Royal Caribbean Cruises Ltd. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Figures are U.S. dollars unless noted. The company operates Royal Caribbean International, Celebrity Cruises and Silversea Cruises, and holds a 50% interest in TUI Cruises. Its full fleet had returned to service by quarter-end.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2.184 billion | $50.9 million | $3.243 billion | $92.9 million |
| Operating loss | $218.6 million | $1.024 billion | $1.078 billion | $1.833 billion |
| Net loss | $521.6 million | $1.347 billion | $1.689 billion | $2.479 billion |
| Diluted loss per share | $2.05 | $5.29 | $6.63 | $9.96 |
| Adjusted EBITDA | $109.7 million | $(711.3) million | $(440.0) million | $(1.251) billion |
Q2 operating and net loss margins were 10.0% and 23.9%, respectively; six-month margins were 33.2% and 52.1%. The sharp year-over-year revenue increase primarily reflects resumed sailings against a 2021 period when most global operations were suspended, so the comparison is not representative of a normal operating year.
- Operations: Q2 occupancy was 82.0%, versus 27.5% a year earlier; six-month occupancy was 71.5%, versus 32.1%. Q2 passengers carried were 1.34 million. Management said Q2 booking volumes for 2022 sailings averaged 30% above comparable 2019 booking volumes, while guests were booking closer to departure.
- Costs and margins: Q2 cruise operating expenses were $1.691 billion and marketing, selling and administrative expenses were $371.4 million. Management cited inflation and supply-chain pressures, especially fuel and food; fuel cost per metric ton, net of fuel swaps, rose 66% year over year in Q2 and 61% for the six-month period.
- Cash flow: Six-month operating cash used was $50.2 million, compared with $1.270 billion used in 2021. Investing cash used was $2.528 billion, including $2.318 billion of property and equipment purchases. Financing provided $1.980 billion. Cash declined to $2.102 billion at June 30 from $2.702 billion at year-end.
- Debt and liquidity: Total debt, net of issuance costs, was $23.213 billion; $5.466 billion was current. The weighted-average debt interest rate was 6.09%. Current liabilities were $11.719 billion, including $4.169 billion of customer deposits. Reported liquidity was $3.3 billion, including $2.1 billion cash, $0.5 billion of undrawn revolving capacity and a $0.7 billion term-loan commitment available to draw before August 12, 2022.
- Equity and investment: Shareholders’ equity was $3.398 billion, down from $5.086 billion at December 31, 2021. The company took delivery of Wonder of the Seas and Celebrity Beyond during the first half.
Material changes and developments
- Revenue, passenger volumes and occupancy rose substantially as the fleet returned to service; operating costs also rose with the restart, inflation and higher fuel prices. Losses narrowed compared with 2021, but the company remained loss-making.
- Customer deposits increased to $4.2 billion from $3.2 billion at year-end 2021. Approximately $0.6 billion represented unredeemed future cruise credits (FCCs); FCCs were about 20% of deposits, down from 32% at year-end.
- Capital spending increased: first-half property and equipment purchases were $2.3 billion, and anticipated 2022 capital expenditures were approximately $3.2 billion. The aggregate expected cost of Global Brand ships on order was $9.4 billion, with $0.6 billion deposited.
- In January, the company issued $1.0 billion of 5.375% senior notes due 2027. It also secured an option for up to $3.15 billion of five-year financing from Morgan Stanley to refinance, repurchase or repay specified 2023 notes, subject to conditions. About $3.2 billion of long-term debt was due in June 2023.
- July 2022 amendments to debt facilities revised covenant terms and established a monthly-tested $350 million minimum liquidity covenant under specified terms. The company reported covenant compliance at June 30 and estimated compliance for at least the following 12 months.
Outlook, risks and contingencies
- Management expected a net loss in the second half of 2022, citing higher fuel rates, interest rates and foreign-exchange rates. Based on rates current at filing, Q3 adjusted EPS guidance was $0.05–$0.25. Management did not provide a full-year earnings forecast.
- Management said COVID-19’s effects would continue to materially affect 2022 revenue, results, cash flows and financial condition. It also cited inflation and supply-chain challenges. Second-half sailings were booked at higher prices than 2019, both including and excluding FCCs, but load factors remained below historical levels; COVID-19 and the Russia-Ukraine war had set back recovery, particularly for Q3 European itineraries.
- The company estimated it had sufficient resources to meet obligations for at least 12 months, based on assumptions about continued operations, collections, occupancy, revenue per available passenger cruise day and costs. It cautioned that these assumptions are uncertain and said it would continue to pursue financing and other liquidity measures. Failure to meet applicable covenants or maintain required liquidity could adversely affect operations and financial condition.
- Key risks include renewed COVID-related disruption, weaker discretionary travel demand, inflation in fuel, food and labor, interest-rate and currency movements, high leverage and refinancing needs, shipbuilding delays and capital commitments. A hypothetical 1% rise in interest rates was estimated to add approximately $28.4 million to forecast 2022 interest expense.
- In the Havana Docks lawsuit, the court granted summary judgment for the plaintiff on liability; a damages trial was scheduled for September 2022. The company said it could not reasonably estimate any potential loss. A separate Port of Santiago case was dismissed with prejudice, with an appeal pending.
- Cash dividends and share repurchases remained restricted under lender arrangements; none were declared in the first half. Management did not expect cash dividends for the foreseeable future.
Investor verification priorities
- Track occupancy, booking prices and cancellation trends against management’s recovery assumptions, including the effect of FCC redemptions.
- Verify liquidity availability and covenant compliance after the July amendments, and monitor the 2023 debt maturities and planned refinancing.
- Compare realized fuel, food, labor and interest costs with management’s outlook and assess cash burn, capital spending and ship-delivery commitments.
- Follow the Havana Docks damages proceeding and any resulting estimate or disclosure of potential exposure.