Royal Caribbean Cruises Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Royal Caribbean operates three global cruise brands and holds equity-method investments in partner brands, including TUI Cruises, Pullmantur and SkySea Cruises.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $2.028 billion | $2.009 billion | +1.0% |
| Operating income | $274.1 million | $279.5 million | -1.9% |
| Operating margin | 13.5% | 13.9% | -0.4 percentage points |
| Net income | $218.7 million | $214.7 million | +1.8% |
| Net margin | 10.8% | 10.7% | +0.1 percentage points |
| Diluted EPS | $1.02 | $0.99 | +$0.03 |
| Operating cash flow | $924.1 million | $796.5 million | +$127.6 million |
- Passenger ticket revenue rose 0.5% to $1.426 billion; onboard and other revenue rose 2.0% to $602.1 million.
- Net yields increased 7.0% reported and 4.9% on a constant-currency basis. Occupancy was 108.0%, versus 107.3%.
- Net cruise costs per available passenger cruise day (APCD) increased 9.4%; excluding fuel, they rose 12.5% (11.2% constant currency).
- Investing cash outflow was $1.645 billion, chiefly reflecting ship purchases and delivery. Financing cash inflow was $711.9 million. Cash declined $8.9 million to $111.2 million.
- At March 31, total debt was approximately $8.809 billion, including $1.144 billion current and $7.665 billion long-term. Debt fair value was $9.334 billion.
- Current assets were $1.035 billion and current liabilities $5.195 billion; the reported working-capital deficit was $4.2 billion. Management cited $2.0 billion liquidity, including $1.9 billion available credit facilities.
Changes and notable items
- Capacity declined 3.9%, primarily due to the prior-year sale of Legend of the Seas and additional drydock days. Revenue excluding favorable currency effects decreased $19.4 million; favorable currency effects added $38.6 million to revenue.
- Operating income fell despite higher revenue. Cruise operating expenses were broadly flat; marketing, selling and administrative expense rose 6.3%, partly due to advertising and media promotions.
- Fuel expense decreased $17.1 million year over year; management said fuel cost per metric ton, net of fuel swaps, declined 5.8%. Interest expense fell $12.4 million, while equity investment income increased $16.9 million, mainly from TUI Cruises.
- A $23.3 million impairment was recorded for SkySea-related investment, debt facility and receivables. The partners decided to wind down SkySea, expected to cease operations by year-end 2018, and agreed to sell its Golden Era ship, with delivery expected in December.
- Symphony of the Seas was delivered in March and financed in part with a $1.2 billion unsecured term loan. Azamara Pursuit was also purchased and was expected to enter service in Q3.
- Adjusted net income was $232.8 million and adjusted diluted EPS $1.09, versus $214.7 million and $0.99, respectively, in Q1 2017. Adjustments included the SkySea impairment and a $9.2 million benefit from a stock-compensation accounting-policy change. The company also adopted new revenue and hedging standards; the revenue-standard adoption had no material cumulative adjustment.
Outlook, liquidity and risks
- Management’s April 26, 2018 full-year guidance included adjusted diluted EPS of $8.70–$8.90, reported net-yield growth of 3.5%–4.5%, and capacity growth of 3.7%. Q2 adjusted diluted EPS guidance was $1.85–$1.90, with reported net-yield growth of 3.0%–3.5% and capacity growth of 2.7%.
- Full-year guidance included approximately 2.0% growth in net cruise costs per APCD and 3.0%–3.5% growth excluding fuel. Fuel expense was estimated at $678 million, with 50% of forward fuel consumption hedged. Guidance is subject to fuel, interest-rate and currency assumptions; management did not forecast those market variables.
- Ship commitments were substantial: approximately $11.7 billion aggregate cost for company-brand ships on order, with $419 million deposited. Expected 2018 capital expenditures were approximately $3.4 billion. Contractual obligations totaled $21.5 billion, including $9.9 billion of ship-purchase obligations.
- Management expected operating cash flows and existing financing arrangements to cover capital expenditures and debt repayments over the next 12 months. It reported covenant compliance with significant headroom; liquidity nevertheless depends on cash generation and access to financing.
- Key exposures include foreign exchange, fuel prices and interest rates; the company uses derivatives to hedge these risks. Other disclosed risks include economic weakness, geopolitical events, weather and natural disasters, safety incidents, competition and industry capacity, shipyard and supplier disruption, cyber and privacy events, and regulation. Routine industry claims were mostly insured; management did not expect them to materially affect results.
Important facts for investors to verify
- Track whether yield improvement persists and whether cost growth per APCD moderates, particularly excluding fuel.
- Monitor delivery timing, financing and spending against the ship pipeline and capital commitments.
- Confirm the Golden Era sale and recoveries on SkySea receivables against the recorded impairment and remaining exposure.
- Assess liquidity and refinancing needs alongside the working-capital deficit, current debt maturities and reliance on advance customer deposits.
- Compare actual results with 2018 guidance and assess the effects of currency, fuel and interest-rate movements and hedges.