Royal Caribbean reported a remarkable second quarter financial turnaround, posting a profit of $60.5 million after a loss in the first quarter of this year. How did they do it?
To put the turnaround in perspective, rival Carnival Corp. reported a profit of $252 million in the second quarter of this year, far greater than Royal's. But that's down from a profit of $264 million in the period, versus a loss of $35 million reported by RCL for Q2 2009.
Unlike Carnival, Royal is still not providing a dividend, but the company has come a long way from a year ago, when it was viewed by several key financial analysts as saddled with dwindling cash reserves in the midst of ambitious expansion. Now the focus is on balance sheets and liquidity – not as sexy as innovative new ships, but apparently what Wall Street wants. CFO Brian Rice told financial analysts during a recent call that liquidity now exceeds $1 billion and capital expenditures will drop significantly over the next couple of years.
Royal execs cite well-known factors for the turnaround, including a growing overseas source market and the ongoing positive impact of Oasis. But cost cutting has certainly been an important factor. Net cruise costs declined 2.8% in the quarter while ticket yields rose 7.1%.
Royal's Richard Fain is known to be a showman on these types of calls, proudly extolling the latest ship to investors. But investors are wary of hype these days, and Fain has rarely been more restrained than on the most recent call. He began the call by saying: "Today, my comments will be brief, because I think the numbers themselves deliver a nice story. Simply put, the year is progressing better than we expected it to."
During the Q&A part of the call, Fain says making more money off existing hardware is the short-term priority." We're expecting to see more of our improvement in the future to margin improvement rather than just to top line growth or just through capacity growth. And so we expect new capacity increases to be less than the past."
Royal may not be ordering new ships anytime soon, but there are still some in the pipeline. Allure of the Seas arrives in Q4, Celebrity Silhouette in the third quarter of next year, and the fifth Solstice-class vessel in the fourth quarter of 2012.
While Royal execs are pleased with consistent booking patterns, CFO Rice preached caution, pointing out that 2009 was a year that makes it easy for 2010 to look good: "If it weren't for last year, we would be miserable this year."
As for commission indicators, Royal reported "commissions, transportation, and other" increased from $232 million in the second quarter of 2009 to $271 million in Q2 2010. For the first half of the year, that bottom line expense increased from $468 million to $540 million.
