Business context and reporting period
Royal Caribbean Cruises Ltd. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. It operates Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises, and holds equity-method investments in partner brands including TUI Cruises and Pullmantur. Figures below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2,195m | $2,105m | $4,204m | $4,023m |
| Operating income | $420m | $282m | $699m | $445m |
| Operating margin | 19.1% | 13.4% | 16.6% | 11.1% |
| Net income | $370m | $230m | $584m | $329m |
| Diluted EPS | $1.71 | $1.06 | $2.71 | $1.52 |
| Net yield growth, reported | 8.7% | — | 6.2% | — |
| Occupancy | 108.7% | 104.6% | 108.0% | 104.8% |
Revenue rose 4.3% in Q2 and 4.5% in the first half. Management attributed improvement principally to higher ticket prices and onboard spending per passenger; reported net yields increased 9.9% and 7.9%, respectively. Adjusted diluted EPS, a non-GAAP measure, was $1.71 in Q2 and $2.71 for the first half, compared with $1.09 and $1.65 in 2016.
For the first six months, operating cash flow was $1,659m, versus $1,271m a year earlier, helped by higher customer deposits and affiliate dividends. Investing activities provided $8m, compared with $2,212m used in 2016, reflecting lower ship-related capital spending and $230m of vessel-sale proceeds. Financing activities used $1,669m, versus $1,000m provided in 2016. Cash was $130m at June 30.
At June 30, current and long-term debt totaled approximately $8,020m, down from $9,387m at December 31, 2016. Liquidity was $1.9bn, including $1.8bn available under revolving credit facilities. The company reported a $4.5bn working-capital deficit, which it says is typical for its business because customers generally pay in advance. Its contractual obligations totaled $20.2bn, including $10.1bn of ship-purchase obligations. Debt covenants were reported in compliance and with substantial headroom.
Material changes versus prior period
- Q2 operating income increased about 49% and net income about 61%; first-half operating income increased about 57% and net income about 78%.
- Capacity declined 4.1% in Q2 and 1.6% in the first half, primarily reflecting the Pullmantur divestiture and vessel sales, partly offset by newer ships. Despite lower capacity, occupancy increased.
- First-half cruise operating expenses fell $120m, including a $30.9m gain on the sale of Legend of the Seas, lower payroll and maintenance costs, and reduced capacity. Depreciation and amortization increased $38m, principally due to newer ships.
- First-half interest expense rose $13m, largely due to higher rates; equity investment income declined $13m, mainly due to Pullmantur losses.
- First-half 2016 results included a $21.7m loss associated with eliminating the Pullmantur reporting lag, plus restructuring and other initiative costs. These items did not recur in 2017.
Outlook, risks and contingencies
On August 1, 2017, management forecast full-year 2017 adjusted diluted EPS of $7.35–$7.45 and Q3 adjusted diluted EPS of approximately $3.45. Full-year reported net yield growth was forecast at approximately 6.0%, and constant-currency growth at 5.5%–6.0%; Q3 forecasts were 4.5%–5.0% reported and 4.0%–4.5% constant currency. Management expected full-year capacity to decline 1.9% and Q3 capacity to decline 4.0%. These are management estimates, not guarantees.
Full-year capital expenditures, excluding TUI Cruises, were estimated at $0.6bn for 2017, followed by $2.8bn in 2018. Six Royal Caribbean International ships and four Celebrity Edge-class ships were on order; the company’s ships on order represented approximately $12.6bn in aggregate cost, with 63.3% exposed to euro exchange-rate fluctuations. The company stated operating cash flows and financing arrangements should cover capital expenditures and debt repayments over the next 12 months.
Key exposures include demand and pricing sensitivity to economic conditions, competition and industry capacity; fuel, interest-rate and foreign-currency movements; disruptions from severe weather, safety incidents, geopolitical events or port access; and execution, financing and currency risks on a large newbuild program. China itinerary demand was affected by travel restrictions relating to South Korea; duration and scope remained uncertain. The company also cited cyber, regulatory, environmental, tax, insurance and third-party/joint-venture risks.
Routine industry litigation is mostly insured; management did not expect claims, net of recoveries, to materially affect results. Royal Caribbean and TUI AG each guaranteed 50% of a TUI Cruises bank loan with €105.7m outstanding; lenders agreed to release the guarantees in 2018, and management did not consider a payment probable. A $500m share-repurchase authorization was approved in April; no shares had been repurchased by June 30. The company was rated Baa3 with a stable outlook by Moody’s in April; derivative collateral previously posted was returned.
Important facts for investors to verify
- Whether revenue, yield and occupancy improvements persist as capacity and regional demand change, particularly in Asia.
- Progress and financing for the shipbuilding program, including the $12.6bn order book, scheduled capital spending and euro exposure.
- Liquidity and refinancing capacity against $1.5bn of debt maturities due through June 2018 and substantial ongoing ship commitments.
- Fuel, currency and interest-rate assumptions underlying guidance, hedges and the projected EPS range.
- Performance and potential obligations associated with equity-method partners, including Pullmantur and the TUI Cruises guarantee.