Oct 29, 2008
Executives
Brian J. Rice - Chief Financial Officer, Executive Vice President Richard D.
Fain – Chairman, Chief Executive Office Adam M. Goldstein - President and Chief Executive Officer - Royal Caribbean International Daniel J.
Hanrahan - President and Chief Executive Officer - Celebrity Cruises Ian Bailey - Vice President of Investor Relations
Analysts
Robin Farley - UBS Steven Wieczynski - Stifel Nicolaus & Company, Inc. Steve Kent - Goldman Sachs Scott Barry - Credit Suisse Timothy Conder - Wachovia Capital Markets Bob Simonson - William Blair David Leibowitz - Horizon Bob LaFleur - SIG Dag Sletmo - ABG Sundal Collier Jamie Rollo - Morgan Stanley
Operator
Good morning. My name is Brittany and I will be your conference operator today.
At this time I would like to welcome everyone to the Royal Caribbean Cruises Limited third quarter earnings conference call. (Operator Instructions)
Brian J. Rice
Thank you, Brittany, and good morning, everyone. I’d like to thank you for joining us this morning for our third quarter earnings call.
With me here today are Richard Fain, our Chairman and Chief Executive Officer, Adam Goldstein, President and CEO of Royal Caribbean International, Dan Hanrahan, President and CEO of Celebrity and Azamara Cruises, and Ian Bailey, our recently appointed Vice President of Investor Relations. As we have done in the past, we have posted slides on our Investor website, www.rclinvestor.com, which we will be referring to during this call.
Before we get into our results and talk about the current operating environment, I would like to remind you of our notice about forward-looking statements which you will see on the first slide. During this call we will be making comments which are forward-looking statements.
Forward-looking statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures.
Additionally, we will be discussing certain financial measures which are non-GAAP defined by Regulation G, and a reconciliation of these items can be found on our website. Richard will begin with an overview of our position.
I will follow with a brief recap of the third quarter, update our guidance, give some insights into the recent demand environment, and details about our capital structure. Adam and Dan will then talk more about their brand, how we are managing the business, and the current environment.
Richard D. Fain
Thank you, Brian, and good morning, ladies and gentlemen. There’s been a lot happening over the last three months since our last earnings call.
Until very recently most of all that was happening was good news. Our bookings remained strong despite a weak economy, operating costs were coming down nicely, fuel prices were falling sharply, and our brands were performing extremely well.
Then a little over a month ago we witnessed a historic change in the financial markets and in many of the key drivers of our business. The resulting deterioration in consumer confidence and spending now requires us to confront new realities.
I wish we knew with certainty the depth and the duration of the credit crunch and the economic slowdown that we face. Unfortunately, we don’t have all the answers anymore than anyone else.
One interesting aspect for us is the need to recalibrate our forecast for a different pattern of consumer behavior. Historically we’ve been very successful in using the pace and type of current bookings to predict future demand.
We have enormous volumes of data that allow us to extrapolate future bookings based on how people are buying cruises today and what their price elasticity is. Unfortunately, the current turmoil came suddenly and disrupted our normal patterns.
In addition, the feedback we get from our guests and from our travel agent partners clearly demonstrates that the consumer is as confused about the economic situation as anyone and consumers hate uncertainty just as much as we do. As we’ve seen in other analogous situations, during times of sudden change and high uncertainty, our customers hold off making any decisions they can.
In today’s situation, there simply hasn‘t been enough time for the public’s attitudes to stabilize, nor has there been enough time for us to determine the new patterns and adjust our revenue models to compensate. That will come.
Against this background, it’s necessary for us to re-look at all aspects of our business and ensure that we are taking all steps to prepare for a different market than we had hoped for. Obviously the dramatic fall in the price of oil helps, but we do need to go much further.
Brian will talk about bookings and finance and Adam and Dan will talk about what they’re doing with their brands. In general I think you will see that we recognize the importance of being proactive in reducing our risk profile.
While I am very confident in our business model and the strength of our brands, it is our responsibility to find ways to further mitigate risks during such extraordinary times of uncertainty. As you can see, we have about $1.4 billion in liquidity.
We’ve implemented aggressive but prudent cost savings initiatives that we expect will yield us about $125 million in annual savings. We’ve slowed capital expenditure and will be guarded before committing to new ship orders.
We’ve diversified our guest sourcing and ship deployments so that in 2009 more than 40% of our revenues will come from outside of North America, up from only 30% last year. One specific area I’d like to address is the financing of our Newbuilding.
It’s long been a practice of Royal Caribbean to make sure we have financing arrangements in place before we order a ship. We’re very fortunate to have not only extraordinary designs and shipyard partners that produce amazing ships but financing arrangements that give us the flexibility to raise the necessary capital even during the most challenging of times.
In our press release we provided more explanation of financing commitments we already have in place and Brian will talk further about it. Obviously in today's financial world, we are extremely pleased at these arrangements already in place.
We do believe they will be adequate to finance our ships on order and we don’t envision any other requirement to access the capital markets in the foreseeable future. I wish the strength that we showed during the weak economy earlier this year was sufficient to overcome all obstacles, but the recent disruption has been too sudden and too pervasive to leave us unaffected.
We still believe our resilience will help us weather this storm, but we will also have to take aggressive steps to adjust in this new economic and social environment. I’m confident that we have the structures in place to weather a very difficult situation, even for a sustained period if necessary, but I am just as bullish that we have the strategy and we have the brands in place to thrive when the economy does begin to reground.
Brian J. Rice
Thank you, Richard. I would like to briefly go through the third quarter results.
I suspect most of you are more interested in the forward-looking environment in our capital structure so I will just high the highlights. As we said in the press release, our earnings per share were $1.92.
We’re about $0.25 better than previous guidance and $0.08 better than last year. This was the best quarterly financial performance in our company’s history despite the deteriorating economy and high fuel prices.
Revenue yields were up 0.7% which was slightly lower than our guidance with an increase of about 2%. While all of our brands are impacted by foreign currency to some extent, Pullmantur is our only entity that has the functional currency other than US dollars.
On Slide 2, you will see our previous guidance to the third quarter and our results as reported. We have also shown how we would have performed if Pullmantur’s rate of exchange had remained the same as at the time of our lat call.
As you can see, aside from the significant strengthening of the dollar and its negative impact on the Pullmantur result, revenue performance was consistent with our prior guidance. On the cost side, net cruise costs excluding fuel came in 2.3% below last year and well below our prior guidance.
Pullmantur benefited from the stronger dollar and we did have some expenses that shifted out of the third quarter and into the fourth, but our cost performance continues to improve and all of our operating groups are doing a terrific job focusing on ways to create efficiency and lower our costs. Higher fuel prices increased costs by $65.1 million, or $0.30 per share, but largely due to falling prices, our fuel costs came in about $0.07 per share lower than at the time of our last call.
So all in, our net cruise costs including fuel were up 5% versus a year ago, substantially lower than previous guidance. Now I’d like to provide you with an update on bookings.
For well over a year we’ve been talking about the resilience of our business model in a very lackluster economy. We have been able to absorb new capacity and generate the highest yields in our company’s history even in a difficult economy.
Unfortunately the events that have transpired over the course of the last six weeks or so took the economic downturn to a new level which significantly impacted consumer confidence in our bookings. I would like to start by showing you a slide we have used frequently on our calls.
On Slide 3, we have updated the graph that shows the quality and pricing closed end demand. For more than a year we have seen better pricing for closed end bookings than we did the previous year.
As you can see, in August pricing began to flatten out and in September we had a rather significant dip in the quality of closed end pricing. On Slide 4 we have tried to give you some insight into the new booking patterns since the beginning of September.
At the beginning of the month we saw modestly lower booking volumes compared to a year ago but nothing unusual given our strong order book at the time. Bookings began to show additional weakness in mid-September, about the time of the Lehman bankruptcy.
Towards the end of the month when Congress was dealing with the bailout package, we began to see a more rapid decline in new demand. For the last two weeks despite the dramatic volatility in the market, bookings appear to have leveled off and we have actually seen a more consistent pattern.
Obviously two weeks does not make a trend and the environment is so erratic right now it is virtually impossible to anticipate consumer behavior in the near term. For books business, our individual cancellation patterns have not changed materially.
In fact, since the beginning of September, our individual cancellation rate has actually been slightly lower than we saw a year ago. On the group side we have seen a more cautious approach by the trade with travel agents being more reserved in securing group space for further out sailing.
Throughout this period we have been taking varying degrees of pricing action. Consumers are understandably distracted by the current events in holding off on major purchase decisions.
For the most part, our more aggressive price reductions have taken place for the fourth quarter sailing. Into 2009, we have begun to take some pricing action but we have had more of a tolerance for booking volume deficits in response to consumer behaviors and to give our revenue management team more opportunity to better understand the elasticity pattern.
I would like to give you one example though of a one day sale we did for our Royal Caribbean international brand which demonstrates the type of action we have available to stimulate demand. For the last couple of years, we have done what we call a Wow sale in the spring and the fall.
This year the sale which had been scheduled for some time fell on October 2 which was a Thursday. On Slide 5 we have shown the net ticket revenue produced from the Wow sale compared to other Thursdays since the beginning of September.
The sale included a reduced deposit, an on-board credit that equated to roughly 7% of the ticket price, an additional promotional support from our sales and marketing team. The sale received a more tempered response than we had seen in the past but did provide a significant boost to bookings nonetheless.
Considering the sale likely consolidated some bookings from surrounded sailings, we estimate the sale roughly doubled the revenue we would have otherwise expected for that day. Lastly on bookings, if you look at Slide 6 you will see directionally where our load factors currently stand for the first and second quarters relative to the same period the last three years.
While bookings in both quarters are now trailing the same point in time last year, we are still in a strong position relative to 2007 and 2006. I will also mention that the average price for book business for both the first and second quarters of 2009 is currently higher than at the same time last year, but I would like to mention again the market is very erratic right now.
We just do not have enough visibility yet to make concrete projections for 2009. Now I would like to update you on our forward guidance for the balance of the year.
On Slide 7 we have provided our guidance for the fourth quarter in the same format we showed the third quarter results. As was the case in the third quarter, the stronger dollar has had a negative impact on Pullmantur’s revenue but a positive impact on cost.
To help you better understand the impact of the recent changes in demand on our revenues, and also our cost savings initiatives, we have added the second column to show you how the fourth quarter would have looked using the same Euro exchange rate for Pullmantur as we had at the time of our second quarter call. As you saw in our press release, we are projecting a yield decline of between 4% and 5% for the fourth quarter whereas about three months ago we were anticipating a solid yield improvement.
Just over half of the decline from our last call has been due to the stronger US dollar. The balance of the decline has been caused by weaker demand for closed end cruises, deterioration of Pullmantur’s tour demand, and somewhat weaker on-board revenues.
Traditionally the fourth quarter sailing is the most price-sensitive. This compounded by the timing of the financial crisis put pressure on our ability to generate closed end demand for the fourth quarter.
The softening demand in Pullmantur’s tour division will be offset by cost production since the capacity of the tours is variable. On board revenue has recently begun to show some signs of weakness and similar to ticket prices, this deterioration has occurred fairly recently and it is too early to fully understand.
Net cruise costs excluding fuel per APCD are projected to decline approximately 1%. As I mentioned earlier, we did have some timing shifts from the third quarter but much of this has been offset by additional cost savings.
As you can see, without the benefit of the stronger dollar on Pullmantur’s costs, we would have been up between 1% and 2%. Based on today’s bunker prices, fuel costs are projected to be approximately $146 million in the fourth quarter.
We are 55% hedged and our average net cost per metric ton would be approximately $454 in today's prices. Our best estimate today for earnings per share for the fourth quarter are between $0.05 and $0.10.
Our updated full year guidance for full year 2008 can be seen on Slide 8. We now expect net yields to be up approximately 1%, net cruise costs to be up approximately 3%, and net cruise costs excluding fuel be about flat.
Our earnings per share forecast for the year has increased to be between $2.73 and $2.78. We are currently developing our operating plans for 2009.
Most of our savings initiatives are now in place and we are still confident net cruise costs excluding fuel per APCD will come in at or below 2007 levels. On our last call we gave a preliminary number for 2009 fuel expense of $890 million and mentioned we were 22% hedged.
Today we are 39% hedged for 2009 and based on today’s at-the-pump prices, we would now project fuel expenses in 2009 to be approximately $635 million. At this level our costs per APCD would be about 13% lower than our current estimate for 2008.
Given the tremendous credit crunch in the market we thought it would be useful to provide you with more details about the financing arrangements Richard mentioned in his comments. As you know, last week we took the liberty of Celebrity Solstice.
The vessel was financed through a $519.1 million loan facility with KfW and BNP Paribas. The facility is a 12 year semi-amortizing unsecured loan bearing interest of LIBOR plus 45 basis points.
We’re currently 4.28%. We were able to accomplish this despite the tight credit market because we have always placed great emphasis on optional financing arrangements prior to entering into a construction agreement.
We have four additional Solstice class ships on order in Germany and will take delivery of one ship in each of the next four years. For each of these vessels we have committed bank financing arrangements that include financing guarantee from HERMES the export credit agency of the German government.
The terms of the financing guarantees and bank commitments are similar to those that I described with the Celebrity Solstice and are executable at our option. We also have two Oasis class vessels under construction in Finland for our Royal Caribbean International brand, the first of which we will take delivery of in the fourth quarter of 2009 and the other a year later.
We have secured loan guarantee commitments from Finnvera, the export credit agency of Finland, which provides potential lenders with government guarantees of up to 80% of the financed amount. We expect these financing arrangements will be adequate to meet our ongoing operations and capital expenditure requirements and do not anticipate any other requirements to access the capital markets for the foreseeable future.
Now I would like to update you on our liquidity. As of September 30 we had approximately $1.4 billion in liquidity, including $300 million in cash and cash equivalent and $1.1 billion in our unsecured revolving credit facility.
Subsequent to September 30 we did draw an additional $460 million to have additional funds on hand for potential working capital needs and in response to the current instability in the global credit market. In summary, we recognize the high degree of uncertainty in the market today and believe we have proactively taken prudent measures to lower our risk profile and to ensure our financial stability.
Nonetheless it is because of times like this that we maintain a $1.2 billion revolver with the diversified portfolio with solid banks. I would now like to turn the call over to Adam for his comments about the Royal Caribbean International Brand.
Adam M. Goldstein
Thank you Brian and good morning everyone. We are pleased with our record third quarter results but obviously concerned about the current market conditions.
Although we are disappointed that the market has softened, it is our belief that Royal Caribbean International continues to fare well in competitive terms within the industry. The weakness we are now feeling stretches across most variables of the business.
Within North America we are seeing roughly the same level of challenge from different geographical source markets as well as from different stateroom categories. We are not seeing variation from last year in terms of first timers versus repeat cruisers or in terms of age distribution of our guests.
From a product standpoint, if there is relative strength, it is in the Caribbean where APDs are up year-over-year albeit load factors are currently down. Also, Mexico is doing relatively well given we are replacing a Vision class ship with Mariner of The Seas of the Voyager class.
Our more exotic products are experiencing more of a challenge primarily in terms of sourcing North American customers. Our international point of sale is faring somewhat better but our expectations are also higher as we grow this segment.
This highlights one of the benefits of the increasingly global nature of our brands. Individual products and markets do go through cycles.
It hasn’t been that long since many observers were decrying the state of the Caribbean as an oversaturated market, yet today it is one of the better performing markets. The versatility of our brands is an asset for us as we work through these cycles.
Switching to on-board revenue, our performance year-to-date is approximately flat on a year-over-year basis. While we cannot forecast on-board revenue as we do ticket revenue, we would expect the current economic conditions to have somewhat of a negative effect on on-board revenue.
As far as sectors of on-board revenue are concerned, one of our strong performers this year has been our shore excursion business particularly on our European cruises. We’ve previously noted that on-board art auction business has been a weak spot this year.
Most of the other areas are roughly consistent with prior year performance. Clearly in this environment we are focusing on being as cost conscious as possible while continuing to deliver a world class product.
This includes our fuel conservation, workplace safety, and other behind-the-scenes efforts. There is considerable focus on identification and replication of best practices across the fleet to promote efficiency.
In addition, where we believe there are product elements that are less relevant or appealing to today's’ guests, we place less emphasis on them or even eliminate them altogether. Meanwhile we continue to introduce innovations that add significant value as we are doing, for example, with the roll out of My Time Dining that is currently underway in the fleet.
From a G&A cost perspective there is an intense focus on increasing productivity and driving efficiency which is enabling us to move forward in a positive manner following the reduction and force that we implemented some months ago. I would like to acknowledge the efforts of our officers and other leaders to reduce or eliminate costs.
Turning to Oasis of the Seas, we look forward to her floating out on November 21. Her construction process is coming along well.
We have now completed our reveals of all seven of the neighborhoods that describe different concentrations of interest around the ship. The ship continues to receive worldwide publicity.
We started to accept bookings a few weeks after the last earnings call and we are pleased with the bookings we are taking, especially considering that the maiden voyage is still more than a year away.
Daniel J. Hanrahan
Thank you Adam and good morning everyone. As you’ve heard Brian and Adam comment, our third quarter was very strong.
However, we quickly moved past the third quarter and all our efforts are focused on understanding the environment in which we are now operating. It is challenging to get insight on consumer purchase patterns.
We have seen some success being able to stimulate closed end demand. Our focus has been on working in partnership with our travel agent partners on direct-to-consumer marketing efforts with offers targeted in the fourth quarter and through January and February of 2009.
We have seen reasonable closed end build as a result of these efforts. We do find it encouraging that we are not seeing a spike in cancellations.
The business we have on the books to date has stuck fairly well. We will continue to concentrate our marketing and sales efforts to stimulate closed end booking.
Our larger travel partners are continuing to spend their own marketing dollars as well as our co-op dollars to focus on the same areas. We are also very focused on continuing to manage our expenses without impacting the guest experience.
Fuel consumption is just one of the many areas that continues to receive a great deal of attention. We also have continued to challenge our supply chain organization to think differently about how we source the products we need on the hotel and room sides of our business.
For example, earlier this year we made a decision not to sign year-long commitments for certain products which would have been our practice in the past. We felt we would be better able to realize pricing in the markets.
This has allowed us to take advantage of declining prices on these particular products. As our European business grows, we began preparation two years ago by putting in a procurement office in Europe.
This European season we open two distribution centers, one in [Sivitavekia] and one in Rotterdam. This move has helped improve our service levels to our ships, while helping us to better manage our freight and logistics costs this year.
We are operating as a European company when it comes to managing our pyramid and logistics. We have also begun to realize some synergies with Pullmantur on their needs.
We believe we can continue to help them leverage our buying power to manage their expenses. These are just a couple of examples of the success our supply chain organization is having on helping us manage our costs.
Finally, we took delivery of Solstice last week. We were able to show her to a number of UK and German travel agents.
Their response is better than we hoped it would be. The ship has exceeded everyone’s expectations.
We are looking forward to showing her off during her pre-inaugural cruises in the middle of November. We have a real winner in Solstice and believe the pre-inaugural cruises will be a great demand stimulus.
Brian J. Rice
Brittany, we’d like to open the call up now for questions.
Operator
(Operator Instructions) Your first question comes from Robin Farley with UBS.
Robin Farley – UBS
I had a couple questions on expenses. First, in the quarter, the currency obviously brought yields down a little bit and you quantify that.
Can you quantify how much of the non-fuel expense has been lower than guided was due to currency?
Brian J. Rice
Robin, on the second slide, we’ve broken out Pullmantur for both revenues and expenses. On net cruise costs excluding fuel you can see it was about 80 basis points change so where we had guided that we would be up between one and two we reported we were down 2.3 currency actually would have made that down about 1.5.
All we translated here is the Pullmantur expenses since that’s the only place we have a different functional currency. It’s the same case on revenue.
Robin Farley – UBS
So it would have been down 1.5 instead of --
Brian J. Rice
Correct.
Robin Farley – UBS
With Pullmantur, in other words, some of your other brands would also have lower expenses due to currency, wouldn’t they, even though the complete functional currency --
Brian J. Rice
We do have some expenses. We’re actually long on revenues.
We’re long on foreign currency net for Royal Caribbean and Celebrity. We have the Brilliance lease for Royal Caribbean is denominated in sterling and then we have some operating expenses associated with our sales offices and our port within Europe, but net net it’s the greater impact on revenues than it is on cost.
Robin Farley – UBS
So there would be, if for those other brands, there would be some additional benefit on the expense line in addition to those 80 basis points?
Brian J. Rice
Yes. If after currency we still have a net savings on our cost structure.
Robin Farley – UBS
Okay, but you can’t quantify what that is outside of the Pullmantur brand, what the currency benefit was?
Brian J. Rice
It’s not dramatic. I can tell you that we would have been very favorable even without the currency.
Robin Farley – UBS
I guess in previous quarters I know people have asked about the benefit of currency on the yields and you haven’t broken it out before. I wonder can you give us a sense of what the benefit from currency has been by your calculations?
Brian J. Rice
I don’t have prior periods. I think the best thing I can point you to is the fourth quarter guidance.
We haven’t really broken it out before because frankly it hasn’t been relevant. Pullmantur again has a different functional currency so for that brand it was easy to break it out for you and you can see that it was about 300 basis points for our fourth quarter on revenue.
That’s been very unique given the strengthening of the US dollar. If you listen to the comments that we made about our overall guidance about a little more than 50% of the movement in our yield guidance for Q4 was due to currency and you add that to the 300 basis points for Pullmantur, you could infer that it’s about 200 basis points impact on Royal Caribbean and Celebrity, but again this is by far the single biggest movement we’ve seen in currency and the reason we felt the need to call it out here for both revenues and costs.
Robin Farley – UBS
Then in terms of CapEx, just looking at your CapEx guidance versus the last quarter you gave guidance, it looks like CapEx went up $300 million in ’08 and it went down $100 million in ’09 so maybe $100 million shifted, but can you give us a little color on what the $200 million higher in CapEx in ’08 and especially since this guidance change just occurred in the last quarter, it looks like a big [inaudible] coming up again.
Brian J. Rice
It’s $200 million and in actuality it’s about $160 million and what occurred is as you know, Pullmantur has traditionally leased aircraft. When we bought Pullmantur, they had three 747 on lease.
Those leases have expired and as we did the IRR we found an attractive opportunity to actually terminate those leases and buy three Pullmantur aircraft so the net net was we decided to buy instead of lease and we were also able to upgrade the aircraft 747-400 which is a much better aircraft, more efficient on fuel, and also had much greater resale value.
Robin Farley – UBS
And then my last question is that just in terms of the currency, on new ship orders, looking several years out, were they hedged within a few weeks of the time of order or will there be some benefit you know in terms of the Newbuilding costs from the [inaudible]?
Brian J. Rice
We’ve been very consistent in our Newbuild hedges. We tend to be anywhere between 85% and 95% hedged on our Newbuild portfolio.
We do have a policy that within about two weeks of signing a contract that we keep the portfolio at that amount, so it would be a little bit of benefit but not terrific amounts. We tend to be hedged pretty well.
Operator
Steven Wieczynski - Stifel Nicolaus & Company, Inc.
Can you give a little more color on pulling the fuel supplements last week, and you guys basically said you’re not going to increase prices or haven’t... Your competitors have but just a little bit more color there?
Daniel J. Hanrahan
We did pull the fuel supplement for 2010 and the way we set this up is we said that for 2009 what we’ll do is we’ll look at what the prices are a couple of weeks out from the quarter and depending upon if that price goes below $65, we would then eliminate it for the following quarter and in regard to pricing we’re always managing our pricing and trying to manage our prices up as high as we possibly can so that’s really more of supply and demand driven then just making a blanket announcement that we would raise prices for 2010.
Steven Wieczynski - Stifel Nicolaus & Company, Inc.
Then something that your competitors are also doing, they’ve reduced deposits so consumers don’t have to spend as much up front, and you did that during your Wow sale. Is that something that you guys are looking to do over the next couple quarters?
Adam M. Goldstein
Clearly reducing deposits is one of the many tools we have in our arsenal for spurring business and the Wow sale that Brian mentioned included both a reduced deposit opportunity as well as an on-board credit opportunity and he may have referenced that the aggregate impact of those two tools on the pricing that we were offering was something like 7% discount, so we have that option. We don’t expect to do that on an every day basis but sometimes it helps us spur needed business.
Operator
Your next question comes from Steve Kent with Goldman Sachs.
Steve Kent - Goldman Sachs
Two questions. First, Richard, you mentioned a reduction in CapEx.
Are you referring to the ’09 or are you really talking about a reduction in your CapEx plans beyond 2011 and given this environment, just pulling back from development and building of ships and then just to echo Robin’s question, I guess I’m still wondering how this FX impact could be so dramatic in the fourth quarter and this quarter and never have been very dramatic in the previous quarters and maybe the way to answer this is to just simply show for the past four quarters what the FX impact has been and then we can all figure out how dramatic it really is.
Richard D. Fain
I’ll answer the first question on CapEx and then I’ll ask Brian to comment on the foreign exchange. I think the comment on CapEx was a general one in terms of all of it.
Of course the biggest capital expenditure that we do by far, the bulk of this is on the Newbuildings and as we’ve indicated, we will be a lot... for some time we have been probably less than some of our competitors in terms of the total amount that we’ve done up until now and I think we would be very cautious looking forward.
Those are about 85% hedged at the moment so the FX helps us only very modestly on that. We will also be looking more cautiously with respect to any new CapEx in the future, although it does take a while for existing CapEx to have worked its way through the system and an example of that is the airplane which we bought much earlier this year, although that was simply replacing inefficient rented airplanes with more efficient owned flights and then maybe I’ll ask Brian to comment on the foreign exchange.
Brian J. Rice
Steve, one thing I would point you to on the FX in terms of the impact that it’s had historically, just looking at the difference between Q3 and Q4, if you look at our slides, the delta between the corporate numbers and the numbers adjusted for Pullmantur, Pullmantur’s affecting Q3 was only 100 basis points but in Q4 it’s 300 basis points. The currency fluctuation has been absolutely dramatic since our call on July 22.
I recall one week just about three or four weeks ago where the Canadian dollar I believe dropped about 9% in one week and if I’m not mistaken, I think sterling dropped about 8% last week. So the cumulative effect and the tight concentration of that in such a short period of time, what we’ve tried to do is, we wanted to distinguish for you what’s being driven by FX, what’s being driven by the challenging market conditions, and give you a little more transparency than we ordinarily would just because the effects of those have been so dramatic and we just thought it was very worthy to call that at this point in time whereas historically in any given period, they have not been nearly as relevant as they are now.
Steve Kent - Goldman Sachs
Just one other thing, Richard, and given what’s going on, why not just commit right now to not building any more ships. We have seen the benefit in the Caribbean of low supply, you have seen it on the pricing, even before this, I guess I still struggle with both companies and even the private companies, why not just slow down the CapEx finally.
It’s obviously a benefit, there is not capital out there. The demand is not there.
I am completely frustrated. I don’t get it anymore why neither company will commit to this.
Richard D. Fain
I think you have said it a little bit, we do not know what the future holds. So I think for us to make a blanket statement would not be very constructive, but I do think it is true that today the demand wouldn’t justify it.
I think we are looking forward to a time, which actually is not that far off, when the existing orders run off and we are then looking at the power of an even better supply and demand situation. In terms of why we do not commit to what we might do under a different set of circumstances, I do not know what those circumstances are, so I do not think it is appropriate to make a commitment to it.
But we have said for some time now that under the current circumstances, we do not envision ordering any new vessels.
Operator
Your next question comes from Scott Barry of Credit Suisse.
Scott Barry - Credit Suisse
Brian, I have two questions. You mentioned that you have some tolerance for lower load factors the first half of next year.
I assume that you are thinking that we get some normalization in this environment then there is some pent up demand. Given your history in revenue management, is this environment that we are seeing currently like anything you have seen prior and then secondly, there has been some significant compression in the distribution value change since the last cycle, zero based pay and [air], big increase in non-commisionables, etc., are you concerned at all about the health of your agency partners and are you contemplating any strategic moves to support the channel?
Brian J. Rice
Okay, Scott, I will take the first part and then have Dan and Adam to comment on the distribution system. The way I would describe the consumer sentiment right now for further out is a little bit of a deer in the headlights.
I think the consumer has a high degree of uncertainty. We have seen experiences in the past, after Gulf War in ’91 and the recession ahead and all, and certainly after 9/11, we probably had a 6 week period where there was a high degree of uncertainty.
I think that right now we are not really sure if we are at the beginning, the middle, or the end of this cycle and exactly what the depth will be. That’s why we are watching the bookings so closely and trying to show you a little bit more about what has been happening day to day.
It is fair to say that we are ensuring our short term order book by taking the necessary pricing actions and if you will we are throwing the trial balloons out there for the future to start being able to gauge the elasticity, but frankly, I think, doing any wholesale structural changes on pricing further out right now would be throwing good money after bad. I do not think that consumer’s psyche is necessarily at the right place.
We have seen in the past that the consumer does work through these cycles and the elasticity comes back into play and our revenue management team is [awdling] this, studying it, and will continue to take appropriate action but as you alluded to, we have a little bit more tolerance as we go further out into ’09 to allow. Fortunately we had a pretty good order book which gave us the luxury of time here to really study what is happening with the demand pattern.
Daniel J. Hanrahan
Hi Scott, it’s Dan, in regards to our travel agent partners, we have been talking to a lot of them, as you can imagine, and probably more so than we even normally do. It’s hard to believe we can talk to the travel agents more than we normally do but I think we have been lately.
I would say that there are a couple of things going on here. Over the last 4 or 5 years, you have seen a real movement to home based so I think that there are a number of travel agents that have taken a lot of the expense out of running their business by going home and I think that they will do quite well.
The large travel agent partners that we talk to on a regular basis are well positioned to get through this. I do believe that there will probably be some that as a result of the downturn in the economy could end up having some serious problems, but I think overall, at this point, one of the things that I am seeing out of travel agents is that they are continuing to market, and those that are continuing to market seem to be the ones that are driving the volumes that we have today.
So will there be some fallout? Yes, I think there might be, but I think we will just have to watch that for a while, but I do think those that made the decision to go home based have probably positioned themselves well in advance of this.
I don’t think that is the reason that they probably did it, but I think there is a benefit of having gone home based.
Adam M. Goldstein
Hi Scott, it’s Adam. There is no question as Dan said that the distribution system is in pain as many industries and the customers are as well.
One of our jobs as a leading supplier to this distribution industry is to call out their attention to where the opportunities are. For example, with the shifting currency, vacation in Europe is suddenly 15% to 20% cheaper than it was just a few weeks ago.
With the perspective and the fuel supplement, that will be a positive for the travel agency compensation model and the more professional travel agency groups are the ones that are more proactive and are looking for ways to get through to the consumer in this environment, and we will continue to work with them as Dan says even more closely than before to spur them on and I think they will get through this just as we all will.
Operator
Your next question comes from Bob Simonson of William Blair.
Bob Simonson - William Blair
Two questions on pricing. This recent fairly substantial deterioration in the pricing picture, has that also affected your preliminary pricing in say the last 2 weeks to 4 weeks on what you have done and have been doing and are doing on Solstice and Oasis pricing?
Daniel J. Hanrahan
Bob, this is Dan. As we’ve talked about, we have been fairly cautious with what we have done in 2009 on pricing.
Our focus really has been on closed end bookings and we have taken some pricing actions on Solstice for the fourth quarter and a little bit into January and February. We have seen that it has helped stimulate demand, so actually in the last couple of weeks we have seen a pick up on Solstice, and I think it is a result of some of the things that we have done on pricing.
But out into the future we have been careful not to do anything dramatic at this point. We want to protect the integrity of the new ship and we will watch it very closely.
Our revenue management team is watching this very closely and will make decisions on what to do beyond January and February as we get closer to that time period.
Adam M. Goldstein
Bob, it is Adam. Of course, Oasis is in a different position from Solstice.
Solstice is coming out in the next few weeks and Oasis still being more than a year from its maiden voyage, but I mentioned before that the development of the bookings to this point is positive and therefore the development of the pricing to this point is positive.
Bob Simonson - William Blair
The second question is again in the same vain as the deterioration in the pricing environment. Can you qualify or quantify the change that you are seeing?
Is it more on the North American side or on the European side? Again, you can do it in whatever constant or dollars are easier to explain it.
Richard D. Fain
I mentioned before, Bob, in my comment that as an overall matter it seems that the international points of sale are a little bit more robust right now than what we are experiencing from North America. The currencies are moving in different ways and it is up to the travel agents to take advantage of the messaging depending on which way it is going because we have a lot of capacity that is based in Europe for Europeans and we also afford for them a lot of opportunities to travel afar and the reverse is true for North Americans.
The messaging is going in the appropriate direction. We are pushing products into Europe that are interesting and different than in the past, shorter cruises, cruises that are particular to different markets and we are hopeful.
The thing is that the programs are still 7 months to 12 months out for the most part and availability is limited.
Adam M. Goldstein
Bob, with respect to Europe, we also want to comment, Europe is not homogeneous either and within Europe you see different markets and strengths and weaknesses. The Spanish market is one of those that was the worst hurt and the earliest hit, so actually by the beginning of ’09 that will give us slightly easier comparables but I think in general most consumers are looking to similar kind...
Some people say even stronger kinds of economic concern there too.
Operator
Your next question comes from Timothy Conder with Wachovia Capital Markets.
Timothy Conder - Wachovia Capital Markets
Brian, how should we think about if all the fuel surcharges are refunded, how should we think about that on a year-over-year swing and net yield? Again, I guess it’s basically asking the question from the standpoint of zero fuel surcharges versus on the other extreme 100%.
How would that impact ’09? And then any commentary on your fuel hedges for ’09 you said were 39% and if I remember correctly they were 25% when you reported the last time.
What levels were those incremental hedging contracts put on it?
Brian J. Rice
In the fuel hedge position on the last call was 22%. I don’t have in front of me what the average hedge price were done at but we do layer them in over the course of the quarter fairly equally in the individual months.
Even though we haven’t correlated too tightly with WTI, it still recently... Again you could probably get a pretty good proxy and I think if you want to give Ian a call later this afternoon, he might be able to help you do some of the math on that.
In terms of the fuel supplement, we are continuing to collect fuel supplement into ’09 for ’09 sailings. Our policy will be that if the WTI price falls below $65 we will refund anything that we’ve collected in the form of an on-board credit.
I think you can probably play with the calculation and that our charge today is $10 per APCD and we’ve provided in our press release dates that will do the calculations to try to keep this simple for the consumer to be able to track and I think frankly if fuel goes below $65 giving back those credits in terms of an on-board revenue with the affected fuel savings we’ll experience will be a good guide for us.
Timothy Conder - Wachovia Capital Markets
Part of the 4X questions from before, is part of that explained, Brian, by the two month lag in accounting for Pullmantur and then the dramatic, as we’ve all seen the dramatic changes in the foreign currency exchange rate?
Brian J. Rice
That’s a good point. The fourth quarter for Pullmantur will be August, September, and October.
August, September being two of Pullmantur’s strongest months, so not only do you have the higher basis of revenue being impacted which is your point I think also, the dramatic fluctuations of currency levels, but yes, that is a significant part of the calculation. Thanks for pointing that out.
Timothy Conder - Wachovia Capital Markets
Then relating to the cost initiatives in the $125 million, just a clarification point, you’re already getting some of those benefits here in 2008 and you’re still calling for an incremental $125 million beginning in ’09?
Brian J. Rice
The $125 million in ’09 is an annualized number, so it wouldn’t be incremental to ’08. We did some of those benefits but then we also had a course on a set of one-time charges that we talked about on our last call and so that would be an offset.
But the $125 million is an annualized... I think a good way to look at this is we’ve talked about our net cruise cost X bunker being at or below ’07 levels on an APCD basis.
I think that would be the best way for you to begin modeling ’09.
Operator
Your next question comes from David Leibowitz with Horizon.
David Leibowitz – Horizon
A few numbers that I was not certain about. When you speak to a lower load factor going forward that you’re willing to accept, are we to take that something below 100% or is it going to be something lower than the 105% to 107% you’ve been enjoying?
Brian J. Rice
David, let me clarify the distinction that I’m making for the near term is the percentage of booked business for further out sailing, not necessarily what we’ll eventually sail at. We’ve had a tolerant to allow ourselves where over the last three years we’ve had a very solid order book where a higher percentage of our inventory has been sold for future sailings.
We’ve allowed that to come down a bit just because we don’t think the consumer’s ready. But to your point, I think there will be instances that if this environment continues that we would choose to make a tradeoff decision where our discounting would actually get to a point of diminishing returns.
We may have to take a trade off to have lower load factors, but I think that would be on a more tactical basis than the structural wholesale changes of lower load factor, so given what we know today, I think you would continue to see our load factors above 100% in the foreseeable future.
Operator
Your next question comes from Bob LaFleur with SIG.
Bob LaFleur - SIG
Just want to talk about the fuel sensitivities and just make sure I’m understanding this correctly given the changes to your forward guidance for fuel. Last quarter you told us that a $10 move was $59 million and we’ve had about 6 or 7 $10 moves since then and the average that you’ve taken your fuel cost down is more like $38 million per $10 move so given your new sensitivities of $51 million per $10, I’m just trying to understand how that changes the farther away from the base case that we get and when we look at the new sensitivities, how can we expect that to change in multiple increments of $10 moves?
Brian J. Rice
I think I can give you a couple of directional things that may be influencing your calculations. I think it would probably be best if you could sit with Ian and walk through the mechanics of it.
We do layer in additional hedges throughout the quarter and for ’09 for example, we went from 22% to 39% hedged and you can use WTI as your basis for the different levels that we were hedging at. The one thing that I will mention that I’m not sure we’ve really described thoroughly enough in the past is our hedging is all being done with IFO fuel.
It is very difficult to get hedging for MGO fuel because we can’t get the accounting correlations that are required and IFO tends to be a much lower priced fuel than MGO so when we’re talking about our hedge position, we’re talking about our consumption in terms of metric tons that is hedged, which is a different amount than our dollar exposure. But I think if you work with that, it might help you understand a little bit of it, but again, if you could follow up with Ian, he could work through the mechanics with you.
Operator
Your next question comes from Dag Sletmo with ABG.
Dag Sletmo - ABG Sundal Collier
Hi, two questions. The first is could you just remind us of your most important debt covenants to the key levels and secondly, in relation to the financing guarantees for your ship boarders, will you need to come up with any equity in addition to the loans you’ve got?
Brian J. Rice
Dag, we effectively have three loan covenants in our financing. The first is a net debt to cap and I believe the covenant would be 2.5%.
We have a fixed charge coverage ratio of 1.25 and we have a minimum shareholder equity amount that varies year to year and includes a percentage of our retained earnings in any given year. For the foreseeable future, given what we see, we don’t have concerns about any of those covenants and we have the...
I think if you took some of your model and you [press test] them you would see that we have quite a bit of [bandwidth to be able to ignore] for deterioration before any of those would come into play. In terms of equity, we don’t see as I mentioned in my script any need to go after the capital markets for the foreseeable future.
We believe the financing arrangements we have in place for all our Newbuilds will be more than adequate.
Dag Sletmo - ABG Sundal Collier
But these financing arrangements, will they finance the entire purchase price of the ship or will they finance part of it and then you need to come up with equity for the ship? I don’t mean issue new equity in the market but come in with new equity for the ship as such.
Richard D. Fain
The financings cover 80% of the price of the ship but remember we’ve already paid installments on a bunch of that and that is our normal operating cash flow, so altogether we looked at all those things together and think at least to the sense that you can that is adequate to meet the requirements.
Dag Sletmo - ABG Sundal Collier
Is there any risks that lenders will let demand equity come in earlier in the construction cycle?
Richard D. Fain
There’s always risks, almost anything, I think at this point no one is going to say there’s no risk on any subject but these are... we try to describe them as well as we can.
They are commitments and they are not contingent upon putting in more equity or anything like that.
Dag Sletmo - ABG Sundal Collier
Just a final question. Are there any remaining formalities relating to these guarantees such as the approval by the Parliament and the relevant countries or are there any cases of the guarantees of this type having been canceled?
Richard D. Fain
No cases of guarantees being canceled that I’ve ever heard of or are there any of those kinds of contingencies. There are normal kind of funding requirements but there none that we consider particularly onerous.
Brian J. Rice
Brittany, even though we’re running out of time, we’ll take one more question please.
Operator
Your final question comes from Jamie Rollo with Morgan Stanley.
Jamie Rollo - Morgan Stanley
Just a quick clarification please on the pricing in the fourth quarter. I think your previous Q4 year guidance was growth of 4% to 5%.
It’s now down 5% and you say half of that is FX. So that assumes [inaudible] from the recent downturn in bookings.
Is that correct?
Brian J. Rice
Jamie, our previous guidance was up between 4% and 5% and now we’re guiding down 4% to 5%. There’s about a little over 50% of that is driven by FX.
300 basis points of it is being driven by Pullmantur’s FX then it’s the combination in order of impact on softening or lower pricing in the fourth quarter, also deterioration in Pullmantur tour business which we mentioned had an offset on the cost side, and then lastly, some pressures on on-board revenue. But sequentially it would go FX, business deterioration, tour division, and then on-board spend, would all be the contributing factors of that.
Jamie Rollo - Morgan Stanley
So the 5% is the non-FX fit given you would have been at least I’m guessing 75% to 80% booked when you last gave your guidance for the fourth quarter. Would that imply ticket prices and on-boards together down around 20% or so for those sort of final 20% or 25% of bookings?
I’m trying to get a feeling for the contour of the sort of overall revenue decline for those final chunk of bookings. It’s obviously quite hard to read it from the exact Slide 3 but is the math correct?
Brian J. Rice
I think that’s high in terms of your calculation. Remember the tour division has an impact.
There’s no capacity associated with it and it just deteriorates the revenue quite rapidly. So I think your 20% calculation is high.
I would also mention the fact, and I don’t have where our book load factors were that at the time there was a new initiative of discounting. But you do get churn of business even though our cancellation rates have not been higher than previous levels, you do have some higher value business that did come off with some being replaced with lower values.
Richard D. Fain
Jamie, I think you also ought to keep in mind that the fourth quarter is traditionally our weakest and most price sensitive quarter and that people are buying on the margins and the margins always are more sensitive than the base business if you will. I understand you are trying to extrapolate from that to the broader market is a little hard to quantify in as precise terms as you appear to be trying to do.
Brian J. Rice
Thank you very much. We certainly appreciate you joining us today.
We’re sorry we couldn’t get to everyone’s questions but as I mentioned Ian Bailey will be around and available to help you with any further questions you may have. Have a great day.
Thank you.
Operator
This concludes today's conference call. You may now disconnect.