Business context and reporting period
Royal Caribbean Cruises Ltd. is a global cruise company operating Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and Silversea Cruises, with equity-method investments in TUI Cruises and Pullmantur. This Form 10-Q covers the quarter and six months ended June 30, 2019, compared with the same 2018 periods. Silversea’s results are included on a three-month reporting lag, so the reported periods do not include its most recent quarter.
Financial and operating performance
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $2,806.6m | $2,337.6m | $5,246.4m | $4,365.4m |
| Operating income | $573.7m | $456.9m | $892.5m | $731.0m |
| Net income attributable to RCL | $472.8m | $466.3m | $722.5m | $684.9m |
| Diluted EPS | $2.25 | $2.19 | $3.44 | $3.21 |
| Operating margin | 20.4% | 19.5% | 17.0% | 16.7% |
Q2 revenue rose 20.1%, operating income 25.6%, and parent-attributable net income 1.4% year over year. For the first half, revenue increased 20.2%, operating income 22.1%, and parent-attributable net income 5.5%. Q2 diluted EPS increased 2.7%; first-half diluted EPS increased 7.2%.
Revenue growth reflected higher capacity and pricing, as well as increased onboard spending. Q2 capacity rose 11.0%; occupancy was 108.5%, compared with 108.6% a year earlier. Q2 net yields increased 8.1% reported and 9.5% on a constant-currency basis. Costs also grew: net cruise costs per available passenger cruise day (APCD) rose 6.1%, and net cruise costs excluding fuel per APCD rose 8.2%. Management attributed increases in part to fleet growth, Silversea, and operating investments. These yield and cost measures are non-GAAP.
For the six months, operating cash flow was $2,195.5m, investing cash outflow $1,899.4m, and financing cash outflow $348.9m. Capital spending on property and equipment was $1,866.1m; cash after that spending was approximately $329m. Cash decreased $52.9m to $235.0m.
At June 30, cash was $235.0m and total current assets were $1,283.0m. Current liabilities were $7,586.1m, including $3,909.5m of customer deposits. The company reported a $6.3bn working-capital deficit, which it says is typical of its advance-payment business model. Available liquidity was $2.1bn, including $1.8bn available under unsecured credit facilities, net of commercial paper. Balance-sheet debt was $9.87bn, excluding $1.05bn of commercial paper; operating lease liabilities were $736.6m. The company said it was in compliance with debt covenants and expected cash flows and financing arrangements to cover capital expenditures and debt repayments over the next twelve months.
Material changes, outlook and risks
- Fleet expansion and the 2018 Silversea acquisition contributed to higher revenue, capacity, operating costs, depreciation and interest expense. Interest expense rose 36.0% in Q2 and 41.4% for the first half, largely reflecting higher average debt.
- The Oasis of the Seas drydock structure incident resulted in an estimated negative impact of about $0.26 per diluted share for Q2 and the first half, including incidental costs and RCL’s share of Grand Bahama Shipyard’s drydock write-off. The shipyard was pursuing insurance coverage.
- The U.S. government’s June 2019 Cuba travel restriction required the company to stop cruise-ship sailings to Cuba. Management estimated a negative impact of about $0.04 per diluted share for Q2 and the first half.
- Other Q2 items included a $6.3m loss on debt extinguishment and a $10.7m expense from the change in fair value of Silversea acquisition contingent consideration. Adjusted diluted EPS, a non-GAAP measure, was $2.54 for Q2 and $3.85 for the first half.
- On July 25, 2019, management guided to full-year 2019 adjusted diluted EPS of $9.55–$9.65. Full-year reported net-yield growth guidance was 6.5%–7.0% (7.75%–8.25% constant currency); net cruise costs excluding fuel per APCD were expected to rise 9.5%–10.0% reported. Q3 adjusted diluted EPS guidance was approximately $4.35. Management cautioned that guidance depends on prevailing fuel prices, interest rates and exchange rates; projected non-GAAP measures were not reconciled to GAAP.
- Capital commitments are substantial: disclosed ship orders had an aggregate cost of $10.3bn, with $614m deposited, excluding certain partner-brand and lagged Silversea orders. Estimated capital expenditures were $3.0bn in 2019 and $4.0bn in 2020. Currency, fuel and interest-rate movements remain material exposures despite hedging.
- Other disclosed risks include economic or geopolitical disruption, severe weather, safety and reputational events, capacity and pricing competition, port access, shipyard and supplier performance, cyber and data-security threats, regulation, and access to financing. Routine industry claims are primarily insured; the company did not expect them, net of insurance, to materially affect results.
Important facts for investors to verify
- How much revenue and earnings growth reflects durable pricing and onboard spending versus added capacity and the Silversea acquisition, accounting for its reporting lag.
- Whether cost growth per APCD and the full-year cost guidance remain consistent with yield growth, and how much of the Oasis incident cost is recoverable through insurance.
- Funding plans and refinancing needs for commercial paper, debt maturities and the large shipbuilding program, alongside the reported $2.1bn liquidity and working-capital deficit.
- Actual performance against 2019 adjusted EPS and yield guidance, including sensitivity to currencies, fuel prices and LIBOR; confirm the effect of the Cuba restriction and any other itinerary changes.
- Progress integrating Silversea and the potential cost or share dilution from its contingent consideration and noncontrolling-interest put options.