Royal Caribbean Cruises Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; compared with Q1 2014. Royal Caribbean operates multiple cruise brands and holds a 50% joint-venture interest in TUI Cruises. Results are seasonal, and interim performance may not indicate full-year results. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1.816 billion | $1.887 billion | Down 3.8% |
| Operating income | $105.7 million | $97.5 million | Up 8.4% |
| Net income | $45.2 million | $26.5 million | Up 71.0% |
| Diluted EPS | $0.20 | $0.12 | Up $0.08 |
| Adjusted diluted EPS | $0.20 | $0.21 | Down $0.01 |
| Operating margin | 5.8% | 5.2% | Up 0.6 percentage points |
| Net margin | 2.5% | 1.4% | Up 1.1 percentage points |
| Operating cash flow | $426.4 million | $315.8 million | Up $110.6 million |
- Passenger ticket revenue was $1.307 billion, down 3.1%; onboard and other revenue was $508.8 million, down 5.6%.
- Fuel expense fell to $205.3 million from $244.5 million; the company said net fuel price per metric ton declined 16.3%.
- Passengers carried rose to 1.336 million from 1.278 million. Capacity, measured as available passenger cruise days (APCD), rose 3.6% to 8.779 million; occupancy increased to 105.0% from 104.5%.
- Net yields declined 5.4% reported and 1.0% on a constant-currency basis. Net cruise costs per APCD declined 5.6% reported and 3.5% constant currency; excluding fuel, the measure increased 1.7% reported and was flat constant currency.
- Cash and cash equivalents were $229.7 million at March 31, 2015, versus $189.2 million at year-end. Investing used $399.6 million, including $304.6 million of property and equipment purchases. Financing provided $19.7 million. Cash increased $40.5 million during the quarter.
- Total debt was $8.560 billion, net debt $8.330 billion, and net debt-to-capital 51.1%, compared with 49.9% at December 31, 2014. Shareholders’ equity was $7.974 billion.
- Working capital deficit was $3.4 billion, up from $3.0 billion at year-end; management attributed the increase primarily to higher current debt maturities. Reported liquidity was $816.8 million, including $229.7 million cash and $587.1 million available under unsecured credit facilities.
Material changes versus Q1 2014
- Reported revenue declined despite 3.6% capacity growth. Management cited an $82.3 million unfavorable foreign-exchange effect on revenue, lower Caribbean ticket prices, and $35.0 million less revenue from Pullmantur businesses sold in 2014. Excluding currency and those divested businesses, total revenue increased 2.4%.
- Currency movements reduced cruise operating expenses by $32.4 million, while lower fuel prices and the absence of Pullmantur divested-business expenses also helped. Reported cruise operating expenses fell 6.2%; excluding currency and divested businesses, they declined 1.3%.
- GAAP net income increased, but adjusted net income was $45.2 million versus $46.1 million and adjusted diluted EPS was $0.20 versus $0.21. The company said the change to prorate recognition for all uncompleted voyages reduced Q1 2015 net income by $32.7 million compared with Q1 2014.
- Other comprehensive loss widened to $294.0 million from $52.5 million, primarily reflecting cash-flow hedge losses of $260.9 million versus $52.9 million, associated mainly with lower forward Euro and fuel rates. These amounts reduced equity through accumulated other comprehensive loss, rather than current-period net income.
- Operating cash flow rose, while investing cash outflow increased, chiefly because of higher capital expenditure, derivative settlements, and investments in unconsolidated affiliates. Dividends paid increased to $131.7 million from $76.3 million; the quarterly dividend declared and paid was $0.30 per share, versus $0.25.
Outlook, management commentary, risks and contingencies
- 2015 guidance: Adjusted diluted EPS of $4.45–$4.65; reported net yields down 0.5%–2.0% (constant currency up 2.5%–4.0%); net cruise costs per APCD down 5.5%–6.5% reported; and net cruise costs excluding fuel per APCD down 2.5%–3.5% reported. Planned capacity growth was 5.5%. Fuel expense was estimated at $834 million, with 52% of forecast consumption hedged.
- Q2 2015 guidance: Adjusted diluted EPS of approximately $0.70; reported net yields down approximately 1.5% (constant currency up approximately 3.5%); and capacity growth of 5.2%. Guidance was based on fuel prices, interest rates and exchange rates as of April 20, 2015.
- Management said operating cash flows and existing financing arrangements were expected to cover capital expenditure and debt repayments over the next 12 months. It also noted that the company expects to continue operating with a working-capital deficit, supported by advance customer receipts, operating cash flows and credit facilities.
- Capital commitments are substantial: ship purchase obligations were $3.127 billion, and estimated capital expenditures were $1.6 billion in 2015 and $2.3 billion in 2016. The company had $4.9 billion of ships on order (excluding Project Edge and TUI Cruises ships), with $554.2 million deposited. Two proposed Project Edge ships were subject to conditions to effectiveness.
- Anthem of the Seas was delivered in April 2015, after quarter-end. The company borrowed $742.1 million under a 12-year term loan, 95% guaranteed by Hermes; swaps were intended to fix the loan’s rate at 3.86%.
- The planned sale of Splendour of the Seas to TUI Cruises for €188 million is scheduled for April 2016. Royal Caribbean will finance the purchase through a secured loan; management expected a gain but did not expect it to be material.
- Pullmantur goodwill and trademarks totaled $285.5 million. Economic uncertainty in its markets and the planned transfer of a vessel to the brand could affect future cash-flow assumptions; management said failure to transfer the vessel could lead to an impairment charge.
- Approximately 575 crew members have filed individual arbitration demands alleging wage-related violations. The company said it believes the claims lack merit, intends to defend them, and cannot estimate their potential impact.
- Debt agreements include minimum net worth, fixed-charge coverage and maximum net debt-to-capital covenants; the company reported compliance with substantial headroom. Change-of-control events could trigger accelerated debt repayment. Certain derivative contracts may require collateral if credit-rating conditions are met; ratings were BB with a positive outlook at S&P and Ba1 stable at Moody’s, and no collateral was required at quarter-end.
- Royal Caribbean and TUI AG each guarantee 50% of a TUI Cruises bank loan with €112.5 million outstanding. The company said potential obligations under the guarantee were not considered probable. Forward-looking statements remain subject to currency, fuel, demand, financing and other risks described in its 2014 Form 10-K.
Important facts for investors to verify
- Whether the 2015 earnings and yield outlook was achieved, particularly given currency movements, Caribbean pricing and fuel assumptions.
- Actual cash generation, shipbuilding expenditure, debt maturities and liquidity after the April 2015 Anthem of the Seas delivery and financing.
- Progress on Project Edge conditions, ship-order commitments, and the planned Pullmantur vessel transfer and related impairment sensitivity.
- Developments in the crew-member arbitrations, TUI Cruises guarantee exposure and any derivative collateral requirements.
- The comparability effects of the voyage-proration accounting change and the distinction between GAAP and adjusted earnings.