皇家加勒比遊輪 (RCL) 2013 Q2 法說會逐字稿

Good morning.

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

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

Mr. Jason Liberty, you may begin.

Thank you.

Good morning.

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

Joining me here in Miami are Richard Fain, our Chairman, Chief Executive Officer, Brian Rice, our Vice Chairman, Adam Goldstein, President and CEO of Royal Caribbean International, Michael Bailey, President and CEO of Celebrity Cruises, and Ian Bailey, Vice-President of Investor Relations.

During this call we'll 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 by providing a business overview and discussing the profitability initiatives that we announced this morning.

I will follow up with a brief recap of our second quarter results, Brian will provide an update on the business environment, I will then walk you through our earnings expectations for the remainder of the year, and Adam and Michael will provide and update on their respective brands.

I will then open the call up to questions.

Richard?

Thanks, Jason.

And thanks to all of you for joining us this morning.

As always, it's a pleasure to have this opportunity to provide a bit more color on our results for the quarter and on our perspective going forward.

I also am ready to admit that it's more fun to do that today when I believe we're building positive momentum and we're setting the stage for taking our returns to the next level.

As noted in our release, the second quarter exceeded our forecast on both revenues and expenses, and the full year also looks like it will be even marginally better than our most recent guidance.

The most significant feature of our recent guidance changes actually is probably something we don't mention as a cause.

The only changes we refer to when we talk about changes in guidance are the fire, and the foreign exchange changes, but everybody knows that in the first half of 2013, the industry suffered under the unrelenting pressure of a deluge of negative publicity.

That pressure has clearly hurt our bookings, and unfortunately, to a greater extent than we originally understood.

It's also true, as many of you reported, that in recent weeks competitive pricing has gotten more intense.

Thus, the fact that we don't even list these factors as driving lower yields, means that in other respects our yields are even stronger than we originally predicted.

I believe that this shows how strong our business model is, and it suggests that current yields anomalously low.

Furthermore, as excruciating as that media coverage was and has been, we can already see indications that that factor is waning and this is most encouraging as we look forward.

I think most of you understand that the recent incidents in our industry are an aberration from an otherwise exemplary safety record over many decades.

Going forward, the industry, under the aegis of CLIA, has undertaken a significant number of additional safety- and comfort-related measures, which further reduce the risks of such events in the future.

And, we have all learned better how to deal with the press and with social media on such issues.

I think all of these factors are helping us overcome the misconceptions.

At the same time, it's very gratifying to see our cost control efforts coming to fruition.

We have previously talked about some of these initiatives and you can already see the early results in both revenues and lower-than-expected costs.

This is helping us this year, but the benefits will accelerate as we go into 2014.

Given our historical booking patterns, this is actually the time of year when the vast majority of our current year's bookings are already in-hand and we begin to focus more on the coming year.

Looking forward, it feels good to see us coming to an inflection point, both on revenue and expenses.

On the revenue side, we take comfort watching the bookings as they recover from the negative publicity earlier this year.

Bookings from both 2013 and 2014 are ahead of where we were at the same time last year, both in terms of load factor and pricing.

And this year, during the middle of our wave period, we had to contend with the CNN effect.

We're also continuing aggressively on the cost side, and we think that, like any other long-term process, the benefits will accelerate over time.

We do call out two of these initiatives in our press release.

The first is Pullmantur's new office in Latin America to position it better for that growing market.

The second item are the steps we are undertaking to reduce the cost of operating our international infrastructure.

We expect the majority of the cost initiatives to be on the overhead component rather than on the shipboard side.

At the same time, I take comfort from the fact that the initiatives we have already been working on have proven successful not only in cutting costs, but in maintaining and even improving our product delivery.

All of this is evidenced by record high satisfaction levels from our guests.

Fortunately, throughout this difficult period, the delivery of our product has remained strong and the strengths of our individual brands has remained solid.

Our objective for next year is to at least achieve flat net cruise costs including fuel, and while we don't forecast what the price of oil will do, we do work aggressively to reduce our energy consumption.

The most recent example of this is a new bubble technology that was installed on Celebrity Reflection last year.

The system generates tiny bubbles that isolate the hull from the friction of the water.

With this technology, the ship is now literally sailing on a cushion of air and we are looking forward to expanding this technology to other ships in due course.

On the fleet development side, we continue our view that lower than historical growth rates is the appropriate strategy for us.

Our current new building program keeps growth from 2012 to 2016 in the 4% range, assuming no dispositions.

Getting the balance right is important.

Lower growth helps our supply/demand dynamic, but the profitability of the new ships is simply awesome.

For example, our ships built since 2006 generate about 25% more revenue per berth than the older vessels, and those older vessels cost roughly 20% more per berth to operate.

As a result, our newer ships generate about three and a half times the cash flow of our older vessels.

Now, fuel efficiency is a big factor in this.

Our new building team and our operating technical people are obsessive about reducing our energy consumption.

Oasis and Allure of the Seas are probably the most energy efficient cruise ships in the world and their fuel consumption is roughly 25% better than the rest of our fleet.

Yet Quantum, coming out next year, is actually even better.

On a like-to-like basis, they have taken advantage of further advances in technology and by focusing on the details, they have designed what should be a new standard in energy efficiency.

At the same time, we also look for opportunities to eliminate inefficient tonnage.

Over the last few years, we have disposed of four inefficient vessels and as the market recovers, we expect opportunities will arise to do more.

So, in summary, while we're frustrated by the hurdles we've had to overcome in recent years, we feel very good about our condition as we emerge from these clouds.

We are well-positioned to take advantage of even marginally calmer waters and we think our profitability initiatives will be highly impactful in both revenues and expenses.

With that, it's a pleasure to turn this back to Jason who will give some more color on our results.

Jason?

Thank you, Richard.

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

We generated net income of $0.11 per share, which was within the guidance range we provided on our April call, despite incurring $0.12 per share in unanticipated charges from the Grandeur of the Seas fire and a correction for the liability for reward redemption related to our Affinity credit card.

I will discuss both of these items in more detail in a moment, but at a high level, better-than-expected onboard spending and the early benefits from our profitability initiative helped offset a significant portion of these unexpected charges.

EPS adjusted for these two items was $0.23 per share.

As you know, over the Memorial Day weekend, we experienced a fire in an industrial area in the Grandeur of the Seas, resulting in the cancellations of six sailings, four of which were in the second quarter.

As we previously disclosed, the impact is expected to be $0.10 per share of which $0.05 is included in the second quarter results.

We also took an unexpected charge related to the redemption rate of rewards earned on our Affinity credit card which decreased Q2 net income by $0.07 per share.

Like many organizations, we offer an Affinity credit card that allows the cardholders to earn points for every dollar spent, which can be redeemed for rewards such as bottles of wine, spa treatments, onboard credits and cruises among other items.

Until those points are redeemed, we recognize a liability based on the estimated redemption rate.

There was an error in the way we estimated the forecast redemption and this resulted in a one-time cumulative charge which reduced our quarter's view by about a percentage point.

Net revenue yields increased 2.8% on a constant currency basis for the quarter or 3.9% excluding the impact from the credit card adjustment.

Ticket revenues came in as expected, but onboard spending was much stronger.

Onboard revenues increased 8.2% per apcd in the quarter, and generated about $0.4 per share of favorability to our April expectations.

Overall, we are generally seeing better spending behaviors out of the North American guests, but we are also enjoying very favorable results from our revitalization project.

Gaming, beverage, specialty restaurants and shore excursions all held.

Net cruise costs including fuel increased 2.3% on a constant currency basis, about one-third of which were one-off costs related to the Grandeur fire.

Absent the fire, net cruise costs excluding fuel were off one and a half percentage points, which was much better than previously expected.

As Richard mentioned, we have launched a series of profitability initiatives and we were able to realize some of those cost benefits in the second quarter which improved our earnings by $0.05 per share.

These benefits are broad in scope and are not intended to compromise the guest experiences or marketing efforts.

Fuel and currency, while volatile over the quarter, were on average in line with expectations, did not have a significant influence in the quarter.

Overall it was a solid quarter from both a revenue and cost prospective.

I will now ask Brian to provide some color on what we are seeing from the demand standpoint.

Once he is done, I will update you on expectations for Q3, the remainder of the year.

Thank you, Jason.

As you saw in our press release, overall business trends are generally in line with our prior expectations.

The midpoint of our net yield guidance is down about 50 basis points for the year, but on a $7 billion revenue base, this represents about $30 million, so these changes really are on the margin.

About half of the reduction relates to the Affinity card liability adjustment that Jason spoke about.

Excluding this adjustment, we actually outperformed our forecast in the first half of the year.

In the second half of the year we have lowered our revenue forecast by just under one percentage point, due to lower expectations in China and some impact from the pricing environment in the Caribbean.

In aggregate, our booked load factors and pricing are both up slightly for the full year.

Since our last call, bookings have been slightly higher than last year after adjusting for capacity.

Europe is developing about as we anticipated, and we are expecting net yield increases in the mid single digits for the year.

Our Pullmantur brand is one exception here and as Richard noticed, the brand will be putting much more emphasis on developing its business in Latin America.

We've seen stronger year-over-year demand out of North America for European sailings and have increased our sourcing accordingly.

You may recall that we reduced our European capacity by 10% this year.

We believe this decision has served us well and enabled us to maintain pricing integrity.

The territorial island dispute between China and Japan has forced us to drop Japanese ports of calls from our itineraries and in total, we have had to modify 30 sailings.

These modifications have resulted in some churn in our book of business, as well as some volatility in the booking behaviors in the region.

It is important to keep in mind that is a relatively small part of our overall business.

China is about 3% of our deployment for the year but as I mentioned before, all of these guidance changes we're identifying really are on the margin.

The Caribbean, which represents about a quarter of our deployment in Q3 and almost half in Q4, is holding up pretty well.

We are aware there's been a lot of focus in the investment community on the overall health of the Caribbean in light of some of the competitive pressures, and we would be naive to say that this has not affected us to some degree, but at a macro level, consumers seem to be recognizing the value of our brands and our pricing in the region continues to show improvement for the year.

Asia is the only product in our portfolio that we are forecasting to have lower yields for the year, and while all of our other products look good, the largest yield improvements are coming from Europe, South America, and some of our Caribbean itineraries.

Finally, while it is very early in the booking cycle, we are encouraged with the early patterns for the first quarter of 2014.

Book load factors are up nicely with slightly higher per diems.

Jason?

Thank you, Brian.

I will now walk you through the outlook for the year, which takes into consideration business environment updates you just heard.

If you look at slide three, we have provided an EPS roll-forward from our April guidance today.

As you can see, from a business perspective, we are about in line with our expectations from April.

The Affinity card liability adjustment and reduced expectations in the Caribbean and China have been offset by stronger-than-anticipated onboard spending and cost program.

A significant driver of the change in our earnings range is clearly the strength of the US dollar, especially versus the Australian dollar and Brazilian real.

Typically changes in exchange rates and fuel prices have provided an offsetting relationship, but the recent tension near the Suez Canal has recently disrupted this relationship.

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

Net yields are expected to increase 2% to 3% on a constant currency basis, which is a 50 basis point reduction since our April guidance, and less than a percentage point lower than our previously implied guidance for the second half of the year.

As Brian mentioned, while there are puts and takes on business perspective, key drivers of the change related to the ongoing territorial dispute between China and Japan, pricing actions that have modestly weakened our Caribbean business, which I'm sure you have seen in your pricing surveys, and the impact relating to our Affinity card.

While the territorial dispute between China and Japan has impacted our performance, the China market continues to be profitable.

On a cost prospective, we expect our net cruise ex fuel to be up 1% to 2% on a constant currency basis, which is 100 basis points better than the midpoint of our previous guidance and approximately 170 basis points lower than our previously implied guidance for the second half of the year.

We have included $923 million of fuel expense for the year, a reduction of $5 million versus our April calculations.

Fuel expense is roughly in line with April as we've been able to offset the increase in at-the-pump prices by further reducing our consumption estimates by 17,000 metric tons for the year.

Our earnings per share are expected to be between $2.20 and $2.30 for the year.

As previously mentioned, we are in the early stages of a very broad profitability program aimed at improving the Company's margins and return on investment capital.

We expect that we will need to incur some one-time costs in 2013 as these programs are implemented.

These one-time costs are not known at this time, but we will provide clarity in future earnings.

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

Net yields are expected to be up 1% to 2% on a constant currency basis, driven mainly by improvement in onboard revenue.

Ticket yields are expected to be flat for the quarter, but up 1.5% if you adjusted for the affected China sailings.

Net cruise costs excluding fuel are expected to increase approximately 4% on a constant currency basis.

The main drivers of this year-over-year increase relate to the concentration of previously marketed activities and planned enhancements to the culinary experience.

For the full year, our fuel hedge position is pretty consistent with last quarter about 60% hedge for the balance of 2013, and 55% and 39%, 20% and 5% hedged for 2014, 2015, 2016, and 2017 respectively.

We have and continue to be quite active from a treasury standpoint.

In the second quarter we retired a $550 million bond, and paid down $275 million in ship debt.

We have recently launched several new financing actions and in combination with our current liquidity of $1.5 billion, and future cash will be used to manage our upcoming maturities.

Current estimates indicate that we'll reduce our year-end debt balance by about $270 million versus prior year, which in combination with improved operating cash flows will help improve credit measures as we continue to strive for investment-grade metrics.

I will now ask Adam and Michael to provide an update on the Royal Caribbean International Celebrity Cruises, respectively.

Adam?

Thank you, Jason.

As you have heard from my colleagues on balance, our corporate business outlook for the year is relatively unchanged.

It is unfortunate that the territorial dispute between China and Japan has not yet reached an amicable resolution, and as a result, we're still running modified Chinese cruises for the season that do not include port calls in Japan as intended.

While demand in the region is still reasonable and we are reaching our desired occupancy levels, we have reduced our ticket revenue expectations for the remainder of the summer season.

On the other hand, the modifications we have made to our China ship, especially those that include the retail stores, have driven strong onboard revenue performance throughout the season to-date.

Jason noted strong onboard revenue performance for the fleet in general in the second quarter across the primary onboard revenue stream.

This has been a major initiative for our brands over the last year or two, and it is gratifying to see it pay off.

Some of this improvement which Michael will elaborate on in a moment, emanates from our revitalization initiatives, including pervasive Wi-Fi and significantly increased bandwidth.

Some of it is from introducing products and services such as a wider array of beverage packages, the reintroduction of art auctions, and taking the wedding program in-house.

Finally, the onboard teams have heightened their focus on seizing opportunities to drive onboard revenue, even as we have reached multiyear highs in guest satisfaction.

Quantum of the Seas will enter the fleet just over 15 months from now.

We're very pleased with her initial bookings since we opened for sale at the end of May.

Quantum has already reached her projected load fact for her 2014-2015 winter season that we had set as a target for the end of this year, and the demand for her suites and new stateroom types such as the studios are particularly encouraging.

Grandeur of the Seas made a successful return to service on July 12 and resumed her sailings to Bermuda and the Bahamas from Baltimore.

I would like to thank our employees for their outstanding efforts in every aspect of responding to and recovering from a challenging situation.

This month marks an important milestone as Royal Caribbean International welcomes our 50 millionth guest onboard our ship.

For over 40 years, the men and women on our ships have delivered the "wow" while providing incredible cruise vacations around the world for our guests.

The wow moments found only on Royal Caribbean inspire our guests to sail with us again and again.

In fact, Royal Caribbean ranked second only to Disney in the leading customer satisfaction survey recently released.

This and other recent accolades across the globe, including awards from Travel and Leisure magazine, Travel Weekly magazine and World Travel awards among others, bears testament to the exceptional guest experiences we provide to our new and loyal guests.

The 50 million milestone kicks off a year-long celebration recognizing our guests, travel agency partners, employees and crew, giving them the opportunity to share all their wow moments with Royal Caribbean to friends and family around the world.

And with that, I'll turn it over to Michael for his thoughts on the Celebrity brand and also an update on our corporate revitalization initiative, Michael?

Thank you, Michael, and good morning, everyone.

I'm very pleased to be on the call with you today.

Next month will mark my one-year anniversary as the president and CEO of Celebrity Cruises.

The timing of this call is good because this is the time that our new strategy for improving Celebrity Cruises' profitability is beginning to shows its impact.

I've spent the first year part of my year evaluating the brand, its positioning and the opportunity for improvement.

We've developed a new profitability program plan which we have been executing for most of this year and which seems to be working.

At the core of the strategy is firming up a strong band essence around our premium modern luxury positioning, and targeting the right affluent consumer.

Through more targeted marketing and greater utilization of data, analytics and segmentation, we have focused our efforts on attracting guests that will more highly value the Celebrity Cruises proposition, thereby, meaningfully increasing our pricing.

Over the past several months, we have significantly increased our sales and marketing activity in key North American markets, with a focus on our target customer.

This has proven to be successful.

Of course, raising pricing is a key part of the equation; another fundamental we are acutely focused on is managing our costs and I feel as though we are make very good progress in this area.

Our focus is on very strong cost management along with our strategy of improving ticket yield, result in superior financial performance for the Celebrity Cruises brand.

Our ability to deliver also takes advantage of our outstanding hardware, our positioning, and the delivery of exceptional customer experience.

I'm very pleased that over the past 12 months Celebrity Cruises has been the recipient of multiple awards.

One example we're particularly proud of is our recent Travel and Leisure World's Best award which recognized Celebrity Cruises as the number-one mega-ship cruise line.

We think this demonstrates the strength of our brand.

It's been a busy year and I feel we're moving quickly, and while we're in the early stages of our strategy execution, I'm very pleased to report that the brand's financial performance is shaping up strongly.

Despite all of the challenges we have faced this year, we're on track to deliver in 2013 the best results in the brand's history.

One critical component of profitability improvement relevant to all of our brands is the revitalization of our older vessels.

We've been pretty vocal about these efforts in the past and I thought I would provide you with some more color as to just how meaningful these projects have been.

As a corporation, we launched the program in 2010 and we have now revitalized 19 ships, five at Celebrity Cruises, 12 at sister brand Royal Caribbean International, and two at Azamara Club Cruises, leaving just six vessels to be revitalized.

So far, we have added 500 staterooms, 400 balconies, over 43 additional dining options, many of which are revenue generating, we've added multiple entertainment venues and experiences throughout each of our ships, we've added retail spaces, upgraded retail spaces particularly for our Asian vessels, and new retail product lines have been added.

Spa areas have been refreshed, revenue generating pervasive Wi-Fi has been installed throughout the fleet, and we've invested in new slot machine technology and redesigned and expanded the casino footprint, specifically on the Asian products.

These efforts allows our brands to retain the freshness and innovation which has resulted in higher onboard revenues and of course higher guest satisfaction, making our brands more attractive to sell and easier to purchase.

We are very focused as a corporation on being paid more for the outstanding brands and products we are offering.

With that, I will turn the call back to Jason.

Thank you, Michael.

With that, I will ask Shira to open up the call for a question-and-answer session.

Thank you.

(Operator Instructions).

Your first question comes from Greg Badishkjanian with Citigroup.

Encouraging to see that the Caribbean and Europe seem to be pretty healthy, and my question is just as we look towards the back half of the year, maybe looking at the last few weeks as a guide here, has the level of industry discounting and promotions, has that accelerated or has that been pretty consistent?

Hi, Greg, it's Adam.

I would say it's been overall pretty consistent.

Clearly throughout recent months, there has been a lot of promotional activity.

We have discussed in the past that you can basically expect to see promotional activity throughout the revenue cycle and I would not say that anything has dramatically accelerated in the last few weeks.

Good.

And then just a follow-up question on Europe, if I could.

Pricing up mid single digit, that's pretty solid.

What's the primary driver there?

Is it the capacity reduction or are you actually seeing some increases in demand and maybe just the consumer was waiting to closer to the sailing date to book their cruise in Europe, and obviously you have the North American sourcing component as well?

Can you tell us like what's maybe the biggest driver of that?

To sort of take your questions in reverse there.

We understand the European booking behaviors and as with pretty much every area of the world, people tend to book closer to the cruise if the cruise is nearer to where they live.

So it isn't unusual this year that Europeans would be booking their Q3 cruises, for example, closer to the time than North Americans for whom that booking decision would be a very significant decision that they would take further out.

I wouldn't say that that is any kind of new driver of what's transpiring in Europe this summer.

The 10% capacity decrease that we as a company have in Europe I'm sure has had something to do with this because, for example, in the Southern European countries where the decrease in capacity was even more pronounced, we've been able to handle the challenges of the marketplace better than we probably would have otherwise been able to do if we had had our previous capacity there.

So there's definitely an inter-relationship between how we've managed our capacity down and our ability to generating positive yields this year and we look forward to in the future, hopefully, Europe will progress back towards where it was a few years back.

Greg, I would just add that the largest capacity decreases were in the Mediterranean, and that's where we're seeing the largest increases in yields, both in the West and Eastern Med, and I think given the current situation we are happy that we reduced that capacity.

Right, thank you very much.

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

Can you clarify, the $0.07 of charge here for the Affinity liability, the calculation error, can you just sort of address how many quarters prior does that cover?

I guess that's $0.07 in theory was yield overstated in previous quarters, so just trying to think about which quarters those might have been.

Then, in Richard's opening comments, he mentioned that competitive pricing has gotten more intense in the last few weeks and I assume that's primarily Caribbean.

Just thinking about whether your guidance is sort of looking at what's on your books today and you talked about that being up, versus, does it include the impact of what, if this competitive pressure that has gotten more intense in the last few weeks, if that continues, or is it just a snapshot of where you are today on the books?

Robin, it's Jason.

As it relates to the Affinity card, it's a cumulative catch-up, so it does relate to the past several years and that's how it edged up on us.

And with respect to the competitive pressures, one of the comments we've made in the past is this is a very complex business and we have swings and rounds-about in areas all over the place.

I think we have been actually remarkably accurate over time in terms of predicting what the numbers will be, but I also think that there's sometimes an overestimate of just how accurate one can be.

I did mention that we have had more competitiveness in the last few weeks, but as Adam said, there's nothing particularly unusual about that.

I think we would put that into the category of the normal swings and roundabouts.

But with respect to your specific question, as to whether forward guidance based on exactly what we're seeing now as opposed to static of what's on the books today.

Our revenue management process is a very dynamic one and we take into account every scrap of information we have from everywhere and when we make our predictions for this and it's really intense effort that a lot of people are involved in, we take into account all of the latest information that we can get from all of the sources, so that would definitely include our commentary on the recent competitive activities.

I think what you have to say is you're focusing a little bit on the negative side of what I said, and actually there are negative things taking place in some of our markets, but the interesting thing is that overall from a business point of view, we're actually seeing that this year has been and will be better than we thought in January when we announced our earnings, in April when we gave guidance, and then most recently at the end of May when we gave guidance.

So I think we're trying to take into account all of the factors when we give this guidance, not the static situation.

Just to clarify, I can appreciate how the guidance has a lot of moving parts.

So I guess I just wanted to get a sense of whether the comment about the competitive pricing getting more intense in the last few weeks, is that limited to the Caribbean?

I'll have to go back and check exactly what I said, but I think I was particularly focusing on that because we had noticed that in particular and quite frankly, we've seen a lot in a lot of your reports from calling around that you've seen some of that.

And I think what we were trying to do was put that in perspective of the total market and yes, that has been more competitive in the last few weeks and other markets have reacted differently.

And as you say, it's always a balance of some things going better and some things going worse.

We try and predict the best we can based on all of those factors.

Thank you very much.

Your next call comes from the line of Richard Carter with DeutscheBanc.

Hi, guys, a couple of questions from me.

Can I just explore with you the opportunity in Europe in terms of yield environment going forward?

Can you remind me how much are yields down since 2008 in Europe?

And then could you also tell me, in terms of the mid-single-digit increases you're seeing, how much of that is driven by onboard spend?

And then I think you made the point about obviously improving US economy has helped onboard spend in your North American business.

I want to get a flavor if you're starting to see an improvement in the European economies and could you give me some sort of gauge in terms of what you think the opportunity there is on the onboard spend outlook going forward?

And then just on the cost reductions.

We obviously, we took our costs back in Q1 on technology investment and marketing investment.

Can you just give an update in terms of where we are there and is it possible to give us some sort of guidance how much exceptional cost you'll take for this level of cost?

Richard, hi, it's Adam, I wanted to start with your question with respect to shipboard revenue.

There's nothing particularly notable going on with shipboard revenue as it relates to our European cruises.

The improvement that we've seen in ticket price improvements.

Richard, it's Brian.

The mid single digits that I alluded to was on a ticket prospective.

The commentary I did was strictly around ticket.

To answer your question about where we are in Europe versus 2008.

We're high single digits off where we were in 2008.

High single digits?

Yes.

If you saw an improving economy next year, would you expect that to be the catalyst on the onboard spend side in Europe?

Richard, other things being equal, higher ticket revenues are probably a positive for higher onboard revenues but we never know onboard revenues until the sailings happen.

We really only talk about onboard revenues looking backwards because we are not able to book them forward.

Sure.

And on the cost side?

On the cost side, Richard, this is Jason.

On these profitability initiatives, we really are on the early stage of our operating planning process.

So to come out with any specific impacts as it relates to those costs would really premature.

Has there been any change in terms of the guidance you talked about a couple of quarters ago in terms of the marketing and the technology?

Is that going to be lower than what you were thinking about then?

No.

On the marketing and technology side, I think our guidance there is still very consistent.

I think where the cost aims are coming from are broad based, but like I said in my earlier discussion that it's really meant not to touch marketing efforts, technology, or the guest experience in terms of where the call statements are coming for the year.

It's more addressing the overall global footprint.

Okay, thank you.

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

Good morning, guys.

Richard, with your 2014 early outlook for loads and pricing, that all sounds pretty positive.

Can you maybe just break down in terms of what you're seeing across markets?

Is that pretty much across the board, and I understand Europe, your visibility there is probably pretty low at this point.

But any color there would be helpful.

Steve, it's Brian.

As you said, it's extremely early in the process.

I will tell you we're feeling pretty good about the first quarter.

We have very strong load factors.

Our pricing is up slightly.

As we look beyond Q2, the numbers are really too small to extrapolate.

I will say that in all our quarters in 2014, our load factors and APDs are running ahead of where they were a year ago, but again, it's way too early to extrapolate from that, particularly Europe.

Okay, thanks.

I guess for Adam, I know you've spent the past day or two up on Capitol Hill.

Can you give your high level thoughts in terms of walking away from those hearings?

I know the concern out there again is that the government could potentially go after you guys from a tax prospective and maybe just some thoughts around that as well would be helpful.

Thanks.

Hi, Steve.

I meant to say before that if by any chance I address any of you as Senator, I apologize for that.

Clearly, we had a very interesting dialogue yesterday.

The overwhelming majority of that dialogue was around consumer protection, the decision of the major cruise lines to begin voluntarily reporting of all allegations of crime wherever they may occur over the world on our ships beginning August 1, and actually, that's what all of the questions were about that were asked of us.

I think your note comes from the fact that at the very end, in fact, in Senator Rockefeller's closing remarks, he mentioned that he would be producing or proposing a piece of legislation that would address what he termed something like the closing of a tax loophole that our industry enjoys.

Obviously, we will take any proposed legislation that he comes forward with very seriously.

We've been very, very transparent for many years about our tax postures at least since we went public over 20 years ago.

What Senator Rockefeller is apparently referring to as a loophole is something that has been fairly entrenched in US tax law going back many decades, has been carefully reviewed by Congress with very small changes made as recently as 2003.

The US is already anomalous in taxing and shipping income more heavily than virtually any other developed country of the world.

Our ships spend less than 10% of their time in US waters and the political environment makes any legislation difficult to achieve as we can all see every single day.

So we'll take it very seriously, but I would say it's extraordinary preliminary at this point to even understand what he has in mind, so we'll see.

Great, thanks for the color.

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

Good morning, guys.

I have one question, maybe, Richard, you can help address this first.

You mentioned in your comments to Robin Farley that the fiscal 2013 outlook is better now than you anticipated in January or in April, but we do have China coming down and it seems that in addition to the Caribbean discounting, which was quite significant over the past 12 weeks, we're see something some pretty important price declines in Alaska.

Is that reference then more to pricing in Europe?

Is that how we should interpret that?

Assia, it is a complex mosaic of markets that we operate in and you're right, the China situation is impactful to us.

It hurts not to be able to operate the way we had hoped to, but even with that knockdown I have to point out, that it's one of our highest per diem markets.

But in terms in how it's changed our expectations, we've seen positives and negatives, and I'm not sure I would say -- didn't expect that much from Europe and it's performed reasonably well.

South America is performing well.

So I'm not sure it's any one thing.

The total hasn't changed that much.

And while China was a big hit it's still a relatively small part of our total, so balancing all of those all together, I'm not sure I would identify one thing as dramatically out of line versus the...

what was the other?

Brian, you want to give some color on that?

Sure.

Assia, we try to be very transparent in our commentary.

I said less than one percentage point in the back half of the year.

We actually lowered our ticket revenue by 90 basis points in the second half of the year, and that's a combination predominantly of China and a little bit of softness in the Caribbean.

Again, I just want to emphasize, we're talking about 90 basis points and Robin asked a question about how we do the forecast and Richard talked about a lot of the discussions and the analysis that goes into this.

In some cases where we have a better feel for a market, we will lean on more current pricing and we'll also look at the trend analysis and frankly, I think we anticipated that Alaska had a terrific beginning of the year and it was unlikely to continue at that trajectory, so we projected out a little bit and handicapped that a little bit more when we give gave you our April guidance.

So there's a lot of work that goes into it.

I want to emphasize we're talking about rounding errors in terms of the sort of change that we made.

And I think the important thing is while we took the second half revenues down 90 basis points, we've been able to more than offset that with cost savings.

I do think maybe we shouldn't do this so much, but we try and point out areas where we think we've been quite a bit off and as you pointed out, Assia, in China, that was a single big hit, but we've also got a lot of successes in other areas so that the net result of all of that is that the markets have, in total, been stronger than our guidance.

I think the other thing that's probably reflected in our thought process is while we're ending up slightly better than we thought, we really hoped to do a lot better than we thought and so from that prospective, we here are still disappointed in the outcome, even if it's marginally better than the guidance because we really felt that this was the year in which we had more upside potential than downside.

Thank you, this was great color.

My second question refers to the onboard forecast which seems to be driving the Q3 yield guidances.

Brian, you gave me a great segue into this.

So Including China, you expect flat ticket and 1% to 2% yield to come from onboard, but as we know and as Adam just pointed out, we never know what onboard will do until the cruise is over.

Is there more risk to the 1% to 2% yield guidance for Q3 than you've previously had in your guidance?

Assia, this is Jason.

I think the guidance that we gave on Q3 does reflect our feelings around risks, whether it's on ticket or onboard.

I think the programs that we've implemented on the onboard prospective are not, you know, aspirational.

A lot of it is structural in nature, whether it's new venues we've added on to the vessels or a new contract we might have with concessionaires and packages we're offering, so it's not something that's aspirational in nature, but there's a pretty strong foundation for the improvement.

Your confidence level is similar to what it has been in the past?

Yes.

Okay.

Jason, can I ask you one technicality?

In the reconciliation table between April guidance and today's guidance, there's a line item that's called net savings.

Is that cost savings in the back half of the year less the yield reduction?

Should I interpret that, that way?

That's right.

It's basically all cost savings efforts that we've put forward versus the revenue decline.

Okay, great.

So it's a net figure, great.

Thank you so much for all of the color.

I appreciate it.

My pleasure.

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

Good morning, thanks for taking my call.

I know you guys talked a little bit about what you thought debt levels, how much they would come down at the end of the year, but you have a fair amount of debt coming due over the next two following years.

Can you talk about how you're thinking about either refinancing or paying down some portion of that to kind of expedite getting back to that investment grade rating?

Sure, hi, it's Jason again here.

We are very active in multiple refinancing activities to address our upcoming maturities.

Yesterday we launched two facilities in the bank market, and there will most likely be some additional activity there.

We're quite comfortable that in the short term we will basically be resolving our upcoming maturities.

Clearly, as we go through the forward-looking period, taking free cash flow to pay down debt will certainly be one of the alternatives that we evaluate.

Okay.

So you will partially refinance part of it and partially pay down part of it, it sounds like?

Exactly right.

Okay.

Then I know you guys have talked a lot about China and Japan, and I think out of a lot of other companies we've been hearing about some weakness in Australia.

I know it's a pretty small market for you, but can you talk about anything that you've seen there, maybe if you're seeing some weakness in pricing there?

Hi, Jaime, it's Adam.

I don't think it's so much we're seeing weakness.

I believe we've mentioned in previous quarters that as Australia has grown in its importance in the industry, there's been fairly substantial industry-wide capacity increases there.

We have put more ships there and naturally that has had some downward pressure on yields, but I would say the market this year has developed roughly in accordance with our expectations for how it would go.

Australia is a very attractive Southern summer market for us.

We have a strong presence there with both Royal Caribbean and Celebrity.

We did expect pressure on yields this year from the capacity increases and we're looking forward to the playing a prominent road in that market going forward in the future.

Thank you.

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

Thank you, just a couple here.

A little more color on the Caribbean.

Can you say is that more tilted, the weakness that you see in the increased competitive pressure of late; is that more on the close-end booking or are we looking out over the curve, number one?

And then in relation to that, how is your current booking curve on a company-wide global basis?

Then secondly, regarding the capacity growth, looking more importantly to 2015 and 2016, yourselves and others in the industry have talked about keeping that at 3%-5%, you mentioned in your press release and you've mentioned before that 12 to 16 at 4% on average, but obviously 2015 and 2016 it's around 7%.

Should we anticipate that either we'll see some sales of ships and bring that net number down, or that, again, you haven't announced anything, but beyond 2016 it will come back down to bring that more in that trend line of the 3% to 5%?

Tim, I'll take the first part of the question.

Our booking window has been expanding I think pretty universally.

I would like to preface, I do think too much gets read into the booking window, but it is moving in a positive direction by most people's perceptions, and again, that's pretty much across the board.

I think the Caribbean pricing pressures, I want to emphasize I think way too much is being read into the fact that we've called out the Caribbean.

We know that there's been a lot of discussion about this.

Ian's been getting a lot of calls about what are we seeing the Caribbean, so we wanted to specifically address it.

We are seeing changes on the margin, and I think we will continue as Adam alluded to, this is just part of the booking cycle.

There are ups and downs and puts and takes that constantly occur.

I don't think, when we called this out, I don't think we're talking about anything structural in the Caribbean.

Brian, is it more skewed close in or a little bit further out?

With that topping off close in or looking out?

Frankly, I think it's probably more centered around the fall, which is something we would normally see this time of year, the fourth quarter is traditionally the harder period to try to fill inventory because the kids are going back to school, but it's something you expect every year.

Okay.

It's a dynamic that occurs -- we are not -- we constantly monitor this and we see new promotions every day but again it is nothing out of the ordinary and it is nothing structural.

Great.

And I will ask Adam or Richard to take the second part.

Yeah, with respect to the second part of your question, I think it is an interesting dynamic in our business that when you do take delivery of a new ship it is not -- it is all at once.

Many industries when you have growth it is a thousand little pieces and in our case it is a very binary type of move.

So I think that does make the individual years look different.

Our view is we should look at this over a period of time on a strategic basis and our objective was to have more moderated growth going forward and while frankly it would be nice to be able to have each year the exact same number that just isn't the way, A, opportunities come up and it isn't the way it happens with big chunks of new ships coming.

With respect to older capacity and potential dispositions, it is somewhat the same thing.

There it is even more opportunistic.

I think it's the direction we are going in, and you have seen we have been successful.

Even in a very difficult market.

This has been an extraordinarily difficult market in the secondhand market and yet we have had some success there and I think again that would be because that market tends to be opportunistic that will also be more binary and a little less predictable as to when the things happen so we tend to look at these things strategically over a number of years and I think that is the way we will continue to look at it.

Okay.

Richard, so, given the lumpiness of how the deliveries happen then, it is still the broad intent is what you are saying, it's still the broad intent of the company after you get past that that things would average out in that 3% to 5% long-term goal?

We haven't -- what we said is low to mid single digits and we -- yes, I think lumpiness is a good way to put it, that will tend to happen in our business.

Also we are conscious of the fact that there is a big difference from a marketing point of view of whether you get a ship frankly in time to enjoy the spring and summer seasonal markets or whether you get it later in the year without that benefit.

But, yeah, I think over time we want a more moderate growth and that probably means that this thing -- sorry, low to mid single digit.

Okay.

Thank you.

We have time for one more question.

And your final question comes from the line of Felicia Hendrix with Barclays.

I want to take a stab at a question from a different angle.

When you discuss net yield next year, I know it is early but you did put it out there in the release when you mentioned that your objective is to generate net yield improvement, just wondering as you contemplated that comment are you thinking about or are you assuming that the discounting we are seeing in the Caribbean could continue and the China/Japan conflict could continue?

Felicia, we are basing that -- well, first, I do want to point out in my commentary I did say despite the current pressures in the Caribbean we are seeing year-over-year pricing improvement, and I think it is important to recognize that.

In talking about 2014, again, I want to emphasize it is still extremely early in the process but based on the current order book that we are seeing in all quarters and the current booking trends that we are taking in for 2014 business and as I think Richard alluded to right now we are taking a lion's share of our business coming in is for 2014, we are feeling good about making a statement and putting it out there that it should be year-over-year improvement but we have thought gotten any more specific than that.

Okay.

Felicia, I will just address at least from a personal point of view one of the items that you mentioned which is the China/Japan situation and that is unpredictable of course, and we have no greater insight than anybody else.

But if you look what is happening regionally in the area I don't think one would read into that a lot of reason for thinking that that is going to is suddenly resolve itself between now and then.

So I think we are trying to be quite realistic about that and I frankly think that is something we will have to deal with for awhile and at least in my own thinking that is behind it and yet overall when we are looking forward we are feeling awfully good about the year.

That makes sense, and then, Richard, while we have you, can you just clarify when you said that the year is better than you thought, I'm just a little confused because your yield guidance has essentially gone down, the high end has gone down and I know it's rounding, but it has come down.

So that seems to me that at the beginning of the year you thought you would be more towards the low end of your guidance range, is that what you are trying to say?

No, I guess what I was simply pointing out, if you look at where we said we would be for the year, the only change that we are sort of highlighting is the foreign exchange and the Grandeur and if you then say we started the year not expecting the negative kind of publicity that we all as an industry received, in any other environment you would look at that and say oh, well, it has been a bad year from a publicity point of view, that clearly has been driving yields down and in fact it has had a more negative impact on our sales than we originally expected it would.

And so since we are ending the year from a business point of view essentially on balance than where we originally said, that implies that other things in the market have actually performed better and so that is what I was referring to.

It's not the totality but we effectively got to the same position in terms of profitability from the business despite an unexpected hit from that source.

Okay, you were focused on profitability and I was thinking about yields, that is the difference.

Yes.

And then, Adam, just final question, I was just wondering, you started booking the Quantum and it has been booking for a while, right now just wondering, not looking for specific numbers but maybe directionally what kind of premiums you're seeing there and has there been any impact on the Oasis and the Allure?

There hasn't been any effect on Oasis or Allure nor would we expect any with Quantum operating out of a New York base.

We are really looking to improve our presence in the northeast catchment market, not that there is anything wrong with the Explorer of the Seas but we are incredibly excited about what Quantum of the Seas will bring to cruising in that area and to our brand.

It's too early to comment anything about Quantum yield.

From a sheer booking standpoint the initial reaction to her adjusted for capacity was even more exciting than the initial reaction to Oasis.

That might have been at the time we released Oasis the market couldn't quite comprehend what it was all about and because of the fantastic success of the Oasis-class ships, it's built up people's enthusiasm for what we might do next to even higher levels and I think when we revealed the features of the Quantum of the Seas in April, the market felt that its expectations of us were more than justified and they can't wait to be onboard.

I can really only comment on the early booking numbers right now.

Very promising, and with three of these wonderful ships coming to us over the next few years we expect them to be a very powerful element of our fleet.

Great.

Helpful.

Thanks.

Thank you for your assistance today, Shira, and we thank all of you for your participation and interest in the country.

Ian will be available for any follow-ups you might have and with that I wish you all a great day.

Thank you for your time and participation in today's conference call.

You may disconnect at this time.