皇家加勒比遊輪 (RCL) 2007 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the year end earnings release conference call for Royal Caribbean cruise lines.

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

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

(OPERATOR INSTRUCTIONS).

Thank you.

Mr.

Rice, you may begin your conference.

Thank you, Celeste, and good morning, everyone.

I would like to thank you for joining us this morning for our fourth 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 and (inaudible) Cruises, and Greg Johnson our Associate Vice President of Investor Relations.

As we have done in the past, we have posted slides on our investor website, www.RCL investor.com, which will we be referring to during this call.

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, and 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 non-GAAP, as defined by Regulation G, and a reconciliation of these items can be found on our website.

To start, Richard will comment on the current economic environment, and our operating priorities for 2008.

I will then take you through our financial results, discuss the current booking environment, and provide you with our 2008 forward guidance.

Adam and Dan will then follow with more specific comments about their brands.

Richard?

Thanks, Brian, and good morning, everyone.

As always, I'm pleased to be able to review what's going on in our business, but it's especially pleasurable to do so, when we have good news.

Obviously everyone is focused on the current turmoil in the economy and in the financial markets.

And like everybody else, we have a highly imperfect crystal ball.

But unlike everyone else, we also have a large percentage of forward bookings, which provides us with some additional insight into what's happening and is likely to happen.

Clearly, our results and our forward bookings are much better, than one would assume from reading the general economic news.

Who would have expected that our fourth quarter yields would have risen over 3%.

For that matter, who would have predicted in this economy, that our current booking patterns, portend the fourth largest yield increase, in as long as we've been tracking the statistics.

We've always acknowledged that our business is not immune to recession.

But we believe that our business, while it's not recession-proof, is recession-resistant.

We feel the effects when consumers begin to slow their spending, but we have somewhat of a cushion downside, relating to that.

During turbulent times, consumers focus even more on value.

They focus on getting more vacation for their money.

Even during soft economic cycles, people continue to vacation, but they also demand exceptional value.

Cruising continues to be the best value in the vacation industry, and the fixed-price nature of the purchase becomes even more appealing, during tough times like these.

As a result, we have never seen the type of correlation between our revenues, and the economic cycle, that many people assume would be determinative.

Furthermore, we have another factor that we think helps us.

In addition to being an exceptional value as an industry, quality of our brands serves us remarkably well during difficult times.

Our market position in each of the markets we serve is terrific, and we aim to continue to develop this competitive advantage.

I think this helps explain why our order book is so solid, and that our early indications from wave period have been more positive than many would have speculated.

At the same time, we need to emphasize that our visibility into booking trends is inherently greater in the short-term, than in the longer-term.

Therefore, a continued bad economy is likely to cause greater deviations in the second half this year, than in the first.

I would also like to take a moment to address our shareholder returns, and our strategies for improving those results.

In 2007, we faced a difficult economic environment, and daunting oil prices.

I'm proud of our team's ability to deliver solid results, despite these pressures, and we are determined to deliver stronger returns to our shareholders, while continuing to make the strategic investment necessary to protect our future.

Unfortunately, the high cost of fuel appears likely to remain a permanent part of the landscape for the foreseeable future, and we simply must accommodate.

Improving our returns requires continued improvement in revenue performance, and better control of both operating and capital expenditures.

I'm convinced that we have the best brands in the market today.

Our product delivery, our sales and marketing efforts, and our revenue management capabilities, have provided us with terrific momentum.

Frankly, we're still too good of a value to our guests.

I believe we will continue to drive higher yields with our existing products, and we foresee wonderful performance from our new solstice classes, and genesis class vessels.

In 2007, we did make good progress improving our cost management, and instilling a mindset in our management team, proving shareholder value.

During the last year, we've had to make many difficult decisions, as we carefully balance the need to invest in our future, rigorous cost controls.

Our team has delivered and I was very proud of the way they responded as we developed 2008 plan.

Now I would like to turn the call back over to Brian, to take you through more of the financials.

Brian?

Thank you, Richard.

As we discussed in our press release, and you will see on the second slide, revenues for the fourth quarter of 2007 increased to $1.5 billion from $1.2 billion in 2006.

Net income for the quarter increased to $70.8 million, or $0.33 per share, compared to our previous guidance of $0.32 to $0.37 per share.

For the fourth quarter of 2006, we had reported net income of $46.6 million, or $0.22 per share.

Our earnings per share were within our guidance range.

Unfortunately, a 19% increase in fuel prices, offset the benefits we saw from strong close in demand.

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

We had another good solid quarter, despite the mounting uncertainty our close end business remained remarkably strong, and yields came in much better than anticipated.

Our costs were higher, due to rising fuel prices, and higher than forecasted load factors.

On page three, you can see that our guidance on a comparable basis, was for yields to increase in a range of around 2%, and we actually generated an increase of 3.2%.

As was the case in the third quarter, we had the highest yields in our company's history for the quarter.

Our load factors were one percentage point higher than our expectation, although slightly below last year, due to deployment shifts.

Our pricing leverage was particularly strong with close in bookings.

If you will turn to slide four, you will see our year-over-year change in pricing, for bookings made within 90 days of sailing, for each month of 2007.

There has been a healthy trend of improvements throughout the year, and I think this is a terrific example of the resilience we have seen with our brands, despite pressures on overall consumer spending.

Now, going back to slide three, you will see our costs were higher than guidance.

Net cruise costs for APCD, on a comparable basis were up 5.9%, and excluding fuel, net cruise costs were up 3.4%, somewhat higher than our guidance of an increase around 2%.

This was driven predominantly by higher running costs, related to higher occupancy levels, and some additional investments in our international infrastructure.

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

For the whole company, net yields increased 11%, and net cruise costs increased 13.4%.

Excluding fuel, net cruise costs increased 12.1%.

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

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

As was the case on a comparable basis, costs were somewhat higher than our forecast, mainly due to fuel, but overall the brand performed quite well, consistent with our expectation.

Our fuel costs for the whole company on a per APCD basis, increased 19.2% versus the same time last year, and also came in 18.5% higher than the costs included in our guidance.

Our fuel costs were $20.50 per APCD in the fourth quarter of 2006.

This quarter, higher average fuel prices added $7.65 per APCD.

We were able to offset a portion of this increase, through consumption efficiencies and hedging, which saved us $3.71 per APCD.

Moving on to our guidance for 2008, on slide five, you will see our guidance for the first quarter and full year.

Our current forecast is for earnings per share to be in the range of $0.30 to $0.35, which compares favorably to the $0.04 we reported for last year's first quarter.

For the quarter, we will have an increase in capacity of 8.8%, and we expect yields to be up around 7%.

Based on the current at the pump price for fuel, net cruise costs are expected to be up around 1%, and excluding fuel, net cruise costs should be down between 1% and 2%.

Our guidance for the full year, includes the capacity increase of 5.1%, and yields to be up around 4% compared to 2007.

Based on current fuel prices, we expect net cruise costs to be up around 2%.

If fuel prices remain at current levels, our fuel costs for the first quarter would be approximately $145 million, or $492 per metric ton, and would be approximately $595 million, or $484 per metric ton for the full year.

This takes into account that as of today, we are 52% hedged for the first quarter, and 45% hedged for the full year.

In terms of sensitivity, a 10% change in our fuel price either way, equates to an $8 million impact to the first quarter, and a $35 million impact to the year.

Our fuel swaps are currently benefiting 2008, by about $54 million.

While we are not going to focus on 2009 yet, I think it is important to note, that largely due to our energy savings initiative, at today's fuel prices, our fuel costs for APCD in 2009, would actually be less than 2008.

Going back to our guidance for 2008, for the full year, we expect net cruise costs excluding fuel, to be up between 1% and 2%, and our earnings per share are estimated to be between $3.20 and $3.40.

As Richard discussed, our team is very focused on cost management, although we will continue to make the necessary strategic investments to protect our future.

Our cost guidance builds on our 2007 results, where we saw net cruise costs with and without fuel, grow less than 1% on a comparable basis.

If you are modeling our guidance, I want to point out, that you will need to take adjustments in other income and interest income into account.

For both the quarter and full year, we expect lower interest income than last year.

This results from the repayment of a loan we received, associated with our joint venture with First Choice, lower interest rates in our management to lower cash balances.

We have also assumed foreign exchange rates remain at today's levels.

We do not receive some of the benefits we had in 2007.

The net effect of these two items is in the range of $25 million.

Now I would like to provide you with some insights about our current demand patterns, in the state of our order book.

On our last call, we showed you that both load factors and pricing were up for the first and second quarters.

On slide six, we have grafted where we stand today, versus the time of our last call.

As you would expect, since we generally sail at, or near full capacity, any variance with book load factors, whether positive or negative, tends to contract as we move closer to sail date.

On the top of the slide, you will see that in the first quarter, we had a very strong-- we had very strong load factors three months ago, and this provided us with very good pricing leverage for our remaining inventory.

As a result, on the right-hand side, you will see our position in the first quarter has continued to improve, and is driving our guidance for yield improvement of around 7%.

On the bottom of the slide is the same information for the second quarter.

The story is directionally the same, although comparables to last year for the second quarter are tougher, and the variances are not as large.

Nonetheless, we he continue to see better pricing, than at the same time last year, and all signs point to yield improvement for second quarter.

For the second half of the year, our order book looks strong, with load factors not much different than at the same time last year, and pricing up very nicely.

We continue to receive good volumes and healthy rates for the second half of the year, and we believe we are seeing a slight shortening of the booking window.

We have benefited from this pattern with the strength of close in demand, and will continue to monitor and analyze booking trends closely, for any need to adjust our revenue management approach.

Said another way, I mentioned earlier that in the first quarter, we have benefited from pricing leverage by virtue of having less inventory to sell.

The second half, even though we have good load factors, you could say we have load factor leverage with the strong pricing we have on the books.

At this point, we are comfortable forecasting yield improvement in all four quarters, and as I mentioned previously, our guidance is for yield improvement of about 4% for the year.

Bottom line, as Richard mentioned, we are not immune to the precious on consumer spending, but our business remains solid, and all indications point to another year of record yield.

On slide seven, you can see our projected CapEx based on existing ship orders for '08, '09, 2010, and 2011, is estimated to be $1.9 billion, $2 billion, $2.2 billion, and $1 billion respectively.

On slide eight, you will see our projected capacity increases for the same four years, are estimated to be 5.1%, 9.3%, 11.4%, and 6.4% respectively.

Lastly, our liquidity at December 31, was $1.4 billion comprised of $200 million in cash and equivalents, and $1.2 billion available on our revolver.

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

Thank you, Brian, and good morning, everyone.

We are pleased with the fourth quarter results, particularly the close in bookings strength that Royal Caribbean International experienced throughout the fourth quarter, as well as the overall positive tone of our current business.

As Brian noted, we are only a few weeks into the wave period, so our visibility remains limited for the back half of the year.

It's nevertheless gratifying to note that virtually all of our products in all four quarters of 2008, are in a favorable pricing position, on a year-over-year basis.

Our mission is to generate the required volume at the prices we are currently commanding.

Our third Freedom class ship, Independence of the Seas is scheduled for delivery on April 17, she will operate from South Hampton, U.K.

for the summer season.

The reception of the U.K.

market to her scheduled deployment has been terrific, and all signs point to a successful first season.

The remaining three of our four Radiance class ships, will undergo their diesel engine installations over the next several months.

By June, all four ships will be consuming less fuel, and purchasing fuel less expensively, than they were prior to the installation.

This will be an important milestone in our ongoing efforts to control fuel and other costs.

Finally, a quick update on our internationally sourced products.

We have enjoyed favorable load factors this winter in Australia, Asia, Brazil, and the Dominican Republic.

The three Vision class ships that are delivering these programs, will all enjoy significant year-over-year net ticket revenue increases.

We will look to improve on board revenue and costs, as we gain experience with these programs.

The international acceptance of our brand, and product delivery, bode well for the future of Royal Caribbean International.

Dan?

Thank you, Adam, and good morning, everyone.

As you have heard from Brian, and now Adam, we are pleased with Celebrity's fourth quarter results, as well as with the results for all of 2007.

The momentum we have going into the new year has been corroborated in a couple of very recent and very interesting travel agent surveys.

I serve as the chair of the marketing committee for CLIA, which is Cruise Line Industry Association, and reported the survey results at the annual press conference in New York, two weeks ago.

Over 500 travel agents participated in that survey, which was conducted at the beginning of January of this year.

Among many questions, they were asked for their outlook for 2008.

90% predicted 2008 would be as good, or better than 2007.

In a press release dated January 18, Cruise Holidays, which is the oldest and largest cruise specialty retailer in North America, conducted a travel trend survey amongst their agents, and found that 87% of the agents are optimistic about 2008.

The positive results we are seeing are being reinforced by the distribution system.

2007 was a good year for the Celebrity brand, and 2008 is shaping up to be even stronger.

We will have a full year of our new Azamara brand which is starting to gain real traction in the market.

We our pleased with our position in the deluxe market, and that Azamara is helping our overall financial performance.

We have been previewing our newest ship, Celebrity Solstice, which launches in the fourth quarter, to rave reviews.

The response from the distribution system, and the consumer is very positive.

Solstice, like Azamara will advance the overall financial performance of the brand.

As Richard, Brian, and Adam have mentioned, we remain focused on our cost efforts.

We also complete our diesel installations, which allow us to burn less fuel and purchase at lower costs.

We begin, although for a relatively short time in 2008, to enjoy the economies of scale that celebrity solstice will bring.

In 2009, we will have the full benefit of Celebrity Solstice, and half the year of Celebrity Equinox.

Brian?

Thanks, Dan.

Celeste, we would now like to open the call for questions.

(OPERATOR INSTRUCTIONS).

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

Thanks, good morning.

Two quick questions, if I could.

First, could you comment a little bit, Brian, on onboard spending trends?

Obviously yesterday, Carnival made a little bit of news by mentioning the onboard spending among the higher end brands seem to be slowing a little bit.

Can you comment at all, if you're seeing a similar type trend?

And if the answer is no, can you maybe lead us down the road, to kind of figure out what the leading indicators would be, that if you start to see a little bit of slowdown in the consumer, where would you likely see that first?

Is it onboard spending?

Is it bookings on some of your shorter itinerary?

Hi, Michael.

It's Adam.

I'll take that question.

Our onboard revenue expectations are covered in the guidance that we've just given you.

In the fourth quarter, our onboard revenue performance was slightly higher than what we had expected.

There are too few data points in 2008, really, to see any changes in that trend.

I think to your second question, we would naturally see things more in the ticket revenue, because we're looking forward, whereas on the onboard revenue we can only really relate to sailings that have already occurred.

I would take-- our guidance with respect to ticket revenue is more indicative of what's out there in the future.

Terrific.

Thanks.

Then a second question, I think this one then, is for Brian.

We notice order your balance sheet a pretty big surge in prepaid expenses.

Sequentially year-over-year, and I even think on an historical basis.

Can you just give us some clarity on what's included there, and why that's changed?

Sure, Michael.

Most of that is related to derivative positions that we have.

The way we have to account for that is, it's an increase in both the asset and the liability.

We've-- both our fuel derivatives, and our FX on our new ships, we've had some pretty good performance on, and that's the primary driver that you see on the balance sheet.

Terrific.

Thanks very much.

Your next question comes from the line of Tim Conder, with Wachovia.

Thank you.

Yes, just a couple of questions.

Continuing first on the onboard, you have over the last year or two, started taking advanced bookings for things like shore excursions, and other events.

Anything, Adam, or Dan, or Brian, that you can derive from that, as far as forward-looking on onboard indications?

And then secondly, could you, Brian maybe detail, what the 4 X benefit was overall in the fourth quarter and '07?

Tim, this is Adam.

On your first question, although shore excursions are an important shipboard revenue stream, it's not important enough to be a bell weather, for what's going to happen overall, with shipboard revenue.

It is our intention over time, to add the opportunity to book more of the onboard revenue stream products and services, but we're not there yet.

So I don't think you can glean much from what's happening with shore ex alone.

Okay.

Tim, on the FX, we really haven't broken out the quantification benefits of FX.

I can comment that unlike our primary competitor, where they have brands that are really focused in specific markets, FX is really part of the equations we're making our revenue management decisions, and where we want to source business from.

So as a consequence, it's not as easy for us, other than for the Pullmantur brand, if you will, to really do a comparison year-over-year on the FX changes.

But I think Greg's nodding.

If you want to follow up with him after the call, he might be able to take you through it.

Okay, and then lastly, could you expand a little bit?

Brian, you had mentioned in the fourth quarter there were some additional investments that were made by the company in certain items.

I think most of that, is just shoring up some of our systems with Pullmantur, on the Royal Caribbean brand we've made entry into Asia.

We're setting up offices there.

It's nothing too large, and it's pretty much part of our plan, but I would say it's attributed to timing differences, when the expenditure's actually cut.

Okay, great.

Thank you, gentlemen.

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

Thanks.

A couple quick questions.

One is just going back to the onboard revenues for a moment, I know you said Q4 was slightly higher than you expected.

Can you comment on any change, specifically sort of in the month of December, versus earlier in the quarter, and any difference in December on certain brands, versus others?

Well, we are commenting on onboard on a macro basis, as we usually do, and we didn't see anything particular in any one of the three months of the fourth quarter that's notably different from the others.

So on an overall basis, Q4 came in slightly stronger than expectations.

The other thing I'll add to that, and I don't think this is a surprise to you, in general, the strength that we've seen has been more clear, on the net ticket revenue side than on the net shipboard revenue side, in the recent quarters, also because the comparables to last year, net ticket revenues for these quarters are easier.

Okay, great.

And then in terms of expenses in '08, the guidance is that ex-fuel, they will be up 1% to 2%.

Can you talk about what are the drivers of that, obviously outside of fuel, what are the drivers of your expenses in '08?

Robin, it's Brian.

I think one of the things that I really didn't get into, that I think is important to mention, because there has been such a focus on our cost management, to really stimulated last-- first quarter when we saw a little bit of softness on the demand side, and it's really stuck with our management team.

Particularly in North America, we're seeing a tremendous amount of leverage, as our brands have really gained traction, as we're adding capacity on them.

While we don't want to break out our, what we call comparable in '07, I will tell you that we're looking at really flat expenses on the American brands in '08.

A lot of the investments that we're putting in for next year, and that's driving some of the inflation, is some of the startup initiatives, adding some new markets, marketing associated with that, creating the infrastructure.

Obviously we're not immune to some of the inflationary pressures that are out there.

We talk about fuel and the impact that fuel has on us, but that somewhat drives throughout the whole P&L.

We have surcharges there being passed on in freight, comes in with our crew acquisition, so obviously we're feeling a lot of those pressures, but our management team has really been focused on it, trying to find offsets to the pressures that are out there.

Thanks, and then just a last question real quick, is Pullmantur's been reported on a two-month lag.

Now that it's been a year since the acquisition, will that lag stop?

Will that line up with your reporting quarters?

Robin, we've said all along that our first priority was to get Pullmantur on consistent systems with Royal Caribbean, and I can tell you that within the last month, our IT team has done a great job, and worked really hard to get our reservation system on a common platform for cruises, and we're in the process of switching Pullmantur over to our accounting system.

We want to ensure that all those transitions occur smoothly.

We haven't pegged a date when we'll do the catchup, but we'll certainly make sure everyone's aware of that.

I can tell you that the net effect of that catchup, will be an entry into other income and expense.

It's not going to be where we're going to have to effect the entire P&L.

Okay, great.

Thank you.

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

Thank you.

Two questions.

The first one is, what's the impact of the fuel supplements on your net yields guidance?

And what's your-- what sort of assumptions do you have with respect to acceptance?

We're not breaking it out.

I can tell you we're in the process internally within our revenue management team, really trying to understand it.

From the consumer standpoint, we believe it's viewed largely as a price increase.

We have talked about the fact that we have a very solid order book, with very healthy per diems on there, and obviously the fuel supplement is included in that.

I think it's fair to say that we are getting a portion of that, that's helping us offset our fuel costs, but obviously there is an elasticity effect.

It's not an exact science to be able to portend-- what is happening with that.

Is it fair to say you're assuming 100% of acceptance at this point, but if anything happens on pricing, that will move it either up or down?

No, I think it's fair to assume that what we do is, we have very sophisticated analysis that we're looking at this on a bi-itinerary basis.

Some areas we are seeing more acceptance of it than others, but what we're looking at is, what we have on the books, and what we're forecasting based on current booking trends, our ability to sell our future inventory at, and that's how it's all-- that's how we come up with our yield guidance.

It's not that specifically broken out by fuel supplement, and ticket price.

I see.

And the other question, with respect to capacity, I think relative to what you have said in the last call, there's been a slight drop in the '08 capacity, I think from 6.4% to 5.1%.

What's driving that?

And then can you provide us the quarterly capacity growth for '08?

Yeah, I can tell you the major shift in '08 has been some additional dry dock that we'll be doing for Pullmantur.

You saw the announcement of sovereign of the seas going Pullmantur, that affected it, because we'll be converting the ship, more to the appropriate Pullmantur brand.

And we had, I believe one other specific longer dry dock that we (inaudible), Greg can certainly take you through the details of that.

If you wouldn't mind following up with him--

Absolutely.

And is it fair to assume that those dry docks would be happening in the latter part of the year, given your cost guidance first quarter versus the back half of the year?

It's -- I believe there's a large one in the spring and then the Sovereign would be much later in the year.

Again, I think Greg can give you specific time periods.

Okay, thank you.

Thank you.

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

Hello, good morning.

Can you just talk about some of the mix changes, so more Alaska, more Europe, less Caribbean.

Are you-- I know the itineraries for this year, for '08, does that continue into '09 generally?

But more importantly, are you getting the same pricing pickup in those higher end cruise itineraries, and then the same on the Freedom class ships, where you were getting a very good premium for a while too, is that still holding up?

Hello, Steve.

It's Adam.

I mentioned earlier that the Caribbean market has been a strong driver of our current yield performance increases, so it was a strong contributor to the very positive results in the fourth quarter, and it is also an important part of the guidance that we've given for the first quarter.

The share of the Caribbean is going down about 5 points on a corporate basis, from just over 50%, to just under 50% of our total mix.

And the other ones tend to be going up slightly accordingly.

We are expecting positive yield performance for all the major product groups.

That includes Europe, where there's a 23% capacity increase, both for us, and coincidentally for the industry as well.

We still expect highlighted by the performance of Independence of the Seas, to maintain slightly positive yields there.

So there's not a material differentiation in yield performance by region.

And then the Freedom class ships still getting that strong pricing premium relative to the rest of the fleet?

Yes, the Freedom class ships continue to drive premium versus the rest of our fleet.

Okay, thank you.

Your next question comes from the line of Bob Simonson, with William Blair.

Good morning.

Greg, do you have the capacity change by quarter yet for '08?

Bob, yes, I do.

I can give that to you guys after the call.

Okay, and just a point of elaboration.

Again, on that end board, onboard revenues, when you use different methods to incentivize the agents, one of them is to offer perhaps, onboard credits.

When does that actually show up in the numbers, in terms of your guidance?

I mean-- if you have given more of them, or less of them, would that influence how you look at the total yield assumption?

Bob, this is Dan.

We do use onboard credits to incent consumers to buy, but that's factored into our thinking already.

So our yield guidance that we've given, contemplates that may be one of the pricing levers that we pull.

Okay, very good.

Thank you.

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

Hello, good morning, guys.

Question on your fuel.

The fuel prices that we track, have shown actually a decline in the first quarter, so I'm just wondering why you increased the hedges for the remainder of the year, and I don't know if it's too early to tell, but you did give us some kind of benefit-- you gave us the magnitude of benefit from your surcharges now, but if fuel decreases, is there a way we can kind of anticipate what that might cost you going forward?

Felicia, it's Brian.

I think one of the things, just in terms of our hedging strategy, we try not to adjust our strategy based on what we're seeing in terms of pricing fluctuations week over week.

We're really not trying to speculate on the price of fuel.

Our hedging really is, if you will, an insurance policy that we're taking out.

We want to limit our exposure if fuel prices continue to escalate, but we also want to be able to anticipate any savings if fuel prices come down, and we've said that we think being hedged 40% to 60% is really the appropriate amount for us on a 12-month go-forward basis.

That's how we're approaching our hedging strategy.

I'm sorry.

The second part of your question?

I was just wondering if you could give us some kind of metric, whereby we can gauge if fuel prices move, against you, what that would cost you, vis-a-vis the hedges?

Felicia, I think we have given here the impact of the 10% change, would be--

Okay.

So that's with the hedges, okay.

That includes the impact of the hedges.

Okay.

Of course if we -- as Brian says, we're hedging as we go forward, so some old hedges fall off, but in fact if you follow what we've done in the past, that statistic has been pretty accurate, pretty useful gauge of what actually happens.

Okay, thank you.

And then just housekeeping, there was a $12 million gain in operating income.

I was wondering if you could tell us what that was?

Felicia, that was tied mainly to FX gains we had.

Okay.

Thank you.

That's it.

Okay.

Your next question comes from the line of Steve Wieczynski, with Stifel Nicolaus.

Please go ahead.

Good morning.

Real quick question for Adam, touch on it real quick in terms of once Independence gets-- moves over to South Hampton this summer, what kind of demand have you seen so far for that ship, just because it's a ship of that size, and never really been seen in that region before?

The demand that we've seen so far is terrific, as I alluded to earlier.

The immediate reception when we announced her intended deployment to the U.K.

market, about almost a year ago, was very positive and has never abated.

So we have built up experience over recent years.

First we had Legend of the Seas operating that program for a couple of years, this past year Navigator of the Seas, and now Independence.

And Independence is performing very well, even in relation to the strong performance of Navigator of the Seas this past year.

Okay, great.

Thanks.

Steve, if I could just add to that, because I think it gives me an opportunity to comment in general, people look at the big ship and talk about something dramatically different.

In fact, replacing Navigator with Independence only added about 15% capacity.

So we have really been, fairly consistently evolutionary in these types of things, and it's not as though that case, or in other cases we have these dramatic jumps in ship sizes.

That's a good example.

Okay, great.

Thanks, guys.

Your next question comes from the line of Scott Barry, with Credit Suisse.

Hello.

You mentioned, I think you mentioned that pricing on the books across all four quarters is up, year-over-year, and you said you were seeing some shrinkage in the book to departure window.

Could you comment on where you are in terms of book load factor across each four quarters, whether you're ahead or behind?

Thanks.

Hello, Scott.

What we've traditionally done is given an outlook on two, maybe three quarters out, and we're trying, I think simply because of all the uncertainty in the marketplace, give you a little bit more insight, into what's happening in waves.

The graph certainly provides you with, I think directionally, where we are from Q1 and Q2.

What we've said is for the second half of the year, and I would say that we're not seeing fundamental differences by quarter, that we're pretty much where we were a year ago, for the second half, and, yes, pricing is up very nicely in the second half.

So I would also point out that I know seven are comparable.

We're probably seeing load factors, certainly for the last decade at the higher levels that we've seen in the past, and I think, obviously, there's different products that are behaving differently, and I've seen some analysts commenting where they see some discounts in certain markets.

I think you're always going to expect to see that, as we're constantly making trade-offs between rate and volume.

But when you aggregate it all up on the volume side, we're basically where we were a year ago.

And on the rate side, we're up quite nicely.

Okay, great.

And then your forecast obviously assumes a fairly stable revenue environment.

Maybe you could comment on how flexible your non-fixed expense cost structure is, and whether you have thought about, or what you can do, to maybe offset a weaker revenue environment, if it does manifest itself later this year?

Well, I think two things.

I-- when you say we're forecasting a certain economic environment, you know, we, again, take what's on our books and we're also digesting what is happening in the marketplace on a perpetual basis, and we're trying to do more than just read what happened last week.

We're trying to understand trends, and what that may bode for the future.

That's all integrated in our yield forecast we provided.

I think the best way to talk about what we can do on the cost side, is to point back to last year.

In the first quarter of last year, we had a yield decline, as I recall, in the range of about 4%, and we were able to come in significantly under our cost guidance.

I think, you know, we have a management team now that's very, very focused on costs for--

I'm not sure where you're coming up with under your cost guidance.

Maybe on a comparable basis, but really Pullmantur is part of the business now, and it looks like based on what I'm seeing on your cost guidance has pretty consistently been above-- your cost performance has pretty consistently been above, your cost guidance historically.

Last first quarter is what I'm referring to when we saw a downturn in the revenue environment, which is when we were able to, really mitigate a lot of the costs we've recently had.

I think if you go back and look at Q1, that's when we-- Q4, we came in above our guidance, but if you look at the first three quarters of last year, costs were effectively flat.

And I assume, Brian, you're referring to the comparable basis, versus including Pullmantur-- Pullmantur's part of the business, right?

Right, but it's not in the prior year.

So I can't compare Pullmantur, because we have a tour company, where you have substantial costs without any (inaudible)-- so in order to compare '07 to '06, you really need to look at it on a comparable basis.

I'm just referring to the guidance that you gave in the first quarter of '07.

You gave, net cruise cost guidance of I believe 4% to 5%.

You came in above that level.

And whether it's due to Pullmantur, or whether it's on a comparable basis, right?

I do--

Pullmantur was part of the business in the first quarter of '07.

Correct, you're correct.

Scott, I can tell you that as I recall in the first quarter of last year, and I remember talking about this on the call, we had a difference in the components that we forecasted for Pullmantur between revenue and expenses, for our company--

We can take it off line.

I apologize.

That's what was driving that.

Okay.

I can tell you overall, we did see an ability to manage our costs, but I do want to caution you, we're not managing our business quarter to quarter.

We're going to do what we need for the long-term, and make the right investments, but I think there is a degree in which we have demonstrated we can offset--

Actually, one other thing, Scott, which actually gives me a chance to just comment on, since Brian said we didn't discuss some of that on the calls last year, too.

Tour business, obviously a fundamentally different business.

In many cases-- new, different tours, or less tours have significant increases on both revenue and the expense lines, which tend to be unpredictable, and have relatively modest effect on the bottom line.

That is the confusion factor-- (inaudible) and that's also going to be a big component.

Okay.

Fair enough.

Understood.

Thanks.

Your next question comes from the line of Assia Georgieva, with Infinity Research.

Good morning.

I wanted to congratulate you on an excellent job in terms of yield management and forward guidance.

And sort of to follow up on the Pullmantur question, if you look at the past year, you have had the business for sometime now.

What are some of, some of the positives that you have seen above prior expectations, and then specifically some items that you can further work on, in order to streamline that business, and make it as efficient as your North American business?

Thank you, Assia.

It's Richard, and I'll comment.

We have had a-- it's actually been a very positive experience overall.

We see a lot more opportunities in terms of growing the business, in markets that we haven't seen before-- (inaudible) we've already shifted three ships into the Pullmantur brand in Spain, (inaudible) we have also started a brand in France based on (inaudible) and I think that offers some terrific opportunities.

We're seeing some benefits also in Latin America, which we think (inaudible), and of course we get the benefits of the strong Euro, which helps.

We have seen more difficulty in terms of, (inaudible) up to the platform needed to absorb that kind of growth in order to capitalize on the kinds of (inaudible).

So administratively, back office type issues are much, much, bigger than we thought they were, and it's taking us longer to turn those around.

But we're seeing them turn around, as Brian mentioned, a big change was starting at the beginning of this year, putting Pullmantur on the Royal Caribbean (inaudible).

I think taking this longer to get the back office side, in effect we also see growth potential, the opportunity to go into new markets as better than expected.

The balance, I'm more pleased now than I was a year ago when we first (inaudible).

Okay, excellent.

Thank you so much, Richard.

Your next question comes from the line of Pat Schaffer, with Chartwell.

Hello, guys.

You stated that booking trends happen, and continued to be strong, and that close-end bookings are also strong.

I was hoping you could provide any color on cancellation trends in the fourth quarter, and thus far in January.

Hello, Pat, it's Dan.

Hello, Dan.

We haven't seen any change in cancellations.

We've been really pleased with the bookings.

They seem to be actually sticking quite well, and if we had had any kind of increased cancellations in the fourth quarter, we wouldn't have been able to produce the kind of results that we did.

And that's been consistent thus far in January as well?

Yeah, we're very pleased with what we've been seeing.

Okay.

That's it, Dan.

Thanks.

You bet.

Your next question comes from the line of [Rahad Meetal], with Blue Bay Asset Management.

Yes, hello.

Just two questions really.

First, if you have seen any trends in the geographical breakup of your sales origination, either in terms of volume or value?

And secondly, on the fuel price, if maybe you could give us an indication of the levels at which you have hedged relative to, hedged to levels last year, if that makes sense?

Hi, this is Adam.

On the macro basis, your question on geographical sourcing.

The story of our company over these years is clearly a shift in the direction of sourcing more from international market.

In fact, if you look at 2005 to 2008, in that period as a corporation, we will have gone from sourcing under 15% from outside North America, to sourcing over 25% from outside North America.

So that's the macro level.

We don't see anything on a micro level in terms of what's happening in the wave, that I would say is worth commenting on.

So there's no-- so the U.S., for instance, isn't any weaker than you would have expected it to be?

No, and our guidance, I would say, reflects that.

Right, okay.

As it relates to the fuel, we don't break out the various contracts, or even the average contract that we have hedged at for this year, or last year, but I think we've given you enough in terms of where we are in terms of our hedge position, and what we, what our price of fuel would be going forward.

So you can probably work with that, and get reasonably close, in terms of the type of hedging we've been able to do.

All right, thank you.

Thanks.

Celeste, we have time for one more question, please.

Okay.

Your next question comes from the line of Henrick Shultz, with (inaudible).

Yes, good morning to you.

Just a couple clarifying questions relating to the surcharge.

Firstly, could you comment a little bit about the timing of the implementation, not in terms of where it's going to be implemented by the first of February, but where it's going to be recognized in terms of revenue, and also the net effect of the travel agent compensation, whether for example the compensation will be paid?

Anyway, some details on that, please.

Okay.

As it relates to the fuel supplement, you're correct.

The first sailing that it impacts is February 1st.

The revenue will be recognized as with our ticket revenue in the month that it's actually earned.

So when they-- when the ship sales, we'll recognize that.

In terms of travel agent compensation, we did announce that when we implemented the fuel surcharge for any retroactive bookings, the fuel surcharge was applied to, we would be paying, I believe a $12 per booking administrative fee to the travel agents who had to go out, and collect that on our behalf.

But there is, similar to taxes and fees that we collect, there's not a variable compensation component associated with the fuel supplement.

This compensation would be payable regardless whether the fuel supplement actually sticks, or-- I take it?

We've, we've agreed to pay a $12 per booking for the agents who actually collect the $12 for us.

Okay.

Lastly, then, could you add some details about your plans for the (inaudible) Corporation going forward, in terms of additional bookings from that market, and also marketing spend, marketing support plans, please?

You were talking about the recently announced joint venture?

Yes.

With [Tuoin], in Germany.

It's early days.

We still have to get-- and so I think that process, and I think as with other joint ventures, we have to do joint ventures (inaudible), but it's too early for us to comment while we're still finalizing--

Okay.

Thank you very much.

Great.

Thank you, all, for joining us today.

If you have any further questions or any follow-ups or need some additional details, Greg will be available throughout the day, and we certainly wish everybody a wonderful day.

Thank you.

This concludes today's conference call.

You may now disconnect.