皇家加勒比遊輪 (RCL) 2013 Q1 法說會逐字稿

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

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

Mr. Rice, you may begin your conference.

Thank you Pasha, and good morning everyone.

I would like to thank you for joining us today for our first 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, Jason Liberty, our Senior Vice President of Strategy and Finance, and Ian Bailey, 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 our booking environment, and our forward guidance.

Adam will talk more about

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

Richard?

Thank you Brian.

And thank all of you for joining us today.

As you can see from our release this morning, we have had a very gratifying first quarter.

It is particularly encouraging that so much of the upside came from better revenue, both ticket and on board.

Looking to the remainder of the year, and to the obvious questions, yes, the recent negative industry media coverage has been frustrating, and yes, it has probably impacted us a bit.

But no, it has not been a game changer for our brands, and no, it can't be compared to other challenges the industry has faced in recent years.

One possible reason is the very strong support we have received from the travel agency community.

They have been effective in communicating the industry's high safety standards,especially to inexperienced potential cruisers who are apparently the most influenced.

Similarly, I can say that this time the bad economic news from Europe has not overcome our positive momentum.

As a result, despite the headlines and despite the European angst, we have been able to reaffirm our full 2013 guidance for both yields and earnings per share.

For a while now we have been talking about the stabilizing platform, the relevant growth, global diversification, and flexible sourcing provide.

I think both our first quarter results and our outlook validate that this is working to a high degree.

We are of course seeing gives and takes as you do in any dynamic system.

A little stronger Europe, a little weaker Asia, et cetera.

But overall our business is balanced globally, and I am looking forward to achieving higher prices broadly across our products and source markets.

One area where I have to admit I am not as balanced, in fact where I am closer to being euphoric, relates to the recent reveals about Quantum of the Seas.

I don't want to steal too much of Adam's thunder, but Quantum is an important new class of vessels for Royal Caribbean International.

Last week an extraordinarily successful unveiling of some of the ship's features to the press and to our travel partners.

I expected that people would be wowed if they got to see it in person.

What I hadn't even hoped for, was the overwhelmingly enthusiastic reaction, not only from the media, but from our travel agent partners as well.

I would encourage you to log on to Royal Caribbean.com and watch our Quantum of the Seas web reveal.

You will find it 8 short well spent minutes that demonstrate that innovation and exciting returns can co-exist harmoniously.

Not only will the vessel be unique and innovative, but it will also be more fuel efficient.

So combined with her compelling scale and rich balcony mix, we expect that Quantum of the Seas will quickly take her place in generating compelling returns for the Company.

I will now turn things back over to Brian for a more detailed look at the numbers, and then Adam will take you through you a little more detail on the regional demand patterns he is observing.

Brian?

Thank you, Richard.

On the second slide, we have summarized our results for the first quarter.

We generated net income of $0.35 a share, which was about $0.20 above the mid-point of our guidance.

From a business perspective, revenues were about $0.08 a share better than our forecast, but we lost about $0.03 of this due to foreign exchange.

Net cruise costs excluding fuel were favorable by $0.08, mainly due to timing of marketing expenses.

We also saved about $0.02 a share from favorable impact of FX on our expenses.

Finally, we were favorable below the line by $0.04, which includes equity pickups from our 2-week cruises joint venture.

Net yields improved 3.6% on a constant currency basis, and I think it is worth noting that our first quarter net yields were the highest we have experienced since 2000,a quarter in which we benefited significantly from the Millennium cruises.

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

The higher ticket yields were driven by Caribbean, Brazil, and Asia itineraries.

We saw improvement in all categories for onboard revenue.

Ships that have been recently revitalized, and vessels sailing on new itineraries did particularly well.

Net cruise costs excluding fuel, decreased 50 basis points on a constant currency basis.

As I mentioned previously, we had some timing shifts, especially in marketing as our brand slowed spending when there was so much negative publicity surrounding the industry.

We believe marketing spend is key to driving higher revenues, and expect to invest these savings throughout the balance of the year.

The overall demand environment has been pretty consistent with our overall projections.

There have been the usual puts and takes that Adam will take you through in a few minutes, but as of today our total book to load factors and book to ADPs are higher than at this same time last year.

Cumulative bookings since the beginning of the year have been up about 5% over the same period last year.

Throughout the wave period booking trends were strong for North America, and European demand really began Coming around in early February.

We did experience modest slowdown in Caribbean bookings from North America during the month of March.

While some this of can be attributed to the timing of Easter and our wow sales, we believe much of it was due to the negative publicity surrounding our industry around this time.

Over the last few weeks though, we have seen an improvement in booking activity, and we are still forecasting record yields for the Caribbean.

I know there has been a lot of commentary in the financial community recently about industry pricing.

Our pricing has been more stable this year than last year, and our brands have done a nice job proactively designing promotions that convey the value that we offer, while controlling dilution to our revenue.

Our average lead pricing is currently about 3% higher than same time last year for sailings departing within the next 12 months.

We are also seeing some positive developments with the booking window.

On average our guests are booking their cruise about two weeks earlier this year than they were in 2011 and 2012.

In fact, the booking curve has looked strikingly similar to 2008 for the last several months.

If you will turn to slide three, you will see our updated guidance for the full year.

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

We have lowered our as-reported guidance about 100 basis points due to the stronger US dollar.

Our constant currency yield guidance is consistent with our previous forecast.

The negative effects resulting from adverse industry media coverage in March and itinerary changes in Asia are expected to be offset by favorable performance in the first quarter, and a slightly better outlook for European demand.

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

We have is included $928 million of fuel expense for the year.

Favorable fuel prices and lower consumption are offsetting the negative effects of the stronger US dollar.

Our earnings per share forecast is consistent with our prior guidance, and is expected to be between $2.30 and $2.50.

On slide four, we have recapped our guidance for the second quarter.

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

Net cruise costs excluding fuel are expected to increase approximately 3% on both a constant currency and as-reported basis, and we have included $236 million of fuel expense for the quarter.

We expect earnings per share to be between $0.10 and $0.15 for the quarter.

I should also point out that we have recently put on some more fuel hedges.

We are now 57% hedged for the balance of 2013, and 55%, 40%, 20%, and 5% hedged for 2014, 2015, 2016 and 2017 respectively.

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 you have heard, stronger than expected ticket revenue onboard revenue and cost control produced a successful first quarter.

Overall the wave period unfolded in accordance with our expectations from a volume and rate standpoint.

We have commented in the past about the global footprint of our primary brand, and our ability to move capacity over time towards market opportunities, and away from market challenges.

This diversification implies we will experience some impact from many causes around the world, but not excessive impact from any one particular cause.

Although our capacity distribution will continue to evolve at the margin, our sense is that the current distribution of 44% Caribbean, 27% Europe, and just under 30% elsewhere is a beneficial distribution for our business model.

The second positive aspect of our global footprint is the ability to draw on worldwide sourcing for many of our products.

We will have more Americans cruising with us on itineraries away from North America in 2013 than we had expected.

Conversely, we will have more guests from outside North America cruising with us in the Caribbean in 2013 than we had expected.

Management is now focusing considerably more than we were just a few years ago on how many customers different source markets will contribute to each product in our portfolio.

Looking at the major cruise regions, the Caribbean got off to a healthy start in the wave booking period ending Q1 performance.

As Brian noted, we expect to achieve record yields in the Caribbean in 2013.

Turning to Europe, the Company reduced its capacity by 10% in 2013, inclusive of a 24% decline for Royal Caribbean International.

Going into the wave, we considered our European summer revenue projections to have more risk attached to them in comparison to other spheres of deployment.

Although there is still somewhat limited visibility for all of our summer deployment, at this juncture in Europe we are sufficiently ahead of 2012 on both rate and occupancy, to be comfortable that our European deployment is of comparable risk to our other programs.

Turning to China, a region that represents 5% of our capacity in 2013.

The hostility between Japan and China surrounding the disputed islands in the East China Sea, continues to affect our itineraries and our demand generation.

We have now removed the Japanese ports of call from nearly all of 2013's North Asia program.

As a result, most itineraries from our China home ports of Shanghai and Tianjin are calling only on ports of call in South Korea.

While the market continues to grow in the face of this unfortunate political reality, our revenue yields will not be what they would have been but for this issue.

As I stated last quarter I certainly hope a reduction of tension emerges in the near future.

Australia is also a region that represents 5% of our capacity in 2013.

The Australian market has experienced rapid capacity growth that has resulted in flat to slightly lower yields in 2013 versus 2012.

Nevertheless, the market remains a very attractive yielding market in comparison to other deployment regions during the northern winter.

It is also a market where both Royal Caribbean International and Celebrity cruises compete well.

Last week as Richard noted, we introduced many of the primary features of Quantum of the Seas at an event in New York, starring the ship's godmother, Kristin Chenoweth.

The news that the ship will be based in New York Harbor at Cape Liberty and Bayonne, New Jersey, was of course received well there.

The most notable features also made an impact.

These include the North Star, which will lift our guests in a jewel-like capsule to a height of 300 feet above the water, for expansive views of the ship, the ocean, and the surroundings.

Another feature element is RipCord by iFly, in which our guests will experience the thrill of skydiving.

Two unprecedented venues inside the ship are 270, which will be the heart of the onboard experience during the day as a place to hang out, and in the evening for state-of-the-art entertainment, and then the SeaPlex which will take the key elements of the popular sports deck and bring them inside and combine them with activities, including bumper cars, roller skating, a circus school with a flying trapeze, and DJ hosted parties at night.

The public reaction to the launch and media coverage of it exceeded our expectations, and we are looking forward to opening the winter 2014-2015 sailings for booking at the end of May.

It was a very exciting moment for the Royal Caribbean brand, and I congratulate our marketing and public relations colleagues who made the event so special.

Brian.

Thank you, Adam.

We would now like to open the call for your questions.

We do ask that you limit your questions to no more than two, if you have more we would be happy to take them after the call.

Pasha?

(Operator Instructions).

Your first question comes from the line of Felicia Hendricks with Barclays.

Brian and/or Adam, you guys talked about the strength of your bookings, your APCDs, your booking curves, and all of that which you are seeing now, which is impressive.

I am just wondering how much of that is coming from disenfranchised Carnival customers, either rebooking on your ships because their cruises got canceled, or they are just leaving the brand in general, and then also of the strong metrics you discussed, are they better, equal to, or worse than what you expected prior to the Triumph incident.

And my second question is, just on Europe, and what is driving the better expected European sourced business there?

Thanks.

Hi, Felicia, it is Adam.

One of the notable and consistent characteristics of our industry, is that everybody's ships go out full at least amongst the major brands in the mainstream part of the industry.

As far as I know that continues to be the case throughout the industry.

There are many factors that go into choosing a Royal Caribbean cruise.

There is obviously Carnival and other main brands that compete with us every day, but we have a lot of brand loyalty amongst our own customers, and it is really hard to say what any development related to any one other specific competitor cruise line means for our bookings.

Our sense is that generally we are doing the business that we do with the types of customers that we have had over time, and we would expect that to continue to be the case as we go forward.

As far as Europe goes, I think with everything that we have read in the news as Richard was alluding to earlier, it makes all of us nervous, and when there is very limited visibility to an upcoming season in this year, and we felt the same thing last year, we feel like there is a higher degree of risk attached to our outlook.

But as we have experienced the wave, and Brian noted particularly in February, we began to see meaningful demand from our European source markets for the European cruises, and at this juncture as I mentioned, we feel the risk looking forward to the rest of the summer/fall season is comparable to the risks that we have on other programs.

Now Europeans taking European cruises are relatively a later booking, a closer in booking phenomenon, and so there is still a lot of activity that remains to be seen.

But it looks like the main markets and certainly taking into consideration that we have reduced capacity as we mentioned, are booking at that pace that has somewhat derisked our outlook for this coming season.

But you didn't see anything in particular driving that, just perhaps maybe you were concerned and maybe should have been less concerned?

Yes, I would say our concerns which I hope you would agree is understandable given the world that we are living in, made us somewhat cautious in our outlook before, but we have somewhat more visibility now, and we are somewhat more confident.

I apologize because I did speak quickly before, but just wondering of the strong metrics you discussed are they better to, equal to, or worse than what you would have expected before the Carnival Triumph incident?

I think before the bad press that was out there we were probably running a little bit better than we expected.

March particularly out of North American demand for the Caribbean, we saw some softness, and I think that the metrics are now getting back toward where we would expect on a daily basis.

I wouldn't say that we fully made up the bookings that were lost during the month of March, but I think we are back in equilibrium now.

Great.

Thank you.

The next question from the line of Greg Badishkanian with Citigroup.

First, what is your expectation for discounting and promoting from the Carnival brand over the next several months, as you talk to travel agents and if they have some gaps they have to fill.

How do you see that playing out for the next few months?

Greg, we really are not in a position to comment on any one competitor's possible actions or are even actual actions.

What we do and I don't know what else is one would do.

Is every day we feel the demand coming from the market, and we take whatever pricing actions promotions we believe are appropriate for the business that we feel, and that is true across all of our six brands, and I am sure that will be true into the future, and whatever happens will play out as people try to book us via the phone, and via the computer.

Could I ask it maybe a different way industry-wide instead of any specific brand?

Do you expect it to be pretty stable, or improve or get a little bit worse over the next few months?

Greg, I think in my comments I specifically tried to call out where our pricing was, because I know there is a lot of reaction in the analyst community whenever they see pricing, and I think it is important to recognize that we compete against different brands regionally, we compete with different brands and different itineraries, and I think it is important to look at the whole portfolio.

I have been in the industry for over 25 years, and there is also promotional activity out there.

And it is very hard when you are looking mainly at North America, and you are looking at certain promotions on itineraries to extrapolate that to the whole.

I think you are going to continue to see promotions by us, you will see them by our competitors.

I would caution you not to read too much into any one deal as you see it.

Yes.

As Adam said, our revenue management team is reacting to the demand that we are seeing for our brands, not necessarily what others are doing.

Right.

And the first time cruisers versus experienced cruisers, any kind of changes in booking pattern and when would you expect some of the first-time cruisers to kind of return to basically normal here in North America with all of the media coverage kind of at some point, which I think is going to be pretty soon, just kind of being in the rear view you mirror, and people moving on in terms of their thoughts and just I think kind of forgetting about it?

Greg, it is Adam again.

First of all I would emphasize that there has not been a momentous shift in the divisions amongst who has been with us before and who has never been with us before, or on a cruised with somebody else who is on a cruise ship for the first time in their life.

We talk to the travel agents, the best producers that we have, and we were with them in connection with the Quantum event in New York.

It is their sense, as it is ours, that negative publicity about the industry at any time, and Richard mentioned this in his opening comments have a somewhat disproportionate effect on first timers.

Nobody has to cruise, everybody has choices of what to do, and people who have cruised before who have personally experienced the dedication to safety that is throughout the industry, and who have seen the procedures and protocols that the cruise industry, marine and hotel personnel go through on an every day basis, are generally very comfortable with the environment.

And if you never experienced it before, you are more likely to wonder about that.

So of course, our job as marketers is to get the people on board so that they are all experienced and they all know.

For now it will probably have more an effect on potential first timers.

The problem is that people don't call us on the phone to tell us that they are not booking with is.

We take the business that is coming to us.

Right, right.

Good.

Nice job on the quarter.

Thanks, guys.

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

Hi, good morning.

Can you guys hear me?

Good morning, yes.

So just a couple of questions.

At one point you mentioned that costs were well controlled, but later said that marketing timing was favorable.

So does this marketing expense come back later on, or was it suspended during Triumph?

And then why don't you answer that, and then I will come back with my follow-up.

Sure, Steve.

We had about $0.08 of favorability on costs in the first quarter, most of which was marketing, and it was attributable to us our brands going a little quieter during all of the bad press, which is something we would traditionally do.

We do expect to reinvest that money in subsequent quarters including a portion of it in Q2.

We did save another $0.02 due to FX, and I think that is money that will fall to the bottom line.

And then separately, given what you are now seeing in Europe that maybe the trends are coming in better, are you rethinking your reduction in deployment in 2014 into that market?

I mean obviously you just announced it, and I know you can't move these things around so quickly, but it does sound like maybe Europe should maybe get rebalanced, and how quickly can you do that, or can you do that for 2015, or how are you thinking about it?

We keep watching it, Steve.

I think I would emphasize is what we said was it wasn't as bad as we had thought.

And actually if you had been looking at the press, you would think oh, it has really actually gotten worse, and I think the point we were making was probably economically and from external factors it has gotten worse, and the point we were making was that we have overcome those.

Not so much that it has turned around.

So at this stage we are not looking for a major shift in our strategy.

But believe me, we are watching that very closely.

Okay, thanks.

Your next question comes from the line of Assia Georgieva with Infinity Research.

Good morning, guys.

Congratulations on great execution in Q1, and I have one question and it relates to Europe again.

We have easing comparisons continuing to ease through the month of May, given last year's Concordia tragedy.

Shouldn't that by itself be helpful if the macro environment is pretty similar to what we saw last year?

Assia when we gave our original guidance in February, we were counting on some benefit given the easier comparables and that was baked into our guidance, and I think what we are saying right now is we feel a little bit more are confident about Europe.

I think it is, a lot of these changes that we are talking about in terms of the performance in the Caribbean and the performance in Europe, is really around the margins, and what we are trying to do is be extremely transparent and tell you where the puts and takes are.

But I would caution you not to overread too much into our comments, that these are fundamental shifts in demand.

We are benefiting from easier comps and I think we have said that we expect to have yield improvement in Europe this summer.

And we are currently in the very active booking timeframe for European sailings, given that European passengers do book closer in, so it would seem that at this point versus ten weeks ago you would have even greater confidence.

I guess my question is your Q3 outlook largely unchanged despite these positive developments on the margin?

Yes, I think we had said back in early February that we were a little less than 50% booked for Europe, and today we are around 70% booked, to give you some sense of where we are.

We are still counting on more business, but the fact that we have maintained our full-year guidance despite the fact that we had a good first quarter certainly implies that we have taken a little bit of a haircut in Q2 through Q4.

Thank you, Brian, so much.

Okay.

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

--over the next three or four years basically has remained unchanged for the last the two quarters.

Sorry, Steve.

Steve.

I am sorry.

We didn't hear the beginning of what you said.

You kind of cut in.

Could you start over?

I am sorry.

Hey, Brian, how are you doing.

With your CapEx projections over the next couple of years, those have been pretty flattish over the last quarter to two quarters.

I though there has been a lot of concern out there that you guys will potentially have to spend more very similar to what one of your competitors has had to have don, in terms of redundancy plans and things like that, can you just address that?

We have a feeling that your ships are a little bit younger, you have always spent a little bit more on your ships versus some of your competitors.

Hi, Steve.

Like others in the industry we have got a long standing practice of investing in redundancy systems, et cetera.

And that does include emergency generator capacity.

We do, of course, constantly review and whenever there is an incident, we try and learn from it.

And so we have again reviewed our equipment and systems, in light of the things going on recently.

And we think that the CapEx that we normally do already covers everything we will need to do at this point.

As you know, we have a long standing culture of continuous improvement, and that does mean that we are constantly looking for ways to do a little better.

But that has been incorporated into our projections consistently over the years, and so we don't envision any need to change our CapEx projections at this point.

Okay.

Got you.

Great, thanks.

And then second question, a bit bigger term picture question here with we have seen some of your competitors albeit smaller competitors start to launch their itineraries and pricing a little bit farther out in the past, with the hopes of getting people to book earlier under the assumption that every couple of months you will see them raise pricing.

Is that something that you guys have thought about, or something that you potentially could go towards over the next couple of years?

Hi, Steve, it is Adam.

We certainly have a lot of internal dialogue about the timing of deployment releases trying to understand whether there is really solid evidence in our history for the, whether releasing earlier or later is better or worse.

And all I can tell you about that because I think this is fairly competitive in terms of what we actually choose to do, is that we have a lot of focus on this, and we pay careful attention to what is happening in the market, and we will release our deployment at the times that we believe are optimal for each of our respective brands.

Because our brands have quite different attitudes towards the marketplace, experience different booking curves, and therefore would have different preferences as to when to release deployment even within our same Company.

Great.

Thanks, guys.

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

Good morning.

A couple of questions.

Europe obviously a nice surprise.

I know that the weather in Europe was unusually cold this winter.

Wondering if you saw any correlation with where you saw the improvement versus where you expected with the areas where the weather was unusually cold like Germany.

And then secondarily, maybe attacking the Carnival question from another angle.

Have you done research on how many of your customers cross shop the Carnival brand, because the price points are different on Carnival versus Royal Caribbean or Celebrity?

Sharon, I will take the first part on Europe.

I think generally speaking, Europe as a whole was doing better than we expected.

The markets that I would say we are seeing the most softness in would be, of course, Spain and then probably secondarily, the UK would be a little bit weaker than maybe we would have expected.

Germany has actually held up quite well for us, particularly with our 2-week cruises brand, we are very pleased with its performance.

And then the other markets in general seem to be doing well, and I will let Adam take the second part.

I would think, Sharon, that if you lined up the deployment of any one major cruise line in the industry against one other one, and looked at where the deployment tends to overlap, there will be some degree of competition and cross shopping.

And that stands to reason, because one of the valuable roles the travel agents play in this industry is to give objective advice about the different choices people have, and there are fortunately a lot of choices that the cruise industry presents to the customers.

If you look at where we and one other cruise line have ships in the same place at the same time, there is going o to be cross shopping, and what we try to do as marketers is make sure that the travel agents and customers know the features and the benefits that make us special, and that we believe cause great value in the proposition to the guests.

And that will be true wherever we meet up against any particular cruise line in the world.

We are very confident in the ability of our respective brands to compete against our major competitors, wherever we may meet them.

Can I ask a follow-up?

Sure, go ahead.

I understand your point on deployment.

But if you look at the hotel industry clearly they are a bandwidths, and people who look at a Four Seasons don't necessarily look at a Hyatt.

Even if they are both in Chicago or New York.

I respect the answer, but I am just asking if you have any insight or research on the actual passenger base that cross shop your brands versus Carnival?

I don't have specific data.

One of the things we have always claimed about the Royal Caribbean International brand in particular, is that we believe that it is the most versatile brand in the industry, it is also one of the two largest brands in the industry.

If we are in a popular market where many of the other brands are of the big brands, then the so-called other contemporary brands, we will have some degree of competition with.

Meaning that some percentage of the guests will be choosing between us and the other contemporary brands.

And at the same time, because Royal Caribbean is fully capable of competing against the premium cruise lines, there will be some percentage of the potential customers weighing our features and benefits against those of the other premium cruise lines, so if you, in the example that you gave, there are probably some customers who would consider Four Seasons versus Hyatts, but there would be others who would be very loyal to the Hyatt brand, and wouldn't think about Four Seasons, and vice versa.

You really have to in my opinion look carefully at the particular region of deployment, who is there, and then understand what the likely competitive scenario will be, which is of course, one of the inputs into how we choose our deployments.

Okay.

Thank you.

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

Tim?

A couple of things.

Brian, thank you for the color on Europe that you just gave a couple of questions ago.

A little bit more there.

Have you seen the booking curve further compress versus when you talked to us three months ago in Europe?

And then I apologize if you commented on this earlier, I missed the opening part of the call, the onboard spending, can you maybe give us some color?

We think we know it is probably the strongest in North America, but maybe color by region?

And then lastly, any commentary on what you are seeing in the Australia/New Zealand market.

I know it is not a huge piece for the industry, but there has been the economy has been softening there and quite a bit of capacity growth and that market has grown quite a bit the last several years?

Tim in terms of the booking window, specifically to Europe, we have pretty much seen an across-the-board expansion of the booking curve.

The last couple of months we monitored this for every market and what it the average cruise that people are booking, how far out, and we have actually seen that expand pretty much across-the-board including within Europe.

On the onboard revenue, it is pretty much across-the-board as I said.

Particularly the ships that have had the revitalizations have done well, and even some of the new deployments have done quite well.

It has been in all of the different revenue centers.

It was pretty much across-the-board in the first quarter.

As it relates to by region, again, we saw an uplift on all ships.

I wouldn't call it out as any one region did necessarily better than the other.

I do think our brands are learning the new markets better, and providing the sort of product offering that guests in some of the newer markets really value and are willing to pay for.

And I will let Adam talk about Australia.

Hi, Tim.

So the Australia market has been a very robust fast growing market.

The country although as you mentioned maybe at the moment isn't doing as economically well as it has been, the last many years have been exceptionally positive for Australia as a country, and the overall GDP per capita is very favorable compared to even very developed other countries around the world.

So that country of 25 million people is clearly able to support a significant amount of cruise activity.

One of the results is there has been a lot of capacity going there both ours and others.

As I mentioned in my opening comments the result in the near term is flat to slightly lower yield outlook for us for this year.

But we feel very strongly and positive about the Australian market.

There is a wonderful array of destinations to be visited from cruises originating in Sydney, Melbourne, and Brisbane and Auckland, and we would expect that Australia as a southern summer market would continue to grow, and be a mainstay of the cruise industry going forward.

Great.

Thank you, gentlemen.

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

Thanks.

Two questions also on Europe.

First it sounds like demand from Europe is positive, and more positive than you had originally expected.

But then your deployments for 2014, it looks like you are lowering significantly in Europe, just wondering if you could comment on that?

And I have another European question to follow.

Hi, Robin.

I think demand from Europe has been better than we expected, but I do want to reiterate that our expectations weren't very high.

And so it isn't that it has been such a strong market this year.

It is just that we are a little bit pleasantly surprised, and although actually the external news has been more negative than we expected, our results are actually slightly better than we expected.

So it is more that we have overcome bad news by the momentum of our brands, rather than we are suggesting that the market is as strong.

So at this point we are not contemplating changing our basic strategy towards Europe.

Great.

Thanks.

And then just thinking about Europe, and how the mix of where you are sourcing from this year compares to last year, because you mentioned Spain still is weak.

In the UK some softness, and Germany still strong.

If the mix of where you are sourcing from hadn't changed, would you still be expecting demand to be up year-over-year?

Like in other words, I am trying to get a sense of how much of that is the mix change versus kind of a same store demand change?

That is an interesting question.

You are asking I guess so some degree a what-if scenario.

What we are experiencing is that we have as I mentioned, first of all, we have more business coming to our European cruises from other parts of the world.

And that is pretty much all other parts of the world.

The United States, Asia, South Pacific, and Latin America.

Within Europe, probably somewhat consistent with the macro economic picture that we see.

There is somewhat more business coming from northern Europe than from southern.

We seriously reduced our expectations for the business that we would source out of Italy, France, and Spain, I am speaking for the Royal Caribbean International brand.

It is hard to know what would happen if we had done it very differently, if we had deployments arranged differently or if we marketed very differently by country than what we are doing, clearly we could have changed the ratio, but the ratio that we are pursuing is the one that we believe is optimal for this year's performance.

And so I wasn't necessarily asking you to sort of think about if you marketing or how that could have changed pricing, but literally the pricing that you are seeing and from those source markets, and just would your overall Europe have been up if your sourcing hadn't changed?

So not actually having to sort of speculate about what might have been, but literally just looking at your pricing by source market, and if you hadn't changed your mix by source market would you still be positiveyear-over-year?

I don't have a precise answer to your question.

Our pricing by the principal market is generally more similar than different.

So changing mix amongst them I don't think would have produced a very different result than what we are seeing, and the price support would come from the fact that we have more demand generation from other parts of the world, which bolster our ability to take whatever actions need to be taken in Europe itself.

Great.

Thanks, Adam.

Your next question comes from the line of James Hardiman with Longbow Research.

Good morning.

Can you hear me?

Yes, we can hear you.

Great making sure here.

Congratulations on a great quarter here.

I will continue to beat the dead horse with Europe, and I apologize if you feel like you have touched on this.

I did hop on a bit late.

Carnival is saying Europe is getting a little bit worse, and you guys saying it is getting a little bit better.

It seems like what you are saying is that maybe your expectations were just lower, is that is the biggest delta here, or it is maybe a function of geographic mix?

Is it a difference in the reporting calendar, where the last month since those guys have reported, things have maybe ramped up in particular, or do you just think from a market share perspective you guys are actually gaining share with maybe fewer brand specific issues in Europe?

James, I will take a crack at this one, since Adam and Richard haven't closed the door on it.

I think really I want to emphasize our view of Europe is really on the margin, and it is slightly better than our expectations were in early February.

I think I would emphasize the fact that we are happy that we took 10% of our capacity out of Europe this year.

We are dealing with an easy comparable.

We think we are in a good place in terms of our capacity relative to what the market condition is right now.

Our preliminary plans for next year is that we might have a slight reduction again in Europe, which we hope would give us pricing leverage which is something we have been criticized a lot for as putting over capacity in markets, and I think what we are trying to do is really get the highest pricing we can for our whole portfolio.

We are excited about new markets.

We are doing well in the Caribbean.

We will have record yields this year.

Asia, with the exception of the current tensions with Japan, seems to be a very promising market for us.

We may allocate a little more inventory to those markets at the expense of the capacity for Europe.

It really is trying to optimize the portfolio, and I think again we view Europe as slightly better than we did three months ago, but we are not ready to declare victory there, and say that is the new treasure chest of the industry.

Got it.

And then talk a little bit about the support that you are getting from the travel agents?

I think in your prepared remarks you said that things could have gotten ugly had it not been for some of that support.

Do you think that has been disproportionately in your favor, particularly post the Triumph incident?

Obviously you guys are going to be extremely hesitant to use any other cruise line's misfortunes in your favor in terms of any communications that are coming from you, but anecdotally do you think that is happening at the travel agent level?

Are they pushing more customers in your direction?

And I guess just bigger picture, talk about commissions made to travel agents?

It is not entirely even depending on the geography.

A lot of these guys are getting paid bigger commissions from you versus maybe some of your other competitors.

Talk about your strategy with commissions with regards to the travel agents?

Thanks.

Okay.

I will try and take the first part of that, and I will ask Adam to respond on the question of the level of commissions.

First of all, I certainly hope, I mean we put a great deal of effort into getting the travel agents to push people towards our brand all of the time.

And we have done that for years.

We have a very strong program of trying to provide support to the travel agent community, we have always believed and continue to believe that travel agents are an important distribution system that helps differentiate products, and we believe that we have a very powerful relationship with them, and the awards, we probably won the most awards from travel agents and, of course, we do everything we can to continue to differentiate ourselves.

One thing the industry doesn't do is compete on the basis of safety or environmental protection, or other things.

And that isn't terribly constructive.

I think the entire industry is focused in the same direction.

So I believe that we, I do believe the agencies, the travel agent industry, the community is important in helping qualify potential cruisers, helping them understand the advantage and value of cruising, and I think the travel agent community is, and has been particularly helpful in times when there is misunderstanding in the world.

And right now there has been a lot of misunderstanding in the world, and I think exaggerated media reports and others which they have helped clarify.

Particularly for as I mentioned earlier, the first time cruiser, who I think may have the most misconceptions about cruising, and that is true of the misconceptions about cruising in terms of safety, but also in terms of how enjoyable it is, and what kind of value it is.

So I think the travel agent can really explain that to people who otherwise wouldn't know, and I think that has continued to be the case.

I think we will continue to push hard to differentiate ourselves, and to make sure that all travel agents know as I believe that in every single category of cruising we would try and be a winner.

But that is on standard process, and I think their support for the industry as a whole remains unchanged, and I think they have served a very powerful and helpful role in that record, not only for us but for everybody.

I would ask Adam to address the commission level part of the question.

Thank you.

So the relationship that we have with the travel agency distribution system that Richard described, is both a source of great pride to us, and is consistently reflected in the feedback from the travel agents, including as I mentioned just the other day when we were with our top travel partners at the time of the Quantum of the Seas reveal.

Having said that, clearly that relationship is predicated on us giving competitive compensation to them for producing for us.

They are all in this business for profit as well as we are.

If they don't feel we are giving them a fair shake on compensation, they may love us and our products but they are going somewhere else.

And also they are always asking for more compensation, which you can't blame them for doing.

Our shareholders are typically wondering if there is some way that we can pay them less compensation, but you can't blame the shareholders for asking that either.

It is our responsibility to navigate the right balance reflecting the value, the great value that they contribute to the success of the business model, neither underpaying nor overpaying.

I would point out that the foundations of travel agency compensation over a good number of years now are much more stable than unstable.

It is pretty clear what the building block elements of travel agency compensation are, and it is pretty clear that the travel agents are willing to produce good business for us with the existing components of their compensation.

Very helpful on all fronts.

Thanks, guys.

Your next question comes from the line of Harry Curtis with Nomura.

I think it would be a good opportunity to discuss the design of your ships, and some of the differences between yours that give you confidence that you won't run into the same issues that Carnival has, whether it is power loss, backup generators, fire suppression?If you could give us your sense of what the difference in design is?

This is Richard, and I can't really make comparisons.

I don't know enough about what others do.

I can only refer to what we do, and the safety and comfort of our guests has always been [significant] to us, and I believe to the entire industry.

I don't think we are at all alone in that.

I think that we all try.

One of the things that I would emphasize is there is no such thing as perfect safety.

There is such a thing as perfect dedication to safety, and we strive towards that every day.

We have tried to build into our systems multiple redundancies, and that includes all of the kinds of things you have talked about.

But I guess I would also say that when people, you talked about the cost of our ships.

Actually, usually when we have conversations about the costs of our ship, they focus around the wow features that we have onboard our vessels.

And as both Adam and I talked about earlier, the Quantum of the Seas launch in New York is probably the most recent example of the amazing concepts that the building team has come up with.

At the same time, I don't think it is a coincidence that the man who oversees our new building projects and has for many years previously headed up our safety and security department, and that is Harri Kulovaara, and he is very focused on that.

And while it is true that redundancies like the ones we have talking about do increase the cost of a vessel's design, we believe those investments are well worth making.

Well, maybe there a is follow-up that I can ask, which is there anything about your design specifically that reduces the probability that you would see one of your ships dead in the water, and guest services reduced to a bare minimum?

Well, I think all of us in the industry work very hard to that objective, and I think it is important to notice that the industry and ourselves have an amazing safety record, that what you have seen recently really is a historical anomaly, and that the industry performs thousands of cruises,normally without a problem.

And recently we did have obviously a very, very well publicized number of events, but I think it is fair to really emphasize that we are all working to minimize the chances of that.

In an ideal world it would be brought to zero, but there is no such thing as a zero probability of anything.

I do think we do work at it, and I think I am proud of the motion to safety that Harri and his team exemplifies, and our marine departments exemplify, and I expect that will continue as we move forward.

Okay.

Well let me then move onto my second question, which is related to your annual guidance, very strong out performance in the first quarter due to incremental costs in the second quarter, probably some of that first quarter benefit goes away, but still net/net/net you have the opportunity to take your guidance up for the year by $0.05 or $0.10, and I am curious what is out there that would keep you from having taken your annual guidance up?

Harry, I think it is a combination of if you look at the first quarter, we had about $0.08 of favorability in revenue, and we had about $0.08 in cost savings.

And we believed that, and we had $0.04 below the line, the combination of the $0.08 of revenue, the $0.04 below the line we think is being offset by some of the deterioration that we saw during the month of March.

And that the cost is really just a timing shift of the marketing.

We have a pretty wide range out there still with revenues of 2% to 4%, that is about a $120 million spread, and we have a 100 basis point spread on costs.

And just when we summed it all up, we thought that we should maintain our guidance.

So it is a little bit softer in Q2 through Q4.

Okay.

Thank you very much.

Sure.

Thank you.

Pasha, I think that we time for just one more question please?

Yes sir.

Your final question comes from the line of Jaime Katz with Morningstar.

Can you guys talk about CDF and Pullmantur, and maybe where those brands performed relative to the rest of the business in Europe?

Sure.

As I think that we have made clear, and over time the Spanish economy is something less than robust, by coincidence this morning, they just announced yet another increase in the unemployment rate to 27%, an almost unheard of rate.

And so of course, Pullmantur's performance is inevitably effected by that very strongly, and that is a big disappointment, and I don't see any quick turn away from massive improvement given the economic situation.

However, Pullmantur has done a very good job I think in dealing with an extraordinarily difficult economic and operating environment, and in diversifying itself away from Spain, into other Latin countries, particularly in South America.

You also asked about CDF, Croisieres de France, and this is actually a quite good success story, it started small, and we have had a significant, a very significant increase in our capacity this year.

Jason, what is the capacity increase in France this year, percentage terms?

I think we have about doubled.

Yes, so it almost doubled as we put in a much larger ship, and yet we are still getting higher yields there than last year, having doubled the capacity.

So the French, CDF, Croisieres de France situation is actually doing quite well for us, and we would expect to continue to expand that to take advantage of a good market position.

Excellent.

Thank you.

Thank you.

And we would like to thank everyone for joining us on the call today.

As usual, I will be available throughout the day if you have any follow-ups, and we wish everyone a good day.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call, you may now disconnect.