Royal Caribbean Cruises Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results. Comparisons are with the three months ended March 31, 2016, except balance-sheet comparisons, which are with December 31, 2016. Amounts are in U.S. dollars.
Business context and operating performance
Royal Caribbean operates Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises, and holds equity-method investments in partner brands including TUI Cruises, Pullmantur and SkySea Cruises. The company noted that cruise demand is seasonal, generally strongest during Northern Hemisphere summer and holiday periods.
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $2.009 billion | $1.918 billion | Up $90.8 million (4.7%) |
| Passenger ticket revenue | $1.418 billion | $1.378 billion | Up 2.9% |
| Onboard and other revenue | $590.3 million | $539.6 million | Up 9.4% |
| Operating income | $279.5 million | $163.1 million | Operating margin 13.9%, versus 8.5% |
| Net income | $214.7 million | $99.1 million | Net margin 10.7%, versus 5.2% |
| Diluted EPS | $0.99 | $0.46 | Adjusted diluted EPS was $0.99 versus $0.57 |
| Operating cash flow | $796.5 million | $477.9 million | Increase primarily reflected higher customer deposits |
| Cash and cash equivalents | $109.3 million | $132.6 million at Dec. 31, 2016 | Quarter-end balance |
| Long-term debt, including current portion | $8.569 billion | $9.387 billion at Dec. 31, 2016 | Balance-sheet carrying amount |
Net Yields increased 6.0% on a constant-currency basis. Net Cruise Costs per available passenger cruise day (APCD) decreased 4.1%, and Net Cruise Costs per APCD excluding fuel decreased 4.9%. Occupancy was 107.3%, compared with 105.1%; capacity increased 0.9%.
Cash flow, debt and liquidity
Investing activities provided $123.6 million, compared with $236.7 million used in Q1 2016. The 2017 period included $230.0 million of ship-sale proceeds; property and equipment purchases were $122.8 million, down from $249.8 million. Financing activities used $944.4 million, including $1.840 billion of debt repayments, $1.006 billion of debt proceeds and $102.9 million of dividends paid. Cash decreased $23.3 million during the quarter.
At March 31, 2017, reported liquidity was approximately $1.7 billion: $109.3 million in cash and $1.6 billion available under unsecured credit facilities. Working capital was negative $4.5 billion, including $1.7 billion of current debt. Management attributed the structurally large working-capital deficit largely to advance passenger receipts recorded as current liabilities and said it expected operating cash flows and financing arrangements to cover capital spending and debt repayments over the next 12 months. The company was in compliance with its debt covenants.
Material changes and unusual items
- Operating income improved substantially as revenue rose and cruise operating expenses fell $65.8 million (5.3%). The expense decrease included a $30.9 million gain from selling Legend of the Seas, lower air expense, lower payroll costs following the Pullmantur ownership change, and lower vessel maintenance from drydock timing.
- Q1 2016 net income included a $21.7 million expense from eliminating Pullmantur’s prior two-month reporting lag. This item was excluded from 2016 adjusted results; Q1 2017 had no comparable adjustment. Adjusted net income was $214.7 million in 2017 and $124.0 million in 2016.
- Interest expense increased 22.7% to $80.3 million, attributed to higher interest rates and a higher debt level. Equity-method investment income declined $9.1 million to $11.9 million, mainly reflecting Pullmantur losses, partly offset by higher TUI Cruises income.
- Depreciation and amortization rose 11.9% to $235.7 million, primarily following the addition of Harmony of the Seas and Ovation of the Seas and shipboard upgrades.
- After quarter-end, Moody’s raised the senior unsecured debt rating to Baa3 with a stable outlook; derivative collateral posted at quarter-end was returned in April 2017. The board also authorized an open-market repurchase program of up to $500 million, expected to be completed by April 2018.
Guidance, outlook and commitments
On April 28, 2017, management guided to full-year 2017 adjusted diluted EPS of $7.00–$7.20. Full-year Net Yields were projected to rise 4.0%–5.5% as reported and 4.5%–6.0% at constant currency. Net Cruise Costs per APCD were expected to be flat to slightly higher as reported; excluding fuel, flat as reported. The outlook assumed capacity down 1.9%, fuel expense of $707 million and 60% of forward fuel consumption hedged.
For Q2 2017, adjusted diluted EPS guidance was $1.60–$1.65; Net Yields were expected to rise approximately 9% as reported and 10.0%–10.5% at constant currency. Capacity was expected to decrease 4.0%. Management cautioned that actual results may differ and that guidance depends on then-current fuel prices, interest rates and exchange rates.
At quarter-end, the company reported 11 ships on order across its Global Brands and TUI Cruises, with approximately 39,000 berths in aggregate. Its own ship orders, excluding TUI Cruises and conditional Project Icon agreements, had an estimated aggregate cost of $8.5 billion, with $316.3 million deposited; 60.5% of that cost was exposed to euro exchange-rate movements. Expected capital expenditures, excluding TUI Cruises, were approximately $0.6 billion in 2017 and $2.6 billion in 2018. Two Project Icon ship agreements signed in April were conditional, including on financing.
Contractual obligations totaled $17.1 billion, including $6.5 billion of ship-purchase obligations and $8.3 billion of long-term debt obligations. Approximately $3.3 billion was due within one year. These commitments make execution, financing access and cash generation important to the outlook.
Risks and contingencies
- Key exposures include consumer demand and discretionary spending, competition and industry capacity growth, fuel prices, foreign exchange, interest rates, and the availability and cost of financing.
- Operations may be affected by severe weather, port access, shipyard delays, safety or health incidents, geopolitical events, regulation and environmental requirements. The filing also highlights cyber, data-security, insurance, labor, tax and international operating risks.
- The company and TUI AG each guaranteed 50% of a TUI Cruises bank loan; the outstanding loan was approximately $118.7 million, with shareholder guarantees expected to be released in 2018. Management did not consider potential obligations probable.
- The Alaska emissions claims were settled in February 2017 for amounts and remedial actions described as immaterial. Other routine industry claims were largely insured; management did not expect them, net of insurance recoveries, to have a material adverse effect.
- Change-of-control provisions could require debt prepayment or affect liquidity. The filing states that covenant requirements were met at quarter-end and that the company was well in excess of required thresholds.
Important facts for investors to verify
- Whether yield and adjusted EPS guidance is being achieved, and how much performance depends on pricing, onboard spending, capacity, and constant-currency assumptions.
- Cash conversion and liquidity, particularly the effect of advance bookings and customer deposits, upcoming debt maturities, and substantial shipbuilding payments.
- Debt, interest expense and refinancing capacity, including covenant headroom and the effect of interest-rate or credit-market changes.
- The sustainability of cost improvements and the effect of the $30.9 million ship-sale gain and other period-specific items on comparisons.
- Exposure to fuel and currency movements, hedge coverage and any changes in ship-order costs, delivery schedules or conditional financing arrangements.