Royal Caribbean Cruises Ltd. (NYSE:RCL) Q3 2023 Earnings Call Transcript

Royal Caribbean Cruises Ltd. (NYSE:RCL) Q3 2023 Earnings Call Transcript October 26, 2023

Royal Caribbean Cruises Ltd. beats earnings expectations. Reported EPS is $3.85, expectations were $3.43.

Operator: Good morning. My name is Regina, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Royal Caribbean Group Third Quarter 2023 and Business Update Earnings Call. [Operator Instructions] I would now like to introduce Michael McCarthy, Vice President of Investor Relations. Mr. McCarthy, the floor is yours.

Michael McCarthy: Good morning, everyone and thank you for joining us today for our third quarter 2023 earnings 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, and a reconciliation of all non-GAAP items can be found on our Investor Relations website and in our earnings release. Unless we state otherwise, all metrics are on a constant currency adjusted basis. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our third 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.

Jason Liberty: Thank you, Michael, and good morning, everyone. Before we begin today, I would like to first acknowledge the devastating events taking place in the Middle East. The horrific terrorist attacks on Israel over 2 weeks ago have no place in a civilized society. The scale and the barbarity of those attacks should shock us all and brings the situation in the Middle East to a very dangerous low. We are heartbroken at the loss of so many innocent lives then and in the war that continues to this day. Our thoughts are with all who have been impacted, including many members of our own team. I would also like to recognize the incredible effort from our shoreside teams and crew, abroad Rhapsody of the Seas. We have been working tirelessly with the U.S Department of State to help safely evacuate Americans from Israel.

My heartfelt gratitude goes out to all involved. As relates to the impact of these events on our business, about 1.5% of our capacity in the fourth quarter had planned to visit Israel. Most of the impacted deployment was quickly adjusted, including a few sailings that were home porting and Haifa. The evacuation services or Rhapsody of the Seas were provided pro bono to the U.S government and these costs are included in our financial forecasts. Combined with cancelled and adjusted itineraries in the region, for the remainder of the year, the impact amounts to about $0.05 in earnings per share. Now moving on to the business, our teams have done an outstanding job delivering on another strong quarter as we delivered a yield improvement of close to 17% and beat the midpoint of our EPS guidance by 12%.

This beat is further solidifying 2023 as a banner year and positioning us extremely well for 2024 and beyond. I want to thank the entire Royal Caribbean Group team, whose enthusiasm and dedication enables us to deliver the very best vacation experiences responsibly while generating strong financial results. During the third quarter, all key itineraries exceeded our already elevated expectations as we delivered a record 2 million memorable vacations, and exceptional guest satisfaction scores. As you can see on Slide 3, we had record yields for the quarter driven by new hardware, record pricing in the Caribbean and Europe, as well as onboard revenue rates that were up about 30%. While the performance of our Caribbean itineraries has been excellent throughout the year, we were particularly pleased with a double-digit yield growth achieved on our European itineraries in the third quarter.

As we look to the full year, the strong performance in the third quarter and continued acceleration in the booking environment is positioning us well to deliver over 13% yield growth for the year and earnings per share that is twice our original guidance for the year. The unprecedented acceleration in demand and pricing for our leading brands, combined with stronger demand for onboard experiences were certainly the main drivers of our outperformance. Adding to that, our strong focus on cost has been an important contributing factor to our elevated 2023 results. The healthy demand environment is very encouraging as we continue to build the business for 2024 and beyond. A year ago, we announced a 3-year financial performance program Trifecta, our teams have rallied around the Trifecta targets, focusing on generating strong quality demand, enhancing margins, building for the future, and most of all, delivering the best vacations in the world.

As you can see from our results, we are well on our way to achieving Trifecta. Our proven formula for success remains unchanged. Moderate capacity growth, moderate yield growth, although I would not describe this year as moderate, and strong cost controls lead to enhanced margins, profitability and superior financial performance. As I’ve said in the past, Trifecta creates the pathway back to what we internally describe as base camp. However, base camp is not our final destination, and our ambitions go well beyond it. As we think about 2024 for the Royal Caribbean Group, from a consumer demand standpoint, we look to both macro trends and data points from the millions of daily customer interactions. On a macro level, some of the economic indicators continue to provide some conflicting signals.

However, when we look closer at these trends, and indicators related to our customers, and their related behaviors and strong propensity to cruise, we see that many of these macro indicators are less relevant to our business. We have more than 130,000 guests sailing on our ships every day, and millions more who book or engage with us throughout our commercial platforms. What we continue to see across all markets, brands and products is an exceptionally engaged consumer that is looking to book their dream vacations with us. The positioning of our brands, attract guests across broad demographics, psychographics and at a median household income of at least $125,000. Our customers sentiment is bolstered by strong labor markets, high wages, surplus savings, and elevated wealth levels.

Even better for us is the fact that overall spend on experiences continued to grow, and is currently up 25% compared to 2019 with twice the amount spent on goods. Cruising remains an exceptional value proposition with strong demographics, and secular tailwinds, allowing us to outperform the broader leisure travel industry. Our goal is to further narrow the gap to land based vacations, as we attract even more satisfied customers to our vacation ecosystem. I believe that is why when people are raising concerns and other industries, like hotel, airline, real estate. Our commercial apparatus is firing on all cylinders with visits to our websites in the third quarter, doubling that of 2019. Our travel partners are also delivering meaningfully more bookings in 2019 levels, and even beating our elevated expectations.

Our brand’s global appeal and nimble sourcing model allows us to attract the highest yielding guests and partially mitigate the impact from the stronger dollar. Now I’ll focus on 2024, which is shaping up to be another incredible year for the Royal Caribbean Group. Our capacity is growing by 8%, and our deployment across markets is relatively consistent with 2023 with slightly more Caribbean, slightly less Europe, and a return to China for the first time in 4 years. Demand for 2024 has continued to accelerate, with bookings consistently outpacing 2019 levels by a wide margin. This has resulted in a book position that is ahead of all prior years at higher rates, further positioning us for another year of strong yield and earnings growth. While still early, we anticipate making significant progress towards our Trifecta goals in 2024.

And based on current fuel FX and interest rates, we anticipate earnings that will start with at least a $9 handle. Our operating platform is larger and stronger than it has ever been. With the best brands, the most innovative fleet and destinations and the best people. Each of our brand is the leader within their category. Royal Caribbean International dominates the contemporary market. Celebrity Cruises has redefined the premium travel space, and no one delivers ultra luxury an expedition at sea like Silversea. By combining their unique strengths, we have created an attractive vacation ecosystem in which the sum is greater than the parts. Essentially, we are turning our delivery of a vacation of a lifetime into a lifetime of vacations. We will continue to ensure that each brand has what it needs to continue doing what it does best, while leveraging our enhanced commercial capabilities to capture and keep customers in our ecosystem.

From young families to empty nesters, as they seek to return to us time and time again for the best vacation experiences. Our innovative new ships and onboard experiences allow us to continue to differentiate our offerings, as well as deliver superior yields and margins. In August, we welcomed Silver Nova, the first of the new evolution class for our Silversea brand. And the next few weeks, Celebrity Cruises will take delivery of Celebrity Assent, and Royal Caribbean International will take delivery of a game changing icon of the seas later this quarter. With revenue sailings beginning at the end of January. In 2024, we plan to take delivery of utopia of the seas for Royal Caribbean International and Silver Array for Silversea. With each new ship we raise the bar in the travel industry while enhancing what our guests already know and love.

Also debuting in January 2024, just in time for the arrival of icon of the Seas is hideaway beach. hideaway Beach is our newest adult only ultimate beachfront paradise at perfect day at CocoCay. Pre-cruise sales for hideaway beach, and premium offerings are exceeding our expectations. We are further enhancing our commerce capabilities to optimize our distribution channels, build even more customer loyalty and lower our acquisition costs. We have seen a significant increase in new to brand and new to cruise customers this year. In fact, in the third quarter, approximately two-thirds of our guests were new to cruise or new to brand, all while also doubling the repeat booking rate, indicating strong loyalty and satisfaction. We’ve continued to remove friction and make it easier than ever for guest to pre-booked their activities with about a third of those purchases now coming through the mobile app.

In the third quarter, about 70% of guests made pre-cruise purchases at much higher APDS than in prior years. In the third quarter, customers who purchase onboard experiences before their cruise spent 2.5x more than those who only bought once on board. As we look into 2024, we have booked over double the amount of pre-cruise revenue compared to this year with more guests engaging before their crews and at higher prices. We will continue to excel in the core and drive business excellence in order to increase yield and capture efficiencies across our platform. I said it before, but it’s worth mentioning again. Our formula for success remains unchanged. Moderate capacity growth, moderate yield growth and strong cost controls will lead to enhance margins, profitability, and superior financial performance.

Our sustainability ambitions help inform our strategic and financial decisions on a daily basis, ensuring that we always act responsibly while achieving our long-term profitability goals. We are making progress on our see the future commitments to sustain the planet, energize communities and accelerate innovation. We are also progressing toward a double-digit reduction in carbon intensity versus 2019 by 2025, and are exploring multiple options for low carbon based solutions for our existing fleet. While we design the Fleet of the Future with flexibility in mind. This past quarter we concluded a 12-week biofuel trial program in Europe, a first in the industry to cover multiple fuel types and multiple operating areas. The trials resulted in a 20% carbon reduction while also helping to better understand supply chain dynamics.

The decision is that we are making now will help position us to deliver a net zero ship by 2035. In our achieve our climate strategy of destination net Zero. Our business is performing exceptionally well, and we are making significant progress towards achieving Trifecta goals. The future of the Royal Caribbean Group is bright with our strong platform and proven strategies. We are creating a lifetime of vacation experiences for our customers, while also delivering long-term shareholder value that allows us to reach new financial records. With that, I will turn it over to Naftali. Naft?

Naftali Holtz: Thank you, Jason, and good morning, everyone. Let me start with third quarter results. Our team’s delivered another strong performance with adjusted earnings per share of $3.85, 12% higher than the midpoint of our July guidance. We finished the third quarter with a load factor of 110% and with net yields that were up almost 17% versus 2019, about 300 basis points higher than the midpoint of our July guidance. Overall, about 50% of the better-than-expected yield performance was driven by European itineraries with the remainder mainly driven by Caribbean and Alaska. Rates were up approximately 18% in the third quarter compared to 19 and onboard APDs have been consistently higher even as load factors return to the historical levels.

NCC, excluding fuel increased 10.3% compared to the third quarter of 2019, a 100 basis points lower than our July guidance. Lower operating costs as well as favorable timing contributed to the better-than-expected costs. Our team’s continued to deliver strong top line growth while maintaining focus on costs to expand our margin. We delivered an EBITDA margin of nearly 42% in the third quarter on par with 2019 levels. Over 100% of the revenue outperformance during the quarter dropped to the bottom line leading to higher adjusted EBITDA and earnings versus expectations. We continue to see strong demand and pricing for both 2023 and 2024 sailings. This has resulted in higher-than-expected load factors and record yields into third quarter along with a record book position on a forward looking basis.

Now that we are in the fourth quarter, many of our ships have transitioned from their summer to their winter itineraries. In the fourth quarter, about 55% of our capacity will be in the Caribbean, 11% in Europe and about 13% in the Asia Pacific region. The remaining capacity is spread across a number of other itineraries including repositioning, South America and expedition cruises. Now let’s turn to Slide 6 to talk about our guidance for the full year 2023. We now expect net yield growth of 12.9% to 13.4% for the full year, a 140 basis points increase from the midpoint of our prior guidance. Net cruise costs excluding fuel are expected to be up 7% to 7.5% for the full year as compared to 19. Our cost outlook has not changed from our July guidance.

We do, however, have slightly fewer APCDs due to the cancelled sailings that included Israel, impacting NCCx by approximately 30 basis points. Our cost outlook reflects the continued benefit from all the actions we have taken over the last several years to support enhanced margins. We continue to expect record adjusted EBITDA per APCD for the year and an EBITDA margin that is back to our previous record in 2019. So in summary, we expect adjusted earnings per share of $6.68 to $6.63 and it includes approximately $0.21 negative impacts from FX and fuel rates as well as sailings that included Israel. Now turning to Slide 7, I will discuss our fourth quarter guidance. Fourth quarter yields are expected to be up approximately 16.2% to 16.7%, driven by our incredible new hardware and a significant increase in rates both ticket and chip board for like-for-like chips.

This range also includes about 200 basis points negative impact from the elimination of the reporting lag related to Silversea. NCC, excluding fuel, is expected to be up 3.9% to 4.4% including 60 basis points impact from sailings that included Israel related to reduce APCDs. As for adjusted earnings per share, we expect the range of $1.05 to $1.10 for the fourth quarter. This also includes $0.18 negative impact from FX and fuel rates as well as sailings that included Israel. Now I will share some insights for 2024, which while still early, is shaping up to be another exciting year for the company. 2024 capacity is expected to be up 8% as we introduce Icon, Utopia and Silver Ray and benefit from a full year of a Ascent and Silver Nova. Capacity growth is most pronounced in the first and the third quarters due to the timing of new ship deliveries and timing of dry docks.

Our Caribbean capacity is growing about 13% in 2024, and will represent about 55% of overall deployment. We’re adding a full year of Icon of the Seas and about 7 months of short Caribbean sailings on Utopia. We also expect to increase the number of guests experiencing perfect day at CocoCay with the addition of HideAway Beach. As a result, we expect a total of 3 million guests will experience perfect day in 2024, up from 2.5 million this year. European itineraries will account for 15% of our capacity in 2024. Alaska will account for about 6% and Asia Pacific itineraries will account for 10%, marking our return to China with spectrum of the seas in Q2 of next year. Capacity for itineraries to visit Israel account for less than 1.5% in 2024. As Jason mentioned, both our book load factors and APDs are higher than all previous years.

This is despite having more short Caribbean itineraries and China, which typically booked closer in. There are a few factors that are expected to influence the cadence of our yield growth throughout 2024. In addition to the typical variability driven by the timing of new ship deliveries, the return to normal load factors in the first half of the year will bolster our year-over-year yield growth in comparison to the back half. The first quarter will also benefit from the annualization of pricing power that accelerated during wave this year. Now moving to costs. Our focus remains to control costs as we seek to grow our revenue and margins. We also continue to benefit from all the actions that we have taken in the last few years to reshape our cost structure.

In 2024, we expect to have double the dry dock days compared to this year because of timing of dry docks throughout the pandemic. In addition, we are launching HideAway Beach with Perfect Day at CocoCay, while its accretive to margin as no APCD is associated with it further impacting cost comparisons. We expect to increase dry dock days and the opening of HideAway Beach to negatively impact NCCx by approximately 300 basis points next year. Outside of that, we expect costs to increase very low single digits consistent with our proven formula. We will provide more details on the financial impact of these items during our fourth quarter earnings call. The combination of our strong book position and an accelerating demand environment is certainly pointing to another year of solid yield growth and a step change in earnings growth as we accelerate towards our Trifecta goals.

Turning to our balance sheet. We ended the quarter with $3.3 billion in liquidity. Strengthening the balance sheet continues to be a top priority better-than-expected cash flow generation and our disciplined capital allocation has allowed us to accelerate reduction in leverage and debt levels with the goal of achieving investment grade balance sheet metrics. Utilizing cash flow from operations, we repaid $775 million of debt during the quarter, including 500 million of our 11.5 senior secured notes due June 2025. In October, we refinanced our 3 billion revolving credit facility and 500 million term loan into a new 3.5 billion multi year revolving credit facility. The successful execution of the new credit facility demonstrate the continued support and confidence in the company’s financial position and credit improvement.

Also in October, we issued a redemption notice for the remaining 500 million of our 11.5 secured notes due June 2025. This redemption will be funded with existing liquidity. With that, we expect to pay off over $3.5 billion of debt and reduced leverage to mid 4x by the end of the year. Debt pay down actions reduced interest expense by close to $100 million in 2023 compared to our initial expectations, and contribute to further increase in earnings going forward as we chip away at our high cost debt. Our commitment to strengthening the balance sheet is also being recognized by the credit agencies. In the third quarter S&P upgraded our credit rating by two notches to BB minus and Moody’s upgraded our credit rating by one notch to be one with a positive outlook.

As the business accelerates and generates more cash flow, we’ll continue to proactively and methodically pay down debt and pursue opportunistic refinancings in support of our Trifecta goals. In closing, we remain committed and focused on executing our strategy and delivering our mission while achieving our Trifecta goals. With that, I will ask our operator to open the call for question-and-answers session.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Steven Wieczynski with Stifel. Please go ahead.

Steven Wieczynski: Yes, excuse me. Hey, guys, good morning.

Jason Liberty: Good morning.

Steven Wieczynski: So, Jason, you essentially just provided us with some kind of guidance for 2024, which is much appreciated. And I would also say probably much better, I think, than anybody would have expected, given the higher fuel costs and kind of those fears out there around your cost structure. So as we think about that spread between the yields and costs, I mean, normally we’d be expecting that spread to be, whatever, 200, 300, maybe 400 basis points. But you guys are on pace this year to see your yields outpace your cost by, let’s call it, close to 900 basis points. So, I guess what I’m getting at here is, we think about next year, based on our math to get to that, that EPS number north of $9. You probably need to see that spread be pretty wide again, given the fact that Naft just talked about costs being up, let’s call it 300 to 400 basis points.

So saying all that another way is that, I’m guessing your yield expectations for next year must be pretty high at this point. So hopefully that will make sense.

Jason Liberty: Well, good morning, Steve. And thanks for the question. So, obviously, we are feeling very good about the business, the demand for our brands, the demand for our ships and in destinations. And we’re seeing that, as I noted in my remarks, not only in terms of the daily interactions with our guests, but also just the high-level of booking activity. And the strength we’re seeing in bookings where we have been booking at an accelerated pace, really, since earlier this year. And of course, as we’ve been booking, not just for 2023, but we’ve also been booking for 2024. And when we look at our book of business, you’ll see a lot of strength and volume. And of course, with strength and volume allows us to continue to improve on the rate side.

And you combine all that with incredible hardware coming into place next year, especially Icon of the Seas, as well as more volume onto places like perfect day because of HideAway, we feel very good about our yield projections for next year. Now it’s still early. So we’re not in a place where we’re going to guide, but as our general internal ambition is always to make sure that our yields are meaningfully outpacing our costs. And of course, most of our costs as not pointed out growth next year on a per unit basis is really just driven by additional drydock days. And of course HideAway which delivers incredible margins, as in which will improve our yield profile, but also has cost with no APCDs. So all in all, we feel very good. And I think it’s important to just stress that, my comment on the earning side was that we expected to at least start with a nine.

And not only that, we also expect to continue to improve on an ROIC basis on the overall organization.

Steven Wieczynski: Great, that’s great color. Thanks for that, Jason. And then again, as we as we kind of think about, if we got to think about next year, clearly there’s a lot of disruption going on with Israel right now, and I think Naft talked about, it’s less than are you talking about that lesson, 1.5% of capacity for next year. But as we think about the rest of the Med, just maybe how you guys are thinking about customer demand for, the rest of Europe next year. And obviously, it’s probably a little bit too early to really understand that. But do you expect to see some kind of pullback, whether it’s Eastern, med, Western Med, or a combination of both? Or have you pretty much kind of moved your ships and your capacity around enough where you don’t think there really will be much pushback from your customer base?