Royal Caribbean defers newbuild options
Royal Caribbean Cruises Ltd. today announced better than expected second quarter earnings of $66.7 million or $0.34 per share but nonetheless said it was extending until September 30 the expiration of options it holds for two more Radiance class newbuilds, because of "uncertainty" about its proposed acquisition of P&O Princess Cruises.
The second quarter figure of $66.7 million compares to $81.7 million or $0.42 per share for the second quarter of 2001. Net revenues per available passenger cruise day ("Yields") were down 3.3%, which was significantly better than previous guidance of a decline in the range of 5 to 7%.
At June 30th, the company's net debt to capital ratio was 56.6% and liquidity was approximately $1.6 billion.
The outlook for the remainder of the year also continues to improve from earlier guidance, says Royal Caribbean, which now forecasts that yields for the third quarter of 2002 will be down 2 to 4%, while yields in the fourth quarter will be up 4 to 6% from the same quarters in 2001. For full year 2002, yields are expected to be down 2 to 3% from 2001.
Revenues for the second quarter were $821.8 million, essentially unchanged from the same quarter prior year. The impact of an increase in capacity was offset by the decrease in yields and a significant decline in the number of guests purchasing air transportation from the company. The trend for more passengers to drive to the point of embarkation or to arrange for their own air transportation continues. As a result, the percentage of guests booking air travel through the company dropped from 26.7% in the second quarter of 2001 to 14.5% in 2002.
"The recovery from the events of September 11th has been extremely encouraging from both a pricing and occupancy perspective," said Chairman & CEO Richard D. Fain. "The industry and our company are proving to be very resilient, and this leads me to be very optimistic about the company's future performance."
Royal Caribbean previously gave guidance that it expected total operating costs (operating plus SG&A expenses) excluding fuel for the full year to drop 5% on a per available berth day basis. The drop in the second quarter was in fact significantly higher, at 13.2%. Contributing to this were reduced air transportation costs associated with fewer passengers purchasing air tickets from the company and lower commission costs associated with lower ticket prices. Due to the anticipated return to more normal air/sea levels and an increase in commissions as well as certain timing issues, the company believes that the previous guidance continues to be accurate.
The change in the sale of air tickets to guests has only a minimal impact to the company's net income. Therefore, the company believes changes in running expenses (i.e., those expenses directly associated with shipboard operations) and SG&A to be a more relevant measure of its ability to control costs in a manner that positively impacts the bottom line. For the quarter, running and SG&A expenses excluding fuel were down 6.9% on an available berth day basis. For the year, the company expects these costs to improve 3.5 to 4.0% on the same basis.
During the quarter the company took delivery of Constellation, the last of the Celebrity newbuilds on order. The delivery of Constellation grows the Celebrity fleet to a total of nine ships, which have an average age of approximately 4 years. Celebrity's fleet was recently recognized by the U.S. Coast Guard for its superior environmental operations with the 2002 William M. Benkert Award for Environmental Excellence.
The company has also added Brilliance of the Seas to its fleet, the second in the 2,100-passenger Radiance-class series for Royal Caribbean International. The ship, which has noise and vibration measurements one-fourth of what is specified in the contract, has achieved the highest rating ever measured for these qualities by Det Norske Veritas.
In connection with the delivery of Constellation, the company utilized an export financing facility, which has a floating rate of LIBOR plus 1.5% and amortizes over eight and one half years. Brilliance of the Seas was financed through a long-term operating lease. The term of the lease is 25 years and is cancelable in years 10 and 18. The effective interest rate of the lease is approximately 5.75%. Following delivery of Constellation, total debt as of June 30, 2002 was $5.6 billion. Cash and cash equivalents were approximately $600 million as of that date, and the company's $1 billion revolving credit facility was fully undrawn, for liquidity of $1.6 billion. The company also has available export financing facilities for approximately $600 million for the deliveries of Serenade of the Seas and Jewel of the Seas.
The company has options for construction of two additional Radiance-class ships for delivery in 2005 and 2006. "In light of the uncertainty relating to the proposed combination with P&O Princess," says Royal Caribbean, "the company has extended the expiration date on these options to September 20, 2002.
Based upon the company's current estimates of revenues and expenses, it believes the consensus of analyst estimates for 2002 full year EPS to be reasonable. Looking forward, the booking period for 2003 is just beginning. This, coupled with the limited visibility resulting from the current close-in booking environment, makes it difficult to provide guidance for next year. However, if 2003 yields return to 2001 levels, the company expects that it will meet or exceed current consensus for 2003 full year results.
Separately, the company disclosed that it expects to incur approximately $25 million in costs related to the proposed combination with P&O Princess. If the transaction is completed as contemplated, these costs, together with additional success fees, will be capitalized as part of the overall transaction. In the event the combination does not occur, these costs will appear as part of operating expenses in the quarter that the final determination about the transaction is made.
Yesterday Royal Caribbean issued a statement expressing "disappointment" over the clearance by the EU Commission of Carnival's bid for Princess. Fain said he was "surprised" at the finding, which accorded neither with Royal Caribbean's own analysis of the cruise industry in Europe nor with earlier reports of the EU inquiry's own findings.
Royal Caribbean said it had been allowed no opportunity to comment on this change of direction, signaled at the start of last week. "The abrupt change effectively reversed an earlier conviction among Commission officials and many others involved in the process, based on many months of analysis, that Carnival's bid should be prohibited or cleared only subject to major disposals," said theRoyal Caribbean statement.
At a meeting on July 15 between senior representatives of Royal Caribbean and the Competition Commission, "no mention whatever was made of the Commission's altered views on the key issues under investigation. Nonetheless, the intention to issue a clearance decision was apparently communicated to the media even while the meeting was still in progress."
Fain said: "The Commission has opted for a peremptory merger clearance. Earlier analyses and widely mooted decisions were abruptly reversed behind closed doors. The concerns of Royal Caribbean and many other third parties over the Carnival bid have been set aside. No explanations have been given, nor reactions sought, in ways that might have allowed a timely consideration of these parties' views -- not least via an Oral Hearing. Such procedural short-cuts have sadly diminished the openness and transparency that all parties rely upon in circumstances such as these."
Meanwhile, Royal Caribbean says it remains committed to its agreed merger with P & O Princess Cruises, which has been approved by the competition authorities in Germany and the U.K. Both the agreed merger and Carnival's hostile bid are still conditional upon regulatory approval by the Federal Trade Commission in the US. "We are doing everything we can to assist the FTC and to help it distinguish clearly between the likely contrasting consequences of the two rival transactions," said Fain.