Royal Caribbean 2005 Q1 Results

Royal Caribbean Cruises (RCC) has reported net income of 135.3 million, or $0.63 per share, on revenues of $1.2 billion for the first quarter ended March 31, 2005, compared to net income of $95.8 million, or $0.47, on revenues of $1.1 billion for the same period last year.

RCC attributed the results to higher prices, better occupancy and onboard spending. In addition., the results were boosted by deferred marketing expenses because of what RCC called “excellent bookings during the beginning of the year,” offset by higher than expected payroll and benefit expenses and a cancelled 10-day Hawaiian cruise.

Ticket revenues were up 10.4 percent compared to Q1 04 and onboard revenues were up 8.9 percent, while the occupancy grew to 105.7 percent from 104.2 percent a year ago with capacity up 3.3 percent.

“We are not in the recovery stage anymore,” commented RCC Chairman and CEO Richard Fain, “but in a more normalized environment.

“The booking trends remain strong, with pricing up 6 percent to 7 percent, and we now have 10 percent fewer cabins to sell than we did this time last year.” 

RCC’s revised its earnings guidance per share for the year, however, to $2.65 to $2.85 from prior guidance of $2.70 to $2.90.

The only drawback, according to Fain, is the unpredictable cost of fuel, but “not so great as to change the fundamentals of the business,” he said. At press time, RCC traded at $41.85 compared to a 52-week low/high of $55.47 – $37.80. The 12-month price target ranges from $44 to $65.

2005 Deployment

Fain said that RCC is seeing strongest earnings improvements in its seasonal deployments – in Alaska and Europe.

In 2005, RCC will have 11 percent of the capacity of its two brands, Royal Caribbean International and Celebrity Cruises, in Europe and 7 percent in Alaska, the same as last year, according to a company presentation.

RCC will have 62 percent of its capacity in the Caribbean compared to 64 percent in 2004; 4 percent in Bermuda – the same as last year; and 16 percent in other markets, compared to 17 percent last year.

Fuel Cost

Fuel costs were a recurring theme during RCC’ s quarterly earnings call and are expected to be up $64 million in 2005, partially due to price increases but also due to ship deployments and capacity increases, representing 6 to 7 percent of revenues.

According to Luis Leon, executive vice president and CFO, the company has been able to reduce fuel consumption by 2 percent in Q1 by using less expensive fuel and operating more efficiently, such as running one gas turbine instead of two and by turning off lights in areas that are not in use. Net costs are expected to be up 5 percent over 2004, according to Leon, who would not speculate on future fuel costs.

Favorable Demand Environment Also commenting on the results, Adam Goldstein, who was recently appointed president of Royal Caribbean, said that the demand environment was very favorable, while his focus is to identify opportunities that will allow the brand to operate more efficiently.

He said he continues to see positive occupancy and pricing development for the remainder of 2005. Goldstein outlined a series of milestone events coming up, including the stretching of the Enchantment of the Seas; the summer program targeted primarily to British guests with the Legend of the Seas sailing out of Southampton; and the May release of more detailed information about the features of the new Freedom of the Seas.

At Celebrity, newly appointed President Dan Hanrahan noted that he was very pleased with the brand’s results in South America and is considering lengthening the season. Fuel is also a consideration both for South America and when planning Celebrity’s new program in Asia, according to Hanrahan, who said the brand is “careful to optimize fuel usage.” RCC has also instituted a new group policy which Goldstein said would give the brands more control of their inventory and pricing.

He also noted that the Northeast is interested in year-round cruising. “So far, we are very happy with the summer season out of Bayonne, while we are looking for other opportunities,” Goldstein added. Going Forward The two RCC brands will grow their combined capacity by 1.5 percent in 2005 and 2.8 percent in 2006. Anticipated capital expenditures are $400 million in 2005 and $1. l billion in 2006, 2007 and 2008.

Leon also pointed out that RCC’s debt was at $5. l billion – less than 50 percent of debt to capitalization. The goal is to reduce the debt ratio to the mid-40s and achieve a triple-B credit rating.

Leon would not provide any guidance for Q4 except to say it is traditionally the company’s worst quarter and “will probably not be good this year either.”

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