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Back ended guidance of a 2010 yield recovery is disappointing following RCL's commentary of positive yields in 1Q2010 and a strong CCL run into the quarter.

1Q2010 guidance of constant dollar net revenue yield declines of 3-4% and EPS of $0.08-$0.12 is below consensus estimate of $0.17.  Full year 2010 EPS guidance of $2.10 to $2.30 compares to consensus of $2.32.  Here is the transcript from the call that just ended.

CONF CALL

  • 4Q09 came in above the mid-point of guidance driven by stronger on board revenue trends, better close in pricing on ticket sales, better net revenue yields and deeper cost savings
  • Net ticket yields NA where down 17% and European brands declined 9%. There were declines across all ships
  • Net on board and other yields declined 5.7%.  European brands saw less declines than NA brands
    • Saw an increase in shops and photos for the first time this year
    • Saw sequential improvement in on board spend
  • 2009 capacity increased by 5.4%
  • Were very pleased with the European brands performance, which contributed 49% of operating income despite only being 33% of capacity.  Decline in yields was relatively mild despite an 8% capacity increase
  • Outlook for FY 2010:
    • Will continue to look for more cost cutting opportunities
    • Fuel and currency are driving their costs, and therefore costs are expected to be up 4-6%, but currency will also increase topline by the tune of 8 cents per share at current spot
    • Cruise capacity will increase 7.7%; 3.3% to NA brands and 11.9% to European brands
    • With continued strength in booking levels, on a capacity adjusted basis, occupancies are flat to last year
    • Pricing for cruises still hasn't recovered as much as they'd like but in selective areas they have been able to raise pricing (premium brands for example)
    • Pricing for all itineraries other than Mexican Riviera pricing have been up y-o-y over the last 13 weeks. Although Mexican Riviera pricing looks to be stabilizing
    • European brands are absorbing 12.2% capacity in the first 9 months of 2010, pricing is a little lower on a local currency basis but up on a US dollar basis. Continental Europe has a 19.4% capacity increase in the first 9 months of 2010
    • Brazil cruise pricing has been weak given capacity additions
  • 1Q2010 Guidance:
    • Topline is expected to increase 10% due to capacity additions
    • Current dollar cruise costs are expected to be up 1-2%
  • Beyond 1Q2010, fuel comparisons should become easier and higher recent ticket prices should have a positive impact
  • 1Q2010:
    • 9.9% capacity increase; 5.3% in NA
    • Occupancies flat, slightly higher in NA and slightly lower in Europe
    • Have very little inventory to sell
    • Pricing for NA Caribbean pricing is down moderately with Mexican Riviera down more.
    • European brands: capacity; 17% in SA and 11% in Asia.  Caribbean pricing is down moderately and down materially in South America
  • 2Q2010:
    • 8.8% capacity increase; 14.4% in Europe
    • 56% of NA capacity in Caribbean with pricing slightly lower than a year ago and Mexico is lower
    • Combined pricing for NA brands are running slightly below a year ago, but because current pricing is ahead they are forecasting higher pricing
    • European brands pricing is modestly behind year ago levels
    • UK brands are showing pricing ahead, but Continental Europe pricing is running ahead.  Expect flat pricing by the time the quarter closes
    • They expect prices to be flat in local currency
  • 3Q2010:
    • Early indications for pricing are positive
    • NA capacity 43% in the Caribbean, 25% in Alaska
    • Pricing on NA Caribbean pricing is lower but occupancies better, Alaska pricing lower but occupancies better
    • European Brands are 97% in European itineraries, pricing is running behind last year but occupancies are running flat with last year on an occupancy-adjusted basis

Q&A

  • FY 2010 NA yields would be up 2-3% and why is FY2010 guidance so conservative given the quarterly guidance?
    • Will gradually improve yields each quarter, that's just how the numbers work - they're not sandbagging
  • How has Oasis affecting their pricing strategy for 2010?
    • Hard to quantify how they are being impacted.  Same thing with Norwegian's Epic.  Their bookings for the summer are holding up well
    • Seeing no impact, if anything they are getting more media exposure for cruising
  • Cost outlook is relatively flat excluding the dry docking impact
  • Ordering another ship for the Princess brand... will the yard take the currency risk?
    • Haven't completed the negotiations. They are willing to take a certain level of Euro exposure given thier business in Europe and can always hedge it
  • Premium brand comeback - saw evidence last quarter that it was booking stronger and ability to raise prices.  Continued throughout the 4th quarter.  The equity market recovery helped.  Thinks that the recovery will be faster/stronger than historical recoveries given the deeper drop
  • Booking curve: where they are for 2010 bookings are consistent with historical averages sitting in December with the exception of 2008.  Saw a little bit of an improvement in the booking curve this quarter
  • On-board spending did see a sequential improvement.  2010 forecasts assume flat spending to current levels
  • Are they going to reconsider hedging fuel?
    • Hedging is a short term fix and they can also charge a fuel supplement
  • Mix change due to less Alaska exposure.  As they move the Alaskan ships to other markets will that depress pricing since Alaska is a premium market?
    • Think that the ships will do better from relocations and the higher pricing tickets are offset by higher operating costs
    • One ship is going to another brand, another is going to Europe which also has high pricing
  • Where are they getting price increases?
    • Everywhere is doing better but Mexican Riviera and Brazil
  • As the business improves which areas will they target for reinvestment?
    • Port infrastructure is the only area outside of new ships that they have been investing in and they are very minor investments compared to cruise capex
  • 1Q2010 yield guidance is influenced by what they have on the books now and the little inventory they have left to sell
  • Are they hearing about any other new ship order discussions?
    • they are aware of some other ongoing discussions but lower than historical levels
    • 2013-2014 should have significantly less capacity increases
  • Interest in acquiring existing ships
    • not looking at anything now
  • Will discuss the dividend during the board meeting in mid-January, and will make an announcement shortly thereafter
  • European pricing strategy:  was pricing more aggressively early on in the booking cycle given the huge capacity increases.  Also the prices in Europe haven't dropped as much as US
  • Returns are better in their European business than the US business hence the shift of ships to Europe
  • 4th quarter booking trends are the best indicator for wave season.  They are optimistic about wave season
  • Too early to give guidance on 3Q2010 yields.  3Q2010 is most skewed towards Europe and will have difficult comparisons