On Wednesday, May 20, Royal Caribbean (NYSE:RCL) held its first-quarter 2020 conference call with analysts. No one really cared about the cruise company's 16.7% decline in revenue or the $1.48 in adjusted net losses posted in the quarter. Those dismal results were expected since the world changed drastically in March when COVID-19 swept across the world and halted the cruise industry in its wake.
Much more important was management's commentary on the current state of Royal's liquidity, when the company might begin cruising again, and what that scenario might look like. Royal Caribbean just recently raised over $3.3 billion in capital last week, giving it a longer runway to survive without returning to operations.
However, those funds won't last forever. Royal Caribbean disclosed that its monthly cash burn will be between $250 million and $275 million under a scenario of a "prolonged" suspension of operations. Assuming about $3.3 billion in liquidity, and Royal Caribbean appears to have about 12 months before it would go bankrupt or have to do an additional capital raise. Therefore, any indication of when things might get back to "normal" is key for Royal and all the other cruise operators.
Here are the three most consequential takeaways from Royal Caribbean's recent conference call.
The company could go back to the debt markets
Royal Caribbean may have just raised billions in debt, but management also made clear to shareholders that the structure of last week's raise actually allows for even more capital raises in the future, just in case. That's actually a huge feat, since Royal Caribbean's bonds had been downgraded to "junk" status last week. When that happened, that made it harder for Royal Caribbean to pledge its ships as collateral.
Fortunately, Royal Caribbean's lead banker Morgan Stanley came up with a creative maneuver to raise more debt than could otherwise be secured by a junk-rated company. Basically, as part of the company's new offering, bond investors have half the new bonds secured by ships, with the other half unsecured, yet with equity rights on the ships -- essentially giving the other half of the bonds "second dibs" on ships without the company officially pledging them.
Is this a lawyer's trick to get around new bond covenants? Maybe, yet CFO Jason Liberty seemed very happy about the raise, as well as the ability to do more if necessary going forward:
[T]he other thing that we're really happy about is that by raising that bond it really provided a lot of flexibility for us to raise additional capital, especially debt. So, there's a pretty significant basket and flexibility on our ability to raise additional debt.
New bookings seeing "surprising" demand
Management also noted that it was encouraged by the demand for cruising going into 2021, especially from the company's 20 million loyalty members. While management did say that 2021 bookings were slightly below 2019 levels in terms of load factors, on the positive side, those load factors were still, "within historical ranges." Furthermore, the 2021 bookings were at prices in the mid-single digits. Encouragingly, only a small percentage of the 2021 bookings are from future cruise credits applied from this year's cancelled cruises, which means there's new organic demand for cruises, not merely a delay from 2020 cancellations.
Management noted it had been pleasantly surprised by the overwhelming response to the company's Cruise with Confidence policy. Interestingly, the Cruise with Confidence option doesn't have a cash refund offer, but rather allows for cancellations within 48 hours of a cruise and the ability to rebook at anytime up until December 31, 2021 or 12 months from the cancelled cruise, whichever is earlier.
Not having a cash refund option is another tool Royal Caribbean can use to boost liquidity over the coming months, as deposits will likely be coming in and the cash refund offers from this year's cancelled cruises taper off. Even though the cancellation policy is quite flexible, that cash should stay with Royal Caribbean no matter what, helping its liquidity situation, which is the most important factor right now.
Royal can break even with 30%-50% load factors
One of the big questions on investors' minds has been if cruises will even be able to turn a profit once they begin sailing again. That's because not only will ships have to be thoroughly cleaned, but cruises may also go sailing with fewer passengers on board once that happens. Fewer passengers over the fixed costs of running a cruise could mean lower profits, even if they do set sail again.
However, Royal Caribbean actually gave some pretty positive news on this front, saying that its cruises would likely be breakeven on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis at just a 30% load factor on newer ships and a 50% load factor on older ships. This is because newer ships are more fuel-efficient and have lower maintenance requirements.
That seems like a threshold Royal Caribbean could pass on its first ventures back out to sea, especially on cruises to lower-risk areas.
Waiting for the go-ahead
Royal Caribbean just extended its no-sail policy through July 31, with the hopes of starting back up shortly thereafter. However, it's unclear at this point if that no-sail window will be extended again. Still, after the conference call and businesses update, investors now know that the company has a year of liquidity, the ability to do even more debt raises, and a fairly reasonable load threshold to make operating profits once cruises start up again.
These encouraging factors make Royal Caribbean, which is down over 70% from its 52-week highs, a high-upside stock. However, all cruise stocks still carry lots of risk, with a wide spectrum of outcomes depending on when they'll be able to set sail again.