Oct 23, 2015 · News

RCL forecasts year-end profits at twice 2013, refocuses Pullmantur on core Spanish market

Before getting to the particulars of Royal Caribbean’s Q3 earnings call today, Chairman and CEO Richard Fain disclosed a previously unnoticed achievement, a “good omen” for the cruiseline’s Double-Double profitability initiative.

“It looks like we’re hitting one interesting milestone this year, which none of us paid any attention to before,” Fain said, after reiterating Double Double’s twin objectives of achieving double-digit ROIC and a doubling of 2014 earnings. “When we set out on this path, our focus was on 2017.

“But I was very pleased when somebody pointed out to me that our new forecast for 2015 means we will be exactly twice our 2013 profit at the end of this year. It’s exciting to see that we’re about to double our profitability in just two years from $2.40 to $4.80. I like a good omen and this one suits me just fine.”

That bright note prefaced both an announcement of an accelerated $500 million share repurchase program – expected to be completed by the end of 2016 – and a “painful” non-cash impairment charge of nearly $400 million necessitated by the economic turmoil foiling RCL’s Pullmantur brand strategy in Latin America.

“Taking such a large write-down is always painful, and no one likes to acknowledge something like this,” Fain explained. “But it’s also true that every cloud has a silver lining.”

“In this case, the write-down enables us to put this issue behind us and focus Pullmantur on a simpler and more attractive proposition – catering to its Spanish base. I believe that we can now move forward with a more positive attitude that enables a more positive outlook.”

Turning his sights to the opposite side of the globe, Fain said a concerted effort over the last few years to cement the line’s position and reputation in China’s burgeoning cruise market has been very successful. (Michael Bayley, Royal Caribbean International’s president and CEO, noted later in the call that the brand has been chosen best cruise line in China for the eighth year in a row.)

“It’s been a major learning experience and not an easy one,” Fain said of the China experience. “But fortunately the market has been very receptive to our product and to our message.”

It has enabled RCL to increase deployment of ships in China and their seasonality, with Quantum of the Seas now sailing year round, and to say that “China and the growth of the Asia Pacific region has and will continue to be yield-accretive for the brand overall.”

Looking to 2016, Fain said RCL’s 7-month-old ban on “last minute discounts” – some as far out as 40 days before sailing – has contributed to a higher percentage of bookings at higher prices than ever before in the company’s history.

After noting that the price-integrity policy has now been expanded to sailings in Britain and Ireland, Fain concluded, “We still expect it will cost us a bit more in 2016, but the long-run benefit in guest satisfaction, in travel agent support and in bottom line results will pay handsome dividends in the long run.”

More details of the Q3 earnings call are available online at rclinvestor.com.