皇家加勒比遊輪 (RCL) 2008 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the second quarter earnings release conference call.

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

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

(OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to your host, Mr.

Brian Rice.

You may begin your conference.

Thank you, operator, and good morning, everyone.

I would like to thank you for joining us this morning for our second 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, Daniel 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 your results and the business overview, I would like do 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 in our SEC filings.

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

As you saw in our press release, we have quite a bit to talk about today.

Richard will start with some perspectives on the current environment.

I will then take you through our financial results, share some more insight into our cost savings initiatives and our booking trends, and provide you with our forward guidance.

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

Richard?

Thank you, Brian, and good morning, everyone.

I'd like to do something a little different in my comments today.

Usually on these quarterly conference calls, we focus on only the next quarter or so.

But today, I'd like to make a few comments, trying to put the current situation in context and to talk about our longer-term perspective.

The current situation may not meet the strict definition of unprecedented, but it's certainly rare and the totality of circumstances that we're looking at is unlike anything we've experienced in our industry's history.

Against this background, the performance of our business continues to do astonishingly well.

We see two particular challenges, fuel and the economy.

We see them as the biggest issues impacting our business.

This morning, I'd like to briefly discuss how we're responding to these dual challenges.

I'll start with fuel.

The facts, unfortunately are quite clear and the price of fuel actually accounts for more than 100% of the change in our performance for 2008 compared to our original guidance.

As usual, there are a number of ins and outs, but bottom line, our overall performance for the year is set to beat our original forecast except for the price of fuel.

We can take some steps to reduce the impact of fuel costs and we're implementing those steps as quickly as we can.

And you can see from the press release that these initiatives have helped us cope with the price increase this year and will help us even more next year.

But the second major challenge is the economy.

Here, I think our continued strong operating performance demonstrates clearly how well we're able to deal with this situation.

Our business provides us with a surprising amount of detailed information about the future because people book their cruises so far in advance.

In fact, we've just entered the period where we are taking more bookings for 2009 than we are for 2008.

The good news is that the bookings that we have been taking this year, and are now taking for next year, continue to hold up better than even a year ago.

And at that time, the market was pretty uniformly seen as being very buoyant.

There are clear and consistent reasons why our bookings have continued to do so well.

First, even in difficult times, most consumers consider their vacations as an entitlement and they give up other things before they cancel their vacations.

Secondly, during difficult times, people are more cautious about the way they spend their money and the cruise value proposition becomes even more relevant at such times.

Thirdly, our brands and our new ships are really resonating with our consumers and we're attracting an increasing premium with the product that we offer.

Lastly, ships are mobile and we can shift our deployment and our sourcing to go where the demand is.

The result of all of this is that our revenue expectations for 2008 have not changed dramatically since the beginning of the year and our forward bookings for 2009 give us good grounds for optimism next year, too.

I know that some observers assume that we're only doing as well as we are because of the bookings that we took last year.

But the fact that our forward bookings for '09 are ahead of last year on both rate and volume shows this really is not an isolated phenomenon.

It's true that our yields in the second quarter of this year were marginally down from what we expected, but that's entirely due to Spain where we had a ship grounding which took her out of service and where the economy has been particularly hard hit.

At the same time, I think it's important to emphasize that we don't believe that we're immune from the effects of the economy.

There's no doubt that the economy has impacted us.

Important difference is that the impact has been so much less than one might have expected in this environment.

If these are the bad times in the economy, imagine how we will do in more normal times.

So how are we responding?

The bad news of course is that we have to respond at all.

But the good news is that we have a number of tools at our disposal that will allow us to respond effectively.

I'd emphasize four general responses.

The first is to cut our energy consumption to the extent that we absolutely can.

This involves numerous initiatives, ranging from changes itineraries to new engines, to more efficient hull designs, et cetera.

The second area, as already mentioned, is to change our deployment and sourcing so we're going to more hospitable areas.

This takes some time, but it is remarkable how quickly we're able to make the shift.

For example, we have gone from about 13% of guests coming from outside of North America, i.e.

United States and Canada, in the year before last to about a third this year.

Note that these figures are for guest count, and since the cruises tend to be longer and more expensive, the revenue percentage a actually higher.

The third thing we can do, as announced last night, is we are undertaking a major cost reduction program, mainly in general and administrative expenses.

We are deeply disappointed to have to do this, but this is a different world that we are facing and a different world requires a different response.

We are determined to make these changes without jeopardizing the outstanding product our crew members deliver every day on board, and without jeopardizing the support we provide to our travel agent partners who have been and will continue to be so important to our success.

Our goal of $125 million is a stretch, but we are determined to achieve it and to make it last.

Lastly, we believe that our new class of ships generate returns that some of the earlier categories of ships would only dream of.

The new ships provide better revenue, greater fuel efficiency and greater operating efficiencies.

In addition, the new features and amenities of our new ships mean that they generate excellent returns which will lift the performance of our entire fleet of ships.

Of course, we remain concerned by the high and the volatile price of fuel and will continue to watch the economy intensely, but we think that the performance for the first half of this year and looking into the second half and next year shows that we can weather these storms surprisingly well.

I also think it demonstrates our determination to take the actions which are necessary to continue to do so.

With that, I'll turn it back to Brian to provide more detail on the results.

Thank you, Richard.

As we mentioned in our press release, net income for the second quarter was $85 million.

And as you will see on the second slide, our earnings per share were $0.40 compared to our previous guidance of $0.40 to $0.45 per share.

Net yields for the quarter increased 1%, slightly less than our guidance of an increase of around 2%.

Nonetheless, our net revenue yields were the highest in our company's history for the second quarter.

Our Spanish brand, Pullmantur's revenue performance was lower than forecast.

Pullmantur's Sky Wonder was involved in a grounding incident that resulted in two cancelled voyages.

We also incurred some belated charges for guest compensation.

The main driver, though, appears to be a very weak Spanish economy where unemployment is now close to 10% and the housing market fell over 30% in the first quarter.

Spain is still a relatively young and small cruise market and as a result, we believe has more sensitivity to economic pressures.

In contrast, in our more developed markets outside of Spain, all of our other brands performed well and consistent with our guidance.

Despite all the economic pressures and falling consumer confidence, we continued to see very healthy close-end demand throughout the second quarter.

On slide three, we show sailings for our last six quarters.

This graph illustrates the quality of pricing for bookings made within 90 days of sailing as compared to the same period the previous year.

As you know, the quality of our close-end bookings was very poor in the first quarter of 2007, but began to rebound in the spring of last year.

We have now seen 14 straight months where close-end demand has booked at a premium to the prior year.

Now going back to slide two, you will see our costs were lower than guidance.

Net cruise costs per APCD were up 6.7% versus our guidance of up between 7% and 8%.

And excluding fuel, net cruise costs for APCD were up 2% versus guidance of an increase between 3% and 4%.

This was driven primarily by lower general and administrative expenses.

Our fuel costs on a per APCD basis increased 31% versus the same time last year.

Fuel prices actually increased 55% year-over-year, but our hedges help mitigate some of the increase and our average net cost per ton was 35% higher.

We also benefited from a reduction in consumption for APCD of about 3.5%.

I suspect our fuel costs were slightly better than some of you may have modeled based on the increases in WTI throughout the quarter in our consumption guidance.

We were able to reduce consumption versus guidance by a little over 4,000 tons.

While our fuel costs tend to correlate pretty well with the changes in WTI over time, in the second quarter our mix of fuels actually increased less than WTI did.

Now, I would like to talk a little bit more about the cost savings program Richard mentioned.

As you know, over the last few years, we've made some large investments to feed our growth in many strategic international markets.

For the most part, we have grown organically, which means most of our start-up costs in new markets are incurred a year or more in advance of the revenues.

Because of the success we have enjoyed in emerging markets, especially in Europe, we are now able to absorb these costs within our capacity and revenue growth and lower our spending per APCD.

Additionally, we are projecting virtually flat capacity for our brands in North America over the next several years.

As a result, we had systematically reviewed our organization to identify opportunities to operate more efficiently and effectively, and to identify activities that are not adding proportionate value.

For the last several weeks, our management teams across the Company have reviewed every aspect of our business to identify cost savings opportunities.

As a result of their diligence and creativity, we have identified approximately $125 million in annual savings, mostly in general and administrative expenses.

Yesterday, we reduced our shore side work force by approximately 400 positions.

As I'm sure you can appreciate, this was a very difficult process for everyone involved.

Regrettably, these actions were necessary given the significant escalation in fuel prices and the need to adapt our business model to operate more efficiently.

We have also discontinued or scaled back investments in some of our noncore operations.

For example, we have discontinued our education at sea program called the Scholarship.

We have always been very excited about the prospects of this program, but also recognize the need to be more measured in our investments given the current environment.

We are still finalizing the details, but expect to take a charge of approximately $15 million or $0.07 per share related to these initiatives.

As Richard mentioned, throughout this process we have been very careful to make sure we preserve the excellent guest experience our brands provide, continue to support our travel agent partners and maintain the focus on our international development.

While we will wait to provide specific guidance for 2009 until we complete our operating plan, we estimate our savings initiatives will result in SG&A expenses per APCD in 2009 to be close to the levels we incurred in 2004.

And net cruise costs, excluding fuel for APCD will be similar to 2007 levels.

Now, I would like to share some more information on the revenue environment.

As Richard pointed out, overall demand remains remarkably healthy given the state of the economy and consumer confidence.

We expect yields to improve approximately 2% in the third quarter between 4% and 5% for the fourth quarter and between 3% and 4% for the year.

Since our last call, as I mentioned before, we have seen weaker demand out of Spain and have adjusted our forecast accordingly.

However, we have actually seen some strengthening of demand in the Caribbean.

And while our newest vessels continue to command terrific premiums, we are pleased to see rather broad-based support across our fleet and among the various cruise links and products in the Caribbean.

Our European products and sourcing, with the exception of Spain, are performing consistent with our last forecast.

In the last two years, we have increased our capacity in Europe by approximately 70%.

The market has shown strong acceptance of our brands and has absorbed this growth quite well.

On a like-for-like basis, our yields from Europe are about flat during this growth period.

But because European yields are higher on average, our overall yield performance has benefited.

We continue to watch the booking activity very closely with a critical eye.

And as you know, we have a very strong revenue management team that is constantly dissecting call volume, elasticity and cancellation rates.

Because of all the uncertainty in the market today and significant focus on current activity, we thought it would be useful to share a bit more insight than we normally do into what is happening with current bookings and pricing.

Slide four shows you how our third quarter bookings have evolved since our last call for the Royal Caribbean International, Celebrity Cruises and Azamara Cruises brands.

On the left-hand side, you can see that our load factor buildup has been remarkable consistent over the last three years.

At this point, our total load factors are approaching 100%.

Please note that this does not mean we are full.

Last year we finished the quarter at close to 110%.

However, this graph does show a very consistent pattern in the booking curve over the last few years.

The right-hand side of the slide illustrates our pricing position versus the same time last year.

You can see that our year-over-year booked APDs for the third quarter are actually better than they were back in April.

On slide five, we have provided the same information for the fourth quarter.

The load factor pattern is consistent with the last two years and as you would expect, we have more inventory left to sell in the fourth quarter than we did in the third.

On the right-hand side, you can see our pricing continues to run ahead of a year ago and is even improved since our last call.

Our expectations for Pullmantur have been lowered for the balance of the year due to the weak Spanish economy.

Advance bookings for the peak season in Spain, most of which will fall into our fourth quarter, are quite strong.

Nonetheless, we have tried to temper our expectations for Pullmantur and currently project our corporate yields to improve between 4% and 5%.

As Richard mentioned, for 2009 sailings, our load factors and APDs are ahead of the same time last year for both the first quarter and the year as a whole.

So given what we know today, we are feeling good about 2009 being another year for yield improvement.

We have also been getting a lot of questions about cancellation rates.

I wanted to share some information about that as well.

On slide six, we have graphed the percentage of our guests that book and make a deposit for their cruise and cancel within a couple of months of their sailing.

Overall, the number of guests that deposit and cancel close in is very immaterial, usually less than 1%.

As you can see, there is no noticeable change in behavior.

Lastly, on revenue, on-board spending for the second quarter came in about as expected.

For the full year, we are projecting on-board revenue to be about flat for the year.

Our on-board yields are still running the highest in our history.

Considering all the new products we have introduced and new markets we are serving, this is quite gratifying.

Now, I would like to update our latest guidance.

On slide seven, you will see our guidance for the third quarter and full year.

For the third quarter and based on current fuel prices, our forecast is for earnings per share to be in the range of $1.65 to $1.70.

For the full year, we expect to earn between $2.55 and $2.65.

At current fuel prices, our fuel costs for the full year would be approximately $86 million or $0.40 per share higher than at the time of our last call.

Adjusting for this increase, our guidance has improved about $0.05 for the year as a result of the net savings from our initiatives.

Unfortunately, it will not be until 2009 that we feel the full benefit of these actions.

For the third quarter, we will have an increase in capacity of 3.9% and we expect yields to be up around 2%.

Based on the current price of fuel, net cruise costs are expected to be up around 10%.

Excluding fuel, net cruise costs should be up between 1% and 2%.

Our guidance for the full year includes a capacity increase of 5% and yields to be up between 3% and 4% compared to 2007.

Based on current fuel prices, we expect net cruise costs to be up between 6% and 7%.

If fuel prices remain at current levels, our fuel costs for the third quarter would be approximately $224 million and would be approximately $772 million for the full year.

This takes into account that as of today we are 44% hedged for the third quarter and 55% hedged for the fourth quarter.

In terms of sensitivity, if we assume our fuel prices move in tandem with WTI, a $10 change in WTI either way equates to about an $11 million impact to the third quarter and a $9 million impact to the fourth quarter.

Looking out to 2009 we are currently 40% and 22% hedged for the first quarter and full year respectively.

And lastly, for the year, we are forecasting our other income and expense line to be similar to last year.

This line includes our equity investments, including our new partnership with Tui in Germany.

It also includes a gain in the third quarter of approximately $18 million related to a settlement of a pending lawsuit.

This line item tends to be driven mainly by derivative and effectiveness, and the reevaluation of certain balance sheet items as a result of fluctuations and exchange rates.

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 second quarter results, highlighted by the performance of our Caribbean products that continue to benefit from high quality close-end demand.

As we strive to mitigate the challenge we face from higher energy costs, we are also scanning the environment for signs that macro economic deterioration will negatively effect our forward bookings.

I would like to note three considerations relative to the environment that we are facing.

First, the Royal Caribbean International brand is more globally-oriented than the North American centric brands that are normally understood as our competitive set.

We now view South Hampton, Barcelona, Venice, [Sowpalo] and even to some extent Shanghai, as so-called drive markets along with Galveston, Tampa, Baltimore, and [Bayon] .

In other words, we are not focused to bringing ships back to North America in order to mitigate exposures related to air capacity, currency, et cetera.

Second, the profitability of our newest ships continues to be outstanding.

Our Freedom class ships will as well against our original expectations, even if the price of oil would ascend to levels materially higher than what we are facing today.

Oasis of the Seas, meanwhile, compares very favorably to our successful Voyager class ships in terms of balcony inventory as 72% versus 49% and an energy consumption at 30% greater efficiency.

Third, in our battle to minimize fuel consumption, we are evaluating our itineraries intensively.

The time, speed and distance we ask our ships to cover is the single greatest driver of our energy usage.

On the other hand, the ability of our ships to visit multiple destinations during one cruise is one of the greatest drivers of the consumer value proposition.

Navigating between these two drivers will always be a balancing act, but given current fuel prices, we have become more aggressive in adjusting itineraries than we have been in the past.

This includes certain tweaks in itineraries already open for sale as well as consideration of more meaningful adjustments for sailings beginning in the spring of 2010.

Any such adjustments will be made with an eye toward sustaining the very high level of guest satisfaction we deliver to our guests today.

Turning to a few other items, during my trip to Asia earlier this month, we announced the Legend of the Seas will begin year-round deployment in Asia starting in the fall of 2009 with a continued focus on local market sourcing especially from China.

As many of you are aware, we began seasonal operations in Asia with Rhapsody of the Seas this past winter, and will bring Legend of the Seas to Asia this coming winter for another seasonal operation.

While the year-round Asia initiative is small in terms of our overall capacity, it is a meaningful reflection of our commitment to continued international development and the announcement was extremely well-received in Asia.

In North America meanwhile, this month Royal Caribbean received the coveted Best Partner overall and two other Partner of the Year awards from AAA.

This achievement is a testament to the dedication of our people, to partner with knowledgeable motivated travel agents, to deliver the wow to millions of guests each year.

Finally, in June, we continued our reveals of notable features on Oasis of the Seas.

We have now announced Central Park, Board Walk, Royal Promenade and the Loft Suites.

We will continue to reveal information about the additional neighborhoods and related programming throughout the fall.

It is clear that Oasis of the Seas and her invasions will be the number one product development story in the cruise industry for the foreseeable future.

Thank you, Adam.

Good morning, everyone.

The primary drivers for the positive second quarter results for Celebrity were driven by good performance with our Alaska and Caribbean products.

We also saw a benefit from moving Azamara Journey out of Bermuda into Europe and the addition of Azamara Quest in the European market this summer.

Looking at the balance of the year, we are seeing some definite trends for Celebrity.

Our yields are holding up in Europe with a 23% increase in capacity in Q3 and a 13% increase in Q4.

We remain confident that the European products will continue to do well for us in the future as we are benefiting from an increase in European sourcing.

Alaska and the Caribbean are performing well for us.

We are seeing good late fees and sales in Alaska as this particular product remains in line with the expectations we had from the beginning of the year.

The Caribbean and Panama Canal sailings for the balance of the year are meeting, and in many cases exceeding what our beginning-of-the-year expectations were.

Celebrity Solstice has been particularly promising.

We are seeing a nice ticket yield premium for the fourth quarter and through next year.

A combination of the excitement that is being driven by our marketing and sales efforts, as well as the 85% balcony cabin mix, is driving the trade and consumer interest in Solstice.

We also have an 18% more retail space on Solstice versus our Millennium class ships and feel confident that on-board revenue will benefit from new design in many areas across the ship.

And while the yield performance is encouraging, we will also be gaining economies with scale on the cost side with Solstice that will make her the top return on invested capital ship for Celebrity.

We were fortunate to be able to open Solstice for revenue sailings three weeks earlier than originally planned because of the progress we were making with the building process.

The response to those three sailings, even at this late date, has been very strong.

Although still relatively early, we are seeing positive results for 2009.

Load factors and pricing are up.

Of particular interest, both group and individual load factors are up versus the same time in '08.

Too early to draw any definitive conclusions from this, but it does suggest both the consumer and the travel agents continue to see cruising as a very viable vacation for 2009.

As you heard Adam say, we have recently been engaged in an exhaustive review of our itinerary.

We also are balancing fuel consumption with consumer demand.

While we will be able to reduce our fuel consumption, we do not believe the changes we will be considering will reduce our demand.

Finally it's important to point out that our guests are rating our product as high as they ever have and our relationship with the travel-trade community remains extremely strong.

These two points give us confidence about what we're seeing in 2009.

Brian?

Thanks, Dan.

Operator, at this time, we'd like to open the call for questions.

(OPERATOR INSTRUCTIONS).

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

Good morning, guys.

I have a few questions for you.

One is on your CapEx spend.

You've laid out, and this isn't new, but you're spending about over $6 billion in CapEx from '09 to 2012.

I'm wondering, can you walk us through how much you anticipate will get funded through free cash flow?

And then for the balance, can you just walk us through how you plan to fund that?

Obviously in this environment, there's a lot of concern about any company with large CapEx plans.

Anything you can walk us through would be very helpful.

Okay, Felicia.

It's Brian.

Our CapEx, as you know, is largely new ships that are under contract.

I believe at this point in time we have about $7 billion on the quarter.

Our maintenance CapEx and IT and all the other money we spend tends to be a little below $200 million a year.

We haven't given specific percentages, but I can tell you the majority of that CapEx will be funded through free cash flow from operations.

Something we probably don't do a good enough job talking about is the backup financing that we have if we need it on all our new ship contracts.

We finance the Independence of the Seas.

And the Solstice, we have committed financing for already that we will be taking delivery of in November.

All of our new ship contracts come with the opportunity to have guarantees for -- anywhere from 80% to 85% of the new ship contract.

At this point in time, with the bond markets being as tight as they are, we would be using bank financing.

And if necessary, we would be able to get government guarantees both out of Germany and Finland for the ships that we build in those respective markets.

The bottom line here is we've been very fortunate, despite the credit crunch, to really not be exposed to it at this point in time.

And then let's just say the economy, for example, turns in Germany, how stable are those guarantees?

They're backed up by the government of Germany.

There's a branch of the German government called Hermes which provides the guarantees and the contractual obligations they have with us, and the same with Finland with Finvera.

Great.

Switching gears on to Pullmantur, I'm trying to understand the magnitude that it's had on your guidance.

We're calculating that it's about 10% of total Company births.

I'm surprised the impact it has on yield.

I was wondering if you could walk us through that.

Sure.

Felicia, Pullmantur has two impacts on our yields.

First, they represent -- I believe the last number I saw was 7% to 8% of our cruise capacity.

But remember, Pullmantur also has a much larger tour division than we're accustomed to having.

And any fluctuations in that benefits us on the cost side and hurts us on the yield side.

Pullmantur, the Spanish market, was down quite a bit in the second quarter.

As I mentioned, our bookings as we get into the peak season look quite good, but we've tried to be somewhat tempered in our expectations for that to continue to hold up.

As you recall on our last call, our full-year guidance was increase of around 4%.

Despite the short fall in Q2 and even recognition of taking Pullmantur down for the balance of the year, it has had a rather de minimis impact on our corporate yield and our current forecast is for improvement between 3% and 4%.

Great.

Finally, can you just tell us how much hedging you have on for 2009?

The number for the full year is 22% and I believe the first quarter we're 40%.

Okay.

Great.

Thank you.

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

Hi.

Yes, a couple of questions.

Thanks.

One is just to clarify, Brian, your comment about Pullmantur.

I'm trying to get a sense of whether yields are down double digits.

Or how much of this is the tour business rather than actually just cruise ticket prices?

Robin, we're trying to be a lot more transparent on this call than we have in the past, but we don't want to get into specific yield changes by brand or by product.

I will tell you that in the second quarter, Pullmantur's cruise yields were down year-over-year.

We also saw some declines in the tour division which includes charters and also their air operation.

That also did help us on the cost side, though.

As you've seen in the past, that tour division's been a little difficult for us to forecast.

When yields are down, costs tend to be down and vice versa.

Is the tour business specifically doing worse than you thought?

It's a combination of both, the cruise division and the tour division.

Okay.

Great.

Then your comments on onboard spending, it's up slightly in Q1, down slightly in Q2.

I think you said you're expecting it to be flat for the year, but I wanted to clarify if I heard that right.

In a sense, why wouldn't you expect it to continue trending down a little bit maybe?

Our on-board yields for Q2 were right where we expected them to be.

I believe they were just about flat in Q2.

The brands look at this quite closely.

We're looking at itinerary changes and shifts of where we have our ships deployed.

You recall that in the first half of the year, we had a tremendous amount of new products going into new itineraries.

Adam alluded to Asia, for example.

Generally speaking, the first year in a market it takes us a little bit of time to adapt.

But I think overall, we're quite pleased with where on-board revenue is.

In terms of -- seasonally Q3, since there's less Caribbean, it seems like maybe it would make on-board a little bit more challenging in the second half of the year than in the first, though?

I don't want to put words in your mouth, but is that a fair expectation?

Robin, hi.

It's Adam.

One of the experiences that we're having right now that runs a little bit counter to that line of questioning is that our excursion business has been strong.

And in the third quarter, of course, there's a lot of destination intensive product that we're offering.

While there are many revenue streams and they have variability in their performance, there's an important revenue stream that's a beneficiary of our third quarter deployment activity.

Okay, great, thanks.

Then the last question is any more color you can give on the expense reduction outside of head count and discontinuing the scholarship program?

It looks like that would be less than half of it.

Just wondering what other expense items you can talk about.

Robin, it was pretty broad across the board.

The head count reductions range from officer level down to clerical staff where you have focus on things like travel and entertainment.

We've looked at consulting.

It's rather broad.

This has been almost a one-month process that our entire officer core was really locked into with a lot of creative ideas with a real mandate that we needed to operate much more efficiently.

I would emphasize the fact that we've been growing quite a bit over the last several years.

We've introduced a lot of new products and a lot of new markets.

I'd say we somewhat took a pause here and really stepped back and said, where can we drive efficiency.

Where do we have duplication of effort that can be eliminated?

There was no silver bullet as there never is in these things, but more just a broad-based holistic view.

Thank you very much.

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

Hey, good morning, guys.

First, is there any material change in the booking window from the last time we talked?

Steve, not on any particular product group.

I think that Adam alluded to the fact that on his brand, we are getting more of our guests in drive markets as we have diversified our portfolio out around the world and those tend to book a little bit closer in.

There's a little less planning involved when you're closer to home.

But I would say on a like-for-like basis, we haven't seen any shifts in the booking window.

Second and final question, it looks like on the commission side of the business, it looks like you made another recent change where it's -- you're going back and it's actually going to benefit some of your larger agency groups.

Can you discuss the decision behind that?

Steve, this is Dan.

We've got great partnerships across the board with the trade.

We went back to a couple of trade partners and looked at some things that we could do that in the end, we think would be a benefit to us on the commission side.

We made some adjustments to commission.

We think that will help generate more demand out of those big players for us and the end result will be very, very positive for us.

Got you.

Thanks, guys.

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

Thank you.

On capacity, gentlemen, your guidance for '09 and 2010, it looks like there was a shift from '09 to 2010.

Could you give us a little more color on that?

It's a pretty meaningful shift it appears.

And then any comments, Brian, as far as what foreign exchange impacted revenues during the quarter?

Or if you want to comment it on an EBIT basis?

And then, what's your expectations are overall for the year there?

Hey, Tim.

The primary shift in the capacity for '09 as you saw at the end of April, we announced that the Galaxy will be leaving the Celebrity fleet and going to Tui.

Tui is reported below operating income because it's the 50% equity, so that is basically what caused the reduction in '09.

Then the reason for the increase in 2010 is the basis in '09 was lower.

No real material shifts outside of that.

There's always tweaking on itineraries when you're looking a year or two out and dry dock schedules.

No change in any of the contracted delivery schedules, Brian?

Nothing material, no.

Okay.

As it relates to FX, we really -- it's difficult for us to really guide you in terms of the impact.

Particularly on revenue, because the only brand that we have that is operating in a different functional currency than dollars is Pullmantur.

That one, we could actually do the calculation of the exchange gain or loss related to that.

But for our other brands, it's part of our revenue management equation.

Adam talked a lot about the diversification of the Royal Caribbean International brand.

We're constantly evaluating pricing and elasticity and opportunities, and how we can benefit or utilize FX in that.

It really is a pricing decision.

There doesn't -- I don't recall that this quarter, we had any real substantial impacts on FX.

If you -- I can tell you that the revenue, the top line will benefit as the dollar weakens.

We do have additional operating expenses as the dollar weakens, because we have the Brilliance lease is denominated in pounds.

We have some operating expenses for our European itineraries in Euro.

Below the line, in other income, you tend to get noise created in FX as our customer deposits get reevaluated.

And that adjustment is taken in other income expense.

But net net, I think a 1% change either way in the dollar has less than $1 million dollar impact on our whole P&L.

Okay.

And I know there is a lot of noise, especially in the occupancy side this quarter.

But in general, do you anticipate any ups or downs in occupancy, more than say, 20 basis points or so on a year-over-year basis?

Nothing on a like-for-like basis.

Nothing really material.

In Q2, our occupancies were down, I think it was about 200 basis points.

Some of that was Pullmantur had a bad quarter.

But also, it was impacted by some of the deployment shifts as we sent more inventory to Europe.

European itineraries tend to have fewer kids on board or fewer thirds and fourths which will drive down your occupancies versus -- say, the Caribbean, for example.

But our strategy hasn't changed in terms of pretty much managing the full capacity.

The demand certainly is out there for us to do that as well.

Tim, I think, though, we should qualify that because you specifically mentioned 20 basis points.

I think 20 basis points is below even our ability to look at if with a magnifying glass.

Okay.

I think in fact, there may well be a slight bias towards having a little lower capacity and holding price in some cases.

Again, it depends a lot on the area and the market that you're in.

But I certainly don't want to give you the impression that we will maintain that within -- anywhere near 20 basis points.

That was the root of my question is are you maybe willing in a more challenging overall economic environment to give up a little bit of occupancy to hold price?

Then how much, I guess, of that dynamic are you willing to take?

We're not really facing that at this point, but that is the kind of trade off that we make all the time, in fact.

Okay.

Lastly, gentlemen, you had given some color on Europe overall, which still sounds very good.

In particular, anything related to Ireland and balance of the UK?

As similar to Spain, they're having probably the most challenging issues of all the European-based economies.

Tim, although Ireland is a very small country, it's notable to us because the Irish guests that we have rate us the highest of any country in the world.

We're very partial to our Irish guests.

It's part of our UK Ireland selling effort and we're doing very well in that market.

To the best of my knowledge, Ireland is contributing its fair share to that growth.

Okay.

Great.

Thank you, gentlemen.

Your next question comes from the line of [Anbia Georgiava] of Infinite Research.

Good morning.

A couple of questions.

First of all, on on-board for the second half of 2008, I assume you're expecting flat on-board spending even though comps were very difficult a year ago.

And a related question, it seems that the costs for on-board revenues have been increasing over the past several quarters.

Is that a trend that will continue and what drives that?

A couple of comments.

I would say that our second half projections, we feel very good about.

We are looking at pretty much flat on-board spending throughout the year.

I will mention that our on-board spending tend -- right now, is still at historical highs.

It's the highest we've ever seen in our history.

We feel very good about it.

In terms of the increase in the cost, Adam alluded to the fact that shore excursions in particular are doing quite well.

Shore excursions tend to be a little bit lower margin.

I think we're also seeing some impact from the weakening dollar in that our costs in Euros for our European shore excursions have been increasing.

But again, on a net basis, our on-board spending is about flat year-over-year.

Again given the new markets and itineraries that we're serving, we think that's held up pretty nicely.

And you expect that to continue for the second half, despite the very difficult comp?

Yes.

Okay.

And another question, maybe to follow up on what Tim was asking about, have you seen any weakness in the UK market in terms of bookings, maybe early indications for 2009?

It's Adam, again.

Our outlook at this point, given the limited visibility that we have for our business overall, which would include the UK, is positive at this point in terms of year-over-year data looking into '09.

Even over the last three months, you have not seen any negative changes, Adam?

Correct.

Okay.

All right.

Thank you very much.

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

Hi.

Good morning.

A very general question which is two years ago, you indicated that consumer trends were weak and that's why you were experiencing softer performance relative to other discretionary categories.

Now with consumer trends weak from retail to all of travel, you're indicating your results are solid.

I guess broadly, maybe you can try to explain this disparity and are you on a different cycle or something like that?

Separately, maybe it's the value product appeal, but that would seem to appeal to customers no matter what.

And third, because I think this might be the answer, is just simply a change in the amount of supply, and in certain markets and a change of the itineraries.

And if that's the case, why not commit this morning to not building more ships than what you currently have planned?

Steven, I think you're referring -- I'm not sure the specific thing you're referring to.

But I think you're referring to well, a one quarter snapshot that we were looking at.

I think I would continue to emphasize, we're not claiming that we are immune from the effects of consumer sentiment, consumer spending, et cetera.

We just think that we have ways to respond to that.

And those ways don't necessarily happen instantaneously.

We are fortunate that in some of this, we anticipated some of those changes, so we've repositioned ships, et cetera.

I would emphasize, we don't think this is a terrific year.

I'm disappointed that we're looking at these kinds of yields.

I think that if consumer send I-was better, we would be looking at better yields.

I think we did say in our press release that clearly in today's world, we think that we would certainly be a lot more cautious in looking at new waters, both because of the operating environment and because of the cost of the ships.

But I think overall, we think we've held -- we don't think we've changed our view that our industry and particularly, our brands hold up better than you would expect, but still are influenced by the general economy.

A few years ago, it seemed like relative to other industries, you were having a much more difficult time.

And appropriately, you changed your itineraries, reduced your supply in certain key markets and that seemed to help.

I'm saying why not continue to do that?

For example, can you maybe move to changing your itineraries faster and not committing to them out a year and a half or two years.

And maybe commit to them shorter and see what the reaction is to that and moving ships more quickly to areas that need demand, and taking them out where a demand's not so strong.

Steven, you can move more quickly and we actually have done that in very narrow circumstances where special circumstances dictated.

I think what is unique about our industry is the ability to reposition, but it does take a while.

You have to build up a market.

You have to build up an infrastructure.

The market needs to be aware the product is there..

The travel agents need time to assimilate the information and disseminate that to their clients.

And so, yes, we've been making some fairly dramatic changes.

As I mentioned a year and a half ago, our nonUS sourcing was -- in terms of passenger count, was 13%, is now closer to a third.

We think that's a pretty dramatic shift.

Can you do it in shorter time?

Possibly, but we think that this is probably the appropriate thing to get the best value for our investment.

Okay.

Thanks.

Your next question comes from the line of David Leibowitz from Burnham.

Did I hear Mr.

Rice say that there's going to be an $18 million legal settlement added to the third quarter's profit?

If that is accurate, what lawsuit is that and when will the settlement actually be announced?

We -- actually, David, we have reached an agreement.

If you look in our disclosures, we had a lawsuit against Essex, related to the [Leesion Aires] case from back in the 1990s with the Horizon.

1994, it's only been 14 years.

We have reached an agreement.

The agreement is signed.

It was signed after the close of the second quarter, so we will be recognizing that in the third quarter.

Okay.

Now, is that included in the earnings estimate, then?

Yes, it is.

And yet, we are not including in the earnings estimate the other costs, the fuel costs when you were speaking.

I have to get it out of the press release.

Okay.

The earnings -- the numbers that I gave you for fuel, I believe was $224 million, something in that change for the quarter and $772 million, I think, for the year.

That's all baked into our EPS guidance.

Okay.

And second of all, the New York times had a major article a week ago today or a week ago tomorrow about Park West and art auctions at sea.

Has there been any change in either their policies?

Or are you negotiating any changes with them, regarding the terms of their remaining on board your ships?

Hi, David.

It's Adam.

Nothing dramatic has happened in our relationship with Park West in the last week.

We expect them to operate at the highest standards of credibility in the business that they're in.

We're pretty demanding of our revenue partners in general, so they wouldn't be excluded from that.

We've noted in previous calls that their revenue stream has been an area of weakness compared to other things happening in the on-board environment.

And that continues to be the case.

We will be focusing quite a bit of attention on them -- this is all our brands now, to make sure that they are both operating properly and producing properly.

Thank you.

Your next question comes from the line of Joe Greff with JPMorgan.

Good morning, guys.

You gave us some helpful information on '09 load factors and pricing.

What percentage of '09 capacity has been booked?

How does that compare to this time last year?

And if you could break it out between North America and international, that would be helpful.

Thank you.

Joe, we really don't break out that specific information.

The information that we gave you for Q3 and Q4 is well above anything we've given in the past.

I can tell you, the only guidance we've traditionally given in terms of the future year is generally by the time we get to the end of the year.

We're normally about half sold.

Okay.

Thanks.

Your next question comes from the line of David Campbell with Owl Creek.

Thank you.

You don't tell us everything about the fuel hedges, in terms of what the strike prices are.

I know that you buy different kinds of fuel in different places around the world.

To simplify -- I'm trying to figure out what the average cost per ton of fuel would be if you were paying spot today for everything?

David, if you want to -- if you could follow up with Greg after the call, we can try and provide you with some of those details.

What we've tried to do is -- the fuel calculation and the hedges and different instruments and whatnot and where we're purchasing can get very, very complicated.

What we've tried to do is keep it as simple as possible and give you what it is based on the current pricing, our best estimate of fuel.

We provide you with consumption in the press release which would enable you to back into the cost per ton.

And then give you the sensitivity based on changes in WPI, assuming a perfect correlation, but over time it looks pretty close.

We think that's really the best way to look at fuel.

But if you'd like to follow up with Greg, he'd be happy to help you go through all the details on that.

David, we have changed the way we're providing that information.

We used to give it as percent change and we're now giving it as a -- what an impact of a $10 change in crude does.

As Brian says, it's not a perfect correlation.

But over time it's been a remarkably good surrogate, so you pretty much ought to be able to simply plug-in off of your computer screen what today's crude price is and see pretty accurately what our costs ought to be.

That doesn't answer my question because investment -- I could get what you're pro forma fuel cost could be, including the effect of your hedges because the sensitivities you give include the effect of your hedges.

What I'm trying to calculate is the pro forma fuel spend when hedges cut off, based on today's fuel prices.

If you call Greg offline, we can give you a little more detail that can help you with your calculation.

Okay.

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

Your final question comes from the line of Greg Haendel Transamerica Investments.

Hi, thank you.

First of all, thank you for providing a little bit more detail on your financing.

As I calculated it, I don't know if free cash flow wouldn't be able to cover the ship costs, but it's good to know about the government guarantees.

What are the -- as best as you can say, what are the terms of that financing?

Are they short bridge loans?

Or are they termed out for an extended period of time and are they exorbitant interest rates?

No.

Actually, I guess you can -- I'm not sure exactly how much we've disclosed on that, but we've given quite a bit.

I will tell you that it has always been our policy that when we order a ship, we always always arrange to have a financing in place that may or -- is at least, acceptable to us.

It tends to be at or less than LIBOR plus a hundred basis points.

You can see in the past for example, we just did one which is fairly extensively disclosed, which was that type of financing on the Independence of the Seas.

The term tends to be eight to 12 years, depending on the situation.

They're always acceptable financing.

In fact, they've been quite favorable recently.

Okay.

Then I think you guys mentioned this earlier, but you -- shore cruises are doing very well somewhat at the expense of longer cruises.

You're seeing more people going to shorter cruises; is that correct?

We have been doing relatively well on our short cruises, but it's not at the expense of our products in our portfolio.

The seven, eight Caribbean product range for example, is all up well and [so forth].

We've given some color around Alaska and Europe.

We are experiencing positive performance with our short products, but it's not out of color to the rest of our range.

Okay, thank you.

Great.

Thank you, everyone, for joining us today.

We certainly appreciate your questions and we wish everyone a great day.

Thank you.

Thank you for participating in today's second quarter earnings release conference call.

You may now disconnect.