what direction what direction is this ship is this ship headed?headed?

Forecasting for Forecasting for the Love Boatthe Love Boat

Jackson 5 - The love you save

Sales Forecast: economy to industry to Sales Forecast: economy to industry to firmfirm

past futuremacroeconomic

series

industry sales

firm sales

predictable series based on past data

unpredictable series based on past data

estimate

relationestim

ate relation taking com

petitive analysis into account

forecast firm

salesforecast industry sales

Figure 8.1 Estimating Industry and Firm Sales from Macroeconomic Data

Sales Forecast: the sales-generating Sales Forecast: the sales-generating unitsunits

sales come from asset investments sales come from asset investments (generally)(generally)

1.1. asset base can grow (e.g. open new retail outlets)asset base can grow (e.g. open new retail outlets)

2.2. sales from existing assets can grow (e.g. sales from existing assets can grow (e.g. comparable store sales growth)comparable store sales growth)

sales growth =(1+asset growth)(1+comp growth)sales growth =(1+asset growth)(1+comp growth) assumes all units, new and old, enjoy comp growthassumes all units, new and old, enjoy comp growth assumes all units, new and old, have same sales assumes all units, new and old, have same sales

raterate

for a really fancy retail sales forecasting model, see Lundholm/McVay at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=486162

Sales assumption determines Sales assumption determines growthgrowth

SalesSalest-1 t-1 x (x (1+1+sales growthsales growthtt) = Sales) = Salestt growthgrowth

SalesSalestt x ( x (AssetsAssetstt/Sales/Salestt)= Assets)= Assetstt turnoverturnover

AssetsAssetstt x ( x (LiabilitiesLiabilitiestt/Assets/Assetstt) = Liabilities) = Liabilitiesttleverageleverage

AssetsAssetstt – Liabilities – Liabilitiestt = CE = CEtt

SalesSalestt x x NINItt/Sales/Salestt = NI = NItt,, marginmargin

CECEt-1t-1+ NI+ NIt t - DIV- DIVt t = CE= CEtt

… and DIVt is determined!

RCL: Sunny Skies and Clear Sailing?

Industry Capacity GrowthIndustry Capacity Growth

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

passenger growth % berth growth %

Or, assuming 5000 berths retired each year, industry growth in berths is 8.2%, 6.1% and 7.1% over next three years,. Can demand increase at least this much?

demand for cruising: who demand for cruising: who cruises?cruises?

Demographic Profile Ever Cruised

Past 5 Year Cruisers

Population over Age 24

Gender: Male Female

49% 51%

51% 48%

50% 49%

25-under 40 years 40-59 years 60 years or older

27% 42% 32%

28% 42% 30%

43% 44% 13%

Age:

Average Median

51 yrs. 51 yrs.

50 yrs. 51 yrs.

43 yrs. 42 yrs.

Marital Status:

Married Not Married

76% 24%

78% 22%

69% 31%

Have children under 18 Adults only

37% 63%

35% 65%

54% 46%

Household Composition:

Occupants 3 3 3 Education: Some College or

less College Graduate or more

42% 58%

36% 64%

54% 46%

$20,000-$29,999 $30,000-$39,999 $40,000-$59,999 $60,000-$99,999 $100,000 or more

8% 12% 32% 28% 20%

5% 10% 31% 30% 25%

13% 17% 31% 29% 9%

Household Income:

Average Median

$72,600 $58,500

$79,100 $64,500

$60,400 $51,800

1999 2000 2001

entire US population growth is about .91% for these years.

demand for cruising: demographics

demand for cruising: more demand for cruising: more vacations?vacations?

Average Number of Vacation Days

0

5

10

15

20

25

30

35

40

45

Italy France Germany Brazil Austria UK Canada Korea Japan USA

building an industry growth building an industry growth modelmodel

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.019

80

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

E

1999

E

2000

E

2001

E

per

cen

tag

e g

row

th

Real GDP Personal Consumption Expenditures Recreation Expenditures

estimating industry growthestimating industry growth

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0

% growth in GDP

% g

row

th in

Rec

reat

ion

E

xpen

dit

ure

s

% Rec growth = 3.23+1.14%GDP growth

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

19

80

19

81

19

82

19

83

19

84

19

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19

86

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88

19

89

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E

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E

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00

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E

pe

rce

nta

ge

gro

wth

Real GDP Personal Consumption Expenditures Recreation Expenditures % growth in passengers

the trouble is…

no relation!

Building a Sales-Unit ModelBuilding a Sales-Unit Model

assume that % sales growth =assume that % sales growth =(1+growth in berths)(1+growth in rev/berth) (1+growth in berths)(1+growth in rev/berth)

– 1– 1

year berths % change occupancy 365 days price/day revenue/berth % change (1+g)(1+c)-11998 29800 1.052 365 227 87163

1999E 30575 0.026 1.052 365 220 84476 -0.031 -0.0062000E 35950 0.176 1.06 365 215 83184 -0.015 0.1582001E 43100 0.199 1.06 365 210 81249 -0.023 0.171

berth forecasts from RCLyear berths at yr end weighted average berths1998 29800

1999E 32900 305752000E 38000 359502001E 44100 43100

growth in berthsgrowth in berths

EXPECTED PASSENGER VESSEL DELIVERY DATES CAPACITY(1) ------ ----------------- ----------- ROYAL CARIBBEAN INTERNATIONAL: Eagle-class Voyager of the Seas(2)................................. 4th Quarter 1999 3,100 Explorer of the Seas................................... 3rd Quarter 2000 3,100 Adventure of the Seas.................................. 2nd Quarter 2002 3,100 Vantage-class Radiance of the Seas................................... 1st Quarter 2001 2,100 Brilliance of the Seas................................. 2nd Quarter 2002 2,100 CELEBRITY CRUISES: Millennium-class Millennium............................................. 2nd Quarter 2000 2,000 Unnamed................................................ 1st Quarter 2001 2,000 Unnamed................................................ 3rd Quarter 2001 2,000 Unnamed................................................ 2nd Quarter 2002 2,000 (1) Based on double occupancy per cabin. (2) Included in table on prior page -- Cruise Ships and Itineraries.

In 1999 ¼ of 3100 new berths arrive. In 2000 get other ¾ of 3100 plus ½ of a new 3100 plus ¾ of a new 2000.

Royal Caribbean Cruises 1998 1997 1996Passengers Carried 1,841,152 1,465,450 973,602Passenger Cruise Days 11,607,906 8,759,651 6,055,068Occupancy Percentage 105.2 104.2 101.3Average Trip Length 6.3 6.0 6.2

Carnival Cruises 1998 1997 1996Passengers Carried 2,045,000 1,945,000 1,764,000Passenger Cruise Days 13,009,000 11,908,000 10,583,000Occupancy Percentage 106.3 108.3 107.6Average Trip Length 6.4 6.1 6.0

Occupancy – How full is the boat?

Forecast Occupancy for RCL 1999 2000 2001

105.2 106 106

Royal Caribbean Cruises 1998 1997 1996Revenue per Passenger Day 227 221 224SG&A per Passenger Day 31 31 32Operating Income per Passenger Day 42 35 36

Carnival Cruises 1998 1997 1996Revenue per Passenger Day 231 206 209SG&A per Passenger Day 28 25 26Operating Income per Passenger Day 63 56 52

Margins and Pricing

Forecast for RCL 1999 2000 2001

236 242 248

CCL price of 231 + CPI of 2.3%

increase by CPI of 2.5%

increase of CPI of 2.4%

bad news forecast 220 215 210good news forecast

my sales forecastmy sales forecast

year berths % change occupancy 365 days price/day revenue/berth % change (1+g)(1+c)-11998 29800 1.052 365 227 87163

1999E 30575 0.026 1.052 365 220 84476 -0.031 -0.0062000E 35950 0.176 1.06 365 215 83184 -0.015 0.1582001E 43100 0.199 1.06 365 210 81249 -0.023 0.171

year berths % change occupancy 365 days price/day revenue/berth % change (1+g)(1+c)-11998 29800 1.052 365 227 87163

1999E 30575 0.026 1.052 365 236 90619 0.040 0.0672000E 35950 0.176 1.06 365 242 93630 0.033 0.2152001E 43100 0.199 1.06 365 248 95951 0.025 0.229

bad news forecasts

good news forecasts

sales % growth forecast

Forecasting Costs: economies of scale?Actual Actual Actual Actual Actual

12/31/1994 12/31/1995 12/31/1996 12/31/1997 12/31/1998Sales Growth 1.1% 14.6% 42.9% 36.0%Cost of Goods Sold/Sales 62.2% 62.7% 63.0% 62.9% 60.5%R&D/Sales 0.0% 0.0% 0.0% 0.0% 0.0%SG&A/Sales 15.3% 15.0% 14.3% 14.0% 13.6%Dep&Amort/Avge PP&E and Intang. 4.2% 3.8% 3.7% 3.7%Interest Expense/Avge Debt 6.5% 6.6% 6.5% 6.7%Non-Operating Income/Sales 0.0% 1.7% 0.8% 0.4% 0.4%

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0 0.1 0.2 0.3 0.4 0.5

%dSales

%d

SG

A

slope of less than one implies economies of scale.

estimated slope of line:

%SGA = .90(%Sales).

implies that SGA/Sales ratio changes by the factor (1+.9g)/(1+g), where g is the %Sales.

price decreases of 3%, 2%, 2%, so CGS99 = .605/(1-.03) = 62.37% etc.

SGA% declines in 2000 and 2001 due to economies of scale, computed as 2000 ratio times (1+.9*(.158))/(1.158).

X’ord item for $47.7M for 9/11/2001 as given in case, = 1.2% of sales.

My Income Statement Forecast Assumptions

Actual Actual Actual Actual Actual Forecast Forecast ForecastFiscal Year End Date 12/31/1994 12/31/1995 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001

Implied Return on Equity 0.165 0.147 0.119 0.154 0.116 0.127 0.095

Income Statement AssumptionsSales Growth 1.1% 14.6% 42.9% 36.0% -0.6% 15.8% 17.1%Cost of Goods Sold/Sales 62.2% 62.7% 63.0% 62.9% 60.5% 62.4% 63.4% 64.9%R&D/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%SG&A/Sales 15.3% 15.0% 14.3% 14.0% 13.6% 13.6% 13.4% 13.2%Dep&Amort/Avge PP&E and Intang. 4.2% 3.8% 3.7% 3.7% 3.7% 3.7% 3.7%Interest Expense/Avge Debt 6.5% 6.6% 6.5% 6.7% 6.7% 6.7% 6.7%Non-Operating Income/Sales 0.0% 1.7% 0.8% 0.4% 0.4% 0.4% 0.4% 0.4%Effective Tax Rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Minority Interest/After Tax Income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other Income/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Ext. Items & Disc. Ops./Sales -0.5% 0.0% 0.0% -0.4% 0.0% 0.0% 0.0% -1.2%Pref. Dividends/Avge Pref. Stock 0.0% 0.0% 0.0% 7.2% 7.2% 7.2% 7.2%

bad news forecast

kept operating cash high because left interest revenue on income statement. Other current liabilities are the Customer Deposits – set at 23.7% as the average of past 5 years. Set Ending PPE so as to hit the capX amounts of 996M, 1196M and 1368M given in MD&A, as shown in SCF. Amortized Intangibles balance down by (1-.037). Held Preferred Stock a constant at $172500 (use Goal Seek in Excel).

Actual Actual Actual Actual Actual Forecast Forecast ForecastFiscal Year End Date 12/31/1994 12/31/1995 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001Balance Sheet Assumptions:Working Capital AssumptionsEnding Operating Cash/Sales 2.0% 2.6% 3.0% 5.7% 6.6% 6.6% 6.6% 6.6%Ending Receivables/Sales 0.8% 1.0% 1.1% 1.2% 1.4% 1.4% 1.4% 1.4%Ending Inventories/COGS 1.9% 2.3% 2.7% 3.1% 2.0% 2.0% 2.0% 2.0%Ending Other Current Assets/Sales 6.1% 2.3% 2.5% 2.1% 1.7% 1.7% 1.7% 1.7%Ending Accounts Payable/COGS 8.7% 9.6% 8.1% 8.9% 7.3% 7.3% 7.3% 7.3%Ending Taxes Payable/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Ending Other Current Liabs/Sales 17.8% 19.5% 23.7% 33.0% 24.5% 23.7% 23.7% 23.7%Other Operating Asset AssumptionsEnding Net PP&E/Sales 118.2% 148.5% 175.3% 246.8% 192.4% 223.4% 224.3% 222.0%Ending Investments/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Ending Intangibles/Sales 30.0% 28.8% 24.4% 16.5% 11.8% 11.4% 9.5% 7.8%Ending Other Assets/Sales 0.9% 1.3% 1.5% 1.2% 0.6% 0.6% 0.6% 0.6%Other Operating Liability AssumptionsOther Liabilities/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Deferred Taxes/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Financing AssumptionsCurrent Debt/Total Assets 0.0% 0.3% 0.5% 2.6% 2.2% 2.2% 2.2% 2.2%Long-Term Debt/Total Assets 40.1% 42.2% 47.6% 45.5% 41.2% 41.2% 41.2% 41.2%Minority Interest/Total Assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Preferred Stock/Total Assets 0.0% 0.0% 0.0% 3.2% 3.0% 2.7% 2.3% 2.0%Dividend Payout Ratio 0.0% 20.5% 22.8% 28.5% 21.3% 21.3% 21.3% 21.3%

My Balance Sheet Forecasts

So What Happened?So What Happened?

ships (berths) occurred almost ships (berths) occurred almost exactly as forecast; occupancy and exactly as forecast; occupancy and prices fell.prices fell.

year berths % change occupancy 365 days price/day revenue/berth % change (1+g)(1+c)-11998 29800 1.052 365 227 87163

1999E 30575 0.026 1.052 365 220 84476 -0.031 -0.0062000E 35950 0.176 1.06 365 215 83184 -0.015 0.1582001E 43100 0.199 1.06 365 210 81249 -0.023 0.171

1998 29800 1.052 365 227 871631999E 30575 0.026 1.047 365 215 82163 -0.057 -0.0332000E 35950 0.176 1.044 365 206 78498 -0.045 0.1232001E 43100 0.199 1.018 365 193 71713 -0.086 0.095

forecast

actual

Actual Actual Forecast Forecast ForecastFiscal Year End Date 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001Annual Growth RatesSales 42.9% 36.0% -0.6% 15.8% 17.1%Advanced Dupont Model Net Operating Margin 0.157 0.189 0.162 0.154 0.131x Net Operating Asset Turnover 0.551 0.554 0.493 0.493 0.502= Return on Net Operating Assets 0.086 0.105 0.080 0.076 0.066Net Borrowing Cost (NBC) 0.063 0.067 0.067 0.067 0.067Spread (RNOA - NBC) 0.024 0.038 0.013 0.009 (0.001)Financial Leverage (LEV) 1.403 1.305 1.118 1.078 1.066ROE = RNOA + LEV*Spread 0.119 0.154 0.094 0.086 0.065

Actual Actual Actual Actual ActualFiscal Year End Date 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001Sales 36.0% -3.4% 12.6% 9.7% Net Operating Margin 0.157 0.189 0.202 0.209 0.161x Net Operating Asset Turnover 0.554 0.484 0.454 0.383= Return on Net Operating Assets 0.105 0.098 0.095 0.062Net Borrowing Cost (NBC) 0.062 0.051 0.052 0.056Spread (RNOA - NBC) 0.042 0.047 0.043 0.006Financial Leverage (LEV) 1.305 0.960 0.884 1.228ROE = RNOA + LEV*Spread 0.160 0.143 0.133 0.069

But profitability held up

“The reason for the discounting: A glut of luxury ships were ordered during the booming ’90s.”

Estimating the amount of cash collected Estimating the amount of cash collected from customers in 1999, assuming from customers in 1999, assuming

ending balance of customer deposits was ending balance of customer deposits was $515,308 (and sales forecast is $515,308 (and sales forecast is

2,710,151):2,710,151):

Beginning balanceBeginning balance $ 402,926 $ 402,926

+ Cash collected+ Cash collected + $?????+ $?????

- Sales- Sales - $2,710,151 - $2,710,151

= Ending balance = Ending balance $515,308 $515,308

Cash collected=2,822,533Cash collected=2,822,533

Estimating the ending balance of Estimating the ending balance of PP&E for 1999, assuming PP&E for 1999, assuming

capX=$810,261 (and depr rate is capX=$810,261 (and depr rate is 3.7%):3.7%):

Beginning balance of PP&EBeginning balance of PP&E$5,073,008$5,073,008

+ capX+ capX +$810,261+$810,261

- Depreciation- Depreciation(3.7%x5,073,008+3.7%x 810,261/2)(3.7%x5,073,008+3.7%x 810,261/2) - - $202,691$202,691

= Ending balance = Ending balance $5,680,578$5,680,578