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Royal Caribbean Cruises Ltd. (NYSE:RCL)

Q4 2013 Earnings Conference Call

January 27, 2014 10:00 am ET

Executives

Richard D. Fain - Chairman & Chief Executive Officer

Jason Liberty - Senior Vice President and Chief Financial Officer

Brian J. Rice - Vice Chairman of the Board

Adam M. Goldstein - President and Chief Executive Officer, Royal Caribbean International

Michael W. Bayley - President and Chief Executive Officer, Celebrity Cruises

Analysts

Gregory Badishkanian - Citi

Harry Curtis - Nomura Securities

Felicia Hendrix - Barclays

Timothy Conder - Wells Fargo Securities

Steve Kent - Goldman Sachs

Robin Farley - UBS

Richard Carter - Deutsche Bank

Assia Georgieva - Infinity Research

James Hardiman - Longbow Research

Operator

Good morning. My name is Holly, and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Royal Caribbean Cruises Ltd. 2013 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) I'd now like to turn today's conference over to Jason Liberty. Please go ahead, sir.

Jason Liberty

Good morning. I would like to thank you for joining us today for our fourth quarter earnings call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Brian Rice, our Vice Chairman; Adam Goldstein, President and CEO of Royal Caribbean International; Michael Bayley, President and CEO of Celebrity Cruises; and Liz Oates, our Director of Strategic Planning. During this call, we will be referring to a few slides, which we have posted on our Investor website, www.rclinvestor.com.

Before we get started, I would like to refer you to our notice about forward-looking statements, which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, as well as a reconciliation of these items can be found on our website.

Richard will begin by providing a strategic overview of the business. I will follow with a recap of our fourth quarter results and will provide an update on our business environment. Adam will provide an update on Quantum of the Seas as well as revitalization efforts. Michael will provide an update on onboard revenue and the trade, and then I will walk you through our outlook for the year. We will then open up the call for your questions. Richard?

Richard D. Fain

Thanks, Jason, and good morning everyone. As always, we welcome this opportunity to provide a little more color on our results for the last year and our perspective on the year ahead of us. Before I start however, I think I should make note of a significant occasion. This is Brian Rice's last earnings call. Brian has been an amazing partner over the last two decades. His impact on our Company and indeed on the industry has been remarkable. It's really not an exaggeration to call him the father of advanced revenue management for the cruise industry and he has helped shepherd Royal Caribbean through some very turbulent times. Brian will be surely missed, but he has crowned his career with a transition process that should be in the textbooks I know everyone here joins me in thanking Brian for his leadership and for his friendship. Brian has agreed to continue to help us on an ad-hoc basis but it won't be the same without him here every day.

Returning to the financials, it's been an interesting time in the cruise industry, and I don't have to tell you how pleased we are to see us emerging from it. Perhaps the best indicator of our strength as a company and the strength of our industry is the fact that we ended up 2013 spot on the guidance we gave at the beginning of last year. At that time, we provided guidance of $2.30 to $2.50. Then, none of us imagined that the industry would be subjected to so much negative coverage. That much bad news would threaten any industry, but our team worked hard to overcome the challenges and our final result was precisely, that's amazingly accurate, at the midpoint of that early forecast. It's a remarkable feat and I would thank all the Royal Caribbean team who worked so hard to accomplish it.

The big benefit on the revenue side came in two areas. Firstly, onboard revenue really excelled. We've invested heavily in ship revitalizations and other enhancements, and these are obviously paying off. The other pleasant surprise was the amount of late-bookings that we achieved. It provides a good omen for the future when we are able to top up the last little bits on a vessel post the sailing date. This is usually a sign of a stronger general demand and it certainly reinforces our optimism about the future.

As you know, a new year doesn't start with a clean slate. We normally begin every year with about half of our capacity already sold. This tends to buttress yields during difficult times but holds them back in good times like these. Thus the impact of the 2013 challenges is holding back the kind of yield increases we would otherwise be enjoying for 2014. The net result, we expect the year-over-year increase in yields of between 2% and 3%. The Caribbean of course is weaker due to two factors. Firstly, it's the area hardest hit by the media storm of 2013, and secondly, we have a large capacity increase here, for both the Company and the industry, of 13%.

I'd also like to take this opportunity to talk about the other steps we're taking with respect to our principal focus, improving our rates of return. To this purpose, I'll talk a little more about our brands and asset classes than we usually do when we focus on geographic markets. Fortunately for us, our newer ships have proven to be remarkably popular amongst the travelling public and amongst travel agents. Our Oasis class ships for Royal Caribbean International and our Solstice class ships for Celebrity are simply the best in their competitive set. They are proving to be not only popular but reliable projects throughout this period. I remain in awe of our new building teams and our management teams who have created such powerful ships. Looking forward, our current focus is to take advantage of this amazing hardware, particularly these newer ships, while at the same time divesting or fixing the returns from underperforming assets.

Looking at the opportunities by brand, I'll start with the Royal Caribbean International which has continued to be our strongest brand even in this period. Of course this is where we have made our greatest investments, and because of its size and its exceptional hardware, this is where we have some of our greatest opportunity. Celebrity has been undergoing a dramatic shift in its operations and in its marketing and this shift really seems to be working very well indeed. Its yields have shown strong growth, and its cost, significant declines. We're therefore expecting Celebrity to be a significant contributor to the 2014 improvement in investment returns. Azamara is facing uphill struggle due to market forces, but it's established an enviable reputation for delivering as amazing vacations. As a result, Azamara looks set to achieve some the highest yield improvements we have ever enjoyed in a single year.

But our biggest transformational focus is on the older vessels and on the performance of Pullmantur, our Spanish cruise operator. Here, we're making the greatest strategic changes and here we expect the greatest relative benefit. The most visible changes involve the shift to having a Latin American headquarters and the recent sale of Pullmantur's non-cruise businesses. By increasing Pullmantur's focus on Latin America and by eliminating the need to focus on its tour operations, we believe we're setting the stage for transformational improvements. Of course, the Spanish market remains key to Pullmantur's long-term success but the immediate growth in Latin America should be significant. We do expect this transformation to take some time and for 2014, the year will be a transitional year. We expect the biggest benefits of Pullmantur's changes to occur in 2015 and beyond.

In summary, we expect the big improvement this year to come from exploiting our superior hardware and improving the marketing of our already successful brands. We also see improvement coming in the results of our underperforming assets. In particular, we are setting the stage for a significant bump in the performance of Pullmantur, but I would note again that we're not anticipating that bump to happen overnight.

Taking all together, we're projecting almost a 40% increase in profitability in 2014 and that's in a year with essentially no capacity increase. This is a real testament to the strength of our brands and the people that manage them. But talking about no capacity in 2014 reminds me to comment on what I believe will be one of the most impactful events this year, and that is the delivery of Quantum of the Seas. Unfortunately, she won't deliver until near the end of the year but the buzz is already very strong and we haven't even finished disclosing all of her sexy features. The introductory video was an absolute home run but we have a few more aspects of the ship's design that we will be rolling out over the coming months. We believe these innovations will excite the public as much as the ones we've already disclosed. This ship will be another game changer for our Company and indeed for our industry.

Interestingly, we are experiencing a phenomenon or Quantum similar to what we saw prior to delivery of Oasis. People are speculating about our innovations and they are doing so in terms of improved or expanded features from our existing ships. There's a natural tendency to start with the innovative features people already know and assume that the new ships builds on those features. In fact, I'm happy to say that they will be surprised. As we've done with our radically new designs in the past, Quantum is a totally new type of vessel. She'll deliver a fantastic new experience in a way that is novel and exciting. Truly, she is a quantum leap. And with her new features and her energy efficiencies, she'll generate a fantastic return on our investment.

With that, I'm pleased to turn it back to Jason who will give you more detail on the figures. Jason?

Jason Liberty

Thank you, Richard. Before we get into our operating results, I would like to mention that as expected and communicated on our previous calls, we have incurred some restructuring and related costs associated with our various profitability initiatives. These totaled $43 million in the fourth quarter and $56.9 million for the full year. These changes relate mainly to the pending sale of Pullmantur’s non-core businesses and the previously noted restructuring and consolidation of parts of our global operation. As we previously mentioned, accounting rules dictate the timing of when we take these charges, so we expect to incur an additional $23 million in 2014. This will all be detailed in our 10-K which will be filed in late February.

So our profitability improvement initiative was an ongoing program that will continue, so we do not anticipate any additional restructuring charges beyond what has already been identified. Now, I would like to talk to you about our operating results. So that you can better understand our operating performance relative to our prior guidance, I have included Pullmantur's non-core businesses during the 2013 numbers. Unless I state differently, all metrics will be on a constant currency basis.

Now let's look at our fourth quarter results which I have summarized on Slide 2. For the quarter, we have generated net income of $0.23 per share, which exceeded the top end of the range we provided on our October call by $0.03. Net revenue yield increased 3.8% for the quarter, which was significantly better than our guidance of an increase of 2% to 3%. Continued strength on European and Asian sailings coupled with another stellar onboard revenue performance drove the majority of the improvement and more than offset a slight decline in Caribbean yields. Net cruise cost excluding fuel were up 1.8% for the quarter, which was in line with the guidance.

I will now discuss full year results, which we have summarised on Slide 3. Yields increased 3.2%. Yields were flat in the Caribbean and were up about 8% in Europe. We also generated yield growth from itineraries in Asia despite significant capacity growth and some of our itinerary modifications resulting from the ongoing dispute between China and Japan. Benefits from our ship revitalization program, packaging initiatives as well as short cruise enhancements drove a 7.6% improvement in onboard revenue. Net cruise cost excluding fuel increased 1.8%, which was in line with prior guidance and 70 basis points better than the midpoint of our January guidance. Adjusted earnings per share came in at $2.40, which was spot on the midpoint of our January guidance.

Now, I would like to update you on what we are seeing in the demand environment. Booking activities during the fourth quarter was consistent with historical levels. As you can see on Slide 4, we entered 2014 in a very strong booked position with 5% more revenue on the books as compared to same time last year. The first week of WAVE was somewhat softer than last year as much of North America was weathering a polar vortex. While cold winter typically means increased demand for Caribbean sailing, the severity of the weather kept people indoors and clearly resulted in lower bookings for several days. Demand was softest out of the Northeast and Midwest but stronger in the warmer markets. Excluding the first week, demand has been more typical of WAVE level.

We have made a number of deployment changes this year, so I will walk you through the trend we are experiencing by product which we have summarized on Slide 5. Our Caribbean capacity in 2014 will be up 13% from 2013 while also representing 40% of our inventory which was similar to 2010 level. Currently our book load factors and rates for the Caribbean are lower than same time last year and we expect yields for 2014 to be down for the Caribbean at low single digit. In the Caribbean, we are generally seeing demand and pricing hold up better for long and more expensive itineraries than we are for shorter itineraries.

Europe will account for 22% of our capacity this year, which is a 17% reduction from last year. As of okay, our book load factors and APDs are significantly higher than same time last year and we are expecting another year of significant yield improvement in Europe and expect yields to surpass pre-recessionary levels. Asia-Pacific will account for 12% of our capacity. Both our book load factors and APDs remained ahead of same time last year in spite of a 12% increase in capacity. We expect yields to be up nicely for our Asia-Pacific itineraries.

The remaining 20% of our inventory is spread across a number of itineraries. In aggregate, these itineraries are booked ahead of same time last year, above rate and volume, and we expect yields to be slightly up. In aggregate, our APDs are up in all four quarters, load factors are flat in the first quarter but are up in Q2, Q3, and Q4. Capacity is expected to be at 1.7% for the year. This is driven mainly by normal changes like [drive-out] (ph).

Now, I would ask Adam to give you an update on Quantum revitalization program and Michael to provide an update on onboard and the trade. Adam?

Adam M. Goldstein

Thank you, Jason. Having worked with Brian, as Richard has, for over 20 years, I would like to add my appreciation and wish Brian all the best in the future. Richard and Jason have summarised the current status of the WAVE booking period and I will not add further commentary other than to say, we are highly focused on leveraging our strength in branding, distribution and product delivery over the Caribbean and also around the globe.

Richard briefly mentioned this year's arrival of Quantum of the Seas. While Quantum was meant to be my topic for today, his possible enthusiasm is understandable. For all of us who collectively undertook the daunting task of creating a class of ship that would follow Oasis class, we are more than anxious to take delivery and begin operation of Quantum of the Seas. As the Quantum class project has unfolded, with the exception of sheer size, we have thought to push the boundaries of what can make a 21st century cruise-ship both more effective for our guests and more efficient for our shareholders. We have revealed the principal physical amenities of this ship, 270, the Seaplex, the North Star and RipCord by iFLY. For us, four of those wild features are unprecedented on the water. In addition, we have announced we will perform the hit musical Mamma Mia! for our guests.

We have not yet said much of anything about our culinary offerings, our other entertainment options, or our technological capabilities. We are equally excited about these elements of our product delivery. We are also enthusiastically looking forward to the fuel efficiency in Quantum class ship and to a variety of back of the house efficiencies that will contribute to the ship's return on investment.

We wish we could announce that the ship will be ready 10 months early, but the reality is we will take delivery of Quantum as scheduled in October, an introducer in South Hampton, England and then in the New York area in October and November. We are very pleased with the progress of the ship's construction in Germany and with the current load factor and APDs at this stage of the booking curve.

Moving now to the topic of revenue management, last fall we significantly upgraded the manner in which we present our prices and promotions to the market. We have increased the visibility, logic and value of our pricing to consumers and travel agents. For example, there is greater visibility of our offers in our automated booking tools and on our brand website. Also, promotional values are applied instantly on guest reservation rather than requiring subsequent manual processing.

Simultaneously, we have enhanced the back-of-house efficiency of our pricing administration. While some of the benefits of this new approach show how to measure in the short-term, we have already seen measurable and significant revenue benefit in certain respects.

Before I turn it over to Michael, I will give a quick update on a topic I mentioned on the last call, which is the revitalization of our five Voyager class ships. The first to undergo revitalization is Navigator of the Seas. She is currently in the Bahamas for the project and we are expecting a completely successful and exciting result on her scheduled return to her Galveston Texas home. As a result of the project, Navigator will have more suite and stateroom type and a refresh of the existing staterooms and suites. She will have multiple new specialty restaurants, a FlowRider surf machine, new shops and bars, and multiple technology enhancements including the industry's first virtual balcony. We expect to revitalize the other four Voyager class ships over the next several years. Michael?

Michael W. Bayley

Thank you, Adam, and good morning everyone. As Jason mentioned, onboard revenue performance in 2013 has been particularly strong with constant currency yields up 7.6 for the full-year and 8% for the fourth quarter. We have now seen year-over-year onboard revenue growth for eight constructive quarters. As we look forward into 2014, we feel optimistic about the continuation of this strong performance.

As you know, we have invested in our onboard revenue programs for a number of years and these investments are generating healthy returns. We have added over 40 specialty restaurants over the past four years and have continued to invest in the refreshing and updating of our casino technology, and on certain vessels we have upgraded our casino footprint in response to demand from source market. We continue to invest in our pre-cruise capabilities and today you can book our shore excursions, speciality dinings, spa appointments, beverage packages and packages generally, and over the past 12 montrhs, we have significantly rationalised our tour offering and improved the quality of our tour product.

At Celebrity cruises for example, we added dedicated destination concierges onboard each of our ships whose focus is to create branded and segmented tours, targeted to our higher value guests and this is beginning to generate incremental revenue. Our focus on technology has allowed us to expand our bandwidth while reducing cost of increasing our revenue. Additionally, in 2014, Oasis of the Seas, Allure of the Seas, and Quantum of the Seas will lead the industry with high-speed satellite delivered broadband service on their Caribbean sailings commencing later this year.

When we look at our onboard revenue by key revenue stream, source market and product, it's really a positive news story across the board. 2013 was a very rewarding year for onboard revenue as all of the investments into the development of our revenue streams materialized. We feel confident about what we have built for our customers as we see the increased demand for these products and services realised.

I'd like to also make a few comments regarding our distribution channels. Our guests have their choice of booking charnel and we will continue to provide every opportunity for them to select the channel that best suits their needs. But by far the most important channel are our trade partners. Travel agencies continue to be the primary and most important source of sales for our ships. The travel agent network is an efficient distribution model for our business and we believe in the value of this channel, so we invest heavily in maintaining strong relationships with our travel partners across the world. To accomplish this goal, we have always maintained a holistic approach to our relationship through training, support, technology, integrated promotions, and marketing partnerships.

We have been consistent in our support to this channel through good times and bad, formally by Celebrity Cruises' commitment and Royal Caribbean International's Loyal to You Always programs, and informally through trade friendly promotions. We have invested significantly more year-over-year in consumer marketing, trade co-op, and trade support staff. We provide highly trained, brand dedicated sales representatives, we serve the role of a trusted advisor to our travel partners to grow their business with ours. We also provide award-winning customer service representatives, call centers, and online training tools.

We were pleased in December when Travel Weekly, one of the most influential travel agent publications in the United States, held their Travel Agent Readers Choice Awards and we received multiple honors. Royal Caribbean International was voted best cruise line overall, best in sales and service, best domestic cruise line, best cruise line in the Caribbean, and Allure of the Seas was voted the best overall individual cruiseship. Celebrity Cruises was voted by Travel Agent Readers, the best premium cruise line, the cruise line in Europe, and Celebrity Reflection was awarded the best premium ship award.

Globally, we are the recipient of multiple trade awards across the markets we operate in. We believe this demonstrates the strength of our brand with our travel partners. In the past, present and future, our fortunes are intertwined and we will continue to strengthen our relationship with our trade partners.

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

Jason Liberty

Thank you, Michael. As a quick correction to one of my previous statements, the Caribbean will represent 46% of our capacity in 2014. Taking into account all we have just told you, I would now like to take you through our guidance for 2014. If you turn to Slide 6, you will see our initial guidance for next year, for this year. Because we expect to close soon on the sale of Pullmantur's non-core businesses, I have excluded these businesses in the guidance metrics. Thus, our guidance metrics are on an apples-to-apples comparison.

Net yields are expected to increase between 2% and 3% for the full year. We expect yields to be slightly down in the Caribbean but we expect to more than offset this with double-digit yield improvement in Europe and further yield improvements in Asia-Pacific and Alaska. In July we communicated that we expected our net cruise cost excluding fuel for 2014 to be better than flat. We remain committed to this target in 2014 despite inflationary pressures, rising insurance costs as well as continued investment in our product offering and marketing.

We have included $944 million of fuel expense for the year and we are 55% hedged. Net of our hedges, a 10% change in fuel prices equates to about $41 million for the year. At today's prices, the impact from our swap is $57 million lower than it was in 2013. Based on current fuel prices and current exchange rates, we expect earnings per share to be between $3.20 and $3.40 for the year.

On Slide 7, we have recapped our guidance for the first quarter. Net yields are expected to be approximately flat. The first quarter of 2013 was a difficult comparable as yields were the highest since the turn of the century millennial cruises in 2000. We also didn't start to feel the effect of the negative industry publicity until after the first quarter.

Net cruise costs excluding fuel are expected to increase 2% to 3% driven mainly by the timing of some maintenance cost and the full year effect of cost enhancements that were implemented after Q1 of 2013. Fuel expenses are expected to be $742 million for the quarter and we expect adjusted earnings per share to be between $0.20 and $0.30 for the quarter.

With that, I will ask the operator, Holly, to open the call for question-and-answer session. Holly?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Gregory Badishkanian with Citigroup.

Gregory Badishkanian - Citi

Few questions just on the initial WAVE season and how that's going. So last year, it was a phenomenally strong WAVE, I think your bookings were up like 20% during January, and you mentioned that this year it's typical. So how should we think about year-over-year bookings this January? And then I know comparison has got a lot easier throughout the year, when do they particularly – they are particularly easy?

Jason Liberty

This is Jason. I think in describing the typical WAVE, it's really kind of how it's played out over the past several years. I would not describe it to be as strong as it was in 2012, but it's not far off those levels – I'm sorry by 2013. And then as it relates to, I think the comparable really becomes easier going into the second quarter, but all the negative industry media really kind of leagued throughout the year but really didn't take effect until the second quarter in terms of our yields.

Gregory Badishkanian - Citi

Okay, that's very helpful. And then the cold weather, I know it hurt you initially. Does it end up helping just because people are cooked in and they would like to take a cruise, when do you think that starts helping?

Adam M. Goldstein

It's Adam. Obviously we are continuing to root for cold weather and we are seeing what is more or less an endless stretch of it, and our general sense based on history is that that should be relatively helpful to us. But as Jason I believe mentioned earlier on in his comments, the weather was so nasty that it actually affected the first week of the WAVE in a negative way. So it still stands to reason that if there this cold snap goes on and on and on, people will eventually be more inclined to have something on the books in the warmer climate than what they are experiencing at home.

Gregory Badishkanian - Citi

That's great. Thank you very much.

Operator

The next question will come from the line of Harry Curtis, Nomura Securities.

Harry Curtis - Nomura Securities

I had two quick questions. The first question is that in 2013, your net cruise costs were up 1.8% and you've guided for relatively flat for this year. Can you give us a sense of where you're actually seeing the savings?

Jason Liberty

This is Jason. The saving efforts that we have put forth, we kind of describe them as, they are not 10 things, they are really a thousand little things and a lot of it has been centered around back-office, global restructuring efforts, but also a series of benchmarking efforts we did on the ships. I think they really did not affect the customer experience but where we saw opportunities for savings. But I wish I could say it's three things but it's really a collective effort of our management team in the organization to find savings.

Harry Curtis - Nomura Securities

But it seems like you're in the early innings. How long is this process likely to go on and if some of the competitor brands, these cost savings can be realized over multiple years?

Jason Liberty

I wouldn't describe it as really early innings, I think we look at this as a journey, as we identify other profitability opportunities, we're certainly realizing them. But additionally I think what we're looking to do is as we grow, to ensure we realize this scale going forward.

Harry Curtis - Nomura Securities

Okay, then quickly moving to the balance sheet, it's possible that your leverage ratio net of cash could be down to roughly the low 3s multiple by the end of this year. What is your target and once you're there, what do you plan to do with your free cash?

Jason Liberty

I think in terms of end cash, our net debt-to-EBITDA numbers, I think there are some components or the commitments that are factored in, but our goal is to really get to investment grade of 3.75 times cash flow and I think as cash becomes available that then kind of drives to be a Board decision on what's the best way to allocate capital.

Richard D. Fain

And I'll just add a comment on that. I think we've shown, recently increased the dividend rate, I think we are feeling more comfortable that we are moving quickly towards investment grade. The objective is not to continue to make that an A rated company or anything like that, and so I think we have the opportunity, given the very high cash flow from our business, to also use that money to give back to shareholders.

Harry Curtis - Nomura Securities

Okay, has the Board touched on the topic of share repurchase?

Richard D. Fain

Of course we look at all those kinds of things and the Board has talked about it, but I think we don't announce anything until we've actually made a decision and we have announced the decisions we made to date.

Operator

The next question will come from the line of Felicia Hendrix with Barclays.

Felicia Hendrix - Barclays

Regarding your market overview, I just wondered if you could give us some more color about the strength you're seeing in Europe and Asia and actually especially Europe, is that across all of your European businesses, is it mainly U.S. sourced, just wondering if you could parse through that for us?

Michael W. Bayley

It's Michael. You're referring to Europe as a source market or Europe as a destination?

Felicia Hendrix - Barclays

That's what I'm asking you, as you said that you're seeing strength in your European business, so I was wondering if you could give us some more granular color behind that.

Michael W. Bayley

Yes, I think our European products and brands are seeing strong demand from the North American market, which is very positive. I think a part of that is because of the stability we're seeing with the air cost and a lot of the programs that we initiated in 2013, with our ChoiceAir program, which is a way of better positioning air earlier on in the transaction with our customers which allows them to purchase the package at an earlier period. So I think we're seeing good demand from North America for European products.

Out of the European markets, again I think we're seeing very good overall demand coming in from the European markets for our various brands and products. So I think it's kind of a good new story overall for Europe. I mean part of it obviously is capacity, because capacity is down for the industry and somewhat for the brand. So it's a combination of these different factors I think all coming into play. But overall, it's very positive story.

Felicia Hendrix - Barclays

Okay, that's helpful, thank you. And Jason, can you help us out as we think about our models going forward, and obviously our own models aren't going to be apples-to-apples, so are you going to provide us with some performance for net yields and costs or is there some kind of rule of thumb that we can use?

Jason Liberty

Sure. Are you talking more in terms of…

Felicia Hendrix - Barclays

Our models are going to – we haven't – historically you're going to include Pullmantur and now we're going to be growing off of non…

Jason Liberty

If you actually look, I think it's on the last couple of pages of the press release, that we actually breakdown our business within the [indiscernible] – they're not referring to Pullmantur.

Felicia Hendrix - Barclays

That refers to past quarter but are you going to give us performance for other quarters, so we know how to model throughout 2014?

Jason Liberty

Yes, we will.

Felicia Hendrix - Barclays

And that will be in your Q?

Jason Liberty

That will be in the K.

Felicia Hendrix - Barclays

In the K, okay. So in the K, of course. Okay, thank you.

Operator

Your next question will come from the line of Tim Conder with Wells Fargo Securities.

Timothy Conder - Wells Fargo Securities

I have a similar question on Europe and Asia to follow on Felicia's, if you could just fill that part on Asia, how that is picking up? In the past you have cited the ongoing issues between Japan and China as a second in area, but if you could just give us a little more color where you're seeing that strength from and what is turning there? And then late-bookings, particularly could you delve a little bit more into what's going on here from the U.S. sourced passengers for the Caribbean here on the late bookings? And then finally, net yields, what are your expectations, Jason, that are built into the 2014 guidance for the onboard component of net yields?

Adam M. Goldstein

It's Adam. First of all on Asia, an example that Michael was saying about Europe, so when we speak about Asia, we're talking about really the whole Asia through Australia area. I believe Jason mentioned earlier that it's about 12% of our capacity in total for that whole region. So it's obviously still a relatively small but increasingly meaningful portion of what we do. And we are generally pleased with how things went last year and with the outlook for this year for the Asia-Pacific region. Clearly the institution, what they expect in a Voyager class ship or the Royal Caribbean brand in China went well in 2013. It was received well, as Voyager of the Seas has been before it, I'm talking about Mariner of the Seas. So the products and services that we're delivering to that market which is clearly in its infancy seem to go on the right direction. There is still a lot of research and development involved in that effort.

And then on the Australian side of the equation, which is where most of the ships are at the moment under the southern summer, it's a robust market. I mean notwithstanding that quite a lot of capacity has gone there and the Australian dollar has been weaker off late, it's still a very solid cruise market for our brands. And so when you put the two together, Asia and Australia, we are pleased with the outlook but we have a lot of work to do, and as you mentioned, the Japan-China dispute is still a wildcard that we're having to work our way around. I mean we wish we could know for sure that we could deliver all the Japanese ports on the itineraries as we intend them. We weren't able to do that last year, and at the moment, we are not planning on being able to do them this year, but we're certainly open to a positive trend in that relationship.

I think you were also asking about later bookings in the U.S. Obviously in the fourth quarter, we were generally pleased with late-bookings and that helped us to exceed our yield guidance for the quarter fairly substantially. A good amount of those late bookings actually were for European and Asian products, it wasn't just what was going on in the U.S. and the Caribbean, and given that we're in the beginning of the WAVE period and the beginning of the first quarter, we can't really say by definition what the late bookings will be for Q1, but we're certainly marketing to encourage them wherever we need them.

Michael W. Bayley

And to your question on onboard, it is actually estimated to be very similar to our overall yield guidance of approximately 2% to 3%.

Timothy Conder - Wells Fargo Securities

Okay, great. And Brian, congratulations, enjoy the increased amount of off.

Brian J. Rice

Thanks Tim.

Richard D. Fain

Tim, don't encourage him.

Operator

The next question will come from the line of Steven Kent with Goldman Sachs.

Steve Kent - Goldman Sachs

Couple of things. Could you be a little bit more specific on the expense reductions? You said that they were dozens or hundreds of them but maybe you could at least bucket them into where you are seeing the opportunities, so that we can understand them better and have a better sense for how long they could go on for and how much more opportunity? And then I think I remember that earlier this year or earlier in 2013, you did talk about some industry discounting and some promotional items, is that happening to the same degree industry-wide so far in the fourth quarter and in the WAVE season?

Jason Liberty

This is Jason. I'll take the cost one. I'll try to bucket a little bit more. I think the big chunk of it comes from our global restructuring and going kind of market by market and looking at what is costing to us to acquire guests relative to what we are getting on a revenue perspective and rationalizing that, but there's a lot of savings that happened there and that had a lot of back office element to it. There was also a lot of action looking at on a back office side, how are we doing versus on a scale perspective relative to prior periods and right-sizing some of that. And then just overall, I'd say more kind of the back of the ship opportunities that we saw, not touching at all maintenance or anything that had to do with the [indiscernible] security of the vessel, and finding opportunities to benchmark it.

Adam M. Goldstein

Steve, as it relates to promotion in the industry, I think it's been sort of a regular feature of these conversations over the years that a fundamental part of the revenue management equation is putting the right promotions in the market at the right time in the very dynamic industry environment, and I would say that discounting is definitely a part of the equation right now in the WAVE marketplace. I think all of the industry is working very hard to get load on the ships at the desirable rate.

I don't think there's anything really very different fundamentally from what we have encountered in the past or would expect during the future. I mentioned before in my comments that we have just invested significantly in our ability to do our promotions in the most effective manner possible, and that's because we know the promotions and discounts will be a regular feature of the landscape, and our goal like with anything else is to do that as well as we possibly can.

So there's not going to be – there isn't just a moment, that we set our prices and that's it, there's nothing to talk about. The travel agency community does a great job for us in navigating the promotional offers that we put out there for the benefit of the guests and all that contributes to the positive yield guidance that we have given.

Steve Kent - Goldman Sachs

So then you'd say that it hasn't improved but it hasn't gotten worse, so it's just regular normal business as the way you'd describe it from the discounting and promotions?

Adam M. Goldstein

I would say it's generally at a level that we wouldn't consider to be normal business as usual, which means that it's a very competitive affair.

Operator

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

Robin Farley - UBS

A couple of questions. First is, with Q1 prices on the books up and the load factor flat, it sounds like you're expecting that closing Caribbean pricing to be down. So just I wondered if you could give us a little more color on how you're comfortable, is that just a Q1 issue and not a Q2 and beyond issue? And then I don't know if you can comment a little bit on Alaska, which I don't think you broke out specifically, and just from what we're hearing, I don't know if there was anything other than the polar vortex that's making Alaska not popular for bookings right now but if you can comment on that?

Adam M. Goldstein

Robin, this is Adam. I'll address your Caribbean question and then Michael can take the Alaska question. We're at a point in our first quarter where obviously the long lead time business is what we have on the books and now the question that remains is, what happens with the short-term bookings, and while they could be robust, if we're in the fourth quarter, that's not anything that we can count on, so we obviously make our most educated projection that we can in a rational way as it seems to all of us who are engaged in the revenue management effort, let's project out what our first quarter guidance will be.

Now, you have seen from the earlier commentary and from the slides that we showed during this presentation that our overall load factor position for the year is strong, and we're going to continue to do everything that we can so that it remains that way and so that we're relatively less dependent on late booking business, and to the extent that we have it, we can continue to generate high APDs from it. So structurally, our load factor situation is positive and we would expect – and so we built that into our forecasting for Q2, Q3 and Q4. For Q1, we'll just have to see how it pans out over the next few months as we do every time we have one of these calls.

Michael W. Bayley

Hi Robin, it's Michael. I'll just make a couple of comments about Alaska. I mean obviously Alaska is almost like a mini Europe in terms of its importance. It's about 5% of our total capacity. It certainly, as you know, during the high yielding period, and it's – we feel pretty good about how Alaska is booking. I mean obviously it has its puts and takes but our capacity overall is pretty much the same as it was in 2013 and our products seem to be selling at a relatively good pace. So I think we are fairly confident with how Alaska is shaping up.

Robin Farley - UBS

Okay, great. And then can you also just lastly give a little bit of color on maybe some of the areas in onboard revenues that are driving – that are the big drivers of the 8% increase?

Michael W. Bayley

I mean I think I said in my comments, that when you look at onboard revenue either by revenue stream or source market or product or brand, the story is universally good. We're seeing strength across every single revenue stream and from every single market. So the entire story is positive. There's just a general uplift that we are seeing in our onboard revenue across all of our brands. There is no one particular revenue stream that's really outshining the rest. I mean obviously different revenue streams have different relative scales of leverage, gaming, retail, et cetera, and shore excursions make up a significant portion of our revenue, and they are all really doing quite well.

Operator

The next question will come from the line of [Andrea Farris] (ph) with Morgan Stanley.

Unidentified Analyst

I have two questions. My first question is that if I look at the net yields that you've delivered in each of the last five quarters you speak in every time, so I was wondering from your point of view what has driven this, has it been generally the stronger late-bookings or onboards and where could we be surprised looking forward? And then, if you could give us an update on your estimate for the impact of the ECA costs coming in next year? I think last year in the 10-K you said it would be $65 million to $70 million, but I was wondering if you've done anything on the technology side to drive an improvement here?

Adam M. Goldstein

This is Adam. As it relates to your first question on our yield performance over recent quarters, there's a factor that you mentioned, it has absolutely been relevant. First of all, as you know, we don't know what the onboard revenue will be until it happens, and based on the commentary that Michael has provided here today, you know that onboard revenue has been continually robust throughout the period that you referenced and so that has definitely contributed on a regular basis to any peaks that we've had on our revenue guidance.

And generally speaking, over the last five quarters, we've been pleased with the quality and the quantity of the late business that we've taken on, and as I just mentioned before, we can't count on that happening in the future. But we – in fact this is what we have experienced over the recent year or so.

Unidentified Analyst

Okay, and on the ECA cost?

Jason Liberty

On ECA cost relative to 2014, it's pretty modest. We haven't quantified in our 10-K filing but the larger impact will really impact more 2015.

Unidentified Analyst

Yes, that's what I was referring to.

Jason Liberty

We have a series of efforts, and I'm not sure if Adam, you might want to comment on the efforts we're doing on the scrubber technology, so how we address.

Adam M. Goldstein

I would just say that as we sit here in early 2014, we've been very conscious of the tougher level of [indiscernible] emissions coming-in the ECA at the beginning of next year, and so we have been engaged in a whole variety of initiatives including scrubbers, or as we would call them, advanced emission purification equipment, to mitigate particularly the burden that will come into effect next year. So as Jason said, we'll quantify that more precisely in the 10-K, at least for 2014 at this point, and it's a huge effort taking place in our Company to come up with the best mitigation technique that we can and part of that is seeing where the AEP or scrubber equipment can get us.

Operator

Your next question will come from the line of Richard Carter with Deutsche Bank.

Richard Carter - Deutsche Bank

Couple of questions from me. Firstly, could you just talk through what's driving the year-on-year fall in net interest costs? Should we expect this trend to continue into 2015? And then secondly, Richard, you talked about 2014 that yield guidance obviously being impacted from what you had to go through in 2013. Is it possible to give us some sort of flavor or some sort of run-by in terms of what you think yield guidance would be if you're looking at it currently, so if we were to take out the weak 2013, I mean are we looking at sort of several hundred basis points above where you set the guidance?

Jason Liberty

I'll just take in the first piece on the interest chunk, our interest expense is expected to be down somewhere between $50 million and $60 million for the year. The main drivers of that is, over the past year and a half we've – [indiscernible] of refinancings are almost $2 billion worth and our weighted average cost of that almost – overall has really jumped by about 55 basis points. As well we had about $500 million left in debt. So the combination of those things is what's driving the lower negative [carry] (ph).

Richard D. Fain

And with respect to how much better 2014 could have been if we hadn't had the impact of all the events in 2013, I'm afraid that our systems are really geared to quite sophisticated in measuring out the demand levels that do exist. It's very hard to measure what they would have been under a hypothetical scenario. And so I don't think we have an estimate of actually how much better it could have been. Obviously we think it would have been better but our focus is on given where we are today, what do we expect to happen, and this takes all that into account.

Richard Carter - Deutsche Bank

And then just finally, I think historically you've talked about capacity pricing sort of 20% premium to the sort of net yield leverage. Is that a reasonable assumption [indiscernible] in 2015 that sort of assumption or should we expect it to be a higher premium?

Richard D. Fain

Yes, I think we actually have said that historically we were – our newer ships had a 25% premium to our older vessels. Now we'd have to divide that out because much of our existing fleet is in fact newer ships today. But yes, we would assume that the newer vessels would continue to attract a nice premium, and forward bookings for Quantum certainly reinforces that.

Operator

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

Assia Georgieva - Infinity Research

Couple of questions. First of all, in terms of European prices and demand, how much of that is Europe's sourced at this early point? I think in the past we have noticed that European passengers tend to book much closer in, and so I wondered if you are seeing primarily North American source trends or some indication of how the European sourced passenger is behaving?

Michael W. Bayley

This is Michael. I think we're certainly seeing very strong demand out of the North American market for the European products. Out of the European markets, we are seeing good demand. We create our own track of expectation of booking, volume and rate out of every individual market within Europe and North America for each of the brands and I think we have been, again, pleased with what we're seeing out of North America, and from the European markets, they are generally meeting our expectations.

Assia Georgieva - Infinity Research

Okay, thank you, Michael. I appreciate that. And maybe, Adam, you can help me with this. Given the large capacity increase industry-wide for the Caribbean in the summer, it would seem wide I guess in this early point in WAVE to assume possibly some future discounting. Is that something that you are already [indiscernible]?

Adam M. Goldstein

When I referred to the current situation earlier as a competitive affair, it certainly encompassed the Caribbean environment for Q2 and Q3. It's not just that we expect that that will happen, this is what is happening and these expectations are baked into our overall guidance for the year and we will [play it hard] (ph) for the business.

Jason Liberty

Holly, we have time for one more question.

Operator

Your final question will come from the line of James Hardiman with Longbow Research.

James Hardiman - Longbow Research

I hopped on a little bit late, if you already these, I apologize. I guess just real quick, Exploder of the Seas, sounds like there were some issues there, needed to come back to port, doesn't seem like a real big deal. Do you think that will end up being at all material to your first quarter?

Adam M. Goldstein

James, it's Adam. Thank you for saving the best for last. So this has been a difficult situation and both a considerable and a rare outbreak of what appears to be norovirus, because that's something that actually takes a little bit of time to confirm but most likely that is what is happening onboard Exploder disease. Very happy to say that after the initial spike in illnesses which happened on the 23rd, two days into the cruise, we have sequentially experienced far lesser numbers of guests being ill, but nevertheless it's a serious situation and we feel very badly for the guests that became ill on the ship. We are doing lots and lots of things for them, which includes compensation for the ports that they missed. But to your question, we don't expect that the impact of this event will be significant or meaningful for the Company or its results, but it is obviously meaningful to the customers who have experienced illness. So we're doing everything we can do to make the ship as clean as possible and the rest of the cruise as enjoyable as we can.

James Hardiman - Longbow Research

Very helpful, that seems about right. And I guess along those lines though, if we sort of circle back to your 2% or 3% yield guidance for 2014, and just the fact that the point that you started the call out with, which was you had all these terrible events and media and yet you were still able to reach your guidance, I guess big picture, how do you think about your guidance as you're putting it together with respect to these exogenous events? I mean do you just assume that nothing is going to happen or is there some base level of the unexpected that you built into your model over and above just the base case, which is that what everybody I think is hoping for is that you have a very uneventful WAVE season and beyond, how should we think about that?

Richard D. Fain

I think it is obviously a challenge for any company doing this and I don't think that we are any different than anyone else and we try and provide a balance. So I don't think it's reasonable to assume that nothing goes wrong in the year. And I remember back to the time when having to divert a ship because of hurricane was the big kind of variable there. And so, we try and give some thought to it. But of course, when you're talking about the kind of events that we've looked to in last couple of years, those are outside of anybody's ability to even remotely predict or incorporate. So we try and be realistic but we also don't try and imagine Black Swan type things happening.

James Hardiman - Longbow Research

Got it. Thanks guys and good luck this WAVE season.

Jason Liberty

Thank you for your assistance, Holly, with the call today and we thank all of you for your participation and interest in the Company. Liz will be available for any follow-ups you might have. And with that, I wish you all a great day.

Operator

Once again, we'd like to thank you for your participation in today's Royal Caribbean Cruises Ltd. 2013 fourth quarter earnings conference call. You may now disconnect.

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