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Fain - Royal Caribbean on the verge of some dramatic breakthroughs for ROIC and profit targets

Europe, Asia strength buoy Royal's Q2, company sets 'Double-Double' goal

Strong close-in bookings for Europe and Asia pushed Royal Caribbean to a higher than expected second quarter profit, and the company raised its 2014 guidance while also outlining a strategy to achieve a double-digit return on invested capital and double earnings per share.

Royal Caribbean's 66-cent per share profit beat Wall Street's 52-cent expectation and was up from EPS of 15 cents a year ago. Adjusted net income was $146.7m or, on a GAAP basis, $137.7m, or 62 cents per share, compared to 11 cents a year ago. Revenues were $1.98bn, up from $1.88bn.

On the strength of the quarter, Royal Caribbean raised its full year EPS guidance to a range of $3.40 to $3.50, up from $3.25 to $3.45. Analysts had been expecting $3.40. The company projected Q3 adjusted EPS as approximately $2.20.

'Higher pricing for close-in European sailings propelled us above the top end of our guidance for the quarter,' cfo Jason Liberty said. 'While the environment in the Caribbean remains promotional, our European itineraries continue to resonate well with strong demand from all markets.'

Bookings since the April earnings call have been 'up nicely' and the company continues to be booked ahead of last year in both load factor and APD. Double-digit yield improvement on European and China sailings is helping offset the continued promotional environment in the Caribbean.

Liberty noted that while the company's five remaining Black Sea sailings are 'under stress' due to the political unrest in the region, that has been more than offset by strength through the rest of the Mediterranean. The company is pleased with how the summer season is shaping up and continues to anticipate double-digit yield improvement for the year.

Royal Caribbean we still has a conservative outlook on the Caribbean, and remains bullish on Europe, Asia and Alaska sailings for the remainder of the year, Liberty said.

The Double-Double Program sets the goal of returning to double-digit ROIC and doubling earnings within three years.

Royal Caribbean chairman and ceo Richard Fain said the company has been 'dissatisfied with an unacceptably low level of ROIC' and has been working hard to raise returns by optimizing revenues, controlling costs and holding to moderate growth.

'We believe we are now on the verge of some dramatic breakthroughs in this regard and this is time to push us over the top,' he told analysts on Thursday.

Fain cited the strength of the brands, with Royal Caribbean International continuing to 'deliver the wow' and about to take that a step further with Quantum of the Seas, Celebrity Cruises attracting 'the most profitable guests' and Azamara Club Cruises achieving double-digit yield improvement. Globalization, particularly with the company's 'terrific market position in China,' is another driver.

The Royal Caribbean chief added that Pullmantur, which has been a significant drag, is about to 'turn an important corner.'

Controlling costs continues to be a priority, and Fain reiterated the company's commitment to 3% to 5% average compound capacity growth as an appropriate rate.

'This is the first time we recall RCL giving EPS guidance this far in advance,' said analyst Robin Farley of UBS Investment Research.

Doubling EPS to $6.80 to $7 by 2017 implies an annual growth rate of 26% in EPS and with +6% CAGR in capacity already locked in, Farley said, that could imply yield above 2% annually in 2015 to 2017. If expenses go up approximately 1% annually, it may take more than +4% annual yield growth to reach that goal or perhaps a very aggressive expense program, she added.

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