皇家加勒比遊輪 (RCL) 2008 Q1 法說會逐字稿

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

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

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

After the speaker's remarks there will be a question and answer session.

(OPERATOR INSTRUCTIONS).

Thank you.

I would now like to turn the call over to our host, Mr.

Brian Rice, Chief Financial Officer.

Sir, you may begin your conference.

Thank you Tracy.

Good morning everyone.

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

With me here today are Richard Fain, our Chairman and Chief Executive Officer, Adam Goldstein, President and CEO of Royal Caribbean International , Dan Hanrahan, President and CEO of Celebrity and Azamara 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.rclinvestor.com which we will be referring to during this call.

Before we get into our results in the business overview, I would like to remind you of our forward-looking statement 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 D-- G, and reconciliation of these items can be found on our website.

First, Richard will comment on our recent performance and strategic priorities.

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

Adam and Dan will follow with more specific comments about their brands, and then we will open the call for your questions.

Thank you Brian and good morning everyone.

We're gratified by the performance of our businesses in the first quarter.

But we continue to be extremely frustrated by the direct and the indirect cost relating to fuel.

We're particularly pleased by the strong yield and cost performance of the individual brands.

Especially in light of the pressures that we continue to see on consumer spending.

Although I know a lot of people view vacations and cruises, as a relatively high discretionary purchase, the evidence shows that consumers are still taking their vacations, that they are attracted to the value of cruising, and that they are responding in particular to the quality of our brands.

I believe our first quarter performance is further evidence, that our product is resistant albeit not immune, to economic slow downs.

I'm pleased that we produced such a healthy yield improvement, but still believe we have very good upside potential, as I believe we are still underpriced for the value that we deliver.

This last week has been a very exciting week.

First we took delivery in Finland of Independence of the Seas.

The third of our remarkably successful Freedom class ships.

Next I visited Germany, where I toured Celebrity Solstice, which will join the Celebrity fleet later this year.

And as I hope you have all seen, we revealed the first set of stirring new features on our Genesis class ships, the first of which will be delivered towards the end of next year.

The Freedom class ships clearly demonstrate the high returns we can achieve from delivering a better and more valued product to our guests.

We're confident that the Solstice and Genesis class ships will have a similar impact.

Then finally just this last Tuesday, we announced the closing of our joint venture with TUI AG,and we will be forming two week cruises specifically designed to serve the German cruise market.

All of that is taking place against a background of continued focus on three things.

Growing our international business, mitigating fuel and other cost pressures, and taking advantage of the great momentum we have with our brands in North America.

In the current environment we're facing serious headwinds from two important directions, economic pressures, and energy costs.

The fact that we're doing as well or better than we originally expected, against the first of these pressures gives me confidence about the future and our ability to improve these returns.

Regarding the painful subject of energy costs, I'm impressed by the concentration our management team has applied, to begin offsetting some of these expenses.

I expect that the investments we are making in international sourcing, and the innovative new vessels will be rewarded with premium pricing, improved operating efficiencies, and then we will deliver very compelling returns.

Brian.

Thank you Richard.

As we mentioned in our press release and you will see on the second slide, revenues for the first quarter of 2008 increased to $1.4 billion from $1.2 billion in 2007.

Net income for the quarter increased to $75.6 million or $0.35 per share compared to our 10-K guidance of $0.25 to $0.30 per share.

For the first quarter of 2007, we reported net income of $8.8 million or $0.04 per share.

Despite significant economic pressures, we had the highest first quarter yields in our company's history.

Even with substantially higher fuel prices, our earnings per share came in better than expectations.

On slide 3, you will see that our guidance was for yields to increase in a range around 7%, and we actually generated an increase of 7.1%.

You may recall that back in October on our third quarter conference call, we gave preliminary guidance for Q1 yields to be up in single digits.

Then in January on our fourth quarter call we updated this guidance to be up in a range around 7%.

Our business has been solid and consistent over these recent months, and as we have pointed out more resilient than many other consumer driven sectors and company.

Our net cruise cost excluding fuel per APCD came in 1% below last year.

We have been feeling personnel related cost pressures, and have seen increases in commodity prices, and freight charges, that relate back to fuel.

As a result our expenses will increase as the year progresses, but I think our first quarter performance is a great example of our management's focus on controlling costs, and our ability to leverage the investments we have made in the past.

On slide 4, you will see our fuel cost on a per APCD basis, increased 23 .9% versus the same time last year.

It also came in 8.2% higher than the cost included in our guidance.

Our fuel costs were $20.17 per APCD, in the first quarter of 2007.

This quarter higher average fuel prices added $9.46 per APCD.

We were able to offset about half of this increase through consumption efficiencies hedging, which saved us $4.64 per APCD.

On a net basis fuel costs were $41 million or $0.19 per share higher than in 2007.

Now I'd like to take a minute to reconcile the first quarter guidance we gave on January 30, with the guidance included in our 10-K, and our actual results.

On January 30, we forecasted that our earnings per share would be between $0.30 and $0.35.

When we filed our 10-K, we lowered the first quarter by $0.05, but maintained our guidance for the year.

In effect we said we would spend about $10 million more in the first quarter, but offset it with savings later in the year.

For example, in the first quarter we spent more during two dry docks on a project aimed at reducing fuel consumption.

This project added to expenses in the first quarter, but will more than pay for itself during the course of the year.

We believe strongly in giving our management the flexibility to make good decisions for the longer term, even if it occasionally means a little short-term sacrifice.

As we have said in the past, we are more focused on managing our business on an annual basis, than on a quarterly one.

In the end, we met our revenue guidance and non-fuel cost guidance.

Fuel expenses increased significantly, but was more than offset by benefits below operating income.

The benefits came from numerous areas.

Our interest expense was better due to lower interest rates, our equity pickups in island cruises and some of our other investments were better than forecasted, and we realized some gains from foreign exchange and hedging ineffectiveness.

All these items combined improved our results by about $0.07 per share.

Now I'd like to move on to our guidance for the second quarter and full year.

On slide 5, you will see our forecast is for earnings per share to be $0.40 to $0.45 for the second quarter, and $2.85 to $3 for the full year.

For the second quarter we will have an increase in capacity of 5.4% and we expect yields to be up around 2%.

Based on the current fuel prices, net cruise costs are expected to be up between 7% and 8%, and excluding fuel, net cruise costs should be up between 3% and 4%.

Our guidance for the full year includes a capacity increase of 5.1%, and we are maintaining our yield guidance to be up around 4% compared to 2007.

Based on current fuel prices we expect net cruise costs to be up around 5%, and excluding fuel net cruise costs should be up between 2% and 3%.

This is slightly higher than our previous guidance due to the cost pressures I mentioned earlier, many of which are fuel related, but our management team continues to look for ways to lessen the impact, without compromising the guest experience or our strategic initiatives.

If fuel prices remain at current levels, our fuel costs for the second quarter would be approximately $172 million, and would be approximately $685 million for the full year.

This takes into account that as of today, we are 49% hedged for the second quarter, and 50% hedged for the balance of the year.

In terms of sensitivity, a 10% change in our fuel price either way, equates to about $10 million of impact in the second quarter, and a $29 million impact to the year.

Our fuel guidance based on current pricing is increased by $90 million since our last call.

If you will turn to slide 6, you will see that our blended fuel costs per metric ton has a very strong correlation in movements to WTI.

We think monitoring WTI and applying the changes to sensitivities we provide, is a pretty good way to model our fuel expenses.

Since our last call WTI prices have increased from around $92 a barrel to about $118 or 28%.

As you may recall, last quarter we said a 10% change in our fuel prices either way, would equate to a $35 million impact or with the 28% increase, about $98 million.

If you consider the fact that our first quarter was not exposed to the full 28% increase, you would get fairly close to our $90 million adjustment for current prices.

As we look forward to 2009, our hedge position is currently in the mid-teens.

Despite this, and even at today's prices, we are forecasting our fuel cost per APCD to actually be somewhat less than this year, due to the savings initiatives we have put in place, and the efficiencies of our new vessels.

Now I would like to talk briefly about the demand environment and our yield guidance.

Before I get into the numbers, I would like to remind you that on Tuesday we announced an increase in our fuel supplement to $8 per day for the first and second guest in a state room, and added a charge of $3 per day for all other guests.

The change applies to new bookings only, effective May 1, and is capped to the first 14 nights of a cruise.

The net impact of this increase will have on yields is difficult to project, recognizing our demand is fairly elastic.

But at this point we do not believe the increase will have a material impact on our full year yield guidance.

It takes approximately $50 million in net revenue to move our yield 1 percentage point, and we simply just do not have enough capacity left to sell for the balance of the year, to see that sort of change.

Consistent with our last call, we expect to see yield improvements in all four quarters this year.

While ticket prices are certainly driving the increases, our guests continue to spend at or above last year's levels when on board our vessels.

I know there is a lot of interest in on-board spending right now, so Adam and Dan will comment more about their brands performance.

At an aggregate level we seem to be faring pretty well.

On slide 7 is the graph that illustrates how book load factors and pricing compares by quarter, to the same time last year.

Book load factors are strikingly similar in all quarters for the balance of the year, and pricing is up nicely in all three quarters.

And although visibility isn't as clear, prices are relatively stronger in the third and fourth quarters, than in the second.

We know there is a lot of concern in the market about the economy and that many people believe it is just a matter of time before we start feeling the pinch.

We continue to monitor our demand closely, and we remain cautiously optimistic from all the data we see.

We generally do not comment so far out because it is still very early in the booking cycle.

But I will mention that at this point, both book to load factors, and pricing, are running ahead for the first quarter of 2009.

On slide 8, you will see our projected Cap Ex based on our existing ship orders.

I am sure you saw that earlier this month Standard and Poor has lowered our credit rating from BBB minus negative outlook, to double B plus stable.

Obviously we are disappointed with their decision and hope to regain our investment grade rating.

But we do not believe the impact of this action will be material.

In the near term we will see a minimal increase in our interest expense, which is included in the numbers we disclosed in our press release.

For our new builds we have either financing commitments, or government guarantee commitments, for funding a large portion of the contract price for each of our current orders.

While we may choose to do so for various reasons, we envision no current reason we would need to access the capital markets for new financing in the foreseeable future.

We already have sufficient funding from internal sources, and financing commitments meet all our existing capital and operating expenses.

On slide 9, you will see our projected capacity increases by quarter, for the balance of 2008, and for the next four years.

And lastly, our liquidity at March 31 was $1.4 billion comprised of $400 million in cash and equivalents, and $1 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 quite pleased with the first quarter results, particularly the performance of our Caribbean products that rebounded strongly from a difficult first quarter of 2007.

The quality of close-in Caribbean demand enabled us to complete our first quarter revenue generation in a positive manner.

We went into and came out of the wave period in generally good shape for the year, and we have maintained our yield guidance that we gave last quarter.

While our visibility is naturally more limited the farther into the future we look, currently most of our products for the rest of 2008 are in a favorable pricing position, on a year over year basis.

In Europe where both we and the industry are growing capacity at nearly 25% on a year over year basis, we expect net revenue yields for the extended season to be slightly up.

The outlook for Alaska yields is flat to slightly down.

Turning to on-board revenue, in the first quarter our guests spent at or above last year's historically strong levels, with the exception that we experienced lower on-board revenue levels on some of the more globally sourced products we introduced this past winter season.

Moving now to our fleet we began to introduce our third Freedom class ship Independence of the Seas, this week, after a successful delivery on April 17.

She will commence revenue service out of South Hampton, U.K.on May 2.

We have announced she will return to South Hampton in 2009 as part of a record eight Royal Caribbean ships that will be sailing in Europe.

Last but not least, early last week, we revealed Central Park, the first major project on the project Genesis ship.

The publicity was instantly global.

Giving an indication of things to come as we reveal more elements.

The footprint of the ship will enable us to deliver an unprecedented variety of wow experiences, that will amaze and please our guests.

Dan?

Thank you Adam.

As Brian, Adam and Richard have already mentioned, we are pleased with our first quarter reports.

The combination of a strong Caribbean and some key deployment changes, including positioning Celebrity in Australia, and New Zealand for the first time, helped lead us to the strong yields we experienced.

We also saw a nice increase in on-board revenues in the first quarter.

In particular, beverage, shore excursions, and spa were strong.

Telephone and internet usage also contributed to the increase.

Looking at the balance of the year we are coming to Celebrity's most exciting time, as Alaska and Europe combined, represent almost 50% of our sailing days this year.

We have increased our capacity in both Alaska and Europe, and are pleased with the results.

Our booking trends are in line with our expectations, volumes roughly the same as last year, and we are seeing rate increases in both markets.

Our Alaska business has seen a slight increase in yields, and the extended season has been beneficial.

Europe is also slightly up, although because of the extended season into the fourth quarter we still have a good bit of our volume to build Our new Solstice ship, due to be delivered in the fourth quarter continues to perform well from a volume and rate standpoint.

The decision to build the ship with 85% balcony cabins is delivering the benefit we had planned for during the design of the class.

Looking beyond the Alaska and Europe seasons we are encouraged by South America yields for the fourth quarter.

Early reports for the first quarter of '09 are positive, although we are still very early in the selling cycle.

We continue to stay focused on managing our costs across the brand, just this week we are completing the installation of the diesel engine on Summit.

The diesel engine is more efficient, and actually enables us to burn less fuel.

We will complete this project by the end of the year, with the installation on the Infinity.

Brian.

Thanks Dan.

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

(OPERATOR INSTRUCTIONS).

We will pause for just a moment to compile the Q&A roster.

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

Hi, good morning.

Could you just talk a little bit about how you see the second half of '08 net yield re-accelerating?

You commented on it a little bit, and I think at one point you said you don't have that much more to sell, so I wanted to understand how you re-accelerate into the second half.

And then the other income line, could you talk a little bit about what went into that, and also the foreign exchange impact?

Steve, it's Brian.

The second half of the year, the yields, if you do the math, would imply that the yield guidance was stronger in the third and fourth quarter, than what we're saying in the second.

We are seeing, I think as Adam alluded to, and Dan, we're seeing healthy Caribbean recovery, which is going to impact obviously the fourth quarter more, than it would in the second quarter.

We also have an extension of the season in Europe, which is benefiting us.

I think that Adam and Dan have said that Alaska is pretty much flat year over year, but I think the strength of our European business, the Caribbean business, really is driving the acceleration of yields in the third and fourth quarter.

One of the things we have had a lot of focus on is really trying to improve our fourth quarter results.

And I would also add that Pullmantur is contributing to both our third and fourth quarter healthy yield improvements.

As we talk about other income or if you will the stuff below the line, again it was a collection of a lot of different individual things.

We did have some gains on foreign exchange.

We try to have natural hedges out there for some of our exposure.

Without getting too detailed, as the dollar weakens our liability for customer deposits grows, and that's-- a bad influence on our other income and expense, and we try to offset that with some inter-company loan effects.

It's kind of interesting in the first quarter the Euro strengthened quite a bit, but the Canadian dollar actually weakened.

The net effect of that was actually a pickup.

But that was less than half of the increase we saw down the road.

We had a healthy increase in the equity pick-ups that we had from island cruises, and we had some other investments down there that did quite well.

Brian, on foreign exchange how did it impact the net yield, both the actual and when you think about your guidance?

Steve, the only functional current, the only brand that we have that has functional currency other than dollars is Pullmantur.

And Pullmantur represents only about 7% of our capacity.

We do have expenses that are sensitive to effects, we have marketing and sales efforts on behalf of Royal Caribbean, Celebrity and Azamara that are sensitive.

We have our Brilliance leases denominated in Sterling.

But we also have benefits on the top line.

We don't break that out, because frankly the way we manage our business, currency is part of our revenue management decision making.

It's not as easy for us to go in and just say, had the dollar been a different level, what the increase would have been.

Okay, thank you.

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

Thanks, a couple questions.

One is for the second quarter, I guess maybe it would have looked like an easier comp versus last year, than the second half.

So I'm wondering if that yield guidance of plus 2%, is that what you would have thought it would be a quarter ago?

I know you didn't give guidance that far in advance, but just in terms of your internal expectations, can you give us a little color on that?

Sure, Robin.

I think our revenue guidance both what we have stated publicly, and even as you break down the details internally, has remained remarkably consistent over the last three or four months.

I think I would emphasize that one of the benefits that we are seeing in the second half of the year is where Pullmantur comes into its sweet spot, during the summer months.

Remember, we do report Pullmantur on a two month lag, and we have been doing some of the ship transfers out of our North American brands into Pullmantur, which is benefiting Pullmantur quite a bit as well.

But it's been remarkably consistent in terms of how the quarter yield performs.

I mean including second quarter specifically, what are your expectations for Q2?

I'm sorry, Robin, could you repeat that.

Sure.

I know you talked about your full year guidance being consistent with the last time you commented.

But I guess I just wanted to clarify that specifically also for your second quarter expectations, that how that changed from a quarter ago?

Actually I'll give you even a little more detail.

I think the second, third and fourth quarters have all remained very consistent with our prior expectations.

Okay, great, thanks.

Then also on the expense front, your expense ex-fuel, was previous guidance of plus one to two, now plus two to three.

I think you mentioned personnel expenses.

I wonder if you could give a little more color on that?

Because it seems like a big increase, that would have come on in the-- that sort of occurred in the last kind of six to eight weeks, as a percentage of your personnel costs, it seems like it went up significantly, maybe you can just give us some more color?

Hi Robin, it's Adam.

It is one of the elements that we mentioned.

I don't want to make too much of it.

We have seen some inflationary pressures, which to your point haven't been sudden, but have been developing over the last year or more, as the shipping market has tightened up in terms of marine officers, licensed marine officers, and what our brands need to do to remain competitive for the quality of personnel that we want to have on board our ships.

But it would also be elements in terms of freight, which is clearly affected by energy costs as well, food, foreign dairy pricing, clearly elements that are affected by energy pricing as well.

These are what would fall into net cruise cost ex-fuel, that are affecting us in different expense lines.

Okay.

Great.

And then the last thing, and I guess you talked a little bit about some of the elements in the other income line, but it looks like it was $0.06 per share higher than in the last quarter, and I guess can you give us any color on what kind of volatility we should expect in this line, for the remainder of the year?

Robin, I think we have a pretty good handle on our interest income and expense.

We have a pretty good handle on our equity pick-ups.

We have tried to refine those forecasts.

The one thing that is really very difficult to get a handle on, is the hedging and effectiveness.

We did have a gain a little over $3 million in the first quarter, because we had some hedges out there for a type of fuel that we were planning, an [MGAO] fuel that we were going to use in the Mediterranean, and they changed the type of fuel we need to burn there.

So it became ineffective and we had a $3 million gain below the line, rather than up in our fuel line.

The accounting rules around hedging, continue to evolve and frustrate us, and sometimes we do see more volatility there than we would like to.

In terms of the currency hedging, you mentioned you tried to offset some things by intercompany loan exchange, is there anything there that is going to reverse later in the year?

It should, they should work in tandem.

What happened that was kind of interesting in the first quarter versus prior quarters, is the dollar did not either weaken or strengthen across the board.

It's kind of interesting that you saw the Canadian dollar weaken, but the Euro strengthen, and the Sterling effectively made flat, throughout the quarter.

When they move in tandem, our natural hedges work quite well with one another.

But when you have individual ones moving back and forth, it creates a little bit of noise.

Yeah, Robin, I'd also add two other things.

Don't forget the equity pickup in things like island cruises.

So although they are below the line as far as we're concerned, that's as much operational, as anything else we do.

And again, we also have a fair amount of movement between quarters.

That's always an issue, I know.

When we look at the year as a whole, we don't really expect to see the big change, year over year, in terms of what's happening below the line.

Okay.

That's great.

Just a final little clarification, what amount of that was the equity pickup from island cruises?

Robin, I don't have the numbers directly in front of me, but as I recall it was the $3 million range.

Okay.

Over forecast.

I'm sorry, $3 million over forecast.

Okay, great, thank you.

Your next question comes from the line of Asia Georgiva, with Infinity Research.

I had one question on your forecast for on-board spend both Adam and Dan mentioned that it was good in the current quarter even though to me it appears it was flat.

And going forward what trends do you expect developing, have you seen a worsening as we progressed during Q1, and is that something you're baking into the numbers?

Asia, could you repeat the last part of it, I lost the last part of it?

Whether you're baking any increase in on-board spend, when you're giving us yield guidance for the rest of the year, or are you assuming pretty much flat on board spend given what we saw in Q1?

Well, it varies by brand, but overall our on-board revenue forecast is up slightly over 2007.

I can comment a little bit more specifically about Celebrity.

We have seen nice on-board spending in beverage, shore executions, and spa as I mentioned.

We also seeing as people become more mobile, we're seeing big increases in telephone and internet usage.

We have seen some nice upsides there.

Overall on Celebrity we're up slightly, and as a company we see ourselves being up slightly for the year.

Assia, if I could just add, one of the things when we look at this we're looking at a fairly detailed level, and we're looking at comparable numbers.

So where we go to a new itinerary, some of our new itineraries inherently have lower on-board spend, because of either where the guest sourcing is, or because of what the itinerary itself is, and so we adjust for that.

What we're looking at is just overall, how we think those are doing.

And that does mean given our new itineraries, the increase is not huge, but we see it as quite healthy, particularly given a very good starting point last year.

Okay.

So when you speak about a healthy increase, that will be on a comparable basis, say sourcing North American passengers, not sourcing out of South America.

Just to be clear, we said, I don't think we said healthy increase, because I think that would imply a larger increase.

We just said that the on-board revenues continue to be healthy, and we were making the two comments.

One, it was healthy last year, and it continues to be healthy.

And two, when we're making comparisons on a like for like basis, we think we're doing even better than last year.

Okay, thank you Richard.

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

Just to clarify again, I think this should wrap it up on the on-board, but you're seeing year over year increase on per guest basis, correct?

Yes, that's correct.

Okay, okay.

And can you give us any color as to the recent fuel surcharges that you an announced two days ago, the incremental fuel surcharges?

I know you alluded to some of this in your preliminary comments, but how much of that could impact your yields here in the year?

Is it 10 basis points, 20 basis points in 2008?

Tim, that is, it's the $64 million question literally.

It's very difficult, our guests are elastic.

We did see last year when we passed on the $50 head tax from Alaska, it put pressure on our ability to raise our ticket prices.

There's kind of varying opinions in the marketplace, and frankly there's varying opinions here within our company, as to how much of that we actually get to keep.

We have not baked in any significant upside as a result of that.

And again it takes about $50 million, just to move it one point.

Okay.

I think we'd probably recognize more of the benefit in '09 than we would see in '08, simply because of the percentage of our inventory that's already booked.

Okay.

But again, Brian, I guess the key there is, the guest is very elastic and you don't know how much of that's effectively going to stick, right?

Right.

Frankly the only way we will ever know is, hopefully someday fuel prices begin to come down, and we take our fuel supplements down, and see how much of the rate increase we can hold on to.

Okay.

And along the line of fuel, at your last report you were about 45% hedged for the year, now you're 50% hedged for the year.

Any color as to why you maybe didn't do more hedging, because it seems like in the past you guys have taken it up?

I know your historical range is 40% to 60% on an annualized basis, but just any additional color as to maybe why more or even less wasn't done?

Actually, it's interesting.

I think it was last first quarter we got the question why we were hedging so much.

Then the second quarter we got why we didn't hedge more.

We are remarkably consistent.

We try to remain 40% to 60% hedged, during looking out in a 12 month window, and we're certainly within that now.

We're not viewing our hedging as speculation, we're not betting that the market is different.

We have a fairly methodical approach, we have a hedge committee that is constantly looking for those instruments out there, that will qualify for hedge accounting given our needs.

We're right about where we have always been, plus or minus a few percentage points.

So I wouldn't read anything that we're, we have changed the way we approach it.

Okay.

And then a little bit longer term perspective here, just refresh us on your commitment, either contractually, or your thought process I guess, as to the number of ships over the next several years you may move into the new TUI AG.

I think we have-- this is Richard speaking, Tim.

I think we have said we-- I think we have clearly said we're going to move one ship into the joint venture, and we will an announce that shortly.

That's the only commitment or public statement that we have made, and that's the only commitment there is.

We have also indicated that we along with TUI AG are looking at the new buildings, that wouldn't happen quickly.

And I think we have just the day before yesterday formally closed the JV, and now we have the opportunity to sit down with them, and formalize a program going forward.

But so far the only specific commitment is the one ship.

Okay.

You would think given, Richard again, the time and the state of the yard slots it may, you may see another ship or two transferred before you would start to get new builds coming on stream?

I think it is possible.

I think it depends on, frankly where can we get the best return, whether it's from their existing deployment or specifically in the German market.

Okay.

Great, thank you gentlemen.

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

Thank you.

Two questions.

First of all has there been any changes in your booking window during the quarter, or any changes in your cancellation rates from the passengers.

Hakan, it's Brian.

No, we really have seen very remarkably consistent booking windows.

I will point out, we didn't show the slide on this particular call, because frankly we just had so many other items to talk about.

But the close end bookings continue to perform very strongly.

The graph that we have shown in the past with the premiums that we're getting within the 90 day window continue, but we have not seen any shift in the booking curve, and the cancellation rates have stayed remarkably consistent.

One of the things I tried to mention in my script before we talked about the first quarter of '09, we continue to dissect this data and look for concerns that are out on the horizon that may be coming up.

At this point in time we're very pleased with the reservations that we're getting every day.

I see.

And with respect to your Europe, I mean obviously there's a lot of capacity that's going there, but is the availability and pricing of air lift has been an issue for bookings, if it has, what are some of the things that you can do, or have done?

Hakan, don't forget that we source an awful lot of our business in Europe as well, so, we have seen some increase in air tickets.

What we're still seeing very, very strong interest in our U.S.

and our domestic guests to go to Europe.

We're seeing a lot of guests out of Europe.

So the combination has continued to work well for us.

As you heard us say earlier, our premium products are-- in Alaska and in Europe are doing pretty well.

So we haven't been troubled by that at this point.

If I can add on, this is Adam.

There's a strong desire by Americans to see Europe.

Whether you want to see it by land or by cruise, you're going to have to secure air to get there.

The advantage that we continue to have is a vacation choice, is how much of your overall European vacation you can secure in dollars, by buying a cruise, as opposed to buying all the different components for yourself on the European continent.

So at any level of air price, we still think we will be relative beneficiaries of the type of vacation we are, and the way that people can insulate themselves relatively speaking, against the weak dollar, strong Euro relationship.

I see.

Okay.

Finally, have you disclosed at what price would you take down or reduce the fuel supplements?

No, we haven't given any specific guidance in that.

I can tell you at the current we're not fully recovering, the type of fuel increases that we have seen from January of '07, though.

Okay.

Okay, thank you.

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

I know there isn't really any transparency into your tour business, but each of the last couple quarters, your on-board and other expense has grown dramatically faster than your on-board and other revenues.

Could you comment on what's driving that?

The tour business is mainly coming from Pullmantur, and we also have what we call sub-charters, we have three aircraft within Pullmantur that we do sub-charters on.

In the first quarter we did charter more of the excess air capacity that we had for Pullmantur, than we had in the prior year.

That's driving the increase in costs there relative to the revenue growth?

That impacts both the cost that, the cost of those are embedded in our net cruise costs, and the revenue is up in the other revenue line.

Maybe the better way to ask it, is Pullmantur, the margins there, are they stable, improving, are they deteriorating?

They're getting better.

Okay.

And then Richard, would you be willing to comment on these trade press reports, that you're negotiating to buy one of NCL's vessels, for your European brand.

No.

We're not.

Okay.

Thanks.

You're not negotiating or--

We're not negotiating.

Okay, thanks.

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

Just kind of--

Operator, I believe we lost Steve there.

Yes, his line did disconnect.

Okay.

Your next question comes from the line of David Liebowitz, with Burnham.

Capacity and the movement of vessels, first the agreement with TUI, TUI still owns Hapag-Lloyd and Hapag-Llyod owns one upscale vessel.

Is that part of the joint venture in any way?

No, it's not.

And is there anything to preclude TUI from expanding further into the upper scale market for the German or European tourist?

You mean with Hapag-Lloyd?

Exactly.

No, there's no restrictions on Hapag-Lloyd continuing to do with TUI, or expanding.

What we're creating is a different market segment.

Right.

Neither they are restricted nor Royal Caribbean International, which has a presence in Germany, there's no restrictions on it operating again a separate, and fundamentally different kind of operation.

Okay.

And in terms of the joint venture, when that was originally announced, I recall there being a statement made that you would be adding two new builds, hopefully in 2010, 2011.

From what you said today, one gets the impression that might not be in the cards any more?

Or am I getting what you stated wrong and I apologized, I'm not trying to misquote you.

No, David, certainly we didn't intend to imply anything like that, I think the earlier releases had indicated that we were hoping for new buildings starting in 2011, 2012 sort of thing.

And that has not changed.

Okay.

Now, Pullmantur has two very old vessels, one dating back to 1965.

Is there-- how much more use life can you get out of a vessel of that age?

Well, that is interesting.

And of course especially if you're addressing the question to who us, who have prided ourselves in very effective, in using the most modern capacity.

But in fact as we have often said, there's nothing technically that's changed that much in terms of a ships ability to operate, there are more efficiencies in the ships.

And as it happens, some of Pullmantur's older ships are extremely attractive in their respective markets.

And so the other thing that we have been, I think fairly consistent in saying, is that we believe one size does not fit all.

And within Pullmantur those old ships have certainly physically capable of continuing to operate well, and the results continue to be quite good, and they're doing better this year than last year.

And I think it's interesting to watch that and we hope to continue to build on that presence.

One of the points I'll take the opportunity to mention, we often talk about our hardware, and we're very proud of our hardware.

But the thing that has always differentiated our brand is the service levels, the men and women on board produce.

And Pullmantur is no exception to that.

Now, your venture in France, there's not been a lot of publicity about it.

Can you give us an update, is it living up to expectations, exceeding expectations, do we need more critical mass by adding more vessels, etc.?

Well, it's just starting, as in fact it hasn't even started yet, it's due to start next month.

And it's really very small.

So it would be a mistake to read too much into that.

But we think that's a market that is hungry for a domestic brand.

And will do well.

That is an older ship, but by the time we are finishing the conversion work, which is going on literally as we speak, from the passenger point of view it will be A, a Modern ship, and B, probably more importantly to them, it will be a French ship.

So we think that will do well, but it's too early to be more specific.

And is there any time line we should be looking at, for Azamara to be adding capacity?

Not at this point you shouldn't be looking for a time line, David.

Okay.

And sticking with Azamara, one of your--

We're going to have to --

My apologies, I'll get back in cue.

Sorry, but we have quite a few others.

Not a problem.

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

Good morning.

Wondering if you have an estimate of this year's sourcing, of all of your capacity, how much would be from the U.S.

versus all other markets?

And how would that compare with last year?

David it was, I'm sorry Bob, it was 69% of the revenue, was sourced from outside of North America last year.

We haven't disclosed any numbers beyond that, other than the fact that we expect the non-North American to continue to grow, both this year, and in the years to come.

The vast majority of our capacity that is coming on line over the next few years, the net growth will virtually all be coming from outside of North America.

So 69% of-- only 31% of the beds last year were filled by Americans?

No, 31% of our revenue was sourced from outside North America.

69% was in.

The 69% will continue to decline, as we grow our business in Europe and elsewhere in the world.

Okay.

And then, is this too simple, but your fuel costs, you're dollar fuel costs in the first quarter were up roughly 35%, your capacity was up 9, is that correct to say that your capacity adjusted fuel costs were up 24, just subtracting one from the other.

Yes.

Okay, thank you very much.

You're next question comes from the Amir Markowitz, with JPMorgan.

Hi, good morning.

Just a quick question about your non-fuel expenses.

It looks like those expenses are increasing going forward, as far as your guidance goes.

Just wondering if there's any sort of increases in marketing that you're seeing, in order to fill the ships going forward?

We're actually, we have raised our non-fuel cruise cost from the range of 1% to 2%, to a range to 2% to 3%, the mid-point moved 100 basis points.

Most of the increases that we're seeing, really are fuel related.

It's in commodity pricing, it's in freight charges, it's in the movement of our crew around the world.

You know, the airlines are coming out with fuel surcharges as well.

Those are the cost pressures that we have seen.

We actually have been very consistent with our marketing.

We're not going to start cutting back on marketing, because that's one of the strategic investments that we continuously refer to.

We have been able to find some efficiencies in our G&A, and I think our management team, as indicated by the first quarter, where we actually saw our non-fuel net cruise costs come down 1% despite all these pressures that have been out there, I think is remarkably focused on mitigating as much as of this expense as they can.

What we have tried to do is give you our best thinking at this point in time, based on what we're seeing happening with the commodities in particular.

Okay, thank you.

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

Morning guys.

If I can return to the second quarter yield guidance, I know the comparisons in the first quarter year over year are better, more favorable than they are in the second quarter.

But in the second quarter here still kind of easy comps.

I'm just wondering if you can kind of explain why we're seeing the huge drop off in the change in net yield guidance, versus the actual results in the first quarter?

Well, the results in the first quarter were very strong with 7.1%, but remember the comp last year was, I believe we were down in the range around 4.2%.

So that was a very easy comparable.

I think the annual number is more appropriate with being up around 4%.

Again, I think the product mix that you're seeing in the second quarter, you know, you have a lot of repositioning cruises, Adam alluded to some of the new products that are out in the marketplace, while those products are doing quite well, versus our expectations, they're not going to be stellar performers that are going to drive up the corporate yields in the near term.

I think most of the health that we're seeing, the recovery of the Caribbean, and certainly the extension of the European season into the fourth quarter, so it's really helping drive the back half of the year.

Okay.

If I could just add, because I think a couple of the questions have indicated, sort of a question about, is this sort of a change for the second half, are we assuming that the economy is getting better, or was it something along those lines.

And just to embellish Brian's comment, I think I actually am always impressed at how accurate they are in predicting yields year, but when you get from quarter to quarter, there is a certain amount of random noise also that goes into it.

It's not that there's dramatic changes, it's not a change in trend, it's just you're applying it to some fairly specific things, and within the context of one quarter, a couple of small changes can make a difference.

But overall for the year, we're not seeing a difference sort of in the style of the first quarter, second quarter or third or fourth.

Okay.

If I could just add, as I think Robin had the same line of questioning, and it really is remarkable for Q1, Q2, Q3, Q4, our forecast really have not moved since beginning of the year.

This is not a result of any shifts that we're seeing.

We have seen a very consistent and fairly predictable pattern throughout the wave season.

Okay.

All right, thanks.

Your next question comes from the line of [Hennis Morelli] with Dundee Securities.

This is questioning on the net yield, the guidance again on Q2, did the fuel surcharge have anything to do with that, the offset in the fuel charge that was announced, that built into the yields?

No, you know, the fuel surcharge, the $5 that we came out with back in November, applied to new sailings February 1.

Obviously we were more booked in the second quarter, than we would have been in the third and fourth.

The extra $3 that we have just added within the last week, we wouldn't expect much benefit from that.

But again the fuel surcharge we're talking, three $5 changes on revenues, that are much higher than that.

And there is a lot of elasticity within our booking, so we wouldn't attribute a lot of that to any consequences here.

Again, you know, the business has remained remarkably consistent, really over the last four or five months.

Okay, thanks.

Operator we have time for one more question, please.

Okay.

Your last question comes from the line of Joanna Wa, with Southpaw.

Hello guys.

I've been hearing recently through the grapevine, that some travel agents have been seeing more promotional activity in the cruise business.

Can you comment on that?

Joanna, it's remarkable, we love to read all the different reports that are coming out, talking about our pricing and what's happening.

You know, promotions are part of what is continuously going on with all brands.

This business is very surgical in the way we do our revenue management.

It's very hard in the marketplace when you consider we have 1500 voyages out there, we're sourcing guests globally, we're selling into 26 different categories on many of our ships.

There's a lot of different noise that you're going to see out there.

I would reiterate that on a macro basis, and even at a product level and brand level, our business continues to be very consistent and we saw it throughout the wave period.

And continue to see it right now.

Great.

Then can you talk about just generally speaking, to what extent do you think you will be able to raise prices in the European region, you know, in the next few quarters or next few years that is, as we continue to see more massive deployment of vessels from the Caribbean to that region?

Also given that I think historically that region has somewhat resisted price increases in cruise lines, and leisure in general?

Well, our comment earlier that notwithstanding an almost 25% year over year increase, both for our company, and for the industry in Europe, and even taking into account some of the other things that have been mentioned like higher airfare and what have you, our outlook for yields is up on a year over year basis.

But that tells us is two things.

There remains a healthy appetite by the American consumer to go over and see Europe on our cruise ships of our different brands, and it also is reflective of the growth of our sourcing of European customers, many of whom would like to cruise close to home, just as we see in other regions of the world.

We really feel that the combination of those two effects bodes well.

Even last year with healthy a capacity increase over the year before.

To go up by almost 25% again is significant growth.

And to combine that with upward yield performance is a healthy indicator for what might happen in the future years.

Right, understood.

But at a time where I think most of your competitors are also looking to grow their presence in Europe, I mean I guess to what extent do you think you will be able to sustain that net yield improvement, year over year over the next three to five years?

I think all we can say, especially looking at the European holiday marketplace, is that there's enormous vacation activity taking place out of all the countries, but especially the larger economies.

They're just catching on to the benefits of a cruise vacation.

We see it very strongly in the U.K., and we also see it now out of the other large markets as well.

Germany market growth has been exceptional.

Italy and Spain market growth have both been very strong.

We believe that France is capable of producing those types of, that type of growth over time as well.

And there's no indication that American appetite to see Europe will decline in the near future.

If anything it will grow.

So we can't project at this point specific year over year yield performance, we can only say that the fundamentals looking forward seem quite favorable to us.

Got it, okay.

My last question is just a quick follow up to the cancellation rate question.

Is this different than the industry conversion rate, that you see after customers put their deposits down on bookings?

Yes, generally when we are asked questions about cancellation rates, we assume that people are asking about folks who have actually deposited on their cruise.

There are actually three things we monitor quite carefully.

We monitor the percentage of the people who are calling us, that actually make a reservation, we monitor the percentage of the people who make a reservation, then make a deposit.

Then we also monitor the percentage of the people that made a deposit that actually sail.

I can tell you all three of those numbers have held remarkably consistent.

Even after 9/11, when we talk about the cancellation rates, we do see that when people put money down on their cruise, again even after 9/11, we saw remarkable resilience in the percentage of the guests that actually went forward, stuck with their cruise vacation plans.

Great.

I think back during that time it was probably more favorable to travel on the seas, rather than by air, so maybe that was a slightly different situation than it is now.

Well, I think the key here is that the numbers are not changing.

We're seeing remarkable consistency and we watch this every single day.

Okay, great, thank you.

Okay.

With that we thank you very much for joining us today.

As always we appreciate it, and Greg will be available throughout the day for any follow-ups you may have.

And we wish everyone a great day, thank you.

This concludes today's Royal Caribbean Cruises Limited first quarter earnings call.

You may now disconnect.