Business context and reporting period
Royal Caribbean Cruises Ltd. is a global cruise company operating Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisières de France, and holding a 50% joint venture interest in TUI Cruises. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2,226.4 million | $2,322.0 million | $5,881.9 million | $5,761.9 million |
| Operating income | $452.1 million | $507.7 million | $684.4 million | $825.5 million |
| Net income | $367.8 million | $399.0 million | $411.1 million | $570.9 million |
| Diluted EPS | $1.68 | $1.82 | $1.87 | $2.60 |
| Operating margin | 20.3% | 21.9% | 11.6% | 14.3% |
| Net margin | 16.6% | 17.2% | 7.0% | 9.9% |
Q3 passenger ticket revenue was $1,635.0 million, down from $1,734.3 million; onboard and other revenue was $591.4 million, up from $587.7 million. Nine-month passenger ticket revenue was $4,319.5 million and onboard and other revenue was $1,562.4 million.
For the nine months, cash from operations was $1,172.3 million, versus $1,272.7 million. Investing activities used $383.3 million, including $429.3 million of property and equipment purchases; financing activities used $801.5 million. Cash declined by $20.9 million to $241.2 million.
At September 30, 2012, total debt was $7,778.9 million, including $1,154.9 million current, compared with $8,495.9 million at December 31, 2011. Net debt was $7,537.6 million. Net debt-to-capital was 46.4%, down from 49.5%. Liquidity was reported at $1.9 billion, comprising $241.2 million cash and $1.7 billion available under unsecured credit facilities. Working capital deficit was $2.8 billion, compared with $2.1 billion at year-end; the company says advance passenger receipts are a significant feature of its operating model.
Material changes versus prior periods
- Q3 revenue declined 4.1% and net income declined 7.8%; diluted EPS fell from $1.82 to $1.68. Management attributed the revenue decline principally to adverse currency movements and lower ticket prices, partly offset by increased capacity. Currency effects reduced Q3 revenue by approximately $61.4 million.
- Nine-month revenue increased 2.1%, while net income fell 28.0% and diluted EPS declined from $2.60 to $1.87. Revenue gains from Pullmantur land tours and packages, onboard spending, deployment and distribution changes were more than offset at the earnings level by higher operating costs, especially fuel.
- Nine-month cruise operating expenses rose 5.6% to $3,899.5 million. Fuel expense increased to $680.4 million from $556.7 million; management reported fuel cost per metric ton rose 16.5%.
- In September, the company repurchased €255.0 million (approximately $328.0 million principal) of 5.625% notes due 2014 for total consideration of $344.2 million, recording a $7.5 million extinguishment loss. It also borrowed $290.0 million under an unsecured term loan and arranged an undrawn €365.0 million term facility for refinancing needs.
- The company declared a $0.12-per-share dividend in September, paid in Q4. Celebrity Reflection was delivered in October, financed with a $673.5 million loan.
Outlook, commentary and risks
For full-year 2012, management forecast diluted EPS of $1.85–$1.95; net yields growth of 1%–2% as reported (approximately 3% constant currency); net cruise costs per available passenger cruise day (APCD) growth of 5%–6%; and net cruise costs per APCD excluding fuel growth of 2%–3%. Forecast fuel expense was $910 million, with 58% of forward consumption hedged. For Q4 2012, guidance was diluted EPS of $(0.02)–$0.08, net yields growth of approximately 1%, and fuel expense of $229 million.
Management said the Costa Concordia incident adversely affected 2012 results and booking patterns, but continued to expect no significant long-term business impact. It cited encouraging early 2013 booking trends, with booked load factors and average per diems slightly above the comparable prior-year point, while noting limited visibility.
Key exposures include fuel prices, foreign exchange and interest rates; global economic and geopolitical conditions; cruise demand and competition; safety incidents, weather and disease; shipbuilding delays and costs; regulation and litigation. Pullmantur remains exposed to Spanish economic weakness and the uncertain effects of Costa Concordia. Management did not consider an interim impairment test necessary at September 30, but stated that weaker-than-projected results, yield changes or vessel redeployment changes could make impairment of Pullmantur goodwill and brands reasonably possible. The company also disclosed securities and crew wage lawsuits; it says it intends to defend the claims and cannot estimate the possible impact of the proceedings. Debt covenants were met with substantial headroom, according to management.
Capital commitments included approximately $3.1 billion of ships on order, with $227.9 million deposited; anticipated capital expenditures excluding TUI Cruises were $1.3 billion for 2012, $0.6 billion for 2013, $1.1 billion for 2014 and $1.0 billion for 2015. Management expected cash from operations and available and anticipated financing to cover capital expenditures and debt repayments over the following 12 months.
Most important facts for investors to verify
- Whether the full-year and Q4 2012 EPS and yield guidance was achieved, and how currency, fares and Costa Concordia-related booking effects developed.
- Fuel cost trends and hedge coverage, including the sensitivity disclosed by management of $9 million for a 10% fuel-price change.
- Liquidity, near-term debt maturities and execution of the stated 2013–2014 refinancing plan, including availability and terms of credit facilities.
- Pullmantur’s performance in Spain, vessel redeployment assumptions and the outcome of the 2012 impairment review.
- Progress, funding and delivery timing for ship orders, and potential exposure from the TUI Cruises loan guarantee, litigation and other contingencies.