Concordia Looms as Royal Caribbean 1Q Net Drops 40%

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April 20, 2012

NEW YORK (Dow Jones)–Royal Caribbean Cruises Ltd. (RCL) predicted another bottom-line decline in the current quarter, after first-quarter profit fell sharply on cost increases and demand pressure following a competitor’s deadly crash.

The company said such challenges were largely in line with what it expected, but its outlook for the current period was much gloomier than Wall Street’s view. Shares were down 4.2% at $27.66 in recent trading, and larger rival Carnival Corp.’s (CCL) stock was down 2% at $31.95.

Royal Caribbean Chairman and Chief Executive Richard D. Fain said on a conference call that the year’s performance is tracking close to predictions, which is “very encouraging.” But he said the market remains highly volatile and uncertain. The deadly grounding of Carnival Corp.’s (CCL) Costa Concordia vessel off the coast of Italy in January put the industry under intense scrutiny, and forced most operators to pull their marketing just as the key “wave season” for new reservations began.

Chief Financial Officer Brian J. Rice said new bookings fell about 20% in the first couple weeks after the Jan. 13 wreck, but the decline has retreated to a mid single-digit percentage cumulatively in the period from early February.

While the first quarter took a big hit from the crash, the period was “so heavily booked already that it was somewhat insulated from the impact,” according to Fain.

Business in the second and third quarters was “suffering the most,” he said, and Royal Caribbean projected much lower earnings in the second quarter than expected. It forecast a bottom line between a loss of 5 cents a share and a profit of 5 cents a share, while analysts polled by Thomson Reuters expected earnings of 19 cents a share.

The company expects sequential deterioration in two key industry metrics, net revenue yield and net cruise costs excluding fuel. Constant-currency yield, which measures revenue per available cruise day, is expected to be up 4% to 5% in the second quarter after the first-quarter’s 7% increase. Divided by capacity, net cruise costs are predicted to be up 10% to 11% excluding fuel versus a 5.7% increase in the latest period.

Most of the demand pressure is centered in Europe. Elsewhere, pricing remains in line or higher than the same time last year for all major itinerary groups except Europe, and the company has seen better demand over the last four weeks, especially in the U.S., where year-over-year bookings exceed last year’s levels.

It expects the effect of European business to be heaviest in the third quarter, when Europe itineraries account for more than half the total.

On the cost side, the company’s efforts to expand its international footprint, though lifting yields, have increased expenses. In addition, Royal Caribbean shifted some marketing expenses out into the second quarter because of the Costa Concordia incident, and it has an unusually high number of dry dock days for maintenance in the current quarter.

Royal Caribbean also lowered its full-year earnings outlook, which executives said “was 100% due to fuel.” It now sees $1.80 to $2.10 a share compared with February’s guidance for $1.90 to $2.30 a share. Royal Caribbean raised its projected fuel expense 3.8% for the year from its prior view, despite consumption expectation staying essentially flat.

Looking further out, Fain said sailings in the fourth quarter and for all of 2013 show promise and reiterated the company’s belief the Concordia incident wouldn’t have a long-term effect on business. Royal Caribbean also believes its globalization strategy will increase its resilience in difficult markets and spur exceptional performance in good ones.

In the latest period, Royal Caribbean reported a profit of $47 million, or 21 cents a share, down from $78.4 million, or 36 cents a share, a year earlier. The recent-quarter earnings included a penny gain related to the company’s fuel option portfolio, and the previous quarter included an 11 cent gain. The company in February forecast downbeat earnings of 10 cents to 20 cents.

Revenue increased 9.7% to $1.83 billion. Analysts polled by Thomson Reuters recently expected revenue of $1.77 billion.

-By Joan E. Solsman, Dow Jones Newswires

Copyright © 2012 Dow Jones & Company, Inc.

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