Hedgeye - RCL 4Q12 CONF CALL NOTES

European uncertainty and higher costs outweighing a better North American yield outlook

"Excluding the Pullmantur impairment charges, our operating results came in remarkably close to our forecast from a year ago, which is notable given the challenging environment. Looking forward, we see a tale of two continents; North America is doing well, while parts of Europe continue to be a challenge. Nonetheless, we are encouraged that the former will countervail the latter allowing us to drive meaningful yield growth in 2013."

- Richard D. Fain, chairman and chief executive officer

CONF CALL NOTES

Spain and the UK are weak, US is strong. It's really the weakness in Southern Europe that is holding back RCL's yield.
Pullmantur is aggressively trying to reduce their reliance on weak markets in Spain by moving their capacity. In 2013 they expect a 10% reduction in their capacity in Europe and moving capacity to Asia.
China and Australia are doing exceptionally well, especially in light of the China-Japan dispute due to the large capacity increases they are absorbing
Seeing a significant deterioration in cruise demand in Spain. This has resulted in significant expectations for the Pullmantur brand which is why they took the write down. They have incorporated a grim view of the Spanish economy in their forecast.
Remaining Pullmantur goodwill is $144MM and the value of the trademarks and name was $208MM
As of today, our total booked load factors and booked APDs are slightly better than at the same time last year and better than this point in time in 2011. Booking activity in the fourth quarter was slightly lower than the same time last year with a greatest decline coming in the aftermath of Hurricane Sandy. With each consecutive week after the storm, we saw improvement though. During the first part of January, bookings were in-line with the same time last year.
Asian and Australia bookings have more than kept pace with the added capacity we have placed in both markets. The UK has been disappointing from a volume standpoint, but pricing is above last year. Spain however, is down significantly in both volume and pricing.
Caribeean will account for 44% of their 2013 capacity, 4% increase from 2012.

Seeing solid booking trends for this product group. Expect record yields in 2013 in the Caribbean

Europe will account for 27% of their capacity (down 10% YoY)

Booked load factors are similar to the same time last year at higher APDs. However, they have sold less than 50% of their capacity so far. Still too early to have a definitive view on how much yield we can recover in 2013.

Asia Pacific will account for 10% of 2013 capacity, up 45% YoY

Booked load factors look strong for sailings in 1H13, although pricing is behind a year ago. Expect yields to be flat for this year despite large capacity increases

Alaska is 4% of their capacity. Early bookings and looking good with both load factors and pricing running higher than a year ago.
Remaining 15% of our inventory is spread across many other products including South America, Bermuda, Panama Canal and Transatlantic itineraries. In aggregate, load factors are higher than last year with pricing running slightly ahead.
Have seen an increase of more than 50% of their protection and indemnity insurance as a resiult of the Concordia incident
10% change in Fuel = $43MM impact for the year. Swaps provide a $65MM benefit. Included in their guidance is an incremental expense of $11MM due to the ECA regulation that went into effect last year.
Europe: Expect yield increase in 2013 relative to 2012 & 2011. Seeing more interest for the US source markets for the European cruise market.
China: 2 Voyager Class ships will be in the market this year. In the short term, the rift between China and Japan are impacting their itineraries and demand. They have already eliminated all Japanese port calls for their June cruises from China.

Q&A

Insurance cost increase: how much is incremental to what they were already expecting

Insurance cost in total are up $20MM YoY (60bps). Anticipate a 10% increase in hull and machinery but the P&I insurance was much larger than they anticipated.

They are also investing more on their online presentation (marketing) and their tech side to do better yield management. Hope to get benefit from these investments in 2015 & 2016.

Need to continue to invest in ways to improve their distribution systems (i.e. incentivizing travel agents to push their products)
Also need to keep investing in new marketing capacibilies in nascent market

Mediterrean season: It's a bit too early to tell.
% from the US is usually a little below 25% of their European business, now expect a little more than 25% of their business in Europe
New onboard revenue opportunities: Effort across all brands to create upside

Getting better at providing attractive shore excursion
F&B has been productive for them through the introduction of various packages
Getting better at catering to diverse nationalities

Surprised that UK is lagging

UK is under some stress economically
Adding some capacity to Southampton
There is always a lot of promotional activity around this time of the year. Will just have to wait and see how effective the promotions are - another few months -before they get a good sense of how the summer will shake out.

Maintenance capex is usually about $250MM/year but may be higher over the next few years due to their IT initiatives
Celebrity Brand: A lot of the improvement they are looking for are coming out of the Celebrity brand, but early indications are quite positive and that's part of what is driving their positive yield guidance
US is in-line with a year ago on the booking curve. There are some pockets where people are beginning to book further out.
Europe: Southern Europe is booking about a month closer to sailings than a year ago; Northern European is similar YoY.
The investments that they are looking at aren't going to reduce commissions by shifting more to direct bookings but hope that it will just make it easier for them and their travel agents to distribute and yield manage their products.
The weather this season so far is helping them. Their travel agents are telling them that the consumer is taking some comfort in a recovering US real estate market and the fact that we didn't fall off the fiscal cliff.

HIGHLIGHTS FROM THE RELEASE

"Booking activity in the fourth quarter was slightly lower than the same time last year, with the greatest decline coming in the aftermath of super-storm Sandy. However, the company has observed a much stronger booking pattern since the beginning of WAVE season and demand trends have been quite healthy."
"In recent weeks, booking volumes have been running approximately 20% ahead of the same time last year, due in part to the slower booking trends the company experienced after the Costa Concordia grounding in January of 2012. Normalizing for this favorable comparison, the company still considers the WAVE season to be off to a strong start, particularly from U.S. points of sale. Booking volumes are exceeding those during the same period in 2011 and in the aggregate, forward booked load factors and pricing are higher than at this time in both 2011 and 2012."
"We were proactive in reducing our deployment and guest sourcing programs from Europe due to uncertain consumer spending patterns as austerity measures continue to pressure the region. Encouragingly though, demand from our other source markets, especially the U.S., is strong and should more than offset any ongoing weakness in Europe. In fact, we are optimistic that we will achieve record yields in the Caribbean and Alaska this year."
"While the 2013 WAVE season is broadly off to a promising start, booking volumes and pricing are down substantially in Spain due to the impact of additional austerity measures there, the lingering impact of the Costa Concordia tragedy and other factors. Accordingly, the company has recorded a total impairment charge of $413.9 million. Of this amount, approximately$319.2 million relates to goodwill and the balance relates to a valuation allowance for deferred tax assets, a reduction in the value of the trademarks and an impairment charge related to three aircraft that Pullmantur owns and operates."
"Both close-in bookings and onboard spending were stronger than expected for the fourth quarter, resulting in a Net Yield increase of 1.8% on a Constant-Currency basis versus prior guidance of up approximately 1%"
"Approximately 110 basis points of the Net Yield improvement and approximately 60 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."
Liquidity: $2.2BN
"Scheduled debt maturities for 2013, 2014, 2015 and 2016 are $1.5 billion, $1.5 billion, $1.1 billion and $1.0 billion, respectively. The company will continue to opportunistically approach the prepayment and refinancing of its 2013 and 2014 scheduled maturities."
"Projected capital expenditures for 2013, 2014, 2015 and 2016 are $700 million, $1.2 billion, $1.2 billion and $1.3 billion, respectively."
"Capacity increases for 2013, 2014, 2015 and 2016 are 1.4%, 1.0%, 6.8% and 4.8%, respectively. The company's annualized capacity growth rate from 2012 to 2016 remains at a historically low rate of 3.5%."