皇家加勒比遊輪 (RCL) 2009 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Royal Caribbean Cruises Ltd.

first quarter earnings conference call.

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

(Operator Instructions) Thank you, Mr.

Brian Rice, you may begin your conference.

Thank you, Adrienne, and good morning, everyone.

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

With me here today are Richard Fain, our Chairman and Chief Executive Officer, Adam Goldstein, President and CEO of Royal Caribbean International, Dan Hanrahan, President and CEO of Celebrity and Azamara Cruises, and Ian Bailey, our Vice President of Investor Relations.

We have posted a number of 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 the current operating environment, I 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 a strategic overview of our business.

I will follow with a brief recap of the first quarter, update our guidance and provide some insights into the recent demand environment in our financing activities.

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

Then we will be happy to open the call to your questions.

Richard.

Thanks, Brian, and good morning, everyone.

I must admit that I find myself a little bit conflicted about the earnings that we are sharing with you today.

It's tough to be pleased about a quarter that's resulted in one of the few losses we have posted in a long time, and in fact, we will never be happy with a loss situation, nor am I happy with the profitability we are looking at for the full year.

On the other hand, this past quarter provided some very significant wins for us.

The most remarkable news about the quarter and about our outlook is that we have very little new to report.

Overall, the year is developing pretty much in line with what we said three months ago, some positives, some negatives, but bottom line, basically the same.

Most importantly, our revenues continue to track about where we expected them to be, stronger close-in bookings helped, as did outstanding cost control.

Forward bookings showed some downside bias, but overall remarkably in line with what we had predicted.

We did not previously assume that the economy would get any better and we are still not basing our projections on any economic improvement.

But some months ago, the market had begun to stabilize and we are happy that the level of stability has continued to increase.

Even in normal times, I'm always impressed with our revenue management team's ability to predict revenue within such narrow parameters.

I'm still amazed at how accurate they have been in the past and how accurate their predictions over the last several months have been.

Admittedly, we are providing our guests more value than we would like to these days and pricing continues to be miserable, but at least it seems to be at a miserable level that's relatively stable.

I am pleased that it does not appear necessary to reduce the guiding range of our expected yield deterioration, and I'm also pleased that volume is remaining surprisingly robust given the current economic climate.

Overall, while this is certainly not an enjoyable business environment, I would say it's at least manageable.

As I mentioned in prior calls, our focus on liquidity has dramatically increased, and looking at our long term forecasts are better today than they were previously.

How many companies that you follow can make such a statement?

Now that we have completed Oasis, some people may question our ability to finance Allure at the end of 2010, and I do admit that it's hard to show it on an Excel spreadsheet or an SEC filing, but I think our success with the financing of Oasis of the Seas demonstrates the power of the factors we have previously discussed to help us accomplish such things.

We have 30 or 40 years relationship with the shipyard, the people of Finland and with our banks.

These things actually do matter, even in today's world.

I'd also like to take this opportunity to congratulate our management team on their excellent work in controlling our costs while continuing to provide an excellent product.

You can see the results of their efforts and it is very impressive.

What you can't see is the fact that our passenger ratings are also at their highest level in years.

We believe it is possible to control costs while maintaining strong branding momentum and you can see that this philosophy is working.

Part of it, of course, is due to a natural offset.

The weaker economy hurts our revenues, but it also presents opportunities for improving our costs and we are doing everything we can to take full advantage of those.

In addition, as I've noted in prior earnings calls, the growth of our international operations means that foreign exchange has become a more relevant driver of our performance.

Again, this provides a natural hedge because the stronger dollar hurts our revenues just as it helps our expenses.

Overall, we are still deeply disappointed to be talking about a smaller loss for the quarter rather than a bigger profit, and we are disappointed that the whole year profit looks to be only half of what it was last year.

But in this economy, I think that actually shows just how strong and how resilient our industry and our Company are.

Imagine how we will look once things start to improve.

Further comment on deployment and itineraries.

One of the great advantages of the cruise line business model is that our assets float and that they can be shifted as markets and circumstances change.

A year or two ago, everyone was talking about the great strength of Alaska and worried about the possible weakness in the Caribbean.

Now, the situation has reversed itself.

We don't change course on a dime, but we are able to move ships around in a relatively short period of time to go where they are wanted, and ships do go where they are wanted.

Turning to our international expansion, that continues to develop successfully.

It does require a major commitment of resources, but the potential benefits are also major and we intend to pursue them aggressively.

There have been a lot of questions about Alaska.

Some time ago we announced, very quietly, that we were reducing our capacity in Alaska, initially by one ship.

Alaska continues to be an important market for us and one that we wish were going in the other direction.

Regrettably, the referendum has led to many of the unfortunate consequences that we had feared for us and for Alaska.

I think a lot of people were misled about what it would do, and I wish we had done a better job of explaining the inevitable implications.

Now, this has been and it will continue to be an awful year, an annus horribilis to use the Queen's words.

Pricing is still terrible and the economy dreadful, but we continue to see powerful evidence demonstrating, yet again, how resilient our business is.

We are determined to continue improving our profitability, even in this environment, and preparing ourselves to rejoice as the markets recover.

With that, I'll turn it over to Brian for a more detailed discussion of the quarter's results.

Brian.

Thank you, Richard.

I would like to briefly go through the first quarter results, which we have summarized on the second slide.

In the first quarter, we had a net loss of $0.17 per share versus our guidance of a loss between $0.30 and $0.35.

Our revenue yields for the quarter were down 13.5%, which was better than our guidance of down 14% to 16%.

Ticket and tour revenue came in slightly better than we had forecasted and onboard spending was consistent with our forecast.

As you know, there have been significant swings in foreign exchange rates over the last year.

In addition to the success of our global expansion efforts, it now means almost one-third of our revenues and a quarter of our costs are denominated in currencies other than the US dollar.

Because of this, we thought it would be helpful to give you some insight into how exchange rates impact our results.

In the first quarter, the stronger dollar negatively impacted our yields by about 4 percentage points.

So if we were to report on a constant dollar basis, our yields would have been down around 9.5%.

You may also recall that during the quarter we refunded approximately $30 million in fuel supplements that cost us about 2.5 percentage points in yield.

So while the revenue environment has been very challenging, I think our results were more resilient in this very bad economic cycle than many may have thought possible.

On the cost side, net cruise costs excluding fuel per available passenger cruise day, came in 6.8% below last year and at the better end of our previous guidance.

And while the stronger dollar hurt revenues in the first quarter, we are fortunate to have a natural offset and saw benefits on the cost side.

On a constant dollar basis, our costs would have been down about 4.5% compared to last year.

Our fuel expense was $155 million for the quarter, which was $10 million better than anticipated at the time of our last call.

Consumption was about 2% better than forecast and pricing was slightly favorable.

Our all-in net cruise cost for APCD improved by 7% versus the same time last year, and were better than our previous guidance of down between 4% and 6%.

Within other income and expense, we had an out of period charge at $7.1 million.

During the quarter, we learned that a software program we licensed for purposes of evaluating the fair value of our interest rate swaps contained an error related to the LIBOR curve, and the $7.1 million represents the cumulative reduction in the fair value of certain swaps related to 2007 and 2008.

Despite this charge, the combination of better revenue performance and lower costs enabled us to come in about $0.15 better than the midpoint of our guidance.

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

Over the last three months, we have seen a fairly consistent demand environment.

The booking window is certainly more contracted than we had seen in 2007 and 2008, and much of the demand is being driven by aggressive pricing.

The good news, though, is the consumer is becoming more predictable and our discounting has leveled off over the last few months.

You may recall on our fourth quarter earnings call, we showed you a graph of the first quarter booking trends which demonstrated how as we moved closer to the date of departure, bookings significantly improved, mostly without any additional pricing erosion.

On slide three, we have updated the same chart to show you how the first quarter continued to evolve from the time of our last call.

The green line shows the change in the volume of new business, versus the same time for the prior year, by the week in which the booking was made.

The blue line shows the year-over-year pricing changes for new business.

Since our last call, the volume of new guest bookings continued to be much greater than at the same time last year and pricing levels, as compared to a year ago, remained relatively consistent.

If you turn to slide four, you will see the second quarter departures are behaving much the same way that the sailings that occurred in the first quarter did.

Bookings lagged behind year ago levels until we reached the end of January.

Since then, the volume of new business has improved significantly, and year-over-year pricing changes have been very stable.

We are very fortunate to have good systems that enable us to map consumer behaviors and adapt our revenue management style to the changes in booking patterns.

Clearly, we would all sleep better at night with an expanded booking curve and less uncertainty, but we grow more confident each day that our models are better calibrated to the new consumer buying patterns.

On slide five, we have graphed the same booking information for third quarter departures.

By today's standards, we are still fairly early in the booking cycle and we are now entering a very important period for new bookings.

But again, the same pattern that we witnessed in the first and second quarters seems to be developing in the third quarter, and the momentum of new business for third quarter sailings has begun to accelerate.

Our revenue management team watches this type of information at a very fine level of detail.

It is constantly adjusting to capture the most revenue out of the available demand.

In updating our guidance, we have again assumed that not much changes in terms of consumer behaviors and the overall economy.

On slide six, we have provided our updated guidance for the second quarter and full year.

Historically, we have given a broader range of both yield and earnings per share projections, but given the nature of the environment and the wide ranging views in the market today, we have tried to be as transparent as possible and provide you with our best estimate.

There is obviously more uncertainty today than usual, but the predictability of our booking gets better every day and we believe the risk of a dramatic deviation continues to fall.

For the year, we expect yields will be toward the lower end of our previous guidance, or down between 12% and 13% on an as reported basis, and down 9% to 10% on a constant dollar basis.

We expect yields to be down around 17% in the second quarter on an as reported basis, and around 12% on a constant dollar basis.

In the third quarter, our comparables for Pullmantur become much easier as the Spanish economy was one of the first to feel the impact of the global recession.

Nonetheless, we expect challenging yields in the third quarter as our product mix is heavily weighted towards seasonal premium itineraries, such as Alaska, which are struggling the most.

At this time, our best estimates have third quarter yield change on both an as reported basis and on a constant dollar basis, to be slightly better than the second quarter.

As we mentioned in our press release, both the second and third quarters are impacted by about 5 percentage points at current dollar exchange rates.

As you may recall, the dollar became much stronger during the fall of last year as the global economy began to deteriorate.

Accordingly, at today's levels, the impact of foreign exchange is projected to be substantially less in this year's fourth quarter.

To help illustrate this, on slide seven, we have graphed the current spot rate for the British pound and the Euro, as compared to the average exchange rates we experienced last year in the second, third and fourth quarters.

In the second quarter of last year, the average rate for the British pound was about $1.98.

Today sterling's spot rate is about $1.45, or 25% less.

As you can see, the value of these currencies was substantially higher in the second and third quarters of last year.

When we get to the fourth quarter, though, the comparable rates of exchange are much closer to today's spot rates.

Another benefit, if you will, of this year's fourth quarter is the impact we had already absorbed from the economic downturn last year.

Unfortunately, the sudden and dramatic nature of the recession had a substantial impact on last year's fourth quarter.

But as a consequence, our benchmark this year will be lower.

Lastly, we are seeing a very favorable impact in the fourth quarter from the introduction of the Oasis of the Seas.

I do not want to steal Adam's thunder, so we will wait for him to elaborate.

Going back to the previous slide, we have further improved our guidance on the cost side and now expect net cruise costs, excluding fuel, to be down 6% to 8% for the year, and down approximately 9% for the second quarter.

Including fuel, net cruise costs are forecasted to be down 10% to 12% for the year, and between 11% and 12% for the quarter.

And while the stronger dollar has hurt our revenue projections, it has helped our cost guidance.

In the second quarter, we are receiving about a 5 percentage point benefit, and for the year, a little less than 3 percentage points.

We have included $574 million of fuel expense for the year and $142 million for the second quarter in our guidance based on current pricing.

We are 51% hedged for the second quarter and 48% for the full year.

And while we have not entered into any additional contracts since our last call for 2009, we have been more aggressive hedging fuel further out.

We are now hedged approximately 40% for our 2010 forecasted consumption and about 25% for 2011.

Our business model works quite well at the current pricing and we felt it was prudent to take advantage of this opportunity.

And lastly for guidance, we are projecting the second quarter earnings per share to be roughly break even to slightly down, and the full year to be approximately $1.35.

Now, I would like to update you on our financing activities and liquidity.

During the first quarter, our treasury team was quite busy.

As you know, last week we announced that we had obtained just over $1 billion in unsecured financing commitments for Oasis of the Seas, which is scheduled for delivery in the fourth quarter.

The Finnish have always been great to work with and really helped make this financing quite smooth.

In addition, we were fortunate to work with three of our banks with which we have great relationships, and the club nature of the deal enabled us to get this done quickly and on good terms.

We also entered into two credit agreements for unsecured term loans for up to 80% of the contract price of Celebrity Equinox, which is scheduled for delivery in the third quarter, and Celebrity's fourth Solstice class vessel, which is scheduled for delivery in 2011.

Both have twelve-year terms and semi-annual amortization.

Celebrity Equinox will bear interest at a floating rate of LIBOR plus 50 basis points which was locked into back in 2005.

Solstice IV will bear an interest at a fixed rate of 5.82%, based on terms originally agreed to in 2007.

I am sure the next question many of you will ask is what about Allure of the Seas and next year's debt maturity?

Allure is still about a year and a half away from delivery, but we have already started early discussions.

I am not going to go into any specifics, but as we said with Oasis, we are comfortable we will get the necessary financing.

As far as our scheduled debt maturities go, we remain confident that current liquidity, coupled with forecasted operating cash flows, will be sufficient.

That said, we are always looking for ways to further improve liquidity.

We pride ourselves on having very solid relationships with our lenders and finding ways to support each other.

For example, since we filed our 10-K, we have smoothed out some of our maturities and agreed to prepay a $100 million, 2010 maturity in 2009, while extending another $100 million payment due in 2010, out until 2011.

The net effect of this improved 2010 liquidity by $100 million.

I could speak for a while about the contingencies we have and the actions we evaluate on a daily basis to improve our liquidity position, but I do not think it is prudent to publicly speculate on possible next steps given our current sound position in the very dynamic nature of the market today.

I do think we have demonstrated our resolve in this area and we have also shown sensitivity to the interests of our lenders and shareholders.

Our liquidity at the end of the quarter was approximately $1.1 billion, including over $450 million in cash and $625 million available on our revolving credit facility.

The primary driver of the improvement in liquidity from year-end was the sale of the Celebrity Galaxy to our 50% owned German joint venture, TUI Cruises.

Now, I will turn the call over to Adam for his comment about the Royal Caribbean International brand.

Thank you, Brian.

Good morning, everyone.

As you have heard, market conditions continued to be very challenging in the first quarter and the sacrifice of rate to achieve traditionally high occupancies was very evident.

Even in difficult times, we believe Royal Caribbean International is achieving a premium versus our primary competitor, however, pricing is materially down in comparison to any period prior to the fourth quarter of 2008.

Although the pricing weakness affected all products, it was most prominent in a number of our developmental programs where there are not mature cruise markets that will respond in volume to pricing stimulus, as is the case in North America, even in recession.

This included our products in Asia, Australia, Brazil and Panama.

In a number of source markets, for example, Brazil and Mexico, currency devaluations exacerbated the shock of the recession.

So on the whole, our Caribbean programs were the most successful during the quarter, albeit at reduced yield.

Looking forward, the evolution of our full-year guidance towards the lower end of the range we previously established has been covered by Brian and Richard.

They each noted the increased stability of our ticket revenue generation.

I would like to add some color on the influence of some of our major product groupings on the development of our guidance from three months ago to now.

Our Caribbean products have favorably influenced our new full-year guidance.

Of course, the Caribbean this summer will not be immune to the pricing pressures we are seeing everywhere, but relative to our other products it continues to be the most robust.

Our two Freedom class ships in the Caribbean continued to generate substantial premiums to the competition and to the rest of our fleet.

I should note that short cruises in the Caribbean always offer the least visibility and are especially hard to predict in 2009 given the late booking nature of the current marketplace.

Our European products have had a neutral to slightly favorable influence on the evolution of our full-year guidance.

Given there is a recession, a stronger dollar and growing capacity, our European yields will be weak in 2009 on a year-over-year basis.

Fortunately however, our strategic expansion in Europe is delivering benefits to our brand as the number of Americans cruising in Europe has decreased.

We estimate that about three-fourths of our guests in Europe this season will originate from European source markets.

Alaska, as has been widely reported, is suffering disproportionately on a yield basis and has had a negative influence on the development of our full-year guidance over the last three months.

Given we have had no growth in our Alaska capacity for several years, we did not expect the price declines we are experiencing, even in a recession.

The deficit extends to our Alaska tour business where 2009 will not match 2008, which was our best year ever.

Our exotic and developmental products have also had an unfavorable influence on our guidance.

Most of this impact has already been experienced in the first part of the year.

We are taking a conservative view of the early part of the upcoming winter season, given limited visibility in several emerging markets where bookings are typically late and where the markets are experiencing recessionary conditions.

Moving onto the ship we do not have yet, Oasis of the Seas, there continues to be great publicity for the ship as a whole and for several of her most notable features, which are understood now as neighborhood.

Despite the success of our communications efforts, we are simply unable to describe how phenomenal this ship will be.

We are very pleased that the shipyard is sufficiently confident in the construction process to have advanced the delivery date by a week into late October.

This will allow our team an extra week to prepare for the first revenue sailing, which is December 1st.

While we are still over seven months out from that sailing and visibility remains limited, the level of bookings and the prices for Oasis' first ten months is very exciting.

In fact, the prices Oasis is commanding and the context of our historical experience in the Caribbean seven night market is really quite remarkable.

As I stated last quarter, onboard revenue is meaningfully down, but not to the same degree that ticket yields are down.

This weakness is across the major onboard revenue components and is exacerbated by the reduced number of Americans on European cruises, as their purchases of shore excursions is normally an important driver of summer onboard revenue.

Finally, we continue to focus on cost control and I would like to express my appreciation to our leadership team for their efforts in this regard.

Very fortunately, despite the cost reductions we have made, our product is generating its highest satisfaction ratings of the last few years and continues to be very deserving of the premiums it commands.

Dan?

Thank you, Adam, and good morning, everyone.

As you have heard from Brian and Adam, we are working through particularly challenging times.

While both ticket and onboard revenues for Celebrity exceeded our first quarter expectations, they are still well below 2008 levels and represent an extraordinary value to the consumer.

We are seeing very similar results in Europe and Alaska, which Adam mentioned, so I will not go through the market by market details.

While the revenue decline is frustrating, there were bright spots.

Solstice just finished up her debut season in the seven night Caribbean market, and even in these challenging times, had favorable yields versus 2008.

These positive results were not only versus our other ships in similar markets during the same time period, but versus Q1 2008 as a whole.

In Europe, Solstice and Equinox are also holding up relatively well and are continuing to command a healthy premium to our other hardware.

By any measure, Solstice has been a terrific edition to Celebrity.

The response from guests, travel agents and the media continues to be beyond what we had expected and gives us confidence as we are preparing for delivery of Equinox and Eclipse.

We will launch Eclipse in the spring of 2010, which is the third of the Solstice class ships.

Eclipse will be dedicated to the UK market.

We recently opened Eclipse for sale for the 2010 European season.

Although still early, indications are quite encouraging as the ship is booking ahead of expectations, and over 85% of those bookings are UK guests.

We are quite pleased by response of the UK market to Eclipse.

This gives us confidence that our plan to continue to expand Celebrity's sourcing outside of the US is on the right track.

I also mentioned onboard revenue.

Our onboard revenue challenges continue to be driven primarily by gaming and art auctions.

Our areas of strength are phone, internet, shore excursions and Solstice.

We have seen similar success for onboard revenue for Solstice that we have seen on ticket revenue.

While there has been onboard revenue pressure on the Celebrity fleet, Solstice has helped offset the challenges, and as a result, we were able to exceed our Q1 expectations.

We continue our diligent focus on costs while maintaining and improving the experience for our guests.

This is an area that receives constant attention from the Celebrity leadership team.

Brian?

Thank you, Dan.

Adrienne, we would now like to open the call to questions.

(Operator Instructions) Your first question comes from the line of Assia Georgieva of Infinity Research.

Good morning, this is Assia.

A couple of questions.

Dan, I wanted to follow-up on your comments on onboard spend.

You said shore excursions and art auctions are the biggest challenges.

Can you discuss spa and other trends, and how you expect that to shape up during the summer season when you have a lot more European passengers?

And, I'll ask my second question afterwards.

Sure, Assia.

What I actually said was that our onboard challenges were driven primarily by gaming and art auctions, and where we have seen strength has been phone, internet and shore excursions in Q1.

It will be interesting to see what we see in shore excursions in Europe.

Last year, when we started to see some softening in the European market for Celebrity on ticket, we saw shore excursions hold up pretty well.

We think part of what's going on here is our guests are just being very cautious about the way they are spending their onboard money and they want to make the most of their vacation experience, and a shore excursion is always a way to do that.

We also sell shore excursions.

Our guests can book shore excursions ahead of time.

We have seen that continue to be good.

The area that you mentioned, spa, continues to be about as it has been over the last couple of quarters for us.

We see some softness there, but where we are seeing the most has been in gaming and art auction.

Okay.

Thank you.

And, a quick question from Brian.

Could you give us some detail on the Oasis financing in terms of whether you're leaning towards a fixed rate and what you expect the range to be?

For example, Solstice IV at almost, 5.8%, it's a little bit higher than some of the other financings.

Where do you expect Oasis to end up in terms of interest?

Assia, first I think, 5.8% in today's market is quite exciting to have a 12 year fixed term at 5.82%.

I think we are extremely pleased with that financing.

We are still working through some things on Oasis, as we said when we issued the press release, we have an option that fixed or floating.

We are actually considering, perhaps, taking a portion of the debt in Euro, and there's two separate tranches.

There's the FEC tranche and then there's bank tranche, and we're working through that.

I will tell you that we are still a couple of weeks away probably from finalizing it, but our best estimate, at this point in time, where we will probably end up given today's pricing is probably somewhere in the range around 7%.

Okay.

Around 7%.

That was very helpful.

That's a mix of some fixed and some floating.

That's our best guess right now.

You expect to have a mix of floating and fixed?

Yes.

We are trying to manage a portfolio here.

We tend to keep between 40% and 60% of our interest rates at fixed, and we are looking forward as to what we will be electing in other financing as well.

But right now, it looks like it will be a mixture of fixed and floating, and it will probably come out right around 7%, given today's rates.

Okay.

Thank you, Brian.

And my last question is more about Alaska.

One way to try to reduce the impact of the $50 head tax is by extending the length of the voyage?

I'm sure you're aware Holland America just started offering a two week Alaska sailing in 2010.

Are you considering going towards a step like that, maybe a ten day voyage or even a fourteen day voyage in 2010?

Do you still have flexibility on that?

Assia, hi, it's Adam.

We have announced our sailings for 2010 and we are going to continue on our seven night patterns with the two ships that Royal Caribbean will have there and the three ships that Celebrity will have there.

And, this is because our market, our demographics, our psychographics respond to that length of cruise in Alaska and we are not going to deviate from what is the sweet spot for our market even in difficult times.

Okay.

Any thoughts on deployment in 2011 and beyond given how much weakness we have seen there, including for the tour division, shore excursion, et cetera?

We understand that deployment choices are critical for our business not only for Alaska, but for our entire portfolio, but it's very, very early in the strategic deployment considerations for 2011.

From April of 2011 onward, we will be announcing those decisions in early 2010.

So, the next six months are really the strategic window of opportunity to consider our choices and go from there.

Okay.

And lastly, Adam, maybe you can help me with this.

On Europe, have you seen any deterioration in pricing since wave season ended, more specifically the last four weeks or so?

Our pricing has been fairly consistent.

In fact, part of our overall message here is that we have been able to have fairly consistent, stable pricing over the last three months since our previous guidance, and Europe is encompassed by that.

Alright.

Thank you so much and good job on your cost cutting efforts.

Keep that up.

Thank you.

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

Good morning.

First, I don't know if I just don't see it.

Brian, maybe you can help me out here.

What was the average fuel cost per metric ton for the quarter?

Actually, Steve, you have got something I don't have in front of me.

I apologize.

We frankly didn't focus that much on fuel.

I can tell you our rates were down slightly for the quarter and our consumption was down 2%, but if you could follow-up with Ian after the call, we can certainly get that data for you.

Okay.

Will do.

And then, I'm not sure if you'll be able to answer this or I doubt you will, but what's the average price in terms of if you looked at crude right now, of where you're kind of locked in for a little bit further out, I would say 2011, at this point?

I can tell you that we are certainly under water in 2009 on our hedges, but that's included in the $574 calculation we gave you.

We have been hedging recently.

If you were to compare our pricing out into 2011 against the forward curve right now, we'd be very close to where the forward curve is for 2011.

Okay.

And then, last question for either Dan or Adam.

What two markets, or I guess a couple of markets is what we are trying to focus on here, what have you seen in terms of the close to home ports recently in terms of bookings, and what do you see out of the Spanish market?

I can take the close to home ports.

We saw some strength in the first quarter in the Caribbean on both our brands and it was helpful to be close to home.

So, we are now at a point where most of our ships are leaving, for Celebrity anyway, and are headed out to Europe and Alaska.

I know that Royal Caribbean will still have some ships here in the Caribbean, and Adam had commented in his remarks that that was helping the overall yields, and I think I'll let Richard comment on the Spanish market.

Yes.

Hi, Steve.

The Spanish market is probably one of the hardest hit of the many economies with which we deal, and the Spanish economy started down the recessionary path a lot earlier than everyone else and it has continued there.

They have just reported, for the first time, actual deflationary results.

It was down 0.2%, which is pretty close to zero, but those kinds of things are worrying.

There's no question that Spain is feeling the effects more than others.

On the other hand, because it started earlier on a comparable basis, it will begin to look better before too long.

Okay.

Great.

Thanks, guys.

Your next question comes from the line of Tim Conder of Wells Fargo.

Thank you, gentlemen.

A few questions here.

Can you talk a little bit more on the 4 X, gentlemen, about your specific pound and Euro exposure, whether on revenues or cost, or if not specific numbers, just maybe directionally there?

And then, relating to some of the comments regarding some of your startup brands, how do you look at those as far as timetable of investment and from a free cash basis?

At what point do you do a reevaluation, either positively or negatively, with those brands?

Tim, I'll take the first part on FX and I'll let Richard talk about the new brands.

On FX, we are long in sterling.

We are, I would describe it as, slightly long on Euro, and we are also long on Canadian dollars.

As I mentioned, about one-third of our revenues are now coming in among those three currencies, primarily.

We do have some other currencies.

I think the fourth largest would be probably the Norwegian kroner.

And, about a quarter of our expenses are now coming in, and the expenses, we have the Brilliant's lease is denominated in sterling, and we obviously have advertising expenses and what not in sterling.

Most of our port expenses, certainly Pullmantur, would all be denominated in Euro.

Okay.

And, Tim, with respect to the startup brands, I'm not sure that there is a particular point in time at which one says, you have this long, three months, twelve months, whatever the period is.

We look at each one individually.

You look at the strategic intentions of it and you look at whether it's moving in the right direction or not.

In any event, none of them are particularly material to the overall Company.

Okay.

And then, one question on guidance, gentlemen, in particular, interest expense.

Brian, can you kind of help us there?

Your prior guidance for the year was $320 million to $340 million, and you brought that range down by roughly $25 million to $40 million on the high and low.

A little bit of color there.

And then overall, for the whole company globally, what percent of your capacity is booked at this point?

Tim, on the interest expense, I think the primary benefit we have received here has been the falling interest rates, the falling LIBOR rates that have been out there.

As I alluded to before, we have plus or minus 10% at any point in time.

Half of our debt is at a floating interest rate, so we have benefited from that.

I think we also may have some slight wins on the overall costs of some of the new financing that we had done relative to what we had baked into the guidance.

Okay.

In terms of percentages, we are probably, I would guess, just under three quarters all in booked for the year.

Okay.

Great.

Thank you, gentlemen.

Your next question comes from the line of Felicia Hendrix of Barclays Capital.

Good morning.

Just kind of tagging onto Tim's last question.

With the just under three quarters all in booked for the year, how does that compare to last year or a normal year?

Sure.

Felicia, we certainly, as we look out into Q3 and Q4, as you would extrapolate from the graphs that we showed, we are behind by 2007, 2008 standards.

We would be ahead of where we were.

If you recall, when we had our fourth quarter call, we talked more about the book loads rather than the trends.

Frankly, given this environment, I don't think 2007, 2008 is quite as comparable.

We are booked ahead of where we were back in 2002, 2003.

I think what we are seeing in our modeling is that we are behaving more like we were probably back in '04 levels, and what we have tried to do is really calibrate our revenue management bottling around what we are seeing in consumer behaviors.

We tried to give you a little transparency into how we did in Q1, what we have seen in Q2, and it's still early, but the pattern certainly seems to be developing in Q3.

Frankly, Q4 would look very similar to those graphs, but we are just earlier in the booking cycle.

Okay.

Thanks.

And then, along those lines, kind of a different take on this, where are you seeing the booking curve now in terms of how far out people are booking?

I'm assuming that's getting a little bit longer also?

Well, we actually looked through a lot of different slides and what to try to share this morning, and we have seen certainly if you compare the last year, we have a significant greater portion booking within three months.

I think if there's something encouraging in terms of where the booking curve could be going, we have seen a little bit of uptick lately in the three to six month window, not a whole lot, but there has been a little bit of movement there and it's getting closer to equilibrium for the last couple of years.

When you go beyond that six month mark is where we are seeing people really holding back and the high degree of uncertainty with the consumer.

Okay.

And then, just switching.

You had said in your prepared remarks that the discounting has ramped down over the past few months and Adam also has said that.

We are still seeing a lot of offers out there from all brands, yours and others, particularly which are allowing the consumers to only put half of a deposit down to book.

So obviously, there's still incentives out there for people to book cruises, both price and these types of incentives.

Wondering if you guys are still continuing that, and also, can you help us understand what incentives, if any, have been offered on the Oasis?

Hi, Felicia.

Hi.

We had our ASAP program in place for the bulk of the first quarter which offered some of the elements that you were just alluding to.

Many of those we did not continue with as such, but this is a very competitive market.

We have commented a lot about where the rates are, which is not where we would like for them to be, and so, you're going to see, obviously, a variety of different discounting and incentive techniques designed to compel revenue generation.

And, all of the major brands clearly are in that game and we would expect it to be that way until the market starts to trend up, and hopefully, we will be able to report on that in forthcoming quarters, but right now, it's a very competitive business.

Oasis overall, as I mentioned before, is commanding really quite remarkable prices in the environment that we are in, and it has, I think, 37 different categories of state rooms, all of which we are managing individually by sailing.

So, I would never say that there couldn't be a discount associated with Oasis, but if you look at her performance on the whole, it's really quite spectacular at this point.

Great.

And then, Brian, just on the cost side, can you just help clarify something?

The guidance that you gave for costs, back when you reported the fourth quarter, did they include the same FX benefit as what you laid out in the release this morning?

Yes, roughly speaking they would.

What we have tried to do, we are going to continue to give you our guidance in constant dollars.

I'm sorry, in real dollars.

And, we have always had that practice, but with the growth of our international business and the type of volatility that we have seen, really that began back in September, I think the graph that showed the Sterling having 25% type movements within -- versus the second quarter last year, we just felt it was very important to not only point out how FX was impacting our revenues, but that we do have a natural offset that when our yields do suffer from the strengthening dollar, that we do have a natural offset on the cost side and that tends to help us maintain our operating cash flows.

Okay.

What I was trying to get to is also for your prior net cruise cost ex-fuel, you were looking for down five to seven and now you're looking for down six to eight.

I'm just wondering if it's fair to interpret that improvement being generated by other things that you were doing internally to cut costs or is it being driven by FX?

No.

That would be predominantly because the dollar has been a little more stable since the end of January, so what you're seeing, that movement, we are comparing apples to apples, the five to seven to six to eight.

Most of that is being driven by the success of some of our cost management measures that we've been doing.

Can you just briefly talk about what has been the most successful and what has driven you to this new guidance?

You know, I think it's been an incredible effort by all our brands' management teams.

They have been very focused in trying to take advantage of the current environment.

Just as we are seeing a lot of pricing pressures with our product, I think a lot of our vendors are seeing pricing pressure, and I think our teams have done a great job of negotiating.

I know Richard, and I believe, Adam both commented on the fact that the best part of this is we are actually seeing some of the highest ratings we have ever seen from our guests.

So it's all been done in a very methodical way, but a lot of team work involved in getting it done.

Okay.

Great.

Thanks a lot.

Thanks.

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

Hi, Brian.

You indicated in the press release you expect $1 billion plus of operating cash flow this year.

Within what seems to be an implied working capital benefit, are you assuming that customer deposits now will be neutral to positive for the full year?

Thanks.

Sure, Scott.

Our customer deposits actually, we hopefully are going to be filing our Q later today and you'll actually be able to see that customer deposits are down year-over-year, and it's not a large amount, but that's all embedded within our yield guidance.

Yes.

Actually, if you take our yield guidance, our customer deposits are actually doing better than you would infer from our revenue guidance that we have out there.

So in answer to your question, we are expecting customer deposits to come down slightly, but most of that is being driven by the value of the FX that's out there as well as the lower yield offset in part by the higher capacity.

Okay.

Great.

Thanks, Brian.

Sure.

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

Thanks.

Most of my questions have been answered.

Just wanted to ask about when you book at 2010, at the next Oasis class ship, the Allure, do you expect that the financing this year is going to be kind of a template for the second ship?

In other words, do you expect the 95% guarantee level and also the direct involvement from the Finnish government in terms of the financing itself?

Do you expect that to be replicated next year?

Robin, I think it's way too early to speculate exactly what we will be doing.

We are still more than a year-and-a-half away from the delivery of that vessel.

I think we have demonstrated by the way the Oasis came together that we have a very good ability to go out and raise financing for these vessels.

We have some excellent supporters out there, and as we said with Oasis, we are not concerned about our ability to do Allure.

I don't want to get any more specific than that.

I would like to mention, though, because I have seen some comments about the fact that people were surprised by the FEC participation, this was not unprecedented.

We actually, when we did the financing for the Independence of the Seas, a little larger than 50% of the financing from Independence of the Seas was actually an investment on the part of Norwegian's Export Credit Finance Group.

They actually took a quite large tranche of the Independence of the Seas as an investment, and I believe that if you look into it, Finland in total, has authorized somewhere in the neighborhood of about $3 billion of direct investment in exports in terms of providing liquidity in support of their export.

So this is not as unprecedented as maybe some may have been led to believe.

Well, and I think part of that comes from discussions with management where that was kind of what was conveyed, but okay, great.

Thank you.

Okay.

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

Good morning.

Can you hear me?

Yes.

Sorry about that.

Well, maybe it was Adam who mentioned that for the third quarter, three quarters of the bookings or expected bookings would come from European customers.

Am I right?

Is that what Adam said?

Yes, you're correct, Steve.

Okay.

So my question then is dealing with the AIDA and Costa brand through Carnival, they have always said that the customer is very much a last minute booker.

So, what I'm asking is, since we are still pretty far away from that peak third quarter season, what's giving you the confidence, in fact, that that customer is going to show up since they tend to be last minute bookers?

Second, when you look at your Q3, Q2, you know, essentially guidance, it still implies a massive rebound in the fourth quarter and I'm just trying to figure out what is in the fourth quarter other than maybe slightly easier comparisons that's giving you that positive tilt?

And then, final question, churn.

Are you seeing people make deposits and then drop the deposits, and then, come back in at lower prices?

Steven, your first question about how visible is Europe for us at this point and what are our expectations about what will happen as the season unfolds, we have been ramping up by about one ship per year in the Royal Caribbean International brand.

We feel like we have a pretty solid platform for doing our revenue management analysis.

We have been present in all of these countries where we are marketing today.

We have long-term relationships with travel agents and consumers in these markets, so we understand that there are differences.

For example, countries on the Mediterranean rim where we have home port products in Barcelona or Venice, for example, we understand that these are later booking markets and we are comparing our year-over-year trends, and we are getting our feedback from the market in terms of what will happen.

The country directors in those markets, their optimism is consistent with the overall guidance that we have given.

It's baked into that.

In the UK, which is a very significant market for us, the customers continue to book further out than many other countries, and so, when we look at a product like Independence of the Seas, which is based out of South Hampton and is an important part of our European mix, we feel like we have a pretty solid platform for projecting forward its performance for the rest of the season.

On the other hand, when we have introduced the new product for the whole summer with Vision of the Seas doing short cruises from different Nordic home ports, there is a little bit more variability attached to that outlook.

So, it's all sort of baked in together, and overall, we feel comfortable, as I mentioned in my comments, that Europe is having a neutral to slightly favorable influence on our guidance as compared to three months ago.

Steve, I'll comment on your second and third question.

In terms of Q4, we actually tried to spend a little bit more time on this call, really showing how we believe the evolution of the year would come about, and we are looking for a better fourth quarter result than we do see in Q2 and Q3 in terms of yield performance.

There are really four drivers.

The first, you mentioned the comparable.

I believe, last year, our yields in the fourth quarter were down right in the range of around 5.9%, and if you recall, when we did our third quarter earnings call, we were actually projecting a yield improvement in the fourth quarter.

So, we did see a substantial deterioration in terms of the impact from the economy and we think we had paid a large price at that point in time.

We also have a significant difference from Q2 and Q3 in terms of FX.

In Q2 and Q3, we are talking about 5 percentage points of yield deterioration, solely attributable to the value of the dollar, or I should say, the value of our foreign sales coming in, and we don't have that in Q4 right now, based on the current spot rates.

The third thing that will really help the fourth quarter is the Caribbean.

As you've rightfully pointed out, there's a lot more pressure on Alaska and the more high end products.

When we get back into the Caribbean in the fourth quarter, we do derive the benefit from that.

And then the fourth factor, while it's only one month, I think the Oasis really has been an absolutely terrific product for us.

There's a lot of excitement about it.

If you go on the internet and compare the pricing that she's getting, it's absolutely terrific, and frankly, I think the brand is probably experiencing some degree of a halo from that vessel and is benefiting from that as well.

And your last question related to churn.

We absolutely have seen churn.

It was included in the first quarter.

Frankly, I think in our forecasting, we were expecting to actually see a little bit more churn than we got and that was one of the benefits that we had ending up at 13.5%, versus our prior guidance.

We have tried to bake that into our guidance.

We look at this very carefully.

I think our revenue management team, as Richard alluded to, really does a really thorough job in evaluating this, and thus far, has proven to have a lot of credibility, and I think we have baked that all into our assumption.

Okay.

Thank you.

Okay.

I guess we are running out of time, but we will take one more question if we could, operator.

Your next question comes from the line of Sharon Zackfia with William Blair.

Hi.

Good morning.

Just curious, with airfares having really retracted, particularly to Europe, are you starting to see any correlation and a benefit to your yield and bookings now for Europe?

I know it's a little bit of a speculative question, but those airfares are dropping dramatically.

Sharon, it's a good question.

We work very, very well with our travel agent partners and rely on them heavily for our business, and we have been communicating just that same fact with them.

On those charts that Brian showed you, you started to see Q2 and Q3 tick up in terms of demand, and we do think that the fact that airfares have come down probably is impacting that somewhat.

Do you think that's being communicated well to your potential passenger base?

Well, we are doing a good job getting the word out to our travel agents.

We are letting them know and we are asking them to get the word out.

I think travel agents are trying to get that word out as they are selling cruises.

I know when they call in to us, the travel agents, they are telling us that that's what they are doing.

They are trying to get that word out there that airfares are down.

Okay.

Great.

And then lastly, I guess this is always a question during times like this.

Are you seeing your passenger mix skew more towards repeat passengers at this point or are you getting more first timers, people who haven't cruised before but are drawn in by the low prices at this point?

Sharon, it's Dan again.

We are seeing a fairly similar mix, depending upon the brand.

We haven't seen anything that's been a big, big change in terms of our mix of our guests.

It will be interesting as we go forward to see if that changes, but at this point, we have seen fairly consistent mix.

Okay.

Great.

Thanks.

You bet.

Okay.

I'd like to thank everyone for joining us today, and Ian will be available throughout the day if anyone has any follow-up questions.

Have a great day.

This concludes today's conference call.

You may now disconnect.