RCL

Royal Caribbean Cruises Ltd. - Q1 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008. Royal Caribbean Cruises Ltd. operates five cruise brands: Royal Caribbean International, Celebrity Cruises, Pullmantur Cruises, Azamara Cruises, and CDF Croisières de France. The company also holds a 50% investment in a joint venture with TUI Travel PLC operating Island Cruises. As of April 18, 2008, there were 213,459,614 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16.8% year-over-year, driven by an 8.9% increase in capacity (Available Passenger Cruise Days) and a 7.3% increase in Gross Yields. Net Yields rose 7.1% due to higher ticket prices and improved occupancy (104.4% vs. 103.7%).
• Profitability: Net income surged to $75.6 million from $8.8 million. Operating income more than doubled to $137.6 million.
• Expense Increases: Fuel expenses rose 34.9% to $158.2 million (11.1% of revenue) due to higher market prices, despite hedging. Total cruise operating expenses increased 14.4% to $962.2 million.
• Liquidity: Cash and cash equivalents increased significantly to $441.1 million from $230.8 million at the end of 2007, aided by a $154.5 million settlement on derivative financial instruments.

Guidance, Outlook, and Risks

Full Year 2008 Outlook:

• Net Yields: Expected to increase approximately 4% compared to 2007.
• Net Cruise Costs: Expected to increase approximately 5% per APCD (2-3% excluding fuel).
• Fuel Expenses: Estimated at $685.0 million for the full year if prices remain at current levels. This is $90.0 million higher than previous guidance, representing a negative impact of $0.42 per share.
• EPS Guidance: Expected diluted earnings per share in the range of $2.85 to $3.00, assuming current fuel prices.
• Capacity: Anticipated 5.1% increase, driven by new ships including Independence of the Seas (May 2008) and Celebrity Solstice (Q4 2008).

Second Quarter 2008 Outlook:

• EPS expected in the range of $0.40 to $0.45.
• Fuel expenses estimated at $172.0 million for the quarter.

Risks and Contingencies:

• Credit Rating: In April 2008, Standard & Poor's lowered the company's credit rating from BBB- (negative outlook) to BB+ (stable outlook), which may increase borrowing costs.
• Legal Proceedings: The company is involved in various litigation, including a class action regarding crew gratuities and an ongoing investigation by the Florida Attorney General regarding fuel supplements. The company agreed to refund approximately $21.0 million in fuel supplements for bookings made prior to November 2007.
• Fuel Price Volatility: Fuel costs remain a significant variable; the company is 50% hedged for the full year 2008.

Key Facts for Investor Verification

• Fuel Cost Sensitivity: Verify the impact of current "at-the-pump" fuel prices on the $685 million full-year expense estimate and the resulting $0.42 per share reduction in earnings guidance.
• Credit Rating Impact: Assess the potential increase in interest expenses and refinancing costs following the S&P downgrade to BB+.
• Capital Expenditures: Confirm the funding strategy for the $7.1 billion aggregate cost of ships on order, with $1.9 billion expected in 2008 capital expenditures.
• Legal Exposure: Monitor the outcome of the Florida Attorney General's anti-trust investigation regarding fuel supplements and the $21.0 million refund obligation.
• Derivative Settlements: Note the $154.5 million cash inflow from derivative settlements in Q1 2008, which significantly boosted operating cash flow compared to the prior year.