皇家加勒比遊輪 (RCL) 2008 Q4 法說會逐字稿

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  • Operator

  • Good morning.

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

  • At this time, I would like to welcome everyone to the Royal Caribbean Cruises Limited conference call.

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

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

  • (Operator Instructions).

  • Thank you.

  • Mr.

  • Brian Rice, you may begin your conference.

  • Brian Rice - EVP, CFO

  • Thank you, Jessica, and good morning, everyone.

  • We would like to thank you for joining us this morning for our fourth-quarter earnings call.

  • With me here today are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and CEO of Royal Caribbean International; Dan Hanrahan, President and CEO of Celebrity and Azamara Cruises; and Ian Bailey, our 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 and talk about our current operating environment, we would like to remind you of our notice about forward-looking statements, which you will see on the first slide.

  • During this call, we will be making comments which are forward-looking statements.

  • Forward-looking statements do not guarantee future performance and do involve risks and uncertainties.

  • Examples are described in our SEC filings and other disclosures.

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

  • Richard will begin the call with the strategic overview of our business.

  • I will follow with a brief recap of the fourth quarter, update our guidance and provide some insights into the recent demand environment.

  • Adam and Dan will then talk more about their brands and how we are managing the business in the current environment.

  • And then we will open the call to your questions.

  • Richard?

  • Richard Fain - Chairman, CEO

  • Thank you, Brian, and good morning everyone.

  • It may surprise you to know that I've actually been looking forward to this investor conference call.

  • Obviously, I hate having to report weaker earnings and a weaker outlook for 2009.

  • In this disastrous economic environment, I'm sure many companies wish that they could just skip 2009 altogether.

  • Nevertheless, there is a great deal that our management team is doing in response to this situation, and I've been looking forward to the opportunity to talk with you all more about what they've been doing.

  • As you've seen from our press release, these responses include a gratifyingly successful cost-cutting effort, excellent operating performance by our brands in their respective market segments, very constructive collaboration with our travel agent partners and strong diversification into international markets.

  • First, I would like to comment on what has to be the major focus of everyone's attention, and that is the economic crisis and its impact on our business.

  • Of course, we are as confused as anyone as to exactly where the economy is going and how it will ultimately affect us.

  • We already know it is bad, but we don't know how bad or how long.

  • Nevertheless, we are finally beginning to get a better handle on its likely implications for our industry and for our Company.

  • Starting with the fourth quarter, we are deeply disappointed to report essentially a breakeven profit for the quarter, and that we ended the year with only $2.68 in EPS.

  • Until a few months ago, we were doing substantially better.

  • Nevertheless, we are pleased that our management team responded early to the approaching storm.

  • That response is reflected in our cost containment efforts, both last year and, to an even greater extent, in 2009.

  • As a result of these efforts, we now expect our net cruise costs will fall by 5% to 7% per berth next year, after what was a pretty good performance in 2008.

  • I think this demonstrates how seriously we are taking the current environment.

  • Now with respect to our booking outlook, forecasting demand is as tough as it has ever been in my 20-plus years with Royal Caribbean.

  • On the one hand, we are terribly disappointed at the kind of pricing levels that we have to offer in this market.

  • Especially given the value of the product that we are offering, to have to suffer likely double-digit declines in yield is terribly, terribly frustrating.

  • At the same time, we had fears coming into this year that the Wave period would be even worse, and we are actually encouraged by the pace of our early bookings.

  • Pricing is still way lower than we would like, but the reason we are encouraged is that it seems that those prices are beginning to reach an equilibrium level.

  • This gives us the opportunity to utilize our yield management tools on a more productive basis, and it gives us some feeling of comfort that there is a level of price elasticity around which we can manage.

  • At the same time, we are also finding that going to extreme pricing discounts in order to fill the very last cabin may not be as productive as has historically been the case.

  • As a result, our yield projections include an assumption that we will accept slightly lower occupancy levels in order to keep pricing up and to maximize yields.

  • Before turning it over to Brian, I would like to comment on a couple of specific elements.

  • The first is volatility.

  • The current economic environment has led to truly dramatic levels of volatility in areas that historically had much greater stability.

  • For example, fuel and foreign exchange have always been variables.

  • Historically, however, they only vary within narrow ranges, and they only change slowly over time.

  • As a result, variations in fuel prices or foreign exchange rates had little near-term impact on our results.

  • All that has changed.

  • Fuel has become such a volatile commodity that we started reporting it separately, and we started giving separate calculations on its impact.

  • Even that has recently proven difficult, as daily or even hourly fluctuations mean about the cost levels don't necessarily follow the pattern one expects when looking at macro trend analysis.

  • The same is increasingly becoming true of foreign exchange.

  • The volatility of foreign exchange rates has recently become so high that we've added it to the list of factors we discussed separately, the way we do for fuel.

  • Another reason foreign exchange has become a more important variable for us is the growth of our international business.

  • We've enjoyed solid improvement in the proportion of our business coming from overseas, and this inevitably means that foreign exchange will play an increasingly important role in our finances.

  • Therefore, both of the volatility of exchange rates and the increasing diversification of our sourcing markets have led us to talk more about currency impact.

  • Lastly, I would like to make some comments on our fundamental business model.

  • The cruise industry in general and Royal Caribbean in particular have proven remarkably able to withstand even truly dramatic shocks to our system.

  • At the same time, I have to admit that I'm getting tired of proving that over and over again.

  • But I am pleased to say that we are still demonstrating that type of resiliency, even today.

  • The most important element, of course, is the attitude of our guests.

  • The current economic crisis weighs heavily on them, and it clearly results in a significant and a lasting cultural change in consumer attitudes and their purchasing behavior.

  • On the other hand, the evidence today reaffirms our belief that consumers still consider their vacations important, and cruising continues to offer the best vacation around.

  • Another reason for our resilience is our relations with the trade.

  • In difficult times, they get the word out about what a great value cruising offers in a way that the cruise lines simply can't do on our own.

  • This is a tough time for the travel agents, too, and we continue to work hard to help them and to keep justifying their trust in us.

  • One recent example is our ASAP program, and it's a good example of what we are doing, and it is part of the reason we have the strongest relationship with our travel partners of anyone.

  • One additional factor that is buttressing our business is the success of our new ships.

  • As Gene Sloan of USA Today recently said, "no doubt about it" -- and I'm quoting here -- "No doubt about it, Royal Caribbean is building the most innovative, stylish and downright beautiful ships in the business these days." I should add that these ships are also some of the most cost-effective ships around.

  • Their economy of scale is terrific, and they are producing dramatically higher revenues and lower costs.

  • The result is that even in these crazy times, they are substantial cash flow generators and will produce good rates of return.

  • But there are other longer-term implications that grow out of the current environment.

  • First of all, as we've noted above, we've responded with an aggressive cost-cutting program.

  • That program has proven remarkably effective at cutting costs without undermining our product delivery.

  • More importantly, we are implementing this program in a manner designed to benefit our long-term operating strategy.

  • In addition, the current economic environment will have a lot of implications for our supply and demand scenarios.

  • As we go forward with less capacity growth in the long term, this will enable us to shift our focus more to margin improvement from purely capacity growth -- or earnings improvement from capacity growth.

  • Another factor I would like to just touch on is international growth.

  • Regional economic conditions and foreign currency changes are increasingly relevant to every company, but especially to one growing internationally.

  • While cutting costs throughout the organization, we have not cut back our strategy of substantially growing our non-US sourcing.

  • In fact, we continue to increase our investment in international growth despite our cost-cutting program.

  • This may lead to some short-term earnings penalty, but in the long term, it diversifies our sources and increases our opportunities.

  • The cost figures that I mentioned above therefore include increased international expenditures.

  • And I think that only re-emphasizes how significant the other cost-cutting measures are.

  • Lastly, for any business, but especially a capital intensive business like ours, cash is king.

  • Our Company, like so many others, is increasing the focus we place on cash flow as opposed solely to earnings.

  • CapEx is being curtailed, rates of return scrutinized and priority given to cash generation over immediate earnings opportunities.

  • These are difficult times.

  • What has happened to our revenues and our immediate prospects is painful to each and every one here.

  • Our management team, our sales leaders, our revenue managers, our onboard staff, in fact every single employee at Royal Caribbean, is impacted by what is happening in the economic environment in which we live today.

  • We all feel it deeply.

  • But we are all convinced that what will separate us from so many others is the underlying strength of our business and the total commitment to do what is required to respond to these challenges in a manner that is calculated, comprehensive and, ultimately and most importantly, successful.

  • For that, I express my thanks and my appreciation to all of our 45,000 employees.

  • And with that, I will turn it back to Brian to go through the results and the projections in a little more detail.

  • Brian?

  • Brian Rice - EVP, CFO

  • Thank you, Richard.

  • We would like to briefly go through the fourth-quarter results.

  • As we said in the press release, our earnings per share were $0.01 for the fourth quarter and $2.68 per share for the year.

  • On slide 2, you can see revenue yields for the quarter were down 5.9%, which was slightly lower than our previous guidance of down 4% to 5%.

  • New bookings came in about as expected during the quarter, although we were hurt somewhat by the stronger dollar.

  • And unlike the first three quarters of the year, we began to see pressure on onboard revenues, especially in gaming.

  • On the cost side, net cruise costs, excluding fuel, per APCD, came in 1.7% below last year, slightly better than our previous guidance.

  • Included in our costs was an unexpected supplemental P&I insurance club call related to group claims from 2006 through 2008.

  • The call amounted to $13.3 million.

  • Had it not been for this call, our net cruise costs, excluding fuel, per APCD would have been down 3.6%.

  • Our fuel expense came in at $182 million for the quarter, which was $36 million higher than anticipated at the time of our last call.

  • Although WTI prices fell throughout the quarter, our fuel costs actually increased due to several factors.

  • Operationally, several of our lowest-priced ports were unavailable for bunkering because of weather interruptions, and we experienced some temporary disruptions with several of our newly-installed diesel engines on our gas turbine vessels.

  • We believe these were isolated events, and overall, we are very pleased with their performance.

  • Our at-the-pump prices significantly lagged the falling WTI prices, and since our costs are based on the FIFO accounting methodology and not spot pricing, this compounded the gap between our actual cost and what we've been seeing with WTI prices.

  • Additionally, this was the most volatile pricing environment we have seen, and the timing of our purchases resulted in higher fuel costs than we modeled.

  • We have made some adjustments to our methodology that should improve our calculations going forward.

  • Other income improved by approximately $10 million in the quarter.

  • The largest change here was caused by revaluation of customer deposit and foreign currency.

  • As we have said in the past, this is a natural offset to foreign currency impacts on revenue.

  • So while we had some ins and outs for the quarter, in summary, if we had not had the unexpected supplemental P&I insurance call, our earnings per share would have come in right at the midpoint of our guidance.

  • I'm going to skip over the full-year results, which are available in our press release.

  • However, I would like to point out that for the year, our yields did increase 0.5%, which is very gratifying, given the condition of the economy.

  • Now I would like to provide you with an update on the booking environment.

  • On slide 3, we have provided a graph that shows the trends for our booking volumes and pricing levels in 2009 sailings compared to the same period last year for 2008 sailings.

  • The red line shows the year-over-year changes in volume of new guest bookings.

  • The blue line illustrates how our pricing for new bookings compares to the pricing we were getting at the same time last year.

  • As you may recall, we previously commented on the deterioration of booking volumes during September and the steeper falloff we experienced during October.

  • As a consequence, we began discounting 2009 sailings rather aggressively throughout the month of October.

  • During November and December, we saw a gradual increase in new booking volume, and since the beginning of the Wave period, we had seen booking levels consistent with last year.

  • Pricing remains well below last year's levels, but has begun to stabilize.

  • Now that our booking volumes are more in equilibrium and pricing has begun to level off, we can begin to get a better understanding of consumer behavior and elasticity.

  • Now I would like to give you a little insight at a high level into how our revenue management team uses this information to manage our business.

  • In our press release, we mentioned that our booking window has shown significant compression recently.

  • A simple way to demonstrate this is to compare how far in advance of a vacation the average customer is booking their cruise.

  • On slide 4, you can see that until last fall, on average, our customers have traditionally booked their cruises approximately five months prior to sail date.

  • Since the economic environment began deteriorating in September, we have seen a steady contraction in the booking window, and today, our average customer is booking a departure only about four months away.

  • As a consequence, on slide 5, you can see that our booked load factors for 2009 sailings are well behind where they were at the same point in time during the 2005 through 2008 periods.

  • We are booked about the same as we were in 2004, but well ahead of where we were during the two years after September 11.

  • Understanding when the customer is prepared to buy is very important input into our revenue management.

  • Traditionally, we have put quite a bit of weight on how various products and markets are behaving compared to recent experience.

  • However, given the dramatic shifts in customer behaviors, we have modified our modeling to consider inputs from the past, when the booking patterns more closely resembled what we are seeing today.

  • On slide 6, we have graphed the same booking and pricing trendlines we showed you a minute ago for the full year for just first-quarter sailing.

  • Here you can see that as we move closer to sailing date, the period when consumers are ready to buy, we can achieve significant improvement in booking volumes without further price deterioration.

  • Now I would like to provide you with our forward-looking guidance for 2009.

  • I would like to first remind you that the contracted booking window limits our visibility and necessitates a wider range of guidance than we have provided in the past.

  • On slide 7, you will see our yield projections for the year anticipates a decline of between 9% and 13%.

  • We have assumed that the challenging pricing environment we are experiencing today continues for the rest of the year.

  • We have also assumed that onboard spending pressures will remain and are consistent with the last couple of months' performance.

  • As we said previously, so far, we are seeing the traditional increase in bookings that occurs during the Wave period, and our customers are buying cruises.

  • Nonetheless, given the current economic climate, we expect consumers to remain very price-focused as these pressures continue.

  • On the cost side, we remain vigilant about lowering our expenses without compromising the guest experience or the support we provide to our travel agent partners.

  • In 2009, we are forecasting our net cruise costs, excluding fuel, to decline between 5% and 7% per APCD.

  • This figure includes the impact of our $125 million savings initiative we announced back in July, as well as continued efforts on the part of our management team to leverage synergies across the organization and take advantage of new deflationary opportunities.

  • Our management and key vendors have really stepped up and found very creative ways of lowering our expenses without affecting our product.

  • In addition, we are benefiting from the strength of the dollar in SG&A and some of our running expenses.

  • As you know, Pullmantur is our only brand that does not have the US dollar as its functional currency.

  • If we use a constant dollar basis for Pullmantur, our revenue yields will improve by just over 1 percentage point, and our net cruise costs per APCD would increase by just under 1 percentage point.

  • On our last call, we gave a preliminary number for 2009 fuel expense of $635 million, and mentioned we were 39% hedged.

  • Today, we are 47% hedged for 2009, and based on today's at-the-pump prices, we would now project fuel expense for 2009 to be approximately $580 million.

  • At this level, our fuel cost per APCD would be about 25% lower than in 2008.

  • Our earnings per share guidance is rather broad at this point, given the contracted booking window.

  • However, the midpoint of our earnings per share forecast is approximately $1.40.

  • We are projecting yield declines in all four quarters, with the most significant coming in the first three quarters of the year, mainly due to prior-year comparables.

  • For the first quarter, we are projecting yields to be down between 14% and 16%.

  • This projection is net of the $30 million we refunded in fuel supplements for the quarter, which cost us about 2.5 percentage points of yield.

  • Net cruise costs for the first quarter are projected to be down between 4% and 6%, and in today's prices, we would expect fuel expense to be about $165 million, and we are 58% hedged.

  • Earnings per share for the quarter are expected to be a loss of between $0.30 and $0.35.

  • Now I would like to briefly update you on our liquidity.

  • As of December 31, we had approximately $1 billion of liquidity, including $400 million in cash and cash equivalents, and $625 million in our unsecured revolving credit facility.

  • As Richard mentioned, we have placed a high degree of emphasis on cash.

  • As you know, our Solstice Class newbuilds have solid financing commitments, and with the support of Finnvera, the export credit agency of Finland, we are confident that we will be able to secure the necessary financing for the two Oasis Class vessels.

  • Despite a very difficult revenue environment, we are confident we will end 2009 with a strong liquidity position.

  • Nonetheless, we continue to explore opportunities to improve our position, including possibly extending some maturities and monetizing derivatives that as a result of the economy are significantly in the money.

  • I want to emphasize that we are confident in our position, but believe it is prudent to continue to improve our financial strength to weather the tough economic conditions.

  • I would like to now turn the call over to Adam for his comments about the Royal Caribbean International brand.

  • Adam?

  • Adam Goldstein - President & CEO-Royal Caribbean International

  • Thank you, Brian.

  • Good morning, everyone.

  • Market conditions were difficult in the fourth quarter and we were not able to maintain the momentum which we had been enjoying earlier in 2008.

  • And we are determined to generate as much demand for Royal Caribbean International as possible in the current challenging environment.

  • It is too early to judge the success of the new marketing campaign we launched during the quarter.

  • We are confident that campaign's emphasis on our brand spirit of innovation and delivery of wow moments will resonate with both repeat and prospective guests going forward, as well as with travel agents, whose continuing support we very much appreciate.

  • As mentioned last quarter, the revenue weakness we are facing stretches across our product portfolio.

  • To the extent there is relative strength, it is in the Caribbean seven-night cruise market and in Mexico.

  • To the extent there is relative weakness, it is in our newer, more internationally-oriented products, in the Alaska market and in short cruises.

  • Given the significant increase in European capacity, we are naturally concerned about the upcoming season.

  • We have been generating the volume we require to fill our ships in Europe, so the question to be answered is rate development in the next few months.

  • While we remain optimistic about our global growth opportunities, the slowdown in bookings in a number of our priority international markets was even more pronounced during the fourth quarter than the slowdown in North American bookings.

  • For example, as recently as October, we were on trend to enjoy a successful Brazilian summer season.

  • Then that the global economic crisis and the sharp currency devaluation significantly affected our Brazilian bookings.

  • In January we have seen a marked increase in volume, but this improvement is coming too late for us to meet our revenue objectives for Brazil.

  • Other markets that have been especially challenging include Singapore and Spanish-speaking Latin America.

  • On the other hand, the UK and German markets are enjoying a positive Wave season to date, and Australia is showing promise.

  • Onboard revenue typically does not fluctuate as widely as ticket revenue.

  • This remains true in the current environment, where onboard revenue is meaningfully down, but not to the same degree that ticket yields are down.

  • Gaming is contributing about half of the decline.

  • The rest is spread across various areas, and also reflects the effect of lower occupancy on some of our developmental products.

  • Short excursions and cell telephony are areas of relative onboard revenue strength.

  • Obviously in this environment we are sharply focused on cost control.

  • Our fourth-quarter results reflect that we have identified numerous opportunities to minimize expense.

  • while maintaining the quality of our award-winning product.

  • We will continue to find more such opportunities during 2009.

  • At the same time, guest satisfaction levels are consistent with those of recent years, and our guests on the internationally-sourced products are more satisfied than they were on those products a year ago.

  • Finally, I am pleased to note that the construction of Oasis of the Seas is progressing well, and the sense of anticipation within our team for having this remarkable ship within our fleet continues to grow.

  • The ship successfully floated out last November, and we recently announced 11 extra revenue nights for the ship this coming December.

  • Although the overall revenue environment is difficult, as we have been discussing, the booking outlook for Oasis of the Seas remains positive through the early Wave season.

  • Dan?

  • Daniel Hanrahan - President & CEO-Celebrity Cruises

  • Thank you, Adam,

  • Daniel Hanrahan - President & CEO-Celebrity Cruises

  • Thank you, Adam, and good morning, everyone.

  • Results for the fourth quarter for Celebrity are similar to what you heard Brian and Adam describe.

  • Business conditions in the quarter were challenging and slowed the momentum we had enjoyed through the first three quarters of the year.

  • We found late-season Europe to be particularly challenging.

  • We have seen a positive shift recently in demand patterns, albeit at the expense of reduced rates.

  • Our sales and marketing programs are tactical efforts to finish filling the winter Caribbean season and generate the necessary demand for Europe and Alaska beginning in the second quarter.

  • These efforts have been focused equally on the consumer and the trade.

  • We announced our ASAP program -- that is our Agent Support Assistance Program -- to support the travel trade, which included temporary increased commissions and co-op support aimed at helping the distribution system through these challenging times.

  • We believe the travel trade distribution system is very important to our success, and the ASAP program will play an important role in our bookings this Wave season.

  • Early indications are the ASAP program has been helpful to the trade and to our bookings.

  • We definitely have been the beneficiary of the trade's attention, and they are reporting an increase in their efforts to sell our brand.

  • We believe a healthy distribution system is important for our success today and in the future.

  • Onboard revenue was a mixed bag in the fourth quarter.

  • Beverage, shore excursions, spa and communication services held up well.

  • Onboard shopping and gambling were off versus '07.

  • The first few sailings of January are showing similar trends.

  • Our operations team and our shipboard personnel are instituting a number of onboard marketing programs aimed at increasing onboard revenue in the areas our guests seem more predisposed to spend.

  • Our new Solstice ship was a strong exception to the trends we have been seeing.

  • We were pleased with ticket and especially pleased with onboard revenue during the quarter.

  • While I was in the shipyard in August, I knew we had something special in Solstice, but even I have to admit I was caught off guard at how successful the launch of Solstice was and quite frankly continues to be.

  • Countless travel agents and press told me Solstice was the best ship launch they have ever experienced.

  • Our sales people tell me travel agents can't stop talking about her.

  • Solstice has been transformational for the Celebrity brand.

  • We continue to be very excited with how strong onboard revenues are after the inaugural and holiday sailing.

  • In a time when revenue is challenging, we are exceeding our expectations in almost every onboard area.

  • The ship was designed and built with the intention of giving our guests what they've told us they were looking for in terms of onboard spend, and it is working.

  • And as we intended her to be, Solstice has proven to be our most cost-efficient ship.

  • It is very gratifying to see the efforts of our shoreside and shipboard teams pay off so well.

  • Our attention to cost, as you heard from Brian and Adam, continues to be successful.

  • Our progress on costs while increasing our guest satisfaction rates has been gratifying.

  • We had the most successful awards year in the history of our brand, earning top honors from, amongst many, the best cruise line recognition from Conde Nast Traveler, and the Guardian and the Observer, all in the UK.

  • We also received top premium cruise line honors from Travel Weekly, which is voted by travel agents here in the US.

  • We realize we are in a tough revenue environment and are taking the necessary steps to optimize our revenue and manage our expenses.

  • But we are encouraged by the support from our travel trade partners, the brand accolades we continue to receive, the early success of Solstice, and we are looking forward to the launch of Equinox this summer.

  • Brian?

  • Brian Rice - EVP, CFO

  • Thank you, Dan.

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

  • Operator

  • (Operator Instructions) Robin Farley, UBS.

  • Robin Farley - Analyst

  • A couple of questions.

  • One is, the additional cost-cutting that you announced today, am I right in just back-of-the-envelope that that looks like an additional $150 million or so to what you -- in addition to the $125 million that you announced in the summer?

  • I don't know if I'm doing the math on that right.

  • And then also, if that is the case, that seems like a very significant increment on top of major cost cutting already.

  • And just looking for more color on that.

  • And then I do have two or three other little questions, as well.

  • Brian Rice - EVP, CFO

  • Your calculations are generally in the ball park.

  • I will give you a little more color.

  • I think the most substantive thing we've done, we haven't had any more of the types of actions that took place in July.

  • Most of the focus has been under a program that we call FIT, which stands for Financial Improvement Teams.

  • And it has been groups of our management team getting together, finding synergies across the brands, finding efficiency.

  • And quite frankly, one of the biggest opportunities we've seen available to us is taking advantage of deflation that we are seeing in the marketplace.

  • So our yield projections for next year are down between 9% and 13%.

  • We are seeing a lot of pressure on all businesses today, and the fact you are able to leverage opportunities through price concession.

  • So we have been very aggressive in that.

  • I did mention that we also had some benefits from exchange gains.

  • We benefit -- I quantified the Pullmantur differences for you, because we have a different functional currency.

  • But we also have expenses for Royal Caribbean, Celebrity and Azamara that we incur in foreign currency.

  • All our European ships have reasonable expenses in euro.

  • The Brilliance lease is dominated denominated in Sterling.

  • So there are other factors that are playing in there.

  • But by far, the largest has been leveraging the new environment for pricing concessions.

  • Robin Farley - Analyst

  • So some of that $155 million in additional cost-cutting is due to currency changes?

  • Brian Rice - EVP, CFO

  • Yes, some of it is, but it is not the largest portion.

  • Robin Farley - Analyst

  • Okay, great.

  • And then -- so that was another question I was going to ask you about, about the currency.

  • Then I guess you made a comment about your liquidity, about monetizing derivatives.

  • And I wonder if you could give a little more color on that.

  • And I guess my question about financing needs would be about Oasis and the 20% that is not guaranteed by the government, 20% that was due upon delivery.

  • And just wondering if you were going to use sort of typical kind of lenders and instruments to what you've done historically for that financing, and just some more color on your comment about derivatives.

  • Brian Rice - EVP, CFO

  • I want to emphasize, Robin, that we are very comfortable with our liquidity position right now and have no need to do anything.

  • But I wanted to give examples that we are working on things.

  • We do have interest rate swaps that are quite a bit in the money, that we could look if, we chose to, to monetize those.

  • We are about 50-50 fixed floating, so we have some gains on those.

  • But again, we are going to look at those and be opportunistic with them when they make sense.

  • No requirements, but I just wanted to share with the group that we are being very creative in exploring ways of continuing to improve our financial strength when it makes sense for us.

  • In terms of the Oasis financing, I can tell you we have had some conversations in partnership with Finnvera and in partnership with our lenders.

  • I don't want to go into details at this point.

  • When it is time to announce a something, we will.

  • But I would just emphasize that we are comfortable with our ability to get the Oasis financing done.

  • Robin Farley - Analyst

  • Okay, great.

  • Thanks.

  • And then just my last question is, you mentioned in the opening comments -- or Richard mentioned that you would be willing to sacrifice some points of occupancy in order to maintain price.

  • And I guess I just want to ask how that sort of fits with the idea that if 20% or 25% of your revenue is from onboard, that you would be sacrificing a lot of that aspect of the yield if your occupancy is lower.

  • Just want to understand better that strategy.

  • Brian Rice - EVP, CFO

  • Robin, I do appreciate that this will be your last question.

  • I do want to say that -- I think Adam alluded to it in his remarks -- that particularly for some of our developmental products, you get to a point of diminishing returns and lowering price to build those last percentages of load factor points.

  • We are not talking about wholesale changes in our strategy.

  • We certainly recognize contributions we get from onboard revenue and that is one of the components in our revenue management decision-making.

  • I think it is likely that you will see some declines in our load factor, but not substantial declines, not a fundamental shift in strategy.

  • Robin Farley - Analyst

  • Great.

  • Thank you.

  • Operator

  • Steve Wieczynski, Stifel Nicolaus.

  • Brian Rice - EVP, CFO

  • Operator, if we could move to the next question and maybe Steve will come back to us.

  • Operator

  • Steve, your line is open.

  • Steven Wieczynski - Analyst

  • Hey, Brian, can you hear me?

  • Brian Rice - EVP, CFO

  • Yes.

  • Steven Wieczynski - Analyst

  • Okay, when you look at your guidance, your yield guidance for 2009 in the negative 9% to 13% range, can you just kind of -- when we look further out toward the back half of the year, I know visibility is very low, but to me, the 9% to 13% still seems a little aggressive for the full year.

  • Can you just go into kind of what you guys are thinking toward the back half of the year?

  • Brian Rice - EVP, CFO

  • Sure.

  • I tried to provide in my comments that our view right now, the midpoint of our guidance, pretty much assuming that the economic climate that we are experiencing today continues, we are not looking at a recovery from the current climate, but we are also not looking for any significant deterioration from what we are seeing today.

  • We have tried to bake into our assumptions kind of business as is, if you will and our read on the elasticity of the customer.

  • I did mention in all four quarters we are looking for a yield decline and those yield declines are rather substantial, particularly in the first three quarters of the year.

  • I think Adam and Dan alluded to the fact that Alaska and Europe, we're feeling more pressure on, so we've tried to be prudent in our projections for the summer season, as well.

  • What happens in the back half of the year, recognize we just had a 5.9% yield decline and our comparables get much easier.

  • Going back to how '08 performed, as well, the greatest increases were in Q1, which would be our more difficult comparables.

  • So again, we just kind of assumed that the current economic climate is about as is, which we felt was the most prudent way to go about providing projection.

  • Steven Wieczynski - Analyst

  • Okay.

  • Got you.

  • and Then last question -- this might be a better question for Dan or Adam -- but in this environment, are you seeing an uptick in first-time cruisers?

  • And also, what kind of demand have you seen for what I would consider drive-to ports?

  • Adam Goldstein - President & CEO-Royal Caribbean International

  • Actually, on the first part of your question, no, we are seeing a little bit more in experienced cruiser activity at this point.

  • And I suspect that in an economy that is characterized by fair amounts of turmoil, people who already have experienced and already understand the inherent value of cruising, it is not surprising that they are a little bit more likely to respond, and that is what we are seeing.

  • It is not very significant.

  • We are talking about a few percentage points, but generally a little more experienced cruiser activity.

  • Steven Wieczynski - Analyst

  • Okay, great.

  • Thanks, guys.

  • Operator

  • Tim Conder, Wachovia Wells Fargo.

  • Brian Rice - EVP, CFO

  • Operator, if we could try the next one.

  • Operator

  • Scott Barry, Credit Suisse.

  • Scott Barry - Analyst

  • Just plugging in those ranges that you gave, it looks like it is a fairly healthy range there, roughly $1 on the downside and $2.20 on the upside.

  • So is that ball park and is it fair to say that at $1.40, that maybe you are a little bit more comfortable at the downside end of those ranges?

  • Brian Rice - EVP, CFO

  • Scott, I think the $1.40 is our best estimate of our EPS right now, given the inputs of the ranges that we've given you.

  • I -- we try to provide 50-50 forecasts whenever we prepare one, where there is a 50% chance we will exceed it and a 50% chance that we will fall short.

  • We are giving your our best information and as much transparency as we can, but also trying to give you the fact that there is a wide range, particularly on the yield, out there.

  • Scott Barry - Analyst

  • Okay, great.

  • Thanks.

  • Operator

  • Felicia Hendrix, Barclays Capital.

  • Felicia Hendrix - Analyst

  • Good morning, guys.

  • Just a couple questions.

  • Back to the occupancy rates, I was wondering what is your guidance implying they are now.

  • Brian Rice - EVP, CFO

  • Felicia, we haven't given any specific guidance in our press release.

  • I would probably say we are looking at maybe a couple of load factor points lower than we would normally be.

  • Felicia Hendrix - Analyst

  • Okay, so still kind of like 98, 97, something like -- I mean, my main question is, are you basing it against the 105-ish number or against the 100 number?

  • Brian Rice - EVP, CFO

  • It would be off the 105 number.

  • Felicia Hendrix - Analyst

  • Okay, and then also, what kind of increase in travel agent commissions are in your forecast?

  • Daniel Hanrahan - President & CEO-Celebrity Cruises

  • I can take that one, Felicia.

  • It's Dan.

  • The ASAP program is a temporary program.

  • It runs from January through February.

  • And what we did is we gave a 1% -- a 1 point increase on commission.

  • So if you are a travel agent making 14%, you would be up to 15% for that time period.

  • So that will have some impact on us, but it is not going to be -- you're not going to see a huge shift in travel agent commissions in 2009 from us as a result of this program.

  • But it has been a very helpful program to the trade during the Wave period.

  • Felicia Hendrix - Analyst

  • I was just going to say they have really appreciated it.

  • Richard Fain - Chairman, CEO

  • Yes, Felicia, thank you.

  • They really have, and I think that helps us.

  • I would like to actually just amplify that.

  • Because I think when we talk about our yields here, there have been a couple of questions about occupancy and about travel agent commissions.

  • And we really look at the net of all that, onboard revenue, and all of those things play in.

  • So sometimes, we would trade off higher occupancy or lower occupancy, higher travel agent commissions against higher ticket price.

  • So we try and balance all those things, and we have never tried to predict the specifics of any one of those components.

  • But we said as they go through.

  • In theory, we ought to be indifferent, for example, between a ship that is 100% full at $100 or 98% full at $102 all in -- that includes onboard and everything else.

  • In fact, there is also the knock-on effect, because sometimes when you offer extreme discounts, you also undermine the fundamental integrity of your price and over time that sort of whittles away at your altogether revenue.

  • So we are not picking them apart individually.

  • We are just saying we look at all of those hopefully in a holistic manner, and our estimate of where we end up looks at them all together.

  • Felicia Hendrix - Analyst

  • Understood.

  • And then finally, Brian, I am trying to understand the timing of the Oasis loan.

  • Typically, how much time prior to delivery do you have to secure the ship's specific unsecured term loans?

  • Brian Rice - EVP, CFO

  • There is no set time frame.

  • I think generally speaking, we would have our financing in place five, six months prior to the ship delivery.

  • Felicia Hendrix - Analyst

  • Okay, so is it just what's going on in the environment now that is kind of holding it from typical timing, or are you holding out for better rates, or kind of what is driving that?

  • Brian Rice - EVP, CFO

  • Felicia, the maiden voyage of Oasis is not until December 1.

  • So frankly, we are well ahead of the curve in our conversations that we've been having with our lenders and with the export credit agency.

  • Felicia Hendrix - Analyst

  • Okay, good.

  • Brian Rice - EVP, CFO

  • Again, I will just emphasize that we've been in conversations and we have a good feeling about what we are going to be able to do for Oasis.

  • Felicia Hendrix - Analyst

  • Okay.

  • And you already have commitments by a financial institution?

  • Brian Rice - EVP, CFO

  • For all the Solstice Class ships, all four remaining deliveries, we have financial institutions signed up, as well as the Hermes guarantee.

  • For Oasis, we have the Finnvera guarantee, but we are in discussions with financial institutions now.

  • Felicia Hendrix - Analyst

  • Okay, thank you.

  • Operator

  • [Asia Georgiva], Infinity Research.

  • Asia Georgiva - Analyst

  • Good morning.

  • A couple of questions.

  • In terms of the outlook for Q2 and Q3 -- obviously it is still a little early for Q4 -- a year ago, you had yields up about 1%.

  • Is it fair to assume at this point that Q1 might be the most difficult quarter because of the comparisons, because of the recent turmoil in the economy, and we can expect Q2 to be slightly better and Q3 possibly even better?

  • Brian Rice - EVP, CFO

  • Asia, I don't want to give specific guidance for Q2 and Q3 right now, but I can tell you that we are not looking at very good yield performance in Q2 and Q3.

  • We are seeing pressure on Alaska.

  • We are seeing pressure on Europe.

  • We have baked in pretty significant deterioration on our yield performance in Q2 and Q3 in the guidance we have given you.

  • Asia Georgiva - Analyst

  • And onboard spend obviously plays a big part; in the last quarter, it down almost 11%.

  • And I think you mentioned that you were looking at the last couple of months -- or Adam mentioned that.

  • Are those trends continuing at a similar rate?

  • Are we looking at about 10% declines?

  • Adam Goldstein - President & CEO-Royal Caribbean International

  • I come back to my comments that I read before.

  • The ticket revenue swing overall is greater than that of the onboard revenue swing.

  • So when we give you a range of 9% to 13% down for 2009, the range for onboard, if we would give it, would be lower, and for ticket higher, in order to make the average.

  • So we have really tried by every revenue stream to project forward throughout the year based on everything that we saw last year and everything that we are seeing at the moment so that it makes the right contribution to our forecast.

  • And it is down, and it is down across the year, but not as much as ticket is down.

  • Richard Fain - Chairman, CEO

  • Asia, just to sort of add to what Adam says, I think that is particularly true of the Royal and Celebrity brands.

  • In Europe, we are actually seeing more of a hit on the onboard revenue side than proportionately so.

  • In Pullmantur, we are actually having more impact on the onboard revenue than on the ticket revenue.

  • Pullmantur had a really very bad ticket revenue environment in '08.

  • That is last year.

  • And therefore, its ticket revenue comparables are easier.

  • But its onboard revenue is actually, for '09, worse than its -- appears to be worse than its ticket revenue environment.

  • Asia Georgiva - Analyst

  • Okay.

  • Thank you Richard.

  • And last one -- one more question and I'm done.

  • I assume if you receive financing for the Oasis, and given your liquidity, cash and revolver, you wouldn't need to access the capital markets in 2009.

  • Is that fair?

  • Brian Rice - EVP, CFO

  • That's correct.

  • Asia Georgiva - Analyst

  • Okay, thank you.

  • Richard Fain - Chairman, CEO

  • Although, I think as Brian said in his comments, clearly today cash is king.

  • Liquidity is king.

  • And so the idea of taking steps to improve our liquidity, if there is an opportunity -- if there is an opportunity is obviously something we would be looking at.

  • Asia Georgiva - Analyst

  • So it is opportunistic; not a need?

  • Richard Fain - Chairman, CEO

  • Right.

  • Asia Georgiva - Analyst

  • Okay.

  • Thank you so much.

  • Operator

  • Steve Kent, Goldman Sachs.

  • Steve Kent - Analyst

  • Good morning.

  • Can you just talk about what the FX impact to net yield and EPS was for the full year 2008?

  • And then could you just give us the quarterly FX impact so we can model better for 2009?

  • And then just one other question.

  • What percentage of the bookings are coming in direct or through the Internet?

  • And I guess I would ask once again why isn't that more of a focus, rather than raising travel agent commissions, given the high returns of that strategy?

  • Brian Rice - EVP, CFO

  • I'll take the first part on FX and then ask Adam or Dan to comment on the direct strategy.

  • I don't have in front of me the FX for '08, and I certainly don't have it by quarter for '09 for you.

  • I can tell you that we commented on the last call about the impact of FX in the fourth quarter mainly because of the change in the guidance that occurred to our revenue and to our costs, and we wanted to show you the change from Q3 to Q4.

  • As Richard mentioned in his remarks, FX is becoming a much more significant issue for us, as we've seen a lot more volatility and as we've diversified our international mix.

  • I can tell you that today we are looking at a little more than 1% impact on yield as a result of Pullmantur's currency, and a little less than 1 percentage point impact on net cruise costs as a result of Pullmantur.

  • What we are working with and we hope to be able to give you more transparency into the future is the impact that FX is having on Royal Caribbean and Celebrity.

  • It's a much more complicated way, because those brands have a US dollar functional currency.

  • And the way we are recognizing our revenue is done at each voyage in the currency on that date, and the way we are doing our AP is the average during the course of the month.

  • So we are trying to figure out how we can give you better guidance on that and more transparency into it on a year-over-year basis.

  • Frankly, right now, it is not hugely relevant.

  • Adam Goldstein - President & CEO-Royal Caribbean International

  • Steve, this is Adam.

  • In respect of our direct business, in round numbers, the 80/20 rule is in effect -- about 80% of our business coming from the trade; about 20% of our business coming direct.

  • We have been asked about that on many of the calls, and we've generally said that the percentage of our direct business is growing very incrementally, sort of coming up through the high teens over the last few years.

  • Richard mentioned before that we truly believe we have the best relationship in the business with the trade, who produce 80% of our revenue.

  • And maintaining that relationship, fortifying it where possible in the current difficult circumstances, is a very high priority for us.

  • So trying to substantially increase our direct business in this timeframe would run counter to a key priority for our revenue generation efforts.

  • Steve Kent - Analyst

  • Okay, thanks.

  • Richard Fain - Chairman, CEO

  • And Steve, if I could just, again, amplify on that.

  • Because I think -- I don't want you to get the idea that this is a bad commercial decision, but we do it in order to maintain the relationship.

  • We honestly believe -- we have been consistent about this for many years -- that what we are getting for those commission dollars is well worth the expense.

  • We simply believe as a matter of dollars and cents that the travel agent community is good business for us, and that is why we continue to use that as our absolutely dominant way of obtaining business going forward.

  • Steve Kent - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Robert Robinson, Shenkman Capital.

  • Robert Robinson - Analyst

  • I was just wondering if you guys had a strategy for what you were thinking about the maturities you have upcoming in 2010 in terms of bonds and loans.

  • Brian Rice - EVP, CFO

  • We are obviously looking at our liquidity, not only through '09, but into 2010, 2011 and beyond.

  • Again, we feel very comfortable with our current liquidity.

  • There will likely be opportunities for us to consider extended maturities.

  • At this point in time, we are not reliant upon any of those, given our liquidity forecast, and certainly our revolver.

  • Our business still generates a tremendous amount of cash.

  • But as Richard alluded to, we do want to strengthen our financial position and we will be opportunistic.

  • And we obviously will be in discussions throughout the course of the year about what opportunities are available to us.

  • And if they make economic sense, we will be taking advantage of those.

  • Robert Robinson - Analyst

  • Okay.

  • I was just curious, though, where do you see leverage peaking to?

  • Brian Rice - EVP, CFO

  • I don't have the percentages in front of me, but if your question revolves around any of our covenants, I can tell you we are substantially below any of those thresholds.

  • Robert Robinson - Analyst

  • No, I was thinking more about just looking at cash flow leverage and thinking about what the cost of capital is going to be getting up to going through 2009 and into 2010, if this economic period really continues and is as bad as people think -- people are saying this is as bad as the Great Depression.

  • And I see the continued spending.

  • So I'm just wondering as cost of capital continues to rise, wouldn't it be more prudent to slow down some of this big expenditure you have laid out for the next few years?

  • Brian Rice - EVP, CFO

  • Robert, I will just touch briefly.

  • And I might suggest if you could to give Ian Bailey a call after this call, and he can share with you a lot more specifics.

  • But we have very advantageous financing available to us.

  • For example, since our last call, we entered into a [steer] agreement for Solstice 5, that we have the option to take advantage of steer rates for our ship delivery in 2012, that it has 12 years' semi-amortizing loan at an interest rate of 4.13%.

  • So we do have very attractive financing available to us, at our election.

  • But I think if you could follow up with Ian, he can take you through all our Solstice financing arrangements, as well as the guarantees we have for our finished ship.

  • Robert Robinson - Analyst

  • Okay, despite by the current economic downtrend, you really feel like you should be continuing ahead and the banks are still there for you, as if nothing has changed?

  • Brian Rice - EVP, CFO

  • Yes.

  • All our German ships have very solid finance arrangements.

  • We are armed with ECA credit as we go out to our finished ship.

  • Robert Robinson - Analyst

  • Thank you.

  • Brian Rice - EVP, CFO

  • Operator, we have time for one more question.

  • Operator

  • John Parker, Jefferies.

  • John Parker - Analyst

  • Yes, I guess you sort of just answered this, but have you had any discussions with your shipyards about potentially deferring deliveries of the ships down the road?

  • Brian Rice - EVP, CFO

  • John, the ships that we have on order, we're very excited to bring in.

  • As Dan told you, talked a little bit about the Solstice introduction and just how tremendously she has been received.

  • She is doing absolutely stellar with onboard revenue, as well as ticket revenue.

  • We have another Solstice Class ship coming out this summer in Oasis in December, and the advanced bookings on both vessels are very strong.

  • These ships, even with the CapEx, they generate a tremendous amount of cash.

  • And even in the current economic climate, we are very excited about having them as part of our fleet.

  • John Parker - Analyst

  • Okay.

  • And then this was just answered also, but I didn't quite understand your -- or this was asked, but I didn't quite understand your answer.

  • You said you are looking at extending -- possibly extending debt maturities.

  • Can you give any more color what you mean by -- how you would go about extending the maturities?

  • Brian Rice - EVP, CFO

  • Again, I would like to stay away from any specifics.

  • What I am talking about is there are opportunities for a lot of different things that we can do in order to improve our financial strength.

  • Again, I would like to emphasize the fact that we are not dependent upon doing any of these things, but just wanted to give you some sense of the types of ongoing activity that our treasury team has in seeing if we can't improve our financial strength.

  • There are opportunities for some of the maturities that are out there for us to have negotiations without extending those.

  • But at this time, we have no specifics that we want to share.

  • Just want to let you know that we are paying attention to those things and we are working them as they make sense for us.

  • John Parker - Analyst

  • Thank you very much for your help.

  • Brian Rice - EVP, CFO

  • Okay, John.

  • Operator, I think we are out of time, so I would like to thank everybody for joining us this morning.

  • We truly appreciate your time and your questions and your interest.

  • And as I mentioned earlier, Ian will be available throughout the day for any follow-ups that you might have.

  • Thank you and have a great day.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.