Royal Caribbean Cruises today announced net income for the first quarter 2007 of $8.8 million, or $0.04 per share compared to earlier guidance of $0.03 to $0.08 per share. The company also reaffirmed its full year 2007 earnings per share guidance of $3.05 to $3.20.
Pullmantur Impact
As the company had anticipated, the acquisition of Pullmantur and other timing changes caused significant changes in the seasonality of company earnings. These changes make comparisons between individual quarters less meaningful (especially for the first year of the acquisition) but have little impact on the profitability of the year as a whole. In particular, Pullmantur’s business is highly seasonal with very strong summer months but very weak winter months.
In addition, the company is including Pullmantur results on a two month lag. Together, these changes significantly diminished the company’s reported earnings in the first quarter, and are expected to do so again in the second quarter, but are expected to commensurately improve earnings in the third and fourth quarters. Pullmantur’s Tour Division adds revenues and costs without any corresponding capacity, and, as such, inflates Yeild and Net Cruise Cost figures.
Weaker Revenues Offset By Lower Costs
The demand environment, especially in the Caribbean, has been weaker than expected. At the same time, cost control has been good, offsetting the revenue decline.
First quarter 2007 Net Yields on a comparable basis (i.e. excluding Pullmantur) decreased 4.2%, which was below guidance of down 2% to 3%. Commenting on the revenue environment, Richard D. Fain, chairman and chief executive officer said, “After a strong Fall performance, close-in bookings in the first quarter required more aggressive price promotions than we experienced throughout the last year.”
Fain continued, “On the other hand, cost performance was better than our prior guidance due to cost control initiatives.” Net Cruise Costs per APCD, on a comparable basis and excluding fuel, increased 2.5% for the quarter versus previous guidance of an increase around 4%. Including fuel, these costs increased 1.5%. Previous guidance was for an increase of 2% to 3%. Fuel costs per APCD decreased 2.8% year-over-year, with “at-the-pump” fuel prices averaging $372 per metric ton for the first quarter 2007, compared to the previously assumed figure of $361 per metric ton and $417 per metric ton in the first quarter 2006.
“We continued several key strategic initiatives, including the revitalization of Majesty of the Seas, enhancing our international sales and marketing infrastructure, and expanding our fleet further into Europe and Latin America, while prudently finding ways to control our costs,” Fain said.
Including Pullmantur, the company’s Net Yields decreased 3.4% and Net Cruise Costs increased 5.4%. Pullmantur’s cruise division performed consistently with previous guidance, while the tour division generated higher revenue and higher expenses than previous guidance; however the net impact of these differences was immaterial.
For the first quarter 2006, the company reported net income of $119.5 million, or $0.55 per share, which included a net gain of $36 million, or $0.16 per share, related to the partial settlement of a lawsuit. Revenues for the first quarter 2007 increased to $1.2 billion from revenues of $1.1 billion in the first quarter 2006.
Outlook For The Rest Of The Year
The softer Caribbean pricing environment continues through the Spring, and is of a somewhat greater magnitude than forecasted back in February. However, the revenue picture for the balance of the year appears more encouraging. Although it is too early to provide specific predictions for the upcoming Fall/Winter season, load factors and pricing are both ahead of same time last year for the fourth quarter and into the first quarter of 2008.
Fortunately, the company’s cost control efforts have been more successful than forecasted, offsetting the revenue deterioration through reductions in operating and other expenses.
Fain continued, “While we are disappointed that the revenue environment is more challenging than anticipated, I am very proud of the way our management team is mitigating the effect through improvements in efficiency. I am particularly pleased that we expect to reduce unit costs while still moving forward with some very important strategic initiatives. These efforts have allowed us to maintain our previous guidance despite lower revenues and higher fuel prices.”
