Royal Caribbean Cruises Ltd. — Q2 2016 Form 10-Q
Business context and period: Global cruise operator reporting the quarter and six months ended June 30, 2016, compared with the same periods in 2015. Figures are in U.S. dollars; financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $2,105.3 | $2,058.3 | $4,023.1 | $3,873.9 |
| Operating income | $282.3 | $261.3 | $445.4 | $367.0 |
| Operating margin | 13.4% | 12.7% | 11.1% | 9.5% |
| Net income | $229.9 | $185.0 | $329.0 | $230.2 |
| Net margin | 10.9% | 9.0% | 8.2% | 5.9% |
| Diluted GAAP EPS | $1.06 | $0.84 | $1.52 | $1.04 |
- Q2 revenue rose 2.3%; passenger ticket revenue increased 0.6% and onboard and other revenue increased 6.9%. Six-month revenue rose 3.8%.
- Q2 adjusted diluted EPS was $1.09 versus $0.84; six-month adjusted diluted EPS was $1.65 versus $1.04. These are non-GAAP measures.
- Q2 net yields were flat year over year, or up 1.1% on a constant-currency basis. Six-month net yields rose 1.4%, or 3.9% constant currency.
- Cash provided by operations for the six months was $1,270.9, versus $1,040.3 in 2015. Investing cash outflow was $2,212.5, including $2,047.2 of property and equipment purchases; financing cash inflow was $1,000.5.
- Cash and cash equivalents were $175.2 at June 30. The company reported total liquidity of about $0.8 billion, including $14.5 of cash attributable to assets held for sale and $607.0 available under unsecured credit facilities.
- Long-term debt, including current maturities, was approximately $10.05 billion, up from $8.53 billion at December 31, 2015. Working capital deficit was approximately $3.5 billion; management attributed this largely to advance customer receipts and said it was typical for the industry.
Material changes versus prior period
- Capacity increased 5.6% in Q2 and 5.2% for the six-month period. Passenger volumes and revenues benefited, while new ships increased depreciation and operating costs.
- Lower fuel costs helped results: fuel expense fell $25.9 million in Q2 and $55.3 million for the six months. Management cited lower fuel cost per metric ton, net of fuel hedges, of 14.6% and 16.5%, respectively.
- Foreign-exchange movements reduced revenue by $30.2 million in Q2 and $95.4 million for the six months, partly offset by lower translated cruise operating expenses.
- Q2 operating income improved despite higher selling, administrative and depreciation costs. For the six months, net income also reflected a $21.7 million loss from eliminating Pullmantur’s two-month reporting lag; adjusted results exclude this item.
- The company took delivery of Ovation of the Seas and Harmony of the Seas, financed with new term loans. It repurchased $250.0 million of shares and paid $243.6 million in dividends during the six months.
Outlook, commentary and risks
- As of August 2, 2016, full-year 2016 guidance was adjusted diluted EPS of $6.00–$6.10; net yields up approximately 2.0% as reported and 4.0%–4.5% constant currency; and capacity growth of 3.3%. Net cruise costs per available passenger cruise day (APCD) were expected to decline 1.5%–2.0% as reported, with costs excluding fuel flat to 1.0% higher.
- Q3 2016 guidance included adjusted diluted EPS of approximately $3.10, net yields approximately flat as reported and up approximately 2.0% constant currency, and capacity growth of 3.2%. Management based forecasts on fuel prices, interest rates and exchange rates at that time; adjusted EPS guidance was used because future restructuring and initiative costs were uncertain.
- In July 2016, after quarter-end, Royal Caribbean sold 51% of Pullmantur and CDF Croisières de France, retaining 49%, ownership of the vessels and aircraft, and certain service roles. It expected an immaterial gain and to account for the retained investment using the equity method. Related assets of $85.9 million and liabilities of $100.0 million were classified as held for sale at June 30.
- Firm ship orders represented approximately $5.3 billion of commitments, excluding TUI Cruises’ orders and proposed orders subject to conditions; 65.1% of the stated firm-order cost was exposed to euro movements. Total contractual obligations were $16.65 billion, including $4.10 billion of ship purchase obligations and $10.00 billion of debt obligations.
- Management expected operating cash flows and existing financing arrangements to cover capital expenditures and debt repayments over the next 12 months. It reported compliance with debt covenants and said the company was well above required thresholds.
- Market exposures include fuel prices, interest rates and foreign exchange. Senior unsecured ratings were BB+ (S&P) and Ba1 (Moody’s); certain long-term interest-rate derivatives may require collateral if ratings remain below specified investment-grade thresholds at applicable five-year anniversaries. The earliest anniversary was November 2016; no collateral was required at June 30.
- The filing described Alaska emissions notices and routine industry litigation; management did not expect these matters, net of expected insurance recoveries where applicable, to materially affect results or financial condition. It reported no material change in previously disclosed risk factors.
Most important facts to verify
- Whether demand, pricing and capacity utilization support the 2016 yield and adjusted EPS guidance, particularly given geopolitical pressure on Mediterranean and Asia pricing.
- How the Pullmantur/CDF transaction affects future reported revenue, earnings, cash flows and the company’s continuing exposure as vessel owner and service provider.
- Funding needs and refinancing capacity amid increased debt, substantial ship commitments and a $3.5 billion working capital deficit.
- Foreign-exchange, fuel-price and interest-rate sensitivity, including potential derivative collateral calls and the assumptions underlying hedging.
- Progress on newbuild deliveries, capital spending and the planned completion of the remaining $50 million share-repurchase authorization.