Royal Caribbean
Sector Insights: Sharp Increase in Cruise Line Deposits Drives Positive Operating Cash Flow in Q2; Higher Pricing Needed to Overcome Inflationary Pressure; Enterprise Values Hovering Near Pre-Covid Levels
Mon 08/22/2022 09:21 AM
Relevant Documents:
Carnival Corp Financials on Aggredium
Royal Caribbean Financials on Aggredium
NCL Corp Financials on Aggredium
TUI Cruises Financials on Aggredium
Hurtigruten Financials on Aggredium
Excel Model (Reorg Analysis Page)
The largest three cruise ship companies Royal Caribbean, Carnival and Norwegian Cruise Lines were able to generate positive operating cash flow in the second quarter, the first such period since the beginning of the Covid-19 pandemic, largely supported by a sharp rise in deposits. Deposit growth could continue to be a positive indicator for revenue in 2023 as operators attempt to overcome higher fuel prices, higher labor costs and a significantly higher interest burden. However, excluding deposit growth, Royal Caribbean was the only major cruise ship to report positive EBITDA in the period.
Pricing was held back on weakness in Europe as cruise travel remained local, but based on the cadence of operating reports, pricing might have increased through the spring and summer months.
In this article, Reorg uses financials pulled from Aggredium to compare operators within the cruise industry and to build a sector view on performance. Aggredium collects quarterly financials and key performance indicators for each of the major cruise lines including Carnival, Royal Caribbean, Norwegian Cruise Lines, TUI Cruises and Hurtigruten.
Aggredium & Top-Down Industry Overview
Aggredium is Reorg’s fundamental data product focused on the leveraged finance universe allowing users instant access to financial reporting of high-yield issuers and leveraged loan borrowers. Users can easily power their models with our Excel Add-in or dashboards and reporting via an API, and can screen and visualize the data. In the article below, we discuss the cruises industry in the context of second-quarter reporting with the graphs, charts and data all powered by Aggredium. To see the reports, all linked to Aggredium, click HERE.
Historical Financials
The rebound in LTM revenue of the companies in the industry from the trough in 2021 can be seen below. While the LTM revenue has grown around threefold across the three major cruise line operators from the year ended Dec. 31, 2021, the benefit of increased utilization has yet to flow into EBITDA, which remains subdued on an LTM basis as some costs have grown faster than the impact of increased utilization on revenue. For example, fuel, payroll and SG&A in the LTM period to June 30, 2022, came in above the levels recorded prior to Covid-19 for Royal Caribbean and Norwegian.
Fuel, in particular, represents a significant cost for cruise lines and, as previously reviewed, fuel prices have more than doubled since 2019. For instance, Carnival spent $1.5 billion on fuel in 2019 and therefore could spend approximately $3 billion at current fuel prices per metric ton on an annual basis when operating at full capacity.
Other inflationary pressures include food and labor. Royal Caribbean had higher labor costs in the LTM period ended June 30 than all of 2019 and the company spent more on food in the second quarter than any quarter in 2019, even though occupancy and capacity were well below peak levels.
Nevertheless, looking at the quarterly results, revenue has begun to approach pre-Covid levels, with results in the second quarter, coming close to fourth-quarter 2018 levels. By the end of the second quarter, occupancy had returned to 90%. However, only Royal Caribbean was able to achieve positive EBITDA as companies were not able to overcome higher costs. Carnival’s second quarter ends in May, and the group therefore did not experience the same ramp-up in sailings as other operators in the reporting period.
An overview of EBITDA across quarters looked as follows:
From a valuation perspective, enterprise value across the three main operators was around the levels seen in 2018, albeit with equity cushion significantly thinner, with all three companies boasting LTV of around 70%.
To plug cash flow holes during Covid, operators largely used debt financing and have significantly higher debt balances than pre-pandemic levels:
Cash Flow Driven by Deposit Growth in Q2
Each of the three major cruise operators generated positive operating cash flow in their most recent quarters. However, that cash flow was driven by growth in deposits. Excluding deposits, each company would have burned cash flow from operations.
Royal Caribbean was the only company to report positive EBITDA in the second quarter. Carnival reported the largest loss. However, with Carnival’s quarter ending on May 31, the results were not comparable given the dramatic increases in sequential activity as the industry ramped up its sailing activity following lockdowns.
Deposits can also be used as an indicator of future demand. On that basis, results appear strong. However, cruise companies admit to accelerated booking patterns and expect a return to more normal seasonal patterns in the near future.
Through Aggredium, Reorg tracks deposit balances including in companies’ balance sheets and changes in cash due to changes in deposits.
Shown below are screenshots from cash flow statement and balance sheet sections highlighting quarterly deposits, both the change in cash from deposit activity and the end of period balance:
Aggredium subscribers can click HERE to access the above financials.
Each of the companies reported peak deposit balances ending their second quarters with balances tracking ahead of 2018 levels.
Norwegian pointed to the strength in bookings as an indicator of 2023 performance. The company said “when compared to the same time in 2018 for 2019 sailings and taking into account capacity growth of approximately 20%, 2023 sales are a whopping 40% higher.”
Royal Caribbean acknowledged that deposits are partially inflated by future cruise credits, which were issued to passengers when sailings were canceled due to Covid. While, in the latest quarter, approximately 90% of total bookings were new compared with future cruise credit, or FCC, redemptions, 40% of the credits given to customers have yet to be redeemed. Included in the latest Royal Caribbean customer deposit balance, approximately 20% relates to FCCs.
Deposit growth could also reverse in the second half, consistent with normal seasonal patterns. Carnival said that, typically, May is the high point for deposit balance and during its third quarter, the company usually sees a seasonal reduction in deposits. That said, the company was also optimistic that deposits could rise through the third quarter, stating, “with more ships coming back online and higher occupancies, that should mitigate any normal seasonalization.”
Quarterly change in deposits looked as follows:
Pricing
One of the biggest wildcards for future profitability is pricing, about which operators have given out mixed messages. Carnival Corp, when it reported in June, stoked concern on industry pricing, stating that pricing on its cumulative book position for the second half of 2022 was lower than 2019 sailings. However, the company said cumulative advanced bookings were at the higher end of historical ranges for 2023.
Carnival said it would maintain pricing discipline even in the face of demand challenges, such as from new Covid variants or the war in Ukraine, and claimed that its business has historically been “recession-resilient” . This, combined with “tremendous pent-up demand,” led the company to expect “pricing strength” it said.
Offsetting this, Carnival has also seen an increase in first-time customers, which could hurt average pricing.
Norwegian claims it has been more successful than the rest of the industry when it comes to increasing pricing. The company said that it has focused on “market-to-fill” strategy as opposed to a “discount-to-fill,” which has resulted in it maintaining pricing. According to its second-quarter presentation, it has been able to lift pricing 18% above 2019 levels while peers have only increased pricing by 1%.
The company said that pricing for 2023 is running 20% higher than 2019 levels.
Results based on revenue per passenger and passenger day support Norwegian’s claims of better-than-peer pricing when comparing the latest quarter with 2019 average pricing.
Geographic Breakdown
On its second-quarter call, Norwegian provided a cautious outlook for Europe. The company said that it had to rely more on local sourcing within Europe to fill European itineraries, which hurt pricing. “[I]n terms of sourcing … we prefer an American consumer onboard all our vessels, regardless of where the itinerary is operating. Americans book earlier, book a higher cabin category, and … spend more money on board,” the company said, adding that “partly because of the hesitancy by many Americans to travel to Europe until the mandate to test negative to come back to the US was lifted, we leaned a little heavier on our European sourcing.”
According to the company, its sales and marketing teams were able to find demand for their European departures, but “pricing suffered a bit.”
Of the big three cruise operators, Carnival is the most exposed to Europe from a revenue standpoint.
Aggredium tracks geographic breakdowns of revenue when provided by companies, whether included in SEC filings or press releases. For instance, Royal Caribbean provides quarterly and annual revenue for North America, Asia/Pacific, Europe and Other regions. Annual results, including the last 12 months ended June 30 for Royal Caribbean, as shown on the Aggredium platform is below:
Aggredium subscribers can click HERE to access the above financials.
Historical profitability by region is a little less clear. Carnival breaks out profitability by geography, but groups Australia with North America and Europe with Asia, making it difficult to isolate profitability for Europe. EBITDA margins for the Europe and Asia segment have historically been slightly lower than North America and Asia.
Royal Caribbean also has exposure to the European market through TUI Cruises, the company’s 50% owned joint venture with TUI Group that operates under German brands Mein Schiff and Hapag-Lloyd. TUI Cruises is accounted for as an investment and results are not consolidated within Royal Caribbean’s financials.
Based on historical financials, TUI Cruises was more profitable than Royal Caribbean.
To the extent it is provided by the companies, Aggredium allows users to see both revenue and profitability by segment. TUI Cruises has not yet reported financials for the quarter encompassing June. However, parent company TUI Group has reported. Therefore, to get up-to-date information for the cruise segment, users can pull segment financials from TUI Group:
Aggredium subscribers can click HERE to access the above financials.
—Ben Kovacka, Mark Fischer
Carnival Corp Financials on Aggredium
Royal Caribbean Financials on Aggredium
NCL Corp Financials on Aggredium
TUI Cruises Financials on Aggredium
Hurtigruten Financials on Aggredium
Excel Model (Reorg Analysis Page)
The largest three cruise ship companies Royal Caribbean, Carnival and Norwegian Cruise Lines were able to generate positive operating cash flow in the second quarter, the first such period since the beginning of the Covid-19 pandemic, largely supported by a sharp rise in deposits. Deposit growth could continue to be a positive indicator for revenue in 2023 as operators attempt to overcome higher fuel prices, higher labor costs and a significantly higher interest burden. However, excluding deposit growth, Royal Caribbean was the only major cruise ship to report positive EBITDA in the period.
Pricing was held back on weakness in Europe as cruise travel remained local, but based on the cadence of operating reports, pricing might have increased through the spring and summer months.
In this article, Reorg uses financials pulled from Aggredium to compare operators within the cruise industry and to build a sector view on performance. Aggredium collects quarterly financials and key performance indicators for each of the major cruise lines including Carnival, Royal Caribbean, Norwegian Cruise Lines, TUI Cruises and Hurtigruten.
Aggredium & Top-Down Industry Overview
Aggredium is Reorg’s fundamental data product focused on the leveraged finance universe allowing users instant access to financial reporting of high-yield issuers and leveraged loan borrowers. Users can easily power their models with our Excel Add-in or dashboards and reporting via an API, and can screen and visualize the data. In the article below, we discuss the cruises industry in the context of second-quarter reporting with the graphs, charts and data all powered by Aggredium. To see the reports, all linked to Aggredium, click HERE.
Historical Financials
(Click HERE to enlarge.)
The rebound in LTM revenue of the companies in the industry from the trough in 2021 can be seen below. While the LTM revenue has grown around threefold across the three major cruise line operators from the year ended Dec. 31, 2021, the benefit of increased utilization has yet to flow into EBITDA, which remains subdued on an LTM basis as some costs have grown faster than the impact of increased utilization on revenue. For example, fuel, payroll and SG&A in the LTM period to June 30, 2022, came in above the levels recorded prior to Covid-19 for Royal Caribbean and Norwegian.
Fuel, in particular, represents a significant cost for cruise lines and, as previously reviewed, fuel prices have more than doubled since 2019. For instance, Carnival spent $1.5 billion on fuel in 2019 and therefore could spend approximately $3 billion at current fuel prices per metric ton on an annual basis when operating at full capacity.
Other inflationary pressures include food and labor. Royal Caribbean had higher labor costs in the LTM period ended June 30 than all of 2019 and the company spent more on food in the second quarter than any quarter in 2019, even though occupancy and capacity were well below peak levels.
Nevertheless, looking at the quarterly results, revenue has begun to approach pre-Covid levels, with results in the second quarter, coming close to fourth-quarter 2018 levels. By the end of the second quarter, occupancy had returned to 90%. However, only Royal Caribbean was able to achieve positive EBITDA as companies were not able to overcome higher costs. Carnival’s second quarter ends in May, and the group therefore did not experience the same ramp-up in sailings as other operators in the reporting period.
An overview of EBITDA across quarters looked as follows:
From a valuation perspective, enterprise value across the three main operators was around the levels seen in 2018, albeit with equity cushion significantly thinner, with all three companies boasting LTV of around 70%.
To plug cash flow holes during Covid, operators largely used debt financing and have significantly higher debt balances than pre-pandemic levels:
Cash Flow Driven by Deposit Growth in Q2
Each of the three major cruise operators generated positive operating cash flow in their most recent quarters. However, that cash flow was driven by growth in deposits. Excluding deposits, each company would have burned cash flow from operations.
Royal Caribbean was the only company to report positive EBITDA in the second quarter. Carnival reported the largest loss. However, with Carnival’s quarter ending on May 31, the results were not comparable given the dramatic increases in sequential activity as the industry ramped up its sailing activity following lockdowns.
Deposits can also be used as an indicator of future demand. On that basis, results appear strong. However, cruise companies admit to accelerated booking patterns and expect a return to more normal seasonal patterns in the near future.
Through Aggredium, Reorg tracks deposit balances including in companies’ balance sheets and changes in cash due to changes in deposits.
Shown below are screenshots from cash flow statement and balance sheet sections highlighting quarterly deposits, both the change in cash from deposit activity and the end of period balance:
Aggredium subscribers can click HERE to access the above financials.
Each of the companies reported peak deposit balances ending their second quarters with balances tracking ahead of 2018 levels.
Norwegian pointed to the strength in bookings as an indicator of 2023 performance. The company said “when compared to the same time in 2018 for 2019 sailings and taking into account capacity growth of approximately 20%, 2023 sales are a whopping 40% higher.”
Royal Caribbean acknowledged that deposits are partially inflated by future cruise credits, which were issued to passengers when sailings were canceled due to Covid. While, in the latest quarter, approximately 90% of total bookings were new compared with future cruise credit, or FCC, redemptions, 40% of the credits given to customers have yet to be redeemed. Included in the latest Royal Caribbean customer deposit balance, approximately 20% relates to FCCs.
Deposit growth could also reverse in the second half, consistent with normal seasonal patterns. Carnival said that, typically, May is the high point for deposit balance and during its third quarter, the company usually sees a seasonal reduction in deposits. That said, the company was also optimistic that deposits could rise through the third quarter, stating, “with more ships coming back online and higher occupancies, that should mitigate any normal seasonalization.”
Quarterly change in deposits looked as follows:
Pricing
One of the biggest wildcards for future profitability is pricing, about which operators have given out mixed messages. Carnival Corp, when it reported in June, stoked concern on industry pricing, stating that pricing on its cumulative book position for the second half of 2022 was lower than 2019 sailings. However, the company said cumulative advanced bookings were at the higher end of historical ranges for 2023.
Carnival said it would maintain pricing discipline even in the face of demand challenges, such as from new Covid variants or the war in Ukraine, and claimed that its business has historically been “recession-resilient” . This, combined with “tremendous pent-up demand,” led the company to expect “pricing strength” it said.
Offsetting this, Carnival has also seen an increase in first-time customers, which could hurt average pricing.
Norwegian claims it has been more successful than the rest of the industry when it comes to increasing pricing. The company said that it has focused on “market-to-fill” strategy as opposed to a “discount-to-fill,” which has resulted in it maintaining pricing. According to its second-quarter presentation, it has been able to lift pricing 18% above 2019 levels while peers have only increased pricing by 1%.
The company said that pricing for 2023 is running 20% higher than 2019 levels.
Results based on revenue per passenger and passenger day support Norwegian’s claims of better-than-peer pricing when comparing the latest quarter with 2019 average pricing.
Geographic Breakdown
On its second-quarter call, Norwegian provided a cautious outlook for Europe. The company said that it had to rely more on local sourcing within Europe to fill European itineraries, which hurt pricing. “[I]n terms of sourcing … we prefer an American consumer onboard all our vessels, regardless of where the itinerary is operating. Americans book earlier, book a higher cabin category, and … spend more money on board,” the company said, adding that “partly because of the hesitancy by many Americans to travel to Europe until the mandate to test negative to come back to the US was lifted, we leaned a little heavier on our European sourcing.”
According to the company, its sales and marketing teams were able to find demand for their European departures, but “pricing suffered a bit.”
Of the big three cruise operators, Carnival is the most exposed to Europe from a revenue standpoint.
Aggredium tracks geographic breakdowns of revenue when provided by companies, whether included in SEC filings or press releases. For instance, Royal Caribbean provides quarterly and annual revenue for North America, Asia/Pacific, Europe and Other regions. Annual results, including the last 12 months ended June 30 for Royal Caribbean, as shown on the Aggredium platform is below:
Aggredium subscribers can click HERE to access the above financials.
Historical profitability by region is a little less clear. Carnival breaks out profitability by geography, but groups Australia with North America and Europe with Asia, making it difficult to isolate profitability for Europe. EBITDA margins for the Europe and Asia segment have historically been slightly lower than North America and Asia.
Royal Caribbean also has exposure to the European market through TUI Cruises, the company’s 50% owned joint venture with TUI Group that operates under German brands Mein Schiff and Hapag-Lloyd. TUI Cruises is accounted for as an investment and results are not consolidated within Royal Caribbean’s financials.
Based on historical financials, TUI Cruises was more profitable than Royal Caribbean.
To the extent it is provided by the companies, Aggredium allows users to see both revenue and profitability by segment. TUI Cruises has not yet reported financials for the quarter encompassing June. However, parent company TUI Group has reported. Therefore, to get up-to-date information for the cruise segment, users can pull segment financials from TUI Group:
Aggredium subscribers can click HERE to access the above financials.
—Ben Kovacka, Mark Fischer
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