Norwegian Cruise Line Holdings Ltd. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars unless noted. The company operates Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,664.3m | $1,522.2m | $3,067.9m | $2,815.6m |
| Operating income | $308.7m | $292.2m | $467.0m | $459.2m |
| Net income | $240.2m | $226.7m | $358.3m | $329.8m |
| Diluted EPS | $1.11 | $1.01 | $1.65 | $1.45 |
| Adjusted EBITDA | $497.2m | $465.2m | $857.8m | $791.6m |
| Adjusted EPS | $1.30 | $1.21 | $2.13 | $1.81 |
- Revenue and yields: Q2 revenue rose 9.3%; management attributed growth to higher ticket pricing and onboard spending, plus 1.7% more capacity days. Net Revenue increased 6.8% and Net Yield increased 5.0% (5.8% on a constant-currency basis). Six-month revenue increased 9.0%, Net Revenue 7.8%, and Net Yield 4.0% (4.8% constant currency).
- Margins and costs: Q2 operating margin was 18.5%, versus 19.2% a year earlier; net margin was 14.4%, versus 14.9%. Net Cruise Cost per Capacity Day rose 4.7% in Q2; Adjusted Net Cruise Cost Excluding Fuel per Capacity Day rose 5.1% (6.1% constant currency). Higher costs reflected added ship capacity, Norwegian Joy’s redeployment, promotions and the Cuba itinerary change. Six-month operating margin was 15.2%, versus 16.3%; net margin was 11.7% in both periods.
- Cash flow: For the first half, operating cash flow was $1,059.8m, down from $1,253.8m. Investing cash outflow was $428.1m, compared with $1,186.1m, primarily reflecting ship construction and improvement spending. Financing cash outflow was $375.6m. Cash rose to $419.9m from $163.9m at year-end 2018.
- Liquidity and debt: Reported liquidity was $1.3bn, comprising $419.9m cash and $875m available under the revolving facility. Working capital deficit was $2.7bn, including $2.2bn of advance ticket sales. Current and long-term debt totaled approximately $6.35bn on the balance sheet. The company refinanced debt, extended the revolving and term A facilities to 2024 subject to conditions, and entered into new secured term loans.
- Capital returns and equity: The company repurchased $200.1m of shares in the first half. Weighted-average diluted shares declined to 216.8m in Q2 from 224.4m.
Material changes and unusual items
- Q2 net income rose 6.0% and diluted EPS increased from $1.01 to $1.11; Adjusted EBITDA increased 6.9%. Capacity days increased, although Q2 passengers carried were slightly lower and occupancy declined to 108.4% from 109.0%.
- Six-month net income included a $35.7m tax benefit from reversing substantially all of a valuation allowance against Prestige net operating loss carryforwards. This is a material factor when assessing reported earnings growth.
- In June, U.S. restrictions ended authorized group people-to-people educational travel to Cuba. The company stopped Cuba sailings and estimated an approximately $0.06 negative effect on diluted and adjusted EPS for both Q2 and the first half.
- Other income was $3.6m in Q2 2019, primarily from insurance proceeds and a litigation settlement, partly offset by foreign-exchange losses; the prior-year quarter included $12.9m, primarily foreign-exchange gains.
Outlook, commitments and risks
- The filing gives no specific full-year earnings or revenue guidance. Management expected the Cuba change to negatively affect diluted and adjusted EPS for the remainder of 2019.
- The company had 26 ships and orders for 11 additional ships, with deliveries scheduled through 2027. The disclosed combined contract price was approximately €7.9bn ($9.0bn); export-credit financing was expected to fund about 80%, subject to conditions. Anticipated capital expenditures were $1.2bn for the remainder of 2019, $1.2bn in 2020 and $0.7bn in 2021.
- Key exposures include fuel prices, interest rates and euro exchange rates. As of June 30, 75% of debt was fixed and 25% variable; a one-percentage-point LIBOR increase was estimated to add about $16.2m to annual interest expense. A 10% fuel-price increase was estimated to add $21.0m to anticipated 2019 fuel expense, partly offset by hedges. Fuel purchases were hedged approximately 72% for the remainder of 2019 and 56%, 47% and 13% for 2020, 2021 and 2022.
- Risks discussed include consumer demand and economic conditions, fuel and currency volatility, shipbuilding delays, port availability, safety and security incidents, regulation, litigation, and debt and covenant restrictions. Management said it was in compliance with debt covenants at quarter-end and believed liquidity sources would cover obligations over the next 12 months, while noting future cash flows and financing are not assured.
- A Booksafe travel-protection class action was compelled to individual arbitration and dismissed in court; plaintiffs appealed. The company said it did not expect litigation losses in aggregate to be material, while noting some potential losses could not yet be estimated.
Most important facts for investors to verify
- Whether revenue and yield gains persist as operating costs per capacity day rise and occupancy eases.
- The extent and duration of the Cuba-related earnings impact, and whether other itinerary or port restrictions emerge.
- Underlying earnings excluding the $35.7m tax benefit and the company’s disclosed non-GAAP adjustments.
- Funding and delivery assumptions for the $9.0bn ship order book, planned capital expenditures, and related future depreciation and debt service.
- Liquidity quality given the $2.7bn working capital deficit, advance-ticket refund exposure, and reliance on continued bookings and operating cash flow.
- Debt, interest-rate and fuel-hedging exposures, and any material developments in litigation or regulatory matters.