Royal Caribbean Group (RCL) — Q1 2023 Earnings Call Transcript

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 Bayley, 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, and a reconciliation of all non-GAAP items can be found on our website and in our earnings release available at www.rcl Investor 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 turned the page from 2022 into 2023 with the full strength of our operating platform deployed and numerous tailwinds related to consumers' desire to travel and experience the world, we believe this would be a great year. We expect 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 4, 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. 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 and 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 5, we are more than doubling our full-year yield growth expectations to 6.75% to 7.25% 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. Looking ahead to the rest of 2023, we expect to deliver amazing vacation experiences to over 8 million guests with 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. New hardware has been a great differentiator for us, and we are benefiting from the eight ships that joined our fleet since 2019. These ships are sure to continue elevating vacation experiences for our guests and will continue to further drive the 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. In closing, 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.

Thank you, Jason, and good morning, everyone. Let me begin by discussing our results for the first quarter. As you can see on Slide 4, we reported an adjusted net loss of approximately $59 million or $0.23 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 that 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 and improving pricing environment and continued strength in onboard revenue were the main drivers for these exceptional results. Turning to the booking environment. Bookings have consistently been higher than the same time in 2019, with the gap widening as the 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 CocoCay continue to be winning combinations. This is a testament to the continued robust demand environment and the attractive value proposition of our cruise vacations.

Hi, 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 I just want to understand maybe how we should think about EBITDA trajectory now for the year and the progression you guys are on now to get north of $5 billion in EBITDA by 2025 according to your Trifecta program?

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 much of the revenue is dropping to the bottom line because we are very focused on costs and enhancing margins. We expect to see significant EBITDA performance as we continue to execute towards our Trifecta goals.

And I mean, just to add on to it, Steve, as we think about it on the Trifecta side. Obviously, this year's performance is much better than we had expected. And I think the commentary we talked about Icon—obviously, we have Nova coming online, which is a high-yielding ship. You have Hideaway coming online. And of course, the commentary that we've been talking about that we've seen acceleration in price in 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 cost control, which you continue to show. And it's great to see that almost every penny of the outperformance on revenue is dropping right down to the bottom line, which would translate directly into EBITDA.

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, it 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.

Hi, good morning, everybody. Obviously, an exceptional quarter, congratulations. A question about load factors. I know you guys are going to hit historical load here in the spring. But I'm curious, looking past that, what the new normal for load looks like given you have obviously a lot of new capacity that’s different and has more onboard and more space. So any comments about what the new normal looks like for you guys for loads?

So, on an expectation standpoint, mathematically, our load factor will begin to rise. And that's really leading with Icon coming on. Our load factors are expected to be up one or two points when we look into 2024 and beyond as we introduce these new ships.

Yes. Outbound travel has always been a relatively small percentage of our China business. I'm encouraged by the signals that we've had for our reopening in China in '24. We still have some work to do, but we've started to rebuild our sales organization in China, and we expect to be back operating out of China in '24.

Thanks. Yield guidance increase. I don’t even have a question on demand because that was kind of a mic drop if that increases. I actually have a question looking at balance sheet issues - wondering if there is potential opportunity for Royal to get some ECA funding for things not directly related to a ship delivery?

Robin, it's Naftali. These sales have been fantastic partners to us. We're obviously very committed to our new build program, and they provide us with very attractive financing. There's always puts and takes, but we don't expect any material changes from our financing arrangements at this point.

What you’re describing is not a new concept. We've actually probably been doing that for about a decade. If we have change orders or we have owner’s extras, that same concept has applied.

I wanted to dig a little bit more into pricing. Obviously, with the net yield guidance, it looks like net for the end of this year to be up high singles, maybe even approaching 10%. I'm curious how you might break out or talk directionally about how much of that is like-for-like versus new hardware versus CocoCay lift? And then maybe just zeroing in on the like-for-like, your ability to continue to move that up in years ahead when you consider the value gap versus land?

If we take that out, we are double digits. So, we're very pleased with that. We have a lot of these ships going to CocoCay, which continues to track yield premiums, and we have strong onboard strength as well. So, all of these are driving the pricing increase, and we see that continuing to benefit us beyond 2023.

Just on the $5.3 billion in customer deposits that you have. I was curious if you could parse out what percentage of the bookings are people that are new to cruise versus historical levels? It just seems like you’re gaining a lot of momentum there. Just curious on where that sits. Thanks.

Yes. The combination of those new to our brands and new to our cruises has significantly exceeded 2019 levels. This benefit you see in the first quarter in these customer deposits is just more people booking with us, both new to our brands and new to cruise.

Okay. Well, we thank everyone for their participation and interest in the company. Michael McCarthy will be available for any follow-up. So, we wish you all a great day. Thank you.