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Royal Caribbean Cruises (NYSE:RCL)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

Adam Goldstein - Chief Executive of Royal Caribbean International and President of Royal Caribbean International

Richard Fain - Chairman and Chief Executive Officer

Brian Rice - Chief Financial Officer and Executive Vice President

Daniel Hanrahan - Chief Executive of Celebrity Cruises and President of Celebrity Cruises

Analysts

Sharon Zackfia - William Blair & Company L.L.C.

Kevin Milota - JP Morgan Chase & Co

Felicia Hendrix - Barclays Capital

Janet Brashear - Sanford C. Bernstein & Co., Inc.

Assia Georgieva - Infinity Research

Timothy Conder - Wells Fargo Securities, LLC

Robin Farley - UBS Investment Bank

Gregory Badishkanian - Citigroup Inc

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruises Ltd. Second Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to our host, Mr. Brian Rice, CFO. Sir, you may begin.

Brian Rice

Thank you, Andrea. Good morning. I would like to thank each of you for joining us this morning for our second 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 Chief Executive Officer of Celebrity Cruises; and Ian Bailey, our Vice President of Investor Relations. During this call, we will be referring to a few slides that 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. 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. Additionally, we will be discussing certain financial measures, which are non-GAAP as defined, and a reconciliation of these items can be found on our website.

We have a lot to cover this morning and issued our press release last evening to try to give you an opportunity to review all the materials. As usual, we'll start with Richard's comments. I will follow with a brief recap of our results and update our forward guidance. Adam and Dan will then talk more about our brands, and then we'll open the call for your questions. Richard?

Richard Fain

Thank you, Brian, and good morning, everyone. As always, I appreciate the opportunity to give a little more color and a reflection on how we've done and where we're heading.

First, I must express how embarrassed we all are about the accounting revision. Fortunately, while the initial error was an internal one, it was that same internal team, which found it and reported it. They quickly notified us, our auditors and our audit committee. I will take their willingness to respond correctly and transparently as something to be encouraged. There isn't a soul here, most certainly including myself, who doesn't regret the error. But fortunately, none of this affects our business trajectory, which remains intact as we enter what appears to be a more stable commercial environment.

Brian will provide more details on the revision in a moment. But in the meantime, I'll focus on the business environment. And it's certainly been a highly eventful year.

At the beginning of the year, who would have imagined the earthquake and tsunami in Japan, the upheaval in the North Africa and the Middle East or more recently, the senseless and tragic events in Oslo? Despite all this, it still looks like this will be one of the best years in our history. Not quite as fantastic as we originally hoped, but a very good year, nonetheless. In fact, I'm more encouraged than ever about our near-term future, not our long-term future, our near-term future, which is what I'm looking at and happy about. I'll talk more in a moment about the challenges. But when I step back and think about the economic mess we're all reading about every day and then I look at our yield performance in the bulk of our markets like the Caribbean, Alaska and Northern Europe, et cetera, I get very excited. I see our reports, which show that our booking volumes and our APDs are up for each of the next 6 quarters. And I realize just how bright our short- and long-term future will be.

The 2 big changes to our business outlook that we're reporting today are, first of all, the current weakness in our Eastern Mediterranean itineraries; and secondly, the cost savings, which our operating teams have been able to achieve.

Starting with the revenue, this is an important transition year for us as Brian, Adam and Dan will discuss in a moment. This is our last year of significant capacity growth for a while. And this is the year where we were implementing a dramatic repositioning of our ships. Naturally, our biggest redeployment was to substantially increase Mediterranean sailings because this was the area which showed the greatest promise. And naturally, that market where we expected the biggest improvement is also the market that suffered the most from the geopolitical changes.

Our next most aggressive deployment choice was to address the Chinese market earlier than ever before. And naturally, this was the market that suffered badly from the tragedy in Japan.

When we gave our guidance at the end of April, we already had several weeks of experience with the turmoil, particularly in Egypt and in Tunisia. That turmoil had a huge impact on sailings heading directly to those ports and a smaller impact on other itineraries in the region. But that impact appeared contained and manageable. Unfortunately, that situation didn't last as long as we had hoped. The Arab Spring not only failed to stabilize, it continued to fester and the turmoil brewed to other countries throughout the region. The result is that during the quarter, we reached a tipping point, and we saw significant declines in our pricing in that area. The net result has been a serious decline in our revenue in what was supposed to be one of our strongest markets.

That decline has been painful, but to put it in perspective, it's only amounted to a drop of 2% in our overall yield from what we had expected at the beginning of the year. How many other industries suffer such a plethora of challenges in one year and still only show a 2% revenue impact?

At the same time, our operating groups have been working diligently and effectively to control our costs. In previous calls, I've noticed -- I've noted that we are seeing inflationary pressures in selected areas such as food and transportation expenses. Unfortunately, I have to report that those pressures have not abated, and they continue to be a costly factor for us. But our operating teams have been extremely effective in reducing our costs in other areas, which has allowed us to reduce total cost for the year by about 100 basis points. At the same time, we've not wavered in our determination. We will not sacrifice our product delivery purely for cost purposes. It is, therefore, especially gratifying to report that while implementing all these cost savings, our guest satisfaction rates have risen to new highs. For that, I extend my congratulations and my thanks to the operating teams, who have made it happen.

Last week, we had the highly successful delivery and naming of the Celebrity Silhouette in Germany. This is the first time we've named a ship in Germany, and the reception demonstrated just how good the Solstice-class ships are and how receptive some of the European markets are to our product. We continue to work on ensuring that we deliver the best product and service in our competitive sense. And we continue to improve the quality of our offerings by taking the best features of our newer ships and incorporating them in our revitalization projects. At the same time, we're implementing new systems that enhance the guest experience and improve on our operating efficiencies.

While this is proving not to be quite as fantastic a year as we had expected, it is still proving to be a highly successful one and it augurs extremely well for 2012 and beyond. Thank you.

Brian Rice

Thank you, Richard. Before I go into our results, I would like to provide insight into the revisions we announced to our interest expense in the press release. During a recent review, our finance team discovered an error in the way we were amortizing certain fees, mainly related to a few of our export credit agency guaranteed loans. We've all asked ourselves how this could have happened. We have completed many of these types of financings, and there was a change in the timing of the payment terms of certain fees related to a few recent loans, which required a different accounting treatment than our past financing. The revision in essence accelerates the amortization of these fees. It does not have any cash impact and does not increase the total expense over the life of the loans. Frankly, this was a human error. And while we are very confident this was an isolated event, we have further enhanced our controls in this area to prevent this risk of future inaccuracies. Once this error was discovered, we notified our auditors and worked with them to determine the correct accounting treatment. We determined that the error was not material to prior periods, did not require a restatement and that our previous financial disclosures were reliable. We did conclude, however, that a revision to our interest expense was appropriate, and we have included a reconciliation of these adjustments in our press release. The revision announced to a change in earnings per share of $0.05, $0.15 and $0.06 in 2009, 2010 and the first quarter of 2011 respectively. To be clear, 2009 was the first year of the mistake. Obviously, we are very embarrassed by this revision. But because these adjustments fall below the line, they do not impact our operating results, net yields or net cruise costs.

If you will now turn to the second slide, I would like to summarize our performance in the second quarter. As you can see, we generated net income of $93.5 million or $0.43 per share, which was at the midpoint of our guidance despite a $0.05 impact interest expense from the changes to our fee amortization.

Net yields improved 3.8% on an as-reported basis and $0.08 of a percent on a constant-currency basis. From an itinerary point of view, yields were up about 9% in the Caribbean and up solid double digits in Alaska, the Baltic and the North Eastern itineraries. The Western Mediterranean was up single -- mid-single digits, but both the Eastern Mediterranean and Asia were down due to the geopolitical events we talked about on our last call.

April and May sailings in the Med came in about as we had expected, but we saw a further deterioration in close in bookings for June sailings.

From a source market point of view, excluding Mediterranean sailings, we saw solid pricing improvement from North America and throughout Europe with the one exception of Spain. Accordingly, we remain bullish on the demand environment and believe any weakness is isolated to the areas impacted by the geopolitical events in the Eastern Med and Japan.

Net cruise costs excluding fuel per APCD were up 2.3% on an as-reported basis and declined 0.1% on a constant-currency basis. While we continue to experience outstanding guest ratings and make prudent strategic investments, you can see our management team is very focused on tight cost controls and succeeded in offsetting the Eastern Mediterranean revenue declines for the quarter.

Fuel costs were very consistent with the calculations included in our previous guidance. Although WTI prices have fallen since our last call, we didn't see much of a change at the pump for the types of fuel we've used.

Also during the quarter, we've sold some of our shorter-dated fuel options, as well as the ones with strike prices of $120 and $150. This enabled us to monetize some of the gains we booked in the first quarter and avoided a negative mark-to-market adjustment as fuel prices fell.

Interest expense was about $10 million higher than our previous guidance for the quarter due to the new fee amortization schedule I previously mentioned.

Moving on to the booking environment. Overall, low factors and APDs are ahead of the same time last year for both the third and fourth quarter. And for the balance of year, all of our brands are showing positive trends.

I would now like to provide you with more product and source market detail than usual given the unique environment we are operating in. On Slide 3 and 4, we have provided you with our capacity allocations for all of our major product groups and our directional expectations for year-over-year yield changes for the third quarter and full year. The biggest changes we are seeing relate to the Eastern Mediterranean. On our last call, we adjusted our yield guidance as a result of the geopolitical events in Northern Africa. Much of this adjustment directly related to sailings deployed away from Egypt into a much lesser extent, Tunisia.

Subsequently, there has been additional unrest in Syria and Greece. If you draw a semicircle on a map from Greece to Syria to Egypt, it is easy to understand why headlines dominating this region would impact demand for the entire Eastern Mediterranean, including Israel and Turkey. Eastern Mediterranean itineraries will account for 18% of our total capacity in the third quarter and are unfortunately weighing down strong yield performance by most of our other products.

Western Mediterranean sailings, in contrast, are expected to have slightly higher yields than last year, which is still encouraging, given the large capacity increases in the region.

For all of our other major product groups, we are seeing very strong demand. The Caribbean, Alaska and the Baltic are all performing significantly better than last year and are all forecasted to generate solid double-digit yield improvements in the third quarter.

In addition, if we exclude Mediterranean sailings, our primary source markets are showing strong pricing performance this year with the United States, United Kingdom and Canada, each showing improvements in the mid- to high-single digits for the year. There is clearly a lot going on in the world, and the headlines could hardly be described as optimistic. The people continue to take their vacations and continue to see the value of cruising in our brands.

On Slide 4, we have recapped our expectations for the year. The Caribbean, which represents our largest capacity allocation, will have yield improvements approaching double digits. We continue to make good progress in the southern hemisphere, which includes South America and Australia. The Baltic and Alaska are the clear stars this year and likely benefited from some of the weakness in the Eastern Mediterranean. Asia is the only other product in our portfolio that is expected to show declines this year. The redeployment affects resulting from the events in Japan are expected to linger through October, but the environment is clearly stabilized, and we remain very bullish on this region's long-term prospects.

I'm sure you are curious about 2012, so here's what we know so far. It is very early in the selling cycle, and slightly less than 1/4 of our inventory is sold at this point. Our APDs and load factors are running ahead in all 4 quarters, but it is too early to provide any definitive yield guidance other than to say we expect improvements. Early bookings for Europe are showing better load factors than APDs, but there is very limited visibility at this point. It is encouraging to see the early order book, though, especially when you consider our comparables are prior to the turmoil in the Eastern Med.

Now I'd like to update our forward guidance. On Slide 5, you will see our guidance for the third quarter. We expect yields to be up 5% on an as-reported basis and up 1% to 2% on a constant-currency basis. Excluding the Mediterranean, yields are forecasted to be up around 11.5% or about 9% on a constant-currency basis.

Net cruise costs, excluding fuel, are forecasted to increase approximately 2% on a constant-currency basis and 4% to 5% on an as-reported basis.

We expect a little more food cost pressure in the second half as well as some higher marketing investments, but we continue to look for ways to mitigate the impact of the Eastern Mediterranean performance. We have also included $202 million of fuel expense in our forecast, and we are 53% hedged for the quarter. Our earnings per share are expected to be between $1.85 and $1.90.

On Slide 6, we show our updated full year guidance. We expect yields to increase approximately 5% on an as-reported basis and between 2% and 3% on a constant-currency basis. Excluding the Mediterranean, we expect to be up approximately 8% as reported and approximately 6% on a constant-currency basis.

Net cruise costs, excluding fuel, are expected to be up approximately 3% on an as-reported basis and between 1% and 2% on a constant-currency basis. We have included $763 million for fuel based on today's prices and our hedges, which cover approximately 55% of our consumption for the balance of the year.

As I mentioned previously, we have seen some inconsistencies between the movement in our current at the pump prices and WTI. While the cause and duration of this decoupling is debatable, as always, we have based our calculations on our current at the pump prices.

Interest expense for the year is currently expected to be between $355 million and $365 million, which is an increase of approximately $44 million or $0.20 per share due to the new amortorization (sic) [amortization] schedule.

Our gross interest expense equates to an average cost of debt of about 4.4%. To help you with your modeling, I will mention that based on current interest rates, our current fixed floating ratio in our existing loan structures, 2012 would also be approximately 4.4%. Earnings per share for the year are now expected to be between $2.85 and $2.95.

Earlier this month, we amended and extended our revolving credit facility that was set to mature next summer. We now have a total line of $1.4 billion split between 2 facilities with staggered maturities in 2014 and 2016. As you know, in October of 2008, our Board of Directors suspended our dividend. The combination of strong liquidity, flow in capital expenditures and improved operating performance has now given them the confidence to reinstate a dividend. We consider the quarterly payout of $0.10 a share to be conservative, but this reflects a balance between our objective of returning cash to shareholders while honoring our goal of returning to an investment grade credit.

Finally, as I am sure you're aware, starting with this quarter, companies are required to file the entire 10-Q under XBRL 2. Because of this, we expect to file the Q on Monday, but we have tried to provide more information in our press release.

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

Adam Goldstein

Thank you, Brian, and good morning, everyone. As Brian and Richard have mentioned, we are pleased that many of our products have generated stronger revenues than we had expected and also that we have maintained strong cost control, and we are disappointed that our Mediterranean yields have turned out to be weaker than we had anticipated 3 months ago.

We have been clear for some time about our strategic intention to build our presence in Europe to capture at least our fair share of the impressive growth of cruise vacations in the world's largest holiday market. The Royal Caribbean International brand has deployed half of our 22-ship fleet in Europe this summer.

When we set our 2011 European deployment about 18 months ago, we placed our main emphasis on establishing homeports in our priority markets. This approach includes several ships that we have based in the U.K. and in the Nordic markets, which have performed well this summer. We placed most of our European capacity, however, in Italy and Spain. The geopolitical events of 2011 have had a disproportionate impact on these products, particularly the ships with itineraries in Greece, Egypt and Israel.

Looking to our 2012 deployment. With the departure of Voyager of the Seas on the Mediterranean to China and Australia, and the arrival of Serenade of the Seas in the Baltic, we will somewhat shift the balance of our European presence from south to north. While we would have done this irrespective of this year's events, one implication of this set of moves will be to further diversify our product range and lessen our exposure to any ongoing geopolitical risks that might affect the Mediterranean.

As the last comment in Europe, it is worth noting that while we have had to discount our pricing more than we would have liked, we have been able to vary substantially increase our number of European guests in 2011. Given our brand's slack capacity in 2012 and the Voyager, Serenade ships I mentioned earlier, we will only need to achieve marginal growth in the number of European guests next year and will, therefore, be able to focus even more on driving APD growth.

Three months ago, I began with an update on the tragic developments in Japan and their emerging effects on Legend of the Seas 2011 China program. This series of events directly affected only our smallest ships, but its impact was significant as it forced substantial changes in legends itineraries from March through October. Although we will fall far short of our pre-event yield aspirations for this 2011 program, I think it reflects well on our young offices in that region that our colleagues were able to attract customers in the volumes they achieved, given the magnitude of the dislocation and the consequential changes in our itineraries and market sourcing. We continue to believe that China's emergence of the cruise market and the high level of satisfaction that our Chinese guests have expressed about our brands bodes well for our market development efforts in the region.

As you have also heard from Richard and Brian, the outlook for our ships in Alaska, the Northeast U.S. and the Caribbean remains positive based on our load factors and rates as we go through the summer season and begin to turn our focus towards maximizing yield in the upcoming winter season.

Finally, in June, we completed the revitalization of Radiance of the Seas under the umbrella of our Royal Advantage Program. Later this year, we will revitalize Splendour of the Seas, and we are planning on continuing our revitalization program throughout the next several years. With 15 ships in our Voyager, Radiance and Vision classes and a slower rate of new capacity coming on line, we are committed to offering an outstanding and up-to-date Royal Caribbean experience on our older ship classes. Dan?

Daniel Hanrahan

Thank you, Adam. Good morning, everyone. The momentum for Celebrity remains strong. As Richard mentioned, we just took delivery of Silhouette, our fourth in the series of 5 Solstice-class ships. We named her in Hamburg this past week, and she is as stunning as her 3 sisters. She set sail on our main voyage last week, and in just a few short months, Silhouette will offer 12-night Caribbean cruises on the Cape Liberty this fall and winter.

We are extremely excited to be taking the Solstice-class ship to the greater New York market. New York has been a historically strong market for Celebrity, and the opportunity to put a Solstice-class ship there is a great way to tell the Celebrity story.

Silhouette has another host of industry first venues in the Lawn Club, all designed to enhance onboard revenue, including the interactive Lawn Club Grill, the relaxing private WiFi-enabled cabanas called the Alcove, the Porch, a casual dining spot and with dining spots with sandwiches, coffees and views of the ocean and the ship's lawn and the art studio, where our vacationists can work with one of our art partners. The ship will also present a new twist on Celebrity's Michaels Club with a selection of more than 50 craft beers from around the world to broaden our appeal to a growing market segment.

During the second quarter, we had healthy demand for many of our products with cruises in Alaska, Bermuda and Northern Europe performing particularly well for the brand. Pricing for these products was significantly higher year-over-year, and all products came in about where we thought they were going to on the previous earnings calls and are trending well for the remainder of the summer.

As you have heard, our sailings and operating in the Holy Land region and the Eastern Med have been more of a challenge due to continuing global events. As has been the trend, our Europe product is about 40% sourced from outside of the U.S. and Canada, and we have not seen any significant differences in booking patterns from these main booking markets.

Looking ahead, we'll have all 4 Solstice-class ship operating in the Caribbean in this fall and winter, and we'll have over 60% of our capacity in this market during this time period. Since our cruises to the Caribbean booked closer in and those to Europe and Alaska, we have less visibility to performance for this time period, but we are on pace to finish ahead of where we finished in Q4 2010 and Q1 2011. Our non-Caribbean products, which represented 40% of our capacity for the period are also performing well. We are particularly pleased with the performance of our South American products and are soon to be Solsticized Infinity, as well as the reintroduction of our brand in the Australia and New Zealand market.

Finally, I'm very excited to announce that once Reflection joins the fleet next year and the last of Armonian class ships has been revitalized, over 90% of our fleet will be Solstice-class or Solsticized. Our Solsticizing schedule is ambitious, as we will Solsticize Infinity this November, Summit in January and Millennium next April. However, given the success of the Constellation project, we're looking forward to completing the program quickly. Brian?

Brian Rice

Thank you, Dan. We would now like to open the call for your questions. As a reminder, we ask that you limit your questions to no more than 2. If you have more, after, we'd be happy to address them after the call. Andrea?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Steve Wieczynski of Stifel, Nicolaus.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

So you, basically, talked about the Med being down. It looks like it's going to be down about 4% this year. Really, what I'm trying to get at is what is essentially changed from the last time you gave guidance back in April to today? Have things materially gotten worse there? And I guess, what has been the change over the past couple weeks or maybe over the last month in terms of what you've seen in bookings come out of that market?

Brian Rice

Sure, Steve. I think we gave our last guidance at the end of April. Frankly, bookings for the end of April, beginning of May held their own. We actually met our internal forecast for the months of April and May. Bookings began to slow down, I would say, kind of mid-May. We didn't have very strong bookings particularly for the Eastern Med. In May, we started taking some additional pricing actions, got price -- got the volumes back to equilibrium in June. We've actually seen higher year-over-year bookings in July than we did before, albeit at the new discounted rates that we implemented in late May and early June. I think the difference that we're seeing is initially, we saw this isolated predominantly to the itineraries that we had changed out of Tunisia and to a larger extent, Egypt. But as we began to see the protests in Greece, the additional hostilities in Syria, as I said before, if you draw that semicircle around Egypt, Syria and Greece to the north, you'll see Turkey and Israel are within those -- that circle. Those are the itineraries we'd like to refer to as the Holy Land area that we really began to see additional drop-off. And as we showed on our slide, we have about 18% of our capacity in that market during the third quarter. So just the continuation of that being a dominant influence in the headlines has caused further deterioration in our forecast.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

And then I guess this might be a little bit more difficult to answer, but when you look out to '12 and I know it's early on, I mean, is that a market, Southern Med I'm talking about, in terms of -- is pricing -- do you think there's still going to be pressure on pricing in that market? Or do you think you can get that more flattish over the next 12 months or so?

Brian Rice

As I've mentioned in my opening comments, the order book right now where we feel good about, but it's still extremely early. We're talking about many people who are going to be taking vacation next summer. And it really is going to be subject upon what happens over there. I think there was -- our initial research has indicated that people still have a very strong desire to go to the region, but it was -- this is not the best year to go there. Hopefully, if we see some stability in the region, there will be pent-up demand from 2011. But it's just too early to say at this point.

Operator

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

Janet Brashear - Sanford C. Bernstein & Co., Inc.

As you look at your deployment for next year and especially as you think about the Mediterranean, does it look more like where you thought you'd be this year? Or does it look more like where you ended up next year? Maybe if you could sort of look to Slide 4 that you showed us earlier and give us an idea of how that might look in 2012, that would be great.

Adam Goldstein

It's Adam. Well, obviously, we can't give you the right side of the slide because it talks about different levels of yield performance. But in terms of the deployment changes or the company were essentially flat in Europe on a year-over-year basis in overall deployment and with some increase in the Baltic and a minor decrease in the Mediterranean area.

Janet Brashear - Sanford C. Bernstein & Co., Inc.

So flat versus where you're ending up 2011 on Page 4, is that what you're saying?

Adam Goldstein

In terms of market share by region, yes.

Richard Fain

Janet, this year was a huge capacity increase, which obviously put a lot of pressure on yields. And so we're clear, what we're saying is no capacity increase over the region next year. And while -- so this year we had more than 30% increase. Obviously, that made it a challenging year in the best of times. Obviously, this wasn't the best of times. But next year, we will be looking at 0 capacity increase and hopefully, a clearer position looking forward. At least our current forward bookings are actually better than they were last year at this time.

Janet Brashear - Sanford C. Bernstein & Co., Inc.

Could you also give us an idea of what you expect from capital expenditures to revitalize ships over the next few years?

Brian Rice

Janet, I don't have specific breakdowns in front of me of the CapEx related to the revitalizations, but we do have in the press release the total capital, and I will tell you that with the exception of an additional Solstice-class vessel next year, we have no new vessels in 2013. We have Sunshine in 2014, and we tend to put a placeholder in the range of around 2 to 250 for what we would call maintenance CapEx and IT expenditures. So by differential, you could back in to what we'd be looking at for the revitalizations.

Operator

Your next question comes from the line of Kevin Milota of JPMorgan.

Kevin Milota - JP Morgan Chase & Co

I was hoping to talk a little about pricing in the Med. And before the events happened, I'm trying to get a sense for what the declines are just in magnitude in terms of pricing for the region and kind of your initial thoughts on potentially how long it could take to regain pricing kind of pre-turmoil in the region.

Daniel Hanrahan

Kevin, it's Dan. I want to stress that at Eastern Med where we had the difficulty, we've actually seen some pricing improvement year-on-year for the Western Med. And then in terms of how long it will take to get it back, that's difficult to say right now. As Brian just mentioned earlier, it's a little difficult to say what's going to happen in 2012. We have seen good reaction to the price declines that we've taken. Indications are that, Richard mentioned, next year that the pricing looks better, but we're still very, very early days when it comes to 2012 at this point. But I do want to stress that the Western Med has held up nicely, and we've actually seen some price increases. It's just that area that Brian described in the Eastern.

Kevin Milota - JP Morgan Chase & Co

Okay, and just in terms of the percent declines, any kind of color magnitude you'd give us on that front?

Daniel Hanrahan

Yes, we haven't broken up specifically where we are. I think it was Slide 4 that showed where our different products were up and down for the year, but we haven't broken up specifically in the Eastern Med or any of the markets to that level of detail.

Brian Rice

Kevin, if I could just add, one of the great things about our industry is we do have the flexibility of moving, if you will, our hotels. I think the fact that we have not done wholesale redeployment out of the region is a testimony that we feel that this is a very important itinerary. There's a lot of consumer interest in it. And for now, we're committed to that region. And I think we'll continue to measure it. But as of this time, we feel pretty good about where it could go.

Kevin Milota - JP Morgan Chase & Co

Okay, and just in terms of changing capacity in the Eastern med, if it does come to that, when would you have to do that by?

Daniel Hanrahan

Kevin, it's Dan again. The beauty of that is we do have a lot of flexibility and it would be a few months from now before we would even have to worry about that.

Operator

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

Assia Georgieva - Infinity Research

Brian, my first question is to you. I'm not a believer in the accounting constructs, so let's ignore the interest expense revision. But I wanted to do a quick reconciliation of what your prior yield guidance or EPS guidance rather was for the year. I think it was $3.10 to $3.30, and we had a $0.04 Q to beat if we ignore again the accounting idea. So it seems that it should have gone up to $3.14, $3.34. And then with a $0.10 reduction, the new guidance should have been $3.04 to $3.24. It seems the high-end of the range though has been reduced by $0.09, $0.10 to $3.15. Could you explain that?

Brian Rice

I can try to give you a directional. I think our revenue declines were in the mid-$0.40 range, if you included those -- the yield change for the Eastern Med as well as currency impact. We were able to offset about half of that with cost savings. We have a little bit of improvement in fuel, and we've had a little bit of improvement in some of our equity pickups below the line. And I think if you took all that into consideration, we'd be getting back to about $3.10 as the midpoint. And unfortunately, the interest expense is a reality. And if you take that $0.20 off, you should be getting back to $2.90, which is the midpoint of our current guidance.

Assia Georgieva - Infinity Research

Well, let's ignore the interest expense. It seems that the high-end before the interest expense revision has been reduced by $0.10.

Brian Rice

From a business perspective, all in, we're down about $0.10, you're correct.

Assia Georgieva - Infinity Research

Okay, it seems there is an additional $0.10 from the top end of that, but maybe I'll ask Brian after the call ends. And my second question, maybe Richard you can help me out on this. Given what has happened with sovereign debt in Europe and the threats in the U.S., how wise was it to reinstate a dividend at this point? You're also facing some significant business risk in the Eastern Med that we have discussed so far at quite some length. Was this the right time to do it?

Richard Fain

Well, Assia, obviously, we think so. I think our situation is in any respects the opposite of what you're seeing with the sovereign credits that you're talking about. Our position is strengthening, and our capital requirements are lowering. If anything, I think that in light of the very dramatic changes that are going on in the region, for us to have held as close as we have to our original guidance really shows how strong our industry is and how strong the company is. We've had in our strategic plan and operating plans for some time now that this was about the time that we wanted to reinstate the dividend. We clearly wanted to have the revolver extension in place, and we not only have the revolver extension in place, but we now have it with staggered maturities. And so we thought this was -- in our financing, the revolver was done relatively easily. You're seeing good receptivity to our credit in the capital markets. So no, we really felt this was a good time to be doing it, and we felt comfortable with doing so.

Brian Rice

Assia, if I could just add also, because as the Med is getting a lot of, obviously, for good reason because it affected our guidance, it's getting a lot of discussion on this call. I do think it's important to recognize that the combination of the Eastern Med and Asia, which are the 2 markets that are down, that represents 13% of our inventory. The other 87% is actually doing quite well despite all the chatter that you're hearing in the marketplace about the sovereign debt crisis and debt ceilings and whatnot. I think it's important to recognize that a lot of our products are actually up double digits, and the people are taking vacations, and they really are enjoying our brand.

Assia Georgieva - Infinity Research

Brian, I thank you for this clarification and as you know, can see the results in the Caribbean and Alaska quite clearly. They are spectacular, but still we are talking about the $0.40 revision to earnings per share and a quarterly dividend of $0.10, which amounts to $0.40 of cash outflow a year. So my concern is that at almost 50% net debt-to-capital, this might not have been the optimal time to reinstate the dividend.

Brian Rice

Well, again, we are talking about less than -- at this level, we're talking about less than $100 million. We do view this as conservative. As Richard alluded to, our CapEx is slowing. Our EBITDA is improving. Our credit metrics in our forecast continue to prove -- improve. We're delevering. We still are very excited about returning to an investment grade credit. So I think on balance, we felt this was the right thing to do for our investors.

Assia Georgieva - Infinity Research

And you do not think that this may delay the investment grade rating?

Brian Rice

No. This should have no impact on it whatsoever.

Assia Georgieva - Infinity Research

Okay, and one please. Can you break out the tour division going forward just as Carnival does? Because your onboard yield seemed down almost one percentage point, and I think it plays havoc with the numbers especially given Pullmantur.

Brian Rice

Okay, Assia, I will tell you that I know our onboard revenues are essentially flat from our last forecast. I don't think the Pullmantur tour division had any material changes. I think this is really a story about Eastern Mediterranean, the changes for Eastern Mediterranean right now.

Operator

Your next question comes from the line of Greg Badishkanian of Citigroup.

Gregory Badishkanian - Citigroup Inc

Brian, I just want ask a follow-up question on your other point, which is that most of the other regions you're doing well. And North America, certainly, was very strong despite the lackluster U.S. macro environment. I'm just wondering what do you think led to that strength.

Brian Rice

Actually, I think that's a good question for our brands.

Adam Goldstein

Well, we've been saying for quite some time that we think that the brands that we're offering, their propositions are resonating in the marketplace. And as we've emerged from the recessionary environment of 2 and 3 years ago, they seem to have an impact in the marketplace. The Caribbean has developed nicely. We have, obviously, fantastic products and services arrayed there now. We talked about the changes that have been made in Alaska in the last couple of years. The state has taken a much more active interest in supporting the cruise industry's development there than what have seen prior to that. The Northeast of the United States seems to recover at least somewhat from the bump that it was in before. And it's nice that the positive developments are emerging at a time that helps us offset some of the impact of what we've mostly been talking about with this call with the Eastern Mediterranean.

Daniel Hanrahan

Greg, if I can pile on a little bit. The other thing that has really worked well for us has been the new hardware and in particular for Celebrity has been the Solstice-class ships that have really helped us drive strong revenues. And I think you knew Richard mentioned in his talk at the very beginning that we're seeing very, very strong customer satisfaction ratings. And as a company, we took a position that during the economic downturn, we wouldn't cut the product and in the fact, we worked very hard. All our brands worked very hard to improve the product that we were offering our guests. I think all that, we're starting to see pay off.

Gregory Badishkanian - Citigroup Inc

Great. And just my second question is on 2012. And I believe you mentioned that the key -- all major regions were up in terms of pricing. Did I get that right? Maybe the Eastern Med was up as well. And then I think you mentioned that it was -- the bookings were about 25%, or your less than 25% booked for 2012. Is that kind of typical for this time of the year or would it be more or would it be less than around that level?

Brian Rice

Well, Greg, we are, I believe in my comments I said we had less than 25%. It is running ahead of where it was a year ago. All the brands seem to be doing well. All 4 quarters are up on load factors and APDs. I didn't give any specific product, but I did mention that Europe is also up in terms of load factors and APDs. But we're talking about very small numbers when we start particularly for Europe and the Eastern Med, when we start getting out to the second and third quarter. I think it's just too early to read into those numbers at this point. But we are encouraged. But again, we're going to keep a close eye on it.

Operator

Your next question comes from the line of Sharon Zackfia of William Blair.

Sharon Zackfia - William Blair & Company L.L.C.

A couple of quick questions. I appreciate all the color on the Mediterranean this morning. I guess I'm curious with the Western Mediterranean, whether that's up where you expected to see? I might have assumed coming into the year that, perhaps, it would have been a stronger section as well. And I'm just curious if that is a little bit weaker than original plan, how you get comfort that it isn't something else happening in Europe that's causing this weakness?

Brian Rice

Sharon, I think, frankly, the Western Med has not performed quite to our expectations. Is not nearly the impact that we saw in the Eastern Med, but it will be -- the yields actually will be up modestly this year. I think in hindsight, there was a tremendous capacity increase in that region, and I think it's a testimony to the efforts that our sales groups, particularly in Europe, had been able to step up and fill that at higher prices given that impact. I think one of the things we look at very carefully, in addition to itineraries, is how were the various source markets doing. And when we exclude Mediterranean sailings to get a sense of how the broader, if you will, economic demand is throughout Europe, we were very encouraged in the second quarter. Virtually, all of Europe with the exception of Spain showed very high -- healthy price increases. And as we look more broadly, our bigger markets particularly the U.K., again, excluding the Med, where we've had some noise, the demand has actually been quite strong. So when we look at it that way, we try to differentiate between, if you will, event demand and economic demand and we felt pretty good about where the economic stand was.

Richard Fain

Yes, Sharon, sorry, if I could just a little more color to that. I think one of the phenomenon that we have experienced regularly is that although we talk about them as though they're totally discreet animals, regions -- there's some impact between regions. People who are a little nervous, for example, about the Eastern Med, that has a knock-on effect on close-by itineraries such as the Western Med. So we think part of what has resulted in some reduction and where we expect it to be in the Western Med is the very strong reaction to what happened in the East and the further afield you go, the less that impact is. And as Brian says, when you start looking towards Great Britain, you start going north of Germany and the Baltic. They've actually been extremely strong. But is not unusual that we feel some cross-pollination to nearby regions like -- so when we've talked about some of these things, we haven't been as specific sometimes. We're talking about the Eastern Med sometimes as a whole, because you really have to look at these things as not black and white but shades of gray.

Sharon Zackfia - William Blair & Company L.L.C.

Okay, and then my second question, you're obviously doing a very good job on net cruise costs. I'm just curious if there's anything about coming in below plan this year that would create some sort of catch up in spending in 2012.

Adam Goldstein

It's Adam. Obviously, we've been in an environment for the last several years, where we've been challenged to demonstrate very good cost control, and we have, in fact, done that. And as each year has transitioned towards the next and we have faced the requirements to manage our costs well in line year after year. So we are firmly cognizant of that challenge presenting itself, but I think we've shown in recent years that we can manage the next year and the next year and the next year. And that's our intention, to do it again in 2012.

Operator

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

Felicia Hendrix - Barclays Capital

So the first question I have is regarding the additional 150-basis-point cut to yields based on everything that you've laid our pretty clearly in the release and talked here in the call. I'm just wondering, is this it? This year has been pretty challenging in terms of forecasting, and I'm just wondering if that captures -- if you feel comfortable if that captures any of the risks that you might not have seen, particularly because the difference between the 100 and now the incremental 150, a lot of that came from close in bookings. So just wanted to get some color on kind of what you're seeing for the rest of the year and your confidence that this is it.

Adam Goldstein

Felicia, it's Adam. Obviously, it's our responsibility on these calls to call it the way we see it based on the evidence that's available to us. So in making our guidance for today, we are giving you our best projections as to what we believe will happen. We've explained on this call how certain changes that occur in the marketplace after we formulated our guidance in April have subsequently affected our guidance in July. We are not going to project things speculatively that we think might or might not happen in the next 3 months that could affect our October guidance. We're giving you the best we have at the end of July.

Richard Fain

I think, Felicia, I think it's a fair question. I think it's always hard to look back and remember what it was like 3 months ago. And one of the points that I try to make in my comments was it's not just the number of countries that were undergoing change or the violence of that change but the sense of this is going to carry on for a while and that it's quite serious. The length of time that Syria has gone on -- I mean, sorry, Libya has gone on, the fairly significant political change and attitude towards what's happening in Syria, all these things accumulated to reach a tipping point I think. And so we were fairly cautious to give our very best estimates at the end of the first quarter. We felt comfortable with those estimates. I think we really saw a quite significant deterioration. We gave our best estimates today with respect to the Far East, which we haven't really talked about. I think those estimates, nothing worse happened. The situation stabilized, so we feel that the estimates we gave in March, that remain accurate. We just feel there's been quite a sea change since March with respect to what's happened in the Middle East and North Africa. And we feel that this really is the best estimate of where we are. And obviously, we're hoping that we don't have any more surprises and in fact, that the situation stabilizes and it could be better, but these really are our best estimates then and today.

Felicia Hendrix - Barclays Capital

And then, now I'm also trying to just reconcile your outlook and results with Carnival's because you always talked before about the hardware premium that you enjoy. And I believe that's still intact. But if you look at your guidance, it's kind of roughly in line with where they are. If you look at the second quarter, it actually was less than what they did on a constant-dollar basis. I know there are some timing in terms of their quarter end and your quarter end. But if I believe that your hardware premium is in place, then that just implies that your underlying business is actually performing weaker than theirs and maybe that's a flawed outlook so I was just hoping you could address that.

Brian Rice

Yes, Felicia, obviously, we're aware of how our competitors are performing, and we hold ourselves accountable to a higher yield performance, particularly given the superior hardware we have. I think what we are looking at as the primary driver and it really is the second and third quarter issue is our overweighting in the Med. If you look at the capacity allocations that the different companies have, as I mentioned in my script, 45% of our inventory is going to be in the Mediterranean this year. And I think we're -- maybe we had a disconnect with expectations out there is people looked at I believe are -- what we had talked about before was that 53% of our capacity was going to be in Europe this summer or at least in the third quarter. I think what people didn't understand is how overweighted toward the Med that was. And I believe our competition has closer to a 50-50 ratio between the Baltic and the Med where we're more like 90-10. And I think that's the significant difference that you would see in the performance. But we'd feel comfortable that on an itinerary basis, that we're performing quite well in the market.

Felicia Hendrix - Barclays Capital

Okay, and look, I just need a clarification on fuel because there's something that confused me. In 2012, you went to $72 a barrel from $86, but the same amount was hedged. So I was wondering if you could clarify that and if you could just let us know at current prices what your 2012 fuel expense outlook is.

Brian Rice

I don't have 2012 fuel in front of me. If I could ask, if you wouldn't mind following up with Ian, he'd be happy to help you with that. I apologize I don't have that in front of me.

Felicia Hendrix - Barclays Capital

Sure. But can you just -- I mean, this was in the release. For 2012, you said that 55% hedged at $72. Under your last press release, it was 55% hedged at $86, so I was just wondering what the change was there?

Brian Rice

What we're trying to do when we put it out in the press release, we're trying to give you a WTI equivalent. And when you have that decoupling between the WTI and the fuels that we're using, we have to go back and restate what that equivalent is. I will mention, as you'll see in the release, we have been doing more hedging, but that's further out hedging.

Felicia Hendrix - Barclays Capital

So basically you're underlying bunker maybe it hasn't really changed?

Brian Rice

Correct. Exactly.

Operator

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

Robin Farley - UBS Investment Bank

I have 2 questions. First is on the 150-basis-point reduction and I guess since the start of the year, it's a 300-basis-point reduction. Can you quantify just kind of roughly what of that change is direct impact from ships that you had to reroute from the Middle East and Japan, which I think is about 4% of your capacity where there's a direct impact, you had those ships' folks, they had to move, versus just sort of the more indirect like other ships where there may be an impact because of more capacity or maybe demand or could be ships that were indirectly impacted that could be due to any number of reasons? But can you quantify what of the either of the 300 basis points since the start of the year or just the 150 basis points year incremental since April is directly impacted, rerouted, the 4% of your capacity that's rerouted versus just anything that may be coming in a little bit less than you had expected?

Brian Rice

Robin, just for clarity, the constant currency has changed by 200 basis points. The actual business has changed -- it would change by 50 basis points from the beginning of the year to the April call and 150 basis points from April to today. And then we have the currency impact, but I'll leverage your talk a little bit about the specific changes that have occurred.

Richard Fain

Yes, just to be clear, Robin, in the 150 basis points, none of that relates to -- essentially, none of that relates to specific itinerary changes. All of those specific itinerary changes were -- almost all of them were held at the end -- at the time of our March call. And so everything that's happened since then has been due to demand generation for the region. In terms of how much of the change from the beginning of the year to the end of the first quarter, reason that I don't have those numbers right in front of us today, we did give them out at the time of the first quarter call, and Ian can provide you that reference offline later on.

Robin Farley - UBS Investment Bank

Okay, wait, and the 300 basis points I was referring to was a constant currency ex Pullmantur what originally was plus 45 for the year, now being 1 to 2. That was just to clarify what stronger basis points I was referring to. My second question is I guess, just a follow-up on just the hedging where you -- in April, you were hedged at $72 and now the same amount as being $86 and $91 a barrel. I guess I just want to understand how much of your hedging for this year was kind of due to perfectly timing. The hedging, when WTI was at those levels versus maybe paying a premium to be hedged at $72. In other words, even just since April, just to understand how much is -- where your hedge...

Brian Rice

Robin, on the close in stuff, we have done no additional hedges. Any change that is in the pricing, that we're putting out there is a result of trying to take the fuels that we burn and give you a WTI equivalent. In 2011, we have done no additional hedges. And as I mentioned before, we've done them in the out years. And as much as I'd love to give our team, who I think is brilliant, credit for perfect timing, it's really got nothing to do with that. But again, Ian has all those details, and in terms of the yield, we try to put a lot more out in the marketplace today to help you to be able to model this. And I think Ian would be more than happy to sit down with the facts that we've laid out and try to help you reconcile it.

Operator

And you have a question from the line of Tim Conder of Wells Fargo Securities.

Timothy Conder - Wells Fargo Securities, LLC

Just back on the Med, a little bit of mixed understanding on my part. Are you saying that as you see things currently, you have -- you feel you have things stabilized or you still -- do you still believe that, that is a fluid situation?

Daniel Hanrahan

Tim, this is Dan. What we have said is that pricing actions that we've taken have stimulated demand. And as the guidance that we're putting out today is our best estimates of what's going to happen in the market as we go forward. But we have seen a nice pickup in demand as a result of the pricing that we have there today. We don't particularly care for the pricing, but we have seen a nice pickup in demand.

Timothy Conder - Wells Fargo Securities, LLC

Okay, so both from a demand and a pricing perspective, you're seeing demands picking up, so that's not that the pricing you feel is appears stabilized for the, primarily the Eastern Med itineraries?

Daniel Hanrahan

Yes.

Timothy Conder - Wells Fargo Securities, LLC

Okay, and then secondly, back to the onboard spending. Brian, could you -- just any comment there. Or are you saying that debt was down slightly? If you could just look at the calculations that you guys had given for the second quarter, is there anything in there that we should -- should we just look at that at face value? Or is there anything in there that we should maybe make some adjustments? So is underlying onboard spending broadly flattish to slightly down or is there something else clouding that number?

Adam Goldstein

Tim, it's Adam. Broadly flattish would be an accurate depiction. I would not say broadly flattish to slightly down.

Brian Rice

Thanks, everyone, for joining us today. As usual, Ian will be available throughout the day to help with your follow-ups and your modeling. Again, we appreciate you dialing in today, and we hope you have a great day. Thank you.

Operator

Thank you for your participation. This concludes today's conference. You may now disconnect.

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