RCL

Business Context and Reporting Period

Company: Royal Caribbean Cruises Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2005
Business Overview: The company operates two cruise brands, Royal Caribbean International and Celebrity Cruises. Revenues are seasonal, with peak demand occurring during summer months.

Key Financial Metrics

Operational Metrics (6 Months 2005):

• Passengers Carried: 1,699,356
• Occupancy: 106.3%
• Net Yields: $167.73 per APCD (Available Passenger Cruise Day)
• Net Cruise Costs per APCD: $110.79

Material Changes vs. Prior Period

Revenue Growth: Total revenues increased 5.3% in Q2 2005 and 7.6% for the first six months of 2005 compared to the prior year. This was driven by higher cruise ticket prices, increased onboard spending, and a 1.5% capacity increase (partially offset by a ship lengthening project).

Profitability: Net income rose 26.5% in Q2 and 33.0% for the six-month period. Operating margins improved from 17.0% to 17.7% in Q2 and from 16.1% to 17.4% for the six months.

Cost Pressures: Net Cruise Costs per APCD increased 5.7% in Q2 and 5.8% for the six months. Approximately 4.1 percentage points of the Q2 increase and 3.3 percentage points of the six-month increase were attributed to rising fuel prices (up 38% in Q2 and 32% for six months year-over-year).

Debt Reduction: The company repaid approximately $900.5 million of long-term debt during the first six months of 2005. Interest expense decreased due to lower average debt levels, partially offset by higher interest rates.

Guidance, Outlook, and Risks

2005 Outlook:

• Net Yields: Expected to increase 6% to 7% for the full year 2005.
• Net Cruise Costs: Expected to increase 6% to 7% for the full year, with fuel costs accounting for approximately 4 percentage points of this increase.
• Earnings Per Share: Full year 2005 EPS estimated at $2.70 to $2.80. Q3 2005 EPS estimated at $1.45 to $1.50.
• Depreciation & Interest: Depreciation expected at $405M-$415M; Net interest expense at $285M-$295M.

Subsequent Events & Capital Actions:

• First Choice Redemption: Received $348.0 million cash from redemption of convertible preferred shares, resulting in a $44.2 million foreign exchange gain.
• Share Repurchase: Plans to repurchase up to $250 million of common stock following the redemption of Liquid Yield Option Notes (LYONs).
• New Ship Order: Signed a letter of intent for a new Celebrity Cruises ship (delivery 2008), increasing 2008 capital expenditure estimates to $1.6 billion.

Risks and Contingencies:

• Fuel Volatility: Fuel costs remain the most significant variable impacting costs; prices are currently ~30% higher than the second half of 2004.
• Litigation: Two class-action lawsuits filed in 2005 regarding cabin steward gratuities and shore excursion profits. Impact cannot be estimated, but management intends to vigorously defend.
• Shareholder Concentration: If principal shareholders (A.Wilhelmsen AS and Cruise Associates) reduce ownership below specified thresholds, the company may be forced to prepay indebtedness.
• Foreign Exchange: Over 90% of the cost of the new Celebrity ship order is exposed to euro exchange rate fluctuations.

Investor Verification Checklist

• Fuel Hedging Effectiveness: Verify the extent of fuel swap agreements and their ability to mitigate the 30-38% rise in spot fuel prices.
• Capital Expenditure Schedule: Confirm the funding sources for the $2.5 billion in Freedom-class ships and the new Celebrity ship order, given the high exposure to the euro.
• Debt Covenant Compliance: Review the impact of the First Choice redemption and share repurchase program on fixed charge coverage ratios and debt-to-capital covenants.
• Litigation Exposure: Monitor the status of the cabin steward and shore excursion lawsuits for potential material financial impact.
• Shareholder Structure: Track the ownership percentages of A.Wilhelmsen AS and Cruise Associates to assess prepayment risk on credit facilities.