Business context and reporting period
Royal Caribbean Cruises Ltd. is a global cruise company operating several cruise brands and holding a 50% joint-venture interest in TUI Cruises. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2.058bn | $1.980bn | $3.874bn | $3.867bn |
| Operating income | $261.3m | $195.6m | $367.0m | $293.1m |
| Operating margin | 12.7% | 9.9% | 9.5% | 7.6% |
| Net income | $185.0m | $137.7m | $230.2m | $164.1m |
| Diluted EPS | $0.84 | $0.62 | $1.04 | $0.74 |
| Net income margin | 9.0% | 7.0% | 5.9% | 4.2% |
- Revenue and operations: Q2 revenue rose 4.0%; passenger ticket revenue increased 3.6% and onboard and other revenue increased 4.9%. Capacity grew 5.0% in Q2 and 4.3% for the six-month period. Occupancy was 104.7% in Q2 and 104.8% for the six months.
- Margins and costs: Q2 cruise operating expenses fell 1.1% to $1.316bn, helped by lower fuel costs and favorable currency movements, partly offset by higher capacity. Fuel expense was $202.6m, down from $242.8m. For the six months, cruise operating expenses fell 3.6% to $2.539bn.
- Yields: Q2 net yields were broadly unchanged year over year, but increased 4.2% on a constant-currency basis. Six-month net yields decreased 2.7% as reported and increased 1.7% on a constant-currency basis. Management reported Q2 net cruise costs per available passenger cruise day (APCD) down 4.7%; excluding fuel, costs per APCD were broadly unchanged as reported.
- Cash flow: Six-month cash from operations was $1.040bn, versus $880.9m. Investing activities used $1.217bn, including $1.152bn of property and equipment purchases; financing provided $151.1m. Cash declined $29.9m to $159.4m.
- Debt and liquidity: Total debt was $8.781bn at June 30, 2015, versus $8.444bn at December 31, 2014; net debt was $8.622bn and net debt-to-capital was 50.9% (49.9% at year-end). The company reported $1.0bn of liquidity, comprising $159.4m cash and $880m available under credit facilities. Working capital deficit was $3.9bn, compared with $3.0bn at year-end; management attributed the deficit largely to advance customer receipts and current debt maturities. The company said it was in compliance with debt covenants.
- Comprehensive income: Q2 comprehensive income was $402.9m, including $202.5m of gains on cash-flow hedges in other comprehensive income. Six-month comprehensive income was $154.2m. These hedge-related changes are not equivalent to operating earnings.
Material changes versus the prior period
- Q2 net income increased 34% and diluted EPS rose from $0.62 to $0.84; six-month net income increased 40% and diluted EPS rose from $0.74 to $1.04.
- Foreign exchange movements reduced revenue by $93.9m in Q2 and $176.2m for the six months, while reducing cruise operating expenses by $48.4m and $80.8m, respectively. Excluding currency effects and the sold Pullmantur non-core businesses, revenue increased 8.7% in Q2 and 5.7% for the six months.
- Fuel prices, net of fuel hedges, were down 15.8% per metric ton in Q2 and 16.0% for the six months. Lower fuel expense supported operating results.
- Interest expense increased to $76.6m in Q2 and $146.8m for the six months, primarily due to higher average debt associated with new ships. Depreciation also increased as new vessels entered service.
- Six-month revenue was nearly flat as reported; the comparison also reflects the sale of Pullmantur non-core businesses and a change in voyage revenue-recognition methodology. Management estimated that the methodology change increased Q2 2015 net income by $11.2m and decreased six-month net income by $21.5m versus 2014.
Outlook, management commentary, and risks
- 2015 guidance announced July 31: Adjusted diluted EPS of $4.65–$4.75 for the full year and approximately $2.70 for Q3. Full-year net yields were projected down 1.1% to 0.1% as reported, but up 2.9%–3.9% constant currency. Q3 net yields were projected down 0.7%–0.2% as reported and up 3.5%–4.0% constant currency.
- Full-year net cruise costs per APCD were forecast to decline approximately 6% as reported and 4% constant currency; excluding fuel, approximately 2.5% lower as reported and better than flat constant currency. Management estimated 2015 fuel expense of $818m and that a 10% fuel-price change would affect results by $13.9m.
- The company anticipated approximately $1.6bn of 2015 capital expenditures and stated operating cash flows and financing arrangements should cover capital expenditures and debt repayments over the following 12 months. It had ten ships on order across its brands and joint venture; disclosed ship-order cost was approximately $5.0bn, excluding Project Edge and TUI Cruises orders.
- Pullmantur remained exposed to weak Latin American economies and currencies. Its goodwill and trademarks passed interim impairment tests, but the trademark fair-value cushion was approximately 3%. Management said failure to transfer a vessel to Pullmantur, or other adverse cash-flow changes, could lead to impairment.
- Fuel, foreign-exchange, and interest-rate exposures are managed partly through derivatives. At June 30, approximately 53% of projected 2015 fuel purchases were hedged. The company had $726.6m of derivative liabilities recorded at fair value; it said no collateral was then required, although certain derivative agreements may trigger collateral posting if credit ratings remain below specified levels.
- Significant commitments include ship construction, debt service, and $3.3bn of contractual obligations due through June 30, 2016. A 50% guarantee on TUI Cruises’ €148m bank loan remained outstanding; management did not consider payment under the guarantee probable. Crew-member wage arbitrations seek damages in an indeterminate amount that the company could not estimate. Alaska authorities also issued notices alleging emissions violations; the company said it was cooperating and did not expect a material adverse impact.
Most important facts for investors to verify
- Whether reported yield and cost trends, particularly constant-currency results, support the full-year and Q3 guidance.
- Whether fuel prices, hedge settlements, and currency movements materially alter earnings and cash-flow sensitivity.
- Funding needs and timing for near-term debt maturities, ship deliveries, and planned capital expenditures, alongside available liquidity.
- Pullmantur’s operating outlook and whether vessel deployment or economic conditions create an impairment charge.
- Developments in the crew arbitrations, Alaska emissions notices, and TUI Cruises guarantee exposure.