Royal Caribbean Cruises Ltd. — Q1 2019 Form 10-Q
Business context and reporting period
Global cruise company reporting the quarter ended March 31, 2019, compared with Q1 2018. It operates Royal Caribbean International, Celebrity Cruises, Azamara and Silversea, and holds equity-method investments in TUI Cruises and Pullmantur. Results include Silversea on a three-month lag: Q1 2019 includes Silversea’s October–December 2018 results, while Q1 2018 does not include Silversea. This limits direct comparability.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenue | $2.440 billion | $2.028 billion | Up 20.3% |
| Operating income | $318.8 million | $274.1 million | Operating margin about 13.1%, versus 13.5% |
| Net income attributable to Royal Caribbean | $249.7 million | $218.7 million | Up 14.2%; attributable net margin about 10.2%, versus 10.8% |
| Diluted EPS | $1.19 | $1.02 | Adjusted diluted EPS: $1.31 versus $1.09 |
| Operating cash flow | $1.078 billion | $924.1 million | Increase primarily reflected higher customer deposits |
| Property and equipment purchases | $470.1 million | $1.720 billion | Lower largely because no ship delivery or purchase occurred in Q1 2019 |
Revenue growth reflected 10.6% higher capacity, improved ticket prices, and higher onboard spending per passenger. Management reported constant-currency revenue growth of $457 million; foreign exchange reduced reported revenue by $45 million. Passenger ticket revenue rose 19.9% and onboard and other revenue rose 21.2%. Passenger occupancy was 107.1%, compared with 108.0%.
Operating expenses rose with capacity and the addition of Silversea. Total cruise operating expenses increased 20.2%; marketing, selling and administrative expense increased 23.0%; and depreciation and amortization increased 21.7%. Fuel expense was nearly flat at $160.2 million, while fuel cost per metric ton, net of fuel swaps, declined 11.2%. Interest expense increased 47.9% to $100.4 million, primarily due to higher average debt and, to a lesser extent, higher rates. Other expense fell to $5.1 million from $24.1 million, chiefly because the prior-year period included a $23.3 million Skysea impairment.
Net yields increased 7.2% reported and 9.3% on a constant-currency basis. Net cruise costs per available passenger cruise day (APCD) increased 6.1% reported and 6.9% constant currency; net cruise costs per APCD excluding fuel increased 8.7% reported and 9.6% constant currency.
Balance sheet, liquidity and capital commitments
At March 31, 2019, cash and equivalents were $248.2 million. Current debt was $1.646 billion, long-term debt was $7.526 billion, and commercial paper outstanding was $1.112 billion. Commercial paper had a 3.04% weighted-average interest rate and approximately 34-day weighted-average maturity. The company reported $1.7 billion of liquidity, comprising cash and $1.4 billion available under unsecured credit facilities net of commercial paper.
Working capital deficit was $6.8 billion, compared with $5.9 billion at December 31, 2018. Management said advance cruise receipts and the industry’s operating model typically produce a substantial deficit and expected it to continue. Customer deposits totaled $3.730 billion, including $2.2 billion of contract liabilities. The company said operating cash flows and financing arrangements should be adequate for capital spending and debt repayments over the next 12 months, and reported compliance with debt covenants at quarter-end.
Q1 investing cash outflow was $450.4 million; financing cash outflow was $667.7 million, including $146.8 million of dividends paid. The company declared a $0.70-per-share dividend in Q1, paid in April. No share repurchases occurred in the quarter; approximately $700 million remained under the authorized $1 billion repurchase program.
Ship purchase obligations were a major funding requirement: the company reported $11.4 billion aggregate cost for qualifying ships on order, with $667.8 million deposited; approximately 54% of the cost was exposed to Euro exchange-rate movements. Expected capital expenditures were approximately $3.0 billion in 2019, $3.9 billion in 2020, $3.1 billion in 2021, $3.5 billion in 2022 and $2.7 billion in 2023. These estimates exclude Partner Brand ship orders.
Guidance, management commentary and notable developments
On May 1, 2019, management provided the following 2019 outlook, based on then-current fuel prices, interest rates and exchange rates:
- Full-year net yields: up 6.5%–8.0% reported and 7.5%–9.0% constant currency.
- Full-year net cruise costs per APCD: up 6.5%–7.0% reported; excluding fuel, approximately 9.5% reported.
- Full-year capacity growth: 8.1%; fuel expense: approximately $707 million; adjusted diluted EPS: $9.65–$9.85.
- Q2 net yields: up 8.0%–8.5% reported and approximately 9.5% constant currency; adjusted diluted EPS: $2.45–$2.50.
Management highlighted capacity additions and improved ticket pricing and onboard spending as growth drivers, while noting exchange-rate headwinds and higher costs. Guidance is forward-looking and sensitive to currency, yields, costs, LIBOR and fuel prices; the filing does not provide GAAP reconciliations for projected non-GAAP measures because required inputs were uncertain.
Subsequent to quarter-end, the company took delivery of Spectrum of the Seas and borrowed $908 million to finance the purchase. It also drew a $1.0 billion three-year term loan to refinance certain borrowings, amended a revolving facility to extend it through April 2024 and increase its size to $1.7 billion, and recorded an approximately $6.5 million debt-extinguishment loss after quarter-end. Additional ship orders disclosed after quarter-end remained subject to conditions or financing.
Risks include economic weakness reducing discretionary travel demand; higher fuel, labor, food or financing costs; currency and interest-rate volatility; capacity growth and competitive pricing; weather, safety, health, cyber and operational disruptions; and regulatory or geopolitical developments. The filing specifically noted possible litigation and itinerary impacts from the U.S. change in Cuba policy effective May 2019. Routine industry claims were largely insured, and management did not expect them, net of insurance recoveries, to have a material adverse effect. The company also identified change-of-control provisions that could accelerate debt repayment.
ASC 842 lease accounting was adopted January 1, 2019, adding operating lease right-of-use assets and liabilities; management reported no material effect on income, cash flows or debt-covenant calculations and no opening retained-earnings adjustment.
Most important facts for investors to verify
- Assess the comparability of reported growth given Silversea’s three-month reporting lag and its inclusion in Q1 2019 but not Q1 2018.
- Track whether yield growth can continue to outpace per-APCD cost increases, particularly excluding fuel.
- Monitor debt, commercial-paper refinancing, interest expense and available credit against the substantial shipbuilding commitments and forecast capital expenditures.
- Compare results with the 2019 and Q2 guidance, including the effects of foreign exchange, fuel prices, interest rates and capacity deployment.
- Evaluate exposure to Cuba-related legal and itinerary changes, as well as the broader operational, regulatory, weather and demand risks described in the filing.