Business Context and Reporting Period
Company: Royal Caribbean Cruises Ltd.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: The Company is the world's second-largest cruise operator, managing five brands (Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises, and CDF Croisières de France) with 38 ships and approximately 78,650 berths as of year-end 2008. The Company operates globally, serving contemporary, premium, and deluxe market segments.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $6,532.5 million | $6,149.1 million |
| Operating Income | $832.0 million | $901.3 million |
| Net Income | $573.7 million | $603.4 million |
| Diluted EPS | $2.68 | $2.82 |
| Operating Cash Flow | $1,071.3 million | $1,268.7 million |
| Total Debt | $7,011.4 million | $5,698.3 million |
| Cash and Equivalents | $402.9 million | $230.8 million |
| Liquidity (Cash + Undrawn Credit) | $1.0 billion | N/A |
| Net Debt-to-Capital Ratio | 49.3% | 44.7% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6.2% to $6.5 billion, driven primarily by a 5.2% increase in capacity (new ships) and a 1.0% increase in Gross Yields. However, Net Yields only increased 0.5% due to lower onboard spending per passenger.
- Profitability Decline: Net income decreased 4.9% to $573.7 million. Operating income fell 7.7% to $832.0 million.
- Cost Pressures: Fuel expenses increased 25.7% per Available Passenger Cruise Day (APCD) due to rising fuel prices. Total cruise operating expenses rose 10.6% to $4.4 billion.
- Balance Sheet: Total debt increased by $1.3 billion to $7.0 billion, primarily due to financing for new ship deliveries (Independence of the Seas and Celebrity Solstice). The Net Debt-to-Capital ratio increased from 44.7% to 49.3%.
- Dividends: The Company discontinued its quarterly dividend commencing in the fourth quarter of 2008 to preserve liquidity.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management cited a "dramatic change" in the operating environment due to the worldwide economic downturn and credit market disruption. Forward bookings were lagging, and consumer confidence had deteriorated.
- 2009 Guidance (Announced Jan 29, 2009):
- Net Yields: Expected to decrease 9% to 13% compared to 2008.
- Net Cruise Costs: Expected to decrease 7% to 9% per APCD (excluding fuel, expected decrease is 5% to 7%).
- Capacity: Expected to increase 6.7% in 2009.
- Earnings: Full-year 2009 EPS expected to be around $1.40 (assuming fuel prices remain at Jan 29, 2009 levels). First-quarter 2009 loss per share expected in the range of $0.30 to $0.35.
Risks and Contingencies
- Financing Risk: Credit ratings were downgraded by S&P (to BB) and Moody's (to Ba2) in 2008. The Company faces uncertainty in securing financing for two Oasis-class ships on order, though government guarantees are in place.
- Legal Proceedings:
- Rolls Royce: Pending lawsuit regarding pod-propulsion failures; Rolls Royce counterclaimed for over $100 million. Outcome uncertain.
- Intellectual Property: Class action regarding copyright infringement on ship performances; impact not estimable.
- Antitrust: Florida Attorney General investigating fuel supplement pricing practices.
- Operational Risks: Exposure to fuel price volatility (11.1% of revenue in 2008), foreign exchange fluctuations (ship construction costs in Euros), and potential shipyard financial difficulties.
Investor Verification Checklist
- Financing Status: Verify the status of committed financing for the Oasis of the Seas and Allure of the Seas given the credit market disruption and rating downgrades.
- Cost Reduction Execution: Monitor the realization of the $125 million annual cost savings initiative and the impact of the 400 shore-side position reductions.
- Fuel Hedging: Review the effectiveness of fuel swap agreements and the impact of spot fuel price volatility on 2009 margins.
- Legal Exposure: Track developments in the Rolls Royce litigation and the Florida Attorney General's antitrust investigation.
- Liquidity Position: Monitor the utilization of the $1.2 billion revolving credit facility and the ability to meet the $2.6 billion in contractual obligations due in 2009.