Jul 22, 2010
Executives
Adam Goldstein - Chief Executive of Royal Caribbean International and President of Royal Caribbean International Richard Fain - Chairman and Chief Executive Officer Brian Rice - Chief Financial Officer and Executive Vice President Daniel Hanrahan - Chief Executive of Celebrity Cruises and President of Celebrity Cruises
Analysts
Mickey Schleien - Ladenburg Thalmann & Company Sharon Zackfia - William Blair & Company L.L.C. Kevin Milota - JP Morgan Chase & Co Rachael Rothman - Susquehanna Financial Group, LLLP Janet Brashear - Bernstein Research Felicia Hendrix - Barclays Capital Assia Georgieva - Infinity Research Timothy Conder - Wells Fargo Securities, LLC Steven Kent - Goldman Sachs Group Inc.
Steven Wieczynski - Stifel, Nicolaus & Co., Inc. Robin Farley - UBS Investment Bank
Operator
Good morning, my name is Camilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Second Quarter Earnings Conference Call.
[Operator Instructions] Mr. Rice, you may begin, sir.
Brian Rice
Good morning. I'd like to thank each of you for joining us this morning for our Second Quarter Earnings Call.
With me here today are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and CEO of Royal Caribbean International; Dan Hanrahan, President and 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 would 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 has some comments to begin our call. I will follow with a brief recap of our second quarter, update our forward guidance and comment on the recent demand environment.
Adam and Dan will then talk more about our brands. And then we will open the call for your questions.
Richard?
Richard Fain
Thank you, Brian, and thank you all for joining us on this call. Today, my comments will be brief because I think the numbers themselves deliver a nice story.
Simply put, the year is progressing better than we expected it to. And generally, our business is as good or better than projected, both in this country and abroad.
The only negative factor impacting us is the weakness of the euro and sterling, which is automatically mitigated to some degree by the reduction it causes in our euro and sterling expenses. Thus, our revenue is somewhat lower than projected, but so are our expenses.
Even better, the cost management program allowed us to enjoy reduced costs in addition to the currency benefits. So the net impact of the currency-related expense reductions, combined with our more meaningful cost reduction efforts, is that expenses have decreased at a rate faster than the currency revenue reductions.
Net results. Very simply, our bottom line is better than planned, both for the quarter and for the year as a whole.
There are changes between different categories on the P&L, but none of these are economically driven or impact our bottom line. Now I recognize that considerable angst exists regarding the state of the economic recovery.
Like everyone else, I would prefer a more robust economy. However, we've always assumed a lackluster economic environment for 2010, and we've never counted on big improvements driving our results this year.
Rather, we've assumed that our new and more efficient ships, along with good cost control, would drive substantial improvements in profitability, and that is clearly proving to be the case. Our previous description of our recovery as "slow and steady" remains unchanged.
And we have yet to see a faltering or a deviation of our earlier expectations. The booking volumes coming into our call centers are strong; our ships are sailing full; most importantly, our guests are enjoying fantastic vacations; and we are mindfully watching each and every penny.
To me, that overall characterization seems pretty consistent with what you've heard us say over the last several quarters, and it's the source of our strength even during difficult economic times. We continue to believe that this strength is driven by the resiliency of the cruise proposition, combined with a strong corporate platform, one that protects our downside risks but is increasingly geared to pop in an economic recovery.
This fundamental landscape and our strategic goals remain unchanged, and we intend to keep those topics top-of-mind as we execute on our strategy of diversifying globally and improving our returns. It isn't happening overnight.
But it's my continued expectation that as fleet mix and sourcing deepen, assets being optimized and cost control remaining a primary focus, our returns and our credit metrics will improve meaningfully. Now with all this talk regarding long-term strategy, I also want to remind you that we continue to focus tactically as well, particularly around the balance sheet and liquidity.
We continue to take steps to further improve our liquidity, and that's now exceeding $1 billion. And we'll continue to be prudent in the use of hedging to help manage our risks in such things as oil prices and interest rates.
At this stage, we still don't see any immediate need to tap the capital markets, but we will continue to consider alternatives on an opportunistic basis. Our new hardware is performing terrifically, and so are some of our new initiatives.
The response to the DreamWorks partnership on Allure has been tremendous, and we're convinced that we'll be able to build on the momentum of the Oasis-class with the introduction of Allure this fall. Equally encouraging is the fact that Celebrity Eclipse has taken the U.K.
market by storm. And finally, we have seen quite encouraging early results on our Millennium class and cruise, both in terms of guest satisfaction, as well as returns.
This kind of revitalization is proving to produce very attractive returns, and I believe it is likely that we will be doing significantly more of these in the future. With that, it's a pleasure to turn the call back to Brian.
Brian?
Brian Rice
Thank you, Richard. I would like to start by going through the second quarter results, which we've summarized on the second slide.
In the second quarter, we had a profit of $60.5 million or $0.28 per share versus a loss of $0.16 per share in 2009. As you know, during the quarter, the U.S.
dollar strengthened quite a bit due to concerns over European sovereign debt. All else being equal, a stronger dollar reduces our reported revenues and expenses.
The net impact of the stronger dollar cost us about $0.02 per share in the second quarter, but we still exceeded our previous guidance of $0.16 to $0.21 per share. Net yields were 4.9% better than last year.
During the quarter, the strengthening U.S. dollar had a negative impact on yields.
But after adjusting for this, our yields came in consistent with our previous guidance of up approximately 6%. Our newest vessels drove most of the year-over-year increase.
However, we did see improved performance on a like-for-like basis as well. All of our brands and virtually all of our itineraries saw improved ticket yields.
For the quarter, our net ticket yields improved 7.1%, and onboard revenue also increased modestly. We did see a modest decline in other revenue, which was driven mainly by reduced tour sales out of Spain.
Excluding fuel, net cruise costs per APCD were 4.4% lower than the same time last year and better than our guidance of down approximately 1%. The stronger U.S.
dollar drove about 100 basis points of the improvement and another 100 basis points is due to timing of maintenance and marketing expenses. Nonetheless, our brands continued to do an exceptional job controlling running expenses, and our management continues to focus on efficiency in our general and administrative areas.
As you will see in our updated guidance, many of these savings are forecasted to improve our full year performance. Fuel costs came in about $6 million better than expected, driven by a 3% improvement in consumption.
While there continues to be a fleet-wide effort to improve consumption, the majority of the improvement came from our newest vessels and fine-tuning of our new developmental itineraries. These improvements are expected to carry forward into the third and fourth quarters as well.
All in, net cruise costs per APCD were 2.8% lower than the same time last year, which was better than our guidance of up approximately 1%. So in summary, after adjusting for currency swings, revenue came in consistent with our expectations, and our continued focus on costs increased our earnings by about a dime.
Moving on to the booking environment, I think the best way to describe demand for our cruises today is, "Stable and remarkably consistent." With the exception of currency fluctuations, our revenue projections today are virtually identical to the ones we did three months ago.
Bookings since our last call have been up about 11% over the same time last year, and our booked load factors and average per diems are both running ahead for the second half of the year. Despite a high degree of uncertainty about the economy and the volatility we see the stock market, our domestic bookings have been very consistent over the last several months.
Our European source business has also shown remarkable resilience despite persistent headlines about the sovereign debt crisis. We often get questions about our booking lead times that we wanted illustrate what we are seeing with consumer behaviors.
On Slide 3, we have graphed the average months prior to sailing that our customers make their reservations with us. As you can see, beginning in the fall of 2008, we saw a fairly significant contraction in the booking window, which carried through all of 2009.
Since the beginning of the year, we have seen a steady expansion in the booking window, and we're now quite close to pre-recession levels. I would like to emphasize that while an expanded booking window is generally a positive sign, from a revenue management point of view, being able to predict buying patterns most important factor.
Accordingly, the stable and consistent buying patterns we have seen throughout the year have been more than welcome. Before I update our guidance, we thought it might be helpful to give you more insight into how currency impacts our projections.
This year, just under half of our revenue will come from guests outside of the United States. While the majority of these guests pay for their cruise in local currencies, virtually all of our onboard revenue is in U.S.
dollars. For 2010, we estimate that approximately 30% of our revenues and 20% of our non-fuel net cruise costs will be denominated in currencies other than U.S.
dollars. Our revenues are most influenced by changes in the euro, British pound and Canadian dollar.
Our expenses are most influenced by the euro, and to a lesser extent, the British pound. Now I'd like to provide you with an update on our forward guidance.
On Slide 4, you will see the third quarter based on today's exchange rates. We expect yields to be up approximately 4% on an as-reported basis.
On a Constant Currency basis, yields are expected to be up approximately 7%. Net cruise costs, excluding fuel, are forecasted to decline by 2% on an as-reported basis and be approximately flat on a Constant Currency basis.
At today's prices, and recognizing we are 47% hedged, fuel is expected to be approximately $170 million in the third quarter. So all in, net cruise costs are forecasted to be down approximately 1% on an as-reported basis and flat to up slightly on a Constant Currency basis.
Earnings per share for the third quarter are expected to be between $1.53 and $1.57. Turning to Slide 5, for the full year, we currently expect yields to be up between 3% and 4% on an as-reported basis and up 4% to 5% on a Constant Currency basis.
Since we last provided guidance, currency has lowered our yields approximately 100 basis points. So from a business perspective, our guidance is unchanged.
Excluding fuel, net cruise costs should be down between 1% and 2% or flat to down 1% on a Constant Currency basis. For the balance of the year, we have 48% of our fuel hedged.
So at today's prices, fuel is forecasted to be approximately $652 million. Accordingly, net cruise costs are expected to decline 1% to 2% on an as-reported basis and decline approximately 1% on a Constant Currency basis.
Our earnings per share are now expected to be between $2.25 and $2.35 for the year. In a nutshell, currency is causing a lot of noise in our traditional metrics, but a stable revenue environment and unwavering focus on costs has enabled us to increase our full year guidance by $0.10.
I'll comment only briefly on 2011, as it is much too early to provide any specific guidance. Our capacity is forecasted to be up approximately 7.1%, and we expect to continue to benefit from the exceptional response to our newest vessels.
We have consistently described the recovery we are seeing as steady and consistent, and the early signs for 2011 fit this description as well. Again, it's fairly early but we are off to an encouraging start.
I would like to spend just a minute in comment on our cash flow statement. You may have noticed a significant increase in our cash from operations.
While net income was significantly better, we also saw a substantial increase in customer deposits, driven by increased capacity, higher load factors and improved pricing. Also during the second quarter, we decided to increase the percentage of our debt that is at a fixed rate of interest, taking advantage of today's extremely low rates.
In the second quarter, we increased our fixed debt ratio from 45% to 55%. To accomplish this, we terminated a fixed-to-floating interest rate swap, which also provided over $100 million in cash proceeds.
Turning now to our capital structure and the balance sheet. We currently have three vessels on order.
The Allure of the Seas deliveries in the fourth quarter, the Celebrity Silhouette delivers in the third quarter of next year and the fifth Celebrity Solstice-class vessel deliveries in the fourth quarter of 2012. As a reminder, we have committed financing for all of these vessels, and all of our debt today is unsecured.
With our capital expenditures dropping significantly over the next couple of years and our improved operating cash flows, we expect continued delevering and improved credit metrics. Finally, as of June 30, we had $1 billion in liquidity and still do not anticipate a need to access the capital markets for the foreseeable future.
I would now like to turn the call over to Adam for his comments about the Royal Caribbean International brand. Adam?
Adam Goldstein
Thank you, Brian. Good morning, everyone.
As Brian and Richard have described, our business continues to be stable and consistent. We are generating revenue and managing costs in line with, or slightly better than, our earlier expectations.
In the business environment as we find it, Royal Caribbean International is clearly a leader in the U.S. market as well as a driver of growth in global markets.
Eight of our 21 ships are in Europe this summer, with record capacity for our brand in the region. We are sourcing over 2/3 of our guests on those ships from Europe.
Having said that, I would like to emphasize that North American and European consumer preference for Royal Caribbean International's products allows us the flexibility to draw customers from either region, depending on what is transpiring in the market. Since the last earnings call, Royal Caribbean has announced several exciting new developments.
As Richard noted, we are very pleased with our new relationship with DreamWorks Animation. We were hoping Shrek could join us this morning, but he had another commitment.
In any event, some might argue that there are enough ogres on this call already. Allure of the Seas will debut with a number of elements from this relationship, including an ice show based on Madagascar and an off-the-theater show based on How to Train Your Dragon.
By the first quarter of 2011, DreamWorks characters will also be integrated into Oasis of the Seas, Freedom of the Seas and Liberty of the Seas. We also announced that a number of features that we successfully launched on Oasis of the Seas will be introduced on Freedom of the Seas and Liberty of the Seas during their dry docks early next year.
Together with the DreamWorks elements, these enhancements will further the guest experience on these two fabulous and still industry-leading ships. A third announcement during the quarter was that, as of June 1, we enhanced our Crown & Anchor Society program for our loyal guests, who are returning to cruise with us in ever greater numbers.
We are very fortunate to have such a passionate following that is of course increasingly global in scope. The construction of Allure of the Seas has continued to proceed very smoothly.
She is right on schedule for her accelerated delivery date in late October. And as I have mentioned previously, she will begin revenue service on December 1 from Port Everglade.
Even as we launch all of these exciting initiatives, I would like to thank our crew who have kept our fleet-wide guest satisfaction ratings at very high levels on an everyday basis. They are the primary reason for our success.
Dan?
Daniel Hanrahan
Thank you, Adam. Good morning, everyone.
The momentum for the Celebrity brand continues to be positive. Since our last call, we laid the keel for Silhouette, our fourth Solstice-class ship, which is scheduled to deliver next July.
She will be equally gorgeous to our other Solstice-class ships, and will have some new additions, which we'll reveal at a later date. The Solstice class continues to perform very well.
In addition to our Solstice-class program, we completed the first revitalization of our Millennium class. Constellation was the first to be Solsticized this past May during a 15-day dry dock, which is a key part of our strategic plan to utilize Solstice-class to help improve the overall returns for Celebrity.
Constellation now boasts some of the most popular venues found on the Solstice-class ship. These venues are in line with our strategy of delivering the best dining and beverage experience at sea, including the Tuscan Grille steakhouse, the creperie Bistro on Five, the Martini Bar, the Cafe al Bacio (sic) [Cafe a Bacio], and the Cellar Masters wine bar.
In addition, we restyled suites and staterooms and completed a general refurbishment of the ship. During the second quarter, we had healthy demand for all our products, with cruises in Europe and Alaska performing particularly well for Celebrity.
Pricing for both products was significantly higher year-over-year, and all products came in about where we had thought on the previous earnings call. Demand for Europe remains strong in the third quarter, with our two Solstice-class ships, Equinox sailing from Rome and Eclipse sailing from Southampton, performing particularly well both in ticket and onboard revenue.
The Eclipse performance is especially gratifying as it is our first U.K.-dedicated ship, and it is giving us a foothold in the British market. Bookings are also performing well on our two non-Solstice-class ship operating in Europe.
We continue to see a high percentage of our bookings coming from outside of the U.S. on many of our cruises.
Our summer cruises to Bermuda, the Caribbean and Alaska have booked closer in than those in Europe and are performing in line with our expectations. As I mentioned in our last call, we'll have all three Solstice-class ships operating in the Caribbean this fall and winter.
Since our cruises to the Caribbean book closer in than those to Europe and Alaska, we have less visibility to performance for this time period. However, we are encouraged.
As I'm sure you heard, Mercury will transfer to two-week cruises in February 2010. With the exit of this ship, almost 50% of our capacity will be Solstice-class once Silhouette joins the brand next summer; which will, along with the three other Solstice-class ships and our recently Solsticized Constellation, mean we will be operating the youngest fleet in the Europe market next year.
Brian?
Brian Rice
Thank you, Dan. We'd now like to open the call for your questions.
As a reminder, we ask that you limit your questions to no more than two. If you have more, we'd be happy to address them after the call.
Operator?
Operator
[Operator Instructions] Your first question comes from Tim Conder.
Timothy Conder - Wells Fargo Securities, LLC
Brian, if we look at just the numbers and the reporting onboard revenue, it appears that are down about 80 basis points. But you alluded that onboard revenues were up.
I know, again, in the first quarter, you had some things going on with Pullmantur and some changes that were made there. Can you kind of give us a little bit more of the details related to that?
And then should we see that actually benefit onboard revenue in the back half of the year? And in conjunction with Pullmantur, just maybe little more color on Spain.
Are you seeing any improvement there, stabilization, any marginal weakening or anything from that standpoint?
Brian Rice
As it relates to other revenue, it really is related to Pullmantur's Tour division. We did see a little bit lower sales in the second quarter.
As you alluded to, onboard revenue was up in the quarter modestly, not nearly as much as 7.1% increase we saw in ticket revenue. As we've mentioned before, Pullmantur is really focused on increasing their profitability.
They've spent a lot of time looking at the Tour division. And the products that provide lower margins, they've been weeding out.
There was a little bit of noise in the second quarter as well. Pullmantur does tours into the Dominican Republic.
And as you can imagine, there wasn't a lot of demand given what was going on in Haiti in the second quarter. But the numbers were small.
It doesn't take a lot to throw our metrics off when you're looking at only one quarter. So it was pretty isolated.
In terms of Spain in general, I'll ask Richard to comment on that.
Richard Fain
Yes. Unfortunately, the situation in Spain remains seriously depressed, and we are not seeing any signs of near-term recovery.
Pullmantur's own performance has improved as we have done a better job in managing in a bad time. But the overall economy remains bad, and we don't see any immediate prospects for that to turn around.
But I do have to say, the management there and the team in Spain have done a good job in managing it. So their results are significantly better this year than last year.
Timothy Conder - Wells Fargo Securities, LLC
So would you say Spain is stable or are you seeing a slight deterioration, a slight improvement versus what we -- sequentially from what you had seen in the first quarter?
Richard Fain
I would say stable, but the first quarter was horrible. So it was horrible and is horrible and it hasn't gone any worse.
Or better, unfortunately.
Timothy Conder - Wells Fargo Securities, LLC
And Brian, just to -- then back to the question on the onboard spending. If you make those adjustments, what are you looking at as far as the onboard spending in the second quarter being up year-over-year?
Brian Rice
It was right between 1% and 2%.
Operator
Your next question comes from Robin Farley.
Robin Farley - UBS Investment Bank
Looking at your capacity increases for the next three years. 2012 capacity was down and more than just adjusting for the Mercury.
Is that -- I don't know if it's just the dry dock schedule. I wonder if you could just give a little color on that change?
Brian Rice
Robin, I think Ian's just going...
Richard Fain
We show 2012 capacity is up 2%.
Robin Farley - UBS Investment Bank
Right, but versus at the prior release, versus your Q1 release.
Brian Rice
Robin, I'll ask Ian to reconcile that and follow up with you. I don't have the answer in front of me.
I think it's probably mainly related to dry dock and then maybe the Mercury. But we'll reconcile that for you and certainly get an answer for you.
Robin Farley - UBS Investment Bank
And then, just to -- I think everyone's probably thinking about the incremental bookings. In other words, what you have on the books for the second half you've mentioned is up in terms of volume and price at the same time last year.
But I don't know if there's any way for you to give us some color for the incremental booking that you're taking. And if this relates to -- I think you're saying -- your Constant Currency guidance for yields had been up 6%, and it was up about 5.4% in Constant Currency.
Where would that sort of incremental -- is that just, is that coming from Spain? Where that -- maybe the little bit of yield that wasn't -- that was a little bit lower than expected?
Brian Rice
Well, on the second part, I think there's a little bit of confusion. And unfortunately, there's been so much activity with currency.
Frankly, we haven't had to focus on it that much, but as we've expanded globally and -- during the second quarter, the euro was down about 7% on average for us from where we had it pegged at the end of the first quarter when we provided our guidance. The sterling was down right -- just over 3%.
And I think the Canadian dollar was actually slightly favorable. The numbers that we've provided in terms of as-reported and Constant Currency are really relative to '09.
And unfortunately, the reconciliation that you're asking for is from the time we've provided guidance up until we've produced our results. And what we've tried to allude to, the fact is that business itself was actually spot on our forecast.
As it relates to your second question, we -- as you saw on the booking window chart, the window is expanding. So we do have higher load factors in the second half.
Pricing is up a bit. There's still a lot of revenue to be booked.
But in percentage terms we're better off this time this year than we were at the same time last year. I think one of the things -- probably the best place to look to, to try to get a sense of what's going on, is really the customer deposit line.
I think it gives you some insight in terms of what we're seeing the back half of this year and into 2011 as '12.
Operator
Your next question comes from Felicia Hendrix.
Felicia Hendrix - Barclays Capital
I have a question on the costs. You guys said in the release one of the benefits that you had in the costs is the timing impact.
If you talked about this in your pre-prepared remarks, then you can tell me to look at the transcript and I won't be insulted. But that's my first question.
And then my second question is also on costs. If you kind of peel back the layers a little bit, your cost guidance, excluding fuel on a APCD basis and I think excluding foreign exchange, employs only a slight pickup sequentially from the first quarter and usually it's lower.
So I'm just wondering is that we're seeing the timing? Or is there anything else going on there?
Brian Rice
Felicia, I did, in my prepared remarks, comment on how much of it was timing. It's about 100 basis points in the second quarter, which was due to maintenance and marketing expense shift, just timing there.
The cost x fuel, we actually -- we had three good guys [ph] (00:34:11) for the full year guidance. We are looking at benefit from lower fuel costs with the 3% lower consumption.
We're benefiting, I think I said about 100 basis points on the FX. And we actually do have some costs that will fall to the bottom line full year.
I think we're probably looking at around $0.05 of benefit from just absolute lower costs. So hopefully, that helps you.
Felicia Hendrix - Barclays Capital
And then just, obviously, you guys are pretty bullish about your business. It's consistent with what we've been hearing from the trade.
Just wondering, just in the very near term -- I know the products are very different, but have you seen any impact at all from the Epic launch, competitively?
Brian Rice
Felicia, I just -- I want to comment on your bullish comment. I think we continue to say...
Felicia Hendrix - Barclays Capital
Let me say "relatively bullish to," some of the others. Is that better?
Brian Rice
I just -- I want to be careful to -- I think as Richard has said in the past, if it weren't for last year, we would be miserable this year.
Felicia Hendrix - Barclays Capital
Let's just say rel -- we'll throw the word 'relative' out there with a capital R.
Brian Rice
Okay. I just -- I like to say steady, stable, consistent.
And Ian and I can't say that enough, that we're not seeing the type of volatility that you're seeing in the stock markets and over in Europe. But I'll let Adam comment about the competition.
Adam Goldstein
From a strict statistical point of view, by our analysis, Epic has about a 3% impact on Caribbean capacity for the full year and about a 6% impact on Caribbean capacity for the back half of the year, which is not that significant. And so our sense is that her arrival, although it has generated a lot of publicity for the industry, which is always a good thing, is not having a significant impact on our Caribbean performance.
Felicia Hendrix - Barclays Capital
And then just finally, and this gets to the relative question. We are hearing about pockets of weakness in the fourth quarter [indiscernible] (00:36:19) some of your competitors, which I will not ask you to comment on.
But what I would like to know is, is that affecting at all any of the programs that you are trying to implement when you think about pricing in the fourth quarter?
Daniel Hanrahan
Felicia, it's Dan. I made a comment that fourth quarter was proceeding about how we had expected.
We are always, with our programs and our promotions, looking for the areas that are weakness and then directing our marketing efforts towards those to shore up the quarter. But I would say that it's going about as we expected and forecasted.
And there's always areas that we see some softness, and then we get our sales and marketing people on those as quickly as we can to get those shored up.
Richard Fain
Yes. I think, Felicia, I would just add, the fourth quarter is always one that everybody's focused on, partially because it's, of course, the weakest part of our year.
And because of that, it's also the most sensitive to what would otherwise be thought of as insignificant changes. But overall, looking across all of our brands and all of our marketing, we're not seeing any indication that there's been any change at all.
We're feeling about towards the fourth quarter as we did before. And that's the basis on which we're making fairly good comments about bookings.
Operator
Your next question comes from Steve Wieczynski.
Steven Wieczynski - Stifel, Nicolaus & Co., Inc.
The other operating expense line, what drove that decrease year-over-year? What was the biggest component of that?
Brian Rice
Steve, we -- I think it's pretty much across-the-board that we saw -- all the brands, as I mentioned in my comments, have really been focused on costs. We've done a really good job of not compromising the guest experience.
There might be a little timing noise in there. As I mentioned earlier, that there's about 100 basis points of the good guy [ph] (00:38:48) that you see in Q2 that we will experience in other quarters.
But for the most part, it's really just an across-the-board. The purchasing group's doing an outstanding job.
Everybody within the operation is really continuously looking for where we're adding value and where we can operate more efficiently.
Steven Wieczynski - Stifel, Nicolaus & Co., Inc.
And you guys still feel pretty comfortable that the majority of these expense cuts are permanent cuts?
Brian Rice
I think I'd be careful using the word permanent. We're very fortunate right now that we're in a very low inflationary period, and that's enabling us to work hard.
We've benefited a lot from the efficiencies of the newer vessels. I think we've demonstrated for the last couple of years the management team is very focused on costs.
We -- I don't think you're going to see the sort of 7% reductions that you saw last year, but we are going to continue to try to operate below the rate of inflation and continue to operate outstanding products. But I think we've been fairly consistent now for the last couple of years in trying to deliver the type of cost guidance we've been providing.
Steven Wieczynski - Stifel, Nicolaus & Co., Inc.
Is there any change in the ship -- your shipbuilding philosophy?
Richard Fain
No. I think we've talked about it before.
So I think you understand what we said. But we'll give a clear no to that.
Steven Wieczynski - Stifel, Nicolaus & Co., Inc.
Are the yards still coming at you with pretty significant deals?
Richard Fain
Yes. I think -- and what we've said is, as we said before, it's a balance.
We're expecting to see more of our improvement in the future to margin improvement rather than just to top line growth, or just through capacity growth. And so we expect new capacity increases to be less than the past.
And we are talking to shipyards. We are not saying that we're not going to build again.
We do think that there will be growth and we are talking to shipyards. And this is a better environment to talk to shipyards, both because of the currency situation and because of the supply-demand situation with respect to the shipyards.
But it's a balance. And I think the balance we're expecting to see going forward is somewhat lower growth than we've seen in the past, but not no growth.
Operator
Your next question comes from Sharon Zackfia.
Sharon Zackfia - William Blair & Company L.L.C.
Could you talk about, I know it's still early, but book load factors for the first quarter? And then separately, just as we think about Allure coming on.
I'm assuming that's going to cannibalize Oasis to some extent, but is the combination of the two still in that favorable for 2011 relative to 2010?
Brian Rice
Clearly, we need to do a better job of timing our call and making sure we're not stacking you guys up. I did comment in my opening remarks a little bit about 2011 and did say it's still very early.
In a nutshell, we're encouraged. But we think it's too early to provide any specific guidance.
We did talk about the back half of this year that our load factors are up, and I just referenced the fact that if you look at our customer deposits, you would -- that's being driven by higher load factors. So I think you could extrapolate from that, that we have a reasonable order book and with the further out-booking window, we're feeling very good.
But I'd just say, it's still very early.
Daniel Hanrahan
Sharon, on the second part of your question about the relationship between having Allure of the Seas and Oasis of the Seas next year versus having just had Oasis of the Seas this year. I mentioned on the last call, and I will mention again, that the two ships together are doing extremely well.
We certainly would expect them to be positive contributors to our performance next year. But given that the two of them together represent double the capacity of when Oasis was there on her own, we would not expect the two of them to have the same yield performance as Oasis by herself.
But they are very powerful performers in the market.
Sharon Zackfia - William Blair & Company L.L.C.
I guess I'm just asking, though, because Allure has a much more favorable kind of veranda versus inside cabin mix. I mean, are the two together still beneficial to net yields next year relative to Oasis by itself, rather than just on a ship alone basis, if you will?
Daniel Hanrahan
Yes, I meant to say that as clearly as possible. The two of them together are a -- clearly a positive contributor to whatever our yield performance will be next year.
Richard Fain
I think we should make it clear. It's a significant positive.
They are both very successful.
Operator
Your next question comes from Greg Badishkanian.
Unidentified Analyst
This is Jeff Hans on behalf of Greg. Just want to get a sense of some of the onboard spend categories in terms of what you're seeing.
And then any color you might have in terms of, I guess, non-U.S. consumers and any patterns you're seeing there?
Adam Goldstein
Yes. This is Adam.
We've mentioned that onboard revenue in general was slightly higher on a year-over-year basis. And within the many categories that aggregate to onboard revenue, most are in that vicinity of flat to slightly up.
One that's done relatively better than maybe others is beverage. And then one that has done worse than others, for obvious reasons, would be the art auctions, because we're in the process of winding down our onboard relationship with Park West.
So there aren't the number of art auctions taking place as what there had been in the past. The others are not particularly remarkable, I would say.
With regard to, let's say, non-U.S. guests and maybe European guests in general, we're seeing more or less similar performance, flat to slightly up.
And some of that, I think, reflects our ever greater learning of what is motivational for our non-US customers to pay for onboard because they put value in it. So we're seeing, I would say, relatively constant performances between the different types of guests that we have.
Unidentified Analyst
And then any color you guys might have on close-in bookings and pricing this past quarter? And what you might be seeing for the 3Q, I guess, in light of some of the stock market weakness, some of the other negative headlines out there?
Brian Rice
Jeff, I think we said that the second quarter basically went exactly according to our track. From a business perspective, it came in exactly as we expected.
Close-in bookings were very consistent with our expectations. As I alluded to in my comments, despite all the turmoil or the roller coaster ride that's occurring in the stock market -- specifically, in January and May, we saw very large dips in the Dow, and during the other months we saw upticks.
And our bookings remained very consistent, very steady throughout that period. Even in Europe, where I know there's been a lot of discussion about how the euro debt crisis, the downgrades of the debt is affecting consumer behaviors, again, we see it very steady.
And as we've talked about for years, I think it's a testimony to the fact that people take vacations, and cruising is a great value. And our brands are well-positioned, and we get very steady demand even during these sort of uncertain times.
Operator
Your next question comes from Assia Georgieva.
Assia Georgieva - Infinity Research
Hopefully, the first one is simple and directed at you, Brian. When we think about FX, should we expect that almost 100% of it is related to ticket?
You mentioned that onboard is all done in dollars.
Brian Rice
Yes. Assia, I think the best way -- because we don't break out ticket as clearly, maybe -- we've said that about 30% of our revenues at the end of the day are denominated in foreign currency.
And in sequential order of importance, it would be the euro, the sterling and then the Canadian dollar. There are a lot of other currencies, but they're not hugely significant at this point.
I really think if you pay the most attention to the euro and sterling and assume a 30% percentage of our revenue, and 20% of our non-fuel costs. And I just point out that's net revenue.
Assia Georgieva - Infinity Research
My question was a little bit different. For example, in Q3, you expect constant dollar yields up seven, reported up four.
Is that 300 basis point difference related mostly to the ticket component of revenue?
Brian Rice
Yes, it would all be ticket. 100% of that movement is ticket.
Assia Georgieva - Infinity Research
And the second question, Dan addressed it to some extent. Again, looking at close-in bookings.
And as they tend to be very important to Q4, obviously the least important to Q3. What kind of trends other than the three Solstice-class ships are you seeing for [indiscernible] (00:49:04) be Adam can also give us an update on RCI?
Daniel Hanrahan
Assia, I mentioned the three Solstice-class ships being in the Caribbean because they've been such good performers for us since the introduction of Solstice, and Equinox and Eclipse have continued that. Especially -- we've been especially encouraged by what we saw from Eclipse in our U.K.
market. And our U.K.
team has done a terrific job over there. In the fourth quarter for -- it's still early, that's the closer-in booking time.
But the entire fleet is performing as we had expected it would perform at this point. So while we get higher pricing for the Solstice-class ships, the rest of our ships are performing about how we expected.
And I -- somebody asked a question a little earlier about are there holes, and there's always holes. But that's -- our sales and marketing team do a terrific job plugging those.
So we're seeing things going across the fleet about as we had expected.
Adam Goldstein
Hi, this is Adam. Although the slide that you viewed earlier showed that the average -- that the booking curve is now closer to where it was in 2008 than to where it was in 2009, the fact of the matter is that we continue to source closer-in bookings where we need them.
That's true in the Caribbean area and that's true in the European area. So for example, to the extent that we still have needs in August for Europe, we're able to motivate the business to fill those gaps.
So it's too early to say exactly what the close-in booking environment will be for the fourth quarter. But throughout this year-to-date, we've been able to find the close-in bookings that we need.
Assia Georgieva - Infinity Research
And they have generally been at higher prices. At least in Q1, I think you were quite pleasantly surprised by those.
Adam Goldstein
In general, that was true then. It -- obviously it varies as the months go by and depending what the needs are.
But we've been able to fulfill our guidance other than for FX, where we have needed to do so.
Operator
Your next question comes from Janet Brashear.
Janet Brashear - Bernstein Research
As you look at pricing in North America, could you talk a little bit about where you think you are versus prior years and when do you think you would get back to more normalized levels? And then thinking that same question through again for Europe, where you have more capacity to overcome, could you answer it for Europe as well?
Adam Goldstein
This is Adam again, Janet. Well, in general, if you look at what our guidance is versus what happened last year and the year before, you could say that we're clawing back approximately 30% or 1/3 of what we lost.
And it was always our understanding and expectation that what happened last year would take a period of years to recover, and that's essentially what we're seeing. And we see North America contributing in particular because of the influence of the new ships that -- in the case of Royal Caribbean International, Oasis of the Seas is based in Florida, of course, and so is a Caribbean product.
And then we're seeing, particularly in Constant Currency, improvement in our European pricing. So both regions are contributing to the degree of claw-back that we have so far achieved.
Janet Brashear - Bernstein Research
But would your claw-back not be slower in Europe given that you're putting a disproportionate amount of capacity there?
Adam Goldstein
Well, it could be that if we hadn't put as much capacity there would be more pricing recovery. But what's exciting to us is that we've been able to steadily grow our presence there, be very well recognized for what we offer in Europe.
And the pricing in Europe has contributed to our ability to claw back from where we were. So our view, net of all those things, is that our growing presence in Europe is very beneficial to the Royal Caribbean International brand and in general to our company.
Janet Brashear - Bernstein Research
No, no, I agree it's very beneficial, and it's helping the North America completely. I'm just wondering to the extent that it's absorbing that capacity though, how does that change your expectations about what you would hope for it to do?
So in other words, if European pricing didn't grow as fast as North America, that shouldn't be a surprise because of what it's contributing in other ways to North America, right?
Adam Goldstein
It might not be a surprise. But the fact of the matter is that in Constant Currency, it is improving nicely, and we're pleased with what we're seeing at the level of capacity growth that we've injected into the market.
Operator
Your next question comes from Mickey Schleien.
Mickey Schleien - Ladenburg Thalmann & Company
What do you estimate your current cost of capital to be with the higher proportion of fixed interest rates in the mix at this point?
Brian Rice
Mickey, our weighted average cost to capital, as we calculate it, would be just under 9% today. And as we begin to -- the thing that will influence that the most is as we begin to delever and switch more toward an equity weighting.
Our cost of debt on the new ships is extremely low. Our Solstice-class ships, we're talking about LIBOR plus less than 100 basis points.
And even the -- as you look out, as we've locked in some of this at fixed rates of interest, the interest rates are extremely low. One of the nice things is even though we swapped out 10% of this debt to a fixed rate of interest, our interest expense guidance has remained effectively unchanged even with that.
Mickey Schleien - Ladenburg Thalmann & Company
So when you look at the lower rates on the debt for the new builds but the higher proportion of equity. Directionally, would your WAC climb over time, in your view?
Brian Rice
Yes, it will climb because we intend to delever the balance sheet.
Mickey Schleien - Ladenburg Thalmann & Company
Can you give us any sense of the scope of that increase over time?
Brian Rice
I don't have the numbers in front of me, and I'd like to think through how we want to guide you on that. But we'll look to -- I don't think it's going to be a rapid ascension.
But clearly, over the next few years, we're looking -- we've put out there that we do have a goal of getting back toward investment-grade credits. And you can kind of the do the math in terms of what that might do with the weighting on the debt and the equity.
One of the things that's affecting our equity right now is a fairly high beta as well. So hopefully, that will normalize a bit over time as well.
Operator
Your next question comes from Kevin Milota.
Kevin Milota - JP Morgan Chase & Co
As you look at the booked load factor over the next two or three quarters. Was wondering where in particular you're seeing some strength, or on the other hand, weakness, for your different itineraries?
And of the booked load factor, where are most of your customers coming from? Is there any deviation from your historical norms for where you're sourcing your customers, either domestically or in Europe?
Daniel Hanrahan
Kevin, this is Dan. As you look at -- as we look at a third quarter, we're seeing this year an increase in the number of guests that we're getting out of Europe and a big increase in the number of guests that we're getting out of the U.K.
because we put Eclipse in the U.K. market.
So we've seen our sourcing mix at Celebrity change quite a bit this year. In terms of holes, nothing stands out.
We're pleased with the way we see things going. For the most part, we're going just as we had planned.
As we get into the fourth quarter, and the ships are doing a more traditional Caribbean business for us, we'll see a shift away from where we are in the third quarter to more of our guests coming out of the North American markets. But this foray into Europe for us is also helping us source guests into the Caribbean because we're building our brand over there.
Kevin Milota - JP Morgan Chase & Co
And then, just in terms of the actual bookings that you have. I mean, where in particular have you seen strength?
Is it -- for the Caribbean itineraries, European itineraries, Alaska? Where do you feel like you have more wood to chop in terms of salesmanship, but then also in terms of pricing?
Daniel Hanrahan
Well, Europe and Alaska have been good. I mean, I commented on that, and we've been very pleased with what we saw there.
And Adam had commented earlier about how pleased Royal Caribbean was with Europe as well. So been particularly pleased about Europe and Alaska.
And the fourth quarter is a closer-in booking period, as you heard Richard say earlier. So it's tough to comment on any particulars in the fourth quarter at this time.
Adam Goldstein
If I could just add in one thing that in general we've been pleased about over the year, and we didn't really comment on it too much on this call but we have on the previous calls, is what at least Royal Caribbean International calls the developmental products. Sort of the ones which, first of all, are sourced with very considerably more non-US customers than U.S.
customers, and for the most part are newer products for us. And we tend to have more of that in the winter period than in the summer.
But as a general rule, that has been one of the bright lights in terms of progress this year.
Operator
Your next question comes from Steven Kent.
Steven Kent - Goldman Sachs Group Inc.
Are you going to provide the historic currency breakdown as a percentage of your net revenues and also as a percent of your expenses? So are you going to give us that going back a few years and maybe even a few quarters?
Brian Rice
Steve, I don't think what we want to do is spend a lot of time going back and reconciling previous numbers. This has been a very volatile quarter.
I think if you'd like to give Ian a call, we've talked a lot about this because we expected that with the volatility we were seeing, there might be a lot of noise and a desire to get closer to this. So I think he's prepared to help you use the ratios that we have out there in the public domain and try to reconcile that.
Steven Kent - Goldman Sachs Group Inc.
So -- but on a go forward basis, are you going to start to...
Brian Rice
Well, what we've tried to do on this call is provide third quarter and full year guidance as-reported and on Constant Currency. You'll notice in the release, we've now provided a non-GAAP definition of Constant Currency.
So that's out there. And as long as this continues to be a relevant issue, yes, we're going to put that out there.
Steven Kent - Goldman Sachs Group Inc.
And finally, just on your -- in your opening comments, somebody said that bookings were up 11%. Is that same store sales?
Or is that just total bookings because you had capacity increases too?
Brian Rice
That's correct. I did say that the volume of our new bookings since our last call has been up about 11%.
And clearly, by the time we began this last quarter, we had much higher advanced bookings in terms of load factors. And the reason I gave that reference of 11% is we've got a lot of questions about -- as we see the volatility in the stock market, and as we've seen the euro debt crisis, are we seeing that being impacted in consumer behaviors?
And what we've tried to get across is, both domestically and in Europe, we've seen a very steady pace of demand. And it's been running on average about 11% ahead of last year, just during this three-month window.
But again, our load factors were and continue to be ahead of where they were at the same time last year.
Steven Kent - Goldman Sachs Group Inc.
Okay, so -- I'm sorry, just because I want to make sure: so then it's not same store sales or same-store shifts? It does include...
Brian Rice
This is all in, yes. And Operator, we have time for one more question please.
Operator
Your final question comes from Rachael Rothman.
Rachael Rothman - Susquehanna Financial Group, LLLP
Just a bigger picture question with respect to your returns and the introduction of the newer ships into your asset base and the effect that, that would have on cost controls. As we think about your goal of exceeding prior peak returns going out over the next cycle, should we think about that as being primarily driven by an acceleration in top line, maybe P&L cost containment efforts or lower costs on the new ships?
Or constraints in the denominator, meaning increased returns of capital to shareholders? And what mix of the three do you think is critical to achieving those returns?
And over what time period?
Brian Rice
I'll start. I think the most important thing here really is our operating performance.
The vast majority of our asset base is in place, and the new vessels that we have on order are at fixed contracts prices. So we basically know what the denominator will be.
So the primary focus has got to be on improving the operating performance. I think we've done a good job on costs.
We expect to continue to benefit from the efficiency of the new vessels. And I think as we talked about, we have a fairly disciplined culture as it comes to managing our costs.
And we've made a substantial portion of the investment that we need to make in the new international markets. I think the big opportunity here is predominantly on the revenue line.
We will be benefiting from Allure. We'll be benefiting from the new Solstice-class ships that are yet to be delivered.
There's a lot of vigilance within the brands to understand which itineraries, which markets, which assets are performing and how do we ensure that all our assets are performing at an optimal basis. So I think in terms of the priorities, it would be clearly be revenue, maintaining the cost structure and then continued focus on managing our capital expenses, would be the sequence, I would say.
Okay? Well, we'd like to thank you all for joining us today, and Ian will be available throughout the day to answer any more questions you might have.
And I'd just like to mention, consistent with our last quarter, we do anticipate to be filing our Q sometime tomorrow afternoon. And thank you again, and wish everybody a great day.
Operator
This concludes today's conference call. You may now disconnect.