Royal Caribbean Execs Calm Analyst Concerns


Richard Fain

Before Royal Caribbean's second quarter earnings call last Thursday, one might have expected reports of trouble from the usual suspects: hurricanes, capacity increases, fuel prices, and exchange rates.

The day before the call, RCL's stock dropped sharply (-2.5%), apparently in expectation that the second half of the year was shaping up as being less than stellar. Then RCL stock dropped sharply in pre-trade hours, and the decline accelerated once the earnings report was released.

But after Chairman/CEO Richard Fain and colleagues addressed financial analysts in the earnings call that morning, there was a turnaround, for that day at least. By day's end Royal's share price closed up by 4.4%, far exceeding the market itself, in fact one of its bigger daily gains of the year.

The fact that mixed trading returned subsequently, though not enough to negate the gain, made the one-day respite stand out even more.

Was the gain due to the presentation itself? Perhaps we're overstating, but we've seen this happen before on Royals' earnings calls. More often than not, the day that Royal make these calls, their stock tends to outperform the market with heavy trading volumes. There’s a certain art to finding the right combination of enthusiasm and honesty to give financial analysts comfort.

Emphasizing Strengths

Perhaps it's the content and tone of the calls that make a difference. In this case, during his strategic overview of the business, Chairman/CEO Richard Fain ably brushed aside investor worries on the key concerns.

"Having to deal with the headwinds of foreign exchange and fuel rates is extremely frustrating, especially this year, when both have moved so strongly against us," he noted, adding: "As frustrating as it is, we feel very good about the fact that the strength of our business is more than compensating for such powerful negative forces."

Not once did Fain mention the hurricane season during his prepared talk; instead he jumped over that time period to speak of business on the books for 2019. "Looking forward, we have a higher percentage of 2019 booked than we did a year ago for 2018, and they're booked at higher prices," he summed up.

CFO Jason Liberty then reported in on Q2 results. A few numbers stood out: net revenues were up 2.8% for the quarter with onboard revenue increased by 5.5% year over year.

Looking forward, he said: "We are booked ahead in both rate and volume for each of our core Caribbean, European, and Asia-Pacific products, and we have no signs of these great demand trends dissipating."

Q & A On Hurricanes, Challenges

During the Q & A session, execs were pelted with questions about the hurricane season. But the Royal execs were ready for them. For instance, when asked, "In the Caribbean the rest of the year, just overall, do you have a lot left to sell in the third or fourth quarter? I mean how much variability could there be, for example, if there were storms in the fourth quarter?"

Liberty responded, "...We're certainly north of 95% booked for the third quarter and it's pretty linear going to the fourth quarter."

Later in the Q & A, Fain, addressing whether pricing in the Caribbean was more challenging than expected, conceded that the hurricanes did indeed have an impact "that was more than anticipated" for this year.

After the initial drop-off in business last year during the storms, Caribbean sales picked up. But then portions of the Caribbean struggled once more. "The [consumer] concern would be the destinations be less attractive and also there would be more storms. I think it took longer to recover."

Summing up last year's storms and their impact: "We had the worst year we've ever had with respect to hurricanes, and obviously we're not expecting that to reoccur. But it did have an impact on the consumer sentiment."

Keeping It Real

On some less successful earnings calls we've tuned into over the years, execs seemed more inclined to give sales pitches than answer tough questions. There was nothing like that from Royal. For instance, no one in the business likes the direction cruise stocks are going this year, but, as Fain put it, "The market anticipates things differently than we do" at times.

He put it all in perspective, noting there are always headwinds and tailwinds in this business. As for the latter, he said, "The guidance we're giving out now is actually ahead of where we thought we would be at the beginning of the year."

At times, there was passion, too, like when Fain said of RCI’s most recent acquisition, "As we mentioned when we announced this partnership, we had a gap in our portfolio, and to close it with a brand like Silversea that is at the top of its market segment was an answer to a prayer."

Overall, the call combined good results with a level-headed look at the triumphs and challenges of the quarter and outlook. We're not financial analysts, but it does appear that a well-prepared conference call can make a difference, at least for a day, and that's not unimportant, given the unusual amount of attention paid to these calls.

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