RCL

Royal Caribbean Cruises Ltd. - Q2 2009 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Royal Caribbean Cruises Ltd. for the period ended June 30, 2009. The company operates five cruise brands: Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises, and CDF Croisières de France. The reporting period reflects the impact of a worldwide economic downturn, the H1N1 virus affecting demand for Mexico itineraries, and a stronger U.S. dollar against major currencies.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 14.8% in Q2 2009 compared to Q2 2008. This was driven by a 17.9% decrease in Net Yields due to lower ticket prices, reduced onboard spending, and a slight decrease in occupancy (102.3% vs 104.0%).
• Cost Reductions: Total cruise operating expenses decreased 11.5% to $965.4 million. Fuel expenses dropped significantly (22.5% per metric ton) due to lower market prices. Marketing expenses also declined by 3.0% due to cost-saving initiatives.
• Net Loss: The company reported a net loss of $35.1 million for the quarter, a reversal from the $84.7 million net income in the prior year quarter. This was exacerbated by a $16.5 million increase in foreign currency exchange losses.
• Asset Sale: The company sold the ship Celebrity Galaxy to TUI Cruises for approximately $315.0 million (deferred gain of $35.9 million), which reduced capital expenditures and impacted capacity.

Guidance, Outlook, and Risks

• Q3 2009 Outlook: Management expects Net Yields to decrease approximately 18% and Net Cruise Costs per APCD to decrease 11% compared to 2008. Earnings per share are projected in the range of $0.95 to $1.00, assuming fuel prices remain at current levels.
• Full Year 2009 Outlook: Net Yields are expected to decrease 14%. Full-year EPS is projected in the range of $0.70 to $0.80. Capacity is expected to increase 5.2% driven by new ship deliveries (Celebrity Equinox and Oasis of the Seas).
• Capital Expenditures: Anticipated capital expenditures are $2.1 billion for 2009, including six ships on order with an aggregate cost of $6.5 billion.
• Risks and Contingencies:
  • Credit Ratings: Senior debt ratings are BB- (S&P) and Ba3 (Moody's), both with negative outlooks. Further downgrades could increase financing costs or trigger collateral requirements on derivatives.
  • Litigation: Significant pending litigation includes a lawsuit against Rolls Royce regarding propulsion system failures (counterclaim >$100 million) and class actions regarding shipboard art sales (Park West Galleries).
  • Market Conditions: Continued economic downturn, fuel price volatility, and foreign exchange fluctuations remain key risks.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with minimum net worth ($7.1B actual vs $5.1B required) and fixed charge coverage ratios (20.38x actual vs 1.25x required).
• Fuel Hedging: Confirm the effectiveness of fuel swap agreements, which hedge approximately 50% of 2009 fuel requirements, given the sensitivity of earnings to fuel price changes.
• Ship Deliveries: Monitor the timely delivery and financing of Oasis of the Seas (Q4 2009) and Celebrity Equinox (Q3 2009), which are critical to the capacity growth assumptions.
• Litigation Exposure: Track the status of the Rolls Royce counterclaim and the Park West art auction lawsuits, as outcomes could result in significant, unquantified liabilities.
• Dividend Policy: Note that quarterly dividends were discontinued in Q4 2008; verify if this policy remains in effect for the remainder of 2009.