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RCL 3Q12 CONF CALL NOTES

Takeaway: Strong close-in bookings and controlled costs helped RCL deliver an strong quarter. No 2013 guidance, but RCL feels good about next year

Strong close-in bookings and continued controlled costs helped RCL deliver an impressive quarter. Without providing 2013 guidance, RCL felt optimistic on 2013.

 

 

"The company noted that while it is very early in the 2013 bookings cycle and visibility at this time is limited, the company is encouraged by the trends so far.  For the year 2013, booked load factors and average per diems are both slightly higher currently than at this same time last year. This is particularly encouraging in light of the fact that these prior year comparisons relate to bookings before the Costa Concordia incident which occurred in January 2012."  

 

- Richard D. Fain, chairman and chief executive officer

 

 

CONF CALL NOTES

  • Satisfied by results
  • Fuel/FX provided 3 cent benefit
  • Exceeded expectations in all regions including Europe, in spite of all those pressures from Southern Europe e.g. Spain
  • Fairly stable bookings environment.  Early 2013 bookings are encouraging.
  • Will move Celebrity Reflection (just over 3,000 berths) to Med in Summer 2013
  • Sunshine 1 project is two years away
  • Half of the $0.06 reduction was due to timing and marketing costs and will be incurred in 4Q
  • 3Q early extinguishment of debt (3 cent loss): Repurchase of Eurobond (Jan 2014)--$7MM charge when they brought them back at par
  • 3Q ticket yields: Europe -5.4%. Ex Europe, + 2.6%
  • 3Q onboard yields: +3.5% 
  • Demand environment relatively steady; bookings for last 3 months up 4% YoY
  • 4Q:  load factors slightly lower YoY but APD up YoY. Caribbean leading with Europe down slightly
  • 2013 capacity:  +1.3% (greatest increase from Asia-Pacific region)
  • 2013:  still expect challenges particularly in Southern Europe but other regions should offsett that weakness
  • 4Q CC guidance lowered by 1% due to loss revenue on early October ship in Asia stemming from tensions between China and Japan; it was one sailing with 60% load factor.
  • 5-year gross CAGR: +3%
  • 2013 Revitalization:  Enchantment of the Seas, Serenade of the Seas, Legend of the Seas and Brilliance of the Seas

RCL 3Q12 CONF CALL NOTES - RCL33

 

Q&A

  • Tough Q1 2013 comps:  Hope for a normalized year; APD is running ahead but load factors are slightly behind
  • Costa Concordia has affected 2012 yields by 3%.
  • More normalized booking curve for North American and Northern Europe market; Southern Europe booking curve has contracted
  • 2013 27% Capacity for Europe: Western Med 13% (-20% YoY), Eastern Med 8% (-9% YoY) and Northern Europe 6% (28% YoY)
  • Onboard:  saw strength in gaming, retail, and shore excursions
  • There might be very slight upward pressure in terms of the itineraries on fuel consumption but generally in fairly stable environment
  • Cost expenses:  improvements in all categories
  • New ship build outlook:  slower pace than in the past; do not have a specific target number of new ships per year 
  • EICA new regulations:  came in effect Aug 1, 2012 but the more significant cost burden based on sulfur requirements won't come until 2015
  • ROI expected on new Oasis ship:  no specified threshold but expect comparable performance from other Oasis ships.
  • 25% of European cruise capacity came from North America.  Asian customers also helped fill the gap for European cruises.
  • 2013 NCC:  not ready to give guidance on costs, couple of areas they are watching--may have modest increases in IT, insurance...pockets of pressure but pretty controlled environment
  • In hindsight, had held on to European pricing longer than what they would have liked
  • Europe in 2013 still a very large unknown
  • Order book sold in 2013 has been higher than any year since 2008... aka best visibility since 2008
  • TUI continues to perform very well both in guest satisfaction and results   
  • Capex outlook:  Slight bump up in installment payments if they complete Oasis order; other items to consider: IT revitalization, and revitalizations of the vessels

 

HIGHLIGHTS FROM THE RELEASE

 

RCL 3Q12 CONF CALL NOTES - rcl11111

  • "The strong third quarter certainly validates our confidence in our business model. Strong close-in demand and our focus on costs drove substantially better results than expected.  I am especially gratified that we are still seeing price increases in a year marked by so many external pressures"

  • "Close-in bookings for the third quarter across most itineraries — including Europe — were stronger than anticipated... NCC excluding fuel were also better than anticipated.  Approximately 200 basis points of the Net Yield improvement and approximately 220 basis points of the NCC excluding fuel increases during the quarter relate to previously announced deployment initiatives and changes to the company's international distribution system."
  • "As the company anticipated in February, the tragedy in Italy had its biggest yield impact in the second and third quarters of the year.  The effect of the incident on bookings has continued to wane and fourth quarter 2012 Net Yields are expected to increase approximately 1% on both Constant-Currency and As-Reported bases.  Excluding previously referenced deployment initiatives and changes to the company's international distribution system, Net Yields for the quarter are expected to be approximately flat."
  • RCL is "engaged in negotiations for the possible construction of an Oasis-type newbuild that would be delivered in middle to late 2016.  While the company has not entered into any agreement at this time, it hopes to do so before year's end.  The new ship is expected to cost less on a per berth basis than either of the first two Oasis-class vessels."
  • "Forecasted consumption is now 58% hedged via swaps for the remainder of 2012 and 54%, 45%,  25% and 7% hedged for 2013, 2014, 2015 and 2016, respectively.  For the same five-year period, the average cost per metric ton of the hedge portfolio is approximately $522, $568, $623, $610 and $582, respectively."
  • "As of September 30, 2012, liquidity was $­­­1.9 billion... the company has taken a number of actions this year to augment liquidity in advance of its 2013 and 2014 scheduled debt maturities, including increasing the size of its revolving credit facility due July 2016 by $233 million and establishing a €365 million 5-year unsecured delayed-draw bank facility.  More recently, the company further bolstered its liquidity through a new $290 million 3 ½ year unsecured bank facility."
  • "In part, this additional liquidity was used for the early extinguishment of €255 million (or approximately 25%) of the company's €1.0 billion senior notes due in January 2014."
  • "The company also has committed unsecured financing for its remaining newbuilds.  The company noted that scheduled debt maturities for 2012, 2013 and 2014 are now $600 million, $1.5 billion and $1.5 billion, respectively."
  • "Based on current ship orders, projected capital expenditures for 2012, 2013, 2014 and 2015 are $1.3 billion, $600 million, $1.1 billion and $1.0 billion, respectively." 
  • "Capacity increases for 2012, 2013, 2014 and 2015 are 1.4%, 1.3%, 1.0% and 6.5%, respectively."

JCP: America’s Fashion

Hedgeye Retail Sector Head Brian McGough pointed out an interesting fact about JC Penney (JCP) yesterday. With JCP opening these individual shops within its stores, we wonder if the company knows how Americans really dress. We’re talking about the postman in Ohio and the auto worker in Detroit; middle class, blue collar, hard working Americans who do their clothes shopping at places like JC Penney. 

 

JCP: America’s Fashion  - JCPfashion

 

With the debut of the Izod Shop inside JCP this week, it appears that JCP will have to be aggressive with pricing in order to sell some of the fashions it’s carrying. Take a look at the photo above and ask yourself: would a blue collar John Doe worker in Michigan wear a top like this? McGough explains:

 

The new Izod shop opens a discussion for JCP’s customer acquisition cost rising faster than revenue and competitive pricing pressure.

·         We like much or what JCP is doing to its merchandise right now, no means a change in tone for us

o   Our call has never been about product, the cost associated with changing around a retailing strategy by such a startling degree, and the extent to which JCP will wake several sleeping giants (KSS, Macys, Gap) with its aggressive pricing strategy which will ultimately come back and haunt them

·         The reality is that the cost of customer acquisition is going up very dramatically

o   It’s hard for this product to have such broad appeal to the people that they already count as customers

·         The punchline for JCP is that the revenue delta will improve - but it won’t outstrip the painfully eroding cost delta

o   That’s bad for JCP. For others like Macy’s, Kohl’s, and Gap, it means that JC Penney is – come hell or high water – bringing more product into the US to sell at what it thinks will be very sharp everyday low prices

o   The thing that people miss is that 100% of this product WILL SELL. It’s just a question as to what price it sells


INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE?

Takeaway: The real labor market continues to improve, albeit modestly. California is to blame for the last three weeks of volatility.

***The following note comes from our Financials team led by Managing Director Josh Steiner. If you aren't yet receiving their work on the space, including their seminal work on the U.S. housing market, please email if you're interested in setting up a trial.***

 


Blame California

Three weeks ago, California was omitted causing initial jobless claims to drop 28k. Two weeks ago, California was double-counted causing claims to rise 46k. Last week, California was back to normal so claims dropped 23k. Net net, in the last three weeks, the 4-week rolling average for seasonally-adjusted jobless claims has gone from 364k three weeks ago to 368k in the most recent week. 

 

As we show in the first chart, the trend in claims since the start of September is lower. This is consistent with our expectation, and we would expect to continue to see claims move steadily lower through February 2013, owing to the faulty seasonal adjustment factors that have been warping the data for the last 3.5 years. The same distortion occurs in non-farm payrolls, incidentally. This perception of a steadily improving labor market should be a tailwind for credit-sensitive financials.

 

What's Really Going On?

Looking past the distorted SA numbers, the reality is that the labor market is still improving in spite of the recent spate of headlines about sizeable layoffs in the private sector. We measure this by evaluating the YoY change in rolling non-seasonally-adjusted initial jobless claims. This morning's print brought that series to -8.4%, slightly worse than the prior week's print of -10%. A larger decline in YoY claims is, of course, better. We don't put too much emphasis on one or two or even three weeks of data, but if we see the 8.4% YoY change from this morning continue to converge toward zero at a rapid rate over the next 3-4 weeks, that will be indicative of a real problem starting to take hold in the labor market. Interestingly, the rest of the market will be unlikely to notice this since the SA tailwinds will appear to make the data go sideways.

 

The Data

Last week initial claims fell 19k to 369k. After incorporating a 4k upward revision to the prior week's data, claims fell 23k. Rolling claims rose 1.5k WoW to 368k. The non-seasonally adjusted series fell 20k to 343k. The NSA YoY change was -8.4%.

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 1

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 2

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 3

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 4

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 5

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 6

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 7

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 8
 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 9

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 10

 

Joshua Steiner, CFA

 

Robert Belsky


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Energy: Winter Is Coming

Game of Thrones references aside, winter IS on its way here and we could  see a normal winter - the kind with snow - bring gas back to $4.00-$4.50/Mcf. Natural gas prices are highly dependent on what kind of winter we have going forward and if we have a warm one like we did in New York last year, expect natgas prices to fall further.

 

Currently, inventories are 9% above “normal” (we used the 2006 – 2010 average); the chart below makes a compelling argument for $4.00 - $4.50/gas should we get a normal/colder winter and inventories continue to decline to a “normal level.”  That would imply upside the winter strip, which is sub-$4.00.

 

Energy: Winter Is Coming  - 1 normal


INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE?

Takeaway: The real labor market continues to improve, albeit modestly. California is to blame for the last three weeks of volatility.

Blame California

Three weeks ago, California was omitted causing initial jobless claims to drop 28k. Two weeks ago, California was double-counted causing claims to rise 46k. Last week, California was back to normal so claims dropped 23k. Net net, in the last three weeks, the 4-week rolling average for seasonally-adjusted jobless claims has gone from 364k three weeks ago to 368k in the most recent week. 

 

As we show in the first chart, the trend in claims since the start of September is lower. This is consistent with our expectation, and we would expect to continue to see claims move steadily lower through February 2013, owing to the faulty seasonal adjustment factors that have been warping the data for the last 3.5 years. The same distortion occurs in non-farm payrolls, incidentally. This perception of a steadily improving labor market should be a tailwind for credit-sensitive financials.

 

What's Really Going On?

Looking past the distorted SA numbers, the reality is that the labor market is still improving in spite of the recent spate of headlines about sizeable layoffs in the private sector. We measure this by evaluating the YoY change in rolling non-seasonally-adjusted initial jobless claims. This morning's print brought that series to -8.4%, slightly worse than the prior week's print of -10%. A larger decline in YoY claims is, of course, better. We don't put too much emphasis on one or two or even three weeks of data, but if we see the 8.4% YoY change from this morning continue to converge toward zero at a rapid rate over the next 3-4 weeks, that will be indicative of a real problem starting to take hold in the labor market. Interestingly, the rest of the market will be unlikely to notice this since the SA tailwinds will appear to make the data go sideways.

 

The Data

Last week initial claims fell 19k to 369k. After incorporating a 4k upward revision to the prior week's data, claims fell 23k. Rolling claims rose 1.5k WoW to 368k. The non-seasonally adjusted series fell 20k to 343k. The NSA YoY change was -8.4%.

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Seasonality

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Raw

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Rolling

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - NSA claims

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - NSA rolling

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - S P

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Fed

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - YoY

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Rolling  Linear

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Initial Claims Linear

 

Yield Spreads

The 2-10 spread fell 4 bps WoW to 150 bps. So far 4QTD, the 2-10 spread is averaging 1.45%, which is up 8 bps relative to 3Q12.  

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 2 10

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over multiple durations.  

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Subsector

 

INITIAL JOBLESS CLAIMS: IS THE LABOR MARKET GETTING BETTER OR WORSE? - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 


EXPERT CALL ON AG PRICES

On Monday, October 29th at 1:00pm EST, the Hedgeye Macro Team and Restaurants Team will be hosting a Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website (www.farmdoc.uiuc.edu). His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends.  This call will be instructive for investors focused on the following names within restaurants and food processing:

 

Restaurant Tickers: DRI, BLMN, TXRH, WEN, JACK, MCD, PNRA, PZZA, DPZ, YUM, CAKE, EAT & CMG 
Food Processing Tickers:
 TSN, SAFM, SFD, HRL, PPC, CAG, DF & MON 

 

Topics will include: 

  •  Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken

Please contact if you would like to trial our research or obtain access to this conference call. Current subscribers of our Macro and/or Restaurant verticals will receive the dial-in information automatically.  

 

 

Good's Background

 

Darrel Good has a comprehensive understanding of the agricultural markets and economic implications. "There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  •  Good and two other faculty members developed a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • He writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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