皇家加勒比遊輪 (RCL) 2007 Q3 法說會逐字稿

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

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

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

After the speakers' remarks there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) Thank you.

I'll now turn the call over to Mr.

Brian Rice.

Sir, you may begin your conference.

Thank you, LouAnn and good morning, everyone.

I'd like to thank you for joining us this morning for our third quarter earnings 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.

We have posted slides on our investor website, www.RCLinvestor.com, which we will be using during this 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 on the 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, in disclosures and our SEC filings.

Additionally, we will be discussing certain financial measures which are nonGAAP defined by regulation G, and the 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 most recent forward guidance.

Adam and Dan will then discuss their brands and 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 the second slide, revenues for the third quarter of 2007 increased $2 billion from $1.6 billion in 2006.

Net income for the second quarter increased to $395 million, or $1.84 per share compared to our previous guidance of $1.75 to $1.80 per share.

For the third quarter of 2006 we reported net income of $345.4 million, or $1.63 per share.

Now, I would like to go through the comparable results, that is excluding Pullmantur.

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

We had a good quarter with yields coming in much better than anticipated.

Cruise costs coming in essentially flat compared to the same time last year and net cruise cost excluding fuel increasing 1%.

On page three, you can see that our guidance on a comparable basis was for yields to be around flat, and we generated an increase of 1.6%.

For the quarter, we achieved the highest revenue yields in our history and we saw broad based improvement across the board in both [predict] and onboard spending.

Our close in business booked at significantly better rates than we experienced last year and much stronger than we had anticipated.

You may remember during our second quarter call we shared a slide that illustrated an encouraging trend of improved pricing for bookings made within 90 days of sale date.

This pattern actually improved further in the third quarter and our pricing leverage increased more with each month during the quarter.

Now, going back to slide three, you will see our cost performance was fairly consistent with our expectations.

Net cruise costs per APCD on a comparable basis were up .1% and excluding fuel, net cruise costs were up 1%.

Fuel costs on an APCD basis decreased 1.9% versus the same time last year and also came in 1.1% lower than our guidance.

On slide four, you will see our fuel costs were $21.49 per APCD in the third quarter of 2006.

This year, higher average fuel prices added 7.1% or $1.53 per APCD.

We were able to more than offset this increase through consumption efficiencies, which saved us $1.20 per APCD, and hedging, which saved us $0.73 per APCD.

As I mentioned previously, our fuel costs per APCD actually were 1.9% lower for the quarter than last year.

Our marine operations team has truly done an outstanding job in finding ways to lower our fuel consumption.

On our last two earnings calls, Richard has talked about our cost management initiatives, and I believe the last three quarters have demonstrated our commitment to controlling costs.

On a comparable basis, our net cruise costs per APCD for the first nine months have decreased 1%.

And excluding bunker, our net cruise costs per AC -- APCD are flat.

Importantly, though, we have been able to achieve this without compromising our strategic investments or risking our product delivery.

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

If you turn back to slide three, you will see our all in net yields increase 4.1% and net cruise costs increase 6.7%.

Excluding fuel, net cruise costs increased 8.6%.

Pullmantur's business did very well in the quarter which, due to the two-month lag in reporting was comprised of May, June and July.

Yield performance for Pullmantur was very strong and similar to our other brands exceeded our expectations.

Costs were somewhat higher than forecast, but this was largely due to timing differences.

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

On slide five, you will see our guidance for the fourth quarter.

Our current forecast is for earnings per share to be in the range of $0.32 to $0.37, which compares favorably to the $0.22 we reported for last year's fourth quarter.

And as we stated previously, we do expect Pullmantur to be accretive in the fourth quarter.

Now, let me share some of the key metrics that we are forecasting for the fourth quarter.

On a comparable basis, we will have an increase in capacity of 4.7%, and we expect yields to be up around 2%.

Based on the current at the pump price for fuel, net cruise costs are expected to be up around 2%, and excluding fuel, net cruise costs should also be up around 2%.

Including Pullmantur, capacity will be up 13.6% and yields are forecasted to be up around 9%.

Based upon current fuel prices, net cruise costs will be up 8% to 9% and excluding fuel, net cruise costs will be up around 10%.

If fuel prices for the rest of the quarter remain at current levels, our fuel costs for the quarter would be $137 million or $440 per metric ton.

This takes into account the fact that we are 42% hedged at this point for the fourth quarter.

In terms of sensitivity, a 10% change in our fuel price either way equates to about an $8 million impact to the quarter.

On slide six, we have provided our guidance for the full year.

On a comparable basis, capacity will be up 4.8% and yields will be about flat compared to 2006.

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

Including Pullmantur, capacity will increase 12.4% and net yields are expected to be up around 3%.

At the current price of fuel, net cruise costs are forecasted to be up 5% to 6% and net cruise costs excluding fuel should be up 7% to 8%.

Our earnings per share are estimated to be between $2.80 and $2.85.

This puts us on the higher end of our previous guidance, despite today's higher fuel prices.

Before we talk about advanced bookings, I'd like to put the softness we felt earlier in the year into perspective.

As you can see on slide seven, the yield deterioration that we experienced in the first quarter into a much lesser extent in the second quarter, really was an aberration in what has otherwise been a healthy pricing environment for our brand.

We believe our product is still too good of a value and we deserve to be paid more, but we also believe concerns about overcapacity and fatigue in the Caribbean have been overblown and our advanced bookings provide evidence of our brands ability to perform even during questionable economic periods.

On slide eight we have provided the status of our current order book, including Pullmantur for the fourth quarter and the first two quarters of 2008.

In all three-quarters, both load factors and APDs are running ahead of where they were at the same time last year.

The first quarter, in particular, is shaping up nicely.

Admittedly, the first quarter will provide us with our easiest comparables from a revenue perspective, but based on our position today, we are confident the first quarter yields will meet or exceed the yields we achieved in the first quarter of 2006.

Put another way, we are looking for yield improvement in the first quarter of mid single digits.

It is still too early to project the full year of 2008 as our visibility beyond the first quarter is somewhat limited, but from what we are seeing, we are optimistic that we will see positive yield performance for the full year.

On slide nine, 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, which is unchanged from the last quarter.

On slide 10, you will see our projected capacity increases for the same five years are estimated to be 12.4%, 6.4%, 9.3%, 11.4%, and 6.4% respectively.

You will notice our 2008 projected capacity increase is lower than we provided on the last call.

Much of the decrease is driven by changes in Pullmantur's deployment.

With the addition of the Pacific Star and Sovereign of the Seas next year to Pullmantur, we have decide not to renew two charters that we have this year.

We will also have some dry dock time for Sovereign prior to her transfer to Pullmantur and Bleu de France, the ship for our new French brand.

We have also made decisions to run dead head repositionings without guests between a number of Pullmantur cruises to improve profitability even though it reduces capacity.

Lastly, liquidity at September 30th was $1.6 billion, comprised of $400 million in cash and equivalents, and $1.2 billion available on our revolver.

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

Thank you, Brian, good morning, everyone.

We are pleased with the third quarter results and the positive tone of our current business.

We're also pleased that Royal Caribbean International continues to receive widespread recognition on a global basis as the world's foremost cruise line.

We've noted in previous calls our ongoing geographical expansion of itineraries and customer sourcing.

This winter, several of our vision class ships will sail on new itineraries that reflect this expansion.

These include: Spender of the Seas in South America, Rhapsody Of The Seas in Australia and Asia, and Legend of the Seas in the Dominican Republic.

While we do not provide revenue guidance on a ship-by-ship basis, I'm pleased to note we're confident these three ships will collectively achieve positive year-over-year net revenue yields for their winter seasons.

Meanwhile, Liberty of the Seas has settled in beautifully along side Freedom of the Seas, offering seven-night cruise from Miami.

These two ships are preeminent in the industry and are delivering the highest level of guest satisfaction in the Royal Caribbean International fleet.

Our third freedom class ship, Independence of the Seas is scheduled for delivery in April 2008.

We recently announced Sovereign of the Seas will leave the Royal Caribbean International fleet in November 2008 and join the Pullmantur fleet.

Monarch of the Seas will leave her current itineraries out of Los Angeles and assume Sovereign's itineraries out of Port Canaveral one week after Sovereign departs.

While Sovereign still has one year of valuable left in our fleet, given that her introduction was to the late 1980s, what Voyager of the Seas introduction was to the late 1990s, we regard this announcement as a milestone in our evolution as the brand and a prize for our colleagues at Pullmantur.

Dan.

Thank you, Adam, and good morning, everyone.

As you have heard from the rest of the team we are very pleased with our third quarter results.

Celebrity had a solid book of business in Europe and Alaska going into the third quarter and we were very pleased with the quality of the close in bookings for both markets.

We are equally pleased with where we are booked for the fourth quarter.

Brian mentioned we are very focused on cost containment.

I'm pleased to report that we have completed the diesel installation on two ships, Millennium and Constellation and they are fully commissioned.

We are in the process of finishing the installation on Jewel of the Seas and will complete all eight gas turbine ships in the Celebrity Cruises and Royal Caribbean International fleets by the end of 2008.

In both cases the diesel engines are carrying the full hotel load and are being use to offset the gas turbine uses for propulsion.

They're diesel engines are more energy efficient, burning less fuel and at today's fuel rates the savings will be approximately $7 million per ship for a year, versus what our fuel expenses would have been if we had not made the change with the diesels.

I'm also pleased to report the we have finished the revitalization of the second Azamara ship.

We will be hosting travel agents and press on a two flight familiarization cruise on Azamara Quest beginning tonight.

She then goes into full revenue service this Wednesday and will be doing exotic Caribbean cruises through the winter before repositioning to Europe next spring.

We remain excited about this new brand and the potential it has.

Finally, we launched a new marketing campaign with the tag line "Starring You." Although it is early in the campaign, the feedback from the travel trade community has been very positive.

Our focus on a differentiated marketing position for Celebrity is working and we are seeing it in the revenue results.

Richard?

Thank you, Dan.

And thanks to all of you for joining us on this call.

I have just a few things to say before we open it up to the questions.

And, first, I'd like to commend the management team and, in fact, all our staff for these record financial results.

I'm very proud of their achievements, both in building a portfolio of industry leading brands and for their commitment to our improving financial performance.

Particularly important aspect of this success is our continuing focus, cost management, and efficiencies.

Brian mentioned, in fact, so did Adam and Dan, the progress we've made in fuel consumption, but fuel is by no means the only area we're focused on.

This really is an enterprise-wide effort involving all of our operating units, both shore side and ship board.

We've made progress here and we'll continue to push forward on this.

Now, shifting gears a bit, I'd like to address the potential impact of the credit crunch that's going on in the country today on our company, and the implications for financing our $7 billion new order in this choppy financial environment.

Fortunately, as we have disclosed on previous occasions all of our ships on order have guaranteed financing in place.

That's always been our practice and it gives us the comfort of knowing we're not dependent on market conditions that happen to be in place at the time of delivery.

These financings are unsecured, and generally they're on terms comparable to what we've done historically.

So, if the markets are turbulent at the time of delivery, we simply use the financing guarantees.

If the markets are more favorable, we will look on an opportunistic basis to see if we can do even better.

Now, moving on, you know we're very excited about our new French brand, CDF Croisieres de France.

This new venture builds very nicely on our commitment to continued European expansion.

The newly named vessel, Bleu de France, completely renovated and customized for the French market, will begin sailing next spring.

In fact, all aspects of this brand will be tailored exclusively for French tastes: cuisine, entertainment, language, decor, etc., all will be exclusively French.

We anticipate strong demand for this product and we have assembled a very talented team that's leading the effort.

Finally, this afternoon, Dan and I will be boarding the Azamara Quest for her first inaugural cruise.

Dan already pointed out the new brand is off to a terrific start and adding this wonderful new ship is an important step forward.

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

I want to make sure that we get to as many people as possible, we'd like to ask you to limit yourself to no more than two questions at a time.

Operator?

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Michael Savner with Banc of America Securities.

Hi, good morning.

Thanks.

Two questions.

And, first, can you give us a little bit of color of what you're seeing in bookings related to the weakening U.S.

dollar both from the perspective of how you might be able to be -- take share from land-based vacations from Americans traveling abroad and conversely has it helped your ability to draw Europeans here to the Caribbean?

And when I say the improvement, I mean, is it something that's material or really incidental?

And then I have a follow-up, thanks.

Hi, Michael, this is Adam.

I would say at this point we've realized a double benefit along the lines that your question suggest, for the American segment, they see the ability to take cruises, particularly in Europe, and especially late in this year, as the value-driven way to continue to satisfy their appetite to experience Europe.

And that's been favorable to the cruise sector in general, I believe.

We've also seen considerable late booking strength from the European point of sale, which is of course an area that's strategically we have raised our investment in a variety of ways lately.

And in the current weeks and months we've definitely seen the benefit of what cruise pricing that's -- is -- they may experience it in their currency, but given that it's computed over from dollars originally, it's a very attractive message for them.

So we're definitely benefiting both ways.

Thanks, Adam.

And then to follow up on your comment, and I know Brian mentioned it as well, you talked about improving trends for close in pricing actually was getting better, not just year-over-year, but you were seeing sequential improvement as the quarters -- as the months went on in the third quarter.

Can you comment a little bit about what you're seeing even more recently, and whether there's been any slowdown in that improvement related to the tickup in oil or the kind of settling in of consumer sentiment?

Michael, it's Brian.

As we've talked about, we haven't really seen too tight of a correlation, our consumer demand, and what's been happening in the broader market in terms of fuel or the sub prime mortgage.

There just -- there seems to be very strong resilience right now with our customer segments.

Throughout the third quarter we saw progressive improvement.

September, the year-over-year pricing for the close in bookings were very strong.

It's something where we're struggling, quite frankly, to find a true pattern to, but it has been very healthy, really for the last five or six months.

Any data on October that you can share yet?

It's a bit early for that right now.

We have been pleased with our bookings over the last several weeks, but I think it's a little too early to really be able to pronounce what will happen in the fourth quarter.

Fortunately, our pricing structure is very adaptable as we see changes in demand patterns and we believe that we're doing a lot to be able to leverage the close in demand that we've seen.

Fair enough.Thank you very much.

Your next question comes from Robin Farley with UBS.

Thanks, I have a few questions.

It looks like Mexico is pretty close to implementing a head tax, I guess following what Alaska did.

Can you talk about that, and also do you see risk of this elsewhere if Mexico does it, will other places [are going to do it in terms of what sense you have in terms of that]?

My second question is on fuel consumption, so I'll wait until after.

Hi, Robin, this is Adam, on your question about Mexico, first of all the decision by the Mexicans as to what to do is hanging in the balance, I believe it's in between their chamber of deputies and their senate.

So there still is an effort to minimize either the passage of that tax or how much it is or when it applies.

That's literally going on at the moment.

We believe that there's a lot of support for our position in Mexico that this is an industry that has brought enormous benefits to that country, and that the best way to continue to have those benefits flow to the country is through more cruise calls by more cruise ships bringing more guests to spend more money there, as opposed to raising revenue through taxes at any level of government.

And that is the message that we're conveying in every which way that we can, not only within Mexico, but around the world actually.

This is a growing industry, and we think this industry can bring enormous benefits to many countries around the world, but it should come in the form of consumer and cruise spending rather than in the form of taxation.

Do you expect it will signed by the president if it passes?

It's very hard to tell.

We are not experts in Mexican politics or government.

It's part of a bigger package as well as being a debate on its own terms and we just have to see what occurs.

And then in terms of other countries.

Well, as I say, the message that we're trying to deliver to many countries around the world is that this industry can best benefit their country if they allow the growth to occur and the spending to follow, as opposed to looking at ships calling on their country as a taxation revenue raising opportunity.

Thanks.

And then in terms of tell you consumption, this is like a bigger difference reduction in consumption per unit than what you've done in previous years.

And I wonder if you could give a little color, is it itinerary changes that have allowed for lower consumption?

The diesel engines are relatively new, it seems like it's got to be more than the diesel engines driving the consumption reduction.

Robin, this is Dan.

It's a function of a number of different things.

We're seeing very, very positive consumption numbers because of the diesel engines.

They just burn less fuel.

And, in fact, we're doing better with those diesel engines than we thought they were -- than we thought we would.

We have also taken steps across the board with all ships in both fleets to reduce consumption.

So more of our ships have the new sigma glide paint on the bottom, so that's a more efficient -- that creates more efficiency for fuel, more of our ships have the 3M window veneers on, so that's helping us with fuel.

The hotel group now is very, very focused on fuel and is helping us quite a bit.

And we're very, very careful with itineraries.

So I don't think you can point no any single thing, it's really across the board and it's a real focus across the company.

It's not just the marine department that focuses on it, it's hotel on the ship and everybody here in Miami who wakes up and thinks about fuel in the morning as well.

Okay, great.

Thank you.

Your next question comes from Hakan Ipecki with Merrill Lynch.

Thank you.

Going back to the fuel, looking into next year, what are you expecting to use and kind of looking at the some of the items that you've spoken, the mixed shift, hedges, what's driving the biggest benefit there?

Well, next year, the biggest benefit is going to be, again, it's across the board, but the diesel engines are going to provide a big benefit for us next year because they just burn less fuel.

So we'll get a bigger benefit.

And by the end of next year we will have the diesel engines installed on all eight.

The pleasant surprise we have on the diesel engines is that when we first put them in, we thought they would run just the hotel load, but we've -- in fact, found that at lower speeds we don't even have to turn the gas turbine engines on, and so the diesel engines are not only running the full hotel load, but they're moving the ship through the water and burning less fuel at the same time.

So there's a real nice benefit to that.

And then we continue all the other things that I just mentioned when I answered Robin's question, that they just continue to come into effect.

We have a fuel team that meets weekly, a steering team that meets weekly, and when I look at that list, there's dozens and dozens of ideas that remain on that list that we're still betting and looking to put into service next year.

So there's a lot of good things going on.

And I think what you have seen there is also itineraries.

We're just being very careful with our deployment as well.

So it's that whole mixture that's driving this horse.

And does that decrease chance of a fuel surcharge, even though oil is around $90 per barrel, does that change how you think about a surcharge or a chance of it being implemented?

I think, we -- this is Richard speaking and I think the -- we've said in prior calls, that's good we tend to look at, but clearly we have been remarkably successful across the board in cutting costs, keeping the costs, I think if you actually look in the '08 based on even today's fuel price, not only be comparable to '07 but actually lower than '06.

And given what's happened to fuel costs that's remarkable.

So, yes, clearly that maybe makes less likely a fuel surcharge.

We keep looking at it and have to just say it's been -- everybody's looking at exactly what is it done.

It's a 1,000 things.

(inaudible)

Okay, great.

Thank you very much.

Your next question comes from Assia Georgieva with Infinity Research.

Good morning, congratulations on a great quarter.

I have a couple of questions, they relate to your expansion into European markets.

First of all, maybe Brian you can help me with this, can you give us the percentage of revenues in Q3, which were generated in nondollar currencies?

And my second question is a larger one, I guess.

Now that you have successfully addressed the Spanish and French markets on a national basis, do you expect to add maybe one brand or two brands a year for specific markets such as Germany or further emphasis on the U.K.?

We -- Assia , we don't break out our revenues by quarter geographically or in currency.

I can tell you that about 83% of our revenues this year will be generated out of the North American marketplace.

I think it's fair to assume that a much higher proportion of that would occur in the third quarter.

But we don't break out that level of detail on a

And with respect to your second question, I don't think we have a specific plan that it's X number of nationalities, nationalistic products that we would roll out on an annual basis.

I think we do this very much on an opportunistic basis.

Does a new market offer an opportunity to generate a high return on invested capital.

We look at those as individual decisions, and continue to look at them opportunistically.

Would you consider some of the larger European countries as suitable for further expansion and maybe Germany, an example?

I think we look at all the places.

There are more countries in Europe that have potential opportunities, there's also seeing that we made (inaudible) into the Pacific arena and Asia, so I think there are plenty of opportunities out there, and we just have to keep looking at them and see whether, given what's happening in those markets, they're likely to generate the kinds of returns that we're --

Okay, great.

Thank you so much, Richard.

Your next question comes from Steve Kent with Goldman Sachs.

Hi, good morning.

Could you just give us a little more detail on Pullmantur and how it's going?

You're now a few more months into ownership, and whether you feel that the upside might be greater?

And I guess I'm very interested in the earlier comments about maybe dead-heading a couple of the ships, moving things in and out of the market, and whether that's to enhance revenues or to reduce expenses.

I didn't quite understand the motivation for all of that.

Steve, yes, I think we're very excited about Pullmantur and beyond just the verbal comments we've made.

The fact that we've taken one of our very finest ships, Sovereign of the Seas, and moving it into Pullmantur, on top of the two ships that we're in, it's probably the most tangible demonstration, and I think you will see more of that as we continue that brand, because we are very optimistic about it.

I think Brian's comment on the dead-heading is mainly to really explain some of the changes in numbers.

That's something we do with all of our brands, sort of looking at the itineraries.

Is it a more better return for us to do a repositioning voyage, which maybe gets a lower per diem, but gets some revenue to offset the costs, or is it better to bite the bullet and have a shorter period where we get no revenue but quickly get to higher revenue destination?

And frankly, those are sort of marginal-type decisions, not fundamental.

Although, there were enough of those kind of things, Pullmantur and elsewhere, that they impacted sort of the incremental change in the number of APCDs.

So I think in answer to your question, that's not any indication of any change in strategy, Pullmantur's always made those kind of decisions on a [on/off] basis, it's just that this particular comparison, it caused some anomalies in numbers.

And so does this mean that it's -- this acquisition is now more accretive than when you started this process a while ago?

No, we said this year that we thought it would be flat, and frankly it's still small, vis-a-vis the overall Royal Caribbean.

I think we think it has more strategic possibility, but I don't think it has changed the short-term number --

Okay, thank you.

Thanks.

Your next question comes from Bob Simonson with William Blair.

Good morning.

Looking at the capacity, page 10, might you, I think there's enough time, might you add another ship for the out period of 2011?

And Richard, do you have in your mind or does the board have in their mind a sustainable growth rate for capacity on a longer term basis?

Let me answer the first -- the first question is yes, of course, there is a possibility that more capacity could be added in 2011.

In fact, if you look at ship delivery schedules, probably, even if you order today, it wouldn't have that big an impact on 2011.

Likely to impact 2012, but could impact a CapEx schedule in 2011, so if you get something late in the year, capacity increase of domestic growth wouldn't affect anything until the following year 2012.

In terms of growth, I don't think we have said that we think there is a particular figure for any one year, and I don't think we can say that today.

I think what we do look at is what are the markets we serve and is there an opportunity to buy in something new, add capacity, at a price and on terms that give you a good return.

I just find it ironic that here we are looking at a fleet that's much larger than anything we've had in the past and we still don't have enough ships to satisfy all the itineraries that we'd like to serve.

And to some extent that comes back to the earlier question about, what about other markets out here.

There are so many new markets that are opening up, and that offers opportunity.

But the other thing I would comment on is, we are now seeing a lower growth rate than we saw perhaps five years ago when most of us were concentrating on creating a critical mass of scale.

Be we think we have that today, so there isn't the same pressure in getting the higher growth rate that there might have been five years ago.

Second question, Brian, do you have a number that you can share as to what percent of your capacity was sourced from the U.S.

in '06, what it might be this year, and what it might be next year?

I don't have the numbers right in front of me, Bob.

I can tell you 83% is North American this year, and we would look for that number to continue to come down.

Our Europe growth is growing quite nicely, and next year with Independence of the Seas debuting out of South Hampton and we'll have two voyager class ships in Europe as well, I think you'll continue to see growth in Europe and also Latin America.

We have exciting new itineraries target toward Latin American that will help that market grow as well and continue to improve our diversification in sourcing.

If you want to follow up with Greg this afternoon, I think we can get you the statistics you're looking for.

Very good, thanks.

Your next question comes from Tim Conder with Wachovia

Thank you.

Just a -- two here.

'08, Brian, where are you percentage hedged at this point, if you would so much as embellish at what levels?

And then second question is, given the performance thank you and the industry are seeing here in what's typically a weaker booking period for the industry on a seasonal basis, is there -- are you slowing down maybe a little bit, maybe trying to take a little bit more price now, or are you running the risk of selling out too fast, I guess, is the end question there?

It's a great question to have to answer.

My things -- how things have changed in the last six months.

In 2008, right now, I think we disclosed this in our press release, we're about 38% hedged.

I don't have the average hedge rate in there, although we did say, even though we've seen a real big run-up in fuel prices in the last couple of months, our fuel savings initiatives and our hedge position in '08 right now with prices remain the same, we think we could almost mitigate all those price increases that we've seen thus far.

Okay.

Okay.

In terms of our pricing strategy, it really -- it's not as macro an answer as I think you're looking for.

We're looking at seasons, we're looking at products, we're looking at the demand dynamics.

When it comes to peak season itineraries and ships that you have a conviction are a star, you're probably more apt to try to go for the pricing leverage earlier on in the life cycle.

I think this year has been a year that both ourselves and our competitors have benefited from a strong order book which has given us that pricing leverage close in.

But I don't think that's always the magical formula.

It really is based on the environment that we're seeing and the product that we're trying to revenue-manage.

So right now, I think the long and short of it is, we're very happy with where we are and I think we're making the right pricing decisions to really optimize our performance in the current environment.

And along that line, since 9/11, using that as a reference point, would you say that that, given what you just described, that you're booking window is maybe at its longest point?

Overall, I think probably -- my speculation is probably more like '04 we might have been a little bit more booked, but we're certainly in a much better fill percentage today for '08 than we were for '07, and I think probably about on par to slightly better than we were in '06.

Okay.

It really, I believe, a lot of it is being driven more by us and our itinerary mix and our source markets than it is in any changes we're seeing in the consumer behavior.

Okay.

So at this point, again, absent what you described with some of the maybe more seasonal markets here, you don't feel you're quite at that point where you're really trying to ratchet up price to maybe slow down the sell rate?

In some products we are and in some quarters.

If you look at the slide that we -- I think that is page eight that we showed our current order book, you can see our pricing tends to somewhat correlate with the order book.

So for example, in Q1 right now where we have real nice loads we're getting higher revenue premiums than we would be over, say Q2, for example.

Where it's still too early, we're not going to go out and get real aggressive on price yet and so we're seeing a real conviction about that in demand environment.

Okay, great.

Thank you.

Your next question comes from Dean Gianoukus with JPMorgan.

Hi.

I'm all set, thanks.

Your next question is a follow-up from Michael Savner with Banc of America Securities.

Hi, thanks for the quick follow-up.

Brian, there's been some talk over the last few months about potentially revisiting the accounting treatment of the useful life for your ships and maybe the accounting treatment today is not properly reflecting the length of the ships being in service, and whether you're considering maybe extending that useful life which would obviously lower the annual [am rate].

Is that something that from a business sense you're thinking about and is being debated?

Michael, the -- I think the current situation with resales and the value of the ships certainly implies that our accounting treatment of 30 years with the 15% residual value is what I would call conservative.

I think, as with any policy of that nature, we would want to get very comfortable before we would propose any changes to our audit committee and to our auditors.

But I think it's an intriguing question, given what we've seen in terms of the resale values in the market that's out there.

But we have nothing at this point in time that we're definitively going to comment on.

But it's something you're studying?

We look at -- it's something we look at and we're somewhat intrigued by, but we want to have ample time to really review it.

We don't want to be making quarter-to-quarter accounting changes, but if there's something that we believe is significant and strategic and a pattern that is very consistent, I think we would want to discuss it with our audit committee and our accountants.

Thanks, Brian.

Your next question comes from Joe Hovorka with Raymond James.

Hi, thanks guys.

A couple things.

One, on your 10K for '06 discloses 18% nonU.S.

revenue, and so I would assume that your '07 number is down from '06, or is --

Actually, Joe, you may have a better data point than I do.

I thought we were about 17%, it could be 18%.

It should be moving in '07 slightly more skewed towards European.

We have seen more European growth.

Actually, I believe the 18% -- no, we're probably closer to 19% this year, would be my estimate for '07, and we should continue to see that increase in '08.

Okay.

And then the -- could you give the quarterly capacity numbers for '08?

And maybe just cost for those diesel engines?

And that's it.

Okay.

If you could follow up with Greg on the quarterly numbers for '08.

Sure.

And we haven't gotten real specific about the diesel engines, but we've given direction in the $16 million to $18 million range per ship.

Great.

Thank you.

Your next question comes from Felicia Hendrix with Lehman Brothers.

Hi guys.

Just a follow-up on fuel.

In response to another question earlier, you had said if prices remain the same you could mitigate out of price increases where you given -- where you're hedged now.

But if we were to assume the rising fuel environment persists throughout the next year, I'm wondering if there's a way or if there's some kind of parameter that you could give us as to what the cost would be of increasing your hedges?

Felicia, we'd look at the cost of the forward curve continuously to try to make the best decisions, but we've had a very consistent pattern where we like to be hedged between 40% and 60%.

We really don't want to be fuel speculators, we're trying to manage the expense.

And the bar that we're comfortable with really is being about 50% hedged.

I can tell you that a 10% change in fuel price for '08, given our current position, would equal about $35 million in terms of sensitivity.

Right.

But-- so you're 38% hedged for next year, fuel is going up and you said you like to be between 40% and 60%, so that's just where my question is coming from.

Well, we're still 15 months out from the year.

We tend to be 40% to 60% hedged over a 12-month period.

Okay.

I'd just like to add because you mentioned our fuel hedging being one of the mitigators or the mitigator for '08.

A large portion of our fuel savings also are on the efficiency initiatives.

Dan talked about the diesel engine project.

We have much more fuel-efficient ships with Independence coming in and a full year of Liberty.

Those are all initiatives that are helping our fuel bill quite a bit.

Yes.

And, Felicia, if I could just add, if we went out to hedge it now, we'd increase it to get the 40% to 60%, because the numbers that we had given are based on today's price, and as you well know, the forward curve is at a premium debt, it would increase our costs.

But it would be much less than the 10%, which sort of assumes it instantly, that share, that price went up 10% as opposed to a curve rolling over a year's time.

So if we were to suddenly go into market and hedge it all, it would increase the fuel costs a bit, but probably not that dramatically.

And then let's just say we're in this situation where all of a sudden fuel prices start coming down, how easy is it to unwind the hedges?

We certainly could unwind them.

But at this point -- it's interesting because I think we've had a very consistent, predictable and useful hedging strategy.

If we go back to our first quarter call, there were a lot of questions about why were we hedging.

And again, we're for the trying to speculate, we're trying to manage our costs.

We -- the forward curves are baking in a lot of thinking that's in the marketplace in terms of cost of fuel.

We don't profess to know anything more than those currents would be and we're trying to manage between that 40% and 60% number.

Okay.

And then just switching gears for one moment, did you -- I might have missed this, if I did, I apologize.

Did you say how booked you were for the fourth quarter?

We didn't give a specific number, but we did say that we're booked further along in the fourth quarter of this year than we were for the fourth quarter of last year at significantly higher prices.

We've given yield guidance of around 2% on a comparable basis.

We are -- at the end of October here, we still have inventory available, but we are very healthy booked at this point in time.

Okay.

Great.

Thank you.

Your next question comes from Steve [Cerel] with Conning Asset Management.

Yes, good morning.

You had talked about the credit crunch and how you would handle financing issues there.

Can you talk about signs of stress potentially on your customer base, if you're seeing anything in your booking patterns or cancellations or just other data you might look at?

Actually, we are very pleased with the current demand.

I think throughout the call we've talked about the health of our bookings.

We haven't seen any pronounced cancellations.

Even if we went back to 9/11, the shocks -- the aftershocks of 9/11, we really didn't see any material amount of cancellation.

What we saw at that point in time was a slowdown in new demand.

But we have seen as customers make a commitment to taking a cruise, they really do stick with their plans.

I think our forward guidance, particularly as you look out into the first quarter and the stabilization and the return of healthy demand in the Caribbean, really is indicative that at this point in time our brands seem to be doing very well in this economy.

Great.

And just in terms of infrastructure in the Caribbean, is there any that's still in need of major repair from any of the past hurricanes, or is it pretty much back to snuff?

Hi, Steve, this is Adam.

Overall, the Caribbean clearly has been the beneficiary from what so far has been a second relatively quiet season.

The big impact of course this year has been on Costa Mata and that port will be out of service until next fall.

And we certainly wish them well with their reconstruction efforts which seem to have gotten off to a good start.

The rest of the Caribbean is fully in gear and we are offering a very positive experience throughout all the other ports of call.

Thanks.

LouAnn, I think we have time for one more question, please.

Your final question comes from Tim Conder with Wachovia.

Thank you.

Yes, two follow-ups.

Brian, number one you were alluding to the financing on the ships and that you do have some flexibility.

You got locked into certain financing ability, but if rates would drop, you would be able to go elsewhere.

Are you talking about import-export credit financing?

And if so, how many ships are -- would fall under that umbrella?

And then secondly, along the same line, do you still see at this point your debt-to-cap modestly increasing, given the new build schedule that you have out through '11?

Tim, this is Richard.

On financing, the export/import financing used to be a fairly defined term and fairly specific.

Now different countries have slightly different methodologies.

But it's all financing that was arranged in connection with the ship orders.

And so I guess in that sense it all has [export-type] structure, but it's consistent with exactly what we've done in the past.

Nothing we can do about that.

With respect to the second question, based on where financings are going today and the financial structure and what is it we have -- in fact, our debt-to-capital continues to improve.

So it is going lower, not higher.

Even though we have this large capital program, the cash flows in the company continue to be so strong that we're able to do that and still reduce the debt-to-cap.

So you're saying, Richard, that at this point given the trajectory of business, you're anticipating your debt-to-cap by '10, '11, being lower in absolute terms as a percent, I'm sorry, as it is at the end of '07?

That's correct.

Okay.

Okay.

Well, we'd like to thank you again for joining us this morning.

We appreciate your interest and questions.

Greg will be available throughout the day to answer any follow-up questions you may have, and we wish you all have very good day.

Thank you.

Thank you for participating in today's conference call.

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