The current promotional environment, a sourcing shift to South America and China, plans for free cash flow and cost opportunities were topics aired with Royal Caribbean management during UBS Investment Research meetings.
The current promotional environment, with free upgrades and other non-cash value add-ons is, not the worst Royal Caribbean management has seen, UBS said in a note recapping its meetings. Promotions are now targeting July sailings.
Royal Caribbean previously stated the fourth quarter and 2013 were ahead in cumulative booked values, but UBS said management’s comment that it is too early to know if third quarter issues are specific to Europe or more widespread may mean Q4 is not as far ahead now.
UBS analyst Robin Farley put Royal Caribbean’s 2013 Europe capacity at 26%, down from 29% this year and 31% in 2011. She said the company’s original goal had been to source international customers for about 50% of cruises, mostly from Europe, but Royal Caribbean is now focused on sourcing from the Southern Hemisphere, primarily South America, and from China.
The company will boost berths in China next year, but that will still account for only 3% to 4% of capacity. Farley’s impression is that China remains a tough place to do business and may be only break-even at the ship level while not covering overhead costs. Still, she said, Spain is worse for shipboard margins, but that could be due to China’s on-board gaming revenues.
In the UBS meetings, Royal Caribbean reiterated its priority of returning to investment grade—one notch from their current rating—and Farley said management sees ‘BBB’ as high as they need to go.
With free cash flow to rise in 2013, the first in a number of years with no newbuild deliveries, Royal Caribbean seems to slightly favor dividends over share repurchase, Farley told investors. She flagged the possibility of a ship order in the next year for 2016 delivery, following newbuilds in 2014 and 2015 for Royal Caribbean International. (Also, joint venture TUI Cruises has a ship coming in 2014 with an option to be decided later this year.)
On costs, Royal Caribbean may take advantage of lower fuel prices to hedge further out in 2014 to 2016. Farley said next year is already 50% hedged, while 2014 is 33% hedged and 2015 is 20% hedged.
Otherwise, the company isn’t likely to pare ship operating expenses further, as it has already trimmed food costs and doesn’t want to impact quality. Instead, Royal Caribbean may look at streamlining overseas operations—not cutting its international presence but examining ‘all of the offices, reservation centers and marketing campaigns that the company has built up internationally’ as it expanded, Farley said.
UBS reiterated its ‘neutral’ rating on RCL with a price target of $29. Shares opened at $23.08 on Wednesday.
The current promotional environment, with free upgrades and other non-cash value add-ons is, not the worst Royal Caribbean management has seen, UBS said in a note recapping its meetings. Promotions are now targeting July sailings.
Royal Caribbean previously stated the fourth quarter and 2013 were ahead in cumulative booked values, but UBS said management’s comment that it is too early to know if third quarter issues are specific to Europe or more widespread may mean Q4 is not as far ahead now.
UBS analyst Robin Farley put Royal Caribbean’s 2013 Europe capacity at 26%, down from 29% this year and 31% in 2011. She said the company’s original goal had been to source international customers for about 50% of cruises, mostly from Europe, but Royal Caribbean is now focused on sourcing from the Southern Hemisphere, primarily South America, and from China.
The company will boost berths in China next year, but that will still account for only 3% to 4% of capacity. Farley’s impression is that China remains a tough place to do business and may be only break-even at the ship level while not covering overhead costs. Still, she said, Spain is worse for shipboard margins, but that could be due to China’s on-board gaming revenues.
In the UBS meetings, Royal Caribbean reiterated its priority of returning to investment grade—one notch from their current rating—and Farley said management sees ‘BBB’ as high as they need to go.
With free cash flow to rise in 2013, the first in a number of years with no newbuild deliveries, Royal Caribbean seems to slightly favor dividends over share repurchase, Farley told investors. She flagged the possibility of a ship order in the next year for 2016 delivery, following newbuilds in 2014 and 2015 for Royal Caribbean International. (Also, joint venture TUI Cruises has a ship coming in 2014 with an option to be decided later this year.)
On costs, Royal Caribbean may take advantage of lower fuel prices to hedge further out in 2014 to 2016. Farley said next year is already 50% hedged, while 2014 is 33% hedged and 2015 is 20% hedged.
Otherwise, the company isn’t likely to pare ship operating expenses further, as it has already trimmed food costs and doesn’t want to impact quality. Instead, Royal Caribbean may look at streamlining overseas operations—not cutting its international presence but examining ‘all of the offices, reservation centers and marketing campaigns that the company has built up internationally’ as it expanded, Farley said.
UBS reiterated its ‘neutral’ rating on RCL with a price target of $29. Shares opened at $23.08 on Wednesday.
