Royal Caribbean Cruises Q3 2007 Earnings Call Transcript

Royal Caribbean Cruises Ltd. (RCL)

Q3 2007 Earnings Call

October 22, 2007 10:00 a.m. ET

Executives

Brian Rice - CFO

Richard Fain - Chairman and CEO

Adam Goldstein - President, Royal Caribbean International

Dan Hanrahan - President, Celebrity Cruises

Greg Johnson - Associate VP of Investor Relations

Analysts

Michael Savner - Banc of America Securities.

Robin Farley - UBS

Hakan Ipecki - Merrill Lynch

Aja Jordiava - Infinity Research

Steve Kent - Goldman Sachs

Bob Simonson - William Blair

Tim Conder - Wachovia

Dean Gianoukos - J.P. Morgan

Michael Savner - Banc of America Securities

Joe Hovorka - Raymond James

Felicia Hendrix - Lehman Brothers

Steve Searl - Conning Asset Management

Presentation

Operator

Good morning, my name is Lou Ann, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruises Limited Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Thank you. I will now turn the call over to Mr. Brian Rice. Sir, you may begin your conference.

Brian Rice

Thank you, Lou Ann and good morning, everyone. I would like to thank you for joining us this morning for our third quarter earnings call. With me here today are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President of Royal Caribbean International; Dan Hanrahan, President of Celebrity Cruises; and Greg Johnson, our Associate Vice President of Investor Relations.

We have posted slides on our investor website, www.rclinvestor.com, which we will be using during this call and should help facilitate our discussion.

Before we get into our results and business overview, I would like to remind you of our forward-looking statements, which you will see on the first slide. During this call, we will be making comments which are forward-looking statements that are subject to change based on the items listed on our website and disclosures in our SEC filings. Additionally, we will be discussing certain financial measures, which are non-GAAP defined by Regulation G and a reconciliation of these items can be found on our website.

To start, I would like to take you through some of the details of our financial results, discuss the current booking environment and provide you with our most recent forward guidance. Adam and Dan will then discuss their brands and Richard will have some comments before we open the call for your questions.

As we mentioned in our press release, you will see on the second slide, revenues for the third quarter of 2007 increased $2 billion from $1.6 billion in 2006. Net income for the second quarter increased to $395 million or $1.84 per share compared to our previous guidance of $1.75 to $1.80 per share. For the third quarter of 2006, we reported net income of $345.4 million or $1.63 per share.

Now I would like to go through the comparable results that is, excluding Pullmantur. I will review both the revenue and cost sides of the business for Royal Caribbean International, Celebrity Cruises and Azamara Cruises, then talk about Pullmantur and the combined group afterwards.

We had a good quarter with yields coming in much better than anticipated. Net cruise costs coming in essentially flat compared to the same time last year and net cruise costs excluding fuel increasing 1%.

On page three, you can see that our guidance on a comparable basis was for yields to be around flat, and we generated an increase of 1.6%. For the quarter, we achieved the highest revenue yields in our history and we saw broad based improvement across the board in both ticket and on-board spending.

Our close-in business booked at significantly better rates than we have experienced last year, and much stronger than we had anticipated. You may remember, during our second quarter call, we shared a slide that illustrated an encouraging trend of improved pricing for bookings made within 90 days of sale date. This pattern actually improved further in the third quarter and our pricing leverage increased more with each month during the quarter.

Now going back to slide three, you will see our cost performance was fairly consistent with our expectations. Net cruise costs per APCD on a comparable basis were up one-tenth of 1% and excluding fuel, net cruise costs were up 1%. Fuel costs on an APCD basis decreased 1.9% versus the same time last year, and also came in at 1.1% lower than our guidance.

On slide four you will see our fuel costs were $21.49 per APCD in the third quarter of 2006. This year higher average fuel prices added 7.1% or $1.53 per APCD. We were able to more than offset this increase through consumption efficiencies, which saved us $1.20 per APCD and hedging which saved us $0.73 per APCD. As I mentioned previously, our fuel costs per APCD actually, were 1.9% lower for the quarter than last year.

Our marine operations team has truly done an outstanding job in finding ways to lower our fuel consumption. On our last two earnings calls, Richard has talked about our cost management initiatives and I believe, the last three quarters have demonstrated our commitment to controlling cost.

On a comparable basis, our net cruise costs per APCD for the first nine months have decreased 1% and excluding bunker, our net cruise costs per APCD are flat. Importantly though, we have been able to achieve this without compromising our strategic investments or risking our product delivery.

Now let’s move on to Pullmantur and the combined group. If you turn back to slide three, you will see our all-in net yields increased 4.1% and net cruise costs increased 6.7%. Excluding fuel, net cruise costs increased 8.6%. Pullmantur's business did very well in the quarter, which due to the two-month lag in reporting was comprised of May, June and July. Yield performance for Pullmantur was very strong and similar to our other brands exceeded our expectations. Costs were somewhat higher than forecast, but this was largely due to timing differences.

Now I would like to move on to our expectations for the balance of the year. On slide five you will see our guidance for the fourth quarter. Our current forecast is for earnings per share to be in the range of $0.32 to $0.37, which compares favorably to the $0.22 we reported for last year’s fourth quarter. And, as we’ve stated previously, we do expect Pullmantur to be accretive in the fourth quarter.

Now let me share some of the key metrics that we are forecasting for the fourth quarter. On a comparable basis, we will have an increase in capacity of 4.7% and we expect yields to be up around 2%. Based on the current at-the-pump price for fuel, net cruise costs are expected to be up around 2% and excluding fuel, net cruise costs should also be up around 2%.

Including Pullmantur, capacity will be up 13.6% and yields are forecasted to be up around 9%. Based on current fuel prices, net cruise costs will be up 8% to 9% and excluding fuel net cruise costs will be up around 10%. If fuel prices for the rest of the quarter remain at current levels, our fuel costs for the quarter would be $137 million or $440 per metric ton. This takes into account the fact that we are 42% hedged at this point, for the fourth quarter.

In terms of sensitivity, a 10% change in our fuel price either way equates to about an $8 million impact to the quarter. On slide six we have provided our guidance for the full year. On a comparable basis, capacity will be up 4.8% and yields will be about flat compared to 2006.

Based on current fuel prices, we except net cruise costs to be about flat and net cruise costs excluding fuel to be around flat to up 1%. Including Pullmantur, capacity will increase 12.4% and net yields are expected to be up around 3%.

At the current price of fuel, net cruise costs are forecasted to be up 5% to 6%, and net cruise costs excluding fuel should be up 7% to 8%. Our earnings per share are estimated to be between $2.80 and $2.85. This puts us on the higher end of our previous guidance despite today’s higher fuel prices.

Before we talk about advanced bookings, I would like to put the softness, we felt earlier in the year into perspective. As you can see on slide seven, the yield deterioration that we experienced in the first quarter, into a much lesser extent in the second quarter, really was an aberration in what has otherwise been a healthy pricing environment for our brands.

We believe our product is still too good of a value, and we deserve to be paid more. But we also believe concerns about overcapacity and fatigue in the Caribbean has been overblown, and our advanced bookings provide evidence of our brand stability to perform even during questionable economic periods.

On slide eight we have provided the status of our current order book including Pullmantur for the fourth quarter and the first two quarters of 2008. In all three quarters, both load factors and APDs are running ahead of where they were at the same time last year. The first quarter, in particular, is shaping up nicely.

Admittedly, the first quarter will provide us with our easiest comparables from a revenue perspective, but based on our position today, we are confident the first quarter yields will meet or exceed the yields we achieved in the first quarter of 2006, that in another way, we are looking for yield improvement in the first quarter of mid single digits.

It is still too early to project the full year of 2008 as our visibility beyond the first quarter is somewhat limited. But, from what we are seeing, we are optimistic that we will see positive yield performance for the full year.

On slide nine, you can see our projected CapEx for ’07, ’08, ’09, 2010 and 2011 is estimated to be $1.3 billion, $1.8 billion, $2 billion, $2.2 billion and $1 billion respectively, which is unchanged from the last quarter. On slide 10, you will see our projected capacity increases for the same five years are estimated to be 12.4%, 6.4%, 9.3%, 11.4%, and 6.4% respectively. You will notice our 2008 projected capacity increase is lower than we have provided on the last call. Much of the decrease is driven by changes in Pullmantur’s deployment.

With the addition of the Pacific Star and Sovereign of the Seas next year to Pullmantur, we have decided not to renew two charters that we have this year. We will also have some dry dock time for Sovereign prior to the transfer to Pullmantur and Bleu de France, the ship for our new French brand. We have also made decisions to run deadhead repositionings without guests between a number of Pullmantur Cruises to improve profitability even though it reduces capacity.

Lastly, our liquidity at September 30th was $1.6 billion, comprised of $400 million in cash and equivalents and $1.2 billion available on our revolver.

Now, I would like to turn the call over to Adam to talk about the Royal Caribbean International brand.

Adam Goldstein

Thank you, Brian. Good morning, everyone. We are pleased with the third quarter results and the positive tone of our current business. We are also pleased that Royal Caribbean International continues to receive widespread recognition on a global basis as the world’s foremost cruise line.

We have noted in previous calls our ongoing geographical expansion of itineraries and customer sourcing. This winter, several of our Vision-class ships will sail on new itineraries that reflect those expansions. These include Splendor of the Seas in South America, Rhapsody of the Seas in Australia and Asia, and Legend of the Seas in the Dominican Republic. While we do not provide revenue guidance on a ship-by-ship basis, I am pleased to note we are confident these three ships will collectively achieve positive year-over-year net revenue yields for their winter seasons.

Meanwhile, Liberty of the Seas has settled in beautifully along side Freedom of the Seas, offering seven night cruises from Miami. These two ships are preeminent in the industry and are delivering the highest level of guest satisfaction in the Royal Caribbean International fleet.

Our third freedom class ship, Independence of the Seas, is scheduled for delivery in April 2008. We recently announced the Sovereign of the Seas will leave the Royal Caribbean International fleet in November 2008 and join the Pullmantur fleet. Monarch of the Seas will leave her current itineraries out of Los Angeles and assumes Sovereign’s itineraries out of Port Canaveral one week after Sovereign departs.

While Sovereign still has one year of valuable service left in our fleet, given that her introduction was to the late 1980’s, what Voyager of the Seas introduction was to the late 1990’s. We regard this announcement as a milestone in our evolution as a brand and a prize for our colleagues at Pullmantur. Dan?

Dan Hanrahan

Thank you, Adam and good morning everyone. As you have heard from the rest of the team, we are very pleased with our third quarter results. Celebrity had a solid book of business in Europe and Alaska going into the third quarter and we were very pleased with the quality of the close-in bookings for both markets.

We are equally pleased with where we are booked for the fourth quarter. Brian mentioned we are very focused on cost containment. I am pleased to report that we have completed the diesel installation on two ships, Millennium and Constellation, and they are fully commissioned. We are in the process of finishing the installation on Jewel of the Seas and will complete all eight gas turbine ships in the Celebrity Cruises and Royal Caribbean International fleets by the end of 2008.

In both cases the diesel engines are carrying the full hotel load and are being used to offset the gas turbine usage for propulsion. These diesel engines are more energy efficient, burning less fuel and at today's fuel rates the savings will be approximately $7 million per ship per year versus what our fuel expenses would have been if we had not made the change with the diesel.

I am also pleased to report that we have finished the revitalization of the second Azamara ship. We will be hosting travel agents and press on a two-night familiarization cruise on Azamara Quest beginning tonight. She then goes into full revenue service this Wednesday and will be doing exotic Caribbean cruises through the winter before repositioning to Europe next spring.

We remain excited about this new brand and the potential it has. Finally, we launched a new marketing campaign with the tag line, Starring You. Although it is early in the campaign, the feedback from the travel trade community has been very positive. Our focus on a differentiated marketing position for Celebrity is working and we are seeing it in the revenue results. Richard?

Richard Fain

Thank you, Dan. And thanks to all of you for joining us on this call. I have just a few things to say before we open it up to the questions. And first, I would like to commend the management team and in fact, all of our staff for these record financial results. I am very proud of their achievements both in building a portfolio of industry leading brands and for their commitment to our improving financial performance. Particularly, important aspect of this success is our continuing focus, cost management, and efficiencies.

Brian mentioned, so did Adam and Dan, the progress we have made in fuel consumption, but fuel is by no means the only area we are focused on. This really is an enterprise-wide effort involving all of our operating units, both shore side and shipboard. We have made real progress here and we will continue to push forward on this.

Now shifting gears a bit, I would like to address the potential impact of the credit crunch that’s going on in the country today on our company. And the implications for financing are $7 billion new order in this choppy financial environment. Fortunately, as we have disclosed on previous occasions, all of our ships on order have guaranteed financing in place. That’s always been our practice and it gives us the comfort of knowing that we are not dependent on market conditions and that happened to be in place at the time of delivery.

These financings are unsecured and generally, they are on terms comparable to what we have done historically. So, if the markets are turbulent at the time to delivery, we simply use the financing guarantees. If the markets are more favorable we will look on an opportunistic basis to see if we can do even better.

Now moving on, you know we are very excited about our new French brand, CDF Croisieres de France. This new venture builds very nicely on our commitment to continued European expansion. The newly named vessel Bleu de France completely renovated and customized for the French market will begin sailing next spring.

In fact, all aspects of this brand will be tailored exclusively for French tastes, cuisine, entertainment, language décor, etc. All will be exclusively French. We anticipate a strong demand for this product and we have assembled a very talented team that's leading the effort.

Finally, this afternoon, Dan and I will be boarding the Azamara Quest for her first inaugural cruise. Dan already pointed out the new brand is off to a terrific start and adding this wonderful new ship is an important step forward.

With that, we would like to open up the call for your questions. In order to make sure that we get to as many people as possible, I'd like to ask you to limit yourself to not more than two questions at a time. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Michael Savner with Banc of America Securities.

Michael Savner - Banc of America Securities

Hi, good morning, thanks. Two questions, and first can you give us a little bit of color of what you are seeing in bookings related to the weakening US dollar, both from the perspective of how you might be able to be take share from land-based vacations for American traveling abroad and conversely, has it helped your ability to draw Europeans here to the Caribbean? And when I say the improvement, I mean, is it something as material or really incidental? And then I've a follow-up? Thanks.

Adam Goldstein

Hi, Michael, this is Adam. I would say at this point, we’ve realized the double benefit along the lines that your questions suggest. For the American segment, they see the ability to take cruises, particularly in Europe and especially late in this year, as the value driven way to continue to satisfy their appetite to experience Europe. And that’s been favorable to the cruise sector in general, I believe.

We’ve also seen considerable late booking strength from the European point of sale, which is of course, an area that strategically, we’ve raised our investment in a variety of ways lately. And in the current weeks and months, we’ve definitely seen the benefit of what cruise pricing they may experience it in their currency. But it’s given that it’s computed over from dollars originally, it’s a very attractive message for them. So, we’re definitely benefiting both ways.

Michael Savner - Banc of America Securities

Thanks Adam. And then, to follow-up on your comment, and I know, Brian mentioned it as well, you talked about improving trends for close-in pricing actually was getting better not just year-over-year, but you’re seeing sequential improvement as the quarters, as the months went on in the third quarter? Can you comment a little bit about what you are seeing even more recently and whether there has been any slowdown in that improvement related to the tick-up in oil or the kind of settling in of consumer’s sentiment?

Brian Rice

Michael, it’s Brian. As we’ve talked about, we haven’t really seen too tight of a correlation or consumer demand, and what’s been happening in the broader markets in terms of fuel or the sub-prime mortgage. There seems to be very strong resilience right now with our customer segments.

Throughout the third quarter, we saw progressive improvement. In September, the year-over-year pricing to the close-in bookings were very strong. It's something we’re struggling quite frankly to find a true pattern to, but it has been very healthy really for the last five or six months.

Michael Savner - Banc of America Securities

Any data on October that you can share yet?

Brian Rice

It’s a bit early for that right now. We have been pleased with our bookings over the last several weeks, but I think it’s a little too early to really be able to pronounce what will happen in the fourth quarter. Fortunately, our pricing structure is very adaptable as we see changes in demand patterns, and we believe that we are doing a lot to be able to leverage the close-in demand that we’ve seen.

Michael Savner - Banc of America Securities

Fair enough. Thanks very much.

Operator

Your first question comes from Robin Farley with UBS.

Robin Farley - UBS

Thanks. Few questions, it looks like Mexico is pretty close to implementing a head tax, I guess following what Alaska did. Can you talk about that and also, do you see risk of this elsewhere if Mexico does it, will other places [follow] and do it in terms of what percents that you have on that? And then my second question is on fuel consumption, so I'll wait for it there.

Adam Goldstein

Hi, Robin. This is Adam. On your question about Mexico, first of all, the decision by the Mexicans as to what to do is still hanging in the balance. I believe it’s in between their Chamber of Deputies and their Senate. So, there still is an effort to minimize, either the passage of that tax or how much it is or when it applies. That's literally going on at the moment.

We believe that there is a lot of support for our position in Mexico that this is an industry that has brought enormous benefits to that country and that the best way to continue to have those benefits flow to the country is through more cruise costs by more cruise ships bringing more guests to spend more money there, as opposed to raising revenue through taxes at any level of government.

And that is the message that we are conveying in every which way that we can, not only within Mexico, but around the world actually. This is a growing industry, and we think this industry can bring enormous benefits to many countries around the world. But it should come in the form of consumer and cruise spending rather than in the form of taxation.

Robin Farley - UBS

Do you expect that it would be signed by the President if it passes?

Adam Goldstein

It’s very hard to tell. We are not experts in Mexican politics or government. It’s part of a bigger package as well as being a debate on its own terms and we just have to see what occurs.

Robin Farley - UBS

And then in terms of other countries?

Adam Goldstein

Well, as I say, the message that we’re trying to deliver to many countries around the world is that this industry can best benefit their country, if they allow the growth to occur and the spending to follow as opposed to looking at ships calling on their country, as a taxation revenue raising opportunity.

Robin Farley - UBS

Thanks. And then in terms of fuel consumption, this is like a bigger difference reduction in consumption per units than what have done in previous years. And I wonder if you could give a little color, is it itinerary changes that have allowed for lower consumptions or I mean, the diesel engines are relatively new, but it seems like it’s got to be more than just the diesel engines driving the consumption reduction?

Dan Hanrahan

Robin, this is Dan. It’s a function of a number of different things. We’re seeing very, very positive consumption numbers because of the diesel engines. They just burn less, fuel, and in fact, we are doing better with those diesel engines than we’ve thought they were -- than we've thought we would. We’ve also taken steps across the board with all ships in both fleets to reduce consumption.

So, more of our ships have the new SigmaGlide paint on the bottom. So, that creates more efficiency for fuel. More of our ships have the 3M window veneers on, so that’s helping us with fuel. The hotel group now is very, very focused on fuel and is helping us quite a bit. And we are very, very careful with itineraries.

So, I don’t think you can point to any single thing. It’s really across the board and it’s a real focus across the company. And it’s not just the Marine Department that focuses on it, it's hotel on the ship, and it’s everybody here in Miami who wakes up and thinks about fuel in the morning as well.

Robin Farley - UBS

Okay. Great. Thank you.

Operator

Your next question comes from Hakan Ipecki with Merrill Lynch.

Hakan Ipecki - Merrill Lynch

Thank you. Going back to the fuel, looking into next year. I mean, where are you expecting to use and kind of looking at some of the items that you’ve spoken in on the mixed shift hedges, what's driving the biggest benefit there?

Brian Rice

Well, next year the biggest benefit is going to be – again, it's across the board. But the diesel engines are going to provide a big benefit for us next year because they just burn less fuel. So, we'll get a bigger benefit. And by the end of next year, we’ll have the diesel engines installed on all eight. The pleasant surprise we’ve got on the diesel engines is that when we first put them in, we thought they would run just the hotel load. But we’ve in fact, we’ve found that at lower speeds, we don’t even have to turn the gas turbine engines on, and so the diesel engines are not only running the full hotel load, but they are moving the ship through the water, and burning less fuel at the same time.

So, there is a real nice benefit to that. And then we continue all the other things that I just mentioned, when I answered Robin’s question that they just continue to come in to effect. We’ve a fuel team that meets weekly, a steering committee team that meets weekly. And when I look at that list, there is dozens and dozens of ideas that remain on that list that we are still betting and looking to put into service next year.

So, there is a lot of good things going on, and I think what you have seen there is also itineraries. We are just being very careful with our deployment as well. So, it’s that whole mixture that’s driving the force.

Hakan Ipecki - Merrill Lynch

I see. And does that decrease the chance of a fuel surcharge even though oil is around $90 per barrel, does that change the way you think about the surcharge or chance of it being implemented.

Richard Fain

I think -- it's Richard speaking and I think we’ve said in the prior calls that is something we tend to look at. But, clearly we've been remarkably successful across the board in keeping the costs. I think if you actually look in the '08 based on even at today's fuel price, not only be comparable to '07, but actually will be lower than, '06 and given what's happened to fuel costs, that's remarkable. So, yes, clearly that maybe makes less likely a fuel surcharge. We keep looking at it and I've to just say, it's been -- everybody is looking at exactly what is has done, I think, it is a thousand things (inaudible).

Hakan Ipecki - Merrill Lynch

Okay, great. Thank you very much.

Operator

Your next question comes from [Aja Jordiava] with Infinity Research.

Aja Jordiava - Infinity Research

Good morning. Congratulations on a great quarter. I had a couple of questions, they relate to your expansion into European markets. First of all, maybe Brian, you can help me with this. Can you give us the percentage of revenues in Q3, which were generated in non-dollar currencies?

And my second question is a larger one, I guess. Now that you have successfully addressed the Spanish and French markets on a national basis, do you expect to add maybe one brand or two brands a year for specific nationalities such as Germany or further emphasis on the UK?

Brian Rice

Aja, we don’t breakout our revenues by quarter geographically or in currency. I can tell you that about 83% of our revenues this year will be generated out of the North American marketplace. I think it’s fair to assume that a much higher proportion of that would occur in the third quarter. But we don’t break out that level of detail on a quarterly basis.

Adam Goldstein

And with respect to your second question, I don’t think, we have a specific plan that it's X number of nationalities, nationalistic products that we would pull out on an annual basis. I think we do this very much on an opportunistic basis. Does a new market offer an opportunity to generate a high return on invested capital? We look at those as individual decisions and we continue to look at them opportunistic.

Aja Jordiava - Infinity Research

Would you consider some of the larger European countries as suitable for further expansion and maybe Germany an example?

Richard Fain

I think we look at all the places. There are more countries in Europe that have potential opportunities. It also, it was seen that we have raise into Pacific arena and Asia. So I think there are plenty of opportunities out there and we just have to keep looking at them and see whether given what's happening in those markets, they're likely to generate the kinds of returns.

Aja Jordiava - Infinity Research

Okay, great. Thank you, so much Richard.

Operator

Your next question comes from Steve Kent with Goldman Sachs.

Steve Kent - Goldman Sachs

Hi, good morning. Could you just give us a little bit more detail on Pullmantur and how it’s going? You're now a few more months into ownership and whether you feel that the upside might be greater and I guess, I’m very interested in the earlier comments about maybe dead heading a couple of the ships moving things in and out of the market and whether that, to enhance revenues or to reduce expenses, I didn’t quite understand the motivation for all of that.

Richard Fain

Steve, yes, I think we’re very excited about Pullmantur, and beyond just verbal comments we’ve made the fact that we’ve taken now one of our very finest ships, the Sovereign of the Seas and moving it to Pullmantur. On top of the two ships, it's probably the most tangible demonstration that and I think, you will see more of those will continue that brand because we are very optimistic about it.

I think Brian’s comment on the dead-heading is mainly to really explain some of the changes in numbers. That's something we do with all of our brands, sort of looking at the itineraries, is it for a better return for us to do a repositioning voyage, which maybe gets a lower per diem but gets some revenue to offset the costs or is it better to bite the bullet and have a shorter period, where we get no revenue, but then more quickly get to a higher revenue destination.

And frankly, those are sort of marginal type decisions. It’s not fundamental, although, there were enough of those kinds of things, Pullmantur and elsewhere that they impacted sort of the incremental change in the number of APCDs.

So, I think the answer to your question, that's not any indication of any change in strategy. We’ve always made those kinds of decisions on an on/off basis. It’s just that, this particular comparison, it cause some anomalies in numbers.

Steve Kent - Goldman Sachs

And does this mean that this acquisition is now, do you think, is more accretive than when you started this process a while ago?

Richard Fain

No, we’ve said for this year that we thought it would be flat and frankly, it's still small vis-à-vis the overall Royal Caribbean. We think it has more strategic possibility, but I don’t think it has changed the short-term number.

Steve Kent - Goldman Sachs

Thanks.

Operator

Your next question comes from Bob Simonson with William Blair.

Bob Simonson - William Blair

Good morning. Looking at the capacity page 10, I think there is enough time. Might you add another ship for the out period of 2011? And Richard, do you have in your mind or is that the board have in their mind, a sustainable growth rate for capacity on a longer term basis?

Richard Fain

Let me answer -- the first question is yes, of course there is a possibility that more capacity could be added in 2011. In fact, if you look at ship delivery schedules probably, even if you order today wouldn’t have that big an impact on 2011 likely,  in fact 2012, but could impact a CapEx schedule in [2012]. So, if you get something late in the year, capacity increase of domestic growth wouldn’t affect until the following year 2012.

But in terms of growth, I don’t think we have said that we think there is a particular figure for any one year. And I don’t think we could say that today. I think, what we do look at is one of the markets we serve and is there an opportunity to buy in something new, add capacity at a price and on terms that give you a good return.

I just find it ironic that here we are looking at a fleet that’s much larger than anything we had in the past and we still don’t have enough ships to satisfy all the itineraries that we would like to serve. And to some extent, that comes back to the earlier question of what about other markets out there? There are so many new markets that are opening up that offers opportunity.

But the other thing, I would comment on is we are now seeing a lower growth rate than we saw perhaps five years ago and most of us were concentrating on creating a critical mass of scale, but we think, we have that today. So, there isn’t that same pressure in getting the higher growth rate that they might have implied here.

Bob Simonson - William Blair

Second question. Brian, do you have a number that you can share as to what percent of your capacity was sourced from the US in ’06. What it might be this year and what it might be next year?

Brian Rice

I don’t have the numbers right in front of me, Bob. I can tell you 83% is North American this year. We would look to that number to continue to comedown. Our Europe growth is growing quite nicely and next year with Independence of the Seas debuting at the Southampton and we’ll have the two voyager-class ships in Europe as well. I think you will continue to see growth in Europe and also Latin America. We have some really exciting new itineraries targeted toward Latin American that will help that market grow as well and continue to improve our diversification in sourcing.

Bob Simonson - William Blair

Thank you very much.

Brian Rice

If you want to follow-up with Greg this afternoon, I think we can get the statistics that  you are looking for.

Bob Simonson - William Blair

Very good, thanks.

Operator

Your next question comes from Tim Conder with Wachovia.

Tim Conder - Wachovia

Thank you. ‘08 Brain, where are you percentage hedged for ‘08 at this point, and if you would so much as embellish at what levels? And then the second question is given the performance that you and the industry are seeing here in what’s typically a weaker booking period for the industry on a seasonal basis, is there -- are you slowing down maybe a little bit, maybe trying to take a little bit more price now running the risk of selling out too fast, I guess is that the end of question there?

Brian Rice

It’s a great question to have to answer. How things have changed in the last six months. In 2008, right now, I think we disclosed this in our press release, we're about 38% hedged. I don’t have the average hedge rate in there, although we did say, even though we have seen a real big run up in fuel prices over the last couple of months.

Our fuel savings initiatives and our hedge position in '08, right now with prices remain the same we think we could almost mitigate all those price increases that we’ve seen thus far. In terms of our pricing strategy it really -- it’s not as macro an answer as I think you are looking for. We are looking at seasons, we are looking at products, we are looking at the demand dynamics. When it comes to peak season itineraries and ships that you have a conviction or a star, you are probably more apt to try to go for the pricing leverage earlier on in the life cycle.

I think, this year has been a year that both ourselves and our competitors have benefited from a strong order book which has given us that pricing leverage close in. But I don’t think that’s always the magical formula. It really - it’s based on the environment that we are seeing and the product that we are trying to revenue-manage.

Tim Conder - Wachovia

Okay.

Brian Rice

Though right now, I think the long and short of it is, we are very happy with where we are. And I think we are making the right pricing decisions to really optimize our performance in the current environment.

Tim Conder - Wachovia

And along that line since 9/11 using that as a reference point, would you say that given what you just described that’s your booking window is maybe at its longest point?

Brian Rice

Overall, I think probably, my speculation is probably more like ’04. We might have been a little bit more booked, but we are certainly in a much better fill percentage today for '08 than we were for '07. And I think, probably about on par to slightly better than we were in '06.

Tim Conder - Wachovia

Okay.

Brian Rice

It really - I believe a lot of it is being driven more by us in our itinerary mix and our source markets than it is in any changes that we are seeing in the consumer behavior.

Tim Conder - Wachovia

Okay. So, at this point again, absent what you described with some of the maybe more seasonal markets here, you don’t feel you're quite at that point, where you are really trying to ratchet up price to maybe slowdown the fill rate?

Brian Rice

In some products we are and in some quarters. If you look at the slide that we -- I think it was page eight, that we showed our current order book. You can see our pricing tends to somewhat correlate with the order books. So for example, in Q1 right now, where we have real nice loads, we are getting higher revenue premiums than would be over say Q2 for example. Where it's still too early we are not going to go out and get real aggressive on price yet until we have seen a real conviction about that demand..

Tim Conder - Wachovia

Okay, great. Thank you.

Operator

Your next question comes from Dean Gianoukos with J.P. Morgan.

Dean Gianoukos - J.P. Morgan

I’m all set. Thanks.

Operator

Your next question is a follow-up from Michael Savner with Banc of America Securities.

Michael Savner - Banc of America Securities

Hi, thanks for the quick follow-up. Brian, there has been some talk over the last few months about potentially revisiting the accounting treatment of the useful life for your ships and maybe the accounting treatment today is not properly reflecting the length of the ships being in services. And whether you are considering maybe, extending that useful life, which would obviously lower the annual amort rate. Is that something that from a business sense, you’re thinking about and is being debated?

Brian Rice

Michael, I think the current situation with resales and the value of the ships are, certainly implies that our accounting treatment of 30 years with a 15% residual value is what I’d call conservative. I think as with any policy of that nature, we would want to get very comfortable before we would close any changes to our audit committee and to our auditors. But I think it’s an intriguing question given what we have seen in terms of the resale values in the market that's out there. But we have nothing at this point in time that we’re definitively going to comment on.

Michael Savner - Banc of America Securities

But it’s something that you are studying?

Brian Rice

We look at - it’s something we look at and we are somewhat intrigued by but we want to have ample time to really review it. We don’t want to be making quarter-to-quarter accounting changes. But, if there is something that we believe it’s significant and strategic and a pattern that it’s very consistent. I think we would want to discuss it with our audit committee and our accountants.

Michael Savner - Banc of America Securities

Thanks, Brian.

Operator

Your next question comes from Joe Hovorka with Raymond James.

Joe Hovorka - Raymond James

Hi, thanks guys. A couple of things, one, on your 10-K for ’06 discloses 18%, non-US revenue, so let's assume that your, ’07 numbers down from ’06 ?

Brian Rice

Actually Joe, you may have better data points than I do. I thought we were at about 17%, it could be 18%. It should be moving in ’07 slightly more skewed towards the European. We’ve seen more European growth. And actually, I believe the 18, we are probably closer to 19% this year will be my estimate for ’07 and should continue to see that increase in ’08.

Joe Hovorka - Raymond James

Okay. And then could you give the quarterly capacity numbers for ’08 and maybe just the costs for these diesel engines and that's it?

Brian Rice

Right. If you could follow-up with Greg on the quarterly numbers for ’08.

Joe Hovorka - Raymond James

Sure.

Brian Rice

And we haven’t that real specific about the diesel engines. But we’ve given direction in the $16 to $18 million range per ship.

Joe Hovorka - Raymond James

Great. Thank you.

Operator

Your next question comes from Felicia Hendrix with Lehman Brothers.

Felicia Hendrix - Lehman Brothers

Hi guys. Just a follow-up on fuel and in response to another question earlier, you had said that if prices remain the same you could mitigate out of price increases where you are hedged now, but if we were to assume that the rising fuel environment persists throughout the next year. I’m wondering if there is a way of this some kind of parameter that you could give us as to what the cost would be of increasing your hedges.

Brian Rice

Felicia, we look at the cost of the forward curve continuously to try to make the best decisions, but we've had a very consistent pattern, where we like to be hedged between 40% and 60%. We really don’t want to be fuel speculators. We are trying to manage that expense and the bar that we are comfortable with really is being about 50% hedged. I can tell you that a 10% change in fuel price for '08 given our current position would equal about $35 million in terms of sensitivity.

Felicia Hendrix - Lehman Brothers

Right. So, you're 38% hedged for next year. Fuel is going up in and you said you like it to be between 40 and 60 that's just where on my question, was coming from?

Brian Rice

Well, we are still 15 months out from the year. We tend to be 40% to 60% hedged over to 12 month period.

Felicia Hendrix - Lehman Brothers

Okay.

Brian Rice

And I just like to add because you mentioned our fuel hedging being one of the mitigators or being mitigator for '08. A large portion of our fuel savings also are on the efficiency initiatives. Dan talked about the diesel engine project; we have much more fuel efficient ships with Independence coming in at full year of Liberty. Those are all initiatives that are helping our fuel, quite a bit.

Richard Fain

Felicia, if I could just add - if we went out to hedge now, we increased it to get to the 40% to 60% because numbers that we’ve given are based on today's price. And as you well know, the forward curve is at a premium that would increase our costs. But it would be much less than the 10%, which sort of assumes it instantly that price went up 10%, as opposed to the curve growing over a year’s time. So, if we were to certainly going to market and hedge it all, it would increase the fuel costs, a bit, but probably not that dramatic.

Felicia Hendrix - Lehman Brothers

And then, let’s just say, we are in this situation, where all of the sudden fuel prices start coming down, how easy is it to unwind the hedges?

Brian Rice

We certainly could unwind them. But at this point, it’s interesting because I think we’ve had a very consistent, predictable and useful hedging strategy. I mean, if we go back to our first quarter call, there were a lot of questions about why we are rehedging. And again, we’re not trying to speculate, we’re trying to manage our costs. The forward curves are baking in a lot of the thinking that’s in the marketplace in terms of the cost of the fuel.

We don’t protest to know anything more than those curves could be, and we’re trying to manage between that 40% and 60% number.

Felicia Hendrix - Lehman Brothers

Okay. And then just switching gears for one moment. I might have missed this, if I did, I apologize. Did you say, how booked you were for the fourth quarter?

Brian Rice

We didn’t give a specific number but, we did say that we are booked further long in the fourth quarter of this year than we were for the fourth quarter of last year at significantly higher prices. We have given yield guidance of around 2% on a comparable basis. We are at the end of the October here, we still have inventory available, but we are very healthy booked at this point in time.

Felicia Hendrix - Lehman Brothers

Okay great. Thank you.

Operator

Your next question comes from Steve Searl with Conning Asset Management.

Steve Searl - Conning Asset Management

Yes, good morning. You had talked about the credit crunch and how you would handle financing issues there. Can you talk about signs of stress potentially on your customer base if you are seeing anything in your booking patterns or cancellations or just other data you might look at?

Brain Rice

Actually, we are very pleased with the current demand. I think throughout the call we’ve talked about the health of our bookings. We haven’t seen any pronounced cancellation, even if we went back to 9/11, the after shocks of 9/11. We really didn’t see any material amount of cancellation. What we saw at that point in time was a slowdown in new demand.

But we have seen that as customers make a commitment to taking a cruise, they really do stick with their plans. I think our forward guidance particularly, as you look out in to the first quarter and the stabilization and the return of healthy demand in the Caribbean, really is indicative that, at this point in time, our brands seem to be doing very well in this economy.

Steve Searl - Conning Asset Management

Great. And just in terms of infrastructure in the Caribbean, is there any that still need a major repair from any of the past hurricanes or is it pretty much [bad cushion up]?

Adam Goldstein

Hi, Steve this is Adam. Overall, the Caribbean clearly has been the beneficiary from what so far has been a second relatively quiet season. The big impact of course this year has been on Costa Maya and that port will be out of service until next fall. And we certainly wish them well with their reconstruction efforts, which seem to have gotten off to a good start. The rest of the Caribbean is fully in gear and we are offering a very positive experience throughout all the other ports across.

Steve Searl - Conning Asset Management

Thanks.

Greg Johnson

Lou Ann, I think we have time for one more question please.

Operator

Your final question comes from Tim Conder with Wachovia.

Tim Conder - Wachovia

Thank you. Yes, two follow-ups, Brian. Number one, you are alluding to the financing on the ships and that you do have some flexibility. You’ve got locked into certain financing ability, but if rates would drop, you would be able to go elsewhere. Are you talking about import/export credit financing? And if so, how many of your ships would fall under that umbrella? And then secondly, along the same line, do you still see at this point, your debt-to-cap modestly increasing, given the new build schedule that you have out through ‘011?

Richard Fain

Tim, this is Richard. On the financing, the export/import financing used to be a fairly defined term and very specific. Now different countries have slightly different methodologies. But it’s all financing that was arranged in connection with the ship orders. And so, I guess in that sense, they all have the export/import type structure. But it’s consistent. It’s exactly what we’ve done in the past. Nothing we can do about that.

With respect to the second question based on your financings are going today and the financial structure and orders that we have, in fact our debt-to-capital continues to improve and so it is going lower, not higher. Even though, we have this large capital program, the cash flows of the company continue to be so strong that we’re able to do that and still reduce the debt-to-cap.

Tim Conder - Wachovia

So you’re saying Richard, at this point, given the trajectory of business, you are anticipating your debt-to-cap by 10 or 11 being lower in absolute terms, as a percent I’m sorry, as it is at the end of ‘07?

Richard Fain

That’s correct.

Tim Conder - Wachovia

Okay.

Brian Rice

Okay, well. We would like to thank you again for joining us this morning. We appreciate your interest in questions. Greg will be available throughout the day to answer any follow-up questions you may have. And we wish you all a very good day. Thank you.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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