RCL: MGMT/INVESTORS NOT ON SAME PAGE

RCL has a much different take on their recent quarter than investors did. While we are much more concerned than mgmt with next year's supply increases, they may have a point regarding 2009.

 

 

Corporate was surprised and frustrated by the investor reaction to the call.  Given the low share count, small movements in the bottom line heavily impact their EPS.

  • Fuel negatively impacted guidance by 5 cents, post 6/29 guidance, however, it has now swung the other way and should benefit them by 5 cents
  • The other 5 cents was related to 13 Pullmantur members getting swine flu (post guidance) which caused a last minute cancellation and bad press which negatively impacted bookings from Spain to the Caribbean in the following weeks

Given that overall business conditions were steady to slightly improving (although this wasn’t really reflected in yield guidance for the balance of 2009), and given the positive guidance on yield growth in 2010, management actually thought the stock price would react positively.

Business Environment:

  • They still feel very strongly that the business environment is stabilizing to slightly improving
  • Given that 85-90% of the business in 2009 is already booked, the “positive” trends they are seeing may not be reflected in yields for the balance of the year, such as the slightly upward bias on close in bookings
  • FX should have a mildly positive impact for the balance of the year since deposits on international cruises will translate into more dollars once those revenues get recognized.
  • RCL locked in some commodity and food costs for next year - close to the lows. They claim that they will benefit even if there is some reflation in these costs
  • Visibility has remained at four to four-and-a-half months out (on average); however, the shorter and cheaper weekend getaway product has less visibility, typically booking approximately two months out.
  • They believe that the “high beta” nature of their stock will help them the next few quarters
  • Onboard spend is trending in the same pattern as shipping. Mix shift in onboard spend has been away from materials (retail & art auctions) towards experiences like shore excursions/etc.

 

New Supply:

For 2010, the new hardware is performing “extremely well” which is why they are expecting moderate yield growth.  For a third of the business that was on the books for 1Q2010 the pricing was better than where they ended 1Q2009.  However, given the large amount of availability for 1Q2010 and the “closer in” nature of bookings, there won’t be a whole lot of confidence in “guidance” until the 3Q09 call when at least 50% of business should be booked. 

Why are they not concerned about the supply growth?

  • The net supply increases will impact Europe (new ships to the saturated North American market, older ships moved in to Europe).  Management believes Europe is very underpenetrated, has a lot of organic growth left, and can absorb the new supply.
  • New supply is being absorbed by first time European cruisers
  • Most of the new ships are going to North America, and there is a segment of the cruise population that likes to say they’ve been on the latest and greatest ship.  Ships that are a few years old are then moved to Europe – and while they aren’t brand new, they are still “fresh” compared to what’s currently out there.

Fuel:

  • Fuel hedges in 2010 – in the low 60’s per barrel range and remaining at the same level for 2011
  • Around 420’s range per metric ton