the third quarter load factors were basically reflected completely booked for the third quarter or nearly, so that would be like 90% that, means into the first quarter kind of 50% or I want to mike sure I am thinking about it right and I know you didn't want to get into specifics, but I want to make sure I am reading that correctly.

Michael, I will take your last question first before I forget it.

In terms of the access, I think I would coach you probably a little bit north of where you are for the third quarter, but directionally I think you're looking at it about right to get a sense where we are for Q1.

Q3, if you look at -- this is our total load factors, and if you think about the third quarter, we traditionally have exceptionally high load factors, well over 100%.

In terms of our hedging strategy, I think we're pretty happy with our hedging strategy for the year right now I believe our swaps are in the money by about 3 or $4 million.

Our hedging strategy really is about managing risk.

We're not speculators.

We're not tracking the markets daily trying to understand and be oil speculators.

What we're trying to do is manage a cruise line and the volatility that fuel prices have on our income statement.

We are very happy at the 40 to 60% range.

We do want to be able to participate if oil prices come down.

It is interesting, about three months ago I think there was speculation by a lot of the analyst that is prices were coming down and we were getting the question about why were we so much hedged and now I think that oil prices have been coming up.

The questions are going the other direction.

I think given the size of our company and the impact that fuel has on us, 40 to of 60% seems about the right range for us given the volatility.

I don't have the calculations in front of me in terms of what the EPS would have been had we not had the hedging.

I think if you can follow up with Greg after the call, he can probably help you understand that.

Terrific.

Thanks, Brian, I appreciate it.

Your next question is from the line of [Ossia Gorgiva].

Good morning.

Good job on the cost side.

I have a couple of questions on outlook for Q3.

It seems that Alaska made an effect by the head tax, but how do you explain the strength, the more recent strength in the Caribbean obviously the Baltic seems to be a very recent, new development?

This is Dan.

Let me talk a little about Alaska, and then I will turn it over to Adam to talk about the Caribbean.

Alaska has as I alluded to in my comments, we've seen some nice close end in bookings for Alaska, and we've been pleased with the pricing that we've seen although overall although it is a fairly solid season from Alaska, it is not as high as we would have liked, and in the European season what we're seeing in-season for demand is actually stronger than what we're seeing in season demand for Alaska.

We do think there is impact for the head tax and obviously we'll wait until the end of the year to understand it and once we get to the end of the year we'll have a better understanding of what impact the head tax is having on Alaska, and I will let Adam comment a little bit about what's going on in the Caribbean.

One of the factors that affects visibility as you get towards the quarter is what's happening in the short cruise markets, and we have seen pretty good late strength in those markets, the Caribbean short cruise markets that have contributed to the current outlook, and I noted earlier that in general the seven-night Caribbean segment has strengthened in recent weeks and months, so the combination of those two being the bulk of Caribbean capacity have given us further encouragement with respect to the near term quarters.

One general question.

Given the Millennium impact on Q3 which I guess is about 70 basis points, what Brian said, does that mean that your guidance today is a little bit higher than it was a May 1st?

I think the impact in Q3 is about 70 basis points on millennium.

I would be careful to -- when we're giving our guidance, we're saying things like around flat, and I think you need to understand that the level of precision there is not within 20, 30, 40 basis points.

There is going to be volatility.

I think we are feeling a little bit more encouraged today, particularly given the strength of the close in demand we saw in May and June.

Overall I think it is fair to say we feel as least as good as we did three months ago about the third quarter and perhaps slightly better.

Thanks, Brian.

I think I would add one point.

You asked what is it that's different today that's making us feel better, and I think the real question is is not why is it getting better today but it was more of what was the anomaly that was happening earlier in the year, so I think what we're seeing today hopefully is more moving back towards a more normal environment as opposed to the hopefully somewhat of an anomaly that we experienced in the first quarter.

I certainly hope that is the case.

Thanks, Richard.

Thanks.

Your next question comes from Scott Barry of Credit Suisse.

Hi.

Two questions.

One, you mentioned low ADPs and load factor.

Would you be able to make a general comment on book load factor and (inaudible) for the full year 2008 versus the same time last year and I have a follow-up.

Thanks.

Scott, it is beyond the first quarter there is quite frankly not a tremendous amount of visibility out there, and when we throw Pullmantur into the equation, the vast majority of Pullmantur's inventory isn't even open yet for 2008 given the close end booking patterns.

I think what we are seeing is I think a plat form that should enable us to have a positive yield environment next year.

We don't have any specific guidance to provide at this point in time.

We're still in the process of really understanding the numbers, trying to understand the visibility that we have and putting together our operating plans.

Ok.

Fair enough.

The second question, you outlined the $8 billion capital program have you through 2011.

Would you be willing to take on more even leverage to make another acquisition?

Scott, I think the answer is under the right circumstances definitely yes.

I think we looked at it.

We have said in the past consistently that we want to maintain an investment grade thats been our strategic objective, and partially to do that we have worked on strengthening our balance sheet.

We've also been consistent in saying that we're looking for the best return on investment, and under the right circumstances if we felt that that that trade off was right, we would be looking to -- whether that's an acquisition, if that were appropriate or something else, we would certainly consider that very seriously even if it meant higher leverage.

I think it is a question of the risk reward, but we are I think we've been clear in not saying that we will just not take more than X amount of leverage, and we will look to the benefits of the acquisition of the investment, but whatever it is that we're looking at and make a balance decision.

I think we've shown that and continue to look at it that way.

Thank you very much.

Your next question comes from the line of Hakan Ipekci of Merrill Lynch.

Thank you.

Two questions.

One is on the full year cost guidance.

It seems relative to last May excluding seal it went from 5% to approximately 7%.

How much it related to the Millennium and is there anything related to the Pullmantur there, and then my other question is related to the fuel now that oil has been rising steadily again, what's your view on surcharge on the ticket prices?

Thank you.

On the first question about the guidance, yes, it was impacted by millennium.

We disclosed that it was $0.14 a share.

I believe about 60% of that impact related to revenue impact in 40% was on the cost side.

But there is also a little bit of noise in there as I alluded to when we gave our guidance back in May we had forecasted the tour division effectively at net, and in our revised guidance we're including the commissions classification in the right way, so that caused a little bit of the distraction.

Okay.

I am sorry, the second question, could you repeat it?

Relating to go the fuel and now that oil has risen substantially again or fuel expenses what's your view on a potential fuel surcharge for the ticket prices passing on the fuel costs to the customers?

It is something we've looked at.

There is a little bit of a legal concern before we can pass on a fuel surcharge.

As you may recall years ago we entered into a compliance with the Attorney General's office in terms of passing on anything that is nongovernmental taxes, anything that was not paid to a government could not be classified as a taxing fee, and we also view fuel surcharges as something that is more for shorter term spike in fuel prices, but it is something we keep an eye on, but at this time we have no immediate plans to do so.

Okay.

Thank you.

Your next question comes from David Leibowitz of Burnham.

Good morning.

Two unrelated items.

First, what are the costs of establishing Azamara all-in?

This is Dan.

The cost of establishing Azamara have been very, very small but we're running Azamara with the same sales organization, the same marketing organization, and the same operating teams, so there is virtually no costs there.

When we moved Zenith out to Pullmantur, Azamara fit in nicely so there is no costs of the addition of Azamara to the company.

That includes advertising, et cetera?

We're absorbing that within the marketing budget we have.

Secondly, Pullmantur-- You've added three vessels, any one of which is greater than the capacity which you yanked out.

Should we take this to mean that the Oceanic and at least one of other vessels are likely to be out of the fleet within next 12 to 18 months?

David, I think the best interpretation is demonstrated intention to grow the business.

Obviously the the long run one looks to replace older ships as well with younger and more modern ships, but I don't think we would be prepared to put any time limited on any of those because I think the conclusion we're growing the business would be appropriate.

And lastly getting back to Azamara a moment, two vessels no matter how boutiquish they are does not a fleet make for the most part.

What is the realistic expectations to how large a fleet Azamara will in fact contain over the next few years?

That's an excellent question, David.

At this time we're focused entirely on building the brand and getting it off the ground very successfully.

As you heard Richard say earlier, the price of ships is very high right now, and driven by the Euro, it is also driven by the subcontractors, so at this point where there is no plans to, immediate plan to say add ships to Azamara, but it is something that obviously we'll be evaluating as we go.

At this time we don't have any plan to say add ships.

Our entire focus is getting this boutique brand as you describe it correctly off the ground successfully.

Just your answer sort of begs a question.

Is there any reason why you can't look to Asia to build these these vessels given they're much smaller sized than what normally pass for cruise ships today?

No reason at all that we couldn't look to Asia to build the Azamara brand, actually for capacity for any of our brands.

I think it is important to say that if we did look to Asia at this point given the supply and demand situation in the Asain ship yards it would probably be 2012, 2013 at the earliest before we would see a ship come out of one of those yards.

Thank you very much.

You're welcome.

Your next question is from the line [Dane Jimesges] of J.P.

Morgan (Inaudible) Your next question is from the line of Bob Simonson with William Blair.

Good morning.

First question for Brian.

Hi Bob, a little confusion.

Brian, what's the earnings impact if you can disclose it of hedges in the first half of the year?

Bob, I am not sure I have that number in front of me.

If you wouldn't mind giving Greg a call, after, I think he can get that for you by the time he gets back to his desk.

Sure.

Richard, it looks like the capacity grows in an 8 to 9% rate over the next four years.

If we even went out five where you haven't disclosed it, if it is about 18%, how do you think about growing the Caribbean part of it and whatever that that rate is, do you try to match it to what you think the underlying growth and demand is for Caribbean Cruises?

Bob, as you well know, you don't get to ship deliveries in small percentage increments.

As you know, the ships are large, and delivery time fits in with the yard schedule more than anything else, and it can make a big difference to any one year's percentage increase of the ship delivered in the spring time or the fall and that very much depends on the physical plant, and that sort of thing.

So I wasn't trying to -- I was trying to be quite vague because I actually don't know what the numbers would be in any given year, just the general thrust in terms of percentage increases.

In terms of the Caribbean versus other markets, we might well build a ship using in the Caribbean would free up another ship for another market.

And you've seen that within if I just take the example of Royal Caribbean international, you've seen we brought in a ships into larger ships into the Caribbean market and taken up slightly smaller ones into the European market.

More recently we had one of the freedom class ships we announced the independence which next year will be our largest ship, and it is going into the British market right away, but so I think there is opportunities even if the new ship like Genesis, for example, goes into the Caribbean, opportunities to put more ships, other ships into other markets whether that is Europe, Asia or what have you.

I think we look at -- we're looking at a more global deployment options, and I think that's the way we will approach any new buildings.

Can I rephrase it and ask you over the next five years how fast you think Caribbean demand will grow and would you grow as fast or faster than that?

In a perfect world?

Well, unfortunately I don't know a perfect world.

We don't make predictions for a perfect world because we're not in one.

I think one of the things that's nice about the cruise business is we have a demonstrated ability to shift capacity around.

I think that's one of the great strengths of this, and is it does change over time.

Two years ago we were bemoaning that we didn't have more ships in the Caribbean cruise market.

Now the side of the market that's doing better is the longer market and the outside the Caribbean, so I think I would be reluctant to make predictions of three, five years out about market that moves as quickly as that except to say that we have the advantage, and it is a very powerful advantage of being able to shift this capacity and you've seen the flexibilities of these ships to be able to go to different marketplaces.

I think that's one of the pleasant surprises that we've seen over the last three to four years.

Thank you.

Your next question comes from the line of Ken Conder with AG Edwards.

Thank you.

Tim Conder here.

On Pullmantur, Brian, just a clarification.

Looks like your costs overall including Pullmantur were up a little bit as well as your overall yield guidance including Pullmantur.

The incremental cost for the year, is that solely due to what we saw there as you alluded to the tour hiccup in the second quarter or is there something else in the back half of the year?

Tim, I would say there are three factors.

There is the forecasting era we had in the terms of gross up of the commission We had a little extra costs we had to absorb from Millennium and we also have some of the timing of the marketing spend I alluded to that shifted out of Q2.

I think the vast majority of what you're seeing really relates to the forecasting difference.

Okay.

Relating to Celebrity, you commented in the past multiple calls that you continued to see a nice trajectory of improvement in yields and everything else and overall performance metrics and ex the cancelation of the Millennium Cruises here, how is that trending this year and finally a question for Richard.

Relative to Azamara, Richard, if you would consider acquisitions, what would be your leaning?

Would you go more upscale to Azamara or down scale to the RCI?

Why don't I answer the second question and Dan will address the first.

On the second question, I think we would look at this opportunistically.

There are not a lot of acquisition candidates out there I should make it clear, but I think we are diversified, and we have the advantage of that, and we would look at the return that any particular investment would give, whether it was upscale or more main stream.

I think that would be purely an opportunistic question.

On Celebrity, I will ask Dan to comment.

Tim, we continue to head in the right direction both on the revenue side and the the cost side.

Obviously Millennium was a huge headache for us and very frustrating but notwithstanding Millennium, we were definitely headed in the trajectory that we had set out a couple years ago and are on track to continue to improve.

Okay.

Thank you.

Your next question comes from the line of [Dominique Milely of Canyon capital].

Good morning.

Sorry to go back to something you talked about earlier, but my question is we're back to an environment where oil is very high and probably weighs on the consumer's wallet.

The housing crisis is in full swing, and having a difficult time understanding why it is that you're observing a better pricing environment and better booking environment?

Just as an overall question, one of the interesting things about our revenue management system is its decidedly objective.

It doesn't have to make conclusions about the impact of housing, fuel, the mortgage foreclosures, doesn't have to make those qualitative judgments.

This is what we're seeing.

We are getting the bookings.

I am not validating that you're seeing that.

My question is more for qualitative assessment from you as to what you think is causing this?

Do you think you're a leading indicator of consumer weakness and that the consumers adapted to the new cost structure or is there anything else you can think about?

I think we've tried to put our finger on it don't know that we have all the answers either, but I do think that we're various specific factors that affected us starting at the end of last year.

One of the things we've often said about the cruise industry is that it is a session resistant, recession proof, nobody is, but we think we are more insulated from that because of the value proposition.

Cruising turns out to be a good value.

If you buy a cruise, it is in fact cheaper than other vacations that give you equivalent experience and satisfaction.

And what happens in a recession, or what happens when people are worried about their pocket books, whether it be fuel or housing prices or what have you, is that people tend to be more careful, they tend to do more research.

They tend to make stronger comparisons, and the also tend to put a higher premium on vacations with a know fixed cost.

In closing its all of things, more people look at their vacation, the better off we look.

So I think all of those things come together and help explain why we are recovering as quickly as we are.

And I say I think the real issue was (inaudible) maybe earlier than some other segment of the market and I think that, would really tend to focus us as, earlier as being an anomaly, rather than the recovery being the anomaly.

Thank you.

There are no further questions at this time.

Ok, great.

Ladies and gentleman that will conclude our call for today than, and I would like to thank you for joining us, and I will remind you that Greg Johnson will be available throughout the day if you have any follow up questions.

Ladies and gentleman this concludes today's conference.

You may now disconnect.