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Royal Caribbean Cruises Ltd. (NYSE:RCL)

Q3 2009 Earnings Call

November 3, 2009 10:00 am ET

Executives

Brian J. Rice - Chief Financial Officer, Executive Vice President

Richard D. Fain - Chairman of the Board, Chief Executive Officer

Adam Goldstein – President, CEO Royal Caribbean International

Dan Hanrahan – President, CEO Celebrity Cruises

Ian Bailey – VP IR

Analysts

Timothy Conder – Wells Fargo

Felicia Hendrix – Barclays Capital

Robin Farley - UBS

Janet Brashear – Sanford Bernstein

Samir Bendriss - Pareto Securities

Scott Barry - Credit Suisse

Assia Georgieva - Infinity Research

Steve Kent - Goldman Sachs

Gregory Badishkanian - Citigroup

Operator

Good morning. My name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruises Limited third quarter earnings call. (Operator Instructions). Mr. Brian Rice, you may begin your conference.

Brian J. Rice

Thank you, Felicia. I would like to thank each of you for joining us this morning for our third 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 Cruises; and Ian Bailey, our Vice President of Investor Relations.

During this call, we will be referring to a number of slides which we have posted Investor website, www.rclinvestor.com.

Before we get started, I would like to refer 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. Forward-looking statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Additionally, we will be discussing certain financial measures which are non-GAAP as defined by Regulation G and a reconciliation of these items can be found on our website.

Richard will begin the call with his comments. I will follow with a brief recap of the third quarter, update our forward guidance, and comment on the recent demand environment. Adam and Dan will then talk more about our brands and then we will open the call for your questions. Richard.

Richard D. Fain

Thanks, Brian and good morning, everyone. I am going to leave most of the facts and figures for Brian to discuss in greater detail but from our release this morning, you can see that we had a better third quarter than we were expecting. Folks are continuing to vacation, the value of a cruise vacation continues to resonate very well and to achieve occupancy levels north of 105% this summer despite the environment that we are navigating I think really speaks volumes about the product we are offering and how it is perceived by the consumer.

Unfortunately, we are also seeing more pronounced seasonality than is the norm and we are giving the upside that we enjoyed in the third quarter back in the fourth. I would prefer simpler patterns but this kind of seasonal swings are common and they are consistent with our earlier view of the world.

Now, I freely admit that I am not happy with the returns we are generating. Frankly, I don’t know any CEO who is today but I think the term returns in that sense is key. We have undertaken a number of systemic and cultural actions over the past 18 months that have helped us generate positive returns even during this cycle. But the real key to our future is the leverage that these decisions will have going forward as we inevitably will experience a rebound.

Now I want to make it clear -- we haven’t yet seen that rebound. The recent news have been full of reports that the economy is rebounding or is about to be rebounding but we have not seen any evidence of that in our bookings to date. Neither I nor any prudent business person is predicting when that rebound will occur but we all know that these cycles do eventually work themselves through.

Now in reviewing the basket of profitability actions that we have undertaken, expense initiatives are front and center. Our management team has done a terrific job in instilling cultural changes in how we think about cost management at the company. And as you can see from the 2010 cost goal in our press release, we are working hard to solidify this progress on an ongoing basis. We have also been proactive in our approach to manage fuel risk as you can see in our continuous strategy. And we are managing our balance sheet more cautiously as well.

I’d like to stop for a second and point out that I have made it this far in my comments and not even mentioned Oasis of the Seas. Actually, that’s intentional. Our new hardware, not only Oasis but also the Solstice class of ships, are integral components in the direction we are taking the company. They are both incredibly successful and even in this market will produce respectable returns.

For 2010, Oasis and Solstice ships will account for about 18% of our fleet and by 2013 Oasis, Solstice, and Freedom class ships will comprise about half of our total berths. But these newer vessels are just one component of a powerful combination going forward. The three items that make up that combination are cost discipline, international expansion, and unbeatable hardware. I really feel that with the eventual uplift from the consumer, we will be able to make short order of deleveraging, improving our credit ratings, and meaningful moving the dial on corporate returns.

There is still a lot of work to be done. There is always more work to be done and improvements to be made but I feel that we are well positioned to ride out what remains of this cycle and to take off when the rebound becomes more tangible.

That said, I am going to take just a moment to chest beat about the Oasis, because she is truly beyond compare. She truly does defy description. You really need to experience her to have a comprehension of what an incredible offering this ship is for our guests and our investors as well. Are you are aware, we took delivery of her this past Wednesday. She is now on her way from Turku to Fort Lauderdale, where she will home port. Revenue service begins December 1 and we will spend from now until then showing her off to the travel trade. Bookings remain strong and she continues to command the lead pricing in the category.

With that, I’m happy to turn it back to Brian.

Brian J. Rice

Thank you, Richard. I would like to briefly go through the third quarter results, which we had summarized on the second slide. In the third quarter, our earnings per share were $1.07, better than our previous guidance of between $0.95 and $1.00. Net yields were better than forecast but were down 16.5% as compared to our guidance of down approximately 18%. Ticket revenue benefited from stronger than expected close in bookings, especially in Alaska and Europe. On-board revenue was also slightly stronger than we had forecasted.

As we mentioned on our last call, the H1N1 virus cost us about 2 percentage points of yield in the quarter. Overall, relative to last year, Alaska was the weakest performer in the quarter and the Caribbean was the strongest. Our load factors were down about 2.5 percentage points from last year but we still managed to sail at over 105% of capacity. Our international markets performed especially well and non-U.S. guests accounted for 43% of our customers in the third quarter. Net cruise costs per APCD came in 10% lower than the same time last year. During the quarter, we reached an agreement to sell Pullmantur’s Atlantic Star. While we anticipate the sale will close in the fourth quarter, we did take a charge of approximately $0.03 per share related to a small write-down, the cost of the sale, and acceleration of dry dock expenses. Absent this charge, our costs were consistent with our guidance.

Our fuel expense was $146 million, which was in line with our prior guidance. Our net cruise costs per APCD excluding fuel were 3.8% lower than the same time last year, with the costs associated with the Atlantic Star sale being the only noteworthy change from guidance.

Below the line in other income and expenses, we had a correction to the statutory rate for an accrued tax liability related to our purchase of Pullmantur that resulted in a $12.3 million gain.

In summary, we beat the midpoint of our previous earnings per share guidance by about a dime, most of which came from the strength of close in demand.

Now I’d like to provide you with an update on bookings. As Richard said in our press release, the booking environment remains fairly consistent and relatively stable. With that said, we are still seeing more volatility in our forecast than we would like. We have seen some early signs of a possibly expanding booking curve but it is still quite contracted by normal standards. We also have several new products in emerging markets and since these products tend to be shorter in duration and closer to the guest’s home, they also tend to have a closer in booking pattern.

Clearly we finished the third quarter with stronger bookings than we had anticipated and looking out to the summer of 2010, we are encouraged by the early peak season demand. On the other hand, we continue to see slow demand for Mexican Riviera cruises and demand out of Spain and the State of Florida is weaker due to their more difficult economies.

For the fourth quarter of this year and the first two quarters of 2010, our cumulative booked load factors are still running behind this same time last year but we are seeing a rapid recovery and with new bookings running more than 40% ahead of last year since mid-September, we expect to see higher book load factors in all quarters before year-end.

On slide 3, we have updated the booking and pricing graph we have shown on the last few calls for our fourth quarter departures. As a reminder, the green line illustrates the change in the volume of new business versus the same time last year by booking. The blue line shows the corresponding year-over-year pricing changes to the new business. The trend for volume has been very favourable since the summer and pricing since the beginning of October is now running higher than at the same time last year. A year ago, we were probably at the low point of demand and our prices were falling significantly. As a consequence, the improvement you see here is mostly a function of easier comparables.

As I mentioned previously, the peak season was better than we expected but it now appears that the traditionally weaker fourth quarter will be worse than we had previously thought. Our holiday sailings have required more discounting than we anticipated and our low season Caribbean cruises are being hurt by Florida’s weaker economy.

During the low season, we traditionally source close to 20% of our Caribbean guests from Florida. This year with 11% unemployment in the state and a very bad real estate market, we have seen our demand from Florida for the fall season drop by double-digits.

Looking out into the first quarter, on slide four you can see guest demand to date has followed a very similar demand pattern to the last few quarters and since the late summer, bookings have outpaced the same time last year.

Cumulatively, we are still slightly behind the year ago but with the accelerated pace of new bookings, we expect to see more booked than at the same time last year relatively soon. We believe it is still early to provide you with specific guidance for the first quarter but if you will turn to slide 5, we wanted to give you some insights into the pricing environment for the first quarter and show why we are still anticipating yield accretion.

What we have tried to illustrate with this chart is how the pricing environment for first quarter sailings in 2010 and 2009 compares to a more normal year -- in this case, 2008. The horizontal line across the middle represents an index of 2008 pricing. The orange line compares our average rate for 200 sailings for each booking week. As you can see, for first quarter sailings in 2009, new bookings taken through the month of October had solid pricing as compared to 2008. But as you know, after the collapse of Lehman Brothers and the AIG bailout, demand dropped off dramatically and we were forced to begin significant discounting. The net result was a 13.5% yield decline in the first quarter of 2009.

Now the blue line compares the average rates we are getting for the first quarter sailings in 2010 again in comparison to 2008. And while our rates consistently compare favourably to 2008, I would caution that the weighting of the Oasis of the Seas and the Solstice class vessels, which have had a greater proportion of their inventories sold at this point, heavily influences this.

On slide six, we have provided the same graph, again comparing to 2008 but stripped out the effect of Oasis and Solstice class. We are often asked about how same-store sales are performing but I would like to remind you that when new ships are delivered, we tend to place them in strong established itineraries. The incumbent vessels are often redeployed into new developmental markets so the comparison is not the same as in many other industries.

We will not be providing guidance by ship class but thought it would be useful to show you how the non-Oasis and Solstice class are performing. Bear in mind that 2008 is a very tough comparable in this environment but we find it reassuring that the volatility we are experiencing is significantly less than it was at this same time last year, and we believe we have a much better read on the consumer.

In aggregate, our forecast range is still quite wide but we do believe we have better yields -- we will have better yields in the first quarter of 2010 than we did in 2009, driven by the performance of our newest vessels and avoidance of the type of dramatic discounting we experienced last year.

On slide seven, we have provided our updated guidance for the fourth quarter and full year. For the year, we expect yields to be down approximately 14% on an as-reported basis and down 12% to 13% after adjusting for changes in currency. We expect yields to be down between 7% and 8% in the fourth quarter, much better than the last few quarters but not quite what we had hoped for.

On the cost side, we expect net cruise costs to be down approximately 10% for the fourth quarter and down approximately 10% for the full year. After adjusting for currency, we expect net cruise costs to be down 11% to 12% for the fourth quarter and 8% to 9% for the full year.

We have included $596 million of fuel expense for the year and $158 million for the fourth quarter in our guidance based on current pricing.

We are 40% hedged for the fourth quarter and we are now hedged approximately 50% for both 2010 and 2011 and 10% for 2012.

We are forecasting a slight loss in the fourth quarter and earnings per share for the year of approximately $0.70.

Finally, I would like to point out that we ended the third quarter with approximately $1.1 billion in liquidity.

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

Adam Goldstein

Thank you, Brian and good morning, everyone. Further to Brian’s comments, overall for 2009 we expect to source 40% of our company’s total business from outside the United States and then more than 40% in 2010. Although the winter season is upon us, we still have limited visibility to the performance of our products that depends more on sourcing of non-U.S. customers. It does appear that Rhapsody of the Seas in Australia/New Zealand will enjoy improved year-over-year performance. For our products in Asia, Dubai, Brazil, and Panama, it is too early to tell.

Further to Richard’s comments, Oasis of the Seas is on her fourth day now of her transit from the shipyard in Turku, Finland to her new home in Port Everglade, Florida. Those of us who participated in the delivery ceremonies in Turku last week watched a remarkable transition on an hour by hour basis as an amazing cruise ship emerged from the very final stages of the construction process. Although we should not have been surprised after working so intensively on the project for nearly six years, Oasis of the Seas is beyond all of our expectations. We are extremely keen to show her off and we will do so with inaugural cruises from November 19th to December 1st. Before that from November 11th to 19th among other things, we will be planting approximately 12,000 plants and trees in Central Park.

The revenue outlook for Oasis of the Seas is very promising. For 2010, she is significantly more booked than any other ship in our fleet at rates that reflect the higher premium to our freedom class than either Freedom of the Seas or Voyager of the Seas attained in their relation to their immediate predecessors. We expect the already large and rapidly growing publicity surrounding her delivery to further bolster her performance.

There has been some speculation regarding Oasis of the Seas short-term booking position. It has always been our intention to carefully ratchet up her load factor as we acclimate to delivering the wow on such an unprecedented ship. We are confident about Oasis of the Seas value proposition at the premium she is commanding and we are not utilizing the discounting techniques that are apparent across much of the cruise space.

We are now forecasting lower load factors in December than we originally anticipated but it may be that we can mitigate even these very short-term reductions during the inaugural period.

Dan.

Dan Hanrahan

Thank you, Adam. It’s been an exciting summer with the successful debut of Equinox in July and most recently Celebrities recognition by Conde Nest travellers magazine’s annual readers’ choice awards, which ranked Celebrity number one in the new mega ship cruise lines category. This is truly a testament to the way the consumer is reacting to Celebrity Solstice and Celebrity Equinox. We continue to be pleased with the reaction these ships have received and are confident that they will continue to be transformative for the Celebrity brand. As I mentioned on the last call, the Solstice class will represent almost 40% of Celebrity’s capacity next year.

In addition to a successful launch of Equinox, we made a number of product delivery updates that we believe will have a very positive effect on the repeat rate of our guests. We launched an upgraded Captain’s Club loyalty program that has met with rave review from our guests. We also launched a new onboard activities program we call Celebrity Life that increases the breadth and depth of activities we offer to our guests. Although early, we are very pleased with our guests’ reaction to the program. We believe both will enhance guest satisfaction and increase our guests’ repeat rates without increasing our net cruise cost.

We had healthy close in demand for our cruises in both Europe and Alaska this past summer and both volumes and rates came in a bit higher than what we had thought on our previous call. Booking volume for Europe cruises through the fall has also held up well, as the Mediterranean season is now coming to a close. Our Solstice class ships are continuing to command healthy premiums.

In the Caribbean, we haven’t been immune to some of the Christmas and late fall issues you heard about earlier in the call. However, we continue to be pleased by the results of our efforts to build our brand beyond the U.S. market. We are seeing a high number of bookings coming from outside the U.S. in our longer Caribbean cruises operating from South Florida this fall and winter.

Celebrity’s on-board revenue results in the third quarter exceeded our expectations. [inaudible] excursions in particular were strong across the fleet. Solstice and Equinox continue to perform well and exceeded our expectations in most on-board revenue areas.

While it is a bit soon to make any predictions about the 2010 Europe and Alaska season, early indications are encouraging, especially for Equinox and for Eclipse, our first ship dedicated to the U.K. market, which will operate summer cruises from South Hampton. The reaction of the U.K. market to the Eclipse has been exciting as early bookings have been quite strong.

I’d now like to turn the call back to Brian. Brian.

Brian J. Rice

Thank you, Dan. We would now like to open the call to your questions. As a reminder, we ask that you limit your questions to no more than two. If you have more, we’d be happy to discuss them with you after the call. Felicia.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tim Conder with Wells Fargo.

Timothy Conder – Wells Fargo

Thank you. Brian, just from a clarity standpoint, again on the first quarter and 2010 net yields, do you expect them to be positive in absolute terms or just up year over year? To clarify that -- secondly, if you -- based on one of the slides that you showed there, and just another clarification point, can you give us some more color on the -- let’s call it legacy core fleet and how the cannibalization is tracking there versus your expectations? And then obviously separating that from the Oasis and the Solstice class ships.

Brian J. Rice

Sure, Tim. For the first quarter and the full year, we are expecting both will have higher yields in the corresponding period in ’09.

Timothy Conder – Wells Fargo

Positive in absolute terms, you are saying?

Brian J. Rice

Yes.

Timothy Conder – Wells Fargo

Okay.

Brian J. Rice

And that would include ticket, on board, and core revenue as well.

Timothy Conder – Wells Fargo

Okay.

Brian J. Rice

And as we looked at the slide for first quarter, we tried to give a little bit of clarity into what you called our legacy vessels. I think one of the points that I was trying to make is cannibalization is less what I would use to define if there is an impact on the legacy ships. I think it is more going into development markets that we believe is very important for our future and oftentimes those markets will take a year or two to really see for us. But similar to the investments that we were making in some of the major European markets a few years ago, those markets are really paying off for us. We are expanding into some of the markets that Adam mentioned that we believe it’s a little too early to get a read on.

I want to emphasize that the charts that we showed was really benchmarking our current pricing environment relative to ’08 and if you recall in ’09, we had a 13.5% yield deterioration in the first quarter of ’09. That’s a tough benchmark. But the legacy vessels as you’ve called them seem to be holding their own at this point and I think the two things that I would call out why we are anticipating yield accretion is the performance of the newer vessels, which we do have the benefit of those vessels and they will be included in our results and they are performing exceptionally well, as well as the fact that we don’t expect that sort of rapid acceleration at discounting that we incurred last year when we were all -- all businesses were kind of shocked by the effects of the economy.

Richard D. Fain

I think I’d like to add something, maybe a semantic comment -- I understand you want to distinguish between the very newest ships and the rest of the fleet. But I think I would prefer we find a better term than legacy vessels. The other ships are the bulk of our fleet. Actually we think in general, the older ships are terrific ships in comparison to the rest of the industry anyhow and I think that we think most of them are quite strong competitors and will continue to be. I think perhaps what causes a little bit of confusion is that the Solstice class, for example, have been so well-received and the Oasis class, which you haven’t seen yet but is still very well-received and getting a lot of publicity and so they are truly extraordinary. But I think we ought to try and look for a better terminology there.

Timothy Conder – Wells Fargo

Okay, we apologize for that.

Richard D. Fain

No, no, I just think -- it’s nice to have that problem that we have, to find a way to distinguish between some wonderful ships and some really wonderful ships.

Timothy Conder – Wells Fargo

And along that line, Adam, can you give any more quantification of what you are seeing the premium or Richard, whoever wants to answer this, the premiums on the Oasis class versus Freedom versus the Voyager class?

Adam Goldstein

Well, we are not going to be specific about that but it is certainly well into double-digit premiums over -- of Oasis of the Seas in comparison to Freedom class. And Freedom Class, I think you will remember at the time we were delighted with her, the premiums that she was commanding in relation to Voyager of the Seas. So they are very healthy class-to-class premiums.

Timothy Conder – Wells Fargo

Okay, great. Thank you, gentlemen.

Operator

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

Felicia Hendrix – Barclays Capital

So Brian, you guys have spent, and Adam and Dan, have spent a good part of the call kind of talking about the outlook and what you are seeing and Brian, your charts are really helpful, giving us a detailed overview on where the first quarter could come out and kind of supporting your belief of why you are still reiterating your forecast that they would be up.

What I am just wondering and I am just having -- trying to get my arms around this is you talked about in the quarter volatility in short-term bookings window, which you are not happy about but it kind of is what it is right now. When you -- I am sure that with your sophisticated net yield forecasting systems that you have, you bake that volatility into your first quarter outlook but I am just wondering with that as a variable, how are you still so confident that yields could be up in the first quarter?

Brian J. Rice

One of the comments I made is our range is still quite wide for the first quarter and the reason we are not calling out specific guidance right now is concern over the close in volatility. I think what gives us the assurance is if you look at that one chart that I showed with the Oasis and the Solstice class, our build throughout the lifecycle of first quarter sailings being open for sale has consistently been above ’08 levels and with that, you can imply the type of average rates that we would have on the books for the first quarter.

Now, we recognize the fact that a lot of that is being weighted by Oasis and Solstice class and as we get closer to sailing, some of the lower yielding products begin to take a disproportionate amount of the business and we do expect that line to come down. But even baking that in, we feel pretty good at this point that we will have yield improvement in the first quarter.

But to your point, there is still a lot of volatility and that is why we are not providing a specific range yet for the first quarter.

Felicia Hendrix – Barclays Capital

Okay, but as far as your budgeting is concerned, there is a wide range?

Brian J. Rice

Well, we actually -- we are right in the midst of our budgeting process and we certainly had a midpoint that we are assuming and we also have a lot of upside and downside to that number. And we are not prepared to share those plans just yet, until we see more of what occurs.

You know, the environment for the last six or seven weeks has been tremendous relative to last year but because of the more contracted booking cycle, we did have some ground to make up and we are in the process of learning every day and while pricing certainly is much, much more stable than it was this time last year, it is still subject to a bit of volatility as we get closer to sailing.

Felicia Hendrix – Barclays Capital

Okay, so it doesn’t even sound like if I asked you if you are looking at low-single-digit increase to high, you’re not going to comment on that?

Brian J. Rice

No, we are not ready to give that sort of specificity yet.

Felicia Hendrix – Barclays Capital

Okay, and then just a final question is I’m just wondering, your capacity for 2010 has changed a bit in terms of the percentage change. Can you just talk to that?

Brian J. Rice

Yeah, the biggest thing is the Atlantic Star which also goes by the name previously of Skywonder, that’s the ship that had been scheduled to go into Mexico earlier this year and she was effectively laid up the second half of this year. And as we looked at that vessel, we thought we had a buyer out there, we thought it was prudent to sell her. We had been improving the fleet with Pullmantur, with a lot of -- some of our original fleet for Royal Caribbean and Celebrity and this was an opportunity to get rid of a ship that wasn’t of the best use for us and when that ship goes out, that will lower our capacity a little bit for next year.

Felicia Hendrix – Barclays Capital

Okay, so the capacity changes that we are seeing are more driven by that versus changing the -- maybe having more longer cruises versus shorter cruises?

Brian J. Rice

Yeah, that wouldn’t affect capacity because our capacity is what we call based on available passenger cruise days, so whether the ship is in a seven night or a three/four night, the calculation is still the same.

Felicia Hendrix – Barclays Capital

Okay, great. Thanks a lot.

Operator

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

Robin Farley - UBS

I just wanted to clarify a couple of things -- in Q4, the lower EPS guidance, and I know you lowered yield guidance, I would have thought that the EPS would have been down more but it looks like your expense guidance ex-fuel is quite a bit better than previous guidance. I wonder if you could give some color on what is kind of new on that front, that is going to be helping the EPS number.

And then also just a clarification on your commentary on Q1 -- I know you said a wide range. I imagine you are talking sort of as-reported yield changes and I am wondering if you could say with currency held constant whether you are still certain it would be in the positive range or if it’s currency that’s getting it over the hump.

And then if I could just ask one other clarification -- Adam’s comments about occupancy of the Oasis; in December, you mentioned it’s going to be a little bit of a lower load factor in December than you had anticipated. I was just trying to clarify -- were you trying to communicate that you are holding back more inventory for operational reasons as you start ramping up or that you are holding back inventory to protect pricing? I just want to make sure I understand what that comment was. Thanks.

Brian J. Rice

On the first couple of questions, on Q4 I am kind of looking at our reconciliation here and our net cruise cost ex bunker are slightly favourable to our prior guidance but not significantly. The only other thing that you might want to consider looking at is our bunker guidance. I think our new bunker guidance may be a little bit less than many people have modeled out there.

Robin Farley - UBS

No, I was looking at the number ex bunker and I know that it’s only a slightly a percentage, 1 to 2 percentage points better but considering that currency would have made that number a little bit worse, that maybe your expense guidance constant currency, you are improving even a little bit more then, it looks like. So I just wondered if there were particular areas or what is driving that.

Brian J. Rice

I think on the cost side it is really what Richard talked about. It’s just a systemic cultural focus on this. There’s nothing specific that I would call out in Q4. I think the brands have continued to do a terrific job of focusing on costs and we are all disappointed with having to lower our revenue guidance slightly in Q4 and I think the brands have rallied as best they can without compromising the guest experience but there is nothing specific that I would call out there.

On the first quarter, I would say that both on a constant dollar and as reported basis and for the full year, our operating plans right now point toward favourable yield performance as compared to ’09 but again, we are going to stay away on this call from specific guidance about that.

And I guess I’ll let Adam answer the Oasis question.

Adam Goldstein

Thank you. I would like to answer in two parts, if I could -- with respect to operational reasons, we have always had the intention of reducing the amount of load factor that we would take on on the early sailings, going back a long time because of the newness of this class of ship and all of the different features and choices that our operational people need to master. So that’s always been the case.

Part two is with respect to the amount of capacity that is for sale, we are definitely protecting our pricing division, if you will, because we know the value proposition that exists here and we are simply not prepared to engage in some of the discounting tactics, as I mentioned earlier in my comments, that we see in the cruise space these days.

So it is possible that we will have a slightly lower load factor in the end than we might otherwise have had if we would be more aggressive to sell each last space that we had intended to sell. But it’s also possible, as I noted in my comments earlier, that the inaugural period will be so successful because the ship is so phenomenal that even that potential small deficit will go away.

Richard D. Fain

And Robin, if I could just add something to that, because I think -- which gives me an opportunity to talk a little bit about how the yield management works, a lot of people look to the bookings or go to their travel agent and they find there is space available and say well, if you have a product that is doing so wonderfully, it should be sold out. Someone here described selling out this early as being yield management malpractice. It is simply the way we operate. We would not want to be sold out -- in fact, I think there’s been some news that says that the upper category cabinets are unavailable far into the future and that does mean that we sold those cabinets too cheaply. We should have held them longer.

So there will always be -- this is something we have seen in the press and your question gives me a chance to talk about it on the call to everyone. We will always have space available. That’s sort of the way the yield management system works.

Robin Farley - UBS

And I understand a lot of buzz that is going to be created over the next month, so when you look out to 2010 to sort of like post inaugural buzz, is the load factor on Oasis something that you, to protect the value proposition, is that something that you would be willing to continue to have sort of below the fleet average? In other words, is this just because of the inaugural buzz driving that closer in booking? Or is this something you are willing to do kind of longer term to protect pricing?

Adam Goldstein

Well, because Oasis of the Seas is in a main Caribbean route and will be very powerful with the family segment and has a lot of third and fourth berth opportunities built into her, I would expect her occupancy next year and in the future to be at least at the fleet average.

Robin Farley - UBS

Okay, great. Thanks.

Operator

Your next question comes from the line of Janet Brashear of Sanford Bernstein.

Janet Brashear – Sanford Bernstein

First question, can you tell us if he H1N1 is in your forward guidance and whether it is or isn’t, what your expectation is going forward for that?

Richard D. Fain

H1N1 and anything related to it would be in our guidance on the basis that we obviously have a lot of experience with it as of this year. We are not seeing very much H1N1 incidents on our ships at the moment, which is something that we are quite pleased about. We’ve been able to take advantage of the relatively little incidents of it over recent months to really work very carefully around the world with a wide variety of destinations inside and outside the Caribbean to make sure that the protocols are understood between the cruise industry and the ports of call, that people know who to speak with if they have any concerns. As a matter of fact, our Chief Medical Officer right now is sort of on rounds in several key places in the world these two weeks exactly doing that. So we are optimistic with regard to the medical capabilities of our ships, our sanitation procedures, and our ability to minimize the impact of H1N1 on board our ship and we believe that the public is understanding since April and May when the illness turned out to be not as severe as was originally feared, that while it is a public health issue it’s not a particular issue for the cruise industry.

Janet Brashear – Sanford Bernstein

And other trends, as you look towards next year and the European Union and their tighter fuel standards that they are starting to impose, what fuel changes will that require you to make relative to your mix of fuels? Do you feel like you are already operating within those standards now or that you will have to change your mix more in favor of the higher grade fuels?

Dan Hanrahan

It won't be much next year but we look very carefully at it and as we are working on our plan, you heard Brian say earlier that we are still in the planning process but we do know that it won't be a significant number for us next year. And as we have always said on these calls, that we look at what we can do to mitigate our fuel consumption constantly, and we are constantly looking for ways to lower our consumption. But it won't be a big number next year.

Janet Brashear – Sanford Bernstein

Thank you.

Operator

Your next question comes from the line of Samir Bendriss with Pareto Securities.

Samir Bendriss - Pareto Securities

Two questions, one on the Q4 yields and the second on returns on the new vessels. So on the first question, I mean, you are taking down your underlying yields for the year by points adjusting for currency and on my numbers, you are taking down Q4 from about a 4.5% yield relative 7 to 8. Now how much of that is due to what we have seen already in Q4 and how much of that is just based on your concerns about close in bookings for November and then early December? And what I am really getting at is how much of this can we add on to Q1 -- like how much of that uncertainty is there a risk about filtering through to Q1?

Second question is on returns -- I mean obviously the Oasis looks to be a fantastic ship but in terms of return on capital, how much is this ship -- can you give any flavor on how much it is generating on today’s pricing, how close to covering cost of capital you are seeing so far?

Brian J. Rice

I’ll take the first part. We had indicative guidance for Q4 of mid-single-digits, so your numbers are pretty good for where you would estimate it from our prior forecast. We are now saying between 7% and 8%.

As I pointed out, what is causing the fourth quarter pressures, we knew Mexico would be weak, we knew Spain would be weak. What kind of came more of a surprise than we expected was the pressure in the State of Florida. We do take a disproportionate number of guests from the State of Florida in the fourth quarter. We are not as reliant upon them in the first quarter so I wouldn’t look for that to be as potentially troublesome as we saw in the fourth quarter.

The other thing that we called out in Q4 in the update of our guidance was really around the Christmas cruises. Christmas fell in an odd place for us this year on Friday and that tends to make it a weaker cruise but we were somewhat surprised by the additional discounting that we had to do when again, that’s not something that we see repeating in the first quarter and we do take into consideration everything that we are seeing in the new bookings and again, that’s why we do still have a fairly wide range for Q1 and don’t want to have specific guidance but again, we reiterate we do think it would be positive.

Richard D. Fain

And I’ll comment on the question of returns for the newer ships -- we don’t give out the returns, just as we don’t give out other types of segment reporting. And as I mentioned earlier in the call, I think it is important that we not over-emphasize the new ships because as dramatic as they are, the bulk of our fleet and the bulk of our profitability depends on the rest of the fleet. But I can say that they have done -- they are more expensive than normal ships but they are not as much -- they are not commensurately more expensive with how much better they are in terms of their earnings capability. So the result is that even in this market, we can see that they will be a terrific investment for us and if the market improves the way we hope it will, they will be voluminous contributors to our returns -- they will generate enormous concerns, probably -- and I do emphasize it’s not just Oasis. Oasis is getting all the publicity today and obviously I am pleased with that but the Solstice class has also just performed wonderfully and I am pleased with that too.

But we are not prepared to give out more specifics on the performance of individual ships.

Samir Bendriss - Pareto Securities

So I guess if I read this right, you are saying that despite the high CapEx, it is accretive to return on capital, both the Oasis and the Solstice class ships? Is that correct in interpreting that?

Richard D. Fain

Absolutely correct, thank you. You made that -- that is precisely what I was trying to say. It is accretive, the returns are and will be outstanding.

Samir Bendriss - Pareto Securities

Okay. Thank you very much.

Operator

Your next question comes from the line of Scott Barry of Credit Suisse.

Scott Barry - Credit Suisse

You mentioned you expect book load factor to be ahead by year-end. Can you give us some sense, given what happened a year ago, given the contraction in the curve, how much more inventory you’ve got to sell for the 4Q/1Q versus a year ago?

And then secondly, can you give us some sense for what the percentage repeat cruiser is in ’09, or maybe just some commentary on the short cruise market? Thanks.

Brian J. Rice

Sure, Scott. As we look into Q4 and Q1, we are down probably low to mid-single digits in terms of our load factor vis-à-vis where we were at this time last year. As you go further out into 2010, we are basically at par. It’s still very early but the booking window seems to be recovering a little bit, although I’d caution it’s still very preliminary. The fact that our bookings for the last seven or eight weeks are up over 40%, we are seeing a very rapid recovery. The booking trends that we are seeing in Q4 and Q1 are strikingly similar to what we saw back in Q3 and Q2. And I think our reservations about Q4 is more the pricing leverage that we will have as we get into those last minute bookings. And I’ll let Adam take your second question.

Adam Goldstein

It continues to be the case that a little bit more than one-third of our customers are on a cruise for the first time in their lives. There’s been some interest in whether lower pricing in the industry has motivated first-time purchase and it’s probably true to a degree. On the other hand, the lower price points have motivated repeat cruisers who already know the value of cruising to respond and book, and I think the net of those two things is not a tremendous change in the ratio.

Scott Barry - Credit Suisse

Great, and then just to follow, Brian, if I could, how much benefit do you get just from having a more consistent booking pattern versus a year ago when “the rudder wasn’t responding”?

Brian J. Rice

I think it’s a terrific point, Scott, and we are anxiously awaiting mid-December, January timeframe where we will really be more on equal footing. It took us about that amount of time to really calibrate to the new consumer behaviors, both in terms of the booking window and the elasticity and I think it’s one of the reasons we are a little hesitant to give more specific guidance about Q1 in the full year of next year, until we really get to that point where we have crossed over. We do anticipate at that point we will have slightly higher load factors in all quarters and we will be able to see really how the pricing compares to after it took us time to calibrate. But I think it will be that sort of window and from a revenue management standpoint, it will be very valuable because we will now have a lot more year-over-year comparisons that we can lean on and not just trying to read from prior quarters with in many instances different seasonality and product mix.

Scott Barry - Credit Suisse

Great, thanks.

Operator

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

Assia Georgieva - Infinity Research

Brian, I wanted to follow-up on your comment that this time a year ago, we were basically in shock and I think it’s this specific timeframe, mid-September through late November, early December, so booking volumes being up 40%, shouldn’t be I guess that surprising. Can you compare volumes to a more normal year, such as the same time frame in 2007, and especially if you have that on a capacity adjusted basis?

Brian J. Rice

Assia, I don’t have the numbers you are asking for in front of me but I think your point is exceptionally well taken and probably right on. I would venture to say that the bookings that we are experiencing today would be proportionately equal to slightly higher on a capacity adjusted basis to what we were seeing back in ’07 and ’08. I would lean toward higher because we have more of a load factor deficit than we did back in ’07 and ’08, given the contracted booking window. But to Scott’s point earlier also, I think we are really getting to a point where we have control of the rudder and things are much more consistent with what we would expect to be seeing at this point in time. And your point that the comparable is really what is driving the 40%.

Assia Georgieva - Infinity Research

And a related question specifically because of the great volatility a year ago, it seems from the numbers I was looking at, pricing was down and booking volumes were significantly down until late November and some voyages even in December, yet as [wave] season started, and specifically for Q1 of ’09, there seemed to be some catch-up, some close in strength which I think also helped you beat guidance, that is probably the factor that you are referring to, the volatility that you still expect. Is that correct?

Brian J. Rice

I think again this year we have a much better handle on the consumer. I think our prices are now set much more in proportion to what the consumer is willing to pay where this time a year ago, if you will, we were still fishing for bottom and I think when we provided guidance, we had probably over-shot the mark a little bit in terms of our pessimism and did benefit a little bit as we got our pricing calibrated.

But I think this year is just a fundamentally different sort of experience. I think the curves, if you will, both in terms of the booking patterns, will have fewer peaks and valleys and I think our pricing will remain more consistent certainly than it did a year ago.

Assia Georgieva - Infinity Research

I certainly hope so. The comparisons, just looking at the year-ago numbers, are so wild that even this year’s consistent pricing makes it difficult to predict, so I understand the difficulty and thank you for providing as much clarification as you can.

Operator

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

Steve Kent - Goldman Sachs

I just had two questions about some of the discounting or some of the pricing issues that you have mentioned. The first one is you mentioned earlier that some of the newer markets are weaker and they are taking time to ramp up and I guess I just want to understand that because I thought the original reason to go into some of these newer markets was that there was less competition and the opportunity was pretty significant so I am surprised that the pricing is lower.

And then the second question is why is that holiday week, just to go back to it again, why is that holiday week so weak and you are discounting more? It should be a peak period for pricing and for occupancy.

Adam Goldstein

On your first question, first of all these markets that we are going into, we’ve consistently identified as strategic opportunities for our long-term prosperity and we are as optimistic about the long-term development of those markets as we have been in the past. In fact, we’ve been able to get really capable management in on the ground in a number of these places, some of them like in China and Australia just in the last year. And we have the opportunity now to work with travel agents in those regions in a much more meaningful way than we have done in the past.

With respect to the shorter term environment, I think what we were trying to express is that there is less certainty around them. First of all, they are newer markets and they have each been affected by world conditions in their own way. Many of them are shorter term booking environments because the ships are there and they are a home port type market. So as the quarters unfold this winter, we will get a better idea of what is happening there. It’s a little bit hard to project here right at the beginning of November.

So it wasn’t our intention to stress that they are weaker -- simply that there is more uncertainty surrounding what their eventual winter performance will be.

Brian J. Rice

Steve, in relation to Christmas, we are certainly getting premium pricing for Christmas -- it’s just not nearly the premiums that we have historically received. We are not really sure what the dynamic there is. I will mention that the earlier in the year that the Christmas cruises depart -- for example, many of them are departing on the 19th, 18th -- those tend to be weaker than if you have a Christmas cruise that is departing on say, for example, the 23rd. It is a phenomena that we see very cycle. Frankly, I think we had kind of over-estimated where we thought Christmas might be in this environment and we are getting premiums but just not to our historical standards.

Steve Kent - Goldman Sachs

Okay. Thank you.

Brian J. Rice

Felicia, I think we have time for one more question.

Operator

Yes, sir. Your final question comes from the line of Gregory Badishkanian with Citigroup.

Gregory Badishkanian - Citigroup

Just two quick ones -- the first, you mentioned that you saw signs of expanding booking curve but it still contracted. I know Carnival saw I think it was about 15 to 30 days of expansion. Is that kind of the same for you guys?

Brian J. Rice

I think on a macro level that we have seen indications toward 15 to 30 day expansion but I would caution that we are not ready to say that the consumer buying patterns have fundamentally shifted, and we are seeing a little bit of a business mix change. But if you took a normalized itinerary, I think our booking window is probably fairly consistent with what they saying.

Gregory Badishkanian - Citigroup

Right, great, thanks and also just in terms of consumer patterns, just kind of looking across the board, general themes, whether it’s premium versus contemporary -- you know, premium rooms or just even on-board spending, is there some general kind of themes that you have seen over the last few months? Have you seen some improvements? Is that kind of -- would you say that the consumer you think is more apt to, willing to spend more on cruises?

Dan Hanrahan

I can tell you that -- we had a pretty good third quarter for onboard revenue and some of the things that we were seeing that were encouraging is we saw guests booking shore excursions more than they have in the past. We’ve seen some -- we are seeing that they are communicating, so Internet and phone is working well. But the obvious things they are not doing, they are not spending as much money gambling, they are not spending as much money on art. But we did have a reasonably good third quarter third quarter for on-board bookings, or for on-board revenue, that is. How that will hold up in the fourth quarter, it is still too early to tell but we were somewhat pleased with what we saw in the third quarter.

Gregory Badishkanian - Citigroup

Did you see sort of a change the last month or so versus what you saw a few months ago? Are you starting to see -- are you seeing that sort of an improving trend or has it been pretty steady?

Dan Hanrahan

It’s been fairly steady. It’s better than it was at the beginning of the year but I want to be very reluctant to say that we saw a dramatic shift in the way the consumer is spending money on board.

Gregory Badishkanian - Citigroup

Great. Thank you.

Operator

I will now turn the call back over to management.

Brian J. Rice

We would just like to thank everyone for joining us today and Ian will certainly be available throughout the day for any follow-up calls you may have and we apologize we couldn’t get to everybody but Ian will be available throughout the day. Have a great day. Thank you.

Operator

And this concludes today’s conference. You may now disconnect at this time.

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Source: Royal Caribbean Cruises Q3 2009 Earnings Call Transcript
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