Royal Caribbean Cruises Ltd. (NYSE:RCL) Q4 2022 Earnings Call Transcript

Royal Caribbean Cruises Ltd. (NYSE:RCL) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Royal Caribbean Group's Fourth Quarter Full Year 2022 and Business Update Earnings Call. 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 fourth quarter and full year 2022 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're 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.rclinvestor.com. 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 and full year results 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 getting started, and on behalf of the entire Royal Caribbean Group organization, 100,000 proud, I want to express how happy we are that our business has returned to normal. In fact, as you saw in the release this morning, our business is accelerating. So let me get into the detail and start off by talking about the fourth quarter and the full year 2022. As highlighted on Slide 6, 2022 was a challenging but successful transitional year as we returned our business to full operations and delivered memorable vacations to 6 million guests. As you can see on Slide 7, during the fourth quarter, demand for our brands accelerated. We delivered a record 1.8 million vacations, achieved a 95% load factor and successfully returned to Australia for the first time in three years.

Pricing for our vacation experiences was higher than record 2019 levels when we operated with normalized occupancy and guest satisfaction scores were exceptional. Adjusted EBITDA and adjusted loss per share were above our expectations and at the high end of our guidance. It is incredible to consider that just one year ago, we were in the midst of Omicron, we were still returning our ships to service, and we were sailing at load factors below 60%. Our fourth quarter results clearly demonstrate that we are back, back to usual occupancy, back to our full addressable market, back to EBITDA and cash flow profitability, back to providing full year guidance and most importantly, back to delivering a record number of incredible vacations on the most innovative fleet in the industry.

We finished 2022 on a high note and are entering 2023 with the full strength of our operating and commercial platforms. Our strong book position along with the normalization of the booking window provides the visibility needed for us to resume annual guidance, which is in line with our Trifecta program. I am incredibly thankful and proud of everyone at the Royal Caribbean Group for executing so well on our mission of delivering the best vacation experiences responsibly and building the foundation for our future growth. There has been a lot of talk about the state of the consumer, so I want to share what we are seeing from daily interactions with consumers who are either booking their dream vacations or who are currently sailing on one of our amazing ships.

Overall, we continue to see robust demand, financially healthy, highly engaged consumers that are excited to sail on our brands. Secular tailwinds continue to benefit us as consumer preferences shift from goods to experiences. Entertainment and travel spend remains strong and the job market continues to show resilience. Consumer sentiment has improved and banks have recently reported healthy savings and continued resilience in credit card spending. Our addressable market is larger than in 2019 and continues to grow. Our products appeal to a broad range of vacationers with everything from a short getaway to Perfect Day to a luxury world cruise. Cruising remains an exceptionally attractive value proposition. And as I have said in the past, it is too attractive, and we are working very hard every day to close that gap.

Growth in cruise search has outpaced general vacation searches, resulting in double the number of visits to our websites compared to 2019. Our brands are attracting new customers into our vacation ecosystem with fourth quarter new-to-cruise and new-to-brand mix above 2019 levels. We are constantly enhancing our commercial capabilities so we can further capture quality demand. Approximately 60% of our guests book some of their onboard activities in advance of their cruise, representing double-digit growth in pre-cruise purchase penetration when compared to 2019 at significantly higher rates. As we have said before, every dollar a guest spends before the cruise translates into about $0.70 when they sail with us and over double the overall spending when compared to other guests.

Our guests are now engaging with us to book onboard activities much earlier than in 2019. So far, guests booked on 2023 sailings purchased onboard experiences an average of more than two months earlier than in 2019. This translates into more revenue, stickier bookings and happy guests. Now I'll provide some insight into the demand environment and what can only be described as a record-breaking WAVE season. As you can see on Slide 8, bookings outpaced 2019 levels by a very wide margin throughout the fourth quarter with particularly strong trends during Cyber Weekend. We expected a strong WAVE season, but what we are currently experiencing has exceeded all expectations even when considering our capacity growth. As a result, and as highlighted on Slide 9, the seven biggest booking weeks in our company's history all occurred since our last earnings call.

Our commercial apparatus is full speed ahead, and all channels are delivering quality demand above 2019 levels. Our direct-to-consumer channels continue to perform exceptionally well as a combination of consumer preference for digital engagement and our enhanced capabilities is supporting record level bookings. We are also encouraged that our strong base of loyal travel partners continues to recover and supporting our brands with bookings above 2019 levels. As always the case, trends vary by region. We are seeing particularly strong booking trends for North American-based sailings, which account for nearly 70% of our capacity this year. From a cumulative standpoint, these itineraries are now booked at the same load factor as they were in 2019 and at higher prices.

Our 2023 European sailings are booked within historical ranges at better rates with recent bookings outpacing 2019 levels. We expect almost 80% of our guests to come from North America as we continue to see particularly healthy demand from that region. Our global brand's appeal and nimble sourcing models allow us to continuously shift sourcing to the highest-yielding guests. I will now comment on our outlook for 2023. In 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. The ramp-up of our load factors in 2022, coupled with a higher and improving pricing environment, is positioning us to fully recover our yields beyond 2019 levels in the first quarter, which is another important milestone, and then ramp up further to record levels as we return to historical load factors in late spring.

Our strong yield growth outlook is driven by the performance of our new hardware, strong demand for our core products and continued growth from onboard revenue areas. This year, we expect to increase capacity by approximately 14% compared to 2019 with eight new ships already introduced since 2019 and three more set to be delivered this year. Each of our wholly owned brands will welcome a new vessel in 2023. Silversea will welcome Silver Nova, the first of the Evolution class. Celebrity Cruises, will welcome the fourth Edge series ship, Celebrity Ascent. And Royal Caribbean International will take delivery of Icon of the Seas, marking the first new ship class for the brand in nine years, which is sure to set a new standard for vacation experiences.

In addition to our incredible new vessels, we plan to launch Hideaway Beach in the fourth quarter of 2023, an adult-only neighborhood, making Perfect Day at CocoCay more perfect and increasing capacity in the island to 13,000 visitors daily. Our journey to deepen the relationship with the customer will continue with 2023. We will further enhance our commerce capabilities to optimize our distribution channels, build a deeper connection with guests and lower customer acquisition costs. We will also further enhance our e-commerce and pre-cruise capabilities and focus on increasing our guest repeat rate and spend. We will continue to excel in the core and drive business excellence in order to increase yields and capture efficiencies across our platform.

Our teams have been working hard for over two years to reshape our cost structure and abate what would have otherwise been at least a 25% increase in nonfuel cost per APCD when compared to 2019. Net cruise costs, excluding fuel, is expected to grow 4.75% to 5.75% versus 2019. That's versus a three-year benchmark that includes a period of significant global inflation. Our cost outlook for the year includes approximately 210 basis points from lingering transitional costs such as crew movement and additional structural costs such as full year operations of Perfect Day at CocoCay and our new Galveston terminal. Our teams have been committed to controlling costs and enhancing profitability while focusing on delivering the best guest experience. We continue to expect the business to accelerate and allow us to deliver record yield and adjusted EBITDA in 2023.

Our proven formula for success remains unchanged: Moderate capacity growth, moderate yield growth and strong cost controls leads to enhanced margins, profitability and superior financial performance. Our ESG 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. In 2023, we will continue active efforts towards our target of reducing carbon intensity by double digits by 2025. We also expect to deliver on significant milestones in our decarbonization pathway, including the advanced technologies on our new ships, while also investing in retrofitting our existing fleet with a mission of reducing technology and programs. We will utilize tools to expand supplier diversity and improve our ability to build an exclusive network of suppliers.

Photo by Adam Gonzales on Unsplash

We will further focus on improving diversity, equity and inclusion and ensure our employees are physically and mentally healthy. To wrap up, 2023 sets the foundation for our Trifecta program. Our people are committed to our mission of delivering the best vacations responsibly and doing so while achieving our Trifecta goals. In 2023, we will be hard at work executing on our strategic pillars, focusing on deepening customer relationships, delivering the best hardware and destinations and excelling in the core. The future of the Royal Caribbean Group is bright. I am confident in our growth trajectory and our ability to deliver on our near-term and long-term goals as well as to reach new financial records. And with that, I will turn it over to Naf.

Naf?

Naftali Holtz: Thank you, Jason, and good morning, everyone. Let me begin by discussing our results for the fourth quarter. As you can see on Slide 10, we reported a net loss of $500 million or loss per share of $1.96 and adjusted net loss of approximately $300 million or per share of $1.12. The results were above our expectations at the high end of our guidance range. Total revenue was $2.6 billion, operating cash flow was $600 million and adjusted EBITDA was $409 million, again, above our expectation and guidance. Fourth quarter outperformance was a result of continued strong demand for our brands vacation experiences, strong close-in bookings at higher prices and continued strength of onboard revenue. Better cost management and favorable timing of expenses across several categories, lower fuel rates, lower customer acquisition cost and lower interest expense also contributed to the financial results.

We finished the fourth quarter at 95% load factor with peak December holiday sailings at 110%. Load factors varied by itinerary with the Caribbean averaging 100% in both late season Europe and Australia, which opened in Q4 at just under 90%. Total revenue per passenger cruise day was up 4.5% in constant currency compared to the record fourth quarter of 2019. Net yield was down 7.4% in the fourth quarter compared to 2019, a significant improvement for the 14% decline in Q3 and above our expectation. 2022 closed out as a successful transitional year and we generated $8.8 billion of total revenue, $712 million of adjusted EBITDA and almost $500 million of operating cash flow. I'll now provide an update on our 2023 business. Let's start with capacity.

Our overall capacity for 2023 will be about 14% higher than 2019. Nearly 70% of our '23 capacity will sail on North America-based itineraries, about 17% will be in Europe and close to 10% will be in the APAC region. The remaining capacity will operate in a number of other regions, including South America and Antarctica. From a cumulative standpoint, our book load factor remains well within historical ranges and we have meaningfully narrowed the gap to 2019 levels. Overall, our North America-based itineraries, many of which visit the amazing Perfect Day at CocoCay, are booked in line with 2019 for the full year and are ahead for Q2 forward at better rates. Sailings in Europe are booked within historical ranges and are catching up. We have seen improved booking trends for these itineraries so far in WAVE, particularly from the U.S. and the UK.

We expect the improvement to continue, supported by our global sourcing model. Constant currency net yields are expected to be higher than 2019 in all four quarters with more growth for Q2 through Q4, when load factors returned to normal. The return to yield growth in the first quarter marks a significant point in our recovery and highlights the resilience of our company, the strength of our brands and the consumers' desire to spend on our amazing vacation experiences. As of December 31, our customer deposit balance was $4.2 billion, which is about $400 million higher than our balance at the end of the fourth quarter in 2019. Shifting to costs. Our teams continue to demonstrate the ability to manage cost pressures while staying focused on our mission of delivering incredible vacation experiences to our guests.

Net cruise costs, excluding fuel per APCD increased 3.9% as reported and 4.7% in constant currency compared to the fourth quarter of 2019. Net cruise costs for the fourth quarter included $1.23 per APCD or a 100 basis point impact of transitory costs related to our health protocols and lagging costs relating to fleet ramp-up and crew movements. We expect these transitory costs to substantially dissipate as the majority of our crew has returned and protocols have eased. Our teams have been working constantly for over two years on reshaping our cost structure through operational and distribution efficiencies, and leveraging group scale. We continue to see the benefits further materialize in 2023 to partially mitigate continued inflationary pressures.

Regarding fuel. Fuel rates are coming off the highs of last year. We continue to improve consumption and have partially hedged the rate, which is helping us mitigate the volatility and cost of fuel expense. As of today, fuel consumption is 55% hedged for '23 and 10% for 2024. As highlighted on Slide 11, we are resuming annual guidance for the first time in 3 years as we have more visibility into our book of business and the year ahead. We expect net yield growth of 2.5% to 4.5% for the full year. The underlying yield improvement is driven by the performance of new hardware, strong demand for our core products, continued growth from onboard revenue areas, and it also accounts for lower expected load factors versus 2019 levels. We expect yields to ramp up as we will return to historical load factors in late spring such that we achieved record yields and revenue throughout the year.

Net cruise costs, excluding fuel, are expected to be up 4.75% to 5.75% for the full year as compared to 2019. Our cost outlook reflects our culture of continuous improvement and innovation. Now let's remember that we are comparing cost figures to a three-year-old benchmark, including a period of high global inflation. We expect that NCCx also includes 210 basis points of lagging transitory and structural costs. Inflationary pressures and supply chain disruptions continue to put pressure on costs across many categories, including food and beverage, airfare and shoreside human capital. Our teams continue to find creative ways to manage through inflation and increase profitability. Lastly, costs in the first half of the year are also burdened by more dry dock days during the second half of the year.

Fuel expense is expected to be approximately $1.1 billion for the year, and we are 55% hedged at below market rates. Based on current fuel pricing, currency exchange rates and interest rates, we expect record adjusted EBITDA and adjusted earnings per share of $3 to $3.60. Now turning to Slide 12, I'll provide some color on first quarter capacity and guidance. We plan to operate about 11.2 million APCDs during the first quarter with load factors at 100%. Let me break down first quarter capacity expectations a little more. During the quarter, approximately 80% of our capacity will operate from North America, mostly sailing to the Caribbean. This is higher than in the first quarter of 2019, particularly for short Caribbean sailings, and we have added more capacity in the region to capitalize on the incredible Perfect Day at CocoCay which was not yet opened three years ago.

10% of our capacity is in Australia, close to 5% is in Asia and the remainder spread across multiple other itineraries. Based on current currency exchange rates, fuel rates and interest rates, we expect adjusted loss per share of $0.65 to $0.85. Net yields are expected to be up 1% to 2% versus 2019 in constant currency. We are excited to finally recover our yields to record 2019 levels and continue to work hard at further growing our yields and revenues as occupancy level normalizes. On the cost side, overall, we expect our net cruise costs, excluding fuel, to be up approximately 8.5% compared to '19. Similar to the full year guidance, the first quarter carries 320 basis points of transitory costs, structural costs and timing of expenses that are weighing on NCCx when compared to the first quarter of 2019.

Shifting to our balance sheet. We ended the quarter with $2.9 billion in liquidity. Our liquidity remains strong, and we are focused on expanding our margins to further enhance EBITDA and free cash flow. Our ultimate goal is to return the balance sheet to an investment-grade profile. During the fourth quarter, we repaid $600 million of debt maturities and closed on the refinancing of $2 billion of secured and guaranteed debt previously due June 2023. Additionally, in January, we successfully extended $2.3 billion of our existing revolver credit facility commitment to April 2025. 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 manage near-term maturities and improve the balance sheet.

For 2023, our scheduled debt maturities are $2.1 billion, made up of predominantly ECA debt amortization, which we expect to pay down with cash on hand and cash flow generated from operations. Our business continues to accelerate, and we expect to grow yields and control costs, such as we achieved record yields and adjusted EBITDA in 2023 as we regained the tremendous profitability of our business. Our strong book position and enhanced commercial capabilities provide further visibility into 2023 and remain committed and focused on executing our strategy and delivering our mission while achieving the Trifecta goals. With that, I will ask our operator to open the call for a Q&A session.

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