ROYAL CARIBBEAN CRUISES LTD quarterly report, Q2 FY2012

Royal Caribbean Cruises Ltd. — Q2 2012 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2012. Amounts are U.S. dollars unless otherwise indicated. The company operates Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisières de France, and holds a 50% interest in TUI Cruises.

Financial performance

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenue	$1,821.0m	$1,767.9m	$3,655.5m	$3,439.9m
Operating income	$96.9m	$168.2m	$232.3m	$317.7m
Operating margin	5.3%	9.5%	6.4%	9.2%
Net income (loss)	$(3.7)m	$93.5m	$43.3m	$171.9m
Diluted EPS	$(0.02)	$0.43	$0.20	$0.78

Q2 revenue grew 3.0%, while cruise operating expenses rose 9.3% to $1,296.0m. Fuel expense increased to $238.0m from $188.1m. Other operating expense rose to $303.6m from $265.2m. Interest expense declined to $89.1m from $93.0m, but other expense was $16.4m versus other income of $11.8m, including losses on fuel options and fuel-swap ineffectiveness. Q2 net margin was approximately (0.2%), versus 5.3% a year earlier.

For the first half, revenue increased 6.3%, but cruise operating expenses increased 11.6% to $2,551.1m. Fuel expense was $467.0m versus $354.2m. Other income of $37.5m in the prior-year period shifted to other expense of $18.5m in 2012, contributing to lower earnings.

Operating trends and material changes

Q2 capacity increased 1.8%; occupancy was 104.1%, compared with 103.7%. Six-month capacity increased 2.1%; occupancy was 104.3%, compared with 104.0%.
Q2 net yields increased 1.8% as reported, or 4.5% in constant currency. For the first half, net yields increased 4.1% as reported, or 5.7% in constant currency.
Q2 net cruise cost per available passenger cruise day (APCD) increased 9.3%; excluding fuel, it increased 5.8%. First-half increases were 9.7% and 5.4%, respectively.
Management attributed revenue growth partly to ticket pricing, increased deployment in Australia and China, new Pullmantur land-tour and travel packages, and changes to the international distribution system, particularly in Latin America. These distribution changes also increased certain expenses.
Currency movements reduced Q2 revenue by approximately $50.8m and cruise operating expenses by approximately $31.7m; first-half effects were approximately $62.8m and $39.7m, respectively.

Cash flow, debt and liquidity

First-half operating cash flow was $583.5m, down from $766.7m. The filing attributes the decrease mainly to a slower increase in customer deposits and payment timing for accounts payable.
Investing cash outflow was $313.2m, versus $46.0m of inflow in 2011; capital expenditures were $322.8m. The prior period included ship-sale proceeds that did not recur.
Financing cash outflow was $315.1m. The company paid $65.3m in dividends. Cash declined by $50.0m during the half to $212.2m.
At June 30, total debt was $8,225.5m, including $1,156.5m current and $7,068.9m long-term. Net debt was $8,013.2m; net debt-to-capital was 49.2%, versus 49.5% at year-end 2011.
Reported liquidity was approximately $1.1bn: $212.2m cash plus $918.0m available under revolving facilities, with total revolver capacity of $1.6bn. Working capital deficit was $2.9bn, compared with $2.1bn at December 31, 2011; management says advance ticket receipts are a principal reason for this industry-typical deficit.
The company stated it was in compliance with debt covenants and well above the minimum net-worth and fixed-charge coverage requirements. A July 2012 facility of up to €365m, undrawn as of July 27, was intended primarily to help refinance 2013–2014 bond maturities; the company also prepaid a $100m term loan due in 2013.

Outlook, commitments and risks

2012 guidance: EPS of $1.70–$1.80; reported net yields flat to up 1% and constant-currency net yields up 2%–3%; fuel expense of approximately $899m. Management projected net cruise costs per APCD excluding fuel to rise approximately 2% as reported and 4% in constant currency.
Q3 2012 guidance: EPS of $1.40–$1.50; reported net yields down approximately 5% and constant-currency net yields down 1%–2%; fuel expense of approximately $213m. The filing’s guidance tables also provide cost, capacity, hedging and interest/depreciation assumptions.
Management cited the Costa Concordia incident as a negative influence on 2012 earnings, with future effects uncertain. Other material sensitivities include fuel prices, foreign exchange, interest rates, demand, economic conditions, competition, shipbuilding execution and safety or operational disruptions.
As of June 30, ships on order had aggregate cost of approximately $3.0bn, with $227.9m deposited; planned 2012–2015 capital expenditures totaled approximately $4.0bn. Contractual obligations were $13.2bn, including $2.3bn of ship purchase obligations and $8.2bn of long-term debt obligations.
Pullmantur’s valuation is exposed to continued weakness or slower recovery in Spain; the company said an interim impairment review was not then warranted, but identified conditions that could lead to impairment or a valuation allowance on deferred tax assets.
Pending matters include a securities class action alleging misleading 2011 outlook statements, a crew wage-related action dismissed in favor of arbitration but on appeal, and a Puerto Rico distributor dispute seeking substantial damages. The company says it intends to defend these claims and cannot estimate their possible impact.
Other disclosed contingencies include a ship-lease tax indemnity and a guarantee related to TUI Cruises financing; management did not consider material payments probable under current circumstances. A qualifying change of control could trigger debt prepayment or other adverse liquidity consequences.
Other comprehensive loss was $300.6m for Q2 and $149.8m for the first half, largely reflecting losses on cash-flow derivative hedges; comprehensive loss was $304.3m and $106.5m, respectively. These amounts should be distinguished from reported net income.

Important facts for investors to verify

Whether fuel costs, unit operating costs and fuel-hedge results track management’s guidance, and how much reported performance depends on constant-currency comparisons.
Whether ticket pricing, occupancy and distribution/deployment changes sustain net-yield growth while also affecting costs.
Liquidity and refinancing progress against near-term debt maturities, shipbuilding payments and the large working-capital deficit.
Developments in Spain and Pullmantur’s operating results, goodwill/trademark valuations and deferred tax asset recoverability.
Updates on the disclosed litigation, ship-related commitments, change-of-control provisions and derivative-related exposures.