Royal Caribbean Group (RCL) — Q1 2017 Earnings Call Transcript

Thank you, operator. Good morning and thank you for joining us today for our first quarter earnings call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, our President and Chief Operating Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Carol Cabezas, our Vice President of Investor Relations. During this call, we will be referring to a few slides, which have been posted on our Investor website. Before we get started, I would like to refer you to our notice about forward-looking statements which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined and a reconciliation of these items can be found on our website. Unless we state otherwise all metrics are in a constant currency adjusted basis. Richard will begin by providing a strategic overview of the business. I will follow with a recap of our first quarter results, provide an update on the booking environment and then provide an update on our full-year and second-quarter guidance for 2017. We will then open the call up for your questions.

Thank you, Jason, and good morning, everybody. It's been another exciting quarter here at Royal Caribbean, and I am pleased to be able to talk to you all about it. Actually, the best news today is no news. We set aggressive goals for ourselves and we're executing nicely against them. I’ll start with the Double-Double Program, which has proven so successful in routing a massive organization across both land and sea. We have used it to instill a focus on effectuating a step change in our profitability, and it's done just that. This quarter again illustrates our team's focus on maximizing revenue opportunities while maintaining cost discipline. Growing yields by 6% this quarter, which follows a 7% growth rate last year, it's remarkable and supports the increase in our guidance for the year. Our first-quarter results were up 74% from last year, which also shows that our focus on improving specifically the winter season is working. Looking ahead to the year, we see the business progressing pretty much as we expected. We keep emphasizing that we manage our year on an annual basis, and the variations between quarters are the norm rather than the exception. I know some of our investors attempt to draw inferences from fluctuations within the year, but we just haven’t found these quarterly variations to be terribly helpful indicators of the year as a whole. Now, these actions remind me of a duck gliding calmly through the water. As we look at the scene from the shore, all we see is an elegant duck gliding serenely across the pond. But under the surface, there is a lot of fierce activity with a lot of energetic paddling. I am really very proud of the fierce activity that our team brings to work day in and day out. Obviously, they can't handle every contingency no matter how hard they paddle, but our track record to date is pretty reassuring. As you know, we've raised our guidance for the year by about a dime. However, the real impact of our message is that little has changed since our call three months ago. At that time, we said bookings were outstanding and accordingly, we predicted strong revenue growth for 2017. That prediction is proving accurate. In fact, we continue to revel in strong daily booking reports. The main negative has been the situation in Korea with the Chinese government in a dispute with the Korean government. We’ve adjusted our itineraries to suit, but it is hurting. It reminds me of the China-Japan dispute from several years ago. But fortunately, bookings in Europe and elsewhere have compensated. Shifting now to another event during the quarter, the prestige is good news for the future. A couple of weeks ago, we introduced the new design, the Celebrity Edge, which is being introduced late next year. Based on all that experience, I believe that Celebrity Edge will be yet another transformational ship, which will influence ship design for years to come. Everything about the Edge-Class is new and exciting. The decor is highly unique and the new spaces are totally inspiring. We’ve just announced a partnership with the Malala Foundation, and we're honored that she will be the godmother of Celebrity Edge. She's an amazing inspiration to young women everywhere, and she inspires all of us. But I’m a numbers person, and there are several statistics about the ship, which are striking. One number that speaks volumes to me is double, as in double the percentage of suites. On Edge-Class, our mix of suite staterooms is 12%, which is a little more than double the amount for most of our existing ships. Since our guests pay more for a suite, doubling the suite count is not a bad thing to do. Another great number is 23, as in Edge’s standard veranda cabin being 23% larger than the corporate ones. This is due to the innovation in the cabin designs. We also publicly revealed our new innovation lab. It allows us to design ships fully in three dimensions, which allows us to involve more creativity in the process. We take great pride in creating the most innovative ships that attract the most premium yields. Based on the experience we have gained over the last two years of our Smart Ship programs, we are now embarking on a new generation of technology to increase our competitive advantage in this area. As you can see, we have a lot to be motivated about. Our performance continues on a steady upward trajectory. We've reached investment grade and we're embarking on another share repurchase program. Clearly, the future for cruising has never been brighter.

Well, thank you, Richard. And as always, thank you for trying to make my job easier. I will begin by talking about our result for the first quarter. Unless I state differently, all metrics are on a constant currency basis. Our first-quarter results are summarized. For the quarter, we generated adjusted earnings per share of $0.99, which is approximately $0.09 higher than our guidance and 74% higher than the same time last year. Net revenue yields are up 6% for the quarter, which is noteworthy considering this follows a 7% improvement last year. This past quarter's results were driven by continued strength in both ticket and onboard revenue. On the ticket side, we received stronger closing bookings for the Caribbean, resulting in better than expected occupancy and pricing for the quarter. Onboard revenue yield was up 8.9% for the quarter. The strong year-over-year growth was driven by a combination of our new hardware, shore excursions, and utilization of VOOM and Xcelerate, our high-speed Internet offerings. As I mentioned over the past couple of quarters, guest spend has been continuing to shift towards areas that involve experiences over buying things. Our costs for the quarter were in line with guidance, ending down 4.4%. Now I'd like to update you on what we're seeing in the demand environment. On our last earnings call, we noted that WAVE was off to a very strong start. These WAVE trends continued in both sides of the Atlantic with bookings exceeding last year's levels on both a volume and rate basis. As a result, we are booked ahead of the same time last year in both occupancy and pricing in each remaining quarter, having approximately 15% fewer guests left to book than at this point last year. Demand for European sailings has been particularly strong from North America and as a result, these itineraries are booked at significantly higher APD and load factor than at the same time last year. The APD strength is particularly impressive considering that Harmony of the Seas spent our inaugural summer season in the Mediterranean last year, making year-over-year comparisons more difficult. We are also seeing strong booking trends from European sourced markets, but since we have a lot less inventory left to sell, we will end up sailing with a greater mix of North American guests than in a typical season. These sourcing shifts are moving to an even stronger rate position as North Americans usually spend more than the average on European cruises and take more shore excursions. Trends for North American products continue to please. Our summer Alaska sailings benefited from a strong WAVE period, remaining on track to outperform last year's record season. Overall, the Caribbean accounts for close to half of our capacity for the year and is performing as expected. Over the past three months, both bookings and pricing have been above last year's level, and Harmony of the Seas is commanding premium prices for her first summer Caribbean season.

Steve, it's Michael. Yes, I think when this initially happened, which was towards the middle of March, there was a slowdown and a little bit of confusion in the market because everything had to be adjusted and itineraries had to be changed. The fortunate thing, of course, is Japan is very popular with the Chinese consumers. We actually started to see some demand coming in because of the changes that were made with many of the itineraries. So, initially, it was a bit tumultuous and uncertain. And as Jason had already commented, we started to see the demand return back to its previous levels.

Can you talk about how your distribution partners have reacted to the changes, and then just to reconfirm, China as a whole is still tracking above on a year-over-year basis. Is that what I heard?

Before the Korean situation, we were in a pretty good position as we had a lot of inventory already and were in a good place. With the distribution, initially, there was confusion in the marketplace, but it took a couple of weeks for everything to get sorted out and straightened out. So, I think obviously with the changes to the Korean itineraries, it has changed the dynamics in terms of the distribution and product offer in the market. So, we’ve moved beyond that initial turmoil and things are starting to settle down more now.

I was wondering if you could help us better understand the extent to which the Korean restrictions are reflected in the adjustment to your guidance and how long do you expect this disruption to last.

Yes, I think it's hard to determine how long the disruption will last. We've seen similar situations in the past that resolved in a reasonable time. In terms of the impact, I'm not going to give a specific number, but it's not a very material change to our forecast. Strength in other areas is benefiting us from this global portfolio.

Can you talk about the positive trends you are seeing, and do you think this is as good as it gets?

It's a good time and we've been a little bit surprised at the strength of this year. I think we feel good about the execution our teams have done. The new ships and upgrades have performed well, and I think we are seeing a cultural shift towards valuing experiences over material goods. Overall, people are beginning to understand the value of cruising. Nothing lasts forever, but we are seeing growth opportunities.

In terms of the second quarter, a little over half of the yield improvement comes from like-for-like improvements in the fleet, while the other half combines new hardware and the Pullmantur deconsolidation. Our costs have been marginally increased this year, but it’s an immaterial change.

Can you just talk about the drivers of the strong onboard revenue? Are there any unique drivers in particular?

We've been pleased with the onboard revenue, with good growth over time. We are seeing a shift towards experience-related revenue streams. VOOM is doing well, and we've managed to increase the sales using effective pricing models. Our strategy of focusing on pre-cruise sales is driving this revenue.

It's a long-term play in the Chinese market, and we need to adapt to the challenges without losing sight of the growth potential. We're accustomed to these curveballs and flexible in our responses.

To clarify regarding capacity growth, we expect mid-single digit growth in 2018, but things are still in flux for 2019. Demand for the Caribbean has been quite positive, despite increased capacity being introduced later this year.

Could you help us understand the joint venture income and the factors affecting that line?

The decrease in that line is due to the deconsolidation of Pullmantur, affecting our equity pickup line. Pullmantur has a seasonal business that peaks during the summer, which is affecting the current pickup we've seen.

I'm curious about your expectations for 2018, as it seems you opened sailings earlier than expected. Are you seeing initial positive results?

The booking curve gives us more comfort in terms of visibility. This isn't just a short-term spike; rather, we continue to see a strong trajectory for the future.

Can you talk about the shift in European and Caribbean pricing as you look at your future bookings?

With the demand from North America and Europe, we have made effective deployment changes that help to stabilize the market in Europe this year, contributing positively to our yield.

In terms of passengers under 35, how do you feel the appetite is for cruising in that generation?

Under 35, we have focused on attracting millennials. The market changes significantly when they have children, as they seek family vacations. Our digital tools have been successful in engaging this demographic.

Thank you all for your interest. Carol will be available for any follow-up questions you might have, and we wish you all a great day.