皇家加勒比遊輪 (RCL) 2012 Q3 法說會逐字稿

Good morning.

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

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

third-quarter earnings conference call.

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

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

(Operator Instructions).

I would now like to turn the conference over to Brian Rice.

Please go ahead, sir.

Thank you, Sabrina, and good morning, everyone.

I'd like to thank you for joining us today for our third-quarter earnings call.

Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and CEO of Royal Caribbean International; and Ian Bailey, our Vice President 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 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, and a reconciliation of these items can be found on our website.

Richard will begin with his comments.

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

Adam will talk about our brands, and then we will be happy to open the call to your questions.

Richard?

Thanks, Brian, and thank you all for joining us today.

You know I always enjoy this opportunity to provide an update on our business, and as you can see from our release, we have a lot of good things to talk about today.

I will start with the third-quarter results, which were quite a bit better than we had anticipated when we last gave guidance in July.

The strength of these quarterly results is particularly satisfying when you consider that we are still navigating in an environment overshadowed by severe political and economic turmoil, and the tail of the Costa Concordia accident.

Fuel and foreign exchange provided a net benefit of about $0.03, and we were a few cents favorable on interest costs.

But the real driver of our beat was the operating performance of the business.

Revenues, especially for close-in bookings, were strong, and we exceeded our market forecast in each of our major markets, including Europe.

The European market, though, continues to be the most puzzling market we are facing.

The impact of the tragedy in Italy was obviously centered in Europe.

Now, that impact does continue to wane, but some of the effects still linger, and we continue to learn and be proactive in trying to recover from it.

Meanwhile, the financial malaise that covers Europe remains our biggest challenge there.

Southern Europe, and especially Spain, is weighted down by austerity and uncertainty.

Actually, it's rather surprising that in light of all this we've done so well against all these pressures.

On the cost front, we've also remained focused on creating value wherever we can find it.

For the year, I'm pleased that on a like-for-like basis, we continue to expect that next cruise costs, excluding fuel, will increase less than 1%.

Overall, it's gratifying to be increasing our full-year guidance by $0.15.

I think this demonstrates in a very tangible way the upside potential in our Company when things start to go right.

Looking forward, we are encouraged by what we see in our bookings.

Now, of course, you know it's hard to make direct comparisons, because a year ago at this time there was no Costa Concordia effect.

We were seeing good demand across the board, and we were looking forward to a strong wave period.

We also were not looking at the kind of economic malaise in Europe that we are seeing -- we could see.

Today we are again seeing solid early bookings, but we expect that this trend won't be hit with the same kind of issues as last year.

That gives us some real comfort that we will do well compared to a 2012 wave period that faced such troubled waters.

As I've said before, if this is how we are doing facing such headwinds, imagine how we will do in a normal year.

A few weeks ago, we took delivery of the fifth and the final shipment in the Solstice class, the Celebrity Reflection.

The ship is gorgeous, and it's actually slightly larger than the other ships in the class at just over 3000 berths.

We achieved the increased berth count without expanding the hull by adding another guest cabin deck to the existing Solstice platform -- an action that improves the flow, the guest flow onboard, while simultaneously improving our returns on investment.

Celebrity Reflection will be homeported in Miami during the winter and will move to the Med for summer European season in May.

Now, I know that capacity additions are a very big topic of focus for the investment community, so I will point out that our next newbuilding, Sunshine One is about two years away, and we have no new deliveries at all until that time.

We've been very transparent about our desire to slow capacity, and we are actually [giving into] demand consistent with those longstanding communications.

At the same time, as we have continued to indicate, we have no intention of stagnating, and we have been busy evaluating the best investments for 2016 and beyond.

As this morning's release indicated, we are in discussions with shipyards regarding an order for an Oasis-type vessel for delivery in mid- to late 2016.

We expect that any order would come at a lower cost per berth than either of the first two vessels, and also that any order would include further advances in energy-efficient design.

We don't have a final deal yet, but we are excited about the possibilities that lie before us, and we hope to announce something reasonably soon.

Given the existing Oasis sisters' positioning, with terrific guest ratings and good financial returns, this is clearly a win for both our investors and our guests.

With a midyear delivery in 2016, our five-year capacity growth rate would still remain in the low single digits at roughly 3%.

Last but not least, I'm sure you also noted that our Board of Directors increased the quarterly dividend by 20% with this last declaration.

This action is also aligned with our goal of improving shareholder returns and managing to investment-grade rating in a slower growth environment.

With that, it's my pleasure to turn the microphone back to Brian for a more detailed recap on the booking environment and the other financials.

Brian?

Thank you, Richard.

On the second slide, we have summarized our performance for the third quarter.

We generated net income of $1.68 a share, which was $0.23 above the midpoint of our guidance.

Better-than-expected demand drove $0.11 of the improvement, and lower net cruise costs, excluding fuel, contributed another $0.06.

About half of the reduced cost, or $0.03, was due to timing shifts in marketing that will be incurred in the fourth quarter.

The remaining $0.06 was the result of lower interest expense and improved foreign exchange rates.

Compared to last year, EPS for the quarter was down $0.14.

Of this, $0.11 was due to unfavorable foreign exchange, and we had a $0.03 one-time charge this quarter related to the early extinguishment of debt that I will cover later.

And while there were other differences between the two quarters, on balance we were able to match last year's earnings, despite the effects of the Costa Concordia incident and the continued economic turmoil in Europe.

Net yields improved 0.1% on a constant-currency basis and declined 2.4% on an as-reported basis.

We did receive the benefit of approximately 200 basis points on a constant-currency basis from changes in deployment in our international distribution systems that we have discussed in the past.

Both tickets and on-board revenue came in better than our forecast.

Ticket revenues benefited from strong close-in demand on most itineraries, including Europe.

But for the quarter, yields in Europe were down 5.4%.

Excluding Europe, net ticket yields were up 2.6%, which is quite gratifying, recognizing the ground we needed to make up after a weak wave season.

Net on-board revenue yields increased 3.5% for the quarter and, as I mentioned earlier, came in better than our forecast.

On the cost side, excluding fuel, our net cruise costs were up 2% on a constant-currency basis and down 0.2% on an as-reported basis.

Approximately 220 basis points of the constant-currency increase was due to the structural changes I mentioned previously.

Fuel consumption was in line with our guidance, and average pricing came in about 0.5% higher.

Looking forward, the demand environment has been relatively steady since our last call.

Adjusting for remaining inventory, bookings over the last three months have been running about 4% ahead of the same period a year ago.

As we stated in the press release, we expect yields in the fourth quarter to increase approximately 1%.

Currently, the fourth-quarter sailings, our load factors are slightly below last year, but at slightly higher APDs.

Caribbean itineraries, which account for 42% of our inventory in the fourth quarter, are showing the greatest strength.

On the other hand, European itineraries, which account for 27% of our capacity, are forecasted to be down slightly.

On slide 3, we have provided a breakdown of our capacity allocations for 2013.

Overall, capacity will increase 1.3%, with the largest increases coming in the Asia-Pacific region.

Our European exposure is being reduced by approximately 10%, and Europe will now account for 27% of our product offering.

Caribbean will remain our largest itinerary group and will account for 44% of our deployment.

We believe it is still too early to provide specific guidance for 2013, but we do want to be transparent and share with you what we know so far.

On slide 4, we have graphed our current booked load factors for each of the next four quarters and illustrated how each compares to this same point in time last year.

And while we have intentionally left the numbers off the axis for competitive reasons, you should be able to get a relative sense of where we stand in the selling cycle for each quarter.

At first glance, there doesn't appear to be too much variance between the two years, but I would remind you that we are comparing next year to the order book we had before the Costa Concordia incident.

At this time a year ago, we were actually quite pleased with where bookings stood.

Unfortunately, the incident and the resulting soft wave period quickly changed things.

We are encouraged, however, that at this point in time, 2013 as a whole is more sold than any year since 2008.

On slide 5, we have provided the same year-over-year comparison, but for booked APDs.

On a constant-currency basis, we are slightly ahead of the same time last year in all quarters.

And for 2013 quarters, please remember we are comparing to pre-incident levels.

So in a nutshell, the last few months of booking activity have been fairly stable.

Our deployment has been adjusted slightly to accommodate for the stronger markets.

And the early order book for 2013 is encouraging.

There are still challenges in Europe, especially Southern Europe, but solid demand from other regions appears to be more than offsetting this.

On slide 6, you will see our guidance for the fourth quarter.

We expect yields to be up approximately 1% on both a constant-currency and as-reported basis.

As you do your calculations, you may notice that we have effectively lowered our constant-currency yield increase for the fourth quarter by about 1 percentage point.

This is mainly due to rounding.

However, for the sake of full transparency, I will mention we have slightly lowered our expectations for a few itineraries.

The largest change is from lost revenue on an early October sailing in Asia as the result of the Japan/China conflict over the disputed islands in the East China Sea.

This was really isolated to one sailing on which we sailed with about a 60% load factor.

We do not expect any further impact from the situation, since the ship has already left the region for the season and is currently in Australia.

Net cruise costs, excluding fuel, are expected to increase approximately 1% on a constant-currency basis and be flat to up 1% on an as-reported basis.

The impact on both costs and yields from our deployment and international distribution initiatives is about 100 basis points each in the fourth quarter.

Based on current prices, we have included $229 million of fuel expense for the quarter, and we are 58% hedged.

Earnings per share for the quarter are forecasted to be between a $0.02 loss and an $0.08 profit.

On slide 7, we have provided our guidance for the full year.

We expect yields to improve approximately 3% on a constant-currency basis and be up 1% to 2% on an as-reported basis.

Excluding the impact of the international distribution deployment initiatives, constant-currency yields are expected to finish the year flat to up 1%.

Net ticket yields for European itineraries are forecasted to finish the year down approximately 4%.

Excluding Europe and the impact of the international distribution changes, full-year net ticket yields for all other products combined are expected to increase almost 4%.

So while Europe has obviously been a point of frustration this year, this clearly proves the benefits of our diversified business model and strong brands.

Net cruise costs, excluding fuel, are expected to increase approximately 4% on a constant-currency basis and between 2% and 3% on an as-reported basis.

Of this, approximately 350 basis points are due to the distribution and deployment initiatives.

Accordingly, on a like-for-like basis, we are forecasting net cruise costs, excluding fuel, for the year to be flat to up 1%.

Based on today's fuel prices, we have included $910 million in fuel expense for the year.

We are now forecasting EPS for the year to be between $1.85 and $1.95.

On slide 8, we have provided a bridge between our July guidance and our current forecast.

The midpoint of our July guidance for earnings per share was $1.75, and we have increased that by $0.15.

Improved constant-currency revenues and expense reduction each drove about $0.06.

The net effect of fuel and foreign exchange rates provides an additional $0.03.

Now I'd like to update you on some actions we've taken related to our bond maturities in 2013 and 2014.

As you know, we previously increased our revolver capacity by approximately $230 billion and closed on a delayed draw a five-year, EUR365 million unsecured bank loan facility.

Since our last update, we closed on a new $290 million unsecured term loan that matures in February of 2016.

With a portion of the additional liquidity, we repurchased approximately 25% of our EUR1 billion bond that matures in January 2014.

While the repurchase will provide us with interest savings going forward, it did result in a loss of $7.5 million for the early extinguishment of debt, which we recognized in the third quarter.

Finally, as you know, we have been focused on three strategic goals -- improving our balance sheet; increasing returns to shareholders; and slower, prudent growth.

Over the last year, we have reduced our debt levels by $1 billion.

During the last quarter, we increased our dividend by 20%.

And with the Oasis-type order Richard talked about for 2016, our five-year gross CAGR is just over 3%.

I believe this demonstrates how all three of these objectives can be delivered in a balanced and effective way.

With that, I would now like to turn the call over to Adam for his comments.

Adam?

Thank you, Brian, and good morning, everyone.

As Brian and Richard have both noted, strong late bookings bolstered our third-quarter performance, and we are gratified to have exceeded our expectations of three months ago.

Although this has been a challenging year, Royal Caribbean International continues to build a leadership position in all major cruise regions of the world.

Our clear goal over the next two years is to leverage our increasing global presence and our slightly reduced capacity to improve yields.

Our program of ship revitalization remains very active and in upcoming months will encompass Enchantment of the Seas, Serenade of the Seas, Legend of the Seas, and Brilliance of the Seas.

By fall 2013, all but one of the 10 ships in either the Vision class or the Radiance class will have been revitalized, strengthening the guest offering and the competitiveness of approximately 30% of our fleet capacity.

We are now halfway through our four-year hiatus in newbuilds, from Allure of the Seas to the first Sunshine ship.

We are still a little ways away from disclosing any of the specific features or amenities of Sunshine, but we are excited about our next class of ships and very much look forward to talking about Sunshine in more detail when the time comes next year.

As you are all aware, several months ago Michael Bayley left his position overseeing Royal Caribbean International's operations to replace Dan Hanrahan as President and CEO of Celebrity Cruises.

The Company immediately tapped into the talent development and succession planning work we have engaged in over the last few years to fill internally the senior positions that came open as a consequence of Michael's promotion.

This occurred both within and across the branded organizations.

As we move forward, we are very fortunate to have such an array of talent.

In closing, I would like to call attention once more to the steadfast support we and industry have received throughout 2012 from the travel agency distribution system.

Travel agents around the world continue to believe in the vacations we deliver to their clients, continue to train and educate themselves on our products and services, and continue to communicate the fantastic value that our cruises represent in these economically challenged times.

We sincerely appreciate this support.

Brian?

Thank you, Adam.

We will now open the call for your questions.

We do ask that you limit your questions to no more than two.

If you have more than that, we will be happy to address them after the call.

Sabrina, we are ready for questions.

(Operator Instructions).

Greg Badishkanian, Citigroup.

Great, thanks.

Nice quarter, guys, and just a two-part question on 2013.

So, as your -- occupancy and pricing up for 2013, and obviously you're up against very difficult comparisons, how would you expect that to change once you lap the Concordia accident and presumably face easier comparisons?

Greg, I think what we are hoping for, and we are certainly seeing in the numbers, is a much more normalized year.

And I think we obviously had a very soft wave season and kind of fell back.

As you may recall, we did say back in January that when we put together our operating plans at the end of the fourth quarter of 2011, we were anticipating kind of mid-single-digit yield improvement.

And as I recall, we came out with a range of -- I think it was 2% to 5% when we did the January call.

So we had obviously felt quite a big hit from that.

All signs right now point toward a more normal year.

And as you stated, the comparables clearly become a lot easier beginning the second week in January.

Right.

Yes, that's helpful.

And I remember you had stated earlier in the year something like a 200-basis-point impact from the Concordia accident.

I believe that's around the impact for 2012.

And I'm wondering, for 2013, do you think you will -- how much of that do you think you would recoup this year?

In 2013, how much would you recoup?

Well, you know, it's tough to say.

We did say back in January that we were expect -- we talked in the range of around 200 basis points.

I just actually pulled out a sheet, and the midpoint of our guidance is in February was 3%.

We raised that in April, mainly due to the tour company.

And then as we started to see Europe deteriorated, we actually lowered the guidance back by 100 basis points.

And today we've effectively raised it back to the original forecast of around 3%.

Difficult for us to really pinpoint how much of that was due to the incident and how much of that was due to a softer European economy.

Right.

Okay, thank you.

Felicia Hendrix, Barclays.

Wanted to thank you once again for some nice clarifying slides, particularly the ones on bookings and APDs for next year.

Wondering, if we talk -- look at third quarter for a moment, certainly it's the least booked, and therefore you have the least visibility.

But just wondering if you could help us get your early read on the US-sourced business for European cruises and if you have any sense of how the European-sourced business is in that quarter.

I know we have a bit of an easy comp situation versus last year, but just wondering if you can tell us what the early trends look like for that.

And then also, for your European deployment in 2013, if you could just provide for us how it looks in terms of the Eastern Med and the Western Med, that would be great.

Felicia, as it relates to the third quarter, particularly Europe, as you mentioned, it's very, very early.

And you can see on the graph that there's not a substantial amount of business booked.

I can comment on it a couple of ways.

We are seeing a much more normalized booking curve from the North American market.

Europe, and in particular Southern Europe, has had a contracted booking curve.

Northern Europe has actually had a pretty normal booking curve as we look out.

So it's kind of hard to comment on a market-by-market basis.

I can tell you overall that Europe is shaping up reasonably well, particularly compared to what will become easier comps.

At this point in time, our APDs are running better than they were a year ago, but load factors are slightly behind.

I think it's way too early to make a call on Europe.

And fortunately -- and I think Adam can build on this -- we have brands that have the flexibility to be able to source from different markets.

Thanks, Brian.

Yes, Felicia, one of the things that I can comment about as far as the European season that just ended -- without, of course, knowing what exactly what its implications are for next year -- is that we really were, interestingly, successful in attracting guests from all over the world to our European cruises.

In other words, one of the ways in which we were able to respond and achieve load factor in a difficult European trading season in 2012 was not only by working hard marketing-wise in Europe and trying to attract North Americans to go to Europe, but we also had a fair amount of success getting people from Latin America and Asia to go to Europe to take those cruises.

So it really was a global response to the challenges of Europe.

On the capacity side, for next year, we continue to grow in Northern Europe, but I think overall we're down about 10% as a company, 2013 over 2012, with a relatively larger decline in the Western Mediterranean cruises and a little bit less in the East.

Felicia, I'll give you the breakout.

Of the 27% that is Europe, the Western Med is 13%, the Eastern Med is 8%, and the Northern Europe is 6%.

The Western Med is declining by 20%.

The Eastern Med -- which we had taken some down in 2012, as you may recall -- is down another 9%.

And the Baltic is up 28%.

Okay, great.

Very helpful.

Thank you so much.

Tim Conder, Wells Fargo Securities.

Thank you.

On the onboard spending, Brian, you've said that obviously both in that the tickets were both tracking modestly ahead of expectations, especially the close-in ticketing.

But on the on-board, I was wondering if you could give a little bit of color by Europe, North America, and, say, maybe rest of the world, how you saw that unfold.

Hi, Tim; it's Adam.

Given -- first of all, given that a lot of our capacity in Q3 was in Europe, then clearly Europe contributed to the OBR performance.

It also, I should say, was manifested in both of our big brands -- Royal Caribbean and Celebrity.

Both had relatively strong shipboard revenue performance.

And it varied -- in terms of the revenue streams, it varied quite a bit from brand to brand, ship to ship, and region to region.

But I would say on an overall basis, we saw some strength in gaming, in retail, and in shore excursions.

Okay.

And then, you really didn't call out this time that much, you've been changing some itineraries over time here, and you did not call that out this time as you have in the past, as how that could impact fuel consumption year over year.

Just maybe give us an update on that.

And do you see, looking into 2013 do you see that as an incremental headwind, or have you kind of now anniversaried with the itinerary changes, and now you'll be able to sort of hone that and get a little bit of efficiencies out of fuel consumption on some of the newer developmental itineraries?

Well, we get, Tim, obviously fuel efficiencies coming from the new ships coming in.

All the ships that have been coming in to the Celebrity brand in Solstice class are wonderfully fuel-efficient ships.

In terms of geography, as our ships continue to shift around the world, looking at 2013, there might be very slight upward pressure in terms of the itineraries on our overall fuel consumption.

But I think in general, you can say we are in a fairly stable environment.

Okay, great.

Thank you, gentlemen.

Steve Wieczynski, Stifel Nicolaus.

Good morning, guys.

So, Brian, I guess first of all, with that $0.06 better cost that you guys pulled out in the quarter, I know you said $0.03 would be rolled over to the fourth quarter.

But that other $0.03, is that -- was that kind of broad based, or were there certain buckets that you guys pulled more costs out than you expected?

Actually, I think it was pretty much across the board.

We've been very focused on spend, and it's a little bit here and a little bit there.

I don't think there's any one particular area that we would call out.

I do -- we, as I mentioned, we have shifted some marketing, and we expect to spend more in the fourth quarter.

, Okay.

And then, I guess this might be for Richard.

I guess once you -- in 2014 and 2015, and if you order the third Oasis-class ship, you'll have a ship in 2014, 2015, 2016.

Do you guys kind of -- do you have an internal-type expectation in terms of where -- how many ships you eventually want to add per year?

I know you have a competitor that has basically said, we would like to build two to three ships a year.

Are you guys on a -- going to start to go down a path of maybe one per year?

I don't think we quite think of it in those terms.

And it's always difficult because, as you know, Steve, the one ship is not a smooth curve.

It ends up being a step curve.

I think we are looking at a slower pace than we have had in the past.

I think I would have described our thoughts in that range as being more, we're looking at a percentage increase.

And of course, sometimes we will do larger ships, sometimes smaller ships.

But I don't think we have said a specific number.

Obviously, we internally look at some stakes in the ground as to what we might do.

But I think the other thing is, we are fairly cautious.

We don't usually announce ships -- actually, historically we haven't announced ships until we're actually signed for them.

And I think this was actually slightly unusual, because we're so close, and we thought it was appropriate to get this word out as to where we were heading.

But, no, we don't have a specific in terms of number of ships.

We're probably looking at a pace slower than we've seen.

And the other thing, I guess, is obviously depends on where the return opportunity comes.

Our criteria is we are really -- our real focus is getting our return to our shareholders up.

And we think that when we can get a ship at a good price, we'd be a little more opportunistic, or a good opportunity.

I think that's the approach.

So, no, we don't have a specific number that we're shooting for.

Okay, great.

Thanks, guys.

Brian Dobbs, Nomura.

Just two quick questions.

First, on the ECAs, have you seen any incremental creep in fuel costs due to the changing mix between high- and low-sulfur fuels?

And is there any update on getting any kind of offset credit for the ships you have that are already burning low-sulfur fuel 100% of the time?

And then, I guess just turning back to the Oasis-class ship for a second, what kind of returns are you expecting on that ship, given that you'll have a lower per-berth cost than on the original ships?

Brian, on your first question, I should point that out that while the ECA came into effect on August 1 of 2012, it isn't really until 2015 that the very -- much more significant burden of sulfur requirements kicks into effect.

So while we are facing a somewhat extra burden of fuel costs because of the first stage of the ECA right now, and that will continue through the end of 2014, it's really not significant in the scheme of things, for us and I think for the industry in general.

The question is really what more will happen as we approach 2015.

Will the ECA regime stay exactly in effect as it is, or will there be potentially some adjustments through political or legislative process?

Right.

And then on the Oasis ship?

Yes, on the -- we don't specify a threshold.

Obviously, we think, as you've pointed out, that with a lower per-berth cost, that helps.

Otherwise, I think we would expect comparable kinds of operating performance from it.

You know, I think a year or two ago, I think I thought two ships in this category would probably be the right number.

But I think they have simply continued to perform so well and shown such solid performance that I think that overcame our reservations.

All right, thank you.

Steve Kent, Goldman Sachs.

I think that's me.

It's Steve Kent with Goldman Sachs.

Can you just talk about the close-in bookings and what that really means?

And what I'm getting at is, is the close-in booking something we are going to have to live with for some period of time?

Is it maybe because there's more supply out there, so consumers feel they can wait to book?

And maybe just discuss, as you've discussed in the past, the pricing as you get closer to bookings and sort of what dynamic is occurring there on close-in bookings.

Steve, our revenue management group watches this, as you would probably appreciate, at a very granular level.

They are looking by market, by booking month, by itinerary, where the pockets of demand came from.

You tend to -- I think when you have a strong close-in booking market, it tends to manifest itself more in the third quarter.

And I think in this case, it was more the pricing leverage that we were able to realize that I think we were a little bit skeptical, given the environment in Europe in particular, that we were going to benefit from that.

North America is a fairly normalized booking window right now.

So I don't think we're looking at a fundamental new dynamic that we have to learn to operate in.

Europe, particularly Southern Europe, really isolated to Southern Europe, is a much more close-in booking market.

But, frankly, it's always been a reasonably close-in booking market.

And I think one of the things our revenue-management models and our analysts do a real good job of is, as we are dealt a hand, we learn to play that hand fairly quickly.

And I don't view this as the new environment that we're going to have to deal with, a new structure, if you will.

Okay, thanks.

Assia Georgieva, Infinity Research.

Good morning, guys; congratulations on a great quarter.

A couple of questions.

What -- how do you feel that Costa's current competitive position is in terms of European sailings in 2013 and some of the exotics?

Hi, Assia, it's Adam.

I don't think it's fair to comment on one specific competitor.

You know, we had a tough season in Europe this year.

We've talked about it from a number of perspectives.

Our capacity as a company in Europe is down 10% for next year.

Europe is still, even with its macroeconomic challenges, a huge holiday market -- bigger than the United States and full of destinations to bring people to and attractive to customers from all over the world.

So our sense is that Europe will remain very interesting to us and to the industry as a cruise market in the years forward.

And there will probably be a number of brands leading the way, and hopefully our brands will be foremost among them.

And as a segue, I guess, into my next question, airlift has been such a big issue, and I've experienced it myself.

The cost of it has been up almost 30% year on year, it seems like.

Could there be any cannibalization, given the strong Caribbean pricing environment, in people going into Europe, or is that still a place where you need to support people so they can actually afford the airlift?

As it relates to Europe, I assume you're talking?

Yes, yes.

Right, so about a quarter of the customers on our European cruises came from North America.

I had talked on earlier calls about our desire and intention to try to attract more North Americans to go to Europe, given the issues that were occurring in Europe that were affecting Europeans.

When we look back at the season that just ended, what actually happened was that we attracted about the number of North Americans that we had originally expected to attract, but we attracted more people from Latin America and Asia, as I mentioned earlier, that kind of filled in the gap.

So, in summary, we thought that North Americans would help fill in the gap, but in the end, people from elsewhere in the world helped fill in the gap that occurred from Europe itself.

And it wasn't out of Europe?

Which is interesting.

Right, so we had fewer Europeans in the end, when the season was said and done, than we had expected to have at the beginning.

That's not surprising.

We still were able to source predominantly Europeans for the cruises.

I'm just talking about what happened on the margins.

It was interesting and I think a positive development for our global footprint that we were able to attract people from all over the world to go on those cruises.

Great, that is very interesting.

And can I ask my second question, and maybe Richard can be able to help me out on this one -- shipyards' willingness to negotiate at this point, I imagine those located further south in Europe might be more willing.

But the history has been more with the German and Finnish shipyards.

So do you see any difference?

Do you see any much greater willingness to be more flexible?

You know, it's -- ordering ships is a very complex process.

And there are a lot of considerations, including what plans you -- physical drawings you already have and what your availability of berths is, et cetera.

And we are in the midst of a negotiation, and it's not final.

So I hope you'll understand if I'm a little cautious about commenting.

I think we have an unusual ship in the Oasis category, and it's not an easy vessel to understand and to build.

But I think we are working towards the best deal we can, and I'm afraid I won't say much more than that on it.

Yes, okay.

Thank you, Richard, and thank you, Adam.

Sorry.

No, I understand.

Thank you.

Sharon Zackfia, William Blair.

You know, this may or may not be a question you're willing to answer at this point, but your net cruise costs have been really, really well controlled this year, if you take out some of the adjustments.

And looking forward to 2014 -- I'm sorry, 2013 -- I'm assuming there's going to be a tickup there.

Could you give any kind of initial thought process on what net cruise costs, ex-fuel, is going to look like next year?

Sharon, your first instincts were correct.

We're not ready to give guidance quite yet.

We are working through our plans with the various brands over the next month or so.

I will tell you, there are, I think -- hopefully we've demonstrated over the last few years that we are very focused on costs.

There are a couple of areas that we're watching right now.

I think we've talked about, on the capital side, that we are investing in IT and trying to upgrade a lot of our systems, both shore-side and shipboard.

Not all those expenses are capitalized, so we may feel some pressure there.

I think we're looking at some modest increases in insurance, but I think they'll be manageable.

We do have a number of revites, as Adam alluded to, over the next year.

And there are costs that hit the P&L that come from there.

And we are still evaluating things like food inflation and freight, whatnot.

So there are some pockets of pressure.

But again, I think we have pretty disciplined environment here that hopefully we can help keep this to a minimum.

Okay, perfect.

Thank you.

Brian Egger, Topeka Capital Markets.

Good morning, nice quarter.

Just a general question about I guess what I would call price elasticity of demand for cruising.

A lot of our impression of late had been that where we've seen rebound in bookings, particularly for the European sector, it's been on the strength of some very tempting pricing, in part meant to maybe sell some inventory that wasn't sold right after the Costa Concordia accident.

Just curious to know in general whether or not we're beginning to see any signs of underlying demand, irrespective of pricing, start to firm a little bit now that that accident is behind us, or whether or not the lingering effect of the Eurozone prices is still keeping that demand picture highly elastic.

Okay, Brian, obviously we are far away from particularly the next European season and definitely not in a position to comment on that.

We can really just look backwards and ask ourselves what lessons did we learn from the most unusual season that we just had.

Obviously there is a relationship between supply and demand and pricing.

I think as Brian said with respect to the booking curve, I don't think we're looking at structural change going forward.

It seems reasonably clear that 2012 was anomalous, is likely to have been anomalous, for good reason.

But if you look back at what we did, after the incident in January, at the beginning, we didn't know exactly what kind of situation we were facing.

We probably held onto our pricing in Europe for a little bit longer than in hindsight we should have done, and the market turned out to be in a deeper trough than we would have liked.

And we ended up doing more discounting in 2012 in Europe than we would have liked.

That's been very clear throughout the year on these calls and in our numbers.

But I don't think we've seen anything that changes the long-term fundamentals of supply and demand in price, and if anything, the continued investments that we're making in our revenue management tools should be very helpful to us going forward.

Okay, that's very helpful.

Thank you.

Erik Kyrkjeeide, Swedbank First Securities.

Good morning, and well done to you and your colleagues in the quarter.

You had previously indicated that you were not scared by the consensus earnings per share estimates of around $3 at the time of entering 2012.

And now that you say that you trend slightly ahead of where you were last year, if pricing and load factors are overall the same and they continue to be so over the next couple of months, are there any other items, generally speaking, that we should be aware of, other than fuel, clearly, of course, that will significantly impact a potential rebound to that $3 in earnings per share for next year?

Maybe that's for you, Brian.

Erik, I think we're clearly not prepared to give an EPS guidance for next year.

We're even, obviously, reluctant to talk too specifically about where yields are headed.

I think there's a lot of unknown.

Europe, we got through this quarter pretty nicely, but Europe is still a very large unknown next year.

And as you can see in the graphs, we still have a whole lot of inventory to sell.

And 25% of our revenue comes from onboard, and we haven't had the first voyage in 2013 yet.

But clearly, revenue is the number one item that we watch on for where we think our performance might be for next year.

Fuel is obviously the other, the second-most variable item that is out there.

And I think in most of the analyst models that we see out there, those are the two that are going to drive the EPS the most, the variability.

And Erik, I don't recall, actually, your comment about the $3 or any other specific number.

But I think we normally don't give guidance and give more harder numbers until we begin to see the wave period start.

And as we said earlier in this call, a big uncertainty and a big factor in how the year progresses is really the third quarter, because the European summer is so important to our overall results, and because, with the economic situation in Europe, we have more uncertainty about how that part of the year will come together than other parts.

And that's been a consistent pattern that we've had for many years.

So I think we would -- Adam -- sorry, Brian's pointed out the key variables.

But I think we would wait until we begin to see the wave period.

And that gives us a little better indication of how the year is developing.

Okay, thank you.

Just a second, if I can.

Is the visibility now approaching or even touching the levels that we saw prior to the financial crisis, for example, the booking window?

Well, I mentioned in my opening comments that our order book for 2013 is better today.

The percentage of our inventory sold is better for 2013 than it's been in any year since 2008.

So it is the best visibility we've had since the financial crisis.

I think we're still slightly below where we would have been before the financial crisis.

The booking windows in most markets, as I mentioned, seems to be normalizing, with the exception of Southern Europe at this point.

Okay, thank you very much.

Robin Farley, UBS.

Great, thanks.

I wonder -- you know, there's a lot of moving parts with your guidance.

So I just want to confirm, if I'm looking at this right, that it looks like most of the kind of 50-basis-point raise in yield guidance is really coming from that deployment change in Asia and the tour change, the distribution change.

Is that moving piece, it looks like, what's driving the yield revision for the most part?

Well, the revision from the April guidance -- I'm sorry, the July guidance that we gave is really driven by the third-quarter performance, which we commented was pretty much across all the major itinerary groups.

And it was just strength in the close-in demand.

I mentioned in my comments that we had taken a slight haircut on the constant currency in the fourth quarter, with the largest single issue being that one voyage over in Asia.

So I don't think there's been a tremendous amount of change since we gave the July guidance, other than Q3 came in stronger than we thought across the board.

On your change in full-year yield guidance, it looks like, just going through the numbers that you provide in your release, that on a full-year basis, your yields are up because of the deployment and tour, that piece of the business.

Is that correct?

On a constant-currency basis, it's really being driven by third-quarter better on-board revenue, better ticket revenue.

There's really nothing more, nothing less to it than that.

Asia did well in the third quarter, but so did our other itineraries relative to our July guidance.

Okay.

And then, in terms of the commentary about new ship orders, I don't think that you guys talked about TUI, which I think you have an option that expires in the next couple of days.

And so I don't know if you have any further thoughts on that.

You are right; we didn't talk about it specifically.

Again, we have followed a pattern normally of not talking about things until we actually confirm them.

But you are correct; there is an option for a second promotion vessel in Finland, which expires on October 31.

And I don't think we would -- I think, consistent with our past practice, we wouldn't comment on that.

But as I say, the only reason we're talking about the potential Oasis order is because we are so close that is something that has actually been in the press and that we just felt, given all the circumstances, we should deviate slightly from our normal practice, and because we are so close.

So we will have to wait five days to hear.

(laughter)

Sorry, Robin, yes.

Robin, if I can just also mention, you know, with TUI, that's not a consolidated entity.

So we view that as less impactful in terms of our individual performance.

But I think we can also say, as I think we said on the last call, when that question -- similar question was raised, although then it wasn't five days away, it was three months away -- TUI continues to perform very well.

TUI, of course, has just had a very strong performance, both in terms of guest satisfaction and in terms of results.

And so we're certainly happy about the BlueMotion 1 order that we have, and you can draw whatever conclusions you wish about BlueMotion 2, five days in advance.

(laughter)

Okay, thank you.

Ian Rennardson, Jefferies.

Good morning, everybody.

Two questions for you, please.

You talked earlier about not looking at a specific number of ships, but thinking about a percentage in terms of the capacity increase.

And you talked about a 3% for the five-year CAGR.

Is that the sort of number we should work with, sort of as an ongoing basis?

Second question -- you went out of your way to thank the travel agents for their support.

What percentage of your sales is now through travel agents, and how is that changing?

And how do you expect it to change?

I'll answer the first part of that, and then I will ask Adam to address the second, although I'm glad you point it out, because the travel agents are so key to our business, I think it's appropriate for us to continue to express our appreciation for what they do for us every day.

On the numbers, as you pointed out, I said that we focus more on percentages rather than individual ships.

But I also would like to emphasize that we look opportunistically for what's happening in the market, both the market for ships and the market for the product that we are using those ships.

And so we do not have a threshold number that we are looking for X percent.

We are clearly looking for lower percentage increases than we have historically, but we are not in a position to quantify that more specifically.

And I think I will ask Adam to answer the other question.

Yes, Ian.

The approximate percentage of our business that is coming directly to us now through intermediaries is high teens to 20%.

And therefore, travel agents clearly are playing a vital role in our success, in our growth, and in our ability to reach consumers around the world, and will continue to do that for the foreseeable future.

Okay, thank you.

So no real move towards the Internet as yet?

The Internet has a small role that it plays in our business for booking.

But the much, much more important role of the Internet in our world is for information, both for travel agents and consumers, which actually improves the travel agent-consumer discussions because the consumers are able to be more educated when they enter into those conversations.

Sure.

Okay, thanks.

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

James Hardiman, Longbow Research.

Thanks for taking my call.

I had a question on sort of CapEx timing.

With the reflection now in the rearview mirror, I think there was expected to be a pretty big dropoff for next year.

I think the last number you guided to in terms of CapEx for 2013 was $600 million.

I guess my question is twofold.

A., does that change at all based on the Oasis announcement for 2016?

And either way, should we expect a pretty big drop-off in capital spending from the fourth quarter to the first quarter?

And if so, should we just assume that we're going to see a commensurate buydown of your debt, or are there other cash considerations we should consider?

As the new ships slow down, there is less CapEx.

Those are by far the biggest expenditure.

There would be a slight bump-up if -- assuming we complete the Oasis order, for the installment payments, et cetera.

The other big items beyond just sort of normal continuing stuff is the IT revitalization and the revitalizations of the vessels, which is something that we've been doing and actually is quite -- we are quite excited about.

So I'm glad you gave me an opportunity to talk about it.

So we are -- using coined words for them, we are Solsticizing the older ships and Oasisizing the older ships.

I didn't say the words were easy to pronounce.

And so those allow us to take some of the new, exciting features from the new ships and bring them to the old.

But those are the other big expenditures.

And then, the numbers that we've given you incorporate all of those expected expenditures as of today, except Oasis -- the new potential order for Oasis.

And the BlueMotion 2 vessel is not part of -- because it's not consolidated, would not be included in those numbers.

Great.

And just a real quick follow-up here; post your debt repurchase --

I'm sorry, I'm sorry.

Brian is correct.

Our contribution of the progress payments for BlueMotion are in our disclosures.

But just our part.

Yes.

Got it.

And just on the interest expense side, you brought back a bunch of debt in the quarter.

How has that changed the interest expense guidance for the year, and how should I just think about the run rate as we look forward to next year?

There was a one-time charge in the third quarter of about $7.5 million, because we bought the bonds back at a premium to par.

I think the run rate on a quarterly basis going forward is just about $2 million of benefit, from what we bought down.

Got it.

Thanks, guys.

With that, we will thank everybody for joining us today.

If you have any follow-up questions, Ian will be around to take your calls.

And we appreciate you joining us today and wish you a great day.

Thank you.

This does conclude today's conference call.

You may now disconnect.