皇家加勒比遊輪 (RCL) 2012 Q4 法說會逐字稿

Good morning.

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

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

fourth-quarter earnings call.

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

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

(Operator Instructions).

Thank you.

At this time, I would like to turn the call over to Brian Rice.

You may begin.

Thank you, Cassandra, and good morning, everyone.

I'd like to thank you for joining us today for our fourth-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, give an update on the booking environment and our forward guidance.

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

Richard.

Thank you, Brian, and thanks to all of you for joining us today.

I should note that we've had some comments about holding this call the morning after the Super Bowl, but I should assure you that we've checked all of our electrical connections, and we are ready to go.

As you can see from the release, the late bookings boosted our year-end results, and overall, the WAVE period has started on a nice, solid note.

I really do have to apologize to Charles Dickens for stealing his words, but the title A Tale of Two Continents simply captures our current situation too well to ignore.

We are happy with the strong bookings we are seeing in the United States, but we are unhappy about the weakness we are seeing in many of the European Union countries, most notably Spain and the UK.

Even though the economies in the US and in places like Germany and France still aren't very good, or aren't great, it is really the weakness in southern Europe that is keeping our yields from truly exciting growth.

I think overall, this demonstrates the power of our brands even in a lackluster market.

I should also note that last year at this time, the Concordia tragedy caused a significant disruption in our booking patterns, and that complicates our ability to make clear comparisons.

We do try and go back further to compare to previous years, but there were complications then, too.

And the further one goes back, the less comparable the figures become.

We are therefore necessarily cautious in making comparisons, but overall, we are optimistic about the direction.

Of course, it is particularly disappointing to have to take such a large write-down related to Pullmantur.

However, it is important to note that the write-down is purely a non-cash item and it will have no ongoing consequences looking forward.

More importantly, it doesn't reflect on the admiration we feel towards our management team in Pullmantur, and they have struggled so hard and so aggressively against the headwinds of the Spanish economy.

Besides working to maintain and to improve Pullmantur's performance locally, they've aggressively pursued a strategy of diversification, which is systematically and dramatically reducing their dependence on the Spanish market.

Simultaneously, we are taking advantage of the mobility that our fleet has to reduce our reliance on weaker markets, and we've done that significantly during 2010.

We have the opportunity to do even more in 2014 if that seems appropriate.

For example, this has been a 10% reduction of capacity in Europe and a corresponding expansion of our focus on Asia Pacific.

It is particularly interesting to note how well both Australia and China have held up.

Both are looking towards flat to higher yields, despite really very large capacity increases.

And in the case of China, that is in spite of the impact from the territorial dispute with Japan.

In addition to our focus on structural gains, we are starting to feel a bit more comfortable that already in the United States and Asia, the consumer is resurging as a positive driver of yield improvement.

Even in Europe, which continues to struggle with a fiscal and banking crisis, we are optimistic that the public is coming to terms with this new normal and that the base we are laying in 2013 will bear ripe fruit in 2014 and beyond.

That is part of the reason we feel so good about the order for Oasis 3, which we have recently negotiated.

Overall, I am pleased with how we performed in 2012 given the external pressures, and I'm encouraged with the profitability improvements we are targeting for 2013.

Frankly, I would probably be ebullient right now if we were experiencing the same demand levels from Europe that we are experiencing domestically.

Our goal remains to improve our returns to double-digit levels despite only minimal support from the economy, and to re-earn our investment grade rating.

With that, I will turn it back over to Brian for a more in-depth look at the numbers.

Thank you, Richard.

I'd like to begin my comments by talking about the non-cash impairment charge we took in the fourth quarter.

During the quarter, we performed our impairment analysis of Pullmantur's goodwill, deferred tax assets and long-lived assets and concluded that a non-cash impairment charge of approximately $414 million was appropriate.

As we have noted in the past, the continued deterioration of the Spanish economy, compounded by the government's austerity measures and the effects of the Costa Concordia incident have been significant risk factors that could cause an impairment of Pullmantur's goodwill.

During the second half of 2012, the Spanish government introduced another round of austerity measures, further impacting consumer spending.

The IMF, which only a year ago was predicting a GDP growth rate for Spain of 1.8% in 2013, recently lowered their forecast to a contraction of 1.5%.

And while the WAVE season is off to a promising start in most markets, we have seen a significant deterioration in demand from Spain.

All indications suggest a continued challenging operating environment in Spain for an extended period of time.

This has resulted in significant changes in our plans and expectations for the brand.

Accordingly, we have lowered our forecasted net operating cash flows for Pullmantur, which has negatively impacted our impairment analysis.

The net result of this is a total impairment charge of approximately $414 million.

Of this amount, approximately $319 million relates to goodwill, and the balance relates to a valuation allowance for Pullmantur's deferred tax assets, a reduction in the value of the trademarks and name and an impairment charge related to three aircraft that Pullmantur owns and operates.

We have incorporated a rather grim view of the Spanish economy in our forecast and are confident that our projected cash flows are appropriate given the current environment and believe we have adjusted our carrying balances properly.

You may be interested to know that our remaining goodwill balance for Pullmantur at year-end was $144 million, and the value of the Pullmantur trademarks and name was $208 million.

We believe these adjustments are appropriate, and also have the utmost confidence in Pullmantur's management team as they diversify the brand's customer sourcing to markets outside of Spain.

Now I would like to talk about our operating results.

So that you can better understand our operating performance, I am going to exclude the impairment charges from the numbers I discuss.

On the second slide, we have summarized our fourth-quarter performance.

We generated net income of $0.10 a share, which was $0.07 above the midpoint of our guidance.

Both ticket and onboard revenue showed year-over-year improvement and came in better than our forecast.

Net yields improved 1.8% on a constant currency basis, about 110 basis points of which was driven by our deployment initiatives and changes in our international distribution system.

Yields for our European itineraries were down slightly, but we saw yield improvement in the mid-single digits for the Caribbean.

Net cruise costs, excluding fuel, increased 1% on a constant currency basis.

Excluding the itinerary and international distribution changes, our costs were up 40 basis points year over year.

On slide three, we have summarized our full year results, again excluding the impairment charges for Pullmantur.

Earnings per share were $1.97, which was at the midpoint of our initial guidance range back in January.

Yields improved 3% on a constant currency basis, again at the midpoint of our original guidance of 1% to 5%.

A total of 240 basis points of the increase was due to changes in deployment and international distribution.

For the full year, yields were up in the Caribbean, Asia and South America.

Excluding Europe, ticket yields increased 3.4% for the year.

Yields in Europe were down significantly in the peak season and by a lesser degree in the late season.

Overall ticket yields in Europe declined about 3.5% for the year.

Net cruise costs ,excluding fuel, increased 4.2% on a constant currency basis, and of this, 350 basis points were due to the changes in deployment and international distribution.

Let me update you on what we are seeing in the demand environment.

As of today, our total book load factors and booked APDs are slightly better than at this same time last year, and better than this point in time in 2011.

Booking activity in the fourth quarter was slightly lower than the same time last year, with the greatest decline coming in the aftermath of Hurricane Sandy.

With each consecutive week after the storm, we saw improvement, though.

During the first part of January, bookings were in line with the same time last year.

Since we lapped the Costa Concordia incident, overall bookings have been up 20% versus a year ago.

As Richard mentioned, though, we are seeing different stories by source market.

US source business is up significantly versus the same period last year.

Asian and Australian bookings have more than kept pace with the added capacity we have placed in both markets.

And with the exception of the UK and Spain, Europe has been pretty solid.

The UK has been disappointing from a volume standpoint, but pricing is above last year.

Spain, however, is down significantly in both volume and pricing.

Our brands have adjusted their guest sourcing targets accordingly, and we hope to minimize the overall impact these two markets will have on our performance.

At the itinerary level, the Caribbean will account for 44% of our 2013 capacity, which is a 4% increase from last year.

We are seeing solid booking trends for this product group, and based on what we know today, we expect a record year for yields in the Caribbean.

Europe will account for 27% of our capacity this year, which is a 10% reduction from last year.

As of now, our booked load factors for Europe are similar to this same time last year at higher APDs.

However, we have sold less than 50% of our European capacity so far, so it is still too early to have a definitive view on how much yield we can recover in 2013.

Clearly, we view the performance of European itineraries as the largest swing factor in our projections.

Asia Pacific will account for 10% of our capacity this year, which is an increase of about 45%.

Our booked load factors look strong for sailings in the first half of the year, although pricing is behind a year ago.

Overall, we expect yields to be about flat for this region despite the large capacity increases.

Alaska represents about 4% of capacity, and early bookings are looking good, with both load factors and pricing running higher than a year ago.

The remaining 15% of our inventory is spread across many other products, including South America, Bermuda, Panama Canal and trans-Atlantic itineraries.

In aggregate, load factors are higher than last year for these products, with pricing running slightly ahead.

If you will turn to slide four, you will see our initial guidance for 2013.

Net yields are expected to increase between 3% and 5% on an as-reported basis and between 2% and 4% on a constant currency basis.

As I mentioned before, we currently view Europe as the largest swing factor.

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

Our brands continue to be focused on driving higher yields, and most of this increase relates to increased marketing activities and investments in information technology to improve revenue.

We expect to receive some benefit from these investments in 2013, but even more in the coming years.

In addition, while we have been able to mitigate pressure on most of our insurance premiums, we have seen an increase of more than 50% in our protection and indemnity insurance costs.

Unfortunately, the reinsurance costs incurred by the P&I Clubs because of the Costa Concordia incident were substantially higher than previous indications.

We have included $960 million of fuel expense for the year and we are 55% hedged.

Net of our hedges, a 10% change in fuel prices equates to about $43 million for the year.

At today's prices, our swaps provide a $65 million benefit, but this is $46 million less than we realized in 2012.

Included in our fuel calculations is an incremental expense of $11 million due to the full-year impact of the North American Emissions Control Area, or ECA, regulation that went into effect in August of last year.

Based on current fuel prices and currency exchange rates, we expect earnings per share to be between $2.30 and $2.50 for the year.

On slide five, we have recapped our guidance for the first quarter.

Net yields are expected to increase 2% to 3% on a constant currency basis and approximately 2% on an as-reported basis.

We expect yield improvement in all key itineraries, with the exception of Australia.

As I mentioned previously, we have a substantial increase in capacity in this market, so there is some pricing pressure.

Nonetheless, Australia remains a very high-yielding market for us.

Net cruise costs, excluding fuel, are expected to increase approximately 2% on a constant currently and as-reported basis, and we have included $245 million of fuel expense for the quarter.

We expect earnings per share to be between $0.10 and $0.20 for the quarter.

Our capital expenditures this year are forecasted to be approximately $700 million.

This includes the revitalization of six vessels, progress payments for new construction and investments in information technology.

We do have scheduled debt maturities of $1.5 billion this year, and the remaining EUR745 million balance of our euro bond maturing in the first quarter of 2014.

We have already refinanced the vast majority of these maturities, as evidenced by our $2.2 billion in liquidity, and we do anticipate strong free cash flow this year.

To the extent necessary, we have numerous options available to us to refinance any remaining balance and have provided for this in our interest forecast.

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 contributed to our exceeding the 2012 expectations we communicated three months ago.

I would now like to thank our men and women, shipboard and shoreside, for their effort and dedication to overcome the many obstacles that 2012 presented.

You have heard commentary already from Richard and Brian on various aspects of the annual WAVE period that is currently underway.

The Caribbean represents 44% of 2013 capacity, up 1.1 points versus 2012.

In general, we are seeing positive performance across short seven-night and long Caribbean sailings, and we expect to post yields that eclipse last year's record Caribbean yields for the Company.

There was a lull in Caribbean bookings following Superstorm Sandy, but we have seen notable year-over-year improvement during the first weeks of the WAVE.

Europe represents 27% of 2013 capacity, down 3.2 points versus 2012.

Against the backdrop of the Arab Spring in 2011 and both industry and macroeconomic adversity in 2012, we expect a yield increase in 2013 relative to both years.

Northern European capacity for the industry and the Company are substantially up, and our year-over-year yield expectations are lower in the north than they are for the Eastern and Western Med, where our capacity is down in each sector for the second consecutive year.

We are seeing more interest from the US source market for 2013 Europe cruises than we experienced last year, and to this point, we are not hearing much, if any, noise about consumers' inability to find air seats from the US to Europe.

Turning to the China market, our 2012 performance with one Voyager class ship and one smaller ship was favorable.

This gives us confidence for 2013, when we will have two Voyager class ships in the market as of the summer.

It also bodes well for the long-term development of this high-potential market, which is clearly in its infancy from a consumer awareness, distribution and port infrastructure standpoint.

Unfortunately, in the short term, the political issues between Japan and China surrounding the disputed islands in the East China Sea are affecting our itineraries and our demand generation.

From the two main Chinese home ports of Shanghai and Tianjin, the destinations are concentrated in Japan and South Korea.

For nearly all of our cruises into June, we have eliminated virtually all Japanese port calls and are offering cruises that only visit South Korea.

It is not clear what will happen in the summer months.

We certainly hope a reduction of tensions emerges in the very near future.

Since the last earnings call, we entered into a contract with STX France for the construction of a third Oasis class ship for delivery in 2016.

While delivery of this exciting ship is still over three years away, all of us at Royal Caribbean International are looking forward to having a third of this magnificent class of ship in our fleet.

Oasis of the Seas and Allure of the Seas are now well established as industry-leading in both guest satisfaction and profitability.

We are pleased to renew our relationship with the French shipyard which has previously built eight ships for the Royal Caribbean brand.

Before the next earnings call, one of those eight ships, Monarch of the Seas, will leave our brand for her new service in Pullmantur, operating southern Caribbean itineraries, targeting Spanish-speaking guests primarily sourced from South America.

Monarch has been a mainstay of Royal Caribbean for over 21 years, carrying approximately 4 million happy guests.

We thank her for her service and wish her well in our sister brand.

Finally, it is my pleasure to report another year of increased guest satisfaction across our fleet according to the various metrics we track.

Despite the diversity of itineraries and guest nationalities, we continue to deliver the wow even more powerfully as time goes on.

Brian?

Thank you, Adam.

We would now like to 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, we would be happy to address those after this call.

Cassandra, if we could open the call, please.

(Operator Instructions) Felicia Hendrix.

Good morning.

Brian, you talked a little bit about some of the drivers of the cost increases.

Just wondering if we could go a little deeper.

Regarding the insurance cost increase, you did say that it had gone up.

But how much of the increase that you're seeing now is incremental to what you were expecting before?

And then I was wondering if you could just discuss the investment spending in more detail that you also highlighted as a driver for the higher costs.

Sure, Felicia.

Our interest costs in total are up about $20 million year-over-year.

So that is a little more than half a percentage point.

It's about 60 basis points.

That's insurance, right?

That's insurance, sorry.

Most of that, as I mentioned in my comments, is related to P&I, which is -- we're just now in the renewal period.

We were actually talking to the clubs last week.

We had anticipated some increases.

We had, I believe, it was about a 10% increase in hull and machinery, which we had anticipated.

But the P&I was much larger, and the allocation of the recovery of those costs to the cruise lines was more substantial than we had anticipated.

We are in the midst -- I am going to let Adam talk about some of the marketing investments that we are making.

But we also -- both on capital and on the P&L, we are doing a lot of investment in IT right now.

We are working a lot with our websites, our core reservation system, our ability to do a much more intuitive presentation to our customer, as well as be able to do a lot more revenue management at a more granule level.

Those are benefits that have begun to start coming in, but they will also snowball over the next couple of years.

So we've included some benefit this year in our revenue, but I think it is going to be 2014/2015 that we really hope to get the biggest gains out of that.

Felicia, this is Adam.

When we talk about technology investments and marketing investments, we are often talking about essentially two sides of the same coin.

We clearly want to invest in the new available ways of doing target marketing, of reaching people on a one-to-one basis and engaging with them in conversations that weren't possible even five or 10 years ago, to take advantage of the interest that people have in cruising in general and in our brand specifically.

Second, the distribution of our industry continues to evolve.

It is a very competitive space, and we need to continue to invest in ways of reaching travel agents and motivating them to sell our products, first and foremost.

And then the third aspect, which will not surprise you based on all the previous conversations, is we need to invest in our global marketing capabilities as we begin to be an active marketer in virtually every significant market in the world.

Whether that is China, Australia, Brazil, the United States, the UK or what have you, we find we need to continue to invest in new marketing capabilities and new systems capabilities to support that.

Thanks.

And also, I guess, Adam, this is probably for you, last question.

You mentioned -- you all as a whole mentioned that you could achieve record yields in the Caribbean and in Alaska this year.

Just wondering if you all have any insight into the Mediterranean sailing season yet, or if it is too early.

Felicia -- sorry, it is Adam.

I had you on mute there for a second.

It is a little bit early, and we have said that because -- with all the different things that have transpired in Europe over the last 24 months, besides the fact that we are a little less booked there percentagewise, we are a little bit less confident in how the market will react to the different techniques that we typically use.

So we really need a little bit more time, I would say, in 2013 as we approach the summer season to see how it will go.

Okay, thank you.

Robin Farley.

Great.

Thank you.

You talked about reducing European itineraries and European passenger sourcing this year, and I think you quantified the itinerary changes.

I wonder if you could give a little bit more of that kind of color on the European passenger sourcing, just what you are targeting for the year and how that had changed from maybe what you were targeting a few months ago.

There haven't been dramatic changes, but at the margins, we are probably looking for a little bit more business from the United States.

Typically, in recent years, when we've been talking about this on these calls, we've had a percentage from the US at or maybe a little below a quarter of our business.

We are probably looking for a little bit above a quarter of our business this year.

But again, as I was just saying, we really need to see how the next few months develop.

It is nice to know that there does seem to be a fairly robust level of interest from the United States to cruise in Europe this summer, a little bit more than we've seen in the past few years at this point in time.

So we have the ability to leverage that to the extent that we need.

So you are just talking about that 25% is just a percent of your European itineraries that are North American sourced?

Correct.

Okay, and can you just ballpark what your -- your North American yields, obviously given the guidance for the Company overall and the weakness or the uncertainty in Europe -- what your North American yields would look like, just looking at North American source?

Robin, we don't get that granular, and it is a mix of itineraries.

I think we've certainly tried to indicate that we are being I think the most bullish on US-sourced business right now when we compare to other markets.

The UK (multiple speakers) -- I'm sorry, go ahead.

I know you don't normally.

I guess I'm just trying to get a sense of whether your guidance leaves room for European-sourced business for those yields to actually be down this year.

Would you say there is enough room in your guidance, but that is at some end of the range?

I think we read a lot about what people expect us to come out with guidance.

We try to be as transparent as possible and actually tried to offer a little more granularity on what we are seeing right now.

Clearly, we are expecting the yields to be down in Spain this year.

The UK, our volumes are off, but our pricing is up a bit.

The other markets are actually holding up okay.

But we've tried to give some variability.

We believe the largest swing factor will be Europe, and we've tried to accommodate that for a little more deterioration or a little more upside within our guidance.

Okay, thank you.

Steve Wieczynski.

Brian, I guess if you look at your NCCs, you basically are saying they would be flat if you stripped out the higher insurance costs and the marketing costs.

That seems like a very optimistic, very strong number, or very strong -- what I'm basically trying to get at here is how are you guys keeping that number flat at this point?

It seems a little bit aggressive, I guess, to us.

As I mentioned, about 50 or 60 basis points is going to be insurance, and the other, really marketing and IT costs are the two areas that we are seeing increases.

The brands work very hard to try to do cost-containment.

We are perpetually looking for synergies and how we can consolidate some of the back office operations and improve efficiency.

I think it is fair to say we are leveraging the technology to get efficiency as well.

And our supply team has done a great job in negotiating and keeping any inflationary pressures in check.

So I think we feel good about the guidance we've provided.

Okay.

Got you.

Then second question, just maybe how you are thinking about onboard yields for 2013 as well.

Looking back at last year, we had a year of reasonable progress, I would say, with our onboard yields.

Overall, some of the areas that were helpful to us were shore excursions and beverage.

Also in general, being more present in the Asia Pacific region is good in terms of the spending by those guests.

And then the third thing I would mention is that the revitalization of a substantial part of our fleet across brands is creating new revenue -- onboard revenue opportunities.

And we were able to take some advantage of them in 2012, and would expect to continue to do so in 2013.

Just as Brian was discussing with costs right now, as it relates to onboard revenue, there is a tremendous effort taking place across all brands to create onboard revenue upside.

And I would say we are cautiously optimistic at this point in the year.

Okay, great.

Thanks, guys.

Sharon Zackfia.

I apologize if I missed this, but could you talk about the drivers of the occupancy being down a little bit year over year?

And secondarily, on onboard spending, just curious if you could kind of prioritize where you are seeing that strength.

I know you've made some changes to some of your beverage programs and I'm curious how that is playing into the onboard spending.

Yes, we have made a number of tweaks in different areas.

Also -- let me start with shore excursions.

I know you just mentioned beverage.

I'll come back to that.

But as we've become a more global operator with a more diverse guest sourcing, we have found both needs and opportunities to create more (inaudible) product for guests from different nationalities with different language capabilities in different parts of the world.

I'd like to think we are getting better and better at that across the brand.

And we saw opportunities in that area in 2012 and we would expect to see more opportunities in that respect in 2013.

So that would be one example.

The beverage area has been also relatively productive for us, both in terms of the introductions of a variety of different beverage packages across brands that give more consumer choice to our guests, both before and during the cruise, in terms of how they would like to structure their beverage experience.

And then, as I was just saying, I think in general, as we get more knowledgeable serving a more diverse group of nationalities across our various brands, we are simply finding new and interesting onboard revenue opportunities.

And as we revitalize our ships with more specialty restaurants, different kinds of entertainment, different and better bars and so forth, we are finding areas of improvement.

So all of those things together give us some optimism for 2013 and also in the years beyond.

Sharon, I apologize; I don't have a reconciliation of the occupancies for you.

I'd say for the year we are down 40 basis points, and we are down -- I believe it was 1.2 percentage points in the fourth quarter.

I know we did have an increase in cancellations due to Hurricane Sandy, but I don't know how much that impact was.

But if you don't mind, we will try to get some details and, if you could follow up with Ian, we will try to help you out after the call.

Sure.

Can I just ask one quick follow-up then?

Do you expect occupancies to be relatively stable in 2013, or should we expect more downward pressure on that?

I think we are always within a percent or two, and our yield management team will make decisions that they believe is going to optimize the overall revenue equation.

And sometimes, particularly on our higher-end brands, we may sacrifice load factor in order to drive yields up.

But for the most part, we keep our load factors within a very narrow range.

Thank you.

Assia Georgieva.

Two questions.

First of all, I was somewhat surprised that the UK is lagging Germany and France in terms of demand.

Given that you have a small price advantage at this point, but the booked load factors are lagging, do you think you might be able to keep that price advantage as we go through WAVE, or do you expect that at some point you will have to be reducing price to get the load factors up?

It is hard to compare the difference, either European countries or actually any two countries.

The UK is the number two market for cruising in the world.

For example, in the case of Royal Caribbean International, we are doubling the number of ships we have out of Southampton this summer, with Adventure of the Seas joining Independence of the Seas.

And clearly, the UK is under some stress macroeconomically.

So we find that we are having to work pretty hard in the market right at this point, and we are waiting to see how the normal kinds of promotional activity will develop.

There is always a heavy level of promotional activity in the UK going on, no matter how robust or not robust the market is, for 25 years that I can remember.

So it is really a question of seeing how over the next two or three months the market responds to the types of techniques we've used in the past and whether we have to get more aggressive or not.

But it is a big cruise market, it is experienced in cruising.

There is very well-established distribution.

Our products and services are well-received in the market, and we would expect to be able to find the customers that we need as we go forward.

Okay.

So it will be another couple of months before you will have a better view into the summer season out of the UK?

Yes.

Okay.

And my second question relates again to the increase in net cruise costs.

I understand the P&I and the marketing pieces are the drivers.

But last year, we already had a pretty significant increase related to deployment initiatives in the international distribution.

I actually would have expected that we would get some of that benefit in terms of yields, but wouldn't have the need to raise costs; and in fact had hoped that maybe costs could be flattish year on year.

At the same time, marketing spend, obviously, if a 1% increase in costs can help drive yields by 1% that is a benefit.

But again, could you come in a little more detail -- I know you've discussed this already -- but I just wish there had been less of an increase on the cost side, if you will.

I think we are trying to drive higher revenues.

We do believe the best way to grow our bottom line is through these investments and getting the revenues up.

A percent, as you pointed out, on the revenue line means a lot more to us than a percent on the cost side.

I think we've done a good job of controlling costs.

If you exclude the investments that we are making in IT and marketing and the adjustment for insurance, our costs are basically flat, which I think it has taken a lot of hard work by the brands and by our infrastructure team, and we are quite proud of that.

But we do believe making these investments is both good for the short-term and the long-term results that we can drive.

But, Brian, it seems that we already have a higher cost base in 2012, again, because of those two types of initiatives that were more of a one-time item or would have significant (multiple speakers).

I'm sorry, they are not a one-time item.

They continue forward.

It will actually be a pleasure to stop talking about deployment and international distribution changes in my script every time.

But those are changes that occurred in 2012 from 2011.

They do continue forward.

I believe I called out early last year one of the structural changes was the relationship that our Pullmantur brand has within Brazil.

We did previously have more of a tour operator sort of structure, where we shared revenues and costs; that changed in 2012.

And we have a more broader distribution system.

And as a result of that, we got more of the revenue and more of the cost.

That continues going forward.

So we really are looking at apples to apples as we compare 2013 to 2012.

Okay.

Well, thank you very much for your answers.

Harry Curtis.

First question -- sorry to beat a dead horse here, but going back to Europe.

If you -- with 50% of your capacity still yet to book, based on the most recent trends in pricing, would your gut tell you that that incremental pricing from here through the end of the summer is going to be on the positive side or on the negative side?

When you say from here, do you mean from here being the United States?

No, no, from this point in time.

I'm sorry.

Just from here on in time.

Correct.

Well, we've said in a couple of different ways that we need to see how this develops over the next two or three months.

We have a wide array of tactical options available to us in this business, both in our consumer and our trade communications.

We have considerably more experience in all of the European countries that we had even a few years ago in terms of how to select and promote the activities that we need to do.

So we have a lot of capability, but we are also facing a market environment that has certainly altered over the last two or three years into something that is a little bit different.

I think when we are talking about the United States market and the Caribbean and Alaska and the different techniques that we have available there, we are pretty confident when we say -- when we look at what the different choices are as to how to go forward, what to select and when to put it into the market and what will probably happen.

Europe is simply more uncertain at this time.

And also, because we source most of our customers on our European cruises from Europe, for them, it is a closer-to-home, later-in-time booking proposition.

So there are several different factors that sort of push towards needing the next few months to see how it will go.

But we are optimistic that we can do the things that we need to do to keep the ships full and to be consistent with the earnings guidance and the yield guidance that we've given you today.

Harry, I think I would -- since there have been a number of questions on Europe, and quite rightly, because we have highlighted that as an issue -- macroeconomically, where we continue to see continued uncertainty there, issues with the banking system and the fiscal crisis that they've been undergoing, so it is a little hard to measure that.

I think overall, we feel that it has stabilized.

It has gone -- Spain has been somewhat of an outlier because of the depths of the issues there.

But we are not seeing the kind of improvement that we would like to see.

But I think overall, our forecasts that we have presented to you here today are based on what we and, frankly, most observers are seeing in terms of the economic activity there.

I think the fact that we have held up and continue to show the kinds of yield improvements that we are doing despite that economic situation is really a tribute to the brands and the strength of those brands.

But it has been a long period of disappointing economic news in Europe, and that news hasn't ended yet.

Obviously, we are hoping it continues to do so.

In that case, why don't we move to something that hopefully is a little clearer to forecast?

In the press release, you gave guidance of CapEx through 2016 in aggregate of $4.2 billion.

Can you walk us through the breakdown of new ship versus renovation CapEx for your existing fleet?

Harry, if you wouldn't mind, I think it would be best if you could follow-up with Ian after the call.

He has got the detailed reconciliation and can certainly make sure your model covers the different categories appropriately.

I will mention we have guided traditionally that our maintenance CapEx is generally in the neighborhood of around $200 million to $250 million a year.

That could be slightly higher in a couple of these years due to some of the IT investments.

But we've included that, and the vast majority is obviously the new ships and the revitalizations.

But Ian can give you the details of that.

Thank you.

Tim Conder.

First of all, I apologize if I missed this in the early part here, but Celebrity, if you could maybe give us some color on how the brand is tracking with some of the new marketing initiatives there.

And I know you mentioned at the investor meeting a couple months ago that -- and, again, you are absorbing all of the capacity and the challenges related to that.

But with the new marketing focus and further trying to differentiate that brand, give us an update, if you could.

And then also on the booking curve, if you could maybe compare and contrast North America to Europe, where that stands at this point relative to last year.

Sure.

Tim, I'll take the first part and Brian would take the second question.

With respect to Celebrity, as you know, we've had a significant management change there as Michael Bailey has taken over.

And he has -- is actually responsible for a lot of the marketing increase that we are talking about here.

And we are also at the end of Celebrity's large and rapid capital buildup with the five Solstice series ships.

And so far, that really seems to resonate.

We are looking for -- a lot of the improvement here is in fact coming out of the Celebrity brand, and the early indications are very good.

Michael would say he has been in the job for a week and a half, and so it is a little early to judge the performance -- a little longer than a week and a half.

But the early indications are really quite promising, and that is part of what has enabled us to be projecting the kinds of yield improvements we have.

Maybe this is a derivative of that.

Brian, of the marketing spend in total, roughly what is that in basis points or absolute dollars of those three major components?

Well, the insurance is about 60 basis points.

We didn't break out the marketing or the IT.

But they are sharing, I would say, roughly equally in terms of driving the incremental expense.

Tim, on your question on the booking curve, I think the US is, for the most part, we would say in line with a year ago.

We do have some pockets, some products where people are actually beginning to book a little bit further out, which is obviously helpful.

Northern Europe, for the most part, is very consistent with what we were seeing last year, but we have seen contraction in Southern Europe.

The Southern European countries are actually booking about a month closer to sailing than they had been a year ago.

Okay, great.

Thank you, gentlemen.

Richard Carter.

A couple of questions.

Sorry to just keep laboring these points on Europe.

You sort of confused me.

But all right in saying -- so 50% of capacity is still to be booked.

You are expecting flat yield in Europe.

Is that sort of factored into your guidance -- is that correct?

(multiple speakers)

Richard, I'm sorry.

We said that we have sold less than 50% of Europe at this point.

In aggregate, we are feeling as though we will have yield improvement in Europe this year.

Is that -- sort of North Europe sort of flattish to slightly up, Southern Europe down and West Europe up?

Is that sort of fair assessment of --?

We haven't been that granular (multiple speakers).

We've taken a lot of capacity out of Southern Europe; we've added capacity to Northern Europe.

So that would be probably a fair synopsis of potentially what could happen.

And then secondly, on the marketing and technology costs, are these one-off costs or do you expect them to continue to reoccur going forward?

And then just on the technology side, you talked about increasing your direct communication.

Can you just say where you are relative to that?

Is this a new development for you or is this just building up on previous technology?

And what sort of changed for you to want to go down this road?

And just finally, do we expect that to come through in lower commissions going forward?

I would say we are in a phase that is more than a one-year phase of ramping up investment in marketing and marketing-related technology development.

That is a function both of the sort of cycles of technology investment over time, as well as the realities of being an aggressive global marketer in the 21st century, and wanting to be -- being very determined, I should say, to have successful globally-oriented brands, as well as some very specifically nationalistically-oriented brands that want to be preeminent in their respective markets.

And so we are in a period right now where we are emphasizing that type of development.

And as Brian noted earlier on the call, that means that it is incumbent upon the management team to find efficiencies and look for cost management opportunities in other areas to allow this type of investment to occur so that we are able to drive yields on the revenue side, which is what the business is most about and what we are determined to achieve.

So those are developments that are a focus for us strategically at this time.

I wouldn't link the development of the distribution costs to these marketing investments.

The distribution around the world is in very differential states of evolution.

Cruise distribution in the United States and I would say the UK is pretty mature.

There is a lot of attention towards our product and services.

Travel agents often build their economic model around what we and the rest of the industry are doing in cruising.

Whereas in places like China, it is a brand-new game.

There really isn't cruise distribution in the way that we've known in the past in other markets, and we are trying to build that so that we can take advantage of the market potential.

So there is a lot of different factors that will propel distribution compensation, independent of what we are doing with marketing and technology investment.

And Richard, just like to comment on something that was at the end of your question, which I think Adam addressed, but I think is worth emphasizing.

Your question was kind of leading towards the extent to which these things would tend to reduce or increase our level of direct business and reduce that which goes through the distribution system.

And while technology is evolving and people's use are evolving and in particular, as Adam pointed, out there is huge geographical differences, what we are really doing is trying to find better ways to communicate with our guests and with our travel agents.

And the technological investments that we are talking about aren't so much focused on changing the current structure that we have today.

The bulk of our business continues to come through travel agents.

Travel agents are key to help people understand what cruising is all about.

And particularly as we look at growing the business, the need to do a better job of communicating with people is important, and the travel agent is particularly good at that.

So I would not in terms of your model think in terms of this making a dramatic difference -- these investments making a dramatic difference in the distribution cost in terms of commissions.

What it will do is make us and the travel agents more efficient and we think provide a better way to communicate with our guests and travel agents going forward.

Do you think this will take you above your competitors in terms of what technology they have?

I'm not going to make competitive comments on the call.

I think we want to be -- in almost anything we are doing, we try and be the best at what we are doing, and we think that our technological investments -- and they are big -- we will have a very good return on the investment.

Okay.

Thank you.

Greg Badishkanian.

Just to focus on net yields a little bit.

So beyond the easy compares, when you're looking at the US bookings, it still seemed like they are very strong from what you talked about.

Any color from travel agents or just from your people who are handling direct calls in terms of what is really driving the strength here?

Well, the travel agents are just doing whatever the business is that they are doing, and I think in the United States market, they have a general perception that the US economy is coming along, that people are taking some confidence from the housing market turning in a somewhat more positive direction, that the country didn't fall over the fiscal cliff into the abyss, and the value of cruising is coming through in a good way in this winter's booking season.

We've been, I guess, reasonably fortunate with the weather patterns that have existed so far.

It's sometimes hard to tell how much influence that has.

But last winter probably wasn't beneficial to us in the weather respect and this year probably more so.

So there is an overall sense that it is a good time to be booking cruises, that the cruise industry and our company are bringing forward exciting and attractive products and services, both new ships and revitalization of older ships, and that the market's stability is in pretty good shape here.

So there's a lot of reasons why the US market would be in a relatively positive stance, and that is consistent with what we hear from the travel agents around the country.

Good.

Good to hear.

And then my second question is just assuming that trends continue decently and you achieve the upper end of your 2% to 4% net yield guidance, how much of the net yield growth would you expect to come from pricing versus greater utilization over the prior year?

Greg, I think, as I indicated to Sharon, we really manage within a narrow range of load factor; unlike hotels, you don't see a lot of volatility in our yield performance based on the load factors.

I think at this point, we would look at it all to come from pricing leverage, as well as some accretion in onboard spending.

Good.

All right.

Thank you.

Cassandra, we have time for one more question, please.

Andrea Ferraz.

-- your yield guidance, particularly because Q1 looks very strong given that it is your toughest comps.

Last year, I think with excluding the distribution and deployment changes, yields were up 3.5% in Q1.

So your guidance implies two-year growth rate of around 6%, whereas your full-year yields were just up around half a percent, excluding the deployment changes.

So your two-year run rate for the full year implies just around a 3.5% increase.

So I was just wondering if it is just -- it is uncertainty around Europe or there is anything else that I might be missing.

Thanks.

I think part of it is driven by the product mix.

In the first quarter, we have very little Europe.

We actually reduced capacity in the first quarter within Europe, which did not perform too well last year.

And I think as we've indicated, our brands are performing particularly well in the Caribbean.

We were up, as I mentioned in my opening comments, mid-single digits in the fourth quarter, and we are looking at just core strength within the Caribbean.

I know the Royal Caribbean brand in particular with the Oasis class ships have done very well, and I think that is predominately why we are seeing good performance in the first quarter despite the harder comp.

Thanks.

Thank you.

And we'd like to thank everyone for joining us today, and as I mentioned before, Ian will be available throughout the day for any follow-ups, and we wish everyone a great day.

Thank you.

Thank you for participating in today's conference call.

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