Royal Caribbean Cruises Ltd. (NYSE:RCL) Q4 2023 Earnings Call Transcript

Royal Caribbean Cruises Ltd. (NYSE:RCL) Q4 2023 Earnings Call Transcript February 1, 2024

Royal Caribbean Cruises Ltd. beats earnings expectations. Reported EPS is $1.25, expectations were $1.13. RCL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Royal Caribbean Group Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Michael McCarthy, Vice President, Investor Relations. Please go ahead.

Michael McCarthy: Good morning everyone and thank you for joining us today for our fourth quarter and full year 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 fourth quarter, the full year 2023, an update on the current booking environment and our outlook for 2024. 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 getting into the details, I would like to take a moment to reflect on last week’s monumental launch of our new ship Icon of the Seas. Every once in a while a revolutionary product comes along that resonates so strongly and makes such a widespread impact, that it forever changes the status quo. For the vacation industry, that product, Icon of the Seas, debuted last week to incredible fanfare. Our mission at the Royal Caribbean Group is to deliver the best vacation experiences responsibly and Icon is going to deliver the best family vacation on the planet with her incredible experiences and amazing crew. I am absolutely thrilled that after years of planning and anticipation, Icon finally welcomed her first revenue guests on board this past weekend.

With a phenomenal guest engagement and word of mouth from this ship, along with our landmark sports partnership with Inter Miami and football GOAT, Lionel Messi, we look forward to making millions of vacation memories for our guests in the years ahead. A big thank you to our incredible team, who worked relentlessly over seven years dreaming, innovating and flawlessly delivering Icon of the Seas. So now let’s talk about 2023 and 2024. 2023 was an exceptional year fueled by unmatched demand for our brands as you see on Slide 5. Net yields were up 13.5% compared to 2019, more than 3.5 times our January expectations, and we delivered margins that were back to record 2019 levels. Our net income exceeded our January expectations by about $1 billion, resulting in adjusted earnings per share more than double our January guidance.

We continued our focus on reshaping the cost structure across the operating platform, leading the durable margin expansion, which is expected to continue to provide operating leverage as we grow the business. Innovation is core to our company’s DNA, and in 2023 we continue to direct that innovative spirit not only to our new ships and destinations, but also to an amazing guest experience at all points in the vacation journey. We received exceptionally high guest satisfaction scores and attracted a record number of both new and loyal guests who are rebooking at twice the rate we were seeing in 2019. The robust performance in 2023 significantly accelerated our trajectory towards our Trifecta goals, with EBITDA per APCD and ROIC on the cusp of our targets.

We also continued to invest in the future while making significant progress in strengthening the balance sheet towards our targets of investment grade metrics. The year ended on an incredible note, with revenue yields up nearly 18% in the fourth quarter, and 2024 is in the strongest book position in the company’s history from both a pricing and volume standpoint. I am incredibly thankful and proud of everyone at the Royal Caribbean Group for executing so well and doing so while achieving strong financial results and propelling our future growth. Momentum continues in 2024 with a record breaking start to the Wave season. Bookings have consistently outpaced last year across all key products at much higher rates. In fact, the five highest booking weeks in our company’s history all occurred since the last earnings call.

As a result, our capacity is up 8.5% year-over-year. We have less inventory available to book in 2024 than we did a year ago for 2023 and half as many staterooms left in Q1. Our commercial apparatus is full speed ahead and all channels are delivering quality demand above 2023 levels. Our direct-to-consumer channels continue to perform exceptionally well as consumer preferences for digital engagement and our ongoing investment in enhanced capabilities is supporting record breaking bookings. Our travel partners are also delivering meaningfully more bookings than last year and beating our elevated expectations. We continue to see particularly healthy demand from North America where about 80% of our guests will be sourced this year. Our brand’s global appeal and nimble sourcing model allows us to attract the highest yielding guests by positioning our ships in multiple markets across the world.

Our brands lead in their respective segments and are very successful at capturing quality demand across sectors and sourcing from new consumer bases. As we think about consumer demand for 2024 and beyond, we look to both macro trends and data points for millions of daily interactions with our customers. We continue to see a very positive sentiment from our customers, bolstered by strong labor markets, high wages, surplus savings and elevated wealth levels. Year-over-year growth in spend on experiences is double that of spend on goods, and cruising remains an exceptional value proposition with lower penetration, higher consumer consideration and high purchase intent. We see an exceptionally engaged consumer base across markets, brands and products.

People are looking to book their dream vacation with us and continue to spend at elevated levels. Consumers are engaging in booking their vacations earlier. 70% book at least one of their onboard activities, pre-cruise at higher APDs and onboard spend continues at record levels and at higher rates. This positions us very well to outperform the broader travel industry and narrow the pricing gap to land based vacations. We continue to attract new customers into our vacation ecosystem and deliver the best vacation experiences, so that our guests are highly satisfied and continue to rebook and return to our brands and our products. 2024 is shaping up to be a record breaking year with 40% earnings growth as our progress continues on an accelerated path towards achieving our Trifecta goals.

As you can see in our release today, we expect to achieve several Trifecta targets in 2024, a full year earlier than previously anticipated. As I said in the past, Trifecta creates the pathway back to what we internally describe as base camp and while an important milestone, it is not our final destination as our ambitions go well beyond it. As highlighted on Slide 6, in 2024 we expect to grow capacity by 8.5% with the introduction of Utopia of the Seas and Silver Ray and the first full year of service of the three incredible ships that joined our fleet during 2023, Icon of the Seas, Celebrity Ascent and Silver Nova. New ships not only elevate our vacation experiences and draw new customers to our brands, but they also provide yield tailwinds and enhance overall profitability.

In 2024, we expect yields to grow 5.25% to 7.25%, driven by the performance of our entire fleet, new and existing ships, combined with our leading private destinations and strong commercial apparatus. Load factors and rate growth, together with continued focus on margins and disciplined capital allocation, are expected to drive record earnings that grow 40% year-over-year, getting us very close to our Trifecta targets. Our proven formula for success remains unchanged. Moderate capacity growth, moderate yield growth and strong cost controls lead to enhanced margins, profitability and superior financial performance. Our operating platform is bigger and stronger than ever. We have the leading brands in their respective segments, the best people and the best and most innovative fleet and destinations.

We remain intensely focused on delivering a lifetime of vacations for our guests and a long-term value for our shareholders. We are leading the vacation industry and creating exciting new products and experiences, which in 2024 include game-changing ships and the expansion of our highly rated destination, Perfect Day at CocoCay. Our new ships are performing exceptionally well and while we always expect to see strong trends when we introduce new ships, Icon of the Seas is definitely living up to her name and has taken things to a whole new level in every way. Demand and pricing for Icon has been incredibly strong. This year we are also thrilled to take delivery of the sixth Oasis class ship Utopia of the Seas, which will set the stage for the ultimate weekend getaway.

Lastly, we will take delivery of Silver Ray, the second ship in the evolution class, redefining ultra-luxury cruising. Silver Ray will debut in the Mediterranean this summer before transitioning to winter season in South America. New ships and their incredible innovative experiences further accelerate our efforts to steal market share from land based vacations. We completed the expansion of Hideaway Beach at Perfect Day at CocoCay just in time to welcome Icon of the Seas, upsizing the benefit of this strategic asset. Hideaway Beach is our newest adult-only ultimate beachfront paradise at Perfect Day at CocoCay, which expands our capacity on the island to over 3 million guests annually. About two thirds of Royal Caribbean International Caribbean guests will visit Perfect Day at CocoCay this year, allowing us to deliver high satisfaction scores and higher margins across the fleet.

Our journey to deepen the relationship with the customer continues this year. We will further enhance our commercial capabilities to optimize our distribution channels, build even more customer loyalty and lower our acquisition costs. The outsized increase in our onboard revenue over the past couple of years has been fueled by new capabilities introduced to make it easier for guests to pre book onboard experiences. We will continue to enhance those capabilities in 2024. About a third of onboard purchases are now coming through the mobile app and we already have about 40% more pre-cruise revenue booked in 2024 as compared to 2023. As a reminder, customers who purchase onboard experiences before their cruise, spend about two and a half times more than those who do not buy pre-cruise.

We will remove friction by investing in a modern digital travel platform, making it easier than ever for guests to book their dream vacations while allowing us to expand wallet share. We will also continue driving business excellence to increase yields and capture efficiencies across our platform. Our teams are committed to controlling costs and enhancing profitability while focusing on delivering the best guest experiences and doing so in a responsible way. Our sustainability ambitions help inform our strategic and financial decisions daily, ensuring that we always act responsibly while achieving our long-term profitability goals. We are making progress on our “see the future commitment” to sustain the planet, energize communities and accelerate innovation.

We wrapped the year on track to achieve our carbon intensity reduction targets and we are entering 2024 well beyond the halfway mark.

Celebrity Xcel: To wrap up, the future of the Royal Caribbean Group is exceptionally bright. With our strong operating 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. We are well positioned for continued growth in 2024 and beyond. And with that, I’ll turn it over to Naftali. Naf?

Naftali Holtz: Thank you, Jason and good morning everyone. Let me start by reviewing the fourth quarter results. Our teams delivered yet another strong performance with adjusted earnings per share of $1.25 about 15% higher than the midpoint of our October guidance. All key products exceeded expectations, delivering double digit yield growth in the fourth quarter. Net yields were up almost 18% compared to 2019, and that would have been 20% if not for the 200 basis point drag from eliminating the reporting lag related to Silver Sea. Load factors were at 105% and rates were up approximately 19% with significant growth for both ticket and onboard revenue. Net cruise costs excluding fuel, increased 6.7% compared to the fourth quarter of 2019.

Since our last earnings call, the stock price appreciated over 50% and added 250 basis points to stock based compensation expense versus our prior guidance. Excluding the increase in stock based compensation, our costs came in in line with expectations. Our focus on enhancing profitability allowed us to deliver 30% adjusted EBITDA margin in the fourth quarter ahead of 2019 levels. We also utilized excess cash flow to pay down debt and lower interest expense consistent with our Trifecta goals.

NCCx: Now, switching to our 2024 outlook, I will start by taking you through capacity and deployment for the year. For the full year, our capacity is expected to be up 8.5% compared to 2023. This year we have almost twice as many drydock days compared to 2023, reducing APCD growth by 1% and resulting in a more pronounced capacity growth in the first and third quarter. APCDs are expected to grow around 10% in the first and third quarter, 5% in the second quarter and 8% in the fourth quarter. 2024 has consistently been in a strong booked position and as Jason mentioned, the year is off to a very strong start with a record Wave. As a result, both rates and volume are currently booked significantly ahead of same time last year. All key products, including the Caribbean, Europe, Alaska and Australia are booked nicely ahead of last year.

The Caribbean represents just over 55% of our deployment this year following a 13% increase in capacity year-over-year. The growth is due to the additions of Icon of the seas and Utopia of the Seas combined with Celebrity’s upsized summer program. Supporting this increase in capacity is the addition of Hideaway Beach at Perfect Day at CocoCay. Our Caribbean programs are booked nicely ahead of last year in both rate and volume. While bookings and pricing for Icon can only be described as iconic and Utopia is demanding significant price premiums in the short Caribbean market, we are also very pleased with the trends we are seeing on existing hardware. Europe accounts for around 15% of our capacity following a 7% reduction year-over-year. At the time of our last earnings call, we were in the process of altering itineraries for European Mediterranean sailings that were previously expected to visit Israel, and we have since redeployed all ships with calls to Israel.

Regarding the situation in the Red Sea, the safety of our guests and crew is of top priority and we are constantly monitoring the situation. We only have a handful of repositioning cruises scheduled in the region this year and have already rerouted one of our Silver Sea ships and have contingency plans for a couple others in the spring. Regarding demand for Europe product more broadly, bookings were softer for the impacted itineraries for a few weeks last October, but rebounded relatively quickly and are now significantly higher than same time last year. As a result, our European sailings are booked nicely ahead of last year. We are also very pleased with the trends we are seeing on other North American itineraries. Alaska has been performing particularly well from both a rate and volume standpoint.

Alaska accounts for 6% of full year capacity and 15% in the all-important summer season. While our capacity for Alaska is only up slightly this year, we have made some exciting changes to our Alaska deployment. For the first time, Celebrity will offer incredible Alaska vacations on an edge class ship, Celebrity Edge and Silver Sea’s newest ship, Silver Nova will also sail in Alaska. Asia-Pacific will account for 10% of our capacity. We are seeing strong pricing and demand trends for both Asia and China as we return to China with Spectrum of the Seas in the second quarter. Taking all this into account, if you turn to Slide 7, you will see our guidance for 2024. This will be the second full year on our path towards our Trifecta goals and our results remain ahead of track.

Net yields are expected to be up 5.25% to 7.25%, and that’s following an exceptional 2023 that saw double digit yield growth that only accelerated as the year progressed. While the 2023 comparable set a high bar, full year yield growth is being fueled by our incredible new hardware, higher load factors, higher pricing, the expansion of Perfect Day at CocoCay and further advancements in our commercial capabilities. Now moving to costs, our focus remains to enhance margins as we continue to grow the business. Full year net cruise costs, excluding fuel, are expected to be up 3.75% to 4.25% and that includes approximately 315 basis points impact from increased drydock days and the operations of Hideaway Beach. The majority of our drydocks are in late first quarter and early second quarter, which will mostly weigh on our first half costs.

The remaining drydocks will be in the fourth quarter. We anticipate a fuel expense of $1.16 billion for the year and we are 61% hedged at below market rates. This year we’ll also see the introduction of the EU emission tax scheme which will apply to 40% of our European itineraries related emissions and we do not expect this to significantly weigh on earnings. Based on current fuel prices, currency exchange rates and interest expense, we expect record adjusted earnings per share between $9.50 and $9.70. Turning to first quarter guidance as summarized on Slide 8, in the first quarter, about 73% of our capacity will be in the Caribbean, 18% in Asia-Pacific, and the remaining capacity is spread across a number of other itineraries, including South America and expedition cruises.

Booked load factors and rates are at record levels and are both up significantly versus same time last year. As you can see from our guidance, we expect significant yield growth for the first quarter, driven by full load factor recovery and the annualization of the strong pricing trends which begin at the end of the first quarter of 2023. Net yields are expected to be up approximately 15% for the first quarter, with both Caribbean and Australian itineraries driving the growth in yield. Net cruise costs, excluding fuel, are expected to be up in the range of 7.1% to 7.6% and include 380 basis points impact from increased drydocks and costs related to operating Hideaway Beach. We also have approximately 200 basis points of costs in the first quarter related to the startup of Icon as well as higher load factors as compared to Q1 2023.

Taking all this into account, we expect adjusted earnings per share for the quarter to be $1.10 to $1.20. Turning to our balance sheet, we ended the quarter with $3.1 billion in liquidity. During the fourth quarter, we refinanced our revolving credit facilities and term loan and repaid the remaining $500 million of our 11.5 senior secured notes. We settled our 2.875% convertible notes in November by utilizing $225 million of cash and issuing just under 147,000 shares. We made significant progress during 2023, strengthening the balance sheet towards our Trifecta goal of investment grade metrics. Better performance and disciplined capital allocation allowed us to accelerate reduction in leverage to around 4 times total debt to adjusted EBITDA at yearend when excluding the impact of new ships that were delivered midyear.

We will continue to proactively pay down debt and pursue opportunistic refinancings and expect to further reduce leverage to close to mid-3 times by the end of 2024. Our priorities to address debt remained unchanged, managing debt maturities, reducing interest expense and removing remaining restriction on capital allocation, and towards a fully unsecured balance sheet. In closing, we remain committed and focused on executing our strategy and delivering on our mission while achieving our Trifecta goals. Trifecta creates the pathway back to basecamp and while an important milestone is not our final destination, as our ambitions go well beyond it. The combination of our strong book position and an accelerating demand environment is certainly pointing to another strong year of yield growth and a step change in earnings growth.

With that, I will ask our operator to open the call for a question-and-answer session.

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Q&A Session

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

Steven Wieczynski: Yes. Hey guys, good morning and congratulations on a strong 2023 and the launch of Icon. So, as we think about your guidance for this year, specifically thinking about yields, just wondering if you could break down that yield guidance a little bit for us? Essentially, just trying to figure out what you guys have included in there in terms of things like core pricing, your occupancy ramp. Obviously you’ve got new hardware in CocoCay as well and then maybe how you’re thinking about onboard yields this year? And then finally there, maybe help us think about the cadence of yields for this year, as this guide might make some believe there’s a potential for slowing in the back half of the year. But I would assume that’s just more lack of visibility and tougher comps with load factors.

Jason Liberty: Well, thanks, Steve, and good morning, everybody. I think you pointed to a lot of things there. So first, obviously 2023 was an incredibly strong year on both a ticket and onboard standpoint. Q1 the strong yield, as Naf commented, is driven by having a kind of full period with the pricing that we saw in the ramp up starting in the middle of the first quarter of last year, and then the recovery of the load factor. There is nothing that we see in the booking environment or onboard spend that doesn’t point towards acceleration. And so our formula for success, which is moderate yield growth and good cost control, is very much how we see Q2 forward. But when we look at things, whether it’s the new hardware, whether it’s like for like, whether it’s onboard spend, all those things are pointing north on a positive basis in terms of what we’re seeing in the booking environment.

And I think there shouldn’t be any concern at this point in terms of what we see that there’s any slowdown occurring in our business Q2 forward.

Steven Wieczynski: Okay, got you. Thanks for that. That makes sense. And then, Jason, as we think about your Trifecta goals, you’re essentially knocking off two of those goals this year with a strong possibility that your third Trifecta goal of getting north of $10 a share in earnings is probably a very high probability based on what we’re seeing right now, based on what you’re seeing right now. So, Jason, I know you talk about Trifecta being what you call base camp, but I guess the question is really, where do you guys go from here? I mean, if Trifecta goals are indeed base camp, do you start to think about introducing at some point something that moves you well beyond base camp? And then maybe help us think about the return to investment grade and how you and your agency partners are thinking about that timeline as well? Thank you.

Jason Liberty: Well, I’ll let Naf take the investment grade question. We are an organization I think that does really well with kind of two, three year targets. And we can see that, obviously here when we consider Trifecta, getting the hearts and minds of our organization, really focusing on delivering strong returns for our shareholders, and also an incredible guest experience, while also lightening our impact on the planet. All these things are so heavily into consideration of what we do each and every day. As we get closer to achieving Trifecta, we will evaluate what’s the next program, financial performance program that we’re going to put out there that we think is important, not just to make sure management is focused on what it is we’re looking to achieve, but also to make sure everybody understands where we’re navigating, too.

But if you just run the math on moderate yield growth, good cost control, while we moderately grow our business, while continuing to invest in destinations and so forth, that math will tell you that we will be in a very strong financial performance on an earnings basis, ROIC basis, as well as a margin basis. And all those things, I think are really important as we consider how disciplined we have been on capital. And also we’ll be in the consideration set as we think about returning capital to shareholders as we zero in on getting to investment grade metrics. But I’ll hold here for Naf to talk about investment grades.

Naftali Holtz: Thanks, Jason. Hey, Steve. So on the balance sheet, part of Trifecta is getting back to investment grade metrics, and we’ve really focused on that. And as you could see, what we’ve announced for the results in 2023, we made significant progress in that direction. We lowered our cost of capital. We repaid roughly $4 billion of debt with excess cash flow, because as we saw the performance accelerate, our formula of just being disciplined around the capital allocation allowed us to pay down debt faster than we thought and we’ll continue to do that this year. And in my remarks, I said that we’ll be very close to the leverage levels that we have in the targets. In addition to that, we also want to unsecure the balance sheet and that will come as some of the notes that we’ve had to issue, either secured or guaranteed, have the opportunity to refinance those or pay them down.

With regards to the rating agencies, we’re very close contact with the rating agencies. We were very pleased with the credit upgrades, that rating upgrades that we had last year. We are focused on making sure that we have the balance sheet we are comfortable operating under and that’s really what the goals are and then we’ll continue to be in close contact with the agencies as we make progress on that. But we’re not focused necessarily on the ratings, really on the metrics there.