Business Context and Reporting Period
Company: Royal Caribbean Cruises Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A global cruise company operating five brands (Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises, and CDF Croisières de France). The company operates in a seasonal environment with peak demand in Northern Hemisphere summer months. As of the filing date, the company faced a challenging economic environment characterized by credit market turmoil and reduced consumer confidence, leading to slowed new bookings in September 2008.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Total Revenues | $2,063.4 million | $1,953.6 million | $5,076.2 million | $4,658.0 million |
| Operating Income | $461.9 million | $482.8 million | $768.4 million | $763.4 million |
| Net Income | $411.9 million | $395.0 million | $572.2 million | $532.6 million |
| Diluted EPS | $1.92 | $1.84 | $2.67 | $2.49 |
| Operating Cash Flow (9M) | $1,044.8 million (vs. $1,160.1 million in 2007) | |||
| Capital Expenditures (9M) | $1,413.3 million (vs. $1,225.1 million in 2007) | |||
| Cash and Equivalents | $302.0 million (as of Sept 30, 2008) | |||
| Total Debt | $6,028.8 million (as of Sept 30, 2008) | |||
| Net Debt-to-Capital | 44.9% (as of Sept 30, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Q3 2008 revenues increased 5.6% year-over-year, driven by a 4.1% increase in capacity (addition of Independence of the Seas and Ocean Dream) and a 1.4% increase in Gross Yields.
- Fuel Costs: Fuel expenses surged 46.3% per metric ton in Q3 2008 compared to 2007, rising from 7.2% to 10.0% of total revenues. This was the primary driver of increased operating expenses.
- One-Time Gain: Net income for Q3 2008 included a $17.6 million gain from the settlement of a lawsuit against Pentair Water Treatment (OH) Company regarding a 1994 Legionnaires' disease outbreak.
- Restructuring Charges: The company incurred $14.3 million in charges ($0.07 per share) in Q3 2008 related to a cost-saving initiative, including $9.0 million in termination benefits and $5.3 million in contract termination costs.
- Occupancy: Occupancy rates declined slightly to 107.8% in Q3 2008 from 109.1% in Q3 2007, largely due to economic difficulties impacting the Spanish brand, Pullmantur.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Q4 2008 Guidance: Management expects Net Yields to decrease 4% to 5% compared to 2007 due to a stronger US dollar and slowing bookings. Net Cruise Costs per APCD are expected to decrease approximately 3%. Earnings per share are projected to be in the range of $0.05 to $0.10.
- Full Year 2008 Guidance: Net Yields are expected to increase approximately 1%. Full-year diluted EPS is expected to be in the range of $2.73 to $2.78.
- Fuel Supplement Policy: The company announced the elimination of the fuel supplement for new bookings made on or after November 10, 2008, for sailings departing on or after January 1, 2010.
- Liquidity: As of September 30, 2008, liquidity was $1.4 billion (cash plus undrawn credit facility). In October 2008, the company drew an additional $460 million on its revolving credit facility to address global credit market instability.
Risks and Contingencies
- Economic Downturn: Prolonged economic weakness could lead to booking slowdowns and depressed prices.
- Market Disruptions: Instability in global financial markets could impair the ability to obtain financing or cause counterparties to fail on obligations.
- Legal Proceedings: Multiple class actions and arbitrations are pending regarding crew wages, gratuities, and intellectual property. A new lawsuit was filed in October 2008 regarding art sales by a concessionaire (Park West Galleries).
- Capital Commitments: The company has $7.2 billion in aggregate costs for seven ships on order, with significant exposure to Euro exchange rate fluctuations.
Investor Verification Checklist
- Fuel Price Sensitivity: Verify the impact of current "at-the-pump" fuel prices on Q4 and full-year guidance, noting that 55% of Q4 fuel consumption is hedged.
- Booking Trends: Monitor the duration and severity of the booking slowdown mentioned in September 2008 and the effectiveness of price discounting strategies.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the Net Debt-to-Capital ratio limit, given the increased borrowing in October 2008.
- Capital Expenditure Funding: Review the status of financing guarantees for the seven ships on order ($7.2 billion total cost) amidst tight credit markets.
- Legal Exposure: Track the status of the Park West Galleries lawsuit and ongoing crew wage arbitrations for potential material financial impact.