Royal Caribbean 2007 Q2 Results

Royal Caribbean Cruises (RCC) has reported net income of $128.7 million, or $0.60 per share, on revenues of $1.5 billion for the second quarter, ended June 30, 2007, compared to net income of $122.4 million, or $0.57 per share, on revenues of $1.3 billion for the same period last year. Q2 earnings were in line with the company’s guidance range of $0.58 to $0.63.

Adjust e d Year-End Guidance

RCC adjusted its full year guidance, reflecting the impact of higher fuel prices and the cancellation of two Millennium cruises due to technical problems. Full year 2007 earnings are expected to be in the range from $2.75 to $2.85 per share, compared to the previous guidance of $3.05 to $3.20. For 2006, actual earnings were $2.94 per share and $3.26 for 2005.

The business environment has stabilized, according to Chairman and CEO Richard Fain, who said that is a sign of improvement as he looks further out. ‘The forward looking signs are much more encouraging,” he said..

Fain also noted the positive effect of RCC’s fuel consumption savings, and while fuel costs are still painful, he said that they are less than previously expected, mitigated by the company’s efforts. By the end of 2008, all the ships that have gas turbine power plants only, will also have a diesel engine installed. RCC will have a 14 percent capacity increase in 2007, driven by Pullmantur Cruises, the April delivery of the Liberty of the Seas to Royal Caribbean International and the full year operation of the Freedom of the Seas.


“Overall we feel slightly better about the trading environment than we did a year ago,” said Brian Rice, executive vice president and CFO, adding that the first quarter looks much stronger than this year’s first quarter. According to RCC, bookings are up significantly for Q l year-over-year, with pricing also being up, but not as dramatically.

“We expect a positive booking environment for 2008, although beyond QI, however, there is not much visibility,” Rice said.

And Pullmantur does not have much of its 08 inventory open for bookings yet.

By Brand

For Royal Caribbean, President Adam Goldstein reported in the company’s Q2 earnings call that Q3 is virtually sold out.

“We are seeing late strength in the Caribbean short market,” Goldstein added, “and the seven-day market has strengthened in recent months.”

Dan Hamahan, president of Celebrity Cruises and Azamara Cruises, said Celebrity is doing particularly well in Europe and that Alaska is good too, but not as strong as Europe.

“We are pleased with the pricing (in Alaska),” Hamahan said. “It is a fairly solid season, but not as high as we would like. I believe there may be some
impact from the head tax.”

In more general terms about Celebrity, Hamahan said: “We are moving in the right direction – both on the cost-side and the earnings-side.”

Hamahan added that the trade response to Azamara has been very good.

Azamara was launched with one ship this spring and will receive a second vessel in the fall (both transferred from Pullrnantur), but there are no immediate plans to grow the brand beyond the two ships, Hamahan said. “Our first goal is to optimize the brand before we consider expansion.”

If newbuildings were part of Azamara’s future, Hamahan said that he sees no reason why they cannot be built in Asia, although because of the workload at Asian yards, deliveries cannot be expected before 2012.

Responding to analysts’ questions, Hamahan also said that the costs to establish the Azamara brand have been very small, as it is being run with the same organization and operating team as Celebrity and the marketing costs have been absorbed within Celebrity’s existing budget.

Pullrnantur, which was acquired by RCC last year, is reported with a two month lag, according to Rice, who noted that February, March and April were also among the brand’s weakest months. In addition, the tour division has had wider losses than expected, Rice said.

For Q3, however, RCC expects Pullmantur to be accretive to earnings. However, Rice pointed out that Pullrnantur is not very material to RCC’s overall performance, representing about 7 percent of total capacity.

Q3 and 4

The quarter is heavily booked and close to being wrapped up, according to Rice.

Including Pullrnantur, RCC will have a 13.2 percent capacity increase year-over-year in Q3, and 4.9 percent without the Spanish brand.

RCC’s earnings guidance for Q3 is from $1.75 to $1.80, including the cancellation of two cruises on the Millennium, which will have a negative impact of $0.14 per share. Actual earnings per share for Q3 last year was $1. 63 and $1. 64 the year before.

For the fourth quarter, Rice said that load factors are consistent with last year, while pricing is up significantly, according to a company presentation, which did give actual prices, but showed directional movement.

Growth Course

“We will continue to build up our non-American brand(s) aggressively,” said Fain.

While the two Pullrnantur ships were transferred to Azarnara, Pullrnantur will instead receive three larger ships from Celebrity and Royal Caribbean, respectively, as well as one purchased from P&O Australia.

For the overall company, Fain said: “You will continue to see modest growth as long as we get the returns.”

Fain also said that RCC will consider more acquisitions “under the right circumstances,” but that there are few candidates left. It is a question of reward and risk, he said.

Following a 12 percent capacity increase in 2007 {including Pullmantur), RCC will boost its passenger capacity another 9.5 percent in 2008; 7.7 percent in 2009; 11.5 percent in 2010; and 5.8 percent in 2011, going from 25.l million available passenger cruise days in 2007 to 34.9 million in 2011, a 39 percent increase over four years. One of the strengths of the industry is that it can move ships around, according to Fain.

Deployment Changes

Goldstein noted deployment changes at Royal Caribbean for 2008: 54 percent of the brand’s capacity will be in the Caribbean, compared to 61 percent this year; 18 percent will be in Europe, compared to 16 percent this year (in absolute terms, capacity will be up 22 percent in Europe year-over-year, Goldstein said); and 5 percent will be deployed in Latin America, South America and Asia, compared to 1 percent this year.


Onboard spending was up significantly year-over-year at $64.70 per passenger per day in Q2 2007, compared to $59 .17 last year.

Ticket prices were up slightly at $166.61 per passenger per day in 2007, compared to $165.81 in 2006.

At press time, the combination of the second biggest market-drop this year and RCC’s adjusted guidance contributed to send the stock lower.

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