Royal Caribbean Cruises Ltd. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Royal Caribbean operates Royal Caribbean International, Celebrity Cruises and Silversea Cruises, and owns a 50% interest in TUI Cruises, accounted for under the equity method.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $3.523bn | $2.184bn | $6.408bn | $3.243bn |
| Operating income (loss) | $771.6m | $(218.6)m | $1.043bn | $(1.078)bn |
| Net income (loss) attributable to Royal Caribbean | $458.8m | $(521.6)m | $410.9m | $(1.689)bn |
| Diluted EPS | $1.70 | $(2.05) | $1.60 | $(6.63) |
| Operating margin | 21.9% | (10.0)% | 16.3% | (33.2)% |
Q2 revenue comprised $2.444bn passenger ticket revenue and $1.079bn onboard and other revenue. Occupancy was 105.0%, versus 82.0% a year earlier; six-month occupancy was 103.6%, versus 71.5%. Adjusted EBITDA, a non-GAAP measure, was $1.173bn for Q2 and $1.815bn for the six months.
- Cash flow: Six-month operating cash flow was $2.701bn, compared with cash used of $50.2m in 2022. Investing used $1.022bn, including $1.048bn of property and equipment purchases. Financing used $2.888bn, primarily reflecting $4.249bn of debt repayments. Cash declined $1.209bn to $726.4m.
- Liquidity: $3.7bn at June 30, including $726.4m cash and $3.0bn undrawn revolving credit capacity. Management said it expects liquidity to cover obligations for at least the next 12 months.
- Debt: Total debt was $20.829bn before unamortized issuance costs and $20.399bn net of those costs; the weighted-average interest rate was 7.16%. Interest expense, net of capitalized interest, was $355.5m in Q2 and $714.9m for the six months.
- Balance sheet: Total assets were $32.923bn and shareholders’ equity was $3.541bn. Customer deposits were $5.676bn, up from $4.168bn at year-end 2022.
Material changes versus prior periods
- Revenue and profitability rebounded from 2022 losses as operations returned to full scale. Management attributed growth to higher capacity, occupancy and ticket prices; comparisons are against periods of partial resumption of operations in 2022.
- Q2 total revenue increased about $1.339bn, while cruise operating expenses increased about $275m. For the six months, revenue increased about $3.165bn and cruise operating expenses about $883m.
- Interest expense increased year over year, reflecting higher rates on refinancing and floating-rate debt, and debt-extinguishment losses of $30.2m in Q2 and $43.5m for the six months.
- In the six months, the company repaid $2.7bn on revolving facilities. It issued $700m of 7.25% senior guaranteed notes, borrowed $503.2m for Silver Nova, and repaid $392m of 11.50% secured notes. A further $300m repayment of those notes occurred in July.
- Through its iCON partnership, the company sold 80% of the PortMiami terminal entity for $208.9m and retained a 20% interest. It also reported $62.5m of equity-method income for the six months, versus a $44.2m loss in 2022, primarily reflecting improved TUI Cruises results.
Outlook, risks and unusual items
- The filing does not provide a clear earnings or revenue forecast. It estimates 2023 capital expenditures of approximately $4.2bn for the company’s Global Brands’ existing ship orders, excluding Partner Brand orders. Global Brand ship orders were estimated to cost $11.0bn, with $1.0bn deposited; committed ship financing was $8.3bn.
- Management expects covenant compliance for at least the next 12 months and says it has sufficient resources for obligations over that period, while noting uncertainty in forecasting liquidity needs. The company may pursue additional financing or refinancing and may reduce capital expenditures or costs if needed.
- Material obligations include debt service and shipbuilding commitments. The filing lists $14.9bn of specified material cash requirements across periods, including $7.645bn of ship purchase obligations; certain final installments have committed financing.
- Debt remains substantial, with exposure to variable interest rates, refinancing needs and restrictive covenants. The company reported covenant compliance at June 30, 2023. Dividends and share repurchases remain constrained by deferred export-credit principal payments; no dividend was declared in the first half.
- Fuel prices, inflation, foreign exchange and interest rates, consumer demand, disease outbreaks, geopolitical events, weather, shipyard delays, port access, competition, regulation and cyber risks may affect results. The company reported that about 14% of debt was variable-rate net of swaps; a hypothetical 1% rate increase would add approximately $13.3m to forecast 2023 interest expense.
- Contingency: Havana Docks obtained a roughly $112m judgment under the Helms-Burton Act; Royal Caribbean appealed and the plaintiff cross-appealed. The company recorded an approximately $130m charge in Q4 2022 for the matter, including interest, legal costs and bonding fees. The outcome of the appeal remains uncertain.
- Fuel hedges and other derivatives create earnings and cash-flow variability. The filing estimated $31.7m of unrealized net fuel-hedge losses to be reclassified to earnings within 12 months as fuel is consumed.
Important facts for investors to verify
- Whether booking trends, occupancy and pricing can be sustained, and how results compare once 2022’s partial-operation base effect diminishes.
- Cash generation after customer-deposit movements, ship capital spending and scheduled debt service; customer deposits materially supported first-half operating cash flow.
- Debt maturities, refinancing access, interest costs and continued compliance with financial covenants.
- The progress and funding of ship orders, delivery timing, and sensitivity of construction costs to foreign exchange and delays.
- The status and potential financial effect of the Havana Docks appeal and other litigation or regulatory matters.