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Royal Caribbean Cruises Limited (NYSE:RCL)

Q4 2008 Earnings Call Transcript

January 29, 2009 10:00 am ET

Executives

Brian Rice – EVP and CFO

Richard Fain – Chairman and CEO

Adam Goldstein – President and CEO of Royal Caribbean International

Dan Hanrahan – President and CEO of Celebrity and Azamara Cruises

Analysts

Robin Farley – UBS

Steven Wieczynski – Stifel Nicolaus

Scott Barry – Credit Suisse

Felicia Hendrix – Barclays Capital

Assia Georgieva – Infinity Research

Steven Kent – Goldman Sachs

Robert Robinson [ph] – Shankman Capital

John Parker – Jaffray [ph]

Operator

Good morning, my name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruise's Limited company call. All lines have been placed on mute to prevent any background noise. After the speaker's remark's, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Brian Rice, you may begin the conference.

Brian Rice

Thank you, Jessica, and good morning, everyone. I would like to thank you for joining us this morning for our fourth quarter earnings call. With me here today are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and CEO of Royal Caribbean International; Dan Hanrahan, President and CEO of Celebrity and Azamara Cruises; and, Ian Bailey our Vice President of Investor Relations.

As we have done in the past, we have posted slides on our Investor Web site www.rclinvestor.com, which we will be referring to during this call. Before we get into our results and talk about our current operating environment, I would like to remind you of our notice about forward-looking statements, which you will see on the first slide. During this call, we will be making comments, which are forward-looking statements. Forward-looking statements do not guarantee future performance and involves risks and uncertainties. Examples are described in our SEC filing and other disclosures. Additionally, we will be discussing certain financial measures, which are non-GAAP as defined by Regulation G. And the reconciliation of these items can be found on our Web site.

Richard will begin the call with a strategic overview of our business. I will follow with a brief recap of the fourth quarter, update our guidance, and provide some insight into the recent demand environment. Adam and Dan will then talk more about their brand, how we are managing business in the current environment. And then we will open the call to your questions. Richard?

Richard Fain

Thank you, Brian, and good morning, everyone. It may surprise you to know that I have actually been looking forward to this investor conference call. Obviously, I hate having to report weaker earnings and a weaker outlook for 2009. In this disastrous economic environment, I’m sure many companies wish that they could just skip 2009 altogether. Nevertheless, there is a great deal that our management team is doing in response to this situation, and I have been looking forward to the opportunity to talk with you all more about what they have been doing.

As you have seen from our press release, these responses include gratifyingly successful cost cutting effort, excellent operating performance by our brands in their respective market segments, very constructive collaboration with our travel agent partners, and strong diversification in the international markets.

First, I’d like to comment on what has to be the major focus of everyone's attention, and that is the economic crisis and its impact on our business. Of course, we’re as confused as anyone as to exactly where the economy is going and how it will ultimately affect us. We already know it’s bad, but we don’t know how bad or how long. Nevertheless, we are finally beginning to get a better handle on its likely implications for our industry and for our company.

Starting with the fourth quarter, we are deeply disappointed to report essentially a breakeven profit for the quarter and that we ended the year with only $2.68 in EPS. Until a few months ago, we were doing substantially better. Nevertheless, we are pleased that our management team responded early to the approaching storm. That response is reflected in our cost containment efforts, both last year and to even a greater extent in 2009. As a result of these efforts, we now expect our net cruise cost will fall by 5% to 7% per berth next year after what was a pretty good performance in 2008, I think this demonstrates how seriously we are taking the current environment.

Now with respect to our booking outlook, forecasting demand is as tough as it has ever been in my 20 plus years with Royal Caribbean. On the one hand, we are terribly disappointed at the kind of pricing levels that we have to offer in this market, especially given the value of the product that we are offering. We have to suffer likely double digit declines and yield. It’s terribly, terribly frustrating. At the same time, we have fears coming into this year that the way period will be even worse, and we are actually encouraged by the pace of our early bookings.

Pricing is still way lower than we would like. But the reason we are encouraged is that it seems that those prices are beginning to reach an equilibrium level. This gives us the opportunity to utilize our yield management tools on a mortal productive basis, and it gives us some feeling of comfort that there is a level of price elasticity, around which we can manage. At the same time, we are also finding that going to extreme pricing discounts in order to fill the very last cabin may not be as productive as has historically been the case. As a result, our yield projections include an assumption that we will accept slightly lower occupancy levels in order to keep pricing up and to maximize yields.

Before turning it over to Brian, I would like to comment on a couple of specific elements, the first is volatility. The current economic environment has led to truly dramatic levels of volatility in areas that historically we’ve had much greater stability. For example, fuel and foreign exchange have always been variables. Historically, however, they only vary within narrow ranges and they only change slowly over time. As a result, variations in fuel prices or foreign exchange rates have little near term impact on our results. All that has changed. Fuel has become such a volatile commodity that we started reporting it separately and we started giving separate calculations on its impact. Even that has recently proven difficult as daily or even hourly fluctuations mean that the cost levels don’t necessarily follow the pattern one expects when looking at macro trend analysis.

The same is increasingly becoming true of foreign exchange. The volatility of foreign exchange rates has recently become so high that we’ve added it to the list of factors we discuss separately the way we do for fuel. Another reason foreign exchange has become a more important variable for us is the growth of our international business. We have enjoyed solid improvement in the proportion of our business coming from overseas. And this inevitably means that foreign exchange will play an increasingly important role in our finances. Therefore, both the volatility of exchange rates and the increasing diversification of our sourcing markets have led us to talk more about currency impact.

Lastly, I’d like to make some comments on our fundamental business model. The cruise industry in general, and Royal Caribbean in particular, have proven remarkably able to withstand even truly dramatic shocks to our system. At the same time, I have to admit that I am getting tired of proving that over and over again. But I am pleased to say that we are still demonstrating that type of resiliency even today.

The most important element, of course, is the attitude of our guests. The current economic crisis weighs heavily on them, and it clearly results in a significant and a lasting cultural change in consumer attitudes and their purchasing behavior. On the other hand, the evidence today reaffirms our belief that consumers still consider their vacations important. And cruising continues to offer the best vacation around.

Another reason for our resilience is our relations with the trade. In difficult times, they get the word out about what a great value cruising offers in a way that the cruise lines simply can't do on our own. This is a tough time for the travel agents too. And we continue to work hard to help them and to keep justifying their trust in us. One recent example is our ASAP program, and it's a good example of what we are doing, and is part of the reason we have the strongest relationship with our travel partners than anyone.

One additional factor that is buttressing our business is the success of our new ships. As Gene Sloan of USA Today recently said, "No doubt about it.” And I’m quoting here, “No doubt about it, Royal Caribbean is building the most innovative, stylish, and downright beautiful ships in the business these days.” I should add that these ships are also some of the most cost effective ships around. Their economy of scale is terrific, and they are producing dramatically higher revenues and lower costs. The result is that even in these crazy times, they are substantial cash flow generators and will produce good rates of return. But there are other long term implications that grow out of the current environment.

First of all, as we noted above, we have responded with an aggressive cost cutting program. That program has proven remarkably effective at cutting costs without undermining our product delivery. More importantly, we are implementing this program in a manner designed to benefit our long term operating strategy. In addition, the current economic environment will have a lot of implications for our supply and demand scenarios. As we go forward with less capacity growth in the long term, this will enable us to shift our focus from purely capacity growth or earnings improvement from capacity growth.

Another factor that I’d like to just touch on is international growth. Regional economic conditions and foreign currency changes are increasingly relevant to every company, but especially to one growing internationally. While cutting costs throughout the organization we have not cut back our strategy and substantially growing our non-US sourcing. In fact, we continue to increase our investment in international growth despite our cost cutting program. This may lead to some short term earnings penalty. But in the long term, it diversifies our sources and increasing our – and increases our opportunities. The cost figures that I mentioned above therefore include increased international expenditures, and I think that only re-emphasizes how significant the other cost cutting measures are.

Lastly, for any business, but specially a capital intensive business like ours, cash is king. Our company like so many others is increasing the focus we place on cash flow as opposed solely to earnings. CapEx is being curtailed, rates of return scrutinized, and priority given to cash generation over immediate earnings opportunities.

These are difficult times, what has happened to our revenues and our immediate prospects is painful to each and everyone here. Our management team, our sales leaders, our revenue managers, our onboard staff, in fact every single employee of Royal Caribbean is impacted by what is happening in the economic environment in which we live today. We all feel it deeply, but we are all convinced that what will separate us from so many others is the underlying strength of our business and the total commitment to do what is required to respond to these challenges in a manner that is calculated, comprehensive, and ultimately and most importantly, successful.

With that I express my thanks and my appreciation to all of our 45,000 employees. And with that, I will turn it back to Brian to go through the results and the projections in a little more detail, Brian?

Brian Rice

Thank you, Richard. We’d like to briefly go through the fourth quarter results. As we said in the press release, our earnings per share were pending to the fourth quarter is $2.68 per share for the year. On slide two, you can see revenue yields for this quarter were nearly 5.9%, which was slightly lower than our previous guidance of down 4% to 5%. (inaudible) came in about as expected during the quarter, although we were hurt somewhat by the stronger dollar. And unlike the first three quarters of the year we began to see pressure on onboard revenue, especially in gaming.

On the cost side net cruise cost, excluding fuel per APCD came in 1.7% below last year, slightly better than our previous guidance. Included in our costs was an unexpected supplemental P&I insurance club call, related to group claims from 2006 to 2008. The call amounted to $13.3 million. Had it not been for this call, our net cruise costs excluding fuel for APCD would have been down 3.6%. Our fuel expense came in at $182 million for the quarter, which was $36 million higher than anticipated at the time of our last call.

Although WTI prices fell throughout the quarter, our fuel cost actually increased due to several factors. Operationally, several of our lowest priced ports were unavailable for bunkering because of weather interruptions and we experienced some temporary disruptions for several of our newly installed diesel engines on our gas turbine vessels. We believe these are isolated events, and overall, we are very pleased with their performance. Our at the pump prices significantly lagged the following WTI prices, and since our costs are based on the FIFO accounting methodology and not spot pricing, this compounded the gap between our actual cost and what we have been seeing with WTI prices.

Additionally, this was the most volatile pricing environment we had seen. And the timing of our purchases resulted in higher fuel costs than we modeled. We have made some adjustments to our methodology should improve our calculations going forward.

Other income improved by approximately $10 million in the quarter. The largest change here was caused by revaluation of customer deposits and foreign currency. As we have said in the past this is a natural offset to foreign currency impact from revenue. So while we had some ins and outs for the quarter, in summary, if we had not had the unexpected supplemental P&I insurance call, our earnings per share would have come in right at the midpoint of our guidance.

Going to skip over the full year results, which are available in our press release. However, I would like to point out that for the year our yield did increase 0.05%, which is very gratifying given the condition of the economy.

Now I would like to provide you with an update on the booking environment. On slide three we have provided a graph that shows the trends for our booking volumes and pricing levels 2009 sailing and carried to the same period last year for 2008 sailing.

The red line shows the year-over-year changes volume of new guest booking. The blue line illustrates how our pricing in new booking compares to the pricing we were getting in the same time last year. As you may recall, we previously commented on the deterioration of booking volume during September and the steeper fall offs we experienced during October. As a consequence, we began discounting 2009 sailings rather aggressively throughout the month of October. During November and December, we saw a gradual increase in new booking volumes. And since the beginning of the wave period, we have seen booking levels consistent with last year.

Pricing remains well below last year’s level, but has begun to stabilize. Now that our booking volume is more at equilibrium, pricing has begun to level off. We can begin to get a better understanding of consumer behavior and elasticity. I would like to give you a little insight at a high level into how our revenue management team uses this information to manage our business. In our press release, we mentioned that our booking window has shown significant compression recently. The simple way to demonstrate this is to compare how far in advance the vacation the average customer is booking their cruise.

On slide four, you can see that until last fall, on average, our customers have traditionally booked their cruise approximately five months prior to sail date. Since the economic environment began deteriorating in September, we have seen a steady contraction in the booking window. And today our average customer is booking a departure only about four months away.

As a consequence, on slide five, you can see that our booked load factors for 2009 sailings are well behind where they were at the same point in time during the 2005 through 2008 period. We are booked about the same as we were in 2004, but well ahead of where we were during the two years after September 11th. Understanding when the customers prepare to buy is a very important input into our revenue management. Traditionally, we put quite a bit of weight on how various products and markets are behaving due to recent experience. However, given the dramatic shift in customer behaviors, we have modified our modeling, consider inputs from the past when the booking patterns more closely resemble what we are seeing today.

On slide six, we have graphed the same booking and pricing trend lines we showed you a minute ago for the full year for just first quarter sailing. Here you can see that as we move closer to sailing date, the period when consumers are ready to buy, we can achieve significant improvement in booking volumes without further price deterioration.

Now, I would like to provide you with our forward-looking guidance for 2009. I would like to first remind you that the contracted booking window limits our visibility and necessitates a wider range of guidance we have provided in the past.

On slide seven, we will see our yield projections for the year anticipates the decline of between 9% and 13%. We have assumed that the challenging pricing environment we are experiencing today continues for the rest of the year. We have also assumed that onboard spending pressures will remain and are consistent with the last couple of months’ performance.

As we said previously, so far we are seeing the traditional increase in booking that occurs during the wave period and our customers are buying cruises. Nonetheless, given the economic climate, we expect consumers to remain very price focused as these pressures continue.

On the cost side, we remain vigilant about lowering our expenses without compromising the guest experience, or the support we provide to our travel agent partners. In 2009, we are forecasting our net cruise cost, excluding fuel, to decline between 5% and 7% for APCD. The figure includes the impact of our $125 million savings initiative we announced back in July as well as continued efforts on the part of our management team, the levered synergies across the organization, and take advantage of new deflationary opportunities. Our management and key vendors have really stepped up, found very creative ways lowering our expenses without affecting our product. In addition, we are benefiting from the strengths of the dollar and SG&A in some of our running expenses.

As you know, Pullmantur is our only brand that does not have the US dollar as its functional currency. If we use a constant dollar basis for Pullmantur, our revenue yields will improve by just over 1% point and our net cruise cost for APCD would increase by just under 1% point. On our last call, we gave a preliminary number for 2009 fuel expense of $635 million. And as mentioned, we were 39% hedged. Today, we are 47% hedged for 2009, and based on today’s at the pump prices, we would now project fuel expense for 2009 to be approximately $580 million. At this level, our fuel cost for APCD will be about 25% lower than in 2008.

Our earnings per share guidance is rather broad at this point, given the contracted booking window. However, the midpoint of our earnings per share forecast is approximately $1.40. We are projecting yield declines in all four quarters, with the most significant coming in the first three quarters of the year, mainly due to prior year comparable. For the first quarter, we are projecting yields to be down between 14% and 16%. This projection is net of the $30 million were funded in fuels supplements for the quarter, which caused us about 2.5% points in yield.

Net cruise costs for the first quarter are projected to be down between 4% and 6%. And in today’s prices, we would expect fuel expense to be about $165 million and we are 58% hedged. Earnings per share for the quarter are expected to be a loss of between $0.30 and $0.35.

Now I’d like to briefly update you on our liquidity. As of December 31st, we had approximately $1 billion in liquidity, including $400 million in cash, cash equivalent, and $625 million in our unsecured revolving credit facility. And as Richard mentioned, we have placed a high degree of emphasis on cash. As you know, our Solstice class new builds have solid financing commitments. And with the support of Finnvera, the export credit agency of Finland, we’re confident that we will be able to secure the necessary financing for the two Oasis class vessels.

Despite a very difficult revenue environment, we are confident we will end 2009 with a strong liquidity position. Nonetheless, we continue to explore opportunities to improve our positions, including, possibly expending some maturity, and monetizing derivatives that is the result of the economy are significantly in the money. I want to emphasize that we are confident in our position. A belief it is prudent to continue to improve our financial strength, to weather the tough economic condition.

I would like to now turn the call over to Adam for his comments about the Royal Caribbean International brand. Adam?

Adam Goldstein

Thank you, Brian. Good morning, everyone. Market conditions were difficult for the fourth quarter and we were not able to maintain the momentum, which we have been enjoying earlier in 2008. And we’re determined to generate as much demand for Royal Caribbean International as possible in the current challenging environment.

It is too early to judge the success of the new marketing campaign we launched during the quarter. We are confident that campaigns emphasis on our brand’s spirit of innovation and delivery of wow moments will resonate with both repeat and prospective guests going forward as well as with travel agents whose continuing support we very much appreciate.

As mentioned last quarter, our revenue weakness we are facing stretches across our product portfolio. To the extent, there is relative strength that’s in the Caribbean seven night cruise market and in Mexico. To the extent, there is relative weakness – it is in our newer, more internationally oriented products in the Alaska market and in short cruises. Given the significant increase in European capacity, we are naturally concerned about the upcoming season. We have been generating the volume we were required to fill our ships in Europe. For the question to be answered is rate development for the next few months.

While we remain optimistic about our global growth opportunities, a slowdown on bookings and a number of our priority international markets was even more pronounced during the fourth quarter than the slowdown in North American bookings. For example, as recently as October, we were on trend to enjoy a successful Brazilian summer season. Then the global economic crisis and the sharp currency devaluation significantly affected our Brazilian bookings. In January, we have seen a market increase in volume. But this improvement is coming too late for us to meet our revenue objectives for Brazil. Other markets that have been especially challenging includes Singapore, and Spanish-speaking Latin America. On the other hand, the UK and German markets are enjoying a positive wave season to date, and Australia is showing promise.

Onboard revenue typically does not fluctuate as widely as ticket revenue. This remains true in the current environment where onboard revenue is meaningfully down, but not to the same degree that ticket deals are down. Gaming is contributing about half of the decline. The rest is spread across various area and also reflects the effects of lower occupancy on some of our developmental products.

Shore excursions and sail telephony are areas of relative onboard revenue strength. Obviously in this environment, we are sharply focused on cost control. Our fourth quarter results reflect that we have identified numerous opportunities to minimize expense while maintaining the quality of our award-winning products. We will continue to find more such opportunities during 2009. At the same time, guest satisfaction levels are consistent with those of recent years. And our guests from the internationally first products are more satisfied than they were on those products a year ago.

Finally, I am pleased to note that the construction of Oasis of the Seas is progressing well, and the sense of anticipation within our team for having this remarkable ship within our fleet continues to grow. The ship successfully floated out last November and we recently announced 11 extra revenue nights for the ships this coming December. Although the overall revenue environment is difficult, as we have been discussing, the booking outlook for Oasis of the Seas remains positive through the early wave season. Dan?

Dan Hanrahan

Thank you, Adam, and good morning, everyone. Results for the fourth quarter for Celebrity are similar to what you heard Brian and Adam described. Business conditions in the quarter were challenging and the flow of the momentum we had enjoyed through the first three quarters of the year. We found late season year to be particularly challenging. We have seen a positive shift recently in demand patterns that’ll be at the expense of reduced rates.

Our sales and marketing programs are tactical efforts to finish fill in the winter Caribbean season and generate the necessary demand for Europe and Alaska beginning in the second quarter. These efforts have been focused equally on the consumer and the trade. We announced our ASAP program, that is our Agents Support Assistance Program, to support the travel trade, which included temporary increase commissions and co-op supports aimed at helping the distribution systems through these challenging times.

We believe that travel trade distribution system is very important to our success, and the ASAP program will play an important role in our booking this wave season. Early indications are the ASAP program has been helpful to the trade and to our booking. We definitely have been the beneficiary of the trade attention, and they are reporting an increase of their efforts to sell our brand. We believe a healthy distribution system is important to our success today and in the future. Onboard revenue was a mixed bag in the fourth quarter. Beverage, shore excursions, spa and communication services held up well. Onboard shopping and gambling were off versus ’07.

The first few sailings of January are showing similar trend. Our operations team and our shipboard personnel are instituting a number of onboard marketing programs, hence an increase in onboard revenue in the areas, I guess seem more predisposed to spend. Our new Solstice ship was a strong exception to the trends we have been seeing. We were pleased with ticket and especially pleased with onboard revenue during the quarter. While I was in the shipyard in August, I knew we had something special in Solstice. And even I had to admit, I was caught off guard at how successful the launch of Solstice was. And quite frankly, continues to be.

Countless travel agents and press told me Solstice with the best ship lines they have ever experienced? Our sales people tell me travel agents can’t stop talking about her. Solstice has been transformational for the celebrity brand. We continue to be very excited with how strong onboard revenues are after the inaugural in holiday sailing. In a time when revenue is challenging, we are exceeding their expectations in almost every onboard area.

The ship was designed and built with the intention of giving our guests what they’ve told us they were looking for in terms of onboard spend and it’s working. And as we intended her to be, Solstice has proven to be our most cost efficient ship. It is very gratifying to see the efforts of our shore side and ship board teams pay off so well. Our attention to cost, as you heard Brian and Adam, continues to be successful.

Our progress on cost while increase in our guest satisfaction rates has been gratifying. We had the most successful awards in the history of our brand, earning top honors from amongst many. The best cruise line recognition from Conde Nast Traveller and The Guardian and The Observer, all in the UK. We also received top premium cruise line honors from Travel Weekly, which is voted by travel agents here in the US.

We realized we are in a tough revenue environment and are taking this very serious steps to optimize our revenue and manage our expenses. But we are encouraged by the support from our travel trade partners, the brand accolades we continue to receive, the early success of Solstice, and we’re looking forward to launch the Equinox system. Brian?

Brian Rice

Thank you, Dan. Jessica, we’d now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Robin Farley with UBS.

Robin Farley – UBS

Several questions. One is the additional cost cutting that you announced today. Am I right that in just back in the envelope that that looks like an additional $150 million or so to what you – in addition to the $150 million that you announced in the summer? I guess unless I’m doing the Math not right. And then also, if that is the case, that seems like a very significant increment on (inaudible) of major cost cutting already, and just looking for sort of more color on that. And then I do have two or three other little questions as well.

Brian Rice

Robin, it’s Brian. Your calculations are generally a ballpark. I would give you a little more color. I think the most substantive of things we’ve done, we haven’t had any more of the types of actions that took place in July. Most of the focus has been under our program that we call FIS, which stands for Financial Improvement Scheme. And its been groups of our management team getting together, finding synergies across the brand, finding efficiency. I mean, quite frankly, one of the biggest opportunities we’ve seen available to us is taking advantage of deflation that we’re seeing in the market. So our yield projections for next year down between 9% and 13%. We’re seeing a lot of pressure on all businesses stay and the fact that they’re able to leverage opportunities through price concession. So we’ve been very aggressive in that. I did mention that we also had some benefits from exchange gain. I quantified the Pullmantur different for you because we have a different functional currency, but we also have expenses for Royal Caribbean Celebrity. And as a more of – that we incur in foreign currency. All our European ships has feasible expenses at zero. The brilliant fleece is denominated in Sterling, but there are other factors that are playing in there. But by far, the largest expense was leveraging the new environment for price concession.

Robin Farley – UBS

So some of the $155 million in additional cost cutting is due to currency changes?

Brian Rice

Yes, some of it is. But it’s not the largest portion.

Robin Farley – UBS

Okay, great. That was a (inaudible) about the currency. Then, I could see – you made a comment about your liquidity, about monetizing derivatives. And I wonder if you could give a little more color on that and I guess my question about financing needs would be about Oasis and the 20% that’s not guaranteed by the government, the 20% that was due upon delivery. And I’m just wondering if you are going to be sort of typical kind of wonders and instruments to what you’ve done historically for that financing and just a more color on your comment about derivative.

Brian Rice

I want to emphasize, Robin, that we were very comfortable with our liquidity position right now and have no need to do anything. But I wanted to give examples that we are working on things that do have interest rates flops that are quite a bit in the money that we could look if we chose to quantify. So we were about to 50%, 56% loading, so we have some gains on those. But again, we’re going to look and be opportunistic with them when they make sense.

The requirement that I just wanted to share with the group that we are being very creative in exploring ways of continuing to improve our financial strength when it makes sense for it. In terms of the Oasis financing, I can tell you we’ve had some conversations in partnership with – and variant partnership with our lenders. I don’t want to go into details at this point, when it’s on to announce something, we will. But I will just emphasize that we are comfortable with our abilities to get the Oasis financing done.

Robin Farley – UBS

Okay, great. Thanks. And just my last question is you mentioned, in the opening comments of Richard, mentioned that you would be willing to sacrifice from points of occupancy in order to maintain price. I guess I just want to ask how that sort of sit with the idea that it’s seen on 20% or 25% of your revenue is from onboard that you would be sacrificing. A lot of that aspect of yield, if your occupancy is lower, just want to understand better that strategy.

Brian Rice

And Robin, I do appreciate that this is will be your last question.

Robin Farley – UBS

Sure. That’s it, yes.

Brian Rice

I do want to say that I think, Adam alluded to it in his remarks that particularly for some of our developmental products, you get to a point of diminishing returns in lowering price to sell those last percentages of load factor points. We’re not talking about wholesale changes in our strategy. We certainly recognize contributions because of onboard revenues. And that is one of the components that our revenue management decision making. I think, it is likely that you will see some decline in our load factors, but not substantial decline. It’s not a fundamental shift in strategy.

Robin Farley – UBS

Okay, great. Thank you.

Operator

Your next question comes from the line of Steven Wieczynski of Stifel Nicolaus.

Brian Rice

Steve? Operator, if we can move to the next question and maybe Steve will come back to us.

Operator

Okay. Steve, your line is open

Steven Wieczynski – Stifel Nicolaus

Hey Brian, can you hear me?

Brian Rice

Yes.

Steven Wieczynski – Stifel Nicolaus

Okay. Hey, when you look at your guidance, your yield guidance for 2009 in the negative 9% to 13% range, can you kind of – we looked further outward the back half of the year. I know it’s – your visibility is very low. But to me, the 9% to 13% still seems a little aggressive for the full year. Just going to – kind of what you guys are thinking towards the back half of the year?

Brian Rice

Sure. I think I tried to provide them my comments that our view right now, the mid point of our guidance is pretty much assuming that the economic climate that we’re experiencing today continues. We’re not looking at a recovery from the current climate. But we’re also not looking for any significant deterioration from what we’re seeing today.

We’ve tried to take into our assumption the business as is, if you will, and our read on the elasticity of the customer. I did mention in all four quarters, we are looking for yield decline and those yield declines that rather substantial particularly in the first three quarters this year. I think Adam and Dan alluded to the fact that Alaska and Europe were feeling more pressure on so we tried to be prudent in our projections for the December seasons as well. What happens in the back half of the year – recognized we just had a 5.9% yield decline and our comparable to get achieved here.

Going back to how our (inaudible) performed as well, the greatest thing, for instance, were in Q1, which would be our more difficult comparable. So again, we’ve just kind of assumed that the current economic climate is about as is, which we felt was the most prudent way to go about providing projection.

Steven Wieczynski – Stifel Nicolaus

Okay, I got you. And then, last question, just – this may be a question for Dan or Adam, but in this environment, are you seeing an uptake in first time cruisers? And also, what kind of demand have you seen for, what I would consider, drive-to ports?

Adam Goldstein

Hi, this is Adam. Actually, on your – the first part of your question, no, we’re seeing a little bit more experienced cruiser activity at those points. And I suspect that in the economy that is characterized by fair amount of turmoil, people who already have experienced and already understand the inherent value of cruising – it’s not surprising that they’re a little bit more likely to respond. And that’s what we’re seeing. That’s not very significant. We’re talking about a few percentage points, but generally a little bit more experienced cruiser activity.

Steven Wieczynski – Stifel Nicolaus & Company

Okay, great. Thanks, guys.

Operator

Your next question comes from the line of Tom – I’m sorry – Tim Conder with Wachovia Wells Fargo. Tim, your line is open and you may proceed with your question.

Brian Rice

Operator, if we could try the next one.

Operator

Okay. Next question is from the line of Scott Barry with Credit Suisse.

Brian Rice

Scott?

Operator

Scott, your line is open.

Scott Barry – Credit Suisse

Could you hear me?

Brian Rice

Yes. We can hear you, Scott.

Scott Barry – Credit Suisse

Yes. Just plugging in those ranges that you gave, looks like it’s a fairly healthy – it’s a fairly healthy range there roughly above the downside and 220 on the upside. So is that ballpark? Is it fair to say that at above 40 that maybe you’re a little bit more comfortable at the lower or the downside end of those ranges?

Brian Rice

Scott, I think the $1.40 is our best estimate of our EPS right now given the inputs of the ranges that we’ve given you. We try to provide 50-50 forecast whenever we prepare one where there’s a 50% chance that we’d complete it and a 50% chance that we’ll fall short. We’re giving you our best information, much transparency and – but also try to give you the fact that there is a wide range particularly on the yield out there.

Scott Barry – Credit Suisse

Okay, great. Thanks.

Operator

The next question is from the line of Felicia Hendrix of Barclays Capital.

Felicia Hendrix – Barclays Capital

Hi. Good morning, guys. So just a couple of questions. Back to the occupancy rates, I was wondering what is your guidance implying they are now?

Brian Rice

Felicia, I would – we haven’t given any specific guidance in our press release. I would probably say that we’re looking at maybe a couple of low factor points lower than we would normally be.

Felicia Hendrix – Barclays Capital

Okay. It still kind of like a 98%, 97% – something like – or even – but I mean – my main question is, are you basing it against 105-ish number or against a 100 number?

Brian Rice

It would be off the 105 number.

Felicia Hendrix – Barclays Capital

Okay. And then also, what kind of increase in travel agent commissions are in your forecast?

Dan Hanrahan

Yes, I can take that one, Felicia. It’s Dan. The ASAP program is a temporary program. It runs from January to February. And what we did is we gave a 1% – a one point increase percent for that time period. So that will have some impact on the us then. It’s not going to be – you’re not going to see a huge shift in travel agent commissions in 2009 from us as a result of this program. But it has been a very helpful program to the trade during the – during the wave period.

Felicia Hendrix – Barclays Capital

Yes. I appreciate. I’m sorry. I just wanted to say that they really appreciated it.

Richard Fain

Well, yes. Felicia. Thank you. They really have and I think that helps us. And I would like to actually just amplify that because I think when we talk about our yields here, there’ve been a couple of questions about occupancy and about travel agent commissions. And we really look at the net of all that and the onboard revenue, and all of those things play in. So sometimes, we would trade off higher occupancy or lower occupancy, higher travel agent commissions, against higher ticket price so we try and balance all those things and we’ve never tried to predict the specifics of any one of those components but we said, as they go through.

In theory, we ought to be indifferent, for example, between a ship that is 100% full at $100 or 98% at $102 all in. That includes onboard and everything else. In fact, there’s also the dock on effect because sometimes when you offer extreme discounts, you also undermine the fundamental integrity of your price, and overtime that whittles away at your – your all together revenue.

So we’re not picking them apart individually. We’re just saying we look at all of those hopefully in a holistic manner, and our estimate of where we end up looking at them altogether.

Felicia Hendrix – Barclays Capital

Understood. And finally Brian, I’m just trying to understand the timing of the Oasis loan. Typically how much time prior to delivery do you have to secure the – secure the ship specific on secured term loans?

Brian Rice

There is no set time frame. I think, generally speaking, we would have our financing in place five, six months prior to the ship delivery.

Felicia Hendrix – Barclays Capital

Okay. So is it just what’s going on in the environment now that’s holding up some typical timing? Or are you – are you holding out for better rates? Or what’s driving that?

Brian Rice

So Felicia, the ship – the maiden voyage of Oasis is not until December 1st.

Felicia Hendrix – Barclays Capital

Right.

Brian Rice

Frankly, we’re well ahead of the curve in our conversations that we’ve been having under – with the expert credit agency.

Felicia Hendrix – Barclays Capital

Okay, okay. Good.

Brian Rice

Again, I’ll emphasize that we’ve been in conversations and we have a good feeling about what we are going to be able to do from it.

Felicia Hendrix – Barclays Capital

Okay, and you already have commitments via financial institutions?

Brian Rice

For all the Solstice five ships, all four remaining deliveries, we have financial institutions lined up as well as the (inaudible). For Oasis, we have the Finnvera guarantee, but we are discussions with financial institutions now.

Felicia Hendrix – Barclays Capital

Okay, okay. Thank you.

Brian Rice

Okay.

Operator

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

Assia Georgieva – Infinity Research

Good morning. Couple of questions. In terms of the outlook for Q2 and Q3 – obviously it’s still a little early for Q4 – a year ago you had deals down about – or up about 1%. Is it fair to assume at this point that Q1 might be the most difficult quarter because of the comparison – because of the recent turmoil in the economy. And do we expect Q2 to be better and Q3 possible even better?

Brian Rice

Yes, I don’t want to give specific guidance for Q2 and Q3 right now, but I can tell you that we’re not looking at very good yield performance in Q2 and Q3. We are seeing pressure in Alaska. We are seeing pressure in Europe. We have taken pretty significant deterioration in our yield performance in Q2 and Q3 in the guidance we’ve given you.

Assia Georgieva – Infinity Research

And onboard played a big part in the last quarter. 11% and I think you mentioned that you were looking at the last couple of months, or Adam mentioned that. Are those trends continuing at a similar rate? Are we looking at about 10% declines?

Adam Goldstein

So I come back to you with my comments that I’ve read before. The ticket revenue swing overall is greater than that of the onboard revenue swing. So when we give you a range of 9%, 13% down for 2009, the range for onboard, if we would give it, would be lower and predicted higher in order to make the average. So we have really tried by every revenue stream to try to project for throughout the year based on everything that we felt last year and everything that we’re seeing at the moment so that it makes the right contribution to our forecast. And it is down. And it is down across the year, but not as much as they could have downed.

Assia Georgieva – Infinity Research

Okay.

Richard Fain

I might just add to what Adam said. I think that’s particularly true of the royal and celebrity brands. In Europe, we are actually seeing more of a hit on the onboard revenue side than proportionately so. In Pullmantur, we’re actually having more impact on the onboard revenue than on the ticket revenue. Pullmantur had a really very bad ticket revenue environment in ’08, that’s last year. And therefore, its ticket revenue comparables are easier, but its onboard revenue is actually, for ’09, worse than its – appears to be worse than its ticket revenue impairment.

Assia Georgieva – Infinity Research

Okay. Thank you, Richard. One more question and I’m done. If you’re financing for the Oasis, they are giving you a liquidity cash revolver, you wouldn’t need to access the capital markets in 2009. Is that fair?

Brian Rice

That’s correct.

Assia Georgieva – Infinity Research

Okay. Thank you.

Richard Fain

Although I just want to – as Brian said in his comments, clearly today, cash is gaining liquidity, is gaining. And so, the idea of taking steps to improve our liquidity if there’s an opportunity. If there’s an opportunity, it’s obviously something we would be looking at.

Assia Georgieva – Infinity Research

So it’s opportunistic, not a need.

Richard Fain

Right.

Assia Georgieva – Infinity Research

Okay. Thank you so much.

Operator

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

Steven Kent – Goldman Sachs

Hi. Good morning. Can you just talk about what the FX impact in net yield and EPS was for the full year 2008? And then, could you just give us the quarterly FX impact so we can model better for 2009? And then just one other question, what percentage of the bookings are coming in direct or through the internet? And I guess I would ask once again, why isn’t that more of a focus rather than raising travel agent commissions given the high returns of that strategy.

Brian Rice

Steve, I’ll take the first part on FX, and then ask Adam or Dan to comment on the direct strategy. I don’t have in front of me the FX for ’08. And I certainly don’t have it by quarter for ’09 for you. I can tell you that we commented on the last call about the impact of FX in the fourth quarter mainly because of the change in the guidance that occurred to our revenue and to our cost. And we wanted to show you the change Q3 to Q4.

As Richard mentioned in his remarks, FX is becoming a much more significant issue for us as we’ve seen a lot more volatility and as we diversified our international decks. I can tell you that, today, we are looking at a little more than 1% impact on yields as a result of Pullmantur’s currency. And a little less than 1% point impact on net cruise costs as a result of Pullmantur.

What we’re working with and we hope to be able to give you more transparency in the future is the impact that FX is having on Royal Caribbean and Celebrity in a much more complicated way because those brands have a US dollar functional currency. And the way we’re recognizing our revenue is done at each voyage and the currency on that date. And the way we’re doing our AP is the average during the course of (inaudible).

So we’re trying to figure out how we can give you better guidance on that and more transparency into it on a year-over-year basis. Frankly, right now, it’s not a huge element.

Adam Goldstein

Steve, this is Adam. In respect of our direct business, in round numbers, the 80%, 20% roll is in effect. About 80% of our business is coming from the trade. About 20% of our business is coming direct. We’ve asked about that on many of the calls. And we’ve generally said that the percentage of our direct business is growing very incrementally, sort of coming up through the high teens over the last few years.

Richard mentioned before that we truly believe that we have the best relationship in the business with the trade to produce 80% of our revenue. And maintaining that relationship, fortifying if it were possible in the current difficult circumstances. It’s a very high priority for us. So trying to substantially increase our direct business in this timeframe would run counter to a key priority for our revenue generation efforts.

Steven Kent – Goldman Sachs

Okay. Thanks.

Richard Fain

And Steve, if I can just again amplify on that because I think – I don’t want you to get the idea that this is a bad commercial decision, but we do in order to maintain the relationship. We honestly believe, we’ve been consistent about this for many years, that what we are getting for those commissioned dollars is well worth the expense. We simply believe, as a matter of dollars and cents, that the travel agent community is good business for us. And that’s why we continue to use that as our absolutely dominant way of obtaining business going forward.

Steven Kent – Goldman Sachs

Okay. Thanks.

Operator

And your next question comes from the line of Robert Robinson [ph] with Shankman Capital.

Robert Robinson – Shankman Capital

Hey, guys. I was just wondering if you guys have a strategy for what you are thinking of about the maturity you have coming in 2010 in terms of the bonds and loans.

Brian Rice

Robert, it’s Brian. We’re obviously looking at our liquidity not only through ’09, but into 2010, 2011 and beyond. Again, we feel very comfortable with our current liquidity. There will likely be opportunities for us to consider extended maturity. At this point in time, we’re not relying upon any of those given our liquidity forecast and certainly our revolver. Our business still generates a tremendous amount of cash. But as Richard alluded to, we do want to strengthen our financial position, and we will be opportunistic. And we, obviously, will be in discussions throughout the course (inaudible) what opportunities are available to us. And if they make economic sense, we will be taking advantage of those.

Robert Robinson – Shankman Capital

Okay. I was just curious though, where do you see leverage peaking to?

Brian Rice

I don’t have the percentages in front of me. But if you’re question revolves around many of our covenants, I can tell you we are substantially below any of those thresholds well.

Robert Robinson – Shankman Capital

No. I was thinking more by just looking at cash flow leverage and thinking about what the cost of capital is going to be getting up to going to 2009 and into 2010. If this economic period really continues and it’s as bad as people think and people are seeing it as a great depression, and I see the continued spending. So I’m just wondering as cost of capital continues to rise, wouldn’t it be more prudent to slowdown some of these expenditures you have laid out for the next few years?

Brian Rice

Robert, I’ll just briefly. And I might suggest if you could give Ian Bailey a call after this call. And he can share with you a lot more specifics. But we have very advantageous financing available to us. For example, since our last call, we entered into a share agreement for Solstice five that we have the option to take advantage of Tier rates for our ship delivery in 2012. It has 12 years, some of the amortizing loans and interest rate of 4.13%. So we do have very attractive financing available to us at our election. But I think – if you could follow up with Ian, he can take you through all our Solstice financing arrangements as well as the guarantees that we have for our finished ships.

Robert Robinson – Shankman Capital

Okay. So despite the current economic downtrend, you really feel like you should be continuing ahead and the banks are still there for you?

Brian Rice

Yes.

Robert Robinson – Shankman Capital

As a (inaudible) exchange?

Brian Rice

All our German ships have very solid financing arrangements. We’re armed with DCI credit as we go after our finished ship.

Robert Robinson – Shankman Capital

Thank you.

Brian Rice

Okay. Operator, we have time for one more question.

Operator

Yes, sir. And that question is from the line of John Parker with Jaffray [ph].

John Parker – Jaffray

Yes. You sort of just answered this, but have you had any discussions with your shipyards about potentially deferring deliveries of the ships way out – down the road?

Brian Rice

John, we – the ships that we have on order, we’re very excited to bring in. Dan told you – talked a little bit about the Solstice introduction and how tremendously she’s been received. She’s doing absolutely stellar with onboard revenue as well as ticket revenue. We have another Solstice flagship coming out this summer, and Oasis in December. And the advanced bookings on both vessels are very strong. These ships, even with the CapEx, they generate a tremendous amount of cash. And even in the current economic climate, we’re very excited about having them as part of our fleet.

John Parker – Jaffray

Okay. And then, this is just answered also, but I didn’t quite understand your – this is asked, but I didn’t quite understand your answer. You said that you’re looking at extending costly staying debt maturities. Can you give any more color what you mean by – how you would go about extending the maturities?

Brian Rice

Again, I’d like to stay away from any specifics, but what I’m talking about is there are opportunities for a lot of different things that we could do in order to improve our financial strength. Again, I’d like to emphasize the fact that we’re not dependent upon doing any of these things. But I just wanted to give you some sense of the types of ongoing activity that our Treasury team has been saying if we can improve our financial strength. There are opportunities for some of the maturities that are out there for us to have negotiations about extending those. But at this time, we have no specifics that we want to share. I just want to let you know that we’re paying attention to those things and we’re working them as they extend for us.

John Parker – Jaffray

Okay. Thank you very much for your help.

Brian Rice

Okay, John. Operator, I think that’s – we’re out of time. So I’d like to thank everybody for joining us this morning. We truly appreciate your time, and your questions, and your interest. And as I mentioned earlier, Ian will be available throughout the day for any follow ups that you might have. Thank you, and have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Royal Caribbean Cruises Limited Q4 2008 Earnings Call Transcript
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