皇家加勒比遊輪 (RCL) 2014 Q1 法說會逐字稿

Good morning.

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

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

2014 first quarter earnings conference call.

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

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

(Operator Instructions).

Thank you.

I would now like to turn the call over to your host, Jason Liberty.

Please go ahead.

Thank you, April.

Good morning.

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, our President and Chief Operating Officer; Michael Bayley, President and CEO of Celebrity Cruises; and Laura Hodges, our Vice President of Investor Relations.

During this call we will be referring to a few slides, which have been 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.

Also we will be discussing certain non-GAAP financial measure, which are adjusted as defined.

Also a reconciliation of these items can be found on our website.

Richard will begin by providing a strategic overview of the business; then I will follow up with recap of our first quarter results, will provide an update on our business environment; then Adam will provide an update on Quantum of the Seas, China and the Caribbean; Michael will provide and update on Europe, Alaska and onboard; and then I will walk you through our outlook for the second quarter and the full year.

We will then open the call up for your questions.

Richard?

Thanks, Jason, andgood morning, everybody.

It's a pleasure to provide some commentary on what's happening in 2014.

And certainly we have a lot to comment on.

Most importantly, it's a real pleasure to be talking today about how we're beginning to realize the potential of our business model rather than having to point out how resilient we are.

Of course, we have a long way to go, but the fact that we're able to present such a very positive picture demonstrates the excellent trajectory that we're on.

Now, as you know, the first quarter ended up near the low end of our previous guidance, but that's accounted for by several small incidents during the quarter.

Any business expects some anomalous events impacting individual quarters, butour plan is to make sure that we compensate for that in the course of the year.

I'm particularly proud of the cost disciplines our team has exercised and what that means for our ongoing results.

They've accomplished this while maintaining focus on the things that make us money.

For example, they continue to focus on a product quality that astounds our guests, and they remain focused on communicating this amazing product every more effectively.

The biggest improvement in our returns will come from getting paid better for the tremendous vacations we offer.

Getting that message out there is one of our biggest opportunities, and the results show that our teams are working hard to maintain that balance.

We've also had some big announcements during the quarter.

First of all, Adam's promotion to President and Chief Operating Officer of the group is exciting for him and for all of us.

After 12 years of ably running the Royal Caribbean International brand, and of course 26 years with the Company, we think this move will allow us to do an even better job of exploiting best practices across all of our shared services areas.

Next, we announced that we completed the sale of Pullmantur's non-core businesses.

This is an important ship in shifting Pullmantur from one of our biggest challenges to one of our biggest opportunities.

Then our joint venture German cruise line TUI Cruises takes delivery of our new ship, Mein Schiff 3, in almost precisely one month from today.

Actually, as we speak the vessel is out on sea trials, and she is spectacular.

We do talk a lot about new ships in our market over here, but Mein Schiff 3 is a dramatic addition to the German scene, and I don't think that we put enough emphasis on that on this side of the ocean.

One interesting feature of this ship is that she will be the first cruise ship ever constructed with the new advanced emission purification system already installed.

This system, this AEP system, also known as scrubbers, purifies the exhaust and removes the sulfur down to less than 0.1%.

We've had one of the first successful prototype AEP systems in the industry on Liberty of the Seas.

We've had that for some time.

But this ship, Mein Schiff 3, will be the first new building to incorporate this technology as a new ship.

We're also -- we earlier announced a major strategic move with Quantum of the Seas, dedicated to the China market.

We consider this a very important market for our future, and we intend to maintain a preeminent position, and obviously Quantum will do that for us -- help do that for us up.

Lastly I would like to talk about something that may sound technical but strategically is really very important.

That announcement was an increase in Internet bandwidth.

I would refer you to the slide here that shows a progression of our Internet bandwidth on Oasis of the Seas.

Over a year -- so we originally had what is shown on the slide as legacy systems, which gave us four megabytes per second download capability.

And over a year ago we changed out these old legacy satellite systems to a much better system provided by Harris CapRock.

The new Harris CapRock system has substantially improved our Internet capabilities, and they today give Oasis of the Seas one of the fastest Internet services at sea, some five -- more than five times as fast as what had been there.

But now we're in the process of installing a new satellite system on Oasis, which offers not just a substantial improvement, but a truly transformational one.

The new system is provided by very innovated company called O3b, andtheir mission is to bring Internet to the parts of the world that don't yet have good connectivity.

Until now you could include cruise ships in that category.

Now, that new system, which is providing some 500 megabytes per second of download capability, is already functioning on a test basis on Oasis, and we expect it to be completely rolled out by early this summer.

Interestingly, this system by itself will give Oasis of the Seas more Internet bandwidth than every other cruise ship of every other cruise line in the world combined.

Now this is not only an important feature for so many of our guests, we believe it will be a particular help in attracting millennials to us.

We're starting out with this on Oasis and Quantum-class ships, but if it's as successful as we expect we will consider rolling it out to more ships, as well.

By the way I would also mention that not only is it more bandwidth, but the latency -- the time it takes for the signal to go back and forth -- goes down on from a norm of 750 microseconds to 140.

So it's -- it will be very fast and very helpful to us.

As you can see, our Company and our people are on a roll.

So with that I get to turn it back to Jason.

Thank you, Richard.

Now I would like to talk to you about our results for the first quarter.

Now, unless I say differently, all metrics will be on a constant currency basis.

We have summarized our first quarter results on slide three.

For the quarter we generated adjusted net income of $0.21 per share, which was at a lower end of the $0.20 to $0.30 range that we had provided in January.

So unfortunately we had to shorten or cancel six voyages in the first quarter, which cost us $0.05.

Some examples of these disruptions included the oil slip by a cargo ship collision with a barge in the Gulf of Galveston, which caused the port to close and affected a sailing.

To give you another example, a steel fishing net that was floating beneath the surface in the Tokyo shipping channel damaged a propeller, which affect two of our sailings.

If it were not for these unplanned events, our earnings would have been slightly above the mid-point of our previous guidance.

Net revenue yields were down 30 basis points for the quarter.

[If you exclude] these voyage disruptions, yields were slightly better than flat and in line with our previous guidance.

It is worth noting that in the first quarter we were up against a very high comparable.

The first quarter of last year was one of the highest yielding first quarters ever.

Ticket revenue yields declined as a result of all these disruptions and the expected lower pricing in the Caribbean.

Now as a reminder we have our greatest exposure to the Caribbean in the first quarter, where the Caribbean represents approximately two-thirds of our capacity.

While not enough to offset lower Caribbean yields, we continue to see strong yield growth on sailings in Asia, even with the significant capacity increase in the region.

Onboard revenue yields continue to advance.

In the first quarter onboard yields increased 3.4%, as we continued to see the benefits of our fleet upgrades and onboard revenue management initiatives.

Net cruise costs, excluding fuel, were up 1.3% for the quarter, which was better than our previous guidance of 2% to 3%.

The favorability was driven mainly by timing.

We ended the quarter with over $900 million in liquidity.

Now, during the quarter we utilized our liquidity to settle the maturity of approximately $1 billion [year] bond.

Last year we took a series of actions as part of our profitability improvement program, which included a global restructuring and sale of Pullmantur's non-cruise business.

As we discussed at that time, the accounting rules dictate that some of these charges for these decisions are spread out over a period of time in 2014.

In 2014 we will recognize $23 million in expenses associated with the restructuring, as well as losses of $11 million associated with the sold business, which closed at the end of the first quarter.

$19.6 million of this is included in our first quarter results, and the rest will be recognized later this year.

Note that these items are excluded from our key statistics and adjusted earnings.

More detail as well as a reconciliation of these non-GAAP measures can be found in the press release.

Now I would like to update you on what we are seeing in the booking environment.

Since our last call, booking volumes have been accelerating.

The past eight weeks have been much stronger, with bookings up more than 20% year-over-year.

While the strong demand trends have been partially driven by promotions available for Caribbean sailings, we are also seeing elevated levels of quality demand for itineraries not being discounted.

So as a result, our book load factors and APDs for the year are higher than same time last year.

So while revenue expectation at the itinerary level have shifted on slightly, revenue guidance for the full year remains unchanged, as we have been able to offset the voyage disruptions experienced in Q1.

Looking forward, we are even more bullish than we were at the beginning of the year for China and European sailings, and have incorporated a more conservative outlook for the Caribbean.

While we were seeing strong bookings for the Caribbean, with recent booking volumes trending well above last year's levels, the environment remains very promotional.

The pressure on pricing has almost -- has mostly been limited to seven night and shorter Caribbean itineraries, as we are seeing continued yield growth along Caribbean sailings.

Although pricing is down overall, we are still generating historical premiums for newer hardware and expect to see higher Caribbean load factors than last year during the summer.

So as Caribbean capacity for the industry is up more in Q2 that than in all quarters, it is subsequently where we expect our largest yield [decline] for the Caribbean.

European sailings have exceeded expectations and are booked at significantly higher load factors and prices than same time last year.

Demand in pricing have been broadly strong for these itineraries, with all key source markets trending ahead.

Trends have been particularly strong for North America, and we are finally starting to see a recovery in pricing from Southern Europe.

We are expecting European itineraries, which account for 22% of our capacity this year, to generate double digit improvements versus 2013, and higher yields in 2008.

Our Asia Pacific sailings, which account for 12% of our capacity, continue to exceed both pricing and volume expectations.

China sailings, which represent about a third of this capacity, those are expected to generate double digit yield improvements.

This is in spite of a 30% year-over-year capacity increase in the market.

As Richard discussed, we are very proud of the cost discipline ingrained throughout our culture.

Last year as part of our profitability improvement program we took several steps to significantly reduce our costs in 2013 and expect to be flat to slightly down in 2014 despite inflationary pressures, rising insurance premiums, as well as nominal capacity growth.

To achieve this we focused on reducing our global acquisition costs by also improving service levels, which included outsourcing our call centers and further centralizing back office functions.

We also went through an extensive benchmarking process that brought our running costs closer to best in class while not affecting the guest experience or crew welfare.

Another major initiative was recapturing scale in back office areas that had grown excessively.

While we are very proud of these achievements to date, we continue to identify further opportunities through benchmarking as well as synergy opportunities amongst our brands that help maintain our cost discipline while allowing for further investments in our products and business expansion.

I would now like to ask Adam to give you an update to the Caribbean as well as Quantum of the Seas and our much anticipated arrival in the Chinese market, and Michael to provide an update on Europe, Alaska an onboard.

Adam?

Thank you, Jason.

There is a lot going on in our business at the moment.

Our main focus is to continue to drive strong revenue in the Caribbean, given the competitive trading conditions that exist in this important market.

As you have heard, the Caribbean sector continues to experience significant promotional activity.

Fortunately, the additional flexibility to craft attractive promotions that we recently instituted in our system has enabled us to compete more effectively in a tactical environment than we would have been able to do in past years.

As a result our bookings in March and April relative to the same time last year have improved double digits, thus improving our occupancy position overall.

Directionally, short and seven night Caribbean sailings are the most impacted by the promotional environment.

As a result, we still expect Caribbean itineraries to be down slightly year over year.

While we are now entering the summer Caribbean season with the annual reduction in capacity, we expect and our forecast expects continuation of our promotionally oriented Caribbean market environment for the remainder of 2014.

Before leaving this topic I will add that while no Caribbean products are immune from the prevailing tactical environment, we are fortunate that our Oasis-class ships continue to command the highest premiums in the Caribbean market, not withstanding the newer ships that have entered the market since 2010 when Allure of the Seas entered into service.

They clearly set the standard for family cruising in today's industry.

Moving to Quantum of the Seas, we are now six months from her delivery, and we are increasingly excited about Quantum on several fronts.

In addition to the fact that she is currently in a very encouraging booked position in terms of both load factor and pricing, we recently unveiled her culinary approach under the name Dynamic Dining.

Departing from our traditional main dining room concept, Quantum will offer five distinctly themed complimentary restaurants, one of which is reserved for the use of suite guest.

In total she will offer 18 culinary venues, including the new Wonderland specialty restaurant concept as well as restaurants featuring our relationships with Jamie Oliver, Michael Schwartz, and Devin Alexander.

Dynamic Dining was exceptionally well received by the media, travel agents and our loyal guests.

Last week we were in the news for the announcement that Quantum will move to Shanghai, China, at the conclusion of her inaugural winter season out of Bayonne, New Jersey.

This is obviously a significant strategic move that will clearly establish Royal Caribbean International as the leader in the rapidly emerging Asian Pacific cruise market, with a particular focus on China.

We continue to be very pleased with the performance of Mariner and Voyager of the Seas in Shanghai and Tianjin respectively.

Our 2014 summer China season is booked far ahead of the same time last year at higher rates.

The travel agents and tour operators are increasingly comfortable resuming itineraries which include Japanese ports.

We believe our already strong onboard revenue on China based cruises will improve even further based on our greater experience and the world-class retail brands which we continue to bring onboard with each passing year.

As you have heard we are expecting a double-digit yield increase in 2014.

At the same time we announced Quantum's move to China we also announced that we will relocate Liberty of the Seas to Bayonne, New Jersey, for the summer 2015 season.

Liberty will become our first Freedom-class ship to serve the Bermuda market.

With the winter 2015-2016 season Quantum's sister ship, and Anthem of the Seas, will take over the Bayonne, New Jersey, program, offering cruises to the Bahamas and the Caribbean.

We are pleased to be able to strengthen our presence in the New York area even as we are pursuing our interest on the other side of the world.

With a third Quantum-class and a third Oasis-class ship arriving in 2016, we will enjoy additional flexibility with which to accomplish our strategic market objective.

Finally, as it relates to my assuming a new management position at RCL, the parent company, I'm very enthusiastic to participate more broadly across the Company's brand and functional areas.

We are fortunate to have a very strong shared services capability.

However, there is always room for improvement and for wider dissemination of best practices.

That will be a focus for me, along with the further development of our global footprint.

In closing, I would like to thank the outstanding management team at Royal Caribbean International for their support and their excellent over the last 12 years, and especially the men and women onboard the ships who have relentlessly delivered the wow.

It has been a great honor to lead such a brand.

Michael?

Thank you, Adam, and good morning, everyone.

European deployment remains a key driver of our profitability, with extremely strong demand driving premium yield.

Capacity adjusted bookings have been outpacing last year by more than 25% for the past three months, and as a result both APD and load factor are significantly higher than same time last year, with load factor at its highest since 2007.

We are seeing strength across global source markets for our European itineraries, and as Jason noted, demand for North America has been particularly strong at increasing prices, and we already have more than 80% of our forecasted United States and Canadian revenue on the books.

This is considerably more than same time last year.

Our brands are leveraging our relaunched ChoiceAir program to offer North American guests simple, convenient and easy to purchase European cruise vacations.

ChoiceAir provides a lowest airfare guarantee, assured arrival, your choice of flights and 24/7 support.

The percentage of guests booked on European sailings who have purchased their air through us has doubled year-over-year.

An added benefit of our ChoiceAir program is that it increases the retention of the bookings.

Both our Mediterranean and North European products are at a higher book position than prior year and driving elevated per diems, with Mediterranean sailings doing particularly well.

The new Celebrity Cruises collection of seven night round trip and open door Mediterranean itineraries, which are combinable into 14, 21 and 28 day sailings, continue to surpass our expectation.

In addition, the mini-European season for Oasis of the Seas in 2014 is also performing very well.

We are expecting a second year of significant yield growth for the Europe product, with yields to be up double digits versus 2013.

Alaska is a key product for us during highly profitable summer months, where it accounts for around 10% of our revenue.

The product continues to be a solid performer, and we anticipate it to be one of our highest yielding products for Q2 and Q3.

We expect Alaska yields to increase in the low to middle single digit range and to be similar to yields in our record 2011 season.

It is encouraging to see that both Europe and Alaska are shaping up very well for the all important summer season.

Shipboard revenues yields increased in the first quarter by 3.4% on a constant currency basis, marking nine consecutive quarters of year over year onboard revenue yield growth.

We continue to optimize each of our onboard revenue channels, driving margin improvements and focus on the areas of most opportunity.

Our Celebrity Cruises brand has formed a partnership with Canyon Ranch, one of the world's leading spa and wellness brands, and today onboard ten Celebrity Cruise ships guests can now enjoy the Canyon Ranch SpaClub at Sea experience.

We are differentiating our short excursion program, offering a range of branded tours.

For example, Azamara Club Cruises has added their Insider Access and Nights in Cool Places program, and Celebrity Cruises has launched Celebrity Exclusive and Celebrity Family [challenge].

In February 2014, we completed the first full revitalization of our Voyager-class ship for the Royal Caribbean international brand with Navigator of the Sea.

Two more Voyager, Voyager of the Seas and Explorer of the Seas, will be completing -- completed in the upcoming 12 months.

A key feature of the Voyager-class revitalizations is adding additional capacity, which will drive improvements in both ticket and shipboard revenue.

Additional revenue generating features, which include pervasive Wi-Fi, multiple new dining venue, upgrades to the casino, retail, and photography areas.

Jason, back to you.

Thank you, Michael.

Taking into account all we just told you, I would like to summarize our guidance for the full year and second quarter.

If you turn to slide four, you will see our updated guidance for the full year 2014.

Net revenue yields and net cruise costs excluding fuel are expected to be consistent with our previous guidance.

Net yields are expected to increase between 2% to 3% for the full year, and net cruise excluding fuel for 2014 are expected to be flat to slight lit down.

Strength in pricing for European and Asian sailings, combined with stronger onboard revenue expectations, is offsetting the competitive pressures in the Caribbean.

Our cost guidance is unchanged.

We intend to invest more in sails and marketing efforts in China.

Our fuel costs for the year have increased to $957 million, driven mainly by rates, and we are 55% hedged at that price of $616 per metric ton.

In the first quarter we continued to leverage our improving credit profile and a healthy banking market to further reduce our interest expense for the balance of the year.

These savings combined with a weaker dollar and further operating improvements in two week cruises are expected to improve our bottom line by approximately $0.05 in 2014.

Based on current fuel prices, interest rates and currency exchange rates, we are raising our adjusted earning per share guidance to be between $3.25 and $3.45 for the year.

Now I would like to walk you through the second quarter guidance.

On slide five we have provided guidance for the second quarter.

Net revenue yields are expected to increase between 1.5% and 2.5%.

Strong pricing for European and Asian itineraries is offsetting the promotional Caribbean environment.

Net cruise costs excluding fuel are expected to be down 2% to 3%, and we have included $245 million of fuel expense for the quarter.

We expect adjusted earnings per share to be in the range of $0.45 to $0.55 for the quarter.

With that, I will ask our operator April to open up the call for questions and answer session.

April.

Thank you.

(Operator Instructions).

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

Hi.

Good morning.

A couple questions.

You mentioned that European bookings are improving.

What are the expectations for the European consumer?

Is it just your offering different and maybe more innovative product?

Or is it just broader European consumer trends?

And then, Jason, maybe you could just give us a little bit more discussion on the six unplanned voyage disruptions?

You gave two examples.

I frankly don't remember seeing these in the press, and I don't remember an EPS estimate change during the quarter on them.

So I'm wondering how you think about these disruptions and when in the future would you give us an update on any impact to EPS ?

Hi, Steven, it's Michael.

I'll take the first question on Europe and the European consumer.

It's difficult to pinpoint one particular item.

I think it's a variety of benefits that we believe our brands have in the European market as it relates to the European source markets.

We're obviously -- we've done a lot of work in making our products easier to sell.

We have what we believe are phenomenal products, very innovative itineraries and significantly superior hardware.

When you combine all of those things together [with a] -- I think that the fact that we are leveraging the European source market infrastructure that we've set up over the past several years, we're beginning to really see the benefit from that investment over time.

And we continue to do that.

So for example, in the UK and Irish market, over the past 12 months we've invested more and we created single branded sales and marketing teams in that market, and we're seeing positive results from that investment.

So I think it's really a combination of factors.

And I think the underlying probably factor is the fact that the European market seems to be fairly strong.

And we're seeing bounce back from the Southern European market, as well.

Hi, Steve.

How you doing?

On the incident side, all of these individually were small in nature, and that's why there wasn't any specific disclosure about them.

Some of them were in the press was on Explorer with the [noral] virus, as an example, but this is really a unique amount of affected sailings within the quarter.

But we will consider, as we always do as these come up, on whether or not they're disclosable events.

Okay.

Thank you.

Your next question comes from the line of Felicia Hendrix, Barclays.

Hi, thank you.

Everyone, your comments on the current state of the industry was encouraging.

I just wanted to talk about the Caribbean in more detail for a minute.

I was wondering if you seen a change since the end of March in terms of bookings or pricing?

We just heard that call volume slowed a bit, soI wanted to have you touch on that.

And then also in terms of the competitive pricing environment that you're seeing, is there any change there, again since the end of March, relative to your pricing programs and your ability to price your product?

Hi Felicia, it's Adam.

Hi.

So as you get further away from the [Waves], the bookings start normally trending somewhat down.

So other things being equal, you would always expect to see April somewhat slower than March.

So even at an equivalent level of promotional intensity, that would be an expectation.

The point that we tried to make in general looking across the two months is that they have had more volume than we would have expected for a normal March and April.

And so we have been able to eliminate a good portion of the Caribbean load factor deficit that we had prior.

So -- and I think I mentioned in my commentary if you compare March and April of this year to March and April of last year, we were up double-digit booking volume.

So the combination of the two show that there is a market reaction to promotional intensity, and we're pleased about that.

But April is normally slower than March.

Okay.

The slowdown that you're seeing this year isn't any different than what you've been seeing in the past?

I don't know the percentage point.

I just know that we would expect that to be the case, and that has been the case.

I think -- Felicia, I think the point, as Adam said and as we mentioned in the release, we really have been a little bit surprised that the post-Wave period has been as strong as it's been.

The volumes have just been unprecedented.

The Wave that we described earlier as typical, and that is what the Wave ended up being, and I think that generated a little bit of concern on our part if that continued.

And then slightly to our surprise the volumes really picked up in the post-Wave period, which isn't the normal pattern.

But as Adam said, we drove a lot of that by the promotional pricing that we did.

And actually, both the Royal Caribbean International brand and Celebrity had some very good and innovative ways of packaging.

So the one, two, three, go; and the pick your perk; and the kids sail free were ways of doing promotional pricing by adding on as opposed to by simply discounting the price.

So giving the consumer more for the same price, rather than giving them the same amount for a lesser price.

And that actually turned out to be surprisingly effective.

That's very helpful color.

Thank you.

Jason, just quickly, I appreciate the color on what was driving the $0.05 increase to full-year guidance, but you also are making up the $0.05 that you lost in the first quarter from the lost voyages.

So I was just wondering what was driving that, since your yields are essentially changed for the full year?

Yes, I mean, it's really driven around the commentary around the strength in Asia, Europe, as well as onboard.

The collection of that is really making up that $0.05.

Okay.

Great.

Thank you.

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

Yes, good morning, guys.

So I don't know who wants to take this, if Adam wants to he that it.

But if you look at the Caribbean -- your view on the Caribbean now versus where it was about six months ago, can you comment on how you see that market today versus, again a couple months?

Is it the same?

Is it getting a little bit better?

Is it getting worse?

Maybe some commentary around that would be helpful.

We understood and I know we talked about in the last couple quarters that fact that we saw the Caribbean as having a promotional outlook to it, and that has continued to be the case.

What we have also now seen, which would be new since the previous call, which Richard was just commenting on, is that we have been able to cause a pretty strong reaction, strong positive reaction in terms of generating volume in the Caribbean, with effective promotions.

So we're clearly in a promotional environment.

Our forecasting takes that into account and does not expect that to change substantially for the rest of the year.

And we've made our guidance on that basis, so it incorporates our expectations of the Caribbean.

So we would have loved to have been able to say we're on to a different and less promotional chapter, but at the moment we expect that to continue.

Okay --

And, Steven, it's Richard again, as well.

Can I -- just add a little more color, because I think we have tried to be clear that directionally the Caribbean is actually weaker today in terms of total yield than it was at the end of January when we gave the last guidance.

As Adam says, it's really been a much more promotional, so we've generated the volume.

And so when we talk glowingly about how the other markets are doing, we also -- that -- the implication, the converse is the Caribbean is probably -- is in our view weaker than we thought it was going to be.

Okay.

And second question, Adam, you have a lot of color on Quantum and the decision to move that over to China, but I guess bottom line is that a decision -- a longer term call on the quality of the Chinese market?

Or is it a call that overtime you think the Caribbean will be a very tough market over the next couple years?

Definitely the former of those two.

We have step-by-step going back to at least 2008 been ramping up our presence in China.

And we had -- we started with one of our smallest ships.

I think we pointed out at the time that from a research and development standpoint that was an immaterial amount of our capacity to devote to an interesting opportunity.

We are now up to the point where last summer and also this summer we have Voyager of the Seas and Mariners of the Seas there, two Voyager-class ships, clearly doing very well.

And our sense was that the brand's capability and the attributes of Quantum of the Seas made sense for us to take a bold next step for 2015.

So it's not a commentary on any other market, it's a commentary on what we believe is an important future opportunity for the Company that's actually delivering results right now.

Great.

Thanks, guys.

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

Hi, good morning.

Thanks for taking my call.

So obviously a lot hand-wringing about the growth in Caribbean capacity this year.

You guys are moving an enormous ship out of the Caribbean into China for next year.

I think Norwegian announced that they're selling one of their Caribbean sailings to Europe.

I know all the itineraries are aren't set in stone, but given all this reallocation of capacity, how should we think about the growth overall on a net basis that we're going to see in the Caribbean in 2015?

How do you guys think about that?

A Caribbean perspective, I think for next year with Quantum moving into China I would expect Caribbean capacity to be very slightly up for next year.

Obviously not knowing what is going to happen with other players in the industry, but for us that's what our expectations [are] at this point.

Okay.

And then on Quantum, when they make the move from the Caribbean to China, should we expect pricing to be generally the same across those two regions, or little bit up, a little bit down?

How should we think about that?

I just want to be clear that are you contrasting the China region with the Caribbean region?

Are those the two that you're talking about?

Yes, but with specific focus on the move of the Quantum.

Will it benefit from pricing as it makes that move on those Chinese itineraries, or is it going to be a net neutral?

Okay.

Thank you.

So Quantum, as I remarked upon earlier, is in a very favorable position for her inaugural winter season serving Bahamas and the Caribbean out of New Jersey.

So she is doing very well.

And we also expect her to do very well in China, both from a ticket and an onboard perspective.

So it's too early to say the exact comparison, but there is -- we're very confident that she will maintain a high level of performance in both sectors.

James, if I could just also ask -- add one other thing.

You asked about the revenue, but I think we also should maybe round it out by saying, as we've said before, it is more expensive to operate in China.

You do have to go after the market.

You do have to build a strategic foothold there, et cetera.

So there are costs.

I think, as Adam says, we would expect the net of that to be positive.

But you asked about one side, and I just wanted to make sure we're also answering the other part.

That's very helpful.

And then just last quick housekeeping question here.

It looks like your guidance today versus where it was three months ago, it seems like you're getting a little bit of benefit from currency, but it looks like your -- it looks like that benefit yields -- hasn't changed costs.

Is that how I should think about that, or is that just a rounding thing?

Yes, it's definitely more of a rounding thing.

On the cost side some of the currencies that have helped or affected us -- or some positions were long and some were short, but for the most part it's rounding that's causing that differential.

Great.

Thanks, guys.

Your next question comes from the line of Andrea Ferraz with Morgan Stanley.

Hi, good morning.

Just one question for me.

You've mentioned that you're expecting Caribbean capacity to be very slightly up next year.

Given that this has been the weakest market and the increasing promotional activity, is this just because you didn't have enough time perhaps to change the capacity, or is it just too challenging to put ships in other regions over Q1 and more the winter months?

Thanks.

Hi, Andrea.

It's Adam.

It's actually mostly a mathematical function of the fact that our long disclosed Caribbean deployment through the first quarter of the coming year has a first quarter increase that's still relatively higher.

If you look -- according to our as-disclosed deployments for the last three quarters of next year [from] Jason's commentary, it's basically flat.

And -- but the year after that would you be considering perhaps moving some capacity out?

And also specifically on the Anthem, for example, it's going to be based in South Hampton for the summer and then moving on to New York.

Is that coming back to South Hampton or is that going to stay there?

Thanks.

So we have not disclosed any particular deployment decisions far into 2016.

Obviously one of the great advantages of our business model is the ability to move ships around, particularly among it the three regions of the world that are now very important to us; North America, Europe and Asia Pacific.

So we continue to evaluate what our choices are from second quarter 2016 forward, and we will make those announcements as they -- as we get to the point where we need to in the regular deployment cycle.

But we do understand and we evaluate all the market performance very carefully and what we believe -- where we believe the ships can perform best.

Okay, thanks.

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

Good morning.

One question for you, Adam.

And first of all congratulations on your new position.

Could you let us know whether China is profitable at this point?

Thank you, Assia.

Yes, China is profitable for us at this point.

Even understanding to Richard's earlier commentary that we have a lot of work to do in building consumer awareness, creating travel agent familiarity with all -- with the concept of a cruise, not to mention our own products and services.

There is more effort to be put in there in the near-term.

But the revenue performance of the market is very strong, and we are in a profitable position today.

That's great.

And going back to another market that seemed very promising and fast growing, South America, one of your competitors' brands (inaudible -- audio skip) to scale back because of the high cost of operation, and you don't seem to be talking about South America so much.

Could you let us know whether that has taken a back seat to expansion in China?

Well, China is clearly very, very significant to what we're doing, and has merited the conversation we're having about it on this call, particularly with the news about Quantum moving to Asia.

We still see opportunity in Latin America, but it is true, and we have been vocal and the whole industry has been vocal that there are costs pressures in Brazil that we would really love for the Brazilians to address, because there is market opportunity down there if the country would s a more favorable regime for cruising.

So that's an opportunity hopefully for the longer term for us.

But we don't mean by the fact that we haven't been talking about it that it isn't interesting to us or we haven't been building up our capability there.

We have the Pullmantur brand, which sees opportunity in becoming a brand known for its appeal to Latin America cruisers.

But I think from an overall strategic standpoint, particularly with respect to news for today, China is in the leadership position.

I see.

Thank you, Adam.

And one question for Michael --

And I'll say --

Yes, Richard.

Thank you.

I think just to comment more on Pullmantur, because we are making a thrust there.

And talking about South America is a little bit like talking about Europe.

Although we talk about it as a place, it's really a series of quite individual countries.

And while I think all of us have experienced the challenges that Adam referred to in Brazil, it's quite a few opportunities there, and our Pullmantur brand will be focusing on that, andwe think that is an opportunity for the brand.

Thank you, Richard.

I appreciate that color.

And one last question for Michael.

With Canyon Ranch onboard Celebrity, I would imagine the transition like that can be somewhat disruptive, especially when the ships are not in dry dock and you're doing it , as you have, ongoing voyages, can you describe to us in a little bit of financial terms I guess how Canyon Ranch has performed relative to your prior operator?

Yes.

We actually literally last week finished the entire transition of Canyon Ranch on to the Celebrity fleet.

We accomplished that in pretty much less than four weeks, and obviously during that transitionary period there was inevitably disruption.

We managed to isolate, we think, the disruption quite well, so literally the last day of the cruise and the turn around day and the first day of the next cruise were disrupted, but I think we [got] ourselves through that pretty well.

As it relates to revenue performance of Canyon Ranch versus the other operator, it's way too early to make a comment on that.

We're literally one week post the transition of ten spas.

So I think we would probably be able to give you more color on that during the next call.

But we -- we're very optimistic.

We're extremely pleased with the relationship.

We believe we've got the perfect partner for our target market, and we certainly believe that we're on the right track with this relationship.

And part of the 3.4% onboard increase, was that driven by spa or other items?

No.

It was -- we saw a lot of strength with the gaming and beverage in the first quarter, so spa was not a key driver of the incremental revenue in Q1.

Okay.

And last quick question, are you protected on the downside in terms of minimum guarantees, et cetera, in case Canyon Ranch is not able to scale, having taken on so many new ships?

Yes, we are.

Okay.

Great.

Thank you so much, Michael.

Thank you.

You're welcome.

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

Thank you.

Given that Europe had -- you commented here for now two quarters in a row that it has been booking well, can you give us any color what you seen specifically out of the European source passengers as you're in the Wave season?

I mean, you gave us a little bit already, but just some additional color that their Wave season has begun here in April?

And then as it relates to the Med in particular your comments that was getting better, what's driving that in particular for what you're seeing in the Med?

Mediterranean, I think, again, it's still difficult to pinpoint one factor.

I think it's a combination of factors, part of it is probably capacity related.

There's less capacity in the Mediterranean this year versus last year.

I can't recall the exact percentage change, but there is less capacity.

We're seeing a little bit more strength coming out of the European markets, particularly out of Southern Europe.

And of course we feel very good about our brands and the products that we got on offer in those markets, so -- and we've worked hard at making these brands and products easier to sell for our distribution channels.

Plus over the years, as I pointed out earlier, we've really invested and built what we think is a good European infrastructure as it relates to sales and marketing and revenue management capability in Europe, and we're beginning to leverage and see the results of that.

So I think that's -- again, it's just a whole series of different factors.

As it relates to I think the question on European bookings or Wave period, we're seeing -- usually around this time we see kind of a transition between US bookings and European bookings, theEuropean product.

And we're beginning to see the bookings from the European markets pick up quite nicely.

So we feel quite good about what we're seeing out of the European markets, and it's really across all markets.

One of the markets that we have been particularly pleased with is the Spanish market.

That seems to have picked up quite nicely for us.

And we're seeing strength out of the UK and Irish market as it relates to pricing.

Okay.

And then back to the Caribbean, correct me if I'm wrong here, it seems that your tone on the promotions -- and again you said that overall since the beginning of the year your outlook for the Caribbean has weakened a little bit while other areas of the globe strengthened.

But between the three to five day market versus the seven day market in particular, it seems like maybe the seven day as a whole, your comment there has become a little bit more promotional, and -- or has that -- is the promotional activity really intensified even more so in the three to five?

We really haven't been that sharp in our distinctions.

What we've set a seven night and shorter cruises is where the most of the promotional intensity has been, and to the extent that the Caribbean area is somewhat weaker than we were expecting it to be three months ago, I think you could characterize that weakness as pertaining to three through seven nights,not going into microscopic detail as between them.

So it's just generally shorter cruises have felt the impact more than long Caribbean type cruises.

Okay.

Great.

Thanks, Adam.

Your next question comes from Robin Farley of UBS.

Great.

Thanks.

I wanted to clarify.

On the tour business that you're selling you have it held for sale, and if I'm reading it right it looks like that added $0.05 to your reported earnings by taking the $0.05 loss and putting it in kind of unusual items now, or one-times items.

So I guess I just wanted to clarify then on a full year basis does selling that add to earnings just from basically having the loss out of your recurring earnings?

So I just wanted to get a feel for that number.

And then also in your expense per day being flat to slightly down, is that excluding the tour business from both years, or is that -- is some of that improvement helped by having the tour business out?

Robin, I'll take the first of those.

The tour business has been plus or minus zero for a while now.

And it's had a couple of years where it's been marginally positive, couple years where it has been marginally negative.

When we gave our guidance, we assumed it would be sold and we left it out.

We weren't sure exactly the closing date.

So the exact amount of the loss, obviously January is the worst month of the year.

So if we had finished something before that, we would have had less of a loss.

And actually it ended up closing at the end of January.

So we had to absorb that month of loss.

But none of that was in our projections, none of that was in our guidance, so the guidance remains like for like comparable.

And I'll let Jason answer the second one, but basically that we kept the guidance so that the tour, when we talk about costs, is not a factor.

So it's -- we are comparing like for like without the tour, without the tour.

So we're talking about costs being flat to slightly down, if we had included the tour it would be actually down quite a bit, because the tour was a big expense.

But we took it out of both the before and the after.

Okay.

That's helpful clarification.

Thank you.

And is there anyway to quantify what the decline if tour -- with tour in last year and not in this year, just to get a sense of the decline?

We can certainly offline, Robin.

I'll just walk you through, because those numbers are physically out there for us to show you.

Okay.

Great.

And the other question was just the onboard was up nicely, and you mentioned some new programs, [beverage] programs and things that you've [got] onboard.

And I'm just wondering if there's a point where that anniversaries, because when I look last couple quarters you had really nice onboards, so there doesn't seem to be like -- it's not like there's -- I mean, you had two very strong quarters at the end of last year, but generally you've had onboard ups.

I'm just trying to get a sense of is there a point when programs start that it would anniversary and we would expect maybe the increases to be more in line with ticket price increases?

A lot of that are -- is initiatives, but the initiatives we keep working on.

I don't know that it's a point in time that one thing suddenly happened and we did it, but it's a series of things we have been working on.

For example, the -- one of the big drivers has been revitalizations.

Those have been very successful for us.

And they have been coming on and more will come on.

I think last year we had a 7.5%improvement in onboard revenue, which was exceptional.

But we keep working on improving it, but I think obviously we don't expect to continue to be generating 7.5% annual increases.

Okay.

Great.

Thank you very much.

April we have time for one more question.

Yes, sir.

And your final question comes from the line of Harry Curtis, Nomura Securities.

Hey, it's [Brian Dobson] in for Harry Curtis.

Just a quick question on China.

Can you maybe elaborate a little bit on the breadth and depth of your sourcing operation over there and where you plan to source your passengers for the new ship?

Okay.

So we have three areas which are developing nicely, with the main area of those three being the provinces in and around Shanghai.

So with Quantum of the Seas herself going to Shanghai, that will be the most fertile source market area for her.

We have also been working very hard over -- since again going back to 2008, in the Tianjin, Beijing northern area, where we have a Voyager-class ship on a regular basis there.

The newest of the three areas that we are interested in the near-term would be the [Pearl] River delta in the south of China plus Hong Kong, and all of those communities are obviously near to the coast.

That's where most of the income and wealth generation is taking place in the country.

And over the longer term we believe we will have opportunities in the inland cities and provinces, but for the near-term and to support Quantum it will continue to be mainly the coastal communities featuring Shanghai area.

Okay.

Great.

Thanks.

Thank you for your assistance, April, withthe call today.

And we thank you all for your participation and interest in the Company.

Laura will be available for any follow ups you might have, and I wish you all a great day.

Thank you.

And, ladies and gentlemen, that does conclude today's conference call.

You may now disconnect.