Royal Caribbean Cruises Ltd. - Q3 2009 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2009. Royal Caribbean Cruises Ltd. operates five cruise brands: Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises, and CDF Croisières de France. The company operates in a challenging global economic environment, facing pressure on ticket pricing and demand, particularly in the Spanish market and for itineraries to Mexico and the Caribbean due to the H1N1 virus.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total Revenues | $1,763,542 | $2,063,389 | $4,438,159 | $5,076,248 |
| Net Income | $230,392 | $411,887 | $159,068 | $572,243 |
| Diluted EPS | $1.07 | $1.92 | $0.74 | $2.67 |
| Operating Income | $306,841 | $461,907 | $406,156 | $768,425 |
| Operating Margin | 17.4% | 22.4% | 9.2% | 15.1% |
| Cash & Equivalents | $285,863 | $301,963 (Q3 2008) | $285,863 (Sep 30) | $402,878 (Dec 31) |
| Total Debt | $7,296,050 | $7,011,403 (Dec 31) | $7,296,050 | $7,011,403 |
| Net Debt-to-Capital | 48.5% | 49.3% (Dec 31) | 48.5% | 49.3% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 14.5% in Q3 2009 compared to Q3 2008, driven primarily by lower ticket prices (discounting) and reduced onboard spending. Net Yields decreased 16.5%.
- Cost Management: Total cruise operating expenses decreased 12.5% in Q3 2009. Fuel expenses dropped significantly (31.3% per metric ton decrease) due to lower market prices. Net Cruise Costs per Available Passenger Cruise Day (APCD) decreased 10.0%.
- Profitability: Net income fell 44% in Q3 2009 ($230.4M vs $411.9M) and 72% for the nine-month period ($159.1M vs $572.2M) due to revenue compression and one-time gains in the prior year.
- Asset Sales: The company sold the Celebrity Galaxy to TUI Cruises in March 2009 and Oceanic in April 2009. The Atlantic Star was classified as held for sale with a $7.1M impairment charge recognized in Q3.
- Debt Activity: In July 2009, the company issued $300M in senior unsecured notes and drew $524.5M to finance the Celebrity Equinox. In October 2009, it drew $840M and €159.4M to finance the Oasis of the Seas.
Guidance, Outlook, and Risks
- Q4 2009 Outlook: Management expects Net Yields to decrease 7-8% vs. 2008. Net Cruise Costs per APCD are expected to decrease ~10%. A loss per share of approximately $0.05 is expected for Q4 2009, assuming current fuel prices.
- Full Year 2009 Outlook: Net Yields expected to decrease ~14% vs. 2008. Full-year EPS is expected to be approximately $0.70.
- 2010 Outlook: Management affirmed expectations for year-over-year improvements in Net Yields in Q1 and for the full year 2010. Net Cruise Costs per APCD (excluding fuel) are anticipated to be flat.
- Key Risks:
- Economic Downturn: Continued pressure on demand and pricing power.
- Credit Ratings: Ratings were downgraded to BB- (S&P) and Ba3 (Moody's) with negative outlooks, potentially increasing financing costs.
- Litigation: Significant pending lawsuits include a $100M+ counterclaim from Rolls Royce regarding propulsion systems, class actions regarding shipboard art sales (Park West), and crew wage/gratuity disputes.
- Capital Expenditures: Significant commitments remain for five ships on order totaling approximately $5.8 billion.
Investor Verification Checklist
- Fuel Hedging Effectiveness: Verify the extent of fuel price hedging (approx. 40% for Q4) and the sensitivity of expenses to future price fluctuations.
- Debt Covenant Compliance: Confirm continued compliance with net worth ($7.3B actual vs $5.2B min) and net debt-to-capital (49.0% actual vs 62.5% max) covenants.
- Litigation Exposure: Monitor the status of the Rolls Royce counterclaim and the Park West art auction class actions, as potential damages are significant.
- Ship Delivery Schedule: Track the delivery and financing of the Oasis of the Seas (delivered Oct 2009) and subsequent vessels to ensure capital expenditure plans align with cash flow.
- Occupancy Trends: Verify if occupancy rates (105.4% in Q3) can be maintained despite aggressive discounting strategies.