Royal Caribbean Cruises Ltd. (RCL) Q1 2011 Earnings Report, Transcript and Summary

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

Thank you, Joanne, and good morning, everyone. I'd like to thank each of you for joining us this morning for our first quarter earnings call. With me here today are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, the President and CEO of Royal Caribbean International; Dan Hanrahan, our President and CEO of Celebrity Cruises; and Ian Bailey, our Vice President, 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. 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 about our strategic direction. I will follow with a brief recap of our results, comment on the demand environment and provide our forward guidance. Adam and Dan will then talk more about our brands, and then we'll open the call for your questions. Richard?

Thanks, Brian, and welcome to everyone to our first quarter earnings call. As always, I enjoy this quarterly opportunity to provide an informal update on what's happening in our business. While these are certainly interesting times, both in our world and in our business, that will make this discussion a little more complicated than normal. But while there are a lot of moving parts, the net result of all of these moving parts is remarkably positive. We therefore try to provide more transparency in the press release itself, and we intend to publish our full 10-Q later today. The objective is to provide you with all the information in a timely manner. Now I know everybody's focus is on the next 3 quarters, but I don't want to ignore completely the results of the first 3 months. Revenues were better than expected, costs were well-controlled, and that combined with our hedging program, lead to a blowout quarter. It shows the upside potential from these and modest improvements. I'd like to take a moment actually to enjoy that progress before we talk about the rest of the year. Now I was hoping that the first quarter improvements would continue for the full year, and for the most part, they still are. We've obviously been confronted, though, with some significant challenges from fuel and from geopolitical events, but it's profoundly rewarding to be able to demonstrate our people's ability to deal even with those challenges. The bottom line is we still expect 2011 to be a great year, almost as strong as we had originally hoped. Now I do have to admit that I hate bemoaning these geopolitical events and characterize them as frustrating given the suffering that they have caused for so many. The events are tragic by any stretch of the imagination, and for the many people living through them, they are unfathomable. Our thoughts and our prayers are with all of them. But as it relates to our business operations, by becoming a more international company, we are more broadly exposed to events that occur throughout the world. The plus side of that is that our exposure to any one event is much more limited than it's been in the past. For example, previously, a Caribbean hurricane could affect the majority of the fleet all at once, but obviously, that's less so the case today. Diversification reduces our risk from any one event, but it also means that we will feel some impact from a broader range of events. Now as you can see from our forward guidance, Japan and Egypt have caused adjustments to our full year outlook, but our more International fleet allocation has afforded us the opportunity to offset the net booking constructions by the strength, for example, in Alaska and the Caribbean. Overall, our risk mitigation and diversification efforts, whether they be through itinerary planning or fuel hedging, are working as they should to reduce earnings volatility and to insulate our shareholders. And given the magnitude of the recent worldwide events and the run-up in fuel pricing, I think a $0.15 reduction in full year earnings would constitute a surprisingly good result. I've probably already spent too much time talking about changing events, so let's talk about what has not changed, mainly our very bullish long-term outlook for our returns and our balance sheet. I'm sure you noticed in our press release that we mentioned our strategic focus several times. First, with regard to cost, we are feeling the pressures, and we are feeling them in precisely the areas that we said we were most concerned about: food and transportation, in particular. However, our team has managed to offset these cost pressures without sacrificing our customer engagement initiatives. On a like-for-like basis, you will note that despite the pressures, our cost estimate in constant currency have not changed, pretty remarkable under the circumstances. Now Dan and Adam will spend some time talking about their respective initiatives, but from a corporate standpoint, we see enhanced customer and agency engagement as key drivers of yield improvement going forward. It helps that we offer such an attractive value proposition, but going forward, we're concentrating on being a little less of a value. Our business model is highly sensitive to revenue or pricing leverage. In fact, each additional 1% we can improve pricing moves our earnings per share up by about $0.25. Given this backdrop, going forward, you should expect to see us towing the line on costs but pushing harder than ever to enhance our pricing, both by being more attractive to the guests and by strengthening the support we provide to our travel agent partners. This will continue to include sales and marketing commitments, our hardware investments, better deployment or enhanced websites, just to name a few. These actions do put pressure on cost, but we only intend to pursue them if they generate disproportionate benefit on revenues. Along those lines, you'll note that we have modestly increased our CapEx estimates. Part of this relates to Project Sunshine, which we have previously announced and which we reasonalized a contract for. Another part of the increase relates to our revitalization programs, which have been underway for some time now. Our results from the refurbishments we have already completed have been so compelling, both in terms of guest satisfaction and returns, that we feel is appropriate to accelerate and expand these. Lastly, we've also been investing in new technologies to reduce our energy consumption. This is an area I've talked about previously, and one where our team has excelled. But we keep finding new ways to drive further enhancements, and these investments drive terrific savings and great returns. On that note, I will tell you that it's nice to be back to talking to this audience about long-term strategic thinking, about how to grow our business and expand our margins. The recent geopolitical events are tough facts of life, but I think we're managing through them effectively. The increase in the price of fuel is a greater long-term focus. Our hedging program is doing just what it was intended to do, ameliorate short-term swings. Longer term, we note that fuel prices don't get set in a vacuum. They are interdependent with many other factors, including economic activities, foreign exchange rate and demand generation. As noted previously, our team is working assiduously to reduce our energy consumption, and they have proven remarkably adept at doing so. Another strategic goal is to improve our balance sheet and return to investment grade. Again, we've made good progress, both in terms of liquidity and financial ratios. We intend to continue building on that base. With that, I'll turn it back over to Brian. Brian?

Thank you, Richard. Before I go into our results, I would like to mention that we recognize there are more moving parts than usual in our results and forward guidance. As a consequence, we are trying to be more transparent and provide you with more detail than usual to help you reconcile the numbers and better understand the drivers behind them. Our first quarter results are summarized on our second slide. In the first quarter, we generated net income of $91.6 million or $0.42 a share. Our operating income improved by $58 million, or by just over 63%. Net yields improved 4% on an as reported basis and 2.8% on a constant currency basis. We saw improvements in both ticket and onboard revenues and across all of our major product groups. Close in bookings came in stronger than expected, particularly in the Caribbean and Brazil. Net cruise costs per APCD were 2/10 of 1% on an as reported basis and were down 1/10 of 1% on a constant currency basis. We did have some timing differences, but overall, our management team continues to do an outstanding job managing expenses. Fuel costs were $2 million better than expected largely due to the performance of our swaps, which in total mitigated about $36 million of the fuel price increase. I would also like to point out that our consumption on a capacity adjusted basis improved another 4% from the first quarter of last year. In addition to our fuel swaps, as we have previously disclosed, we have numerous WTI fuel options, which provide additional insurance against rising fuel prices. These options are at strike prices ranging from $90 to $150 and have various maturities running through 2013. A full listing of our option portfolio is available in our 10-K. Unlike swaps, which largely receive hedge accounting treatment, our options are mark-to-market at the end of each reporting period. The change in value is then recorded below the line in other income. While this can cause fluctuations in short-term earnings, options provide additional protection of future cash flows in a fixed cost. In the first quarter, we recognized a gain of $24.2 million due to the increase in the value of our fuel options. In an effort to help you model this going forward, I will mention that option values are driven in large part by changes in spot fuel prices and changes in the forward curve but are also influenced by volatility. On Slide 3, we have plotted the changes in WTI spot prices versus the changes in the value of our option portfolio for the last year to give you a sense of how the two correlate. As you can see, there is a pretty good correlation between the two, but not a perfect one. In addition to the gains from our fuel options, we have had additional improvement in other income from our equity pickups, which includes our joint venture in Germany, TUI cruises. TUI cruises is in only its second year of operation, but is already performing very well and making positive contributions to our results. During the first quarter, we sold the Celebrity Mercury to TUI cruises, adding a second vessel to the brand. We did have a $24 million gain on the sale, but because this was a related party transaction, the gain will be recognized over an extended period and it will not be material to our earnings. Moving on to the booking environment. We see exception of itineraries affected by the events in Northern Africa and Japan. Demand for our brands has been very stable to slightly improving since our last call. And despite the disruptions, in total, our booked load factors and average per diems continue to outpace same time last year by comfortable margins. The events in Tunisia and Egypt forced us to modify the itineraries of 63 sailings across 4 of our brands. In Asia, we have 1 ship in the Royal Caribbean brand dedicated to the region. Prior to the earthquake in Japan, we were forecasting double-digit yield improvement for the Legend of the Seas. Unfortunately, our spring deployment of this vessel was targeted to the Chinese market with Japan as a featured destination. In total, we have already rerouted 21 sailings as a result of the tragic events in Japan, and it is likely we will need to make further modifications going forward. While the situation is still fluid, our best estimate is that the total direct impact from the combination of these geopolitical events will be approximately $0.20 per share and will reduce our yields by about 1%. Not included in these figures are the indirect costs associated with discounting we needed to do to stimulate bookings for Mediterranean itineraries as an indirect consequence of the turmoil in the region. Prior to the Libyan uprising, Mediterranean bookings were running ahead of the same time last year despite significant increases in capacity. And as many of you saw in your research, during the months of February and March, demand softened considerably, particularly out of the U.S. and U.K. markets. Over the last few weeks, however, bookings have returned to normal levels, albeit at reduced pricing. Despite all of this, I think it is important to note that we still expect our European product line in total to finish the year with yield increases in the mid-single digits. Additionally, our other product groups, including the Caribbean and Alaska, continue to show strong year-over-year improvement. We expect this strength to substantially offset the discounting you have witnessed in the Mediterranean. Now I'd like to provide you with an update of our forward guidance for the full year. On Slide 4, you will see we expect yields to be up 5% to 7% on an as reported basis and up 3% to 5% on a constant currency basis. Net cruise costs, excluding fuel, are forecasted to increase 2% to 3% on a constant currency basis and between 4% and 5% on an as reported basis. On Slide 5, we have provided a reconciliation from our previous guidance to help you see the primary drivers of the changes. In addition to the geopolitical events I have already talked about, the primary changes from our previous guidance have been changes in currency exchange rates and the expansion of tour operations within our Pullmantur brand. As you can see, the weakening U.S. dollar has had a positive effect on revenue yields of between 1% and 2% but has also inflated our net cruise costs by about 1%. Our Pullmantur brand operates a tour company that includes revenue and expenses from land operations, air charters and travel distribution. Pullmantur has recently expanded its air and distribution operations in Spain. Both of these initiatives are expected to strengthen our brand and improve our market position in the future. And while this area may cause some volatility in our metrics, we expect little to no effect on earnings for the balance of the year. We currently expect about a 1% increase in yields and about a 1.5% increase in costs due to these initiatives. Excluding currency exchange rates and the impact of tour operations, our other costs have remained consistent to slightly better than our previous guidance. We have begun to see some inflationary pressures, especially related to food and transportation, but we have been able to find offsetting savings in other areas. Turning to fuel. Based on current prices, we have included $770 million in our full year guidance. We are currently 56% hedged for the balance of 2011, and a 10% change in price equates to approximately $31 million, not including changes in the value of our fuel options. On Slide 6, we thought it would be helpful to provide you with an EPS bridge reconciling our updated guidance for the guidance we gave back in January. At that time, we provided initial guidance for the year of $3.25 to $3.45. As I mentioned previously, the direct impact of the geopolitical events is expected to be about $0.20. At today's pricing, fuel expense, net of our hedges, cost us another $0.30. But we recovered about $0.11 of this in the first quarter from the change in the value of our fuel options. In addition, when fuel prices are increasing, the U.S. dollar, more often than not, is decreasing in value, which has a positive effect on our earnings. Since our last call, we have picked up about $0.15 in our forecast from currency. So in a nutshell, the midpoint of our guidance has been lowered by approximately $0.15. The bad news is oil prices have increased about 30% since our last call, and the events in Japan and Northern Africa have already disrupted 84 sailings directly and caused the temporary slowdown in Mediterranean demand. On the brighter side, we have been able to offset virtually all of the increases in oil prices through our hedges, options and currency gains. The demand environment remains sound, and for the vast majority of our products, demand is as good as or better than it was in January. And with the exception of Asia, we are forecasting yield increases for all of our other product groups. On Slide 7, we have provided the guidance for the second quarter on both an as reported basis as well as a constant currency basis. The drivers of these figures are the same as I went through for the full year. You will likely note that the constant currency yield increase for the quarter is low relative to the full year. This is driven by two factors: First, the majority of the impact from events in Northern Africa and Japan are expected to be felt in the second quarter; and secondly, most of the revenue upside from Pullmantur's increased tour operations will fall in the second half of the year with very limited impact in Q2. Lastly, I would like to note that in the first quarter, we paid off a $500 million bond, and we continue to make good progress toward our goal of returning to investment grade. Our liquidity as of March 31 was $1.6 billion. I would now like to turn the call over to Adam for his comments about the Royal Caribbean International brand. Adam?

Thank you, Brian, and good morning, everyone. As Brian mentioned, we outperformed our revenue guidance in the first quarter. Nearly all products from source markets contributed to this success with strong late bookings bolstering our yields throughout the quarter. In particular, we enjoyed another year of progress in the markets we formerly referred to as developmental, including Australia, Brazil and Singapore. We have reached the point in these regions where we no longer consider them developmental but simply important cruise markets in which we compete. As both Richard and Brian mentioned, the various natural and human events that are affecting our world began to have an impact on us near the end of an otherwise very successful first quarter and will continue to have an effect on us for some time to come. I will simply note two consequences of these events. In Asia, the prospects for Legend of the Seas China season were bright in the days leading up to her first Shanghai departure on March 14. The Royal Caribbean International brand is already recognized as the leading international brand in the emerging China market, and our year-over-year yield outlook was for substantial growth, as Richard and Brian have noted. Our excitement at starting the season early soon evaporated, however, as the magnitude of the multifaceted tragedy in Japan unfolded. It became clear that we would have to radically alter our program in the short term, relocating the ship to Singapore on a few weeks' notice and starting over from scratch. It is a credit to our colleagues in Asia that we can generate decent load factors under such circumstances. Our ability to respond to an unanticipated dislocation of this magnitude in a relatively new cruise region underscores the maturity of our International sales and marketing capability and the global acceptance of the Royal Caribbean International brand. Meanwhile, in Europe, the succession of events in Tunisia, Egypt and Libya have of course had an impact on our 2011 Mediterranean program. As with Asia, we are pleased with the ability of our sales and marketing colleagues in Europe to drive encouraging booking activity for our 11 ship Europe program this summer. We have announced substitutions for all scheduled calls in Egypt for the remainder of the year. We have also announced the relocation of Navigator of the Seas from the Mediterranean to the Caribbean for the winter 2011-2012 season. We do not aspire to change deployments after they have been announced and opened for sale, but it is an attribute of our business model that we are able to do so when necessary. The Navigator Winter Europe program of 14-night cruises to Egypt was an ambitious program from its inception. Once we found ourselves in a situation where we could not count on calling at the destination highlight of the itinerary, our judgment was that we will perform substantially better by bringing the ship to the Caribbean than we would have done by changing the Egypt calls to Turkey and remaining in Europe for the winter. Although there is of course very limited visibility for the 2012 Europe season at this time, we remain bullish on our brand's prospects for next year in Europe and view the navigator situation as a unique one. Turning to our fleet. We continue to benefit from the flawless introduction of Allure of the Seas and the dual impact in the market of the Oasis-class ship. In addition, during the first quarter, we completed dry docks of both Freedom of the Seas and Liberty of the Seas where, under the umbrella of the Royal Advantage, we added a variety of new features and technologies that have resonated incredibly well with our guests. For example, we now offer the DreamWorks Experience on both Oasis-class ships as well as on Freedom and Liberty, and it is a wonderful offering for our guests. In May, we will revitalize the already beautiful Radiance of the Seas, again having a number of features from our more recent ship class. And in the fall, we will do the same for Splendour of the Seas. Finally, we continue to generate high guest satisfaction ratings and received exceptionally positive feedback from our travel agent partners and the media around the world. With that, I would like to thank all of the men and women at Royal Caribbean for continuing to deliver the WOW. Dan?

Thanks, Adam, and good morning, everyone. It's been a very interesting few months since we last spoke. As always, there a lot of exciting things going on with Celebrity. Celebrity Silhouette is in the midst of the final phases of her construction and sets sail in July of this year. Enhancing our guest vacation time with the host of industry first venues and experiences. In addition, we started cutting steel for the fifth in the 5-ship Solstice-class Series, Celebrity Reflection at shipbuilder Meyer Werft in Papenburg, Germany last month. The 3,030 guest ship will debut in the fall of 2012 and be the largest of the 5 ships. Our first Solstice-sized ships, Celebrity Constellation, has now been sailing for almost a year since we built the size there. I'm very pleased with the way she has been performing, including our guest satisfaction rating, onboard revenue and ticket revenue. We have also seen good support from the travel agency community for cancellation. Celebrity Infinity is next this November, followed quickly by Celebrity Summit in January and Celebrity Millennium next April. This has been an ambitious schedule that we feel will have a very positive effect on the brand. During the first quarter, we had healthy demand for all of our products, the majority of which were Caribbean, and both volume and rate came in slightly up ahead of where we had thought at the time of the previous call. Our Solstice-class ships continue to command healthy premiums to other ships in our fleet in both ticket and onboard revenue, and all of our ship classes generally performed as planned. We are also pleased with our onboard revenue. All of our revenue areas performed as expected with our drinks package program continuing to drive healthy increases in our beverage revenues. I am quite proud of how the Celebrity team here in Miami and on the ships has mannered the inflationary pressures we are facing. Our continued focus on delivering the best possible guest experience and managing our costs has continued to pay off with record guest satisfaction rating and very strong cost control. Some of the most exciting news is the announcement in opening of our Summer 2012 and Winter '12, '13 deployment. All this deployment will be opened by the end of the month, but I wanted to share the most exciting highlights and new itineraries with you today. First, and one that our loyal Captain Club members have been anticipating for some time is the announcement that we will be introducing the ships in the far east during the winter of 2012 and '13. Celebrity Millennium, which will be Solsticized in April 2012 will visit 9 countries new to the brand, including Vietnam, Thailand and China among others. The inaugural season will consist of a series of 14-night open-dock cruises between Singapore and Hong Kong. Also exciting and new for the brand is the introduction of the Celebrity Solstice to Australia and New Zealand for the winter of 2012 and '13. Celebrity Century will be sailing the Australia, New Zealand run this winter. Our confidence in our sales and marketing team in Australia was a key part of our decision to send Solstice down under. On arriving in Australia, the ship will deliver a series of 12 and 13-night open-dock sailings between Sydney and Auckland, New Zealand. Many of these itineraries will include overnight stays in Sydney. In the summer of 2012, we'll have our largest Europe lineup ever with 6 ships, 5 Solstice-class ships when Reflection joins the fleet in the late October of next year and the Solsticized Constellation, visiting 70 ports in 24 countries, sailing from 6 departure ports. Brian?

Thanks, Dan. We will now open the call for your questions. [Operator Instructions] Joanne?

[Operator Instructions] Your first question is from the line of Tim Conder. [Wells Fargo Securities]

Adam, or Dan, can you talk about how the demand from the U.K. is relative to the continent and then if there's any way to exclude the impact of what's going on in the MENA? And I guess in relation to that, too, maybe contrast the cruise industry demand, what you're seeing relative to that of Thompson from the other's land, more land-focused tour operators.

Well, I don't know how many questions that actually aggregated to, Tim. It was probably more than two. Well, the U.K. market, as you know, is a very strategic market for us, and it is a market that is actually the primary source market for our European cruise program. And we expect to have a solid successful season from the U.K. market. We had gotten off to a good start for the market, and we believe that the customers there will continue to see the value of our cruises throughout the Mediterranean Baltic region as the season goes on. So it's one of the markets that we're counting on for our sourcing of the program this summer, and we expect the market to come through for us. We do see somewhat differential performance from one market to another depending on their geography and their relationship with some of the different events that have taken place. So in the last month or so, we have seen pretty solid demand, some of it at lower prices than we would have received if we had been in the absence of these events. But nevertheless, we expect to fill our ships and we expect to do it at reasonable pricing as the season wears on. It's very hard to divorce what's happening in the U.K. and the EMEA markets from the rest of what we're doing because they've just become so strategic and such a primary source market for us that we take them sort of integrally into the mix as we do our business.

Tim, it's Dan. I can add a little bit. I could tell you that with Eclipse, which is an ex-U.K. product and substantially sourced out of the U.K. that the demand has been very strong, and we're experiencing a very, very good year out of the U.K. Prices are appraised substantially over a year ago. So we're quite pleased with the U.K. performance. I can't really comment relative to the tour operators, but I can tell you anecdotally that our team is proud of what they've been able to accomplish this year.

Okay. And then maybe as my second question here, can you talk about whether from North American perspective or European perspective, what percent of passengers in general are fly versus drive to the ports of departure?

Hey, Tim, it's Adam. You talking about on a global basis?

Yes, yes. And does that vary between North American passengers and/or European passengers?

Okay. Well, in general, we, and to some extent the whole industry, over time have developed lots and lots of new home ports, making it a lot easier for people to get to the cruises. And that doesn't really matter at this point whether you're in Asia, Europe or in the Americas. There are major cruises departing from somewhere near you. So if you'd come back to Europe that you asked about originally, more than 3/4 of our customers on our 11-ship program in Europe this season are not from the U.S. So while U.S. people, who are trying to cruise with us in Europe, have to figure out the air situation obviously in order to get over for the cruise, that's less than 1/4 of our sourcing mix. And in the U.S., obviously, if you live in Chicago, you're probably looking at air transportation to get to the cruise. But with the range of cruises that we offer around the seaboard, there's a lower percentage of people that have to do that than ever before.

Okay. And is there any global, kind of global composite number of drive versus fly customers?

I don't think we have that number. I mean, we really look at it on a deployment-by-deployment basis and making sure the ships are in the right places for the market. But it's certainly a lot -- there a lot fewer people flying to cruises than they used to be. I just don't have the exact percentage.

Okay. And I can tell you that the number of people that purchase their air through us is only about 10%.

Your next question is from the line of Sharon Zackfia. [William Blair & Company] Sharon Zackfia - William Blair & Company L.L.C.: I apologize if I missed this, but did you comment as to whether or not Mediterranean pricing was leveling off? And then if you could give us an idea as we look forward to the back half of the year, I mean, are we expecting yields then peak in the third quarter because of the seasonality of some of the issues you were talking about? Or is it more of a fourth quarter peak in yield?

Sharon, the Mediterranean, we're still discounting. We had got the volume back where it needs to be, but it is discounted from before the Libyan situation. But the volume's back, and our yields in aggregate from the other products are substantially offsetting at discounting. We are looking at peak yields in the third quarter in part because of the impact of the items that we talked about but also, as we alluded to on our last call, the third quarter is probably where we have the most ground to make up to pre-recession levels. Sharon Zackfia - William Blair & Company L.L.C.: Okay. And I guess just to clarify, when I was asking about pricing in the Mediterranean, I was just wondering if the pricing if the continuing to go down or now that you've seen the bookings kind of reestablish themselves if you're seeing some sort of levels around there. I understand it's discounted versus a couple of months ago.

Okay. I'm sorry. At this point, we're not adding discounts other than the normal tactical things that go on in the marketplace. But I think our pricing is more back in equilibrium with the demand environment and relatively stable at this point.

Your next question is from the line of Kevin Milota. [JPMorgan Chase] Kevin Milota - JP Morgan Chase & Co: I was hoping you could give a little bit more detail surrounding the cost initiatives you have to offset the food and transportation pricing. And then also, if you could just provide a little bit more detail for the second and third quarter in terms of booked load factor and per diems for the North American and European business, kind of parse out both pieces?

Thank you, Kevin, this is Adam. On the cost initiatives, which go across all of our brands, and clearly when we're under pressure for things like food costs and transportation costs, we're going to be looking at our general and administrative cost environment, looking at the ways that we move our crew around the world to and from the ships in their home. And in general, looking for every opportunity that we possibly have that doesn't have any impact on guest satisfaction, which both Dan and I have noted, remains at very, very high levels, which is forward to our strategy. So while we are always attentive to costs, under these circumstances, we look even harder than ever and we find offsetting opportunities.

Kevin, in terms of the booked load factors and APD's, the only level of detail we're going to provide is the fact that both are up in aggregate, and I think I mentioned in my script that we are looking for all of our product groups to be -- to have year-over-year yield improvement based on the order book we have today with the one exception of Asia as a result of the events in Japan.

Your next is from the line of Felicia Hendrix. [Barclays Capital]

This is kind of asking a question another way. But in your last quarter, you had mentioned in January that you were 50% booked for the year, so where are you now?

Sharon, we're -- I'm sorry, Felicia, we're not going to -- we don't have the specific numbers that we're prepared to provide today. I can tell you that we -- as normal as after the post WAVE season we're obviously feeling better and better about our order book and where it is and our ability to meet the projections that we've provided. Generally speaking, we've talked about being 50% booked in the rolling 12-month period, and that if you look at it quarterly, it's rather linear. And I think from there, you should be able to kind of triangulate where we are.

Okay. And Dan, you've mentioned several times in the call that your pricing is good everywhere else besides the Mediterranean. I'm just wondering in those other regions, are you continuing to be able to raise prices? And I'm asking that in context of the promotional environment we're seeing in the Caribbean. I know that you've discussed that as being tactical, but I'm wondering how that compares to other periods just to give us a context of those tactical promotions.

Hi Felicia, it's Dan. The first part of your question is we have been able to raise prices I think Brian mentioned in his comments about Alaska and the Caribbean. But in other areas, we've been able to get some traction on prices in Bermuda this year. So we are seeing outside of the Med [Mediterranean] the ability to raise prices. We've also been able to raise some prices in Northern Europe. So we are able to largely offset the shortfall in the Med. And then in Med promotions are typical promotions that we do anywhere when we run into a situation where we aren't getting the demand that we'd like. So we've seen prices level off, but there are specific sailings where we've had to do tactical things that will help for demand - onboard credits, travel agent incentives, et cetera.

I'm sorry. The promotions that I was talking about were if you could comment on those in the Caribbean that we're all seeing?

We're -- I might turn that over to Adam because Celebrity is leaving the Caribbean right now, so we're out, probably out on the meaning of that one.

Yes. I think it's actually good that you referred to some of the promotional activity of it possibly being normal because one of the yield maximization techniques that is completely normal is promotional activity to help us achieve the highest prices possible on a variety of ship, forcing customers from a variety of markets. And I would characterize what's happening in the Caribbean as completely normal at this point. The overall situation is positive. The outlook is positive. The experience that we just had in the last quarter was positive. So the Caribbean environment is in pretty good shape for our brands.

Your next question from the line of Steve Waskosky [ph].

Going back to Europe, you talked about pricing, but now the booking window there has historically been a little bit longer than what you get in North America. Have you seen any change there over the past 6 months?

Steve, I would say that the booking window reflects the transition that has occurred in the business, which is that you have people closer to home generally cruising on the ships. So as that mix has changed from people coming from far away to cruise towards people coming from close away to cruise. The booking window reflects that accordingly. People don't have to do long-term planning for their air arrangements of the same rate that they would have previously done. People who can drive the market, drive to the ship, take a bus to the ship, take a train to the ship are able to make decisions later in time. So the evolution of the booking window with respect to the European programs reflects the fact that the programs of 10, 15 years ago, which were almost entirely in our case in to getting in North America is to take a long-haul trip over to Europe to experience the European cruise vacation have now shifted to where it's primarily for local markets to take cruise vacations.

Okay. Got you. And then, Brian, a question for you on the SG&A line. That spiked up there a good bit sequentially. But what kind of caused that? Is this a better level than what you kind of witnessed back in 2010?

Well, I think Richard and Adam and Dan all referenced a lot of our customer engagement initiatives. We do have investments that we're making in the new markets. We're also investing -- I think Richard alluded to websites and some of the other initiatives that we have. I think the G&A line is very well controlled right now. But we are investing in the marketing side. We think strategically that's in our best interest, and we'll help drive the revenues where we'd like to get them.

Yes. And, Steven, I'll just add. I think we do see that the investments that we're making, most of this relates either to sales and marketing efforts in the U.S. or to our growth internationally. So we have significantly expanded our focus and our others in places like China, Brazil, et cetera. We're also investing in things that will hopefully make us even more attractive to the travel agent community in terms of systems, programs. So all of those are expensive. They've been included in our forecast and our expectations. And while we -- coming back to a question that was asked earlier, while we are trying to control costs and seem to have done so, we're not doing it at the sacrifice of those things, which we think pay off.

Your next question is from the line of Robin Farley. [UBS Investment Bank]

I wanted to clarify -- there's a lot of moving parts on the senior guidance. So just to clarify, just so we could think about just cruise demand and exclude sort of Pullmantur, that's not really meaningful to cruise yields and then currency. If your prior guidance was constant currency of up 4% to 5%, if we exclude the additions of Pullmantur, is the bottom end of your constant currency yield guidance now -- is the full range up 2% to 4%? In other words, the bottom end of the range, it looks like it's going down by 200 basis points excluding currency in Pullmantur. And I just want to understand where the other 100 basis point, you mentioned 100 basis points from the disruptions from geopolitical events, but it looks like the bottom end of range may be going down by 200 basis points.

Robin, I think if you go back on the website and look at Slide 5, we've done our best to really reconcile this. I think the bottom line here is if you take currency out and you take Pullmantur for expansion out and you take the events, specifically the very direct impact of Japan and Northern Africa, just the direct part, everything else is about the same in aggregate as it was in January, that the Mediterranean discounting has put a drag on yields, but we have been able to offset that with Alaska, Caribbean, Bermuda and the other products that Adam and Dan talked about. In terms of the mechanics of the number, I think we tried to lay that out as best we could on the slide.

No, I do see the slide, but the slide actually doesn't clarify your specific constant currency yield increase in Pullmantur.

Our constant currency with those -- taking currency and tour out of it would be down about 1% as a result of the events in Japan and Northern Africa. All other products net out with the Mediterranean being a drag and everything else being positive in offsetting that.

So your constant currency, excluding Pullmantur, either is not the up 2% to 4% now?

I don't have the mechanics of the numbers you're describing. And I think, Ian could more than work through this.

Okay. Now that helps because it -- it just -- it looks like excluding the basis points of Pullmantur that the bottom of the range is x currency and x Pullmantur maybe down by about 200 basis points. I just wanted to understand what was driving that. And then also just in not clarifying in the release, the full year EPS range of the $3.10 to $3.30, that you're including the benefit of the fuel options there. So excluding the fuel option would be $2.99 to $3.19, is that right? I just want to make sure.

$0.11 is in our guidance.

The other question I had was if you could comment on sort of whether you will be hedging or are interested in hedging above -- looking after 2014, you've historically hedged out starting 3 years out. Will you be hedging above the $103 per barrel that you mentioned in the release? Or I guess,what are the plans for 2014 hedges now?

Yes. Robin, we tend to keep looking at these things on an ongoing basis. We don't have -- and so we're not going to specify a specific at any one point in time. We do tend to be a little bit opportunistic. We've already entered into some hedges for 2014, which we've talked about and disclosed in the release and in our filings. So I think you can assume that we will continue the kind of pattern that we have in the past whereas we consume, we continue to look forward. I think you can also assume that we will continue to have a strong focus on things that we can do to reduce the total amount of fuel we consume. So we will, yes, continue the hedging out and hopefully we'll have less to hedge as we continue to conserve.

Your next question is from the line of Janet Brashear. [Sanford C. Bernstein]

This is Jonathan winging for Janet. Here, wondering if you could speak about the composition of your cruise itineraries in terms of the breakdown between developed markets, like the U.S. and Europe, versus emerging markets and how you expect that to evolve going forward.

Jonathan, I'll mention that I think the best way to do this is if you could give Ian a call after, he can give you the specific breakdown that can correlate this. Maybe Adam and Dan want to comment in terms of where the trend is going forward.

Jonathan, this is Adam, hi. from an overall perspective, the look of the International fleet is now in the stable posture. We have received our new ships. We don't have a new ship coming for some years. So we will be roughly where you see as at. We've made very strong commitments to Europe. We have important involvements in Brazil, in Australia and China. And of course, we maintain a strong competitive position in and around North America and the Caribbean. So we are probably not going to change other than at the margin. Because at this point, with a stable fleet, if we take something towards one area, that means we have to reduce in another, and we're pretty optimistic about all the regions in which we are competing.

I think it's also -- I would just make, Jonathan, one additional comment, and Adam mentioned in his script, some of the things that we used to call developmental are now core to us, and that's a progress that we've gone through, although as Adam says, we think we're mostly through that progress.

Your next question is from the line of Assia Georgieva. [Infinity Research]

I had a question, a kind of the follow-up on Robin's question on fuel options. In the guidance that you've provided as the $3.10 to $3.30, have you included any other potential accounting benefit from the fuel option mark-to-market other than the $0.11?

Assia, the $0.11 is in there, but because we won't mark-to-market those until the end of the quarter, there would be no additional in there.

Okay. So that would come on...

That's done at the end of each quarter, and it's based on the market value of the options at that part of day.

My second question, 3 months ago, when you were looking at Q2 during a key booking time frame for that quarter, how have your expectations change relative to today's guidance? I imagine they have come down. Can you give us the magnitude?

Oh, again, I think the best way to say it is that the Mediterranean became softer as a result of Libya. Obviously, the events in Asia, and Egypt and Tunisia had an impact. I would say all those product lines are down from our expectations when we had our last call. But our expectations related to the Caribbean, Alaska and the other product lines are the same to slightly better. And the net effect of it is excluding the direct impact of Egypt, Tunisia and Japan, net-net, it's all about the same as it was 3 months ago.

And would it be fair if today core old guidance in constant dollar of 1% to 2% three months ago maybe you were looking at 3% to 4%. Is that sort of the magnitude we're looking at?

As it relates to the second quarter?

Yes.

Yes. I would say the expectations are probably down in a range between 2% to 3% mainly because of the events that we've talked so much about today.

Okay. And if we assume Q3 yields of about 6%, would we be far off from kind of your expectations?

What we've said is that Q3 will be the peak. And I think given the guidance that we have, you should be able to back into that number.

Well we also have Q4, which is always soft, so typically...

Ian will be more than happy to help you with that one.

Your next question is from the line of Greg Badishkanian. [Citigroup]

So my two questions, first one is as you look out to 2012, are you seeing any discounting there? So really the dis -- or is really just the discounting and kind of the summer sailings from the disruption?

Greg, it's Adam. As we've kind of alluded to earlier on the conversation, the discounting, in general, is part of revenue maximization. And we're currently not seeing anything unusual in respect to that far forward. So it's very early days. There's limited visibility. But at this point, we're optimistic about that time frame, and the technical activities are what you would probably expect thus far in advance.

Right. Good. Right. Good to hear. And second question, just in terms of maybe a consumer perspective. The reason for the discounting, I understand the disruption. Is the consumer thinking, it's more economic? Is it more economics there? Also, is there a safety issue? Or just the itinerary change kind of led to a lot of disruption that led you to need to discount to fill up those itineraries?

Well, I guess it's probably a combination of all those, but I think really it's given -- it's what's going on in Northern African and people taking away to see approach to that. And what we've done is we've stimulated the market with price and we've been able to get the demand to come back as a result of that.

Right. And you hear maybe that it's more of a safety issue, is that also somewhat of an issue for the consumer there?

I think it's uncertainty is what's driving this. And I don't think that's -- the consumers are definitely concerned about their safety being in part of Southern Europe, but I just think it's the uncertainty that these kind of events bring that make people feel maybe a little slower to pull the trigger on booking their vacations.

Your next question is from the line of Steve Kent. [Goldman Sachs]

Maybe I could go back to Robin's question because I think it's one that I'm struggling with, too, which is it just looks like you've lowered the second half of 2011 pretty dramatically and I still don't get it. And I know you've spent now an hour of viewing it, but it does look like that's happening. And then the second question I have is, you said that your expenses were lower in the first quarter due to timing. And that's the second time you said that, because in the fourth quarter, you said the same thing. So are all these expense -- at why the second half is going to be lower because some of these expenses that happened in the fourth quarter '10, first quarter '11 got shifted, are going to get shifted into the second half?

Steve, the primary reason the last 9 months of the year would be down is $0.30 is related to fuel prices, all of which is hitting in Q2, Q3 and Q4. If you'd remember, we actually beat Q1 on fuel by about $2 million. So there's $0.30 there. There's $0.20 related to the events in Northern Africa and Japan. And then a distant third place would be some cost timing shifts. They're not substantial shifts. We're probably talking in the high single millions of dollars, and it's more the timing of things like maintenance on our vessels and some of the marketing investments that can shift easily between quarters. There's no structural shift in cost. But the events and the fuel prices are all concentrated in Q2, Q3 and, to a lesser extent, Q4.

Okay. Thanks. I guess I'll talk to Ian.

Okay. Well, we thank everybody for joining us today. And Ian will be available throughout the day for any follow-ups you may have, and we wish everyone a great day. Thank you.

This concludes today's conference call. You may now disconnect.