5/4/2023
Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Group first quarter 2023 earnings and business update conference call. If you have a question today, please press star one on your telephone keypad. I would now like to turn the conference over to Mr. Michael McCarthy, Vice President, Investor Relations. Please go ahead, sir.
Good morning, everyone, and thank you for joining us today for our first quarter 2023 business update conference call. Joining me here in Miami are Jason Liberty, our Chief Executive Officer, Naftali Holtz, our Chief Financial Officer, and Michael Bailey, President and CEO of Royal Caribbean International. Before we get started, I'd like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures which are adjusted as defined in a reconciliation of all non-GAAP items can be found on our website and in our earnings release available at www.rcinvestor.com. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our first quarter and an update on our latest actions and on the current booking environment. We will then open the call for your questions. With that, I'm pleased to turn the call over to Jason.
Thank you, Michael, and good morning, everyone. I'm thrilled to be here this morning to share our incredible first quarter results and the strong trajectory of our business. When we turn the page from 2022 into 2023, with the full strength of our operating platform deployed, and numerous tailwinds related to the consumer's desire to travel and experience the world. We believe this would be a great year. We expect it to finally return to yield growth in the first quarter and accelerate even more through the rest of the year. Well, as you saw in the press release this morning, what transpired over the past four months was much better than we had anticipated. Our brands are stronger than ever, and our yield in Q1 blew away previous records. Before getting into the detail, I want to thank the entire Royal Caribbean Group team, 100,000 plus strong, for another outstanding quarter. Their dedication and commitment allow us to deliver the very best vacation experiences responsibly while generating strong financial results. As highlighted on slide four, it has been a tremendous first quarter that set us well on the path to a year that is significantly better than we expected just a few months back. We knew that demand for our business was strong, but what has transpired was a record-breaking extended wave season that translated into robust bookings and meaningfully better prices. In the first quarter, we delivered a record 1.9 million memorable vacations, achieved 102% load factor at higher pricing than 2019, and earned exceptional guest satisfaction scores. Yields grew 5.8% compared to record 2019 levels and were significantly above our guidance. Strong demand for Caribbean itineraries translated into higher load factors at better than expected pricing for both ticket and onboard. Our yields are now exceeding record highs and we expect this trend to continue for the rest of the year and beyond. This is particularly significant because while we thought the first quarter would be a transition period, We always expected the rest of the year to be strong. The fact that demand for the coming nine months is so much stronger than our already robust expectations says a lot about the strength of the consumer and the strength of our brands. Adjusted EBITDA and adjusted EPS in the first quarter were both considerably higher than our guidance, and we generated $1.3 billion of operating cash flow. Strong revenues, our continued focus on increasing margins and favorable timing of operating expenses contributed to the better than expected earnings performance. The acceleration of demand coupled with our team's incredible execution is also translating into higher revenue and earnings expectations for the full year. As you can see on page five, we are more than doubling our full year yield growth expectations to six and three quarters to seven and three quarters on increased expectations for ticket and onboard revenues. We are also increasing earnings per share expectations by 40% to $4.40 to $4.80 as we continue to focus on expanding margins as revenue accelerates. Now I'll provide some insight into the robust demand environment in our incredible wave season. Bookings outpaced 2019 levels by a very wide margin throughout the entire first quarter and into April. Pricing was also significantly higher as our commercial apparatus across all channels has been driving quality demand into our vacation ecosystem. The strong wave season resulted in an acceleration of our book position in relation to prior years. The booking window is now completely back to normal, demonstrating consumers' desire to continue to plan their vacation travel with us well in advance. While demand has been strong across all products and markets, we continue to see exceptional strength from the North American consumer. This strength in combination with the incredible perfect day of Coco Cay has resulted in record yields for our Caribbean sailings. In addition, European bookings are nicely outpacing 2019 levels with peak summer sailings trending particularly well in recent weeks. The robust demand we see for our products as a result of our superior brands, hardware, enhanced destination offerings, a nimble and global sourcing model, and strong execution by our teams. As you heard me say on prior earnings calls, we continue to see financially healthy and engaged consumers who are eager to vacation and build memories with us. Our customer sentiment remains strong and is bolstered by strong labor markets, high wages, and excess savings. Secular tailwinds continue to benefit us as consumers continue to shift preferences and spend from goods to experiences, resulting in a strong entertainment and travel spend. This trend continued in the first quarter, where spend on experience was 24% higher than 2019 and doubled the spend on goods. Further, our research shows that consumers plan to continue prioritizing leisure travel over other spend. Our addressable market is plentiful and continues to be meaningfully larger than it was in 2019. Our product appeals to a broad range of vacationers who are seeking everything from a short getaway to perfect day to a luxury world cruise. Cruising remains an exceptional value proposition. I would actually say it's too attractive of a value proposition, which is allowing us to outperform broader leisure travel as we seek to close the gap to land-based vacations and drive better revenue and happy customers. Cruise search is up 15% versus 2019, significantly outpacing the growth in general vacation search and contributing to the doubling of visitors to our website when compared to 2019. Our vacations are popular among a broad range of consumers, which allows us to attract more and more new customers into our ecosystem. In the first quarter, the percentage of guests who were either new to brand or new to cruise surpassed 2019 levels by a wide margin. The improvements we have made in our commercial capabilities have allowed us to capture quality demand and expand our share of guest wallet. In the first quarter, about two thirds of our guests booked some of their onboard activities in advance of their cruise. The comparable figure in 2019 was 48%. So you can see we have used our time well to upgrade our systems. Every dollar a guest spends pre-cruise translates into approximately 70 cents of incremental spend once on board. While we have made a significant leap in our commercial capabilities, we are still in the early innings of our journey and will continue to add features and capabilities to our app and commercial engines. Looking to the rest of 2023, we expect to deliver amazing vacation experiences to over 8 million guests at record yields as we deploy our best-in-class fleet across the best global itineraries. We expect to return to historical load factors in late spring and continue to benefit from a strong pricing environment. We expect to deliver record yields that are six and three quarters to seven and three quarters higher than 2019, with every one of our brands generating positive direct profit this year. Our strong yield growth outlook is driven by the performance of new hardware, a strong pricing environment, especially for Caribbean itineraries, and continued growth from onboard revenue areas. New hardware has been a great differentiator for us, and we are benefiting from the eight ships that joined our fleet since 2019. This year, each of our wholly owned brands will welcome a new vessel. These ships are sure to continue elevating vacation experiences for our guests and will continue to further drive a competitive advantage and deliver very attractive financial returns. Since all three of these ships will be delivered in the second half of this year, they will be a key yield driver next year. Silver Sea will welcome Silver Nova this summer, the first of the new Evolution class. Celebrity Cruises will welcome the fourth in the award-winning Edge series. And Royal Caribbean International will take delivery of the game-changing Icon of the Seas. Let me spend a minute talking about Icon of the Seas and the excitement she is generating with our customers. With Icon, we set out to create the ultimate vacation for thrill-seekers, the chill enthusiast, and everyone in between without compromise. She is getting exceptional demand with bookings well surpassing previous records. Despite being on sale for only five months, Icon is significantly more booked for her inaugural season at materially higher rates than any other Royal Caribbean ship launch. Icon will join the fleet later this year and will debut in the Caribbean in January 2024 with itineraries that include Perfect Day at Coco Cay, and its new expansion, Hideaway Beach. Moving to costs, our team have been working hard for several years to reshape our cost structure with the goal of enhancing margins. Our cost outlook for the year reflects our commitment to enhancing profitability while focusing on delivering the best vacation experiences. We continue to expect the business to deliver a record yield and adjusted EBITDA in 2023. Our proven formula for success remains unchanged. Moderate capacity growth, moderate yield growth, though I wouldn't define this year's growth as moderate, and strong cost controls will lead to enhanced margins, profitability, and superior financial performance. We just published our 15th Annual Sea Sustainability Report, providing an in-depth update on our strategy and performance of delivering the best vacation experiences responsibly. In this report, we outlined our progress towards reducing our carbon intensity by double digits by 2025, versus 2019. We expect to deliver on significant milestones of our decarbonization pathway this year, including the introduction of advanced technologies on our new ships, such as LNG, fuel cells, and a first-of-its-kind onboard waste-to-energy system. To wrap up, the business continues to accelerate, and we are uniquely positioned to grow earnings and cash flow in 2023 on our way to achieving our trifecta goals. The strength of our brands and operating model continues to grow. We are committed to delivering the best vacation experiences responsibly, and I couldn't be more excited about what's ahead for the Royal Caribbean Group. With that, I will turn it to Naftali. Naft?
Thank you, Jason, and good morning, everyone. Let me begin by discussing our results for the first quarter. As you can see on slide four, we reported an adjusted net loss of approximately $59 million, or 23 cents per share. These results were significantly above our expectations and the high end of our guidance range. Total revenue was $2.9 billion, adjusted EBITDA was $642 million, and operating cash flow was $1.3 billion, again, significantly above our expectations. We finished the first quarter with a load factor of over 102%, At net yields, they were up 5.8% for the quarter, or 440 basis points higher than the midpoint of our guidance. Better than anticipated, close in demand for Caribbean sailings, an improving pricing environment, and continued strength in onboard revenue were the main drivers for these exceptional results. Higher load factors drove two-thirds of the yield outperformance, and higher pricing drove the remainder. Net cruise costs, excluding fuel per APCD, increased 5.8% in constant currency compared to the first quarter of 2019. Net cruise costs for the first quarter included $2.87 per APCD, or 240 basis points impact of structural costs. Operating costs also benefited from approximately 160 basis points of favorable timing compared to guidance. first quarter results are a testament to the continued robust demand environment, attractive value proposition of our cruise vacations, and strong commitment by our teams to deliver the best vacation experiences responsibly. Turning to the booking environment, bookings have consistently been higher than the same time in 2019, with the gap widening as wave extended further into the year than ever before. The booking strength has been particularly evident on Caribbean sailings, where our superior hardware and Perfect Day at Coco Cay continue to be a winning combination. More than half of our Caribbean sailings visit Perfect Day at Coco Cay, which is Royal Caribbean International's highest-rated destination in the Caribbean. Since Perfect Day opened midway through the second quarter of 2019, these itineraries are driving outsized yield and pricing growth. While the Caribbean has seen booking strength, performance of our European itineraries is also aligned with our initial expectations. European itineraries account for 17% of full year capacity, peaking at 35% in the third quarter. Bookings for our European sailings have been nicely outpacing 2019 levels, with peak summer trending particularly well in recent weeks. Several of our newest ships, including Celebrity Beyond, Odyssey of the Seas, and Silver Dawn are sailing in Europe this summer and are attracting quality demand and rates. Now, let me review our 2023 outlook. If you turn to slide 8, you will see our updated guidance for the full year 2023. We expect net yield growth of 6.75% to 7.75% for the full year. This represents an approximately 400 basis point increase from the midpoint of our prior guidance. About a third of the increase is due to strong Q1 results, with the remainder due to better business outlook for the rest of the year. The underlying yield improvement is driven by the performance of new hardware, strong demand for our core products, particularly Caribbean itineraries, and continued strong growth from onboard revenue areas. While yield growth is expected to ramp up for the rest of the year, there is some variability at the quarter level. Yield growth is likely to be the highest in Q2, where we lap the opening of Perfect Day at Coco Cay and benefit from our Caribbean deployment mix. As you can see from our guidance, yields for the back half of the full year are expected to be up by more than 6%. From a cost perspective, Net cruise costs excluding fuel are expected to be up 5.5% to 6.5% for the full year as compared to 2019. Our cost outlook reflects our culture of continuous improvement and innovation, and we are benefiting from all the actions we have taken over the last several years to support enhanced margins. Net cruise costs also include 210 basis points of structural cost that we did not have in 2019. Those include, for example, costs related to the full-year operations of Perfect Day at Coco Cay and our new Galveston Terminal. We continue to actively manage persistent inflation across categories, including food and beverage, airfare, and shoreside human capital. Our teams continue to find ways to manage through inflation while maintaining exceptional guest experience and increasing profitability. Fuel expense is expected to be approximately $1.1 billion for the year, and we are 54% hedged for the remaining of the year. Looking ahead, fuel consumption is 25% hedged for 2024 and 5% hedged for 2025. Based on the current business outlook, along with current fuel pricing, currency exchange rates, and interest rates, we expect record-adjusted EBITDA and adjusted earnings per share, or $4.40 to $4.80. Now, turning to slide nine, I'll provide some color on second quarter capacity and guidance. We plan to operate about 11.7 million APCDs during the second quarter. Net yields are expected to be up 10.1% to 10.6% compared to 2019. Exceptional strength in Caribbean itineraries, combined with our amazing private island destination, Perfect Day at Coco Cay, is driving the increase in yields. Net cruise costs, excluding fuel, are expected to be up approximately 8.9% as we continue to focus on margin expansion while revenue accelerates. Second quarter operating costs carry approximately 430 basis points of incremental expenses that weigh on NCCX when compared to 2019, of which half are structural and half are timing from the first quarter. So in summary, based on current currency exchange rates, fuel rates, and interest rates, we expect adjusted earnings per share of $1.50 to $1.60 for the second quarter. Turning to our balance sheet, we ended the quarter with $3.9 billion in liquidity. Our liquidity remains very strong, and we are focused on expanding our margins to further enhance EBITDA and free cash flow. During the first quarter, we repaid $286 million of debt maturities as well as $2.4 billion of revolver advances. In February, we issued $700 million of senior guaranteed notes at 7.25% coupon to refinance 2023 and 2024 debt maturities. Our access to capital remains strong, and our execution and performance resonate with our investors and financial partners. We will proactively and methodically continue to improve the balance sheet through debt paydowns and opportunistic refinancings. Our remaining scheduled maturities for 2023 are $1.8 billion, made up predominantly of ECA debt amortization, which we expect to pay down with cash on hand and operating cash flow. As the business continues to accelerate and generate strong and growing cash flows, we are committed to a disciplined capital allocation and to return to an investment-grade balance sheet profile in line with our trifecta goals. In closing, Our business continues to accelerate and we expect to grow yields and margin so we can achieve record-adjusted EBITDA in 2023. We remain committed and focused on executing on our strategy and delivering on our mission while achieving our trifecta goals. With that, I will ask our operator to open the call for a question and answer session.
Thank you, sir. Just a reminder that it is star one. If you have a question, we'll go first to Stephen Wisinski-Steefel.
Yeah. Hey, guys. Good morning. So first off, congratulations on a strong quarter. Jason, in the release, you mentioned that for 2023, you're expecting 2023 EBITDA to significantly exceed 2019 levels, which is a change in wording relative to where you were back in February. And look, I understand I'm probably nitpicking here a little bit, but You know, just want to understand maybe how we should think about EBITDA trajectory now, you know, for the year and the progression you guys are on now to get north of, you know, $5 billion in EBITDA by 2025, according to your trifecta program.
Hey, Steve. Good morning. It's Naftali. So as you can see, we are very pleased with the results. And as we think about EBITDA and how this translates to the progression throughout the year, you can see that we are increasing yields, and we expect the EBITDA growth to be higher than our yield growth. And that's because a lot of the revenue is dropping to the bottom line because we are very much focused on costs and enhancing margins. So if we look at the guidance that we provided, we expect to be an eyelash away from our previous EBITDA per APCD record in 2019. And a lot of the things that we're doing and a lot of the strategies that we're employing should benefit to us as we continue to execute towards our trifecta goal.
And I think, just to add on to it, Steve, as we think about it on the trifecta side, obviously this year, the performance of this year is much better than we had expected. And I think the commentary we talked around About ICON, obviously we have NOVA coming online, which is a high-yielding ship. We have Ascent coming online, which is high-yielding. We have Hideaway coming online. And, of course, the commentary that we've been talking about, that we've seen acceleration in price and volumes, is also what we're seeing for like-for-like for 2024, though it's early. And for us to get to the marks for Trifecta, we really just need moderate yield growth and good competition. in good cause control, which you continue to show. And so that's kind of very much on our path. And as Nav mentioned, it's great to see that really almost every penny of the outperformance on revenue is dropping right down to the bottom line, which would be dropping right down to EBITDA.
That's great, Keller. Thanks, guys. And then second question, as we think about the back half of the year, obviously we can back into your yield guidance, but if we kind of break down those yields a little bit, are you assuming your customer from an onboard, onboard has obviously been extremely, extremely healthy. Are you assuming that your customer kind of stays in the same ballpark that they are now? Do you have them slowing a little bit in terms of spend levels? And then second part of this question, which is a little bit different, but we get a lot of questions from investors about, you know, demand and demand into 2024? And can the demand levels that are there right now persist into next year? Or is 23 being, you know, is 23 benefiting from just still kind of reopening and COVID, you know, bookings and stuff like that? So hopefully all that makes sense.
Yeah, sure. Well, I think, you know, obviously, you know, we don't have a crystal ball. What we know is what we see happening basically every minute of every day. We're taking tens and tens of thousands of bookings a day. We've got 160, 170,000 people spending on our ships. And so we have a very good idea of the customer in terms of what's happening today. We also obviously do a lot of surveying of our customers in terms of what they're looking to do in the future. And it's obviously clear to us that they are very focused on gathering experiences and creating memories with their friends and family. So the other point I'll just add is, and this is more on the pre-cruise side and what they're booking on the ship for the future, that number continues to rise, which also just shows their appetite to spend more and more on non-ticket related spend. So I think for us, when we think about the back half of this year, our expectation is that we're going to continue to see what we're seeing. However, the mix changes a little bit. Q3, we have a little bit more Europe. We have a little bit less Caribbean. And, of course, you've heard our commentary on the Caribbean. It's exceptionally strong, which is really what's driving the overall outperformance, while Europe is now very much coming in as we expected for the year. So I think that probably talks a little bit about how we think about the back half of next year. Now, again, going to demand level for 2024, What we have, again, is what we're seeing day in and day out. And, you know, at this point in the year, the customer now, and, of course, we begin to position ourselves and orient ourselves to 2024 more and more. Certainly the majority of the bookings we're now taking are focused on 2024. And we see very similar strength and acceleration there. from what we've been seeing close in as well as what we've been seeing for the bookings for 2023.
That's great, Keller. Thanks, guys. Appreciate it and congratulations.
Steve, I just have to add one comment because I have to talk about Icon of the Seas. I think if you think about 24 and the comments we made earlier about Icon, Icon is literally the best performing new product launch we've ever had in the history of our business and we're delighted with volume and rate, and that really is a full 24 product. So you can see if you wanted to use Icon as a proxy, I know it's a brand new product and it's stunning, but it's really driving a huge amount of demand and great rate.
That probably won't be the first time you hear about Icon from Michael. Thanks, guys. Thanks, Steve.
Your next question comes from Brandt Montour, Barclays.
um hey good morning everybody obviously a exceptional quarter congratulations um a question about uh load factors i know you guys are going to hit historical load here in the spring but you know curious looking past that um what the new normal for for load looks like given you know you maybe you have some regional mix shift which could affect it but more so you know you have obviously a lot of new capacity that that's um you know that's different and has and has more on board and more space. So any comments about what the new normal looks like for you guys?
So on an expectation standpoint, I mean, just mathematically, our load factor, our normalized load factor will begin to rise. And that's really leading with ICON coming on, which will have a higher load factor profile. Now, we're also taking on NOVA, which has a lower load factor than than the Royal Caribbean brand or the Celebrity brand. And we're also taking on Ascent, which has lower load factors than Royal. But with Icon coming on next year, Utopia coming on next year, you would expect our load factors to be up a point or two when we look into 2024 and beyond.
That's super helpful. And then my second question is just on China. Back in 2019, if I recall, you guys had something like mid-single digits of your global demand coming from China, traveling outside of China. And I know there's outbound international flight constraints limiting China outbound travel, but you're probably engaged with your database over there. I'm just curious what you're seeing from them now that they're starting to travel again, and if it's even showing up sort of on the radar in terms of what's booked for later this year.
Yeah, hi, it's Michael. Yeah, Outbound's always been a relatively small percentage of our China business. I think we're now more encouraged by all of the signals that we've had for our reopening in China in 24. And we've still got some work to do, but we've now started to rebuild our sales organization in China. And we expect, hopefully by late spring, early summer, to be back operating out of China. 24. It's pretty good.
And then, sorry, that's in terms of actual capacity in China. The question was more about China outbound to other areas.
Right. Yeah, that's correct. That's in actual capacity operating out of China in 24. As it relates to outbound, outbound started to return, but it's obviously coming now from a smaller base. Great.
Thanks so much.
Thanks, Brent.
Up next, we'll hear from Robin Farley, UBS.
Great, thanks. With that yield guidance increase, I don't even have a question on demand because that was kind of a mic drop, that increase. I actually have a question kind of just looking at related to balance sheet issues. Another cruise line has talked about getting ECA funding for a significant amount of money that's not related directly to a ship order, but that's for owner's extras. And I'm just wondering if Is there potentially opportunity, because obviously those would be at sort of 1% and 2% interest rates, is there opportunity for Royal? I know you guys aren't doing any big change orders that we know of at the moment, but is there an opportunity for you to get some ECA funding for things not directly related to a ship delivery?
Yeah. Hi, Robin. It's Naftali. You know, the ECAs have been fantastic partners to us. We obviously are very committed to our new build program, and they provide us very attractive financing opportunities. There's always puts and takes, but we don't expect any material changes from our financing arrangements at this point.
Yeah, the only point I would just add, Robin, what you're describing is not a new concept. We've actually probably been doing that for about a decade. So if we have change orders or we have owners extras, the same concept of the 80-20, 20% down, 80% financed,
um is is how um those those ships have been financed whether it is for the contract price or or or other elements that we're adding on to the ship i guess it was really more i was thinking that it's the first time we've seen sort of like incremental eca funding that wasn't tied to you know ships ordered before the pandemic which and again it's tied to a very uh big change order so not not your not your situation um And then just one other quick clarification on the expense side of things. When you look at your expenses for the full year, obviously some of it you mentioned structural because you have a full year of Coca-Cola and Galveston, but you said some of it's transitional. And I don't know if I heard you say, I'm just wondering what amount, because obviously some of the structural, that'll be recurring next year, but some of the transition costs would as they fall away, create an expense decline next year. So I don't know if you can quantify how many basis points if your full increase is one time. Thanks.
Yeah. So it's predominantly structural. Some of the two examples that you mentioned are there. And obviously, they will be now in our basis as we go forward. As we get to our full or historical load factors, those transitional costs are very minimal.
and we are expecting them to go away. So it's predominantly the structural costs.
But I mean, for the transition costs, is it 100 basis points or 200 basis points of the full year expense this year? Yeah, it's even less than 100 basis points. And some of the COVID protocols that
that we had a little bit in Q1 and some of our crew movements that we need to finish up, but that's generally the bold part.