Royal Caribbean Cruises Ltd. (RCL) Q3 2010 Earnings Report, Transcript and Summary

Good morning. My name is Ginger, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruises Ltd. Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Brian Rice, Chief Financial Officer, you may begin your conference.

Thank you, Ginger. Good morning. I'd like to thank each of 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 and CEO of Royal Caribbean International; Dan Hanrahan, President and CEO of Celebrity Cruises; and Ian Bailey, our Vice President of Investor Relations. During this call, we will be referring to a few slides, which we have posted on our investor website, www.rclinvestor.com. Before we get started, I would like to refer you to our notice about forward-looking statements. 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. Richard will begin with his comments. I will follow with a brief recap of our third quarter, comment on the demand environment and update our forward guidance. Adam and Dan will then talk more about our brands, and then we will open the call for your questions. Richard?

Thanks, Brian, and good morning, everyone. As always, it's a pleasure to have an opportunity to provide an update on what's happening in our business. And you'll all be happy to know that one of the advantages of having good news is that it's easier and quicker to report on the converse. Today, obviously, we are reporting more good news. As Brian will go into further in a few moments, both revenues and expenses continue to improve. Profits for the third quarter were better than expected, and the fourth quarter is better than expected and 2011 is better than expected. I'm told that some would call that a trifecta. I wish that I could say that this was evidence that the economic troubles are behind us. Unfortunately, we are producing these results despite rather than because of the economy. The bulk of our improvement comes from the benefits of our new ships and better management of our existing ships. Our brands are gaining traction, and our global strategy is working. So while I wish the economy were more of a driver, the fact that we're doing this well against such headwinds augurs particularly well for the future. Speaking of the future, we've also started providing insight into 2011. We have not completed our budgetary process for next year, so we're not providing details about specific areas yet. Furthermore, I'll remind you that the booking period is still early, and we get constantly more understanding of patterns as we approach year-end and as we entered the WAVE Period. Nevertheless, our revenue management systems are quite sophisticated, and we get a lot of insight from early patterns. Those patterns are very encouraging so far, and historically, they've been quite accurate. Based on them, we believe that the yield improvements, similar to the 4% to 5% we're getting in 2010, are likely for 2011, even without a strong boost from the economy. And we expect that this will drive our profitability above the previous best year in our history. It will also drive meaningfully positive free cash flow, again, even during year with the new ship delivering for Celebrity. Obviously, this is all very preliminary. But equally obviously, we don't make such projections lightly, and we continue to gain confidence in them. While Europe as a whole has proven very strong, that, unfortunately, doesn't hold true for our Spanish operations. Pullmantur has been buffeted by the worst recession of any of the countries in which we operate. And unfortunately, the recession in Spain shows no signs of abating anytime soon. In looking forward, we have assumed that the Spanish economy continues to act like a sea anchor. However, the management in Spain has been very proactive in finding ways to minimize the impact. That includes shifting itineraries and redeploying assets. Those actions have improved the situation in 2010 and are expected to do more in 2011. But the real upside will have to wait some economic support. As we look forward, we're also looking to a rapidly improving balance sheet, supporting our target of returning to investment-grade status soon. Who would have imagined that so soon after the economic collapse, we would already be talking about record profits, positive free cash flow and investment-grade rating. Again, this year has required an amazing focus throughout the organization on improving our returns and disciplining our processes. I'd like to thank all of our people at sea and on land for making such progress and for giving us such further process to look forward to. With that, I'll turn the microphone back over to Brian to go over the financials.

Thank you, Richard. I'd like to start by going through the third quarter results, which we've summarized on the second slide. In the third quarter, we had a 55% increase in net profit to $357 million or $1.64 per share versus $1.07 per share in 2009. Net yields improved 5.2% as compared to last year, which was better than our guidance of up around 4%. The improvement was driven by net ticket revenue, which increased 7.4% in the quarter. Virtually, all of our products showed solid improvement, especially Alaska and the Caribbean. Yields for European itineraries also improved despite significant increases in capacity and currency pressures. On a Constant Currency basis, our net yields performed even better, improving 7.2%. While we were quite pleased with this performance given the economy, it is important to note that our yields in the quarter were still 12% below the peak levels we experienced in 2008. Clearly, there's still quite a bit of opportunity for further recovery, especially in the summer months. Excluding fuel, net cruise cost per APC day were 2.8% lower than the same time last year and better than our guidance of down approximately 2%, mostly due to timing. On a Constant Currency basis, these costs were 1.2% lower. Fuel costs came in about $5 million better than expected, driven by a 2.2% improvement in consumption. There continues to be a fleet-wide effort to improve consumption, and our newest vessels continue to perform even better than our expectations. All in, net cruise cost per APC day were 2.3% lower than the same time last year, which was better than our guidance of down approximately 1%. On a Constant Currency basis, net cruise costs were down 1.1% as compared to guidance of flat to down slightly. So in summary, on both an as-reported and Constant Currency basis, revenues came in better than forecast, and costs were lower than our previous guidance. Moving on to the booking environment, demand for our brands continues to be stable and remarkably consistent while showing a trend of gradual improvement. Booked load factors are higher than same time last year for the fourth quarter and for all four quarters of 2011. As you can see from the balance sheet, customer deposits are running about 26% higher than the same time last year. For the fourth quarter, virtually all itineraries are booked at higher load factors with better APDs than a year ago. Our developmental itineraries continued to show the most improvement with Europe and the Caribbean both demonstrating improving trends. 2011 is also up to an encouraging start. We're still very early in the selling cycle and still a couple of months away from the WAVE Period. But based on early booking activity, we are feeling good that the recovery continues to follow a consistent and gradually improving trend, quite different from the trend we saw after 9/11. As you may recall, the shape of the post-9/11 recovery could best be described as a hockey stick, with two years of flat yield followed by several years of rapid yield improvement. In 2004, for example, our yields improved by more than 9%. And over the four-year period from 2004 through 2007, yields improved 24% cumulatively. The recovery from the great recession appears to be taking a much different path. Following last year's significant drop-off in yields, we quickly began regaining some pricing leverage this year, not as dramatic as the gains in 2004, but much earlier in the cycle. Based on the early signs for 2011, we expect our yields to continue to improve at a pace similar to 2010. And although I would caution it is still very early, current trends point to yield improvement in all four quarters with the greatest upside opportunity during the summer months. Now I'd like to provide you with our updated forward guidance. On Slide 3, you will see our guidance for the fourth quarter. Based on current exchange rates, we expect yields to be up between 4% and 5% on an as-reported basis and up approximately 5% on a Constant Currency basis. Net cruise costs, excluding fuel, are forecasted to increase approximately 4% on an as-reported basis and between 4% and 5% on a Constant Currency basis. These increases are mainly due to timing. And as you will see in a minute, our cost guidance for the full year is unchanged on a Constant Currency basis. At today's prices and recognizing we are 50% hedged, fuel is expected to be approximately $167 million in the fourth quarter. Including fuel, net cruise costs are forecasted to be up approximately 2% on an as-reported basis and up approximately 3% on a Constant Currency basis. Unfortunately, during the fourth quarter, we experienced two separate mechanical incidents that will cost us approximately $0.05 per share. Nonetheless, we have been able to increase our fourth quarter EPS guidance from our previously implied guidance to between $0.08 and $0.12 per share. Turning to Slide 4, for the full year, we currently expect yields to be up between 4% and 5% on both in as-reported and Constant Currency basis. Excluding fuel, net cruise costs should be down approximately 1% or flat to down 1% on a Constant Currency basis. At today's prices, fuel is expected to be approximately $651 million. Accordingly, net cruise costs are expected to decline approximately 1% on both an as-reported and Constant Currency basis. Our guidance for earnings per share is an increase to between $2.43 and $2.47 per share. You are most likely interested in guidance for 2011. I need to again caution that it is still very early, but we did want to provide you with some color. First quarter bookings are off to a solid start. And at today's exchange rates, we are estimating yield improvement of between 2% and 4%. Our current thinking is that the second and third quarters should provide the greatest opportunity for yield improvement in 2011. Our early projections are the yields will continue to improve in 2011 at a rate fairly similar to 2010. We are still in the process of developing our 2011 operating plans. And while we are beginning to see some cost pressures, especially with food prices, our brands and department heads continue to relentlessly focus on costs. Accordingly, based on current fuel prices and currency exchange rates, we are encouraged that 2011 could be a year of record profits for our company. As of September 30, we had liquidity of $1.3 billion along with committed financing for all of our newbuilds. Our projections show rapidly improving credit metrics as a result of increasing operating cash flows and slowing capital expenditures. At this time, we expect to be able to meet our 2011 maturities with operating cash flows and do not see a need to access the capital market, although we would always consider being opportunistic. Finally, I would like to point out that we currently have fuel hedges covering 58% of our forecasted consumption in 2011, as well as 55% and 22% for 2012 and 2013, respectively. I would like to now turn the call over to Adam for his comments about the Royal Caribbean International brand. Adam?

Thank you, Brian, and good morning, everyone. Royal Caribbean International continues its steady recovery from the challenges of 2009. In the third quarter, all of our summer product groupings enjoyed positive year-over-year yield performance. At the same time, the fleet continued to deliver strong guest satisfaction to our diverse level mix of guests. Today is an exciting day for more reasons than this earnings call. This evening, we depart for Turku, Finland to take delivery of Allure of the Seas, sister ship to Oasis of the Seas from the STX Shipyard on Thursday. Following the delivery, Allure will depart from Turkey on Friday morning and will arrive in Port Everglade, Fort Lauderdale, Florida on November 11. By all accounts, the construction process has been remarkably smooth, and we expect our 22nd ship will be completely ready to join the fleet this week. We will introduce her to travel agents and media next month, and her initial revenue cruise will be December 1. As we have already experienced for Oasis, Allure will provide a boost to our revenue yield. With her arrival, the percentage of our brand capacity, that is either Oasis or Freedom class, will be over 33%. As you all remember from a year ago, Oasis of the Seas received enormous worldwide publicity before, during and after her arrival. We have been undertaking the daunting task of replicating that success, at the least to the degree possible, in order to cement the public's understanding that there are now two ships in the unique and revolutionary Oasis class. So far, we are very pleased with the performance of Allure both in terms of bookings and publicity. Just in the last week, we announced that Adam Sandler will be filming his next feature movie on Allure during November and that Taylor Swift will be playing a live concert on Allure on January. The fact that stars of this magnitude have gravitated to an Oasis-class ship reinforces the degree to which these two ships have moved the cruise industry to a new level. We look forward to executing the full array of media opportunities that we have lined up in connection with Allure's arrival. As we have previously mentioned, our relationship with DreamWorks Animation and their roster of memorable characters, such as Shrek and Donkey, will debut on Allure when she arrives in Florida. We will also feature Chicago The Musical, several spectacular in-house productions and enough other attractions so that in totality, we have taken to referring to Allure as the ship of entertainment. We are looking forward to an exciting month ahead. I'm going to pass the microphone to Dan. It might not sound like Dan, but it really is him. Management believes that he sounds sexier, but you can be the judge of that. Dan?

Thank you, Adam. Good morning, everyone. There continues to be an exciting time for Celebrity. We announced the name of our fifth and final Solstice-class ship, Celebrity Reflection, slated to launch in fall of 2012. In addition, we will be Solsticizing both Infinity in fall of 2011 and Summit in Q1 of 2012. Solsticizing, if you'll recall, is putting many of the features that have been extremely popular on the Solstice-class ships on our Millennium-class vessels. Our latest newbuilds, Celebrity Silhouette and Celebrity Reflection in the upcoming revitalizations, will have some interesting new features that are slightly different from their sister ships. We will be announcing these changes in the upcoming months. These new features have been designed to further enhance the profitability of these ships. We continue to be happy with the reaction and results these new and updated ships are producing. During the third quarter we had healthy demand for all of our products, with both Europe and Alaska performing particularly well. Both products experienced healthy close-in demands and will finish up the quarter better than what we thought on our previous call. Bookings for Europe held up well in both our Solstice- and non-Solstice-class ships, and for the first time in the brand history, we will sail with a higher percentage of guests coming from outside the U.S. on our European products. We continue to see the results of our efforts to build our brand beyond the U.S. market. Our long Caribbean itineraries from South Florida are benefiting from the increased international sourcing as well. As 2010 comes to a close, we are pleased with the progress we have made regarding our financial performance. While it's still early to discuss next year, indications for our 2011 Europe and Alaska season are encouraging and contributing to the yield improvement Brian mentioned. During our second and third quarters combined, we'll have over 60% of our capacity sailing across these two products. We'll have all four Solstice-class ships in Europe after Silhouette debuts in July as well as our Solsticized Constellation. Brian?

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

[Operator Instructions] Your first question is from Tim Conder from Wells Fargo.

Richard or Brian or whoever wants to take this, I know you talked a little bit, Adam and Dan, about your deployment changes in your capacity. But can you give us some color for the company as a whole where the customer, how the customer sourcing mix is changing, where you're sourcing the customers from? I guess maybe put it neither the bucket of North America versus Europe and U.K. combined and the rest of the world, how that's changed maybe from '09 to what you're looking for in 2011? That would be question number one. And number two would be your onboard spend down a little bit here. I guess there are a very few little minor negative here in the whole quarter, but down just a little bit. Can you give us some more color? Was there anything special impacting onboard spend during the quarter?

Tim, it's Adam. First, I think about the guest mix development over time. And we've said on a number of the recent calls that the overall mix of our company is trending more on the direction of guests coming from outside of the United States. And for example, with Royal Caribbean International moving from eight ships in Europe next summer to 11 that will propel that trend forward. So while our guests still come more than 50% from the United States, we're getting closer and closer and actually quite close to our business mix overall, being half of our customers coming from inside the United States and have coming from outside, that's across all the brands of the company.

In particular, Adam, how would that look if you just sort of put the Continental Europe and the U.K. in a bucket, I mean versus the rest of the world on the international part?

Europe is certainly the clear majority of our non-U.S. guest mix. But we are pulling healthy numbers of guests from across Latin America, including some products that are geared towards them, and to a lesser degree, from Asia and Australia, including some products that are geared towards them.

Tim, as it relates to the onboard revenue, onboard by itself was relatively flat year-over-year. The slight decline that you're seeing is really driven more by the tour company. Pullmantur, in particular, has been very focused on margin improvement within their tour division. So we saw a slight decline in some of their tour operations. Onboard revenue, as we've said in the past, tends to move directionally the same as ticket revenue but is less volatile. I think it's fair to say that we're also learning a lot more about our customers on some of our developmental itineraries. And they tended to be lower in terms of their onboard spend, but we think we have some good momentum there as we've learned more about the customer base.

And on the onboard, given Pullmantur's two-month lag, do you anticipate that, Brian, continuing into the fourth quarter reporting? Should that be a factor also in the fourth quarter?

Well, the two-month lag will continue for the foreseeable future. I don't think that that would have a material impact on the onboard performance. I think included in our guidance is not a huge uptick in onboard spending. We're seeing most of the accretion that we're forecasting and we've experienced more recently is really being driven by the ticket revenue.

I think with respect to the tour operation team, I think you're right. As Pullmantur is relating or reacting to the bad Spanish economy, we are going more for profit rather than volume. And so, there'll be lower volume in the tour operation. And so that will affect that line a little bit.

And your next question is from the line of Felicia Hendrix from Barclays.

Just in terms of, Brian, the cost increasing in the fourth quarter, is that all coming from the Pullmantur issue?

Felicia, the fourth quarter really is -- the cost increase is really driven by timing, mainly of things like marketing and some maintenance and repair expense that had originally been forecasted in the third quarter that shifted to the fourth. I'd also mentioned that in the fourth quarter, and we haven't talked too much about it and don't really need to, we did have two incidents that were mechanical problems, one on Celebrity and one on Pullmantur, that we incurred some costs associated with it and actually had to take the capacity out. So that has a little bit of a blip. I think the important number to focus on, really, is the full year constant currency, where we've effectively held our guidance constant despite absorbing those additional costs in the fourth quarter.

And then you touched a little bit on -- that for next year, cost ex-fuel, you're seeing food costs increasing. I'm just wondering if you could elaborate a little bit more. I'm wondering if we should just expect increased costs next year or your various programs could mitigate those pressures.

I think I want to reiterate we're very focused on cost here. We're very committed to keeping costs down. We really are still in the midst of developing our 2011 plans, so we don't want to give real specific guidance yet. We did want to just signal, particularly if you read out there in the marketplace, there are clearly price pressures out there, particularly on things like protein. But our brands are very focused on this. We do intend to mitigate a portion of that until we develop the exact plan, so we don't want to commit to specific guidance other than the fact that I think it's fair to say we will be below the rate of inflation. But again, we want to wait until our next call, after we've really developed our plans, to commit to what the cost guidance would be.

And this is for anybody really, in 2011, industry-wide, there's going to be a large capacity shipped to Europe. And then also, specific to you guys, I'm just wondering if you could discuss the tenure of the Europe-for-Europe customer and the U.S. customer relative to the economy? And if you could just comment whatever increasing airfare to Europe could do to your U.S.-sourced European business?

Felicia, it's Adam. I can comment mostly in respect to what we just experienced this year, which is probably the best data that we have because the visibility for next summer is still very limited. We saw good late demand come in throughout the summer season, both from European market, which we now count on for close to three quarters of our overall mix on the ships that are in Europe, and also from U.S. customers. So even though the dollar was more recently declining in value, Americans were able to find their way on flights over and take our cruises. Actually, it's slightly above our expectations for this season. It doesn't mean that those factors are going to repeat themselves next year, but that is the very recent experience that we just had.

And then where on top of that, though, with the industry increasing so much -- I was just wondering, and I know it's early. But if you could comment on your view of what it might look like for both your European source and U.S. source in terms of the additional competition that will be there?

Really, all I can tell you at this point is, of course, we're very aware of the overall competitive environment and our own increasing capacity. We've been successful in growing our volumes of sourcing from the different priority markets that we have in Europe. And we've remained pleased at the interest of Americans who also go on our products over there. So we expect the competitive market environment as it has been, and our intention is to be successful in that environment. But we're not going to be able to say anything more in detail, really, until we get a couple of quarters closer to the action.

And Felicia, I think although there is a big increase this year, you've all seen that happen in the past, where we've had years where there's been a lot more growth, particularly in the European market, and one of the nice things about cruising is that we have the ability to operate different itineraries, go to new and different places and source people from different markets. And so as we say the forward-looking patterns give us a fairly high degree of confidence that, in fact, Europe will be able to absorb that capacity as it has in the past and with a reasonable response despite the relatively rapid increase in one given year.

Richard, one of your competitors announced a new ship build yesterday. I was wondering if you could just update us on your thoughts there.

Yes. Obviously, we're aware of that. And I think I can't give much more information that we've given in the past, Felicia, because as you know, we're cautious. We really don't announce new buildings until we have a deal. So it is our intention -- we've said previously that we don't expect to do anymore Oasis-class ships. We've also made it clear that we don't expect to stagnate and not to have future growth. We look at these things opportunistically. We do think that the rate of growth of new capacity has slowed and will be slower than we've seen historically. We don't feel rush to do something. It's nice to be getting -- you can see how sensitive we are, even relatively minor improvements in yields. And we're still not back to where we were before, so we're looking to the foreseeable future that our growth will come from internal capacity growth that we've already got on order and improvements in our margins, and that's where our focus is. And we've also said historically, we don't see a possibility at this point in building a ship anything before something that would deliver at the earliest 2013. But at this point, it's getting more likely that that would be something more like 2014. But we're careful not to make any comments about our plans until we actually have a deal, and I think we'll stick to that.

And your next question is from the line of Sharon Zackfia with William Blair. Sharon Zackfia - William Blair & Company L.L.C.: As we look forward to 2011, I was wondering if you could talk about, regionally, if you're seeing strength in particular itineraries? And then separately, whether there is a significant shift in your capacity and where it is sailing next year?

Sharon, this is Dan. As I commented earlier, we have seen early signs that Europe and Alaska are strong next year. And we're very pleased with that. It is early. Adam commented about the fact that we're growing on our way to 50% of our sourcing coming from international markets. So those are the early trends we see. And it's what prompted us to give the yield guidance that we're projecting for next year at this time. Sharon Zackfia - William Blair & Company L.L.C.: Is the actual capacity by region fairly similar next year? Or is there a material shift there?

No. It's pretty similar to what it is. Both brands are going to be bigger in Europe next year. Adam said that we'll have eight ships in Europe. We'll have five. So both of us are growing when Silhouette comes out next year, which will be our newest Solstice-class ship. It would go right into service in Europe. So we're seeing capacity increase in Europe. But overall, when you look at the entire year, our capacity mix is pretty similar to what it was this year. But we are seeing growth in Europe. Sharon Zackfia - William Blair & Company L.L.C.: And then I think at this time last year, you were giving us some sort of indications on how Oasis was doing relative to plan, and I guess I'm just curious with Allure coming out, obviously, you have a, I would hope, a pretty good handle on how Allure is doing. So could you give us an update on how Allure is doing versus what your expectations were and how much that -- is it or is it not cannibalizing Oasis versus your expectations?

I believe on the last call or maybe even the last two calls, a variant of that question was asked. We never expected the two ships together to do as high of a yield as Oasis did by herself last year. It's the first of her kind. But the two ships are doing about equally well, which we're very pleased with because we have, sometimes in the past, experienced that the second ship of a class didn't do quite as well as the first ship in the class. Our experience this time is much more equal. And the two of them together are clearly the foremost competitive cruise ship in the Caribbean sector. And given that there are no cruise ships either existing or under construction that can rival their features, we expect that they'll be permutable for the foreseeable future.

And your next question is from Robin Farley from UBS.

First question is I'm just trying to get more insight into your yield guidance for next year because I don't recall you ever giving full year yield guidance this early in previous years and not even just the last, even going back and beyond the period of -- we know you say visibility wasn't that great the last year's. You don't normally quantify this early, but I wanted to see if we can get a little more color on -- of that sort of four to five points you're looking for next year, maybe one, one and a half points of that is from mix impact from new ships and maybe how much? It sounded like you're saying not mix impact from itinerary changes. I'm just trying to get a sense of how much this kind of same-ship pricing sort of speak versus mix factors and just why you say your visibility is so much better this year than even sort of more typical historically than the last year's?

Robin, believe it or not, we actually talked a lot to Ian before we prepared for this call to try to find out exactly what most of the interest is. And clearly, over the last six months or so, there's been a lot more focus on the strategic direction of our company and of the industry. And there seem to be -- most of the questions really surrounded around the 2011 guidance and what people are looking at. I think it is, say, for two years now, we've been referring to the booking environment as stable and more consistent. And we felt that we had some insight. Now we have a little over a third of our business on the books for 2011. It is early. It's not necessarily something we want to get in the habit of providing specific guidance. We tried to use wording that talked about similar to this year. We didn't necessarily say a one-point range of 4% to 5%. But from what we're seeing, the pattern seems to be continuing going forward. Clearly, we continue to benefit from the new vessels. I would venture to say probably about half of the increase that we're looking at for next year is being driven by the benefit of the newer capacity, and the other half is coming from just core strength within our brands. I think, as Richard alluded to, we've got only minimal help from the economy, and I think this continues to be a testimony to the resilience of our industry, the value of cruising that is out there and the fact that people are going on vacations, and we seem to be a beneficiary of that.

Robin, I might just add, this is a bit of an unusual situation. We have, in the past, talked a little bit about what we were expecting this early. We haven't put numbers on it like this. But I think as Brian said, we were influenced by the fact there's so much desire to understand this. And we really have now come through a very unusual period. And the fact that we're looking at a more stable pattern, we feel much better able to convey that. And so I think it's really a testament to the strength of the industry and to the fact so many of the people who are following us and so many people who are investing us are now looking past this couple of years of weirdness, if I may use that term. And we really have seen that the industry has begun to stabilize, and we felt, as I say, we don't do this. We wouldn't give out these kinds of projections lightly. And we've now had a demonstrated period where things are stable enough, so we really felt quite good about making these kinds of forward-looking statements.

And was there any comment that you guys have said particularly kind of on a winter Caribbean? I know you talked about Europe and Alaska being particularly strong. Is there anything you can say about the Caribbean?

It's Adam. The Caribbean has been in a state of, let's say, high competitiveness for a while now. Over these last few years, we expect the competitive marketplace over the next couple of quarters. The guidance we've provided for the short term reflects our assumptions about how that will turn out. A very high percentage of our capacity for the fourth quarter is already on the books. So of course, we have a high degree of confidence in our guidance for the fourth quarter, and that includes the Caribbean. And even looking to the first quarter, we have a fairly good grip on the situation. So while it is a competitive marketplace this winter in the Caribbean, we believe our range of products and services stands us in very good stead to pursue that competition.

In the guidance that you're giving for Q4 in both cruise costs and yields, I assume that's got baked into it that $0.05 impact from the two ships, from the Dream and the Century. Is that $0.05 mostly a yield when we think about Q4 next year being -- not having the ship incident in there, is all that $0.05 really going to be on the yield side or some of that is going to be on the expense side, the lack of expense from disruptions this quarter?

Actually, Robin, the yield numbers really won't be affected because the capacity came out along with the revenue. So it would be very minor, but it would be more along the cost side because the costs are actually absorbed, but the capacity goes away as well. So you have to amortize those costs over last capacity, whereas when the revenue comes out, it comes out with the capacity.

So I think what I'm asking is in theory, that $0.05 will get added back to the revenue, just by putting your...

That's right.

And your next question is from Assia Georgieva from Infinity Research.

Couple of questions basically following up on Robin's questions. Brian, you mentioned that you're about a third booked for fiscal 2011 right now. How does that compare versus a more normal year?

It actually is a little better than what we would've been for '09 and for 2010, just given the great recession as its been called. It's probably slightly below where we would be in prerecession periods. Generally speaking, we say we tended in the year around 50%, and clearly, we're getting a lot more of our business right now towards 2011 and 2010. 2010 is really on the back end of the booking curve. So what we are seeing, we're going to show the booking curves and how they compare to prior years, but it was at this time two years ago that we hit the recession, so we're now running above the 2010, the '09 levels and even the fall of '08, but we're not quite back to where we were prerecession level.

So the length of the booking curve is something like four and a half months at this point?

Correct.

And again, focusing a little bit more on the Caribbean, given that it's such a large percentage of capacity in the coming two quarters. Do you believe that it's the product that sets you apart or you've just factored in some weakness? I think the Norwegian Epic is probably a key consideration in terms of the increasing capacity there.

I feel there's a lot of ships in the Caribbean besides that one. We're competing against all of them. We do feel very confident about what our brands represent in the market and the capacity that we have there. The newer ships are very powerful competitors in the Caribbean, even on a very competitive winter environment. So as I said before, the guidance that Brian gave includes our assumptions about how we will compete in the Caribbean. And yes, we feel that there's value associated with each of our brands that is unique and distinctive in the market, and that serves us well in challenging competitive conditions.

But it seems that as we're getting into Q4 and getting closer to Q1, there is continued pricing pressure, especially on the short Caribbean-Bahamas and the seven-night Caribbean. Any concerns that this could continue and maybe even strengthen as we get closer to the sailing date?

There always will be a level of discounting of price probably in every season and every sector. Our view is that the steady overall increase in business conditions that we've been experiencing in the last year or two, will continue to be the case, including in the Caribbean this winter. If you look at the types of Solstice-class ships that Celebrity's bringing in the market, Oasis and Allure are now competing for us in this market, we are in good stead. Now there's a wide range of products from three nights to 11 or more in cruise length and a lot of different home ports around the Caribbean region. So the performance by ship and by cruise line varies, of course. But overall, we are looking at the Caribbean sector, where, as I mentioned, most of the business for the fourth quarter is already on the book, and even most of the business for the first quarter is already on the book. so we're pretty confident in giving the guidance that we're giving.

And your next question is from Janet Brashear from Sanford Bernstein.

I was wondering in 2010, you were able to decrease your fuel consumption considerably, around 6% on a capacity-adjusted basis. Going forward, what do you think is possible based on both your new vessels and your learnings about how to manage cost in general?

Yes. I think the 6% number seems a little high. I'd have to check that. But the new ships are remarkably efficient. We've worked hard with the existing ships to do better training, better technology. We've adjusted our itineraries, so we continue to do better. And I think we will do better in 2011. I don't think we've put a number on it. And as I mentioned earlier, we are in the process of putting together our operating plan, and that's when a lot of that kind of dialogue takes place. We've been trying for improvements in low single digits, and we expect to have some further improvements in 2011. But it is tough, and I think the team has done an outstanding job. But I will be a little reluctant this early, and frankly, a little reluctant to make a forecast. Obviously, we've used one in our own internal figures, and we've tried to be conservative in these kinds of figures. But in terms of quantifying individual items on the balance sheet or P&L, we're a little reluctant to do that.

Could you talk a little bit about what regulatory changes you're looking at over the next couple of years and what impact you think will have?

Well, there's quite a few of them. I guess the one good thing is that they tend to issue these regulations with a fair amount of notice. And so some of these regulations, we've been working on for years and some have literally been talked about for decades. But there are new rules coming into effect. They're different by region. So there are so-called eco-zones both in the U.S. and elsewhere. Some are coming in at different rates. These things require either new technology or new fuels, or in some cases, different itineraries. And when we do our projections, it's pretty clear what the implications are, and we bake that into our forecast. There are no new surprises. None of the rules are just being sprung on us, and there aren't any rules that we know of that are being contemplated that we haven't already taken into account.

And your next question is from Steve Wieczynski from Stifel, Nicolaus. Steven Wieczynski - Stifel, Nicolaus & Co., Inc.: Just one question mainly for Brian. As your free cash flow starts to expand over the next couple of years as capacity slows, just kind of update us in terms of where your capital deployment is going to go to. Is bringing back the dividend a possibility?

Steve, clearly, the dividend is a board-level decision. We know it's important to some of our shareholders. I think as we said in the press release, we are forecasting meaningful cash flow next year. And as we look forward to 2012 and 2013, we view those as clearly de-levering opportunities. It will be up to our board to find out how we balance that continuing de-levering with rewarding our shareholders. I think I would remind you, even if we were at our peak levels for dividends, we were talking at about $125 million, $130 million a year. So I wouldn't view it as meaningful to our de-levering opportunity. And I think clearly, our credit metrics are improving dramatically over the next few years, but that dividend would clearly be a board-level decision.

And your next question is from Steve Kent from Goldman.

One, could you just give us maybe some more examples of the cost programs and what specifically you're working on? Second, you mentioned, I think, during the beginning of the call that later bookings have been coming in stronger. Maybe if you could put some color on that. I know in the past, you've talked about that sort of a trend famine [ph]. Finally, I think, Brian, maybe you mentioned that customer deposits are up 20%, so I just want to know what portion of that is same-store or same-ship and how much of that is new capacity?

Sure, Steve. I believe that the statistic was 26% year-over-year on customer deposits. It really is a combination of additional capacity, pricing, as well as higher load factors. I don't think any of those individually pop on this thing the key driver. But it is, and as Richard said, it's the trifecta. All three are moving in the right direction for us.

Steve, it's Dan. Our cost initiatives, I think when you heard Richard and Brian both talked at the beginning, have really been management's focus across the board, and it's not just the four of us that have been focusing on it, but our teams as a whole. But some of the examples, our supply chain has some and we've changed some of that. We've changed management and supply chain about a year ago, and the new head of our supply chain has done an exceptionally terrific job for us, so we've been much more effective with our purchasing. Another example is across our marine departments. We put a virtual inventory program in place, which has allowed us to manage our inventories better than our costs better. We've been working with our suppliers, who are effectively on the marine side. And then across the board, we've just stayed very, very focused on doing things that are going to have a positive impact on the guest experience. And if it's not, we ask why. Why we should be doing it. If it's not improving revenue or if it's not having to cause a very positive impact on the guest experience, we'd ask why. We're doing it. And we've become much more efficient as a result, and it's really shifted the culture in the way we think about cost, and that's really what's driving it. So it's not a big thing beyond what I said was supply chain and some of the things we're doing on the REIT side, it's more across the board.

Steve, on the question about the later bookings and the fact we've reported that they generally come in stronger, I think there's a couple of drivers for that. First of all, I believe in absolute term. We are seeing more demand and healthier demand closer to sailing for any products that need that demand to come in than maybe we were expecting a while back in this environment. And we've seen that across the Caribbean range of products and elsewhere as well. We've seen it, as I mentioned before, throughout the European season up until now. The other factor that I would mention is we've worked hard to build up our occupancy situation so that we're in a more favorable position quarter-by-quarter to drive whatever business remains that we need. And so we haven't found ourselves in a position to need to do any kind of exceptional discounting to fill the ship finally to capacity. And so between the absolute demand close into sailing when needed and our better occupancy position going into the later period, we found ourselves, overall, to be in a more to favorable situation close to sailing.

And your next question is from Greg Badishkanian from Citi.

Just wondering maybe kind of walk us through the last few months and any change in terms of characteristics coming from your customers in terms of bookings, do they kind of pick up a little bit here in the last month or two with stock market going up or just any kind of trend that you noticed?

Greg, we really don't see that sort of volatility that you witnessed in the stock market. I think it's never quite as good as the four periods on Wall Street. It's never nearly as bad as the doom and gloom that we sometimes hear. I think we continue to stay consistent, steady, gradually improving. One of the things I try to do on the strategic discussion about what we're seeing in contrast to 9/11, this seems to be a much more linear sort of recovery than the hockey stick that we saw after 9/11. I think the last couple of months have been fairly consistent with what we've seen throughout the year. You have good days, when we do, for example, Royal Caribbean will have what we call a WOW Sale, where they'll compress bookings and stimulate them tactically towards some of the sailings that we have need. But aside from that, it really is a fairly stable environment. And so, I wouldn't say that we've seen any dramatic changes from where the other in the last couple of months.

And the 4% to 5% net yield improvement for next year that you'd expect, let's say the economy improves, how much upside do you think you could see there. And also on the other side of the cost side, if we do see a nice recovery, are you going to be able to -- are there still opportunistic cut costs or are you going to see those creep up as well?

No. I think our commentary on yield performance for next year is really assuming that the economic environment is fairly consistent with what we're seeing right now. If we get some uplift from the economy, that would clearly provide some upside opportunity for us. On the cost side, the cost, it seems to be the most volatile for us is fuel. And as you've seen, we've been fairly conservative and has hedged quite a bit of our fuel out for the next three years. I will mention that our hedges are at pricing that is slightly below the current curve. So as we've said before, our business model works pretty well at these fuel prices, so we've locked those in. We've baked in some assumptions here around the pressures on food costs, but we continue to be relentlessly focused on costs. And I think our brands are doing a great job really trying to figure out how can we squeeze more cost out of our P&L without compromising our guest experience.

And your next question comes from Kevin Milota from JP Morgan. Kevin Milota - JP Morgan Chase & Co: On the cost side, you've done a good job with the other operating expense line over the last number of quarters. I'm wondering as we look to '11, can you still post down year-over-year expenses for the other operating expense line? Or is that kind of in the line with the inflationary pressure that you're seeing on the food side?

Kevin, this is Dan. As you heard both Richard and Brian saying, I think Adam mentioned it as well, we're deep in the throat of the 2011 plan right now with the focus on two things. One is what can we do to drive revenue and make sure that we continue to improve our revenue performance. And then the other is on the cost side. It's early to start to talk about individual lines in the P&L, but I can tell you that the focus is just across the board from our teams and what we're doing to drive costs out of the business. You heard that Brian say that there's some concern over food inflation, but our teams have marching orders to figure out how to manage through that. So we're very focused on that, and I think as we get to the next quarter, we'll be able to give more specific guidance on that kind of thing.

Thank you, Kevin, and thanks to each of you for joining us today. And as usual, Ian will be available throughout the day for any follow-ups you may have, and we wish everybody a great day. Thank you.

Ladies and gentlemen, that does conclude today's conference call. At this time, you may now disconnect.