Royal Caribbean Reports Fourth Quarter Earnings and Provides an Update on the 'Wave' Period
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Royal Caribbean Reports Fourth Quarter Earnings and Provides an Update on the 'Wave' Period
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Category: Worldwide - Industry economy
- Figures / Studies
This is a press release selected by our editorial committee and published online for free on 2009-01-30
Royal Caribbean Cruises Ltd. (NYSE, OSE: RCL) today announced its earnings for the fourth quarter and full year of 2008.
Key Highlights
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Fourth quarter 2008 net income was $1.5 million, or $0.01 per share, compared to $70.8 million, or $0.33 per share in 2007. For the full year 2008, net income was $573.7 million, or $2.68 per share.
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As previously described, bookings began to suffer a substantial downturn in September resulting in a Net Yield decline of 5.9% for the quarter. This is lower than the company's previous guidance of down 4% - 5% due to foreign currency changes during the quarter.
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During the quarter, substantial cost containment and other actions largely offset higher than anticipated fuel and insurance expenses.
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Fuel expense was higher than the company's last calculations mainly due to higher at-the-pump pricing than anticipated.
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Looking forward, the revenue outlook for 2009 remains weak. Both ticket sales and onboard revenue have been impacted by the general economic conditions. It has required substantial discounts to generate the requisite volume and consumers are making their vacation decisions later than previously.
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Increased cost containment programs are expected to result in a 5% - 7% decline in Net Cruise Costs per APCD excluding fuel in 2009.
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The company expects Net Yields for 2009 will be down 9% - 13% from 2008 and that EPS will be in a range around $1.40 per share.
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Early indications from the "WAVE Period" are encouraging and suggest that the booking situation may have begun to stabilize although pricing remains extremely challenging.
"The fourth quarter was an extremely difficult operating environment and we expect even more challenges in 2009," said Richard D. Fain, chairman and chief executive officer. "Nevertheless, I am pleased by our success in reducing costs without compromising the guest experience. Although the WAVE Period has only just started, we are encouraged by what we have seen so far; pricing is still very difficult, but booking patterns have begun to stabilize."
Fourth Quarter 2008 Results
Royal Caribbean Cruises Ltd. today announced net income for the fourth quarter 2008 of $1.5 million, or $0.01 per share, compared to net income of $70.8 million, or $0.33 per share, in 2007.
Revenues were $1.5 billion, the same as in 2007. Net Yields decreased 5.9% from the prior year. The overall revenue environment was in-line with previous guidance but foreign currency weakness negatively impacted this by about 2 percentage points.
The company experienced higher than anticipated fuel and insurance expenses during the quarter, but was able to significantly offset these items through cost containment and other initiatives. Net Cruise Costs per APCD increased 0.3%, and Net Cruise Costs excluding fuel per APCD decreased 1.7%.
Selling, general and administrative expense decreased 12.6% per APCD as a result of cost control initiatives.
Included in the fourth quarter results is a $13.3 million P&I insurance club call related to group claims from 2006-2008. Absent this insurance call, Net Cruise Costs excluding fuel per APCD decreased 3.6%, significantly better than the company's previous guidance of down approximately 1%.
Fuel cost per metric ton for the fourth quarter increased 11% to $565 versus 2007. This resulted in fuel expenses of $36.1 million, or $0.17 per share higher than the company's previous fourth quarter calculation. Most significantly, while crude oil prices followed an erratic downward trend during the quarter, at-the-pump pricing lagged crude oil, resulting in higher than expected pricing at-the-pump. In addition, certain issues relating to weather and vessel operations contributed to the difference. While such factors are not always predictable, the company has made adjustments for these items in its 2009 fuel calculation.
Full Year 2008 Results
Net income for the full year 2008 was $573.7 million, or $2.68 per share, compared to net income of $603.4 million, or $2.82 per share, for the full year 2007. Revenues for the full year 2008 increased to $6.5 billion from revenues of $6.1 billion for the full year 2007. Fuel costs per metric ton increased 30% to $592 for the full year. The fuel expense increase for the year would have been higher if not for a 3.3% consumption improvement per APCD that the company was able to achieve.
Revenue Environment
The demand environment has remained weak over the last few months, although booking volumes have been successfully stimulated through aggressive pricing actions. "The start of the WAVE period has produced booking volumes consistent with last year, albeit at significantly lower prices," said Brian Rice, executive vice president and chief financial officer.
The company also commented that the booking window has seen significant compression and load factors are lagging behind levels achieved the last few years. Because of the contracted booking window, the company provided a widened range of yield guidance for 2009. Net Yields are currently expected to decrease between 9% - 13% for the full year and 14% - 16% for the first quarter. These projections include the lost revenue from the fuel supplements that the company recently refunded.
"We recognize this will be a very challenging year and do not expect any quick turnarounds in our pricing," Rice continued. "Consumers are certainly delaying their purchase decisions, but as they get closer to their vacations, they appreciate a great value and are buying cruises."
The company also disclosed that its core Caribbean products are seeing stronger demand than its premium seasonal products such as Europe and Alaska. Onboard revenue, which until the fourth quarter of 2008 had remained resilient, has also been reduced in the company's guidance.
The company continues to successfully expand the proportion of its business that comes from outside the United States, which also makes currency issues more relevant to the company's results.
Expense Guidance
The Net Cruise Costs excluding bunker per APCD guidance of down 5% - 7% that the company is providing today is significantly better than its previously announced 2009 expense targets. In addition to the $125 million of general and administrative expense reductions that were announced in July, a number of new initiatives including targeting vendor synergies and the capturing of deflationary opportunities have been implemented.
Fuel Expense
The company does not forecast fuel prices and its cost calculation for fuel is based on current at-the-pump prices net of any hedging impacts. Based on today's fuel prices, the company has included $580 million in fuel expenses in its full year 2009 guidance. This figure is $55 million, or $0.26 per share, lower than its previous calculation. The company is currently 58% hedged for the first quarter of 2009 and 47% hedged for the full year.
Earnings Guidance
The level of volatility in commodity prices, exchange rates and other economic factors makes forecasting even more difficult than usual. Accordingly, the range of outcomes is broader than usual and instead of providing a larger range, the company is providing a single mid-point figure.
On the basis of the factors and assumptions described above, the company expects 2009 earnings per share of approximately $1.40.
First Quarter 2009 Full Year 2009
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Fuel Consumption 300,000 mt 1,265,000 mt
Fuel Expenses $165 Million $580 Million
Percent Hedged (forward consumption) 58% 47%
Impact of $10 Change in WTI/Barrel $8 Million $46 Million
As noted previously, historically the company's price at-the-pump has correlated well with WTI, but over the past few quarters fluctuations in this relationship have caused volatility in these estimations.
Guidance Summary
The company provided the following estimates for the first quarter and full year 2009. Except for earnings per share, all estimates are as compared to the first quarter and full year 2008, respectively.
First Quarter 2009 Full Year 2009
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Earnings Per Share ($0.30) - ($0.35) Around $1.40
Capacity 6.9% 6.7%
Net Yields (14%) - (16%) (9%) - (13%)
Net Cruise Costs per APCD (4%) - (6%) (7%) - (9%)
Net Cruise Costs per APCD,
excluding Fuel (5%) - (7%) (5%) - (7%)
Depreciation and Amortization $135 to $140 Million $543 to $563
Million
Interest Expense $77 to $81 Million $320 to $340 Million
In summarizing the company's outlook Fain added, "Obviously, we are very disappointed at the outlook for 2009, but we are confident that with continued focus on our product delivery and cost control, combined with the steps we have taken to strengthen our liquidity and finance our order book, we are well positioned to weather these tough economic conditions and prosper when the recovery begins."
Liquidity and Financing Arrangements
As of December 31, 2008, liquidity was $ 1.0 billion, including cash and the undrawn portion of the company's unsecured revolving credit facility. The company's liquidity is consistent with historical levels for the end of the year.
Capital Expenditures and Capacity Guidance
Based on current ship orders, projected capital expenditures for 2009, 2010, 2011 and 2012, estimates are $2.1 billion, $2.2 billion, $1.0 billion, and $1.0 billion, respectively.
Projected capacity increases for the same four years are estimated at 6.7%, 12.9%, 7.1%, and 3.0%, respectively.
Conference Call Scheduled
The company has scheduled a conference call at 10 a.m. Eastern Standard Time today to discuss its earnings. This call can be heard, either live or on a delayed basis, on the company's investor relations web site at www.rclinvestor.com.
Terminology
Available Passenger Cruise Days ("APCD")
APCDs are our measurement of capacity and represent double occupancy per cabin multiplied by the number of cruise days for the period.
Gross Cruise Costs
Gross Cruise Costs represent the sum of total cruise operating expenses plus marketing, selling and administrative expenses.
Gross Yields
Gross Yields represent total revenues per APCD.
Net Cruise Costs
Net Cruise Costs represent Gross Cruise Costs excluding commissions, transportation and other expenses and onboard and other expenses. In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Costs to be the most relevant indicator of our performance. We have not provided a quantitative reconciliation of projected Gross Cruise Costs to projected Net Cruise Costs due to the significant uncertainty in projecting the costs deducted to arrive at this measure. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful.
Net Debt-to-Capital
Net Debt-to-Capital is a ratio which represents total long-term debt, including current portion of long-term debt, less cash and cash equivalents ("Net Debt") divided by the sum of Net Debt and total shareholders' equity. We believe Net Debt and Net Debt-to-Capital, along with total long-term debt and shareholders' equity are useful measures of our capital structure.
Net Revenues
Net Revenues represent total revenues less commissions, transportation and other expenses and onboard and other expenses.
Net Yields
Net Yields represent Net Revenues per APCD. We utilize Net Revenues and Net Yields to manage our business on a day-to-day basis as we believe that it is the most relevant measure of our pricing performance because it reflects the cruise revenues earned by us net of our most significant variable costs, which are commissions, transportation and other expenses and onboard and other expenses. We have not provided a quantitative reconciliation of projected Gross Yields to projected Net Yields due to the significant uncertainty in projecting the costs deducted to arrive at this measure. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful.
Occupancy
Occupancy, in accordance with cruise vacation industry practice, is calculated by dividing Passenger Cruise Days by APCD. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.
Passenger Cruise Days
Passenger Cruise Days represent the number of passengers carried for the period multiplied by the number of days of their respective cruises.
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