Ambassadors International, Inc. Q4 2007 Earnings Call Transcript

Ambassadors International, Inc. (AMIE) Q4 2007 Earnings Call March 12, 2008 11:30 AM ET

Executives

Joseph Ueberroth – Chairman, President and CEO

Blake Barnett – CFO, Secretary and Treasurer

Analysts

[Steve Altabrondo] – Sidoti & Company, LLC

David Libowitz - Barnum Financial Group

Jaison Blair - Rochdale Securities LLC

James Bellessa – D.A. Davidson & Company

[Mark Cummins] – Prime Capital

[Paul Stones] – Stones Partners

Operator

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ambassadors International, Incorporated Fourth Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer question. (Operator Instructions)

I would now like to turn the conference over to Mr. Blake Barnett, Chief Financial Officer. Mr. Barnett, please go ahead.

Blake Barnett

Thank you; and good morning, everyone. Joe Ueberroth, Ambassadors International’s Chairman and CEO and I are pleased to speak with you today regarding our Fourth Quarter earnings and Full Year 2007 Results.

First, we’d like to remind listeners to this call that it may contain forward-looking statements, including without limitation statements regarding anticipated U.S. tax exemptions and potential insurance recoveries, which involve various risks and uncertainties. Forward-looking statements that we make on this call are based on our current expectations and entail various risks and certainties that could cause our actual results to differ materially from those suggested in our forward-looking statements.

We believe such risks and uncertainties include, among other things, general economic and business conditions; overall conditions in the cruise, marine, travel, and insurance industries; potential claims related to our reinsurance business; further declines in the fair market value of our investments; lower investment yields; unexpected events that may disrupt our cruise operations, environmental related factors; our ability to successfully integrate the operations of the companies or businesses we acquire and realize the expected benefits of our acquisitions; our ability to successfully and efficiently operate the U.S. businesses that we require; our ability to compete effectively in the U.S. and International cruise markets; our ability to compete effectively in the U.S., International marine construction markets, including our ability to obtain construction contracts; our ability to effective manage our rapid growth; our ability to continue to identify attractive acquisition targets and consummate future acquisitions on favorable terms; our ability to accurately estimate contract risks; our ability to service our debt and other factors, please refer to our public filings with the SEC for further consideration of these and other risk factors. We are providing this information and projections as of the date of this call and do not undertake any obligation to update any forward-looking statements contained on this call as a result of new information for future events or otherwise.

With that said, Joe will provide commentary and insight on the business segments, and then I’ll cover the financial results. Following this, we’ll open the call up for question-and-answer. Now I’d like to turn the call over to Joe.

Joseph Ueberroth

Thank you, Blake; and good morning, everyone. The fourth quarter results are the conclusion of a very difficult year. For the fourth quarter, the Company on a consolidated basis reported a net loss of $24.5 million or $2.26 a share. On an annual basis, the Company lost $27 million or $2.48 a share. A review of the fourth quarter financial results show that the Cruise Division continue to post significant losses overshadowing the progress made in our other businesses.

The fourth quarter results were also severely impacted by the requirement to take the full valuation allowance of our deferred tax assets of $15 million as required under SFAS No. 109 guidelines. Although, we took the full valuation allowance of our deferred tax asset, we must emphasize of the establishment of valuation allowance does not have any impact on cash, nor does such an allowance preclude us from using our loss carry-forwards or other deferred tax assets in the future. It’s also important to note that under SFAS 109, the Company was precluded in taking into consideration future earnings and that the establishment of a valuation allowance does not reflect a change in the Company’s view of its long-term financial outlook.

In order to understand the Company’s performance, we must review our business segments. The Marine segment had a strong fourth quarter, realizing $3.2 million in operating income, which is a 37% increase in operating income compared to the fourth quarter of 2006. The 2007 annual results of $8.6 million in operating income is a dramatic increase over last year, and it exceeded our internal expectations.

As we look towards 2008, our back log is approximately $67 million, compared to $72 million a year ago, which bodes well for another strong year for our Marine business. Management views a slight decrease in backlog from year-to-year comparison as a timing issue and not an indicator of a negative trend.

In addition, in February, we were pleased to acquire the Anacapa Marine Services facility in Ventura, California, for approximately $400,000. This facility is roughly double the size of our New Port Harbor facility and management believes that it is a good first step in our expansion of the yacht service business.

Our Travel and Events division in the fourth quarter posted a slight operating loss, which was anticipated. This division historically realizes its earnings in the first half of the year and typically loses money in the latter half of the year. The $400,000 increase in annual operating income in this division compared to the previous year represents a 42% increase. As we look towards 2008, we anticipate a slight growth year-over-year and the preliminary indications for 2009 are good.

In our Cruise segment, both of our brands lost money in the fourth quarter with a combined operating loss of $12 million. For 2007, we earned approximately $10 million of operating income in Windstar and lost approximately $34 million in Majestic America Line. Blake will cover these results in more detail later on in this call.

I’ll turn our attention to 2008 and review booking trends. Currently we are up on both brands as it relates to our average per diem and are also ahead of pace compared to last year. The bookings were stronger than we anticipated in the fourth quarter and we were comfortably ahead of pace to achieve our internal revenue targets as of 12/31/07.

However, the first couple of 2008 that [Perry] referred to as a “Wave Season” has been disappointing not producing the bookings we anticipated. There are several potential explanations for the weakness in Wave Season ranging from the concept that bookings are shifting from Wave Season to an earlier period, which explains the strong bookings in the fourth quarter, to the concept that consumer trends that are impacting the rest of the economy are having a negative effect in our business as well.

We also have some data that suggests that interest rate cuts are having a negative effect on our senior customer spending patterns. No matter what is driving the trend, the result is that we are no longer ahead of pace to reach our internal revenue targets. The booking patterns for the pose wave must revert back to our planned expectations in order for the Company to achieve its 2008 revenue targets.

A positive sign that we are seeing is a higher than anticipated bookings close in, which leads us to believe that some of our customers who are concerned about the economy are eventually deciding to go forward with their leisure activities.

For a more granular review of our cruise business, we will first discuss our Windstar operation. Management had anticipated the fourth quarter to have been a breakeven quarter based on the per diems realized in the Caribbean and Transatlantic crossings and the planned dry dock of the Windstar vessel. The variance between our breakeven plan and the actual loss as it relates to the decision to expense all disputed expenses we have with Holland America Line, the reconciliation of opening balance sheet items, the unplanned dry dock to the Wind Spirit and the increase of fuel costs.

Although we expense approximately $2 million of expenses that we believe are expenses of Holland America line, it is important that our shareowners know that we are aggressively pursuing reimbursement. In addition, we mentioned in our press release that we had an overrun in the dry dock of the Windstar. A significant portion of the overrun is related to issues of class, which is also responsibility of the previous owner, Holland America Line. Once again, we are pursuing reimbursement.

Our outlook for 2008 for Windstar continues to be positive. The increase in our average per diem for the Windstar fleet is encouraging. Our average per diem for 2008 that’s currently on the books is $316, which is an improvement from a $295 average per diem for the nine months we operated in 2007 and a significant improvement from the estimated $279 average per diem for 2007 on a full year basis.

Now turning our attention to Majestic America Line: The business was negatively impacted in the fourth quarter by low per diems, the early layoff of the Empress of the North, high operating costs and costs associated with the transition to these ships. Majestic America Line finished 2007 with $84 million in revenue, operating cost of $77 million, $36 million in sales in G&A costs, depreciation of roughly $6 million, and an operating loss of $34 million. The results are clearly disappointing and have required management to make dramatic changes to reposition the Company for success.

Management is focused on three components of the business to drive financial improvement: Sales and revenue, operating efficiencies, and reduction of SG&A costs. To drive revenue under the leadership of Diane Moore, we have moved to a multi-channel market strategy that embraces the travel agent community, opens up international markets, caters to charter and incentive business, and pursues a strong group support for our unique offerings.

Under this strategy, we have increased our sales force and now have teams dedicated to both our product lines and channels of distribution. As we right size the Company, our investment in a sales force permits us to be more efficient and targeted in our direct mail and enables us to scale our campaigns to a level more appropriate to a Company of our size.

Through this strategy, we have already seen a positive impact on 2007 bookings from the travel agent community. Although there are also encouraging signs from other channels such as groups, charters incentives, and international markets, the impact of these channels will be realized in 2009 and beyond.

To drive revenue we’ve also implemented new pricing strategies and disciplines. The bookings for 2008 illustrate the positive impact of this initiative has had specifically as it relates to the Mississippi River programs. The Delta Queen has had tremendous support driven primarily from her loyal following and the fact that it is her last year of operation unless we’re able to get Congress to appropriately represent the American people and once extend her operating exemption. Currently the Delta Queen is at a 95% occupancy and at an average per diem of $369, which is significantly up from 2007 average per diem of $262.

There has also been significant improvement in our largest contributor, the American Queen, which has been driven primarily by a reenergized travel agent community. Bookings are up 18% from a year ago and the current average per diem of $383 is up 20% from where we were a year ago and 40% from the 2007 actual average per diem of $275.

Our best performing product in 2007 was our Columbia River product. Although in 2008 we are slightly behind pace on a year-to-year comparison, we believe that we’re trending to end 2008 at a higher average per diem than the $348 that was achieve in 2007. On the Columbia River in 2008, we do not have the group support that has traditionally supported this product. Management is working to reengage this channel as we develop 2009 business.

Our Alaska program is by far the most challenging program. As we were planning for 2008, it was our goal to get the Alaska program to the results achieved in 2006. Although our Alaska program is only 19 sailings, in 2006 it represented roughly $13 million in revenue. We are currently on pace to follow significantly below this target. We have taken appropriate price action and the results are showing that our challenges are not primarily pricing driven. We believe that the ground in Alaska last year and the cancellation of a total of 21 cruises on the Empress of the North during the 2007 season is having a significant impact on 2008. We believe that some of our customers and travel agents are taking a wait and see attitude as it relates to our Alaska program.

In 2008, the Company is committed to demonstrating that we deliver a consistent and quality offering that is unique to the Alaska market and we will earn back the high rankings of our customers that we achieved in 2006. Even though 2008 results for Alaska will not meet our initial expectations, we believe that as we look to 2009 and beyond that there is a significant group interest in our Alaska program, which will allow us to make Alaska a very successful offering.

Now let’s more to the other two areas of management focus: The Company’s ability to reduce cost in both vessel operating expense and SG&A is encouraging. We remain on plan to achieve our lay-up target of approximately $5 million. Working with these ships, we’re driving to reduce total vessel operating costs by at least 10% versus last year. We are also working to reduce SG&A by $10 million. Even with the weakness in the Alaska offering, management is still driving from Majestic to breakeven even after paying the interest on its $68 million of vessel debt.

Listeners on the call should take into consideration that to achieve our goal of a swing from a negative loss of $34 million to a breakeven in one year on a business that had $84 million in revenue will be a real accomplishment. It is a considerable task, requires significant change in operation, does not factor in any business interruptions and requires a consumer to continue to purchase cruises at a level it has in previous years.

Before I hand the call over to Blake, it is important to highlight that the Company has made significant progress in our turnaround of the business since our last call. Some of the highlights include a new CFO, record earnings for our Marine division, retaining these ships for the Majestic operations, a successful transition to these ships, lay-ups coming inline with the lower end of cost expectations, and no citations on our vessel inspections.

Now I’ll turn the call over to Blake for a review of the fourth quarter financial results.

Blake Barnett

Thank you, Joe.

Financial results for the fourth quarter ended as are follows: Revenue is $78 million compared to $49 million in 2006; total revenue increased by $30 million, almost $19 of which was driven by the Cruise division, Windstar, which was not part of our 2006 operating results accounted for just over $17 million of the Cruise increase. We operated eight ships in the fourth quarter of ’07 compared to four ships in the same quarter in 2006. Our Marine operations contributed $12 million in higher revenue in 2007 as a result of a strong growth in Bellingham Marine. Travel advance, in events rather, added almost $1 million on higher program volume. Insurance premiums decreased by about $2 million.

Operating expenses in the quarter increased $35 million to just over $89 million. Of the increase approximately $20 million was associated with the addition of Windstar. Of these costs $2 million was due to reserves for disputed items with the previous owners of the line. $11 million of the increase was due to, oh excuse me, Marine revenue.

Other expenses in the quarter were almost $2 million compared with income of $3 million in the prior year. This was driven by $1 million of interest on our convertible debt as well as $1 million of interest on ship debt. In total for the quarter, we reported a net loss of $24.5 million, $2.26 per diluted share compared with the loss of $1.9 million or $0.17 per diluted share in 2006.

Now looking at our full year results: As Joe mentioned upfront, the valuation allowance on our deferred tax asset significantly impacted 2007 results. In the fourth quarter, we fully reserved our tax asset booking almost $15 million. I really that Ambassadors’ overall tax position has been difficult to understand driven by the changing mix of foreign and domestic income. Going forward, we’d like to discuss the tax rates on friend and domestic income separately.

With that said, the figures I’m about to provide are before the valuation allocation taken into consideration. We ended the year with a U.S. fact tax rate of 36.5%. Our foreign tax rate blended across the countries in which operate is about 4.9%. Comparison to the prior year is not meaningful given the early stages of our acquisitions. Going forward, we would like to use this approach when discussing taxes.

On a separate note, in late January of 2008, we received a notice from our credit card processor that they intend to increase our restricted cash related to the cruise operations. We estimate this amount to about $13.5 million (inaudible) was reflected in our 12/31 statements. This reserve is being built up over the next four to six months. While this clearly reduces our cash position, it puts a hold on our strategic uses of cash such as share repurchase.

Turning to the full year financial results: Revenue is up $287 million compared to $144 million in 2006. Total revenue growth of $143 million was primarily driven by the Cruise and Marine segments. Total Cruise revenue increased $73 million driven by the acquisition of the Windstar line which accounted for about $65 million of the increase. Marine revenue grew almost $77 million on the full year annualization of the 2006 acquisition. Travel and Events increased full year about $1 million, which was more than offset by a reduction in our insurance business of $8 million due to lower premiums and no new contracts being written.

Operating costs were just over $307 million compared to $143 million in 2006. Total operating cost increased $164 million, of which the Cruise segment accounted for about $100 million, $55 being due to the Windstar acquisition. Additionally the cost of the Marine segment increased $72 million, again on the full year annualization of the Marine acquisition, a reduction in insurance cost accounted for the majority of the balance.

Other operating expenses were just over $3 million compared with the $ 5 million of other income in 2006, and this was largely due to the interest on a convertible debt that was issued in April of 2007. In total for the year, we reported a net loss of almost $27 million or $2.48 per diluted share compared with a gain of $5.6 million or $0.49 per diluted share in 2006.

A look at the major changes in the balance sheet year-over-year shows the following: Cash and cash equivalents were up by about $13 million due to higher cruise bookings in December as well as strong Marine performance. Year-over-year restricted cash increased by $20 million to just over $31 million, almost $11 million is attributable to letters of credit associated with our reinsurance business, the balance being attributable to Windstar acquisition.

As I mentioned, we expect this figure to increase by $13.5 to about $44 million by the end of the year. Available for sale securities declined $35 million in 2007, largely attributable to an increase in restricted cash, dry dock costs as well as ongoing cruise operations. Accounts receivable is up $16 million on a full year annualization of the Marine acquisition, PP&E increased $101 million due to the Windstar acquisition, AP in recruited expenses increased about $24 million, $15 of which was due to Windstar, $7 is attributable to higher marine volume. Participants and passenger deposits increased by just over $29 million of which $22 is due to the Windstar acquisition and Majestic accounted for the balance.

That wraps up the full year financial review. Now I’d like to turn the call back to Joe.

Joseph Ueberroth

Thank you, Blake. Now we’re prepared to answer questions, so if the operator could open up the lines.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question is from the line of [Steve Altabondo] with Sidoti & Company.

[Steve Altabrondo] – Sidoti & Company, LLC

Hi guys. How are you?

Joseph Ueberroth

Pretty good, Steve.

Blake Barnett

Hi Steve.

[Steve Altabrondo] – Sidoti & Company, LLC

A couple, just a couple quick ones. Do you have a cap ex number for the fourth quarter and what you think cap ex will be for ’08? You mentioned $6 million, I wasn’t sure if that was just for Majestic or?

Joseph Ueberroth

We discussed $5 million of lay-up expenses that will be expensed in 2008. We did not give you a cap ex number. We have in previous calls and it would remain consistent from what we indicated prior.

[Steve Altabrondo] – Sidoti & Company, LLC

When is the K being filed?

Joseph Ueberroth

In the next 48 hours.

[Steve Altabrondo] – Sidoti & Company, LLC

Then you had mentioned you’re looking to reduce, did you say vessel cost by 10%? Are you talking about the line item basically cruise operating expense?

Joseph Ueberroth

Yes.

[Steve Altabrondo] – Sidoti & Company, LLC

All right, thanks, guys.

Operator

Your next question is from the line of [David Libowtiz] with Barnum.

[David Libowitz] with Barnum Financial Group

Two unrelated quickies: One, the litigation with Holland America, has that been already filed?

Joseph Ueberroth

There is not litigation currently. We’re working diligently with them to resolve these issues.

[David Libowitz] with Barnum Financial Group

Secondly, you said the credit card company is taking a, putting a large hold on your cash. How much is that hold going to be?

Blake Barnett

We said it was going to increase $13.5 million. It’s already roughly at that level for the processor, so in total it’ll go to about $27 million.

[David Libowitz] with Barnum Financial Group

Thank you.

Operator

Your next question is from the line of Jason Blair with Rockdale.

Jaison Blair with Rochdale Securities LLC

Hey Joe. Hey Blake, how you guys doing?

Blake Barnett

Good. Greetings.

Jaison Blair with Rochdale Securities LLC

Greetings. In the third quarter in your earnings release, you provided cruise booking trends and for Majestic America we saw that the number went from 13% in the third quarter of ’06 to 26% in the third quarter of ’07 and Windstar went from 46 to 48 year-over-year, that’s the third quarter. I see now you’ve gone to now in the fourth quarter cruise booking trends, passengers books and book on APD, I’ve got 19,547 for Majestic. Would it be fair to assume that the average trip is seven days which gets me to a, and that 383 a day gets me to about 52 million? If I add 14% for onboard, that gets to me about $60 million of revenue you’ve already booked for Majestic in the year.

Joseph Ueberroth

Jason, I want to be careful because you’re doing numbers pretty quickly there. But if you’re asking us is the average day seven days, it’s slightly longer, but seven days is a good ballpark. Your math is on line. So yeah, we will support that.

Jaison Blair with Rochdale Securities LLC

So in theory in the target for Majestic was somewhere in the 100 to 110 million range and I believe that that was what was required to get to breakeven at Majestic America. If you’re closer to 60… I guess I’m trying to get… What you said was, “We will be breakeven on Majestic, but the consumer will need to continue to purchase at rates of pervious years.” Then earlier in the call you talked about how in the first couple months of the first quarter, you were seeing weakness. Does that mean that you’re saying that if demand returns to what you were seeing during the fourth quarter that you’ll be able to reach breakeven and that the weakness that you’re seeing in the first couple months, you would need to get that demand back at some point? In other words, given the current demand decline in the first quarter of ’08, does that make it risky that you’re not going to be breakeven, or does that risk your breakeven target for ’08?

Joseph Ueberroth

Let me see if I can answer the question a little bit in a different way. In the fourth quarter, we were seeing bookings significantly higher than we anticipated, so we were entering into the Wave Season in a very comfortable position. Then during the Wave Season, we didn’t see the bookings as anticipated. We would expect bookings to start going down from what we anticipated in the Wave Season, and we’re hoping that we’ll see a normalized booking pattern for the next several months.

Just a concern is: Why did Wave go down from our expectations? So we’re just going to watch it very carefully. There is a concern on our side that the next several months will be slower than we anticipate, so we’re discussing it on the call. But we don’t have conclusive evidence of that. It could be that the next several months come in as we are trending and things work well. It’s something that we’re watching carefully.

Jaison Blair with Rochdale Securities LLC

So if it continues to be slower than you anticipate your breakeven, your 110, $100 to $110 million of Majestic revenue and your breakeven number could be at risk.

Joseph Ueberroth

Could, yes.

Jaison Blair with Rochdale Securities LLC

How should we think about the sensitivity of that business in terms of… If your revenue… If you have a revenue shortfall, what the size of any potential loss could be?

Joseph Ueberroth

As we’ve discussed in previous calls, this business profits are made on the margin. At the same time if we have a shortfall revenue, we’ll do everything we can to address cost and expenses, but it does have a significant impact on earnings.

Operator

Your next question is from the line of James Bellessa with D.A. Davidson & Company.

James Bellessa – D.A. Davidson & Company

Good morning. I commend you for your new information, the release of statistical information. Is there any intention to give us the historical numbers for the last three quarters prior to this?

Blake Barnett

Let me back up. One of the things we said we wanted to do is continue the move towards more disclosure, as you noted and hopefully everyone has seen that today. I think we can talk about it internally, but at this point unless… I don’t see any reason why we can’t provide that sort of information.

Joseph Ueberroth

Jim, just to add to what Blake said, as we provide quarter the next few quarters, we will be providing you with a previous quarter as a comparison. So yes, overtime we will be providing the data that we have here for the previous three quarters.

James Bellessa – D.A. Davidson & Company

I understand that comment about each quarter will be able to see a fresh year ago quarter, but I can’t understand 2007 so I can’t hardly press to understand where you’re going in 2008 if I can’t even see where you want on 2007. So I just mention that.

Joseph Ueberroth

Okay, we did give you annual numbers and maybe it’s something that you want to call Blake offline and we can try to walk you threw those.

James Bellessa – D.A. Davidson & Company

Glad to have the annual numbers. Did you reclassify… You must’ve reclassified some of your revenue figure, not your revenue figures, your expense line items, is that true?

Blake Barnett

Yeah, that is true. Let’s see, so primarily the thing to note there, and this will be more fully disclosed obviously in our subsequent filings was commissions which was, well moved into its own line but also air ticket revenue was moved into ticket revenue as we go forward so…

James Bellessa – D.A. Davidson & Company

We don’t see that detail. What we see is selling (inaudible) promotion expense and a year ago figure moved down sharply but the Cruise operating expenses moved up so…

Joseph Ueberroth

It’s really commissions was in SG&A and they should be… It’s been re-classed into operating expenses, which is more appropriate.

Blake Barnett

More aligned with the way the industry looks at it.

James Bellessa – D.A. Davidson & Company

I’m glad to see that reclassification but again here if we don’t see how the last four quarters fit together, it’s hard to figure out where the next four quarters are going to go.

Blake Barnett

Understood.

James Bellessa – D.A. Davidson & Company

So we’d love to be able to have that help of seeing what the numbers are for the last four quarters. You’ve given them for the fourth quarter and for the whole year, but the other three quarters were lacking. Now that was two questions, but I have more. Do you want to have me get back into the queue?

Joseph Ueberroth

Please ask your question, Jim.

James Bellessa – D.A. Davidson & Company

You talked about overrun on Windstar and it was an issue of class, and I don’t understand that completely. Would you go through that please?

Joseph Ueberroth

When we bought the Windstar vessels, we bought them, they had to be delivered to us in class. In our dry dock, we found areas that were not in class, you have to address those, but, and we did and we paid for them, but those are the, those issues if it is steel work or others would be the responsibility of the seller. So when you take a ship into dry dock, there’s always components that are not in class that you need to fix during that dry dock and we did. If we discovered other issues that were out of class that had to be addressed during that time, that would also be the responsibility of the owner because we bought the ships, they had to be delivered in class.

James Bellessa – D.A. Davidson & Company

When you say class, what do you mean by that? Delivered in class, what do you mean? Is that at a certain standard or…

Joseph Ueberroth

Yes, there is… Our class is one, the initial are BV, but it’s a standard and they come in and they inspect our vessels and there’s a standard that we have to our vessels to, and we call that the class. There’s a couple different ones. Ours is BV and on this call I’m blanking on the exact, what the longer version of BV.

Blake Barnett

Bureau Veritas

Joseph Ueberroth

Bureau Veritas

James Bellessa – D.A. Davidson & Company

.This is one of the disputes you had with Holland. Are there others? Can you go through them?

Joseph Ueberroth

We’ve also told you that there is $2 million of expenses that are disputed. Give an example: We believe that there’s invoices that we were charged that were incurred prior to our ownership that we’re not accrued for in the closing balance sheet. These types of items would be their responsibility as well as we’re charged for some services that we did not purchase. Once again, this should not be our responsibility. They did our accounting for a transition period and we were charged these expenses and they’re ones that we’re disputing.

James Bellessa – D.A. Davidson & Company

So it was hard to tell because of where your tax rate was, but I penciled it in and figured out maybe that was $0.13 per share, that $2 million, would that sound right?

Joseph Ueberroth

On the Windstar, we do not pay taxes unless we bring the cash back, so you’d be talking about $2 million on $11 million, so I get a little bit higher number.

James Bellessa – D.A. Davidson & Company

I see. Then… Well I’ll step away right now and come back.

Joseph Ueberroth

Thank you.

James Bellessa – D.A. Davidson & Company

Thank you.

Operator

Your next question is from the line of Mark Cummins with Prime Capital.

[Mark Cummins] – Prime Capital

Hi guys. A couple questions related to the booking trends. One is the softness that you’re seeing just Majestic or is it Windstar as well? If you were to characterize the softness you’re seeing the first quarter, would you characterize it as mild or severe, I guess, in terms of the trend line?

Joseph Ueberroth

We’re seeing it in both, both brands. I wouldn’t call it severe, but we’re not just seeing the spike that we would anticipate and it might be that’ll continue to be on this booking pattern that we’re on today, which would be fine. But we did not get the big spike over a several week period that we would’ve hoped to seen. But it isn’t to the point of severity.

[Mark Cummins] – Prime Capital

That’s helpful. One other question, then I’ll get off too. The $15 million tax, or I’m sorry, impairment charge, how does that actually run through the fourth quarter financials. Am I seeing that in the tax line? Where am I actually seeing that in the income statement?

Blake Barnett

Yeah, it runs the tax line spread across the various entities.

[Mark Cummins] – Prime Capital

It’s the tax line. So if I look before the tax line, income before provision for income taxes of $12 million loss for the fourth quarter, $2 million of that was the reserve, right? So before the reserve it’d be $10 million. Are there any other special charges effecting the fourth quarter that would diminish the loss?

Blake Barnett

Just the ones that Joe noted, some of the expenses that are in dispute.

[Mark Cummins] – Prime Capital

How much was that in aggregate?

Joseph Ueberroth

You talked about the $2 million, you already deducted that one. There was some other reserves that were taken in the fourth quarter related to acquisitions and you might add that as another $1 million.

[Mark Cummins] – Prime Capital

So if I were to normalize the fourth quarter on an operating basis basically even after the interest actually, which was a higher number, it’s $9 million. If I do it on like an EBIT number, it’s actually about $5 million loss, which is consistent with where you were in the fourth quarter of ’06. Is that accurate?

Joseph Ueberroth

I would like to review it but hearing what you’re saying we will concur.

[Mark Cummins] – Prime Capital

I think it’s worth looking at that and maybe because if the EBIT was basically negative $5 million on a adjusted basis for one-time items versus negative $5 million last year, it’s a much different situation then sort of the way it’s presented here. So I’d love to have some follow-up from Blake on that if that’s possible.

Joseph Ueberroth

Will do.

Blake Barnett

Sure.

[Mark Cummins] – Prime Capital

Thank you.

Operator

Your next question is from the line of Paul Stones with Stones Partners.

[Paul Stones] – Stones Partners

Good morning, gentlemen. I have a question for you. In looking at the numbers that you released, it seems like the problem, and maybe I’m putting too (inaudible) a face on this, but it seems like the real problem here is the Empress of the North. What I wanted to ask you, it seems like it’s a boat problem, not a fleet problem. I’d first like your comment on that and then your thoughts on how to sort of reenergize or get people re-excited abo9ut the Empress of the North? Is there a re-branding strategy? Change the name, whatever? But I’d love your comments on that.

Joseph Ueberroth

Right now as we said, our real challenge is the Empress of the North and mostly in Alaska. We’re pleased with improvements we’re seeing on the Mississippi River. We still believe that we can open up other channels that will give us more support for that product. As we look to the Alaska, I think there’s a couple things we can do, and we’re doing it currently: Reaching out to people who would like to support this product. It’s a wonderful vessel with the balconies. It’s a terrific vessel in its own right, but the way we’ve operated it has been very problematic. I do believe that canceling 21 cruises in a single year has an impact. People have other alternatives. If they believe that their vacation is at risk, they’ll look at other alternatives. What we need to do is to operate her in a very consistent and quality manner and we’re going to earn back our customers. The travel agent community, as I said earlier, I think is on a wait and see, is taking a wait and see position. But going forward looking beyond ’08 because it’s too late for us to get real strong group support, but as we look to 2009, we’re going to look to have solid group support behind this vessel and the Alaska itinerary. We also are going to be able to demonstrate that she had a very successful operating season. I’m not saying from a financial perspective, but from a quality perspective in 2008.

[Paul Stones] – Stones Partners

Excellent. Could you comment on, you have a new VP Marketing and Sales, Diane Moore, could you comment on the changes she’s made over what Mr. Giersdorf did?

Joe Ueberroth

I mean basically we were too reliant on direct mail, and when you’re relying on direct mail, two things happen: You don’t really talk to your customers and you’re not talking to the travel agents and you’re communicating verbally and the best thing that you communicate will be price. As you can see, we did extensive discounting when we’re trying to chase capacity. Under Diane, she’s coming with a multiple channel strategy, very friendly attitude to the travel agents, and she’s… We’ve invested in the sales force. We now have many more bodies who are targeting our different channels and are meeting with the travel agents, so we’re not so reliant just on direct mail.

[Paul Stones] – Stones Partners

Excellent. One last question if I may. You talk about cutting SG&A by $10 million and that’s a fairly substantial number. I wondered if you could sort of delineate where that’s going to come from.

Joseph Ueberroth

The major piece will come out of the direct marketing budget. As we did our analysis, there’s a point where our direct marketing was not effective and we talked about previous calls, the reduction in that area. We’ve also stated on this call that we’ve made an investment in sales people will offset that a little bit, but the savings in the direct marketing is significantly more than the investment we’re making in the sales force. But also in every aspect of G&A, we believe we can do it more effectively and efficiently, and we have been addressing that already, but it’d be going through multiple line items and there aren’t three other headlines I can give you.

[Paul Stones] – Stones Partners

All right. Thank you very much.

Operator

There are no further questions. Do you have any closing remarks?

Joseph Ueberroth

I just want to thank the shareowners. We know that 2007 was a very difficult year. We look forward to our call in the next couple months to talk about the first quarter and we’re committed to the amount of information that we provided on this call that you can see it on future calls, and we hope to be able to talk about improvements that we’re making in the turnaround of Majestic. But thank you from the management team.

Operator

Thank you for participating in today’s Ambassadors International Incorporated Fourth Quarter 2007 Earnings Conference. You may now disconnect.

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