Business context and reporting period
Royal Caribbean Cruises Ltd. is a global cruise company operating Royal Caribbean International, Celebrity Cruises, Azamara and Silversea Cruises, with equity-method interests in TUI Cruises and Pullmantur. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Silversea results are included on a three-month lag, so 2019 reported results include Silversea activity not included in the comparable 2018 periods.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.187 billion | $2.796 billion | $8.433 billion | $7.162 billion |
| Operating income | $890.8 million | $799.7 million | $1.783 billion | $1.531 billion |
| Operating margin | 28.0% | 28.6% | 21.1% | 21.4% |
| Net income attributable to Royal Caribbean | $883.2 million | $810.4 million | $1.606 billion | $1.495 billion |
| Diluted EPS | $4.20 | $3.86 | $7.65 | $7.05 |
| Adjusted diluted EPS (non-GAAP) | $4.27 | $3.98 | $8.12 | $7.32 |
Q3 revenue increased 14.0%; nine-month revenue increased 17.8%. Management attributed growth principally to higher capacity, ticket prices and onboard spending. Occupancy was 110.5% in Q3 and 108.8% year to date, versus 111.9% and 109.6%, respectively, in 2018. Q3 net yield rose 5.2% and nine-month net yield rose 6.6%; net cruise costs per available passenger cruise day increased 7.1% and 6.5%, respectively.
For the nine months, operating cash flow was $3.107 billion, investing cash outflow $2.402 billion and financing cash outflow $714.9 million. Cash declined $11.1 million to $276.7 million. Capital expenditures for property and equipment were $2.342 billion. As of September 30, total debt was approximately $9.762 billion, with $922.2 million of commercial paper outstanding. Liquidity was $2.2 billion, including $276.7 million cash and $1.9 billion available under unsecured credit facilities, net of commercial paper. The company reported a $5.9 billion working-capital deficit, which it said is typical of its advance-ticket-receipt business model.
Material changes versus prior periods
- Higher revenue and earnings coincided with increased capacity, including new ships and Silversea. The company reported capacity growth of 8.2% in Q3 and 9.9% for the nine months.
- Operating costs rose, including depreciation and marketing expenses; interest expense increased 17.9% in Q3 and 32.8% for the nine months, primarily reflecting higher average debt and, to a lesser extent, interest rates.
- Fuel cost per metric ton, net of fuel swaps, decreased 12.3% in Q3 and 9.8% for the nine months, partly offsetting cost increases.
- Other comprehensive loss was $293.2 million in Q3 and $318.6 million for the nine months, compared with other comprehensive income of $34.6 million and $103.7 million in 2018, primarily reflecting unfavorable changes in cash-flow hedge values.
- 2019 results included a $6.3 million debt-extinguishment loss, Silversea-related costs and a change in fair value of contingent consideration. 2018 included Silversea acquisition transaction costs, SkySea impairment, tour-business exit costs and gains that did not recur.
Outlook, commentary and risks
On October 30, 2019, management guided to full-year 2019 adjusted diluted EPS of $9.50–$9.55 and Q4 adjusted diluted EPS of approximately $1.40. Full-year reported net yields were expected to rise approximately 6.75% and net cruise costs per available passenger cruise day to rise approximately 7.5%; constant-currency estimates were approximately 8.0% for both. Q4 reported net yields were expected to rise approximately 6.25%, while net cruise costs per available passenger cruise day were expected to rise approximately 10.0%. These are forward-looking estimates based on then-current fuel prices, interest rates and exchange rates.
Management estimated diluted EPS impacts of approximately $0.13 from 2019 hurricane-related disruptions for both Q3 and the nine-month period; $0.02 and $0.28, respectively, from the Oasis of the Seas drydock incident; and $0.13 and $0.16, respectively, from the U.S. prohibition on cruise travel to Cuba effective June 5, 2019. The Oasis incident’s costs were partly offset by insurance recoveries.
Key exposures include demand and pricing sensitivity to economic conditions, fuel and foreign-exchange movements, interest rates, weather disruptions, shipbuilding commitments and regulatory change. The company had $11.1 billion of aggregate cost for ships on order, with about 57.9% exposed to euro fluctuations, and estimated capital expenditures of $3.0 billion in 2019 and $4.5 billion in 2020. Two Helms-Burton Act lawsuits concerning Cuban port properties seek statutory remedies, including treble damages. The company said it believes it has meritorious defenses and considers a material adverse outcome unlikely, while acknowledging litigation uncertainty. Debt covenants were reported satisfied with substantial headroom.
Most important facts for investors to verify
- Whether growth in ticket pricing and onboard spending continues to exceed rising operating costs per capacity day.
- Whether the $9.50–$9.55 full-year adjusted EPS outlook and stated yield and cost assumptions were achieved; adjusted measures are non-GAAP.
- How new ship spending, debt maturities, commercial paper and available credit facilities affect liquidity and leverage.
- The eventual financial and operational effects of Cuba travel restrictions, hurricane disruptions, the Oasis drydock incident and the Cuban-port litigation.
- The comparability impact of Silversea’s three-month reporting lag and its inclusion in 2019 results but not the corresponding 2018 periods.