Royal Caribbean Announces 2nd Q Earnings and Major Cost Savings Initiatives

Key Highlights

Second Quarter Net Income of $84.7 million, or $0.40 per share.
Cost savings program expected to save approximately $125 million annually.
Revenue environment remains solid:
Net Yields expected to be up 3% to 4 % for the full year.
Full year 2008 results in line with original expectations except for fuel.
2009 load factors and pricing ahead of same time last year.
At current fuel prices, full year 2008 earnings per share expected to be $2.55 to $2.65, including estimated restructuring-related expenses of $15 million, or $0.07 per share.

Royal Caribbean Cruises Ltd. today announced net income for the second quarter 2008 of $84.7 million, or $0.40 per share, compared to a net income of $128.7 million, or $0.60 per share, for the second quarter 2007.  Net Income for the first six months was $160.3 million or $0.75 per share, compared to net income of $137.6 million, or $0.64 per share, for the same period last year.

Second Quarter Highlights

Key metrics for the second quarter 2008, as compared to the second quarter 2007, were as follows:
Net Yields improved 1.0%.
Net Cruise Costs per APCD increased 6.7%.
Net Cruise Costs excluding fuel, per APCD increased 2.0%.
Fuel prices increased 55%, while fuel costs per APCD increased at a lower rate of 31%, due mainly to fuel initiatives and hedging.

The improvement in Net Yields was consistent with previous guidance for the company’s Royal Caribbean International, Celebrity Cruises and Azamara Cruises brands.  Net Yields were somewhat weaker than expected for the company’s Spanish brand, Pullmantur Cruises, the effect of which was offset by lower than expected general and administrative expenses.

Net Cruise Costs per APCD increased 6.7% versus guidance of an increase of 7% to 8%.  Excluding fuel, Net Cruise Costs per APCD increased 2.0%, versus guidance of an increase of 3% to 4%.  This was driven primarily by lower general and administrative expenses

Cost Savings Program

The company also announced a significant cost savings initiative that is expected to reduce spending by approximately $125 million annually. “Too much of our profitability is being eroded by the increase in fuel prices.  This is unacceptable and we are evaluating everything we do to find ways to do it more efficiently and effectively,” said Richard D. Fain, Chairman and Chief Executive Officer.  “While our brands continue to attract premium prices even in this difficult environment, it is imperative that we find ways to reduce our costs.”

As part of the restructuring, the company announced it is eliminating approximately 400 shore-side positions. In addition, the company announced it had discontinued some non-core operations, including The Scholar Ship, an educational partnership aimed at college students studying aboard cruise ships.  The company expects to incur charges related to this restructuring of approximately $15 million, or $0.07 per share, in the third quarter 2008.

“This is a difficult period for virtually all businesses, but we are determined to improve our operating results through tight cost controls, while preserving our outstanding guest experience and continuing to strongly support our travel agent partners.  We will also continue to make measured strategic investments, especially in growing the international operations of our business,” Fain continued.

In 2009, based on the targeted reductions, selling, general and administrative expenses per APCD are expected to be around the levels that the company incurred in 2004, and Net Cruise Costs excluding fuel, per APCD to be similar to 2007 levels.

“Over the last few years, we have made significant investments to seed our growth in many strategic markets,” said Brian J. Rice, Executive Vice President and Chief Financial Officer. “These costs are now being absorbed by capacity and revenue growth in the emerging markets around the world. In addition, our scale and exceptional brand positioning in North America are enabling us to drive further efficiencies.”

Revenue Environment

Despite the worsening economic environment, the company continues to enjoy healthy demand for its products and its revenue expectations have not changed materially.  The company’s Net Yields improved by 1.0% in the second quarter 2008.  This was lower than the 2% forecast, mainly due to lower yield performance by Pullmantur Cruises, as a result of weaker demand in Spain and a grounding incident involving the Sky Wonder.

The company’s other brands saw Net Yield improvement of approximately 2%, consistent with previous guidance. Close-in demand, booked within 90 days of sailing, continued to show strength and provided year-over-year pricing premiums.  Forward bookings for 2009 are strong, with higher load factors and higher prices in the first quarter and for the full year compared to the same time a year ago.

The company expects Net Yields to increase in a range around 2% for the third quarter 2008; to increase 4% to 5% for the fourth quarter 2008; and to increase 3% to 4% for the full year 2008.

“Although pressure on the consumer persists and there is much uncertainty in the market, demand for our cruises and onboard spending continues to be resilient,” said Rice. “Our yields should improve in all four quarters this year.”


The company expects third quarter 2008 earnings per share, including the restructuring charges, to be $1.65 to $1.70, and to be $2.55 to $2.65 for the full year 2008.  This forecast is virtually unchanged from that provided at the beginning of the year and at the end of the first quarter, except for the direct increase in fuel costs.

Mr. Fain commented that, “We continue to watch with concern both the high oil price and the weakening economy. While we can’t solve high oil prices, we are gratified that, except for the oil price, our business continues to do as well or better than expected despite the economy.

One might have assumed that we would have been impacted by both, but the fact that our business continues to overcome these economic pressures says volumes about its resilience.  We believe this is due to several factors, including the strength of our brands, the success of our newest ships, the value of cruising to the consumer and our growing penetration of new global markets.”

The company provided the following estimates for the third quarter and full year 2008, as compared to the third quarter and full year of 2007, respectively:

                                        Third Quarter 2008                Full Year 2008
Earnings per share                           $1.65 – $1.70                  $2.55 – $2.65        
Capacity                                        3.9%                                 5.0%
Net Yields                                      approx. 2%                      3% – 4%
Net Cruise Costs per APCD                      approx. 10%                      6% – 7%        
Net Cruise Costs per APCD,
   excluding fuel                               1% – 2%                                  approx. 1%
Depreciation & Amortization                 $138 – $143 million                $530 – $540 million
Interest Expense                           $83 – $88 million                 $330 – $340 million

Included in projected third quarter 2008 Net Cruise Costs are the estimated restructuring charges of $15 million, or $0.07 per share.  For the full year 2008, the company expects other income (expense) to be comparable to last year including an $18 million gain from the settlement of a pending lawsuit in the third quarter 2008.

The company does not forecast fuel prices and its cost guidance is based on current at-the-pump prices net of any hedge impacts. Based on current fuel prices, the company has included $772 million in fuel expenses in its full year 2008 guidance.  This figure is $86 million, or $0.40 per share, higher than at the time of its previous earnings guidance.  Assuming the company’s fuel costs correlate with movement in the price of WTI, a $10 change in WTI per barrel, would equate to an $11 million change in the company’s fuel expense for the third quarter and a $20 million change for the full year.

    Third Quarter 2008    Full Year 2008       
Consumption (metric tons in  
  thousands)     312    1,220       
Fuel Expenses     $224 million    $772 million       
Percent Hedged (forward consumption)     44%    50%       
Impact of $10 Change in WTI Price per Barrel     $11 million    $20 million

The company also estimated that at current oil prices, its fuel expense for 2009 would be approximately $890 million net of existing hedges and that a $10 change in the WTI price would change the expense by $59 million or $0.28 per share.

Based on current ship orders, projected capital expenditures for 2008, 2009, 2010, 2011, and 2012, are estimated to be $1.9 billion, $2.0 billion, $2.2 billion, $1.0 billion, and $1.0 billion, respectively.  Projected capacity increases for the same five years are estimated at 5.0%, 6.8%, 12.1%, 7.2%, and 3.0%, respectively.

“Obviously, justifying new ship orders is becoming more and more difficult with a soft economy, weak dollar, and continuing escalation of steel and oil prices,” Fain commented. “We are fortunate to already have an enviable portfolio of new ships on order which enables us to continue growing our business outside of North America.  We are very confident the vessels we will take delivery of in the next few years will provide price premiums, operating efficiencies and rewarding returns, even at today’s high fuel prices.”

As of June 30, 2008, liquidity was $­­­1.3 billion, including $0.4 billion in cash and cash equivalents, and $0.9 billion in available credit on the company’s unsecured revolving credit facility.

The company has scheduled a conference call at 10 a.m. Eastern Daylight Time tomorrow, Tuesday, July 22, 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


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, 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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