皇家加勒比遊輪 (RCL) 2012 Q1 法說會逐字稿

Good morning.

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

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

first-quarter earnings call.

(Operator Instructions).

I will now turn the conference over to Brian Rice.

Thank you Keila, and good morning, everyone.

I would like to thank each of you for joining us today for our first-quarter earnings call.

Joining us from London is Richard Fain, our Chairman and Chief Executive Officer; and here in Miami with me are Adam Goldstein, President and CEO of Royal Caribbean International; Dan Hanrahan, President and CEO of Celebrity Cruises; and Ian Bailey, our VP of Investor Relations.

During this call we will be referring to a few slides which we have posted on our investor website, www.rclinvestor.com.

Before we get started I would like to refer you to our notice about forward-looking statements, which is on our first slide.

During this call we will be making comments that are forward-looking.

These statements do not guarantee future performance and do involve risks and uncertainty.

Examples are described in our SEC filings and other disclosures.

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

Richard will start with his comments.

I was will follow with a brief recap of our results, give an update on the booking environment and our guidance.

Adam and Dan will follow with insights from their brands, and then we will open the call for your questions.

Richard?

Thanks, Brian, and thanks to all of you for joining us this morning.

As you can tell from my comments in the press release, as well as our cautious messaging back in February, there really was a great deal of hesitancy on our part in providing earnings guidance so shortly after such an unprecedented industry event.

But we did recognize the value of being transparent with the financial community, and we wanted to communicate as much information as we could, even in the face of that uncertainty.

So far, we're actually tracking very nicely to the kind of ranges that we provided in early February.

And as expected, we've continued to experience a slow but steady recovery in our booking patterns.

Of course I would like it to be even faster, but the pattern that has emerged so far validates our earlier guidance.

Essentially, as we reported this morning, our outlook for the year hasn't changed very much.

The only significant variation in our earnings outlook for the year is fuel.

That's very encouraging, but it is early days.

The market is still highly volatile, highly uncertain and our guidance reflects a higher than typical degree of uncertainty.

Even so, we've seen enough positive direction to justify narrowing our yield range by shaving a percentage point off the bottom case scenario.

The pattern of the tragedy's impact is also informative and really quite logical.

The closer one is to the location of the incident and the closer one is to the time of the incident the greater the impact.

Thus, for example, Europe and especially southern Europe, have been the most affected.

Also, the first quarter took a big hit, but it was also so heavily booked already that it was somewhat insulated from the impact.

On the other hand, not surprisingly, the second and third quarters are suffering the most.

They book a great deal during the wave period and the summer is our most valuable season, especially in Europe.

With less of a cushion than the first quarter, they are therefore, and not surprisingly, the most vulnerable.

On the other hand as we enter the fall, we appear to be turning a corner.

Sailings in the fourth quarter and for all of 2013 show promise.

Both remain stronger than comparables from the same time last year, and I think that further validates our belief that this is a shorter-term issue.

Another point of encouragement is the strength of our developmental itineraries this year.

Brazil performed nicely in the first quarter.

Asia appears to be rebounding from last year's tsunami and then some.

And Australia is nicely absorbing some meaningful growth in capacity this year.

In fact, stepping back from industry and economic anomalies that are so frustratingly affecting our earnings, we are actually executing quite well against our multi-year strategic initiatives in globalization, improved credit ratings and improved returns.

2012 marks a big milestone for us in the globalization of our company as we expect that half of our guests will be coming from outside the United States this year.

This has been a big push for us over the past years and has required a significant amount of investment, both human and capital, and this goal of organically establishing our brands throughout the world appears to be bearing fruit.

Our rate of global expansion will now slow as incremental berth additions slow.

But despite a pretty lousy economic backdrop these past several years, we've been building and fine-tuning a broad and diversified global footprint, from which to operate our vessels and source our guests.

With about a third of our footprint allocated to Europe, the Arab Spring and the Costa Concordia have disproportionately burdened results for the past two years.

But we feel strongly that our diversification in a more normalized economic situation will provide us with significant flexibility for itineraries and for sourcing, which will help increase the pricing on our fantastic products.

I'm also encouraged with the progress we've made regarding our capital structure.

Just at the end of February, we received a credit upgrade that puts us within one notch of returning to investment grade.

Obviously many factors influence rating decisions, but I'm sure that the $650 million in debt that we extinguished in 2011 did play a significant factor in the upgrade.

Interestingly, returning to investment grade in and of itself won't lower our borrowing cost all that much.

That's because we already benefit from access to export credit financing and other existing financing.

But the fact is that the associated leverage reduction that accompany the goal will provide us benefits in terms of earnings, cash, and volatility.

Looking strategically, we've really made tremendous progress globally diversifying the enterprise, and this should have a positive impact on our pricing.

And it should provide great flexibility in our sourcing.

We have also continued to strengthen the balance sheet and expect that to continue.

All of these together should lead us to higher returns on our investments.

Can't do much about the economic backdrop which is so challenging these days.

But our focus is overcoming the headwinds in the short term and preparing ourselves to unfurl our sales and exploit the upturn when it does come.

What we're really building here is a company that performs well in difficult times and performs exceptionally well during good times.

Now I'll turn the call back to Brian, Dan, and Adam to take you through more information regarding the quarter and our outlook.

Thank you.

Thank you, Richard.

On the second slide, we have summarized our performance in the first quarter.

We generated net income of $47 million or $0.21 per share.

That yield has improved 7% on a constant currency basis and 6.4% on an as-reported basis.

As you may recall, in February, we updated you on some changes related to our international distribution and deployment initiatives that will have a positive impact on yields but a negative effect on cost.

In the first quarter these changes had a positive impact on yield of approximately 350 basis points.

The vast majority of our products in source markets experienced yield improvement during the quarter with some of our highest yields coming from our developmental markets, such as Australia, Brazil, and Asia.

On-board revenue exceeded our expectation, and it was particularly gratifying to see our first-quarter net ticket yields surpass 2008 pre-recession levels.

On the cost side, excluding fuel, our net cruise costs were up 5.7% on a constant currency basis and up 5.1% on an as-reported basis.

Approximately 500 basis points of this increase was due to the structural changes I mentioned previously.

Below the line we had a $3 million gain on our fuel option, which offset about half of the increase in fuel costs from the figures included in our guidance.

Now I would like to update you on what we've been seeing in the demand environment.

Overall the pace of new bookings and the price points in the market have been very consistent with the midpoint of our previous guidance.

Demand is still somewhat volatile and as many of you have witnessed, there are many mixed signals in the pricing surveys being done.

Uncertainty still remains, especially for European itineraries this summer, but so far, the performance has been consistent with our earlier expectation.

As you may recall, when we reported in February, we said in the two weeks following the Costa Concordia incident, new bookings were down approximately 20%.

In the week before our call, as media coverage subsided and advertising began to come back, our new reservations were down in the low to mid teens.

Since then, our cumulative bookings have been down mid-single digits.

Over the past four weeks, though, we have seen better demand, especially from the United States, where year-over-year bookings have been exceeding last year's levels.

As of today, our total booked load factors are slightly behind this same time last year for the second and third quarters, but ahead for the fourth quarter and for 2013.

Our booked APD's are higher than this same time last year in all quarters.

Overall, our current pricing remains in line or higher than the same time last year for all major itinerary groups except Europe.

At this time last year, the Arab Spring was in progress, but it wasn't until May that we felt the full impact on bookings in the Eastern Med and we took our most aggressive pricing actions.

This year the challenge is more widespread than the Eastern Meds.

The level of discounting is more contained.

The net effect of all this is we expect some yield improvement in the Eastern Med, but overall European yields will likely be down slightly versus last year.

On the other hand, all of our other major itinerary groups, including the Caribbean, Alaska, and our developmental products, are expected to have solid yield performance, with most exceeding 2008 levels.

Now Europe accounts for 32% of our itineraries in the second quarter, 54% in the third quarter and 27% in the fourth.

Based on what we were seeing today, we expect to have overall yield improvement in the second and fourth quarters, but we expect the weighting of Europe to put pressure on our third-quarter performance.

Most importantly, though, the full-year still looks to be on pace with our original projections.

On slide 3, you will see our guidance for the second quarter.

We expect yields to be up 4% to 5% on a constant currency basis and between 2% to 3% on an as-reported basis.

Net cruise costs excluding fuel are expected to increase by 10% to 11% on a constant currency basis and increase 8% to 9% on an as-reported basis.

On slide 4, we have provided a reconciliation of our second-quarter net yields and cost guidance.

The international distribution and deployment initiatives I mentioned before account for approximately 250 basis points of yield improvement.

So on a like-for-like basis net yields are expected to increase around 2% on a constant currency basis.

Approximately 450 basis points of the cost increase was due to the international distribution and deployment initiative.

Additionally, we shifted some marketing and related expenses out of the first quarter, mainly due to the Costa Concordia incident, and we have an unusually high number of dry dock days and related maintenance in the quarter.

These two items combined account for about 400 basis points.

So on a like-for-like basis, net cruise costs excluding fuel are forecasted to increase between 2% and 3% on a constant currency basis.

Based on current prices we have included $232 million of fuel expense for the quarter and we are 51% hedged.

Earnings per share are forecasted to be roughly breakeven for the quarter.

On slide 5 we have provided our guidance for the full year.

We expect net yields to improve between 2% and 5% on a constant currency basis and between 1% and 4% on an as-reported basis.

As you can see we have both narrowed the range and raised the midpoint slightly.

This modest uptick in net yield is due mainly to better sales for our Pullmantur brands tour product in Europe.

Approximately 200 basis points of the yield improvement is due to the structural changes, so on a constant currency basis, we are looking at a like-for-like performance of flat to up 3%.

Net cruise costs excluding fuel are expected to increase approximately 5% on a constant currency basis and approximately 4% on an as-reported basis.

Of this, approximately 300 basis points are due to the international distribution and deployment initiative.

On a like-for-like basis, we are projecting an increase in these costs of about 2% or 50 basis points higher than in February.

Similar to revenue this increase is all due to the improved tour sales.

Based on today's fuel prices we have included $923 million in fuel expense for the year, and we are 55% hedged.

Our projections for earnings per share have been updated for current fuel prices.

Otherwise the midpoint is essentially unchanged from our last call.

We are now forecasting EPS for the year to be between $1.80 and $2.10.

With that I'd like to now turn the call over to Adam for his comments.

Adam?

Thank you, Brian, and good morning, everyone.

Three months ago I stated we believe a recovery of booking momentum is highly likely.

The question is the timing and strength of the prospective recovery.

What we see three months later is we are just now returning to last year's levels and directionally the recovery has been somewhat stronger in North America than it has been in Europe.

In Asia, Australia, and Latin America, we really did not see a falloff in business to begin with.

Royal Caribbean International's year-round Caribbean programs are doing nicely, spearheaded of course by Oasis Of The Seas and Allure Of The Seas, which continued to maintain their impressive performance throughout the year.

We expect our Caribbean yields to be higher in 2012 than they were in 2008.

Meanwhile, we are at the beginning of our summer seasonal programs.

Many Royal Caribbean seasonal ships will be in Europe, where we are still a few months away from the peak holiday period.

Although our capacity in the Mediterranean is down by double digits from 2011, we remain focused on our sales and marketing effort in the region, both to fill this year's capacity and to continue to build awareness of and preference for our brand.

The biggest story of Royal Caribbean's seasonal deployment, however, is the move of Voyager of the Seas to Singapore and then China.

While the ship will not arrive in Singapore until May 26 it is clear the prospective presence of Voyager in Asia has galvanized interest in Royal Caribbean in the region.

Asia is in general a late-booking market, so we still have limited visibility into the performance of specific sailings, but at this stage of the selling effort, we are pleased at the market's response to Voyager.

Royal Caribbean continues to revitalize its older ships under the Royal Advantage umbrella at a brisk pace.

Rhapsody of the Seas has recently undergone a complete makeover in Singapore and Grandeur of the Seas is about to have very similar work performed in the Bahamas.

The re-berth of the Centrum as venues for aerial entertainment takes place during each cruise, is a new breakthrough in cruise ship entertainment.

Several other Royal Caribbean ships will also receive the Royal Advantage treatment before the end of this year.

Dan?

Thank you, Adam, and good morning, everyone.

It continues to be a very positive time for Celebrity.

While the world events have had an impact on some aspects of our business, Celebrity continues to make strides.

One of our most exciting initiatives is the slated arrival of Celebrity Reflection in October, our fifth in the five ship Solstice Class series which is on pace at shipbuilder Meyer Werft in Papenburg, Germany.

Other big initiative is the continued rollout of our modern luxury platform through upgraded and enhanced onboard programming and dining experiences.

I'm particularly pleased with the positive guest reaction to our new main dining room menus.

During the first quarter we had healthy demand for all products.

Both volume and rate came in about where we thought at the time of the previous call.

We are pleased our performance finished well ahead of Q1 2011 and 2010 and also finished ahead of 2008 levels.

In addition, we had another record first quarter for our South America product on the Celebrity Infinity, which operates a series of 14-night open night open-draw open-jaw sailings from Buenos Aires to Valparaiso, as well as on Celebrity Expedition our boutique 90-passenger ship which operates seven-night sailings in the Galapagos year-round; and also on the newly introduced Australia and New Zealand product on Century this year.

Given the strong results in Australia I'm looking forward to having Solstice there for the winter of 2013 and 2014.

Onboard revenue performed well as the newly Solsticized Millennium Class ship helped us exceed expectations.

For the summer season our Alaska product, where we are once again operating three ships, is performing well.

Bookings for our seven-night Bermuda sailings out of Cape Liberty this summer are also doing well.

And we are on pace to achieve healthy yield improvements over last year on both of these products.

Performance for our summer Europe product has been mixed.

As has already been mentioned we continue to feel the impact of the Costa Concordia event and have had to get more creative through various offers and promotions.

We are starting to see the promotional efforts work and are beginning to gain traction.

Looking further out and while it is admittedly early we continue to see positive signs for Q4 and into Q1 of 2013.

Load factors are up and pricing has been encouraging.

Some of the most exciting news is the announcement and opening of our summer 2013 and winter 2013 and 2014 deployment.

All of this deployment will be open by the end of the month and will feature four fully Solsticized Millennium Class ships and our five Solstice Class ships.

But I wanted to share a couple of the itineraries with you today that will have a positive impact on our performance.

I already mentioned we will have Solstice in Australia and New Zealand this coming winter and as a result the Solstice Class ship will for the first time sale the West Coast of the United States during the summer of 2013.

Solstice will replace the Infinity and operate seven-night Alaska itineraries from Seattle.

The ship will join the currently deployed Millennium and Century.

Finally, we'll have options for everyone with a more diversified 2013/2014 Winter portfolio.

Our lineup will feature our ships, six in the Caribbean, five around the globe and Australia, New Zealand, the Galapagos Islands, Hawaii, South America, and the South Pacific.

Brian?

Thanks, Dan.

We'll now open the call for your questions.

As a reminder we ask that you limit your questions to no more than two.

If you have more than that we'd be happy to answer them after the call.

Keila?

(Operator Instructions).

Assia Georgieva, Infinity Research.

I had one easy question.

There seems that capacity figures are coming down for the next three years.

Do you have a ship sail in mind or more dry docks?

Assia, the primary change there is the transfer of the Monarch from Royal Caribbean international to Pullmantur.

And because Pullmantur is reported on a two-month lag, it has a slight impact on capacity.

Okay, so no ship sails that we are not (technical difficulty)?

No.

A question, Europe tends to book closer in when it comes to European (technical difficulty).

What would be the sweet spot for those sailings on a normal year?

Is it two months or three months before the sailing?

And should we expect that in May we can see a significant year-on-year pickup as we enter more easy comparisons?

It's Adam.

I don't know if you can pinpoint the sweet spot to exactly one month.

One of the characteristics of Europe as a cruise market is that the peak holiday season is more let's say July/August, whereas in North America, it's become in recent years more June/July.

So there is a little bit more time.

We're beginning to see this now in April, but I would say April, May, June into July, is the key booking period for really understanding the visibility of how the peak European cruise season will perform.

Okay.

So we are just entering that key season for European-sourced passengers.

Yes, there is the sense on our part that it really is a question of what begins to happen after the Easter holidays occur, which of course just took place a couple of weeks ago.

And now we will begin to enter the key booking period.

Thank you, Adam.

Felicia Hendrix, Barclays.

Good morning, guys.

I wonder if you could just throw -- you give us some good details.

I always appreciate that.

But just wondering if you could further discuss your strategy with us as you've been trying to navigate the cruise years, so this difficult year.

Other than Europe, we're just wondering where you have had to take the largest price reductions.

Adam, you definitely spoke about how strong the Caribbean was for the Royal Caribbean brand, but just wondering, again, in Europe, other than Europe, what you're seeing.

And then also have you found that the promotions that you have been doing have been successful enough to allow you to avoid further price reductions?

And I'm wondering what kind of promotions have been the most successful or the least successful.

I'll give you kind of a high-level view and then maybe Adam and Dan can talk about what they are seeing at the brand level.

Overall, again, as I tried to allude to in my script, with the exception of Europe, the other products, our pricing today is at or above where it was a year ago.

I think we have seen reassurance that there is elasticity in the market.

And when we've had to do some promotions, we've seen good response from that.

And I'd like to reiterate the pricing that you're seeing in the market has been and is currently in our guidance.

Consistent with -- we have a little bit of latitude in terms of if we want to sacrifice some load or if we want to do different pricing strategies.

And I think each brand has a unique strategy depending on the circumstances that they're seeing.

I'll pass it on to Dan for comment.

Felicia, I think Brian's comments were right on.

We are really -- where we've had to take all the action has been in Europe.

And we've tried a number of different promotional efforts, from prepaid gratuities, onboard credits, buy one get half off for the companion, things like that as well as reduced air.

And they respond -- the different markets respond differently to all those promotions.

I think we are getting better at it and I think that has helped us gain some traction in Europe.

But the rest of our categories, we really haven't had to be very aggressive with the promotions.

It's really all been focused on Europe.

Felicia, hi, it's Adam.

We've commented a lot about this from a geographical standpoint.

So I don't think there's anything more I need to say about that.

What I wanted to say is that while we still consider ourselves to be in a somewhat challenging revenue environment, three months ago when we spoke with you we really were not in a position to know if the kinds of discounting techniques that we had engaged in the past would have the kind of effect that we have seen them have in the past because we were in such a novel environment.

It's pretty clear today that we are able to use the techniques that we commonly use and get the kind of results that we commonly get.

For example, one of the things that Royal Caribbean International is pretty well known for is the so-called WOW sale.

And we engaged in the exact same kind of WOW sale that we have in the past.

We saw the kind of uplift in bookings that we have seen in the past.

This happened just a couple weeks ago.

So, yes, we have challenges, but from a revenue management standpoint, we are in a much more normal type of environment.

Okay.

And Adam, am I correct that you did it in March this year versus April last year?

Is there anything to read into that?

We've flexed it a little bit in the past.

We don't want to be totally predictable under any circumstances.

That would probably actually undermine the value of the program.

So I think if you look historically it was on the early side of what we'd done, but I wouldn't read too much into it.

Okay, great.

And then just a follow-up, Brian, in your comments, you tried to give us some color on how to spread our yields quarterly.

And I just want to make sure I heard you correctly regarding the third quarter.

Did your comments imply that we should look at the third quarter as potentially being a negative yields quarter or just less than the fourth -- less growth than the second and fourth?

I was purposely vague there, Felicia.

I kind of figured you'd pick up on that.

We -- we're confident that we're going to have yield improvement in Q2 and Q4.

I think there is still a very wide range of outcomes for Q3 with the possibility of some yield deterioration.

But, as I tried to allude to I think our biggest level of uncertainty right now is really the heart of the European season in Q3.

Okay, yet -- but that being said you feel comfortable with the new guidance that you gave today?

Correct, yes.

That assumption, that range of outcomes within Q3, is considered in our full-year guidance.

Perfect.

Thank you so much.

Tim Condor, Wells Fargo.

Thank you.

Adam, if you could -- I just wanted to make sure I heard you correctly -- a clarification question here -- that your 2012 Caribbean yields for the Royal Caribbean international brand would be higher than 2008; was that what I heard?

Yes, I said that is what we expect.

Okay.

Okay, great.

Okay.

The first question here that I have is onboard, continuing to see some good progress; you called that out, sequential progress here.

What categories are you seeing that's driving that?

And I would presume that, again, also that's all occurring outside predominantly of Europe?

Tim, it's Dan.

You are right, it's outside of Europe because we really haven't -- we don't have much deployment at all in Europe at this point, so you're right about that.

But what we've seen is pretty good across the board.

It's been a very, very conscious effort to raise our onboard revenue with programs that we have at Celebrity.

We've seen it across the board.

We've seen it -- a very strong beverage revenue; we've seen strong shore-ex.

revenue.

Casino has not rebounded yet, but we've put programs -- as a whole -- but we have put programs together with high rollers to help casino improve.

So I think what we're seeing is that all the hard work from our operations team here in Miami as well as on the ships is starting to pay off.

Okay.

Okay.

And this is probably a very difficult question but I will throw it out there.

I know you've given no guidance for 2013, but everything that you know at this point, and assuming nothing changes in the world, but everything that you know at this point from what you're seeing in the broad market, the hit from Europe, as your best guesstimate, what would you assume that hit piece would recover, looking to next year, would be a reasonable range of recovery?

Tim, I don't think we're prepared to put any numbers around that.

I think we're talking about a lot of uncertainty in Europe in the third quarter.

I think to try to project that out to a year from now is a little too ambitious.

I think I would comment that we are pleased that we are seeing Q4 and 2013 bookings continued to show strength, but it's so early in the selling cycle; I think it's just way too early to speculate on that.

Well, Brian, let me -- within that context of your answer, let me re-ask it.

Again, Europeans, as you've already stated --

I don't think you're going to get a different answer (laughter).

(laughter).

Well, but what you have seen of European bookings, those that -- the few that do book out further, what are you seeing for fourth quarter and first quarter of 2013 out of European-sourced passengers relative to normal?

I think you know in aggregate, we are seeing our bookings are healthy for Q4.

They are healthy for early 2013, but, again, the basis is so small I think it's very dangerous to extrapolate.

I think we're going to try and be as transparent as we can with the things that we do know, but we're also going to be very honest with you on the things that we don't know.

And I think that's just one we are not prepared to comment on at this point.

No, that's fair.

And again thank you all for the continued good transparent and the detailed disclosure.

Thank you, Tim.

Sharon Zackfia, William Blair.

Hi, good morning.

A few questions I guess on the techniques you're using to simulate the bookings.

I'm just curious if you're finding that different strategies are successful in North America versus Europe, and if you could provide any detail on that without giving away the competitive secret sauce?

And then secondarily, just if the North American consumer is seemingly a little bit more resilient at this point, how easy is it, or is it not easy, to shift your sourcing towards more of a North American consumer versus the European consumer?

If you could help us understand that.

Hi, Sharon, it's Adam.

I think I commented on the last call that we have the opportunity because we are versatile in our sourcing to somewhat redirect sourcing where needed.

And so we have some ability for example to promote more to North American source market for European cruises.

That's mostly at the margins of the ratio; it's not about a fundamental change in sourcing.

But we do have that opportunity, and we have been striving to take advantage of that where necessary.

I think when you're looking at North America versus Europe, a lot of it has to do with where the source markets are in relation to where the ships are that they are going to cruise on.

So, for example, the UK market has -- is a market that we count on to have a good number of customers flying down to European -- Mediterranean home ports, cruising from there.

Just as from the Midwest of the United States, we are dependent, clearly, on customers getting on airplanes and flying down to South Florida, for example.

And in those cases we're more packaging together air with cruise, possibly with land stay before or after the cruise attached to it.

And I would say generally speaking we are finding that we are able to bring those promotions to bear on the current situation and get a response from the market.

When it is either in southern Europe where people live close to where the ships go out and the UK if it's South Hampton-based product or for people who live in Florida or New York right near where ships are going out, then it's much more cruise-only pricing and a range of discounts, depending on if you are a senior, a resident, military, what have you.

And, generally speaking, we find again in the current marketplace that we get the kind of response to those offers that we have historically gotten.

Overall, we've said we probably are having to work a little bit harder at it in Europe than we are in North America, but we are within the range of revenue management expertise that we've built up over the years.

Okay, great.

Thank you.

Harry Curtis, Nomura.

Good morning.

I wanted to go back first to Asia.

You mentioned that you were pleased with the initial response in your bookings.

If you could put a little bit more meat around that.

Specifically, what is your motivation to move capacity to Asia from the point of view -- and if you could put that in the context of EBITDA per -- does the EBITDA per ship go up or down?

How long does it take to improve?

And do you factor in all of the costs, including marketing and infrastructure?

Harry, I think we've made it clear we see Asia in general and China in particular as a strategic objective.

And we have acknowledged in the short term that it's a losing proposition.

In particular, and you raise the question of infrastructure, etc., there's a lot of infrastructure that goes in.

We've had three offices in China to support one relatively smaller vessel.

So I think you have put your finger on something.

In the short term, this is a strategic move which is going to cost us money.

And we think that it will pay off relatively quickly.

And part of that is to grow the volume to help cover much of that infrastructure and overhead and initial opening costs.

So, right now, it's -- it is costing us money, but when we do look at it, when we look at why we're doing it, we're doing it because in the long term we think we will get strong enough returns to justify.

We're getting enough returns today, but we'll first approach breakeven, then we'll be profitable, taking into account all of those things.

Any sense of how long it takes to break even?

Well, we are not that far away from it today.

Okay.

And the second question that I had relates to -- if you could provide us on the update of your costs related to stricter environmental regulations, specifically your fuel mix.

What have you built into your 2012 estimates to account for that?

And then what are the technologies that you're considering, and what might be the costs to install those new technologies?

Harry, it's Dan.

In all of our guidance we've assumed all of the regulations that we have to deal with.

So, that's baked in there today.

We have a real strong focus on driving consumption down.

And I think that all of our brands have done a great job on that.

In terms of abatement kind of technologies we're still very early in studying and analyzing things like scrubbers.

So it's -- it's not at the stage where I think we could say this is what it's going to cost us to do it on ships, but we are engaged in it.

But I think the thing that we're doing more than anything else is keeping our continuous focus on driving our consumption down.

And then, just the last follow-up is, Carnival has given us some sense of what it's going to cost in higher fuel expense.

Can you give us anything more specific about what the incremental costs are going to be this year or next?

Harry, we've said it's not material for this year.

And, when we come out with our 2013 guidance we'll be sure to -- if that level of detail is important, we can provide that.

But, I can tell you, as Dan alluded to, and I know we don't share this publicly, but we do have our long-range models.

We've assumed the worser-case scenarios where we don't have abatement technologies, but I think we see some promising opportunities out there, but it's still in the R&D phase.

Thanks very much.

Steven Kent, Goldman Sachs.

Can we just switch a little bit to the expense side?

Maybe talk -- I know you commented a little bit about the shifting of expenses from Q1 to Q2, but could you start to talk a little bit more about what you're doing longer term to reduce expenses both at the headquarter level and also at -- on the ship level?

And then just broadly, on shipbuilding, shipyards, attract -- can you just talk about attractive deals for more shipbuilding -- when would you start to talk about building more?

Or are you comfortable with the pace as of now?

Steve, hi, it's Adam.

On your first question about costs, I mean obviously it's incumbent upon us as a management team to look like hawks at opportunities to spur efficiency anywhere in our structure, whether that be in headquarters, in other facilities that we have on land around the world, or onboard the ships.

At the same time, though, we continue to invest in a range of initiatives, mostly designed to enhance our revenue-generating capabilities for the future.

Richard just alluded to some of them when he was speaking about what we're doing in China, but, with the product in general, with respect to any of our brands, this is a very competitive industry that's constantly moving its offering forward.

So if your product is staying the same, essentially, in competitive terms you're going in reverse.

And we've been very clear that we will continue to invest in product enhancement features.

That puts even more pressure, therefore, on us to make sure that we identify efficiency that will not touch the product experience in any way.

And we're in pursuit of both of those objectives at all times, more efficiency where guests won't see it and better product where they will.

And Adam, is that on purchasing power or what is it that you're able to do?

I'm sorry, Brian, you can go ahead.

I was just going to add that despite all the investments that we have been putting in for our international footprint, and they -- you can imagine the infrastructure that we've put in place and the marketing of our brands as we've grown them organically, has been significant.

Despite that we have been able to keep our non-fuel cruise -- net cruise costs well below the rate of inflation.

And, I can tell you the brands and the shore-side environment worked tirelessly, whether it's through taking advantage of scale and leveraging the new international footprint that we have; whether it's finding efficiencies; whether it's through new technologies; whether it's finding those things that our guests and our customers just don't value and de-emphasizing those or eliminating them, there is a continuous focus on how do we gain efficiency, yet at the same time we are making those strategic investments.

And then, Steve, looking at -- responding to your question on future new buildings, I think you have to remember that that's a decision which is a very long-term one.

If you ordered a ship it takes years before the ship can be delivered.

So you really have to be constantly looking out.

We've made it very clear that we think in the environment that we see today and the environment that we see looking into the future, we are really looking for margin growth as opposed to simply volume growth.

And, we are -- we believe that having a relatively modest amount of growth will help the supply/demand situation and, therefore, pay for itself quite attractively.

So we do see that growth continuing on a slower basis than it has in the past.

At the same time, we really have to constantly think about these things.

Unlike some industries when the capacity comes, it comes in a big lump, and that will lead to a somewhat jagged curve.

And even in difficult times you need to be thinking what is going to be needed years into the future.

So I think we will continue to progress this sort of on a regular basis and not adjust that based on day-to-day or month-to-month fluctuations or even the economic situation.

Okay, thank you.

James Hardiman, Longbow Research.

Good morning.

Thanks for taking my call.

First, just a real quick clarification if you will.

I was hoping you could just ultimately distill the changing guidance a bit.

You increased the midpoint of both the yield and the cost guidance, both excluding currency and fuel, by about 50 basis points, I believe.

Was that in both cases changes in distribution and deployment that drove that, or was there, maybe, a slightly better outlook on the low end that also contributed to the yield side of things?

Sure, James.

The -- we increased if you will the midpoint of yield by 50 basis points, increase in nonfuel net cruise costs by 50 basis points.

That was due almost entirely to -- we've seen some increased sales in our tour business for Pullmantur within Europe.

While our cruise sales have been struggling a bit, we have seen an uptick on the land base which includes air from Pullmantur's tour product.

It's essentially breakeven, slightly positive, but for the most part it's breakeven.

And the change in the guidance for EPS is 100% due to fuel.

We had a 15% change in fuel costs and that's what our midpoint changed by.

Got you.

Very helpful.

And then my question is, you are typically pretty hesitant to talk about any individual competitors but to the extent that the Concordia disaster has been a major factor for you and the rest of the industry, it may be appropriate.

Carnival has talked about holding pricing and basically taking the losses on the occupancy side of the yield equation.

Obviously they're going to do what's in their best interests, but it's pretty clear that if they hold true to that strategy it's a good thing for you and the rest of the industry just from a rational pricing standpoint.

Can you speak to how rational pricing has been competitively and how you think that plays out over the rest of the year, whether or not they are realistically going to hold true to that goal?

As you say, we've been pretty consistently reluctant to talk about competitors.

And, I don't really think it's appropriate.

And quite frankly I don't know enough about what they are doing to be able to make intelligent comments anyhow.

I think one of the interesting aspects of the way we do revenue management is, the main driver isn't looking at our competitor.

Our main driver is looking at our customer.

And our customer -- we look at the volume of calls, we look at their interest at different price levels.

And I think we have the best revenue management system in the business and the best revenue management people in the business.

And their real focus is, who's calling, what are they willing to accept.

And I think that will continue to be our main driver.

And I think what we are seeing is, we are seeing a lot more hesitancy from the first-time cruiser, not to repeat guests.

And so I think there is a period of assimilation, a period of getting over this unfortunate event.

And then I think we'll move on with the system operating as it's geared to do, which is to educate people more about what cruising offers and then price it to match their willingness to pay that.

Let me ask it this way, then.

The big fear following Concordia was that you'd have a lot of potential travelers, potential customers, that may want to hold off and may assume that pricing is going to come down.

As you think about the decline in bookings in the European market, are you able to discern how many of those people are just sort of waiting for things to come down and may hop back in as we get closer to those sailing dates, or is that impossible to tease out?

Well, I think enough time has gone by for them to see which way pricing is going.

I think that was something that people talked about in the weeks after the event.

But it's pretty clear that we are continuing to operate our revenue management system in a methodical and measured way, and I think talk about those kinds of things.

I know there were some people who were suggesting that was a big issue.

But I think talk about those sorts of things has dissipated as it is very clear that the industry and certainly ourselves are seeing enough demand to continue to operate in our revenue management systems as we always have.

Great.

Thanks, guys.

Greg Badishkanian, Citigroup.

My two question -- first one is just in terms of the booking volume trends following the Concordia accident.

How would you characterize the -- kind of the volatility?

Would you say that that's moderated recently?

And as you talk to travel agents, are they still waiting for deals like they were maybe following the Concordia accident?

Greg, from the volume standpoint, you know there has been a little bit of volatility, but there is also a lot of noise in terms of when the Easter holiday fell, it's a couple weeks earlier.

As Adam alluded to, he ran his WOW sales a couple of weeks earlier.

So, when you're looking at year over year you're seeing a little bit of noise.

But I think we have a better grip on what's happening, particularly for products outside of the core summer Europe itineraries.

I think that's where we are seeing the most uncertainty at this point.

We regard to travel agents, I think the most notable thing about our interaction, with Adam speaking for the most part here specifically to the United States market, is sort of how calm they are about the situation that they are in and believing that cruise products and services are still very much at the core of their business model and looking forward pretty optimistically.

They often say they haven't seen any diminution in sales and that their business is relatively healthy.

So, we think that the distribution system is in pretty good shape and continues to look forward to distributing our products and services.

Great.

And just my second question, just, I guess because net yields, you raised the lower end slightly.

So, but, basically unchanged, maybe a little bit higher.

Do you still think it was -- the Concordia accident had about a 200 basis point impact on net yields overall?

I think that it's hard to kind of dissect it.

There is a lot more noise out of the European economy right now, but I think directionally, around that number is probably not too far off from our best estimates.

Great, thank you.

Robin Farley, UBS.

I just wanted to clarify, just circling back to the Pullmantur expense increase that you mentioned, the 50 basis points, from higher tour sales, and just trying to think about your change in the lower end of yield guidance, that 100 basis points.

Is it fair to say that most of that increase at the lower end of your guidance was for tour sales?

And that your expectations for just cruise sales, that your guidance is basically unchanged?

Yes.

The tour sales were still right at the midpoint.

And we, as you alluded to, if you average the high and the low, are -- both our yield and our net cruise cost ex-fuel, we raised 50 basis points.

Both of those were due almost entirely to the increase in tour sales.

Okay, that's great.

Thanks.

That's all, thank you.

Jaime Katz, Morningstar.

I know you guys talked a little bit about returning to investment grade on the call, but can you talk a little bit about how that trajectory has changed now that this year's cash flow might be crimped a little bit more than originally expected, and when you expect to get there?

Yes, the -- Jamie, the cash flow in the grand scheme of things is not affected that much.

I think we're still looking at $1.5 billion plus in terms of EBITDA for the year.

And, fortunately, these sort of hiccups, in terms of, if you assumed a 2% haircut on yield, you are talking about $0.50, $0.60 a share, but you're only talking about $100 million, $120 million in cash flow.

So it doesn't have that big of an impact on our credit metrics.

I think as a general rule of thumb we kind of look at a 3.75% ratio of net debt to EBITDA as kind of the benchmark that we are looking for.

Obviously as Richard talked about the rating agencies are going to look at a lot more than that, and it depends on whether they are forward-looking or backward looking in terms of when they get there.

I think if you look at most of the analyst models, since we haven't published anything further out, I think most of them you would see those sort of ratios probably late 2013, early 2014, would be where they would be getting us.

But again there's a lot of other factors, and it depends on kind of the operating environment that we are in at that time.

But that should give you some sort of a feel.

Perfect.

Thank you so much.

Kevin Milota, JPMorgan.

Hey, guys.

I appreciate the updated commentary as you look through the year.

Fourth-quarter and the full year 2013 looked pretty solid or at least your commentary sounds a lot better than it was immediately post-Concordia.

I was hoping you can give us a sense of, typically at this point in the year, from a capacity standpoint, how much is booked.

And if the fourth-quarter trends that you're seeing now, how that fits into the typical booking range?

Yes, Kevin, I do want to emphasize that it's still very early in the booking window.

And I think our commentary about Q4 and 2013 is fairly consistent with what we saw back in early February, when we had our fourth-quarter call.

What we saw was bookings had a significant impact in the second and third quarter; we had a very strong order book in the first quarter.

But we had seen a continuation of the pre-Concordia demand for Q4 and 2013.

We're still a ways off from our peak booking window for those periods.

What we have said is if you take a rolling 12 months we are generally about 50% sold.

And that curve is fairly linear as you go out to the different quarters.

But I do want to caution, while things are looking good, it is still exceptionally early.

Okay, great.

And then from a fuel consumption standpoint, first quarter being the first of -- in a long time that you haven't beat on the consumption side of things, is that primarily related to the deployment initiatives that you're working through, or kind of what's going on there?

What happened in the first quarter?

Yes, there were actually three factors.

We had a little bit more impact from weather, where the ships had additional consumption.

We had a few additional medical evacuations where we had to deviate from the itineraries.

But the lion's share was really driven by some of the new itineraries and just I guess we may have gotten a little aggressive in terms of what we thought we might be able to do with those.

But, as Adam and Dan have alluded to, this is a 24/7 effort to continuously figure out how we can contain and lower our fuel consumption.

Okay.

Thanks a lot, guys.

Okay.

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

Joe Hovorka, Raymond James.

Guys, it looks like your CapEx has gone up by $100 million in 2012 and in 2013 from last quarter.

What is that?

Joe, it's a very slight change, actually.

We rounded to the nearest $100 million.

And that was entirely due to the progress payments for Sunshine 2, the order that we just confirmed.

Great.

Okay.

Thank you.

Okay.

Well, with that, we'd like to thank everybody for joining us today.

And as always, Ian will be available throughout the day for any follow-ups you may have.

Thanks and have a great day.

Thank you.

This concludes today's conference call.

You may now disconnect.