Royal Caribbean Cruises Ltd. today reported third quarter results and provided a preliminary outlook for 2015.  Net Yields and Net Cruise Costs as well as Adjusted Net Income all performed about as expected for the quarter generating Adjusted Net Income growth of 31% to $493 million.

Early bookings for 2015 are robust and the current order book is better than at the same time last year in both volume and price.  Based on this, the company's current earnings estimates are consistent with Street consensus of $4.55 per share for 2015.


Third Quarter 2014 results:

  • Net Yields were up 4.2% on a Constant-Currency basis (up 4.9% As-Reported).
  • Net Cruise Costs ("NCC") excluding fuel were down 1.2% on a Constant-Currency basis (down 1% As-Reported), better than guidance mainly due to timing.
  • Adjusted Net Income of $492.9 million, or $2.20 per share, versus Adjusted Net Income of $377 million, or $1.71 per share, in 2013.
  • US GAAP Net Income was $490.2 million or $2.19 per share, versus $365.7 million, or $1.65 per share in 2013.

Full Year 2014 forecast:     

  • Net Yields are expected to increase approximately 2.5% on a Constant-Currency basis (1.5% to 2.0% As-Reported).
  • NCC excluding fuel are expected to be flat to slightly down on a Constant-Currency basis (Flat to down 1% As-Reported).
  • Adjusted EPS is expected to be approximately $3.45 per share.

"It was another very positive quarter as we progress methodically toward our DOUBLE-DOUBLE goals," said Richard D. Fain, chairman and chief executive officer. "We are positioned nicely on the eve of delivery of the highly anticipated Quantum of the Seas."


Adjusted Net Income for the third quarter of 2014 was $492.9 million, or $2.20 per share, compared to Adjusted Net Income of $377 million, or $1.71 per share, in the third quarter of 2013.  US GAAP Net Income for the third quarter 2014 was $490.2 million or $2.19 per share, compared to $365.7 million or $1.65 per share in 2013.  

Net Yields on a Constant-Currency basis increased 4.2% during the quarter.  Onboard and Other Revenue drove the slight upside, particularly in Europe and Alaska, with onboard revenue yields also increasing 4.4% during the quarter.

Constant-Currency NCC excluding fuel decreased 1.2% mainly due to timing.  Bunker pricing net of hedging for the third quarter was $688 per metric ton and consumption was 335,000 metric tons.


The company expects full year Adjusted EPS to be approximately $3.45 per share.  Constant-Currency Net Yields are expected to increase approximately 2.5%, consistent with the mid-point of previous guidance. NCC excluding fuel are expected to be flat to slightly down on a Constant-Currency basis, consistent with prior guidance.

"Despite the usual swings, the trajectory for 2014 continues along the path described three months ago," said Jason T. Liberty, chief financial officer.  "Our satisfaction with the positive results in Europe and Asia continues unabated, as does our eagerness to lap the highly promotional Caribbean environment."

Bookings since the July earnings release have been solid and the company continues to be booked ahead of last year in both load factor and APD. Double-digit yield improvements on Europe and China sailings continue to offset the continuation of a highly promotional Caribbean environment.   

The US Dollar has strengthened recently and that has a net negative impact on our earnings.  Correspondingly, the price of fuel in world markets has declined and net of hedging that has had a small positive impact.  The net impact of these two items is a negative $0.10 in 2014. Over time, we believe there is a certain degree of inverse correlation between these factors, but such offsets are not complete and short run fluctuations are inevitable. The company pointed out that it had previously raised its guidance for 2014 partially based on the weakening of the US Dollar earlier in the year. 

Taking into account current fuel pricing, interest rates, currency exchange rates and the factors detailed above, the company expects 2014 Adjusted EPS to be approximately $3.45 per share.

The company also described an immaterial accounting change they have made this quarter relating to partially completed voyages.  For voyages of more than 10 nights, the company prorates the revenue and cruise operating costs of the voyage at the end of each quarter.  However, for shorter cruises, the company has historically only recognized the revenue and related costs upon completion of the voyage.  Thus, for shorter cruises, revenue and related costs were not recognized for partially completed voyages between quarters.  For example, the revenue from a seven night New Year's cruise would only be recognized when the cruise ended in January even if most of the cruise took place in December.  The company has historically followed this "completed voyage" approach on its shorter voyages because the difference was immaterial and the effort required to prorate the shorter voyages was not cost beneficial.  The accumulation of new technology and process improvements have simplified the task, and beginning in the third quarter, the company now prorates all voyages.

This change has no material effect on our earnings, yields or cost metrics.  In 2014, there is an element of normalization related to prior years which will benefit earnings this year by approximately $0.13 per share.  Because it relates to prior years, the company has excluded this benefit from Adjusted Earnings. This is consistent with the company's previous approach to Adjusted Earnings guidance.  Also in the third quarter, the company recognized a loss on the sale of the Celebrity Century of approximately $0.08.  Together, these two items increased EPS by $0.05 per share which has been excluded from Adjusted EPS but included in GAAP EPS.

In addition, largely due to the entry and success of Quantum of the Seas, we expect a proration benefit in 2014 related to this year's December sailings of approximately $0.07 which has been included in our Adjusted Earnings guidance. 


Constant-Currency Net Yields are expected to be up approximately 3.5% in the fourth quarter of 2014 and NCC excluding fuel are expected to be up in the range of 2% to 3%.  TUI Cruises' additional capacity continues to be a key contributor to earnings for the fourth quarter. Based on current fuel pricing, interest rates and currency exchange rates and the factors detailed above, the company expects fourth quarter Adjusted EPS to be in the range of $0.35 to $0.40 per share.


The company is experiencing strong early booking trends for 2015.  Booked load factors and APDs are higher than same time last year and the booking window has extended.  Europe sailings are off to a particularly good start, with strong booking trends from North America and from Europe.  Caribbean pricing pressure continues through the first quarter, but we expect it to improve thereafter. 

It is early days yet, but the view looking forward is very encouraging and the company is optimistic that 2015 will be the sixth consecutive year for yield growth. The company has sufficient visibility into 2015 to say that it is comfortable with the Street consensus of $4.55 per share. That would represent more than a 30% increase over this year's record profitability.

"We anticipate another record year in 2015, an important step on the way to DOUBLE-DOUBLE," said Richard D. Fain, chairman and chief executive officer.  "Our strategy continues to drive better revenues, and coupled with cost discipline and moderate growth, we will continue to excel."


Fuel Expense
The company does not forecast fuel prices, and its fuel cost calculations are based on current at-the-pump prices, net of hedging impacts.  Based on today's fuel prices the company has included $225 million and $943 million of fuel expense in its fourth quarter and full year 2014 guidance, respectively.

Current estimates for 2015 are $938 million of fuel expense with consumption anticipated at about 1,397,000 metric tons.  The impact of a 10% change in fuel prices for 2015 would be approximately $38 million for the full year. 

Forecasted consumption is 52% hedged via swaps for the remainder of 2014 and 56%, 41% and 20% hedged for 2015, 2016 and 2017, respectively.  For the same four-years, the average cost per metric ton of the hedge portfolio is approximately $614, $635, $602 and $585, respectively.

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