Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Royal Caribbean Cruises Ltd. (NYSE:RCL)

Q4 2009 Earnings Call Transcript

January 28, 2010 10:00 am ET

Executives

Brian Rice – EVP and CFO

Richard Fain – Chairman and CEO

Adam Goldstein – President & CEO, Royal Caribbean International

Dan Hanrahan – President & CEO, Celebrity Cruises and Azamara Cruises

Analysts

Robin Farley – UBS

Janet Brashear – Sanford Bernstein

Jeff Hanthan [ph] – Citi

Scott Barry – Credit Suisse First Boston

Felicia Hendrix – Barclays Capital

Steve Kent – Goldman Sachs

Tim Conder – Wachovia Capital Markets

Sharon Zackfia – William Blair & Company

Assia Georgieva – Stanford Financial Group

Kevin Malhotra [ph]

David Leibowitz – Horizon Asset Management

Operator

Good morning. My name is Latisha and I will be your conference operator. At this time, I would like to welcome everyone to the Royal Caribbean’s fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Rice, you may begin.

Brian Rice

Thank you, operator. And good morning, everyone. I would like to thank each of 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 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 on our Investor website, www.rclinvestor.com.

Before we get started, I would like to refer you of our notice about forward-looking statements. 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 has some comments to begin the call. I will follow with a brief recap of the fourth quarter, update our forward guidance, and comment on the recent demand environment. Adam and Dan will then talk more about their brands, and then we will be happy to open the call for your questions. Richard?

Richard Fain

Thanks, Brian. And good day to everyone. While it is a great pleasure that we are in a position to say sayonara to 2009, there were four particularly significant accomplishments during the past year that I think deserves special mention. First of all, our company and our industry proved yet again how resilient we are in the phase of an economic collapse of almost unprecedented proportions. It was a painful year, but we still managed to suffer less revenue decline than most comparable industries despite the double whammy of the economy and the swine flu.

Secondly, our management team sustainably reduced our non-fuel expenses by over 7% per berth. Thirdly, we launched two of the most impressive and profitable ships in the cruise industry’s history, Celebrity Equinox and Royal Caribbean’s Oasis of the Seas. And then lastly, we proved our company’s financial strength by completing financings on level and on the cost that we dismissed as impossible only 12 months ago.

Who would have imagined in January of 2009, the Royal Caribbean would end 2009 with almost $900 million of liquidity and know need to access the capital markets in 2010. I’d like to congratulate and thank the management team and all of our employees for their hard work and their focus on accomplishing these objectives.

Now looking forward to 2010, the year is looking much stronger than many thought possible only a short time ago. As you can see from this morning’s release, we are expecting good yield growth despite the continued poor economy. Wave season is off to a strong start with good volume and even higher pricing.

While we are also not seeing a dramatic run-up in pricing, our numbers demonstrate a slow but steady improvement in our revenue environment consistent with the slow but steady improvement in the economy. This improving environment combined with continued focus on cost will be meaningfully accretive to earnings this year. And you can see the power that this combination is likely to have in future years that are not weighed down by bookings made in 2009.

Operating costs continue to be a priority for our management team. Like a diet, it’s often harder to keep the weight off than it was to lose the weight in the first place. But we are determined to continue our exercising of the cost discipline that has served us so well over the last few years. The impact of our new ships has also been a significant boost. Adam will comment more about Oasis shortly, but from 40,000 feet, I’m pleased to report that the vessel introduction was a gratifying success.

Our guest lover, she is commanding tremendous premiums on ticket revenue, onboard spending is handily above other ships. And the economies of scale are working. But while Oasis of the Seas got the most publicity, Celebrity Solstice class ships are kicking butt too. Ticket revenue on these vessels are commanding a premium, on-board spend is higher, and costs are lower. These Solstice vessels represent to Celebrity guests while Oasis and Freedom represent the Royal Caribbean International guests.

Clearly, the business model we have been espousing for these ships is producing the hope for results. These new ships are incrementally more expensive to build, but they are quantumly more profitable to operate. That combination generates better returns on our investment. At the same time, it’s important to remember that the bulk of our profitability still comes from the rest of the fleet. And it’s encouraging to know that our yield guidance would still be positive for 2010 even if we excluded the Oasis and Solstice class ships.

Now, many of you have asked us to comment on what this means for future growth and for possible new orders. As we’ve said before, we look forward to a period of slower growth expansion that enables us to build our profitability more with margin expansion than purely with volume expansion. We remain to believe that a more subdued long-term growth rate is appropriate for both our yield accretion and improvement in our returns.

We also continue to pursue our long-term objective of returning to investment grade rating. But at the same time, we have seen the power of a well executive new building program. And as market conditions warrant, we will certainly consider next steps. Note, however, that due to construction lead-times, even if we would act now, it is unlikely that any new building would deliver in time to impact results before 2013 at the earliest.

Now, before I turn the microphone back to Brian, I’d like to make a couple of short comments about the situation in Haiti. A disaster like this affects all of us. Looking at the unimaginable death toll and the pervasive suffering should make all of us realize just how fortunate we are. It’s especially impactful to us at Royal Caribbean because of the large numbers of Haitian-Americans who are part of our community.

You also know that we have a private destination on Haiti’s north coast, which makes us privileged to have been one of Haiti’s largest foreign investors for over 30 years. We employ hundreds of Haitian workers, many of whom suffered grieve as personal loss. And all of whom were impacted directly. Obviously, we’ve tried to help them. Firstly, to help find out about their loved ones and then with direct financial aid as well as grief counseling. All of this together makes us at Royal Caribbean feel the devastation more personally than most do. And I do feel most people feel it intensely and as well.

Regarding the relief effort, it really never was a doubt that we would help. Haiti needed our help and we couldn’t refuse. Part of that involved deciding whether it was better for our ships to return to Haiti or to sail by the island and take our guests elsewhere. We couldn’t help agonizing over the idea of people taking their holiday so near the devastation. But you also couldn’t refuse the country’s plea that we help it in its time of greatest need.

In the end, we decided that the moral imperative demanded that we bring to people of Haiti much needed relief supplies and equally needed tourists and economic activity. We have since then transported more close to 1 million pounds of food, water and medical supplies, as well as providing other logistical support. We have also brought desperately needed tourism dollars to Haiti that are essential to their rebuilding effort. Certainly the Haitian people are glad we’ve done so, as was summarized by one Haitian worker who said, “Without those ships, we don’t eat.”

I’m also pleased to note that our guests have been extraordinarily supportive and complimentary. They have given our captain standing ovations and more of them are going ashore than usual. We are also spending record amounts onshore. But maybe that’s because they know we are contributing 100% of the proceeds to the relief effort. I’m proud of the response from our people here and in Haiti. Hopefully, we are now entering the next phase of the response involving the rebuilding effort in Haiti. This will unfortunately require a massive sustained effort from all involved, and we intend to continue to be an active participant and contributor.

With that, I’ll let Brian take you a bit deeper into the numbers. Brian?

Brian Rice

Thank you, Richard. I’d like to briefly go through the fourth quarter results, which we’ve summarized on the second slide. In the fourth quarter, we had a profit of $3.4 million or $0.02 per share, which was better than our previous guidance of a loss of approximately $0.05 per share. Net yields were at the better end of our guidance, down 7.2%. Ticket revenue benefited from stronger than expected close in booking and even onboard revenue was slightly stronger than we had forecasted.

Net cruise costs per APCD were 10.5% lower than the same time last year, which was also better than our guidance. Excluding fuel, net cruise costs were down 8.8%, lower than same time last year and better than our guidance of down 7% to 8%. On slide three, you can see for the full year, earnings per share were $0.75 versus guidance of approximately $0.70. Net revenue yields declined 14.2% for the year, and on an as-reported basis, declined 12.3% on a constant dollar basis.

Net cruise costs per APCD declined 9.8% for the year, and excluding fuel, were 7% lower. Our management team did an excellent job controlling costs while maintaining very high customer satisfaction rating. I would also like to point out that the cost savings were net of our continued investment in the organic growth of international market. These investments have enabled us to double the number of international guests on our brand over the last five years. But we have enabled to fund this expansion through continuously improving efficiency in our established market.

Now I’d like to provide you with an update on booking. It is still early in the selling cycle, but the wave season is off to a promising start. Each of the last three weeks has generated record booking volumes for us at pricing that is running ahead of the same time last year. Clearly we are not back to pre-recession demand level, but we are pleased to see yield recovery underway. As of today, our booked load factor and average per diem are ahead of the same time last year for all four quarters and the full year.

On slide four, we have spotted the variance in our booked load factor for all sailings in 2010 as compared to 2009. As you can see, since we lapped the beginning of the recession back in September, we are experiencing clear signs of recovery in our order book. In fact, since September, our booking volumes have been running more than 30% higher than during the same period a year ago. This acceleration in booking volume has also begun to have a positive effect on pricing.

On slide five, we have graphed the year-over-year variance in our cumulative booked average per diems for all 2010 sailing. Similar to the load factor slide, you can see a nice recovery is underway, and pricing is trending upward as compared to a year ago. And while our current price levels are still being influenced by the weak economy, we are clearly in a better position to control discounting and even take some measured price increase. Adam and Dan will provide more color by brand and itinerary, but in aggregate, we are feeling more positive about 2010 than just a few months ago.

On slide six, you can see we currently expect yields to improve around 2% in the first quarter and between 3% and 6% in the full year. If we adjust for today’s exchange rate, yields in the first quarter are projected to be around flat, and for the year, we have between 3% and 5%. On the cost side, our management team continues to be very focused on driving efficiency without comprising the guest experience or our strategic investments.

For the first quarter, we expect net cruise costs, excluding fuel, to increase approximately 1%, and for the full year, we expect net cruise costs, excluding fuel, to be flat to up slightly. Adjusting for today’s exchange rate, we would expect to be about flat to down slightly for both the first quarter and full year. We have included $687 million of fuel expense for the year and $163 million for the first quarter in our guidance based on today’s pricing.

We are 58% hedged for the first quarter and 50% hedged for the full year. We are also hedged 50% for 2011 and 15% for 2012. For our earnings per share guidance, we have included a $0.39 gain from a legal settlement that will be realized in the first quarter. We currently expect earnings per share to be between $0.25 and $0.30 for the first quarter and between $2.00 and $2.20 for the year.

Moving on to balance sheet, as of December 31st, we had approximately $900 million in liquidity. We recently announced that we have received financing commitments for 80% of the purchase price of the Allure of the Seas, and we now have financing in place for all of our new-builds. In 2010, we will have approximately $770 million of scheduled maturities and anticipate easily funding this through operating cash flows. At this time, we do not foresee a need to access the capital markets in 2010, although we may be opportunistic under the right circumstance.

Now I’d 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, everybody. Believe it or not, I do not intend to talk about Oasis of the Seas on every earnings call. In fact, this call, which is the first since the ship went to revenue operation on December 1st will be the last time that I will especially focus on her.

As Richard briefly indicated, we are very pleased with our actual experience with Oasis of the Seas. The publicity and the inaugural program that preceded her revenue service exceeded our very high aspirations. The quality of the product offering has been an immediate success.

From a guest rating standpoint, Oasis has already leveled with the highest rated ships on our fleet, even though we continue to learn more about how to operate her every week. In contravention of the concerns expressed by some about our ability to manage the logistics of such a large ship, we do not face issues of (inaudible) onboard. The ports have no issues handling the ship, and our peer check-in ratings at the fabulous new Terminal 18 in Port Everglades have been higher for Oasis than for any other ship in the fleet for every one of her sailings thus far.

Last but not least, she is driving very considerable ticket size premiums over all Caribbean based ships. By that I mean, ours and everybody else’s. With healthy load factors and her onboard revenue to this point, it has exceeded our expectations.

In summary, we are exceptionally pleased and I would like to thank everyone inside and outside of the company who contributed to the success of Oasis launch, most particularly the outstanding men and women who make up her crew. Before I turn to the wave booking period, I will note that we are just over nine months away from taking delivery of Oasis’s sister ship, Allure of the Seas, and her construction process is proceeding smoothly at this point.

Moving to the wave, in general, the first few weeks have exceeded our expectations, as Brian noted. Our internationally oriented or developmental products, which comprised six of our 21 ships this winter, are all reflecting a positive momentum, which is encouraging both for year-over-year revenue yield performance as well as for the long-term outlook for the Royal Caribbean International brand.

In market-after-market we continue to win the top awards for best cruise line, which is a reflection of the brand’s global appeal. The outlook for Europe where we will have eight ships, including four Freedom or Voyager class ships, is particularly encouraging, with strong performance both from our European and North American point of sale.

Our three ships in Alaska are also booking well in comparison to last year’s disappointing decline in performance. We have seen promising volume on our Caribbean product portfolio, which has contributed to the fact, as stated by Brian, that we are ahead of last year on both rate and volume in each of the four quarters. We still have a lot of Caribbean cruises to sell in 2010, though our visibility to this segment is still relatively limited.

While we have not experienced pronounced weakness in any of our product groupings, the areas of least strength are the cruises based on the West Coast and the Northeast of the US. But again overall, we are pleased with the start of the wave season. Despite our focus on cost control, we continue to generate strong guest satisfaction rating. We are looking forward to advancing our brand in 2010. At the same time, we are committed to helping with recovery and reconstruction in Haiti. Dan?

Dan Hanrahan

Thanks, Adam. Good morning, everyone. It’s been an exciting time for celebrity. As you know, we kicked off the year and celebrated our 20th anniversary by re-launching our new brand platform Designed For You. Our brand design in Solstice-class ships continued to perform well. And we are looking forward to Solsticizing all of our Millennium-class ships over the next few years.

We are also looking forward to taking delivery of Eclipse, our third Solstice-class ship, in April. In the fourth quarter, we once again had healthy close-in demand for our cruises in both Europe and the Caribbean. In general, volume was a bit better than what we thought at the time of our previous call. Our onboard revenue also performed better than we had planned, driven by show act [ph], gaming and onboard communication. And expenses were slightly under where we thought we would be, driven by our focus on costs.

In the Caribbean, we have continued to see close-in bookings for the first quarter. Some of the closed-in business is being driven with discounting, but overall Caribbean pricing remained consistent with our expectations a few months ago. This summer’s European season is looking very strong for Celebrity. Both Equinox operating 10 and 11-night net cruises from Rome and Eclipse, our first ship dedicated to the UK market, operating summer cruises from Southampton are performing well at very healthy prices. I’m pleased to say bookings are also performing quite well on our non-Solstice-class ships operating in Europe.

We continue to be pleased by the results of our efforts to build our brand beyond the US market, and we are seeing a high percentage of bookings coming from outside of the US and many of our Europe cruises. We will continue to operate three ships in Alaska, and all three are doing much better than what we had seen last year at this time. However, Alaska is still not as strong as in 2008 and past years.

We do have a couple of new deployments for Celebrity that are worth mentioning. For the first time in several years in response to feedback from consumers in the trade, we are once again operating seven-night Caribbean cruises year-round from South Florida. The award-winning Solstice will operate those year-round Caribbean cruises. Our cruises at the Caribbean tend to book closer in than cruises in Alaska and Europe. Our visibility for our year-round Caribbean sailings will improve in the coming weeks.

We are also back in the Bermuda market after a three-year absence, with Summit operating seven-night cruises from Cape Liberty. Bermuda cruises tend to be first regionally, and we expect this product to be a big win for Celebrity in the Northeast. As you’ve heard from Brian, we are all very pleased with these first few weeks of wave and looking forward to the year ahead. Brian?

Brian Rice

Thank you, Dan. We’d now like to open the call for your questions. As a reminder, we ask that you limit your questions to no more than two. If you have more than that, we’d be happy to follow up with you after call. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from the line of Robin Farley.

Robin Farley – UBS

Great, thanks. I wonder if you could expand a little bit more on potential plans for new-builds in terms of -- it sounds like 2013 will not necessarily be a pause in deliveries. And also what brand or ship class are you thinking about more than others as you think about forward plans? Thanks.

Richard Fain

Thank you, Robin. I’m not sure that I can add much more to what we’ve said. We’ve historically tended not to make speculative comments about what we might or might not do. We think that just adds to confusion in the market. I think we’ve been fairly consistent in saying that we are looking forward to a period of slower growth, and I think that’s still the case. Other than that, I think we would be simply looking at the market as it evolves. We look at what opportunities there are in terms of on the shipyards, but also in terms of if we saw something that particularly fit a need that we had. But I think it’s way early to speculate on which particular brand or market that might be in. It’s just too early for us to comment on that.

Robin Farley – UBS

If I could just ask it way then, I think that the Oasis venue said that the next order would not necessarily be another Oasis class that you might be more likely to -- and so by that, I would think that would mean Solstice or Freedom class. Is that still -- would you at least say that that’s still the case or not that -- even that’s on the table right now?

Richard Fain

Well, I think we always like to keep our options open in all ways. But I have said before and I think it’s still remains the case that we think that Oasis was a special case, a special opportunity. And I think I would probably give it less likelihood that we would have more Oasis than the two that we have.

Robin Farley – UBS

Okay. Great. Thank you very much.

Operator

The next question is from the line of Janet Brashear.

Janet Brashear – Sanford Bernstein

Thank you. Last year -- in 2009, you made some progress on SG&A. Can you comment on what you expect for SG&A in 2010 versus the 2009 results?

Brian Rice

I think -- this is Brian. Our SG&A will be consistent with our overall cost guidance. We -- I mentioned in my opening comments that we’ve been investing a lot in some of the new international arenas. We’ve been opening offices. We’ve been -- we're growing our brands organically in these markets that we are investing in the market in the sail side. I think it’s fair to say that we continue to find efficiency in our core operations, and we expect that to continue. But overall, I think the general theme is that our costs, on a reported basis, will be flat to slightly up, and when you factor in base exchange rate, will actually be flat to slightly down next year.

Janet Brashear – Sanford Bernstein

Thanks. I’d like to just ask one more. The capacity in Europe is increasing dramatically next year. And unlike North America where you’re getting some particular support from new ships and things like that, you have new capacity that’s all new in Europe. What do you suppose the impact on pricing would be? Do you expect pressure on pricing to crop up in 2010 based on the capacity (inaudible)?

Adam Goldstein

Hi, this is Adam. Well, I gave a fairly, I would say, upbeat report in my commentary in the script about where Europe is looking for this year. I mentioned that we have eight ships, but we also had eight ships in 2009. Really the only difference for us is that we upsized and brought in and will be bringing in an additional Voyager-class ship in place of one of our smaller ships that will stay out in Asia all year long. So from Royal Caribbean International standpoint, there is not actually a very significant increase in capacity. And what we are seeing in terms of booking, both in North America and Europe point of sale and in terms of rates, is encouraging at this point.

Janet Brashear – Sanford Bernstein

Thank you.

Dan Hanrahan

Janet, this is Dan. One of the interesting things that we’ve done on the Celebrity side in Europe is we have Eclipse, which we will be sourcing predominantly out of the UK. So while it does look like capacity is up, what we’ve got is an opportunity there to really -- for Celebrity anyway to expand into a new market. So we are tapping into new supply, which is we’ve been very, very gratified by the pricing we are seeing there and the interest from UK guests has really been terrific.

Janet Brashear – Sanford Bernstein

Thank you.

Operator

Your next question is from the line of Greg Badishkanian.

Jeff Hanthan – Citi

This is Jeff Hanthan [ph] speaking on behalf of Greg. I noticed in four key that are really big (inaudible) between your ticket revs and your onboard revenue. What really drove that and is that a sustainable run rate for 2010?

Brian Rice

Jeff, actually both our ticket revenue and onboard revenue performed a little bit better than our guidance. I think we clearly benefited from the introduction of Oasis. We have seen good performance on the Solstice class. I think going forward -- we’ve always said that ticket revenue tends to be a little more volatile than the onboard revenue. I think going forward, we provided guidance of up 3% to 6% that’s probably driven a little bit more by assumptions on ticket revenue, recoveries and perhaps onboard. But we are seeing positive trends with onboard as well.

Jeff Hanthan – Citi

Okay. And then just a quick follow-up. You guys (inaudible) job, cutting costs in 2009. And I think you are protecting flattish-type costs for this year. Where do you see most of that coming from?

Brian Rice

It really -- it's just a tremendous amount of focus by our management team to find those cost that we can become more efficient, again reiterating, without comprising the guest experience or really the growth in international. There has been a laser focus on it. Also making sure that these are sustainable cost savings, we are committed to continuing to spend in marketing and sales. Most of it in shore side efficiency that we’ve been able to get. I’d also say that as we’ve matured in some of the international markets at very nice growth rates, we begin to get economy to scale in those markets as well.

Jeff Hanthan – Citi

All right. And just one last one, I apologize, I know you warned too. But any update on what you are seeing with booking windows? I think last quarter you had mentioned you were seeing signs of expanding a bit. Just kind of broad based throughout your entire portfolio. Thank you.

Brian Rice

Sure. I think my comment on booking windows overall is it probably had a slight amount of expansion. It really varied significantly by market. I think some of the premium itineraries such as Europe and Alaska were seeing the booking window move out from where it was a year ago. But Adam alluded to the West Coast, specifically Mexican Riviera. I think we are seeing a more contracted booking over there. When you net it all out, I’d say the booking curve was slightly expanded from where it was, but not -- certainly not back to where it was before the recession.

Jeff Hanthan – Citi

Thanks.

Operator

Your next question is from the line of Scott Barry.

Scott Barry – Credit Suisse First Boston

Hey, Brian. To what extent do you anticipate any improvement in your load factor in that net revenue yield guidance you gave? And then secondly, could you address the variance in your capital spend, it looks like it’s about $400 million higher than the guidance you gave?

Brian Rice

Sure. The capital spend, really if you look at the cash flow statement, below the investment is property, plant and equipment is the derivative line. That derivative line is debt [ph] of gains and losses that were losses on interest rates, but a rather large gain on the FX portion. So when you net the two out, you are pretty much back to our guidance.

Richard Fain

In 2009, our load factors were about 2 percentage points down from 2008. I think we had a little bit of a slip on load factor because of the impact of the recession. I think there is also a little impact from some of our new developed nano market. I think we would expect our load factor to begin to recover, probably fall somewhere in between 2010 and ’09 -- I'm sorry, ’08 and ’09 level.

Scott Barry – Credit Suisse First Boston

Great, thanks.

Operator

Your next question is from the line of Felicia Hendrix.

Felicia Hendrix – Barclays Capital

Hi, guys. I need you to help me understand something. You guys have been really positive on the call. You talked about positive momentum. You mentioned that the wave is better than expected, discounting is less than expected, all really positive data points. Yet I’m just struggling with your first quarter yield guidance. So on your last call, you said that first quarter yields are going to be positive in both constant and current dollars. And now it looks like they are indeed positive, including FX, but when you back out FX, they are flat. So that seems like a change. And I was hoping to understand that. And then also, what was driving -- what was like now is going to be higher net cruise costs for the year excluding fuel?

Brian Rice

Felicia, on the second part on the cost side, we have said -- we said on the last call that we had a goal of being flat in 2010. In our commentary, we’ve said that on an as-reported basis, we will flat to slightly up. But when you look at it after FX, we are saying we are going to flat to slightly down. So I think we are very consistent with where we have been previously. For the first quarter, I think we are talking about marginal changes and we are giving directional comments on our last call. I think we feel fairly consistent about the first quarter performance today than we were a few months. I think we’ve shown since autumn [ph] in Q3 where yields were down in the teens [ph]. We’ve had a nice recovery in Q4 where we were down just over 7%. We are now talking about going up 2%. Obviously our comparables are easier in Q2 and Q3. So we would expect more opportunity there. I would also comment that in terms of ’09, we probably saw more pressure on what we would define higher end products. And I think we are seeing relatively stronger --

Felicia Hendrix – Barclays Capital

Hello?

Operator

Ladies and gentlemen, please hold.

Brian Rice

Operator?

Operator

Your line is open. Go ahead.

Felicia Hendrix – Barclays Capital

Hi.

Brian Rice

Sorry. Felicia?

Felicia Hendrix – Barclays Capital

Yes. You start -- we all lost you when you’re starting to talk about ’09 seeing more pressure on the higher end.

Brian Rice

Yes. I apologize for that. All of our calls on this end just went completely dead there for a moment. We’re not sure what happened.

Felicia Hendrix – Barclays Capital

It was a vibe I was sending.

Brian Rice

Well, I think again, in ’09, we felt more pressure on what we would call the higher end products. I think last year (inaudible) talk about Alaska being under a tremendous amount of pressure. If we look out to 2010, we are seeing more of the higher end products having a disproportionate recovery to the products that didn’t suffer as much as ’09, which bodes will more for Q2 and Q3 when Europe and Alaska begin to kick in. But I think what we are seeing here is a steady recovery. Richard alluded to, as we come out of 2010, we are looking forward to a revenue environment where we don’t have a lot of business on the books that we’ve booked in ’09. We have a disproportionate amount of that first quarter having ’09 sales. But I’d just reiterate our view of Q1 has not materially changed.

Felicia Hendrix – Barclays Capital

Okay. It just -- it seems like it does, but I understand your -- I hear you. Just final question, just regarding the fuel guidance that you gave, I was wondering -- does that already include the efficiency that you are enjoying from the Oasis or do you think we could see upside to that?

Brian Rice

This is our operating plan. The guidance that we’ve given and our -- I think we mentioned in the press release, since ’05, we gained about 11% efficiency overall. The brands continue to focus on ways to become more efficient, but the numbers we’ve got it do include (inaudible) as well. One thing I would call out is, we have changed a lot of itineraries in 2010. We are going into new markets, and a lot of times that can have an influence on our consumption as well.

Felicia Hendrix – Barclays Capital

All right. That’s very helpful. Thank you.

Operator

Your next question is from the line of Steve Kent.

Steve Kent – Goldman Sachs

Hi, good morning. Just a couple questions. First, as the sister ships to Oasis and Solstice come on line, do you expect them to maintain the same level of premiums? Is that in your guidance? And I guess the reason I’m asking you is my recollection is that on the Freedom-class ships that some of the -- as the second wave came on, you saw some pricing fade. And then just generally, any view about the new Disney ships coming on? And then finally, wave as a percentage of the total year, can you just give us an update of what percentage you think the wave period will account for this year versus previous years?

Dan Hanrahan

Hey, Steve it’s Dan. I’ll start. We are looking at the third Solstice-class ship coming on in this summer. And we’ve been extremely pleased that we’ve seen yields all the way along. Solstice was terrific when it came on. Equinox maintained it. And actually I’m very pleased on what we are seeing with Eclipse, even a little improvement from what we had originally anticipated we get out of Eclipse. So we haven’t seen any fall-off at all and have been quite pleased with the results that we’ve had.

Adam Goldstein

Hi, Steve, it’s Adam. I just wanted to comment quickly on Allure of the Seas simply because she is only in December. So she doesn’t have more than a 1% or 2% impact on our year, and really I would say immaterial for the purposes of your question.

Richard Fain

And then I’d comment -- or I’d rather won’t comment on the Disney ship. I think just in general -- first of all, we don’t comment on other ships. But I think historically we have seen that Disney -- because the Disney brand is itself so powerful actually helps add a hail to the market. It does tend to validate the relevance of cruising as a vacation choice, and much as we felt when Disney first came into the cruise industry, we actually thought the net impact of that would be positive. And I’m hopeful that this will be too.

Brian Rice

Steve, on the wave question, I would say wave continues to be important to us. I think several years ago, we said it wasn’t the sea change one way or the other that it had been probably in the 1990s that we even preferred to it as high tide. I think as we diversify our product sourcing, we talked about we are only a year or two away, more than 50% of our guests will come from outside of the United States. We’re feeling with the little more contracted booking curve today than we would be accustomed to do in normal sign [ph]. It’s still very important, but I wouldn’t say it’s the end-all, be-all to (inaudible). But we are encouraged by it. We are happy to see that we are taking record booking volumes over the last few weeks. So it’s very reassuring to come back with the holidays and that business coming in.

Steve Kent – Goldman Sachs

Okay, thank you.

Operator

Your next question is from the line of Tim Conder.

Tim Conder – Wachovia Capital Markets

Thank you. Regarding your overall net yield guidance, in 2009, both yourselves and the industry had some issues with H1N1. Obviously, that doesn’t seem to be that much of an issue now. But also in -- I think you quantified H1N1 in the Pullmantur problems that you had as far as the hit for 2009. In your overall yield guidance, how Pullmantur are factored in? Is it still a drag? Are you expecting some recovery in that net yield guidance?

Brian Rice

Tim, I think Pullmantur is clearly in our guidance. I think that Spanish economy continues to see likely the weakest that we are operating in these days. But I think we are feeling that Pullmantur has an opportunity for yield accretion in 2010. We referenced H1N1. My recollection is we said that that impacted it right around 1%, maybe just over 1 percentage point for the year. I think while we wouldn’t specifically assign it to H1N1, I’ll just build on Adam’s comments that the Mexican Riviera itinerary seemed to be one of the weaker markets right now. Whether that’s beneath the California’s economy or what we are seeing is residual effects of that, we are not sure. But I think our yield guidance of up 3% to 6% somewhat speaks for itself and includes all that.

Tim Conder – Wachovia Capital Markets

Okay. And Brian, again, just to clarify the 1% yield hit was due to H1N1 alone and excludes any effects from Pullmantur.

Brian Rice

Yes, that’s including Pullmantur being affected by H1N1. Both Royal Caribbean International and Pullmantur were impacted by H1N1.

Tim Conder – Wachovia Capital Markets

It is about $0.27 for the whole year, correct, for ’09?

Brian Rice

That’s correct.

Tim Conder – Wachovia Capital Markets

Okay, okay. Okay. So again, Pullmantur will be yield accretive in 2010?

Brian Rice

Well, we don’t provide segment reporting, but I’ve tried to indicate that we are feeling better about Pullmantur. The economy is clearly not better, but the management team is doing very good job operating in a very tough environment.

Tim Conder – Wachovia Capital Markets

Okay. Fair enough. Thank you, Brian, on that. And then just a little more color, Dan or Adam, whoever. Can you give us a magnitude of the premiums, a lot of estimates out there, including the premiums that Oasis is getting versus the rest of the fleet of Solstice versus the rest of the Celebrity flat? And then in your commentary regarding onboard spending, of those premiums that you’re getting on the ticket side, directionally if you are getting a 30% premium on tickets versus a fleet, how are onboard as a percent versus the fleet? It’s sort of the same directional type of question.

Dan Hanrahan

Tim, it’s Dan. That was a brilliantly asked question.

Tim Conder – Wachovia Capital Markets

Thank you.

Dan Hanrahan

Unfortunately we don’t give out the detail on that. But it is better. I mean, we are pleased. And we are seeing it better on Solstice class in ticket, and Solstice class in onboard, I can’t give the quantifiable details, but I can tell you that we are very pleased and we are seeing similar things. Obviously we don’t know what onboard will be yet for Eclipse. We haven’t taken delivery, but we are seeing similar things on the ticket side.

Tim Conder – Wachovia Capital Markets

Okay. I mean, directionally, is it a little -- would you say if your premiums are up 50%, would your on-boards be 25%? Would it be -- I mean, would it be half of the rate of ticket plus or minus over that half of the rate of the ticket premiums?

Dan Hanrahan

It’s less than that. We are seeing more of an increase on tickets than we are on onboard. We are seeing a nice increase in onboard, but we are getting more in tickets.

Tim Conder – Wachovia Capital Markets

Okay, okay. Thank you, gentlemen.

Dan Hanrahan

Okay, thanks.

Operator

Your next question is from the line of Sharon Zackfia.

Sharon Zackfia – William Blair & Company

Good morning. I think there has been a lot of chatter about the Oasis and maybe a cannibalization of other ships in the Caribbean. Could you address that for Royal Caribbean specifically? Excuse me.

Adam Goldstein

Hi, Sharon, this is Adam.

Sharon Zackfia – William Blair & Company

Hi.

Adam Goldstein

Well, I mentioned again earlier that in general we are pleased with what we are seeing in our Caribbean product portfolio. It’s early in the wave and understand that we have a tremendous amount of Caribbean cruises to sell this year. And what Oasis has done for us and Allure will also do for us is allow the continued global expansion of our fleets. So independence [ph], let’s say, a year from now, the next coming winter, won’t even be in the Caribbean. So we have the sort of domino effect, which sort of tampers the overall Caribbean capacity growth and increases our global growth. That’s (inaudible) by bringing the big ship into Fort Lauderdale and the other ships going out. So Freedom-class ships are still very formidable ships in the industry, which is why we are so pleased that Oasis is getting the premium that she is getting over them and other ships even though they continue to be very strong competitors in the marketplace. And so I would think overall the tremendous publicity that we’ve got in connection with Oasis launch have strengthened the brand in general.

Sharon Zackfia – William Blair & Company

I guess separately for both Royal Caribbean and Celebrity, you saw some nice sequential tick-up in onboard spending, at least a year-over-year improvement. Can you talk about where you are seeing that improvement on both brands?

Richard Fain

I’ll just comment. I think it’s across the board. We are seeing better beverage sales, we are seeing -- the shops are doing better, the casinos are doing better, the -- you name it. The spas doing very well on both ships. It’s really across the board for two reasons, one, the -- three reasons actually. One, the facilities are better and larger and more opportunity. Secondly, we also have we think better systems in place. And that’s coming back to the earlier question, one of the things that helps us the benefit goes to other ships because the new systems that we put in place on both Oasis and Solstice to expand to be better able to lever the service on both ships, we retrofit to other ships. And so that’s helping us. And lastly, there is -- people pay more for their cruise and they are enjoying their cruise a lot. And so I think people tend to feel a little bit freer with their money. So it’s really across the board. It’s not that there is one area that’s just overwhelmingly dramatic.

Sharon Zackfia – William Blair & Company

Thank you.

Operator

Your next question is from the line of Assia Georgieva.

Assia Georgieva – Stanford Financial Group

Adam and I think John Weis, who is probably not on the call, I wanted to congratulate you on the Solstice and efforts that you’ve made towards helping the Haiti population. So I wonder if everyone on the call can actually pledge to themselves to contribute at least $1,000, I think it would be a worthwhile effort. So again, keep up the good work and I’m sure the island nation appreciates the fact that you are back there and helping them out. Going into the results for Q1 expectations, there is about a $20 million expectation of a benefit, which I think is about $0.09 a share. Would you comment on that? Maybe Brian, you can take this up.

Brian Rice

Sure, Assia. Originally, this deal -- and hats off to Dan Hanrahan and his team and our attorneys on this deal -- was really negotiated on the courthouse steps right before it was scheduled to get a trial. And we wanted to get a press release out quickly. There were pretty much two components to that. The first is the $0.30 that we had originally announced. And there are some deferred cash aspects of the negotiation that are to be realized over future years. And we’ve come to realize here towards the end of our close that the revenue recognition for that has to be taken in the first quarter where we had originally thought that that would be a deferred recognition. And that’s where the extra $0.09 came from.

Assia Georgieva – Stanford Financial Group

In addition to the $65 million or $68 million, you’re going to be receiving additional money?

Brian Rice

Correct. There will be an additional $20 million that could come in up to five years time. But because of the accounting policies, the certainty of those payments, we have to recognize it in the first quarter.

Assia Georgieva – Stanford Financial Group

But in terms of the balance sheet, in your liquidity, the $68 million you have now?

Brian Rice

Well, when the deal is absolutely finalized, we will get the $68 million in the first quarter. The other $20 million is deferred over time, though it will help liquidity in the first quarter.

Assia Georgieva – Stanford Financial Group

So you could pay a dividend at about half the rate of what you used to have and that kind of will help you pay that dividend for at least 2010?

Brian Rice

Well, we’ve not made any announcement about any change in our dividend policy.

Assia Georgieva – Stanford Financial Group

Okay. And the second question -- and Brian, that’s again for you. Net cruise costs being up 1.5% in Q1, is that Pullmantur-related, is that the core business? What is driving that?

Brian Rice

Well, we’ve said that net cruise costs will be up around 1% in Q1. Again, that is on an as-reported basis. If you adjust for currency, we’ve said it will be flat to probably down slightly. It really is timing of expenses. It’s not anything specific to Pullmantur. We are in a lot of developmental markets, more during the winter season, as we try to develop new markets to help smooth out our earnings. So you might have a little bit of disproportionate spending in Q1, but nothing material.

Assia Georgieva – Stanford Financial Group

Any dry docks that might be a greater proportion this year versus the 2009 Q1?

Dan Hanrahan

Assia, this is Dan. Nothing in the first quarter in terms of dry docks, with Celebrity Constellation goes in the dry dock in the second quarter. And we will be doing a revitalization at that time, but not Q1.

Assia Georgieva – Stanford Financial Group

Okay. All right. Thank you so much.

Adam Goldstein

You’re welcome. This is Adam. I just wanted to add to that the Royal Caribbean does have dry docks in the first quarter, but nothing out of the ordinary. And I also wanted to thank you for your comments related to Haiti, which I think --

Assia Georgieva – Stanford Financial Group

Yes, I think very helpful what you and John Weis have been doing in terms of -- relating (inaudible). So thank you, Adam.

Adam Goldstein

Right. Well, that’s the way the publicity works, but I think it’s important to note that this has been (inaudible) of support from across the company and involving many others. And this is a country that required enormous reconstruction before the earthquake and now has entered into another dimension. So your thoughts are very much appreciated.

Assia Georgieva – Stanford Financial Group

And your efforts, I hope that you just are able to continue to bring supplies on the ships.

Operator

Your next question is from the line of Kevin Malhotra [ph].

Kevin Malhotra

Good morning, everyone. I was hoping -- Richard had noted that yields would still be positive for the remaining portion of the fleet, excluding Oasis and Solstice. I was hoping you would provide some color on what sort of contribution the newer hardware is putting on. Additionally, with the fuel hedge guidance that you gave here, I was hoping you could give us on the levels of crude where the hedge component is pricing at it right now. Thank you.

Brian Rice

Kevin, I don’t have a whole lot of details on the hedging in front of me. If you could follow up with Ian after the call, I think he’d be happy to try and help you through that. In terms of directionally on yields, we’ve said that the majority of our yield accretion in 2010 is being driven by the Oasis and Solstice-class vessel. We made the comment in the press release and Richard also mentioned that the base fleet is contributing to yield accretion in 2010 as well, which I think is a little bit of a change in how people were perceiving, how the market is shaping up in 2010. I think there was a lot of feeling that we were becoming a one trick pony, if you will, and that it was really the newer vessels that were driven that. And what we are trying to say now is the 39 ships that make up our fleet in aggregate are contributing.

Kevin Malhotra

Okay. And just one last question on the dividend, I know you haven’t updated your methodology, but I was wondering -- is it a prerequisite to get to investment grade before you start paying that out, or is it more of a general feeling that cash flows, return on invested capital and EPS continue to move in the right direction? Is that getting more comfortable to begin to reinstate that dividend level?

Brian Rice

It clearly is up to our Board of Directors, but at this time, we discontinued the dividend. We know it’s something that shareholders value, but we don’t have any current plans to do so. We don’t have any restrictions in terms of when we are allowed to continue it other than it’s at the discretion of our Board of Directors.

Kevin Malhotra

Okay. Thanks a lot. Appreciate it.

Brian Rice

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

Operator

Okay. Your final question is from the line of David Leibowitz.

David Leibowitz – Horizon Asset Management

Good morning. Briefly, could you tell us the number of years it will take to earn your full investment on both Solstice-class ships and Oasis-class ships versus the rest of the fleets?

Brian Rice

David, we really have never provided that level of detail. We don’t do --

David Leibowitz – Horizon Asset Management

Does mean you can’t change now.

Brian Rice

We don’t think we will do so today.

David Leibowitz – Horizon Asset Management

Okay. Second question. If the -- any new-build outside of what’s already on the books will not be available until 2013. And by everybody’s admission, you will be slowing down the number of new-builds. How do you want to at the same time enter new markets, keep your same share of markets in existing markets where you clearly are getting very fine pricing, and lastly, at the same time, replace any number of the 15 vessels, which will be 15 to 30 years old at that time?

Adam Goldstein

Hi, David, it’s Adam. And those are all certainly good questions that we spend a lot of time thinking through in our strategic planning process. And we are fortunate that we have a good number of ships, including the recent new-builds and the ones still coming that we’ve been able to make the meaningful statement in the markets that we determine were a priority for our company. And we have now six brands that we are involved with that serve those purposes for us in various parts of the world. So we do have to make strong and difficult trade-off decisions. But when you look forward -- or when we look forward, I should say, we feel like we can get the capacity in the markets, which are growing or can be made to grow, and we can compete successfully all over the world with varying market share. So there will be a slowdown that’s fairly inevitable when we are talking about 2013. It’s the likely timeframe for any potential ordering that we could do in the future. So we have to be very sharply focused on the decisions that we make about market penetration. But we are pretty comfortable though we can get capacity where it needs to be for the near future.

David Leibowitz – Horizon Asset Management

But you are also going to withdraw capacity with ships that are 15 to 30 years old.

Adam Goldstein

We have -- we are operating the ships -- I'll speak for the Royal Caribbean International fleet. We’ve got Monarch and Majesty of the Seas, which are nearly 20 years old, which are still very solid parts of our guest offering and are attracting significant numbers of first-time cruisers into the short cruise market. Some of those people are graduating to be cruisers with us for longer lengths of time in other parts of the world. So with our refurbishment and maintenance programs and our dedication to product quality, we can continue to operate very successfully with ships in that age range.

Richard Fain

If I could just add on that as it relates to something Dan said earlier when he was talking about Solsticizing some of the Millennium ships as part of the launch of Celebrity’s Designed For You platform. We really -- one of the things that’s unique about our fleet, of course we are very proud of the new ships and they are doing extremely well, and we look forward to benefiting from those that are yet to deliver because we have more ships coming. But I think the other thing that we should emphasize is, historically our ships have been particularly well designed and not of the moment, but these are lasting designs. And also we’ve been able to take some of the benefit from the new ships and some of the features and put them back. So for example, when we started with the rock-climbing wall that obviously became an icon of the Royal brand, we retrofitted that on older ships. As Dan mentioned, we are in the process of taking some of the exciting features on the Solstice ships and retrofitting on the Millennium ships and that has been very powerful for us. So I do think there is a fair amount of opportunity and I think we shouldn’t forget that.

David Leibowitz – Horizon Asset Management

Okay. Thank you very much.

Brian Rice

All right. Well, we’d like to thank everyone for joining us today, and as I mentioned before, Ian will be available throughout the day for any follow-ups you may have. And we wish everybody a wonderful day. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Royal Caribbean Cruises Ltd. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts