Royal Caribbean Cruises Ltd. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Dollar amounts below are in millions except per-share data and where otherwise noted.
Business context and financial performance
Royal Caribbean operates Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisières de France, and owns 50% of TUI Cruises. Results are seasonal; interim results are not necessarily indicative of the full year.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,980 | $1,883 | $3,867 | $3,794 |
| Operating income | $196 | $113 | $293 | $279 |
| Operating margin | 9.9% | 6.0% | 7.6% | 7.4% |
| Net income | $138 | $25 | $164 | $101 |
| Net margin | 7.0% | 1.3% | 4.2% | 2.7% |
| Diluted EPS | $0.62 | $0.11 | $0.74 | $0.46 |
| Adjusted diluted EPS (non-GAAP) | $0.66 | $0.15 | $0.86 | $0.51 |
Q2 passenger ticket revenue was $1,455 and onboard and other revenue was $525. For the first six months, those amounts were $2,803 and $1,064, respectively. Q2 occupancy was 104.9%, compared with 103.0%; six-month occupancy was 104.7%, versus 104.0%.
For the six months, operating cash flow was $881, investing cash outflow was $326, and financing cash outflow was $575. Cash declined $19 to $185. Capital expenditures were $342. The filing attributes stronger operating cash flow chiefly to higher customer deposits and the timing of vendor payments.
At June 30, total debt was $7,594, cash was $185, and net debt was $7,409. Net debt-to-capital was 45.6%, down from 47.2% at December 31, 2013. Available liquidity was approximately $1.1 billion, including $185 in cash and $874 available under unsecured credit facilities. Working capital deficit was $2.6 billion, which management says is customary for the industry because customers generally pay before sailing.
Material changes versus prior periods
- Q2 revenue rose 5.2% and net income increased to $138 from $25. Six-month revenue grew 1.9% and net income rose to $164 from $101.
- Management attributed revenue growth mainly to higher capacity and stronger close-in European and Asian ticket prices, partly offset by lower Caribbean ticket prices. Q2 capacity increased 4.5%; six-month capacity increased 2.5%.
- Q2 cruise operating expenses rose 0.5%; six-month expenses rose 1.1%. Capacity-related costs were partly offset by lower expenses following the Pullmantur non-core business sale and lower commissions.
- Net interest expense fell 24.9% in Q2 and 24.4% for the six months, mainly due to lower interest rates and, to a lesser extent, lower average debt.
- Net yields increased 2.4% in Q2, or 2.6% on a constant-currency basis; six-month net yields were comparable year over year, increasing 1.1% on a constant-currency basis. Net cruise cost per available passenger cruise day declined 3.3% in Q2 and 1.2% for the six months.
Outlook, commentary and risks
Management’s 2014 guidance was adjusted diluted EPS of $3.40–$3.50, net yield growth of 2%–3%, and net cruise costs per available passenger cruise day flat to up 1%. It expected full-year fuel expense of $949 and depreciation and amortization of $775–$785.
For Q3 2014, guidance included adjusted diluted EPS of approximately $2.20, reported net yield growth of 5%–6% (approximately 4% constant currency), and net cruise costs per available passenger cruise day up approximately 2% (1.5%–2.0% constant currency). Fuel expense was projected at $231.
The Double-Double Program targets double-digit return on invested capital and doubling 2014 adjusted EPS by 2017. Management expected operating cash flows and financing arrangements to cover capital expenditures and debt repayments over the next 12 months. It estimated approximately $15 of remaining cash outlays for profitability initiatives, mostly through year-end 2014.
- Capital commitments: Four Royal Caribbean ships on order had an aggregate estimated cost of $4.8 billion, with $525 deposited. Expected 2014 capital expenditures were approximately $1.4 billion. A conditional agreement for a fourth Oasis-class ship, expected to enter service in 2018, was subject to conditions expected in Q3.
- Brand valuation: Pullmantur goodwill of $151 and trademarks/trade names of $213 were not considered impaired at June 30. Management warned that modest forecast changes or failure to transfer planned vessels to Pullmantur could make impairment charges reasonably possible; persistent economic instability in its markets adds uncertainty.
- Market exposure: Fuel prices, foreign exchange and interest rates affect results. The company had hedged 55% of projected 2014 fuel purchases and 51% of 2015 purchases. A 10% fuel-price change was estimated to affect 2014 results by $20.8.
- Debt and contingencies: Debt covenants require minimum net worth of $5.9 billion, fixed-charge coverage of at least 1.25x and net debt-to-capital no greater than 62.5%; the company reported compliance with substantial headroom. Litigation involving crew wages remains unresolved, and its potential impact could not be estimated. Other routine claims are mostly insured.
- The company reported a $2.9 loss reserve associated with guarantees and a loan facility connected to the Pullmantur business sale; the transaction’s reported gain before that reserve was $0.8. It also disclosed a $172.5 outstanding TUI Cruises bank loan balance subject to a 50% company guarantee, while stating that payment under the guarantee was not considered probable.
Most important facts for investors to verify
- Whether bookings, ticket pricing and occupancy sustain management’s 2014 and Q3 yield and adjusted EPS guidance, including the effect of weaker Caribbean pricing.
- Whether projected cost control, fuel hedges and currency assumptions support the stated guidance and the Double-Double targets.
- Funding, timing and final costs for the shipbuilding program, including the conditional fourth Oasis-class order and projected capital expenditures.
- Pullmantur’s operating forecasts and planned vessel transfers, which are significant to the disclosed impairment sensitivity.
- Liquidity and refinancing capacity against debt maturities, ship payments, guarantees and other contractual commitments; also monitor any change in covenant headroom or credit ratings.