Earnings Call: How Epic Has Impacted Royal Caribbean, and More

Cruise Critic

The company’s “hardware” (Oasis of the Seas, Celebrity Eclipse) is performing terrifically; the booking window is coming “quite close” to pre-recession levels; Norwegian Epic is not a serious threat; and consumers should expect to see significantly more high-profile refurbishments rather than new-builds in the future. These are a few of the comments made this morning during Royal Caribbean Cruises Ltd’s (RCCL) Q2 earnings call.

RCCL, parent company of Royal Caribbean, Celebrity Cruises and Azamara Club Cruises, beat most Wall Street estimates for the second quarter, posting a profit of $60.5 million on revenues of $1.6 billion. In a show of strength, the line also upped its guidance for the remainder of the year by some 10 cents per share to between $2.25 and $2.35 per share. Despite the good news, the overall message was cautiously optimistic. “Our previous description of our recovery as slow and steady remains unchanged,” said RCCL Chairman and CEO Richard Fain, “and we have yet to see a faltering or a deviation from our earlier expectations.”

Do the Math
RCCL’s Q2 profits in 2010 of $60.5 million compare to a net loss of $35.1 million, or $0.16 per share, in the second quarter of 2009, and revenue was up some $300 million from $1.3 billion year over year. The company attributed these improvements to capacity increases and yield improvements, mostly driven by the brands’ newest vessels (again, Oasis of the Seas, Celebrity Eclipse). Net yields for the second quarter of 2010 increased 4.9 percent despite the volatile impact of the stronger U.S. dollar. Speaking of currency, foreign exchange rates were a hot topic during the call. Fain noted that the biggest single factor cutting into the bottom line is the weakness of the euro and pound, from which approximately half of the company’s ticket revenue is generated. Consequently, revenue was somewhat lower than expected, but the reduced revenue was mitigated by lowered expenses.

In the cost control department, fuel expenses came in about $6 million better than expected, driven by a 3 percent reduction in usage across the brand. This was achieved by fine tuning new developmental itineraries and the improvement in energy efficiency of the newest Celebrity and Royal Caribbean ships. The company is 47 percent hedged on fuel for the third quarter (it uses hedging to mitigate risk), and it expects fuel costs to come in at $170 million for Q3 and $652 million for the year.

Deals or No Deals?
Once again, the executives were coy in terms of identifying specific itineraries where pricing was weak, and they said that they were “quite pleased” with the pricing for just about every itinerary. The general comment was that all brands in virtually all itineraries saw improved ticket yields.

But just as Carnival Corp. top brass admitted in that line’s Q2 call that the horrible economic situation in Spain had dealt a blow to Iberocruceros, Carnival’s Spain-based operation, RCCL execs said that its Spanish line, Pullmantur, despite improvement, was still suffering. “Pullmantur’s own performance has improved, and we’ve done a better job at managing in a bad time,” said Fain, “but the [general economic climate in Spain] was horrible — was horrible, is horrible, hasn’t gotten any worse, or better unfortunately.”

Adam Goldstein, president and CEO of Royal Caribbean International, suggested that pricing may fall slightly for the Oasis-class sisters once they were operating simultaneously. He noted that the two ships together were currently selling extremely well, but when Allure debuts and capacity doubles, “We would not expect the two of them to have the same yield performance as Oasis herself.” An analyst also asked about the competitive impact of Norwegian Epic, the innovative new-build from NCL that debuted in June, on Royal Caribbean’s Caribbean cruising. Goldstein took the answer: “From a strict statistical point of view, by our analysis, Epic has about a 3 percent impact on Caribbean capacity for the full year and about a 6 percent impact on Caribbean capacity for the back half of the year, which is not that significant, and so our sense is that her arrival, which has generated a lot of publicity for the industry, which is always a good thing, is not having a significant impact on our Caribbean capacity.”

Future Tense
At this point the company has just three new-builds on the docket: Allure of the Seas, the sister to Oasis, launching on December 1; Celebrity Silhouette, the fourth Solstice-class ship, which will launch in July 2011; and the still-unnamed fifth Solstice-class ship, which will debut toward the end of 2012.

So is there any change in the company’s now more modest ship-building philosophy, asked an analyst. “That’s a clear no,” answered Fain. Fain reiterated what he’s been articulating for the past several calls: RCCL lines are certainly talking to shipyards, and they’re not saying they’re not going to build again, but slower growth should be the continued expectation.

Interesting Moment
In the call’s single loopy moment, Adam Goldstein may have exposed the fact that he’s been spending too much time in Oasis of the Seas’ comedy club. “We were hoping Shrek could join us this morning,” said Goldstein, alluding to Royal Caribbean’s new partnership with Dreamworks, “but he had another commitment … anyway, some would argue that there are enough ogres on this call already.” The attempt at humor was met with resounding silence.

In Case You Missed It
May and June were busy months for RCCL in terms of announcements. Royal Caribbean sealed a deal with Dreamworks, and announced that it will be adding several amenities from Oasis of the Seas (cupcake cupboard, outdoor movies, Broadway show) to two Freedom-class ships during the first quarter of 2011. Celebrity Cruises’ Celebrity Constellation became the first Millennium-class ship to undergo the impressive “Solstice-ization” refurb, which involved adding several elements from Celebrity’s popular Solstice-class ships (Italian steakhouse, creperie). That line also announced in May that it will be transferring the 77,713-ton, 1,898-passenger Celebrity Mercury to German cruise line TUI Cruises. The ship will depart the Celebrity fleet in 2011.

–by Dan Askin, Associate Editor

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