Business Context and Reporting Period
Company: Royal Caribbean Cruises Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: The Company operates four cruise brands: Royal Caribbean International, Celebrity Cruises, Pullmantur Cruises, and Azamara Cruises. The reporting period includes the results of the Pullmantur acquisition (completed November 2006) on a two-month lag basis. The Company operates in a seasonal environment with peak demand during summer months.
Key Financial Metrics
| Metric (in thousands) | Q2 2007 | Q2 2006 | 6 Months 2007 | 6 Months 2006 |
|---|---|---|---|---|
| Total Revenues | $1,481,325 | $1,292,984 | $2,704,451 | $2,439,520 |
| Operating Income | $200,883 | $184,244 | $280,526 | $325,295 |
| Net Income | $128,745 | $122,427 | $137,570 | $241,926 |
| Diluted EPS | $0.60 | $0.57 | $0.64 | $1.12 |
| Operating Cash Flow (6 Mo) | $823,146 (2007) vs $683,719 (2006) | |||
| Net Debt-to-Capital | 47.3% (as of June 30, 2007) | |||
| Cash and Equivalents | $212,365 (as of June 30, 2007) |
Key Operational Metrics (Q2 2007):
- Capacity (APCD): Increased 12.4% year-over-year.
- Occupancy: 106.0% (down from 106.9% in Q2 2006).
- Gross Yields: $245.17 per APCD (up 1.9% year-over-year).
- Net Yields: $183.80 per APCD (up 0.9% year-over-year).
Material Changes vs. Prior Period
Revenue Growth: Total revenues increased 14.6% in Q2 2007 compared to Q2 2006, driven primarily by a 12.4% increase in capacity (due to the Pullmantur acquisition and new ship deliveries) and a 1.9% increase in Gross Yields.
Profitability:
- Quarterly: Net income rose 5.2% to $128.7 million, despite higher operating expenses.
- Six-Month: Net income decreased significantly to $137.6 million from $241.9 million in the prior year. This decline is largely attributed to a one-time gain of $36.0 million recorded in 2006 from a settlement regarding Mermaid pod-propulsion system failures, which did not recur in 2007.
Expenses:
- Fuel: Fuel expenses decreased 3.6% per metric ton in Q2 2007 compared to 2006, though total fuel costs rose due to volume.
- Depreciation: Increased 19.3% in Q2 2007 due to the addition of the Pullmantur fleet and new ships (Freedom of the Seas, Liberty of the Seas).
- Interest: Gross interest expense increased due to higher average debt levels and rates.
Guidance, Outlook, and Risks
Full Year 2007 Guidance:
- EPS: Expected to be in the range of $2.75 to $2.85.
- Net Yields: Expected to increase 2% to 3% compared to 2006.
- Net Cruise Costs: Expected to increase approximately 5% compared to 2006.
- Capacity: Expected to increase 12.0%.
- Depreciation & Amortization: $490.0 million to $500.0 million.
- Interest Expense: $330.0 million to $340.0 million.
Third Quarter 2007 Guidance:
- EPS: Expected to be in the range of $1.75 to $1.80.
- Net Cruise Costs: Expected to increase 5% to 6% compared to 2006.
Unusual Items and Risks:
- Ship Cancellations: In July 2007, Celebrity Cruises cancelled two sailings due to propeller damage on the Millennium, expected to negatively impact earnings by approximately $0.14 per share.
- Fuel Hedging: The Company is 53% hedged for the remainder of 2007. A 10% change in fuel prices would result in a $12.0 million change in costs for the second half of 2007.
- Capital Expenditures: Anticipated aggregate cost of seven ships on order is approximately $6.9 billion. Total capital expenditures for 2007 are projected at $1.3 billion.
- Litigation: Ongoing proceedings include a class action regarding crew gratuities (dismissed but under appeal for rehearing), intellectual property infringement claims, and a Legionnaires' disease lawsuit (retrial awarded $15.0 million, total award approx. $25.0 million, subject to appeal).
Investor Verification Checklist
- One-Time Gains: Verify the impact of the $36.0 million 2006 litigation settlement on year-over-year net income comparisons.
- Fuel Price Sensitivity: Monitor fuel price fluctuations given the Company's exposure and current hedging levels (53% for remainder of 2007).
- Debt Structure: Review the recent issuance of €1.0 billion senior notes and the amendment of the revolving credit facility (increased to $1.2 billion).
- Capital Commitments: Assess the $6.9 billion commitment for seven ships on order and the associated cash flow requirements.
- Operational Disruptions: Track the financial impact of the Millennium propeller damage and any future ship cancellations or drydock schedules.
- Acquisition Integration: Evaluate the performance contribution of the Pullmantur acquisition, which is reported on a two-month lag.