Royal Caribbean Cruises Ltd

NYSE:RCL

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Abby Gail, and I'll be your conference operator today. At this time, I would like to welcome everyone to Royal Caribbean Group's Business Update and First Quarter 2022 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, Vice President-Investor Relations]

Good morning, everyone, and thank you for joining us today for our business update and first quarter 2022 earnings 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'll 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 strategic overview and update on the business. Naftali will follow with a recap of our first quarter 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, Chief Executive Officer]

Thank you, Michael. Good morning everyone. And thank you for joining us today.

Before jumping in and talking about the exciting things happening in our business, I would like to express our deep thoughts and prayers to our 2000 plus Ukrainian Royal Caribbean Group, family members, and to the citizens of Ukraine who continue to be affected by this tragic war. We, as always, remain focused on the safety and wellbeing of our employees and continued to provide them with support services and financial assistance during this time of incredible hardship. We are all praying and hoping for a peaceful resolution soonest.

Now moving on to the business, our teams have done an exceptional job, getting our fleet back into service so that we can continue our mission on delivering the best vacation experiences in a responsible way. As of today, 95% of our fleet capacity has returned to service. It's incredible to think that our journey to full fleet operations will be complete in less than eight weeks on our 63rd ship Celebrity Infinity welcomes guests for the first time since March of 2020.

Since we resumed operations, we have delivered memorable vacation experiences to over two million guests worldwide while earning record high guest satisfaction scores.

Additionally, outside of China, the vast majority of our destinations and markets are back online. I want to thank our teams, both ship and shore, for delivering on our mission. So successfully.

During the first quarter, we managed through the challenges brought on by Omicron variant that resulted in the cancellation of 57 sailings in Q1, moderated our load factors in January and February and softened demand for future voyages. We have now sailed through these operational and short term demand challenges caused by the variant.

Over the past 60 days, demand has materially surpassed both pre-Omicron and 2019 levels. Load factors improved throughout the first quarter and we finished the month of March at a load factor of 68%. We expect our load factors to continue to build averaging between 75% and 80% in the second quarter and reaching triple digits by the end of the year. We continue to be thoughtful about the build of our business, being mindful of maintaining price integrity, taking advantage of high onboard spenders, and as always focusing on the health and safety of our guest and crew.

Now moving to the demand and operating environment, we continue to see strong demand for leisure travel and cruising. The robust, secular trend of experiences over things that propelled our business in the past years is now recovering towards pre-COVID levels.

Consumers are now re-engaging with the world and as a result, spending on travel in 2022 is set to outpace pre-pandemic levels with consumers, planning to travel more frequently. Cruise consideration is the highest it has been in two years and nearing pre-pandemic levels with the most significant recovery among those new to cruising.

Consumers are in a healthy financial position, strong labor markets, wage growth, and record cash savings, $4 trillion in the U.S. support spend on vacation experiences. We are watching the high inflationary environment, but so far we have not seen an impact on consumer behaviors or willingness to spend on travel and cruise vacations. Strong demand for cruise experiences continue to translate into robust, onboard revenue performance for us across all categories from casino, beverage, and shore excursions to internet, retail and spa.

As we mentioned in recent quarters, our investment in a new pre cruise planning system allows guests to better plan and book their onboard experiences. As a result, we continue to see increased penetration of pre-cruise purchases, which is leading to significantly higher total spend per guest.

We remain focused on continuing to innovate the vacation experience we offer. We are strategically investing in our future to maintain our strong, competitive advantage setting the foundation for a strong recovery and long term profitable growth.

On our last earnings call, we discussed our expectations for a delayed wave period. And while it started a few weeks later than we originally expected, it is what we are seeing now. Bookings improved each week during the first quarter, as the impact from Omicron faded. For the past eight weeks, bookings have been meaningfully higher than 2019 with particular strength and North American itineraries.

Our largest brand, Royal Caribbean International, set two new records in March with the largest single booking day and the highest booking week in the brand's 53-year history. We have also experienced some headwinds related to the impact from the ongoing conflict in Ukraine. Itineraries initially planned to visit Russia represent only 2% of our overall capacity and close to 10% of our European capacity.

In early March we decided to cancel calls to Russian ports, including St. Petersburg and substituted those itineraries with other highly desirable destinations. Naturally, we saw a short-term increase in cancellations and booking hesitancy for Baltic Sea itineraries, combined with some softness in overall European demand. After several weeks of softer trends, booking volumes improved and are now above 2019 levels. However, the impact from the slow down during a key booking period is definitely weighing on our load factors for our European sail.

While there are some headwinds in Europe, our North American based itineraries, which account for over 70% of our capacity this year have been trending much better with recent bookings more than 40% ahead of 2019 levels. We are also seeing an increased volume of close in bookings as consumers seem to be making their vacation decisions closer to their sailing date. This contributed to better than expected load factors in March, despite the impact of the Omicron variant earlier this year. We continue to build on the demand environment for the rest of this year and into 2023.

Inflation is impacting businesses across the globe, and we are no exception. As we mentioned in the last few quarters fuel and food are categories that are most susceptible to inflation for us. The war in the Ukraine and continued supply chain constraints have further heightened those pressures. Our teams have become increasingly adept and navigating these challenges and we have implemented several strategies to manage cost pressures while delivering the incredible product expected by our guests.

On the fuel side, we continue to optimize consumption and have partially hedged rate below market prices, which is mitigating the impact on our fuel costs. We have taken and continue to take numerous actions to reshape our cost structure with a focus on further improving our leading pre-pandemic margins. While these actions are intended to enhance our cost structure and margin profile, we do anticipate that inflationary pressures mainly attributable to fuel and food as well as transitory cost related to our health and safety protocols will weigh on our costs this year.

I will now touch upon environmental stewardship, creating a more sustainable cruise industry as a journey and every day is an opportunity to innovate and improve.

Back in 2016, we announced our partnership with the World Wildlife Fund to advance our sustainability performance. This partnership pushed us to set ambitious sustainability goals in three areas, greenhouse gas emissions, sustainable food supply, and destination stewardship. I am proud of the fantastic work to cheat by our teams since we first signed the agreement with the WWF. And I am pleased to announce that the Royal Caribbean Group has recently signed a new five-year agreement to take our advancements to the next level.

I'm also pleased that in the first quarter we were named one of the world's most ethical companies by Ethisphere. This is the seventh consecutive year our company has been recognized, the only one in the leisure and recreational category. Furthermore, we also earned a 100% rating on the Human Rights Campaign Foundation's Corporate Equality Index, which rates corporate policies and practices that relate to LGBTQ+ workplace equality. We are immensely proud of these recognitions and we reflect our deep commitment to our employees and our purpose and values. As we continue to focus on completing our return-to-service, we are charting our course for future growth. Combination of strong secular demand tailwinds, our leading brands, the best cruise ships in the world, our global platform and the very best people position us exceptionally well for long-term success.

It is no secret that our innovative and industry leading ships are the foundation for creating a great vacation experience. Year-to-date we welcome two new ships to our fleet, Wonder of the Seas which is the new largest and most innovative Oasis class vessel joined Royal Caribbean International, and Celebrity Beyond the newest, the revolutionary edge class joined Celebrity Cruises just a few weeks ago. We have a long track record on delivering new and exciting experiences through new ships while achieving premium yield and profits. These ships along with others that are set to join the fleet in the next few years will drive differentiated vacation experiences and financial performance. We have more exciting new ships currently on order; construction is now underway on Royal Caribbean International's 6th Oasis class ship, which will be named Utopia of the Seas. This ship is expected to debut in the spring of 2024. We are excited that Utopia will be the first Oasis class ship powered by L&G when she launches.

Finally, the building of Royal Caribbean International is highly anticipated Icon of the Seas has reached a pivotal milestone, a physical construction ahead of its fall 2023 debut. Icon will set sale next year with the latest innovations and with signature features that were re-imagined by our teams in bold new ways. Stay tuned for more on that.

On the destination front, we continue to make progress on the expansion of Perfect Day at CocoCay​with the addition of Hideaway Beach. Hideaway Beach will make Perfect Day at CocoCay even more perfect with an entirely new experience expanding capacity to the island. On the technology front, the team has made tremendous strides modernizing our digital infrastructure and capabilities to enhance our commercial engines and the guest experience. Our business model is incredibly strong and we have a long track record of growing revenue, earnings and cash flow. The pandemic has taught us new ways to operate with agility, but our formula for success remains unchanged.

We have the best brands each of their segments, the most innovative fleet in the industry, exclusive destination experiences like Perfect Day at CocoCay, a nimble and effective global sourcing footprint, a leading technology platform, and most of all the very best team both at sea and on land. Despite these challenges at the start of the year and the complex operating environment, we still expect 2022 will be a strong transitional year as we bring the rest of our fleet back up into operations, and approach historical occupancy levels and return to our profit in the back half of the year. This will set a strong foundation for our success in 2023 and beyond.

With these tools at hand, I'm confident about the recovery trajectory and the future of the Royal Caribbean Group. Our people will always be our most important competitive advantage, and I'd like to thank all of them for everything they do each and every day to deliver on our mission.

With that I will turn to call over to Naftali. Naf?

[Naftali Holtz, Chief Financial Officer]

Thank you, Jason, and good morning, everyone.

Let me begin by discussing our results for the first quarter. This morning, we've reported an adjusted net loss of $1.2 billion or $4.57 per share for the quarter. During the first quarter, we started operations with two additional ships and as Jason mentioned we welcome Wonder of the Seas to the Royal Caribbean fleet. We operated 7.7 million APCDs and carried 800,000 guests. Both factors on our core itineraries in the first quarter was 59%.

Earlier in the quarter our load factor was impacted by about 2% due to temporarily elevated cancellations associated with omicron. Trends however improved throughout the quarter and March sailings exceeded our initial expectations achieving an average load factor of 68%. We also had multiple sailings in March that operated at 100% load factors in the Caribbean. As Jason mentioned, we are seeing consumers take vacation decisions closer to the sailing date, which contributed to the outperformance in March. In Q1 we saw a 4% increase in total revenue per passenger cruise day compared to the first quarter of 2019.

Onboard revenue continues to perform well for us. A combination of strong consumer spending and higher pre-cruise purchase penetration is contributing to this favorable trend. Cash flow from operating ships was positive in the first quarter. Operating cash flow significantly improved throughout the quarter and approached a positive inflection point in the month of March. Operating cash flow turned positive in April. We are pleased to have reached this important financial milestone, and we expect that EBITDA will also turn positive from June forward.

Next I'd like to comment on capacity and load factor expectations over the upcoming period. We plan to restart operations on all remaining ships by the end of June. We plan to operate about 10.3 million APCDs during the second quarter and we expect load factors of approximately 75% to 80%. Our load factor expectations reflect the higher occupancy we see in the Caribbean and lower expectations for repositioning voyages and early season Europe sailings.

We now offer cruises in the vast majority of our key destinations once again. Australia announced the resumption of cruising in April and our cruises are open for sale. While China remains close to cruising, we're maintaining dialogue with the local authorities regarding our return to service when China opens its borders. We have redeployed ships planned for China to other core markets. We remain optimistic about our ability to capture long-term growth opportunities in that market.

Next I'll provide an update on the demand environment in our 2022 sailings. As Jason noted, we saw consistent improvement in bookings throughout the first quarter. In the past eight weeks, booking volumes have been meaningfully higher than 2019. In addition, the elevated near-term cancellations experienced early in Q1 that impacted bookings have now normalized to pre-omicron levels. While we are very pleased by the ramp-up in demand, it took a few weeks longer than expected leading to promotional activity on some itineraries. That being said, we remain focused on maintaining price integrity, while maximizing both load factor and overall revenue.

Our shipboard revenue APDs are at record levels and are contributing to more overall revenue per guest than ever before. North American based itinerary have been trended particularly well with load factors building nicely. Regarding our European sailings we are now seeing improving trends with bookings outpacing 2019 levels. We did however lose some ground when the tragic situation in the Ukraine escalated, which is weighing on load factors for a higher yielding summer season in Europe.

From a cumulative standpoint, our load factors on sailings in the second half of the year are booked slightly below historical levels with a greater mix of high yielding suite inventory booked versus inside and outside statements. Our booked APDs remain higher than 2019, both including and excluding FCCs, while still early 2023 is booked within historical ranges at record pricing. We expect sequential occupancy improvement each quarter with fleet wide load factors reaching triple digits by the end of the year.

Our customer deposit balance as of March 31 was $3.6 billion, an improvement of about $400 million during the quarter. Approximately 27% of our customer deposit balance is related to future cruise credits which is an improvement from last quarter, to date 56% of FCCs have been redeemed. As Jason shared the main impact of the current inflationary environment is on our fuel and food costs. Regarding fuel we are 55% hedge for 2022 and 25% hedge for 2023 at below market rates. Our proactive hedging efforts help us mitigate the rate impact. We continue to actively manage our fuel consumption and our investments in technology and systems help us reduce our mission profile infuse costs.

In addition, the eight new vessels to join our fleet in the last 18 months are 30% to 35% more fuel efficient than older capacity. Fuel is typically just over 10% of our cost basket. So while elevated prices certainly weigh on our cost we continue to manage consumption and proactively hedge the rate. Like other businesses we are seeing inflation across the food basket. Our operational and supply chain teams have been navigating these pressures through long-term partnerships and contracts within our diversified supplier base than allow us to opportunistically adjust sourcing strategies as needed. Do anticipate inflationary pressures and transitory costs related to our healthy return to service and continued safety protocols will weigh on this year's earnings.

Shifting to our balance sheet. We under the quarter with $3.8 billion in liquidity. We have ample liquidity to allow us to continue our recovery trajectory. We're extremely focused on managing and improving the balance sheet. Our plan throughout 2022 is to continue with refinancing debt maturities and high coupon debt issued during the pandemic. In January, investors again demonstrated their support when we access the capital markets by issuing $1 billion of senior unsecured notes. Proceeds from the offering have been used to repay principle payments on debt maturing in 2022. February, we arranged for a $3.15 billion backstop facility to provide us flexibility in refinancing debt maturities in June, 2023.

Lastly, turning to the outlook for 2022, we expect a net loss for the first half of the year and a profit for the second half. We also expect positive EBITDA starting in June. We continue to focus on bringing the fleet back to service, building our load factors and restoring profitability. When our business is fully operational, it generates attractive financial results and significant cash. We are pleased with the progress we're making towards the inflection points of profitability as we complete our return and build the future for the Royal Caribbean Group.

With that I will ask our operator to open the call for your questions.

[Operator]

Thank you. [Operator Instructions] And our first question comes from the line of Steve Wieczynski with Stifel. Your line is not open.

[Steve Wieczynski, Stifel]

Yes. Hey, now guys. Good morning. So Jason, I want to ask about the cash flow inflection point that you reached in April, and I'm wondering if you think that positive operating cash level should be sustainable now moving forward? Or do you think April was an anomaly and you might go back into a negative position until the full fleet is deployed and basically to simplify this question, do you think outside of some crazy event or event operating cash flow from here should remain positive?

[Jason Liberty, Chief Executive Officer]

Well first good morning, Steve, I hope all is well. I think we should just really pause and take in that statement. I mean, it has been a effectively over two years since we can make a statement about being cash flow positive, and so it's great now to be in that position where we start to generate positive cash flow and positive EBITDA and then positive earnings as we get to the back half of the year. We very much think it is sustainable. Our load factors, our building in accordance with our expectations and there's been – there's been a lot of noise, you know, kind of generally in the system. There's always things that come up, but from what we can see in the day-to-day booking environment. We feel very good about the load factor build, the rate build that we're seeing. But I do think that this inflection point is a very important moment, not just for us but for the industry as we kind of get onto the other side of this.

[Naftali Holtz, Chief Financial Officer]

Yes. And maybe to add Steve, good morning. So yes, so we share here that that this is obviously a great inflection point. And as you – as we go forward obviously there are things every quarter interest expense timing – other timings of expenses, but this is the inflection point that we've reached here and we expect it to continue.

[Steve Wieczynski, Stifel]

Okay. That is – that's a very solid positive there guys. Second question, bigger picture question obviously there's – there's a fear out there building around a possible slowdown in the economy in a possible recession. Given what you guys have gone through with COVID and the stress it's put on your balance sheet, I guess my question is, if we do encounter some type of economic slowdown, how do you guys envision being able to navigate in an environment like that given your current liquidity position, and maybe also remind us how you navigated through 2008, 2009?

[Jason Liberty, Chief Executive Officer]

So Steve, I think – I think first and as Naftali said in his comment, we are in a strong financial position. We're in a strong liquidity position. I first want to point out that the level of booking activity that we're seeing, the spend levels that we're seeing on the ship, we don't see anything to date that would show that there's some type of recession or recession fear weighing on the consumer. And I think a piece of that, as I said in my comments are the trillions of dollars of cash sitting in the savings accounts and the low leverage of the customers just in North America alone. But as we've seen in the past when there are recessionary periods, I think one of the things that's really important and it does pain me sometimes to say this, but we trade still at a significant value relative to land-based vacation. So when a consumer, let's just say they – they are feeling a level of pressure and they still need and want to go on vacations and build experiences and memories. And I think that that value differential, which we are every day doing all we can to close that gap is one in which the consumer recognizes, and that has tend to kind of farewell relative to other travel or consumer discretionary products during times like that.

[Naftali Holtz, Chief Financial Officer]

And just to add quickly, we are in a very strong liquidity position. We're obviously in this inflection point of free cash flow – of the operating cash flow and our focus is, as I said in my remarks is to continue to refinance the balance sheet. And that means both refinancing our maturities, obviously that that creates the runway as well as reducing the interest costs and the, and the leverage overall. So we have plan here to, in the next – in the next future to manage the balance sheet.

[Steve Wieczynski, Stifel]

That's great color. Thanks guys. Really appreciate it.

[Jason Liberty, Chief Executive Officer]

Thanks Steve.

[Operator]

Our next question comes from the line of Robin Farley with UBS. Your line is not open.

[Robin Farley, UBS]

Great, good morning. Thanks for taking the question. I wanted to ask about you mentioned that you lost a little bit of ground for some weeks there, even though European demand is above 2019 levels. Can you tell us how you're thinking about load factor? I mean, in normal times you're going to be 100% full, no matter what because of maximizing the variable revenue. Is this a period in Q3 with Europe where you might say given the ramp-up let's stay below 100%. In other words, I guess if you could help us think about that trade-off between giving up the onboard revenue and, but maybe potentially impacting the price of other things already booked for Europe?

[Jason Liberty, Chief Executive Officer]

Well, I think there's a few things – I think just a comment on the Europe side. So first I would say, it is our expectation in Europe for our load factors to be lower. Some of it is very much related to price integrity, but some of it's also that relates to the testing requirement to come back into the U.S. for Americans and that – those the combination of those things weighs on the consumer in terms of their travel expectations. And so as we said on our remarks, our expectation is we're going to be building up through the back half of this year to that that triple digit mark. And so our expectations is we will have lower load factors in Q3 relative to 100%.

[Michael Bayley]

But Robin its Michael. I just have to jump in and say that we have ships now sailing at 100% and we've had ship sail at 100% now for several weeks out of the Caribbean into the Caribbean market and [indiscernible] product. And as we head towards Memorial Day weekends, we are going to see significant percentage of our ship sailing at 100% and greater. So the Europe's one thing but what we've seen in terms of demand in the American market for the drive to products, which I think we have around 70% of our products drive to this year has been really strong. And certainly over the past several weeks we've been delighted with the volume of bookings that we've been seeing coming in for these products it's been really good.

[Naftali Holtz, Chief Financial Officer]

And when we make the comments around the load factor obviously that total low factors are with a whole fleet, right? So that reflects the combination of the transit that Jason and Michael just shared.

[Robin Farley, UBS]

Okay, great. Now that's very helpful color. Thank you. And maybe just a last follow up given that you're back to profitability and sort of reasonable – reasonable visibility with that. Is there a point when you might restart giving guidance in the next quarter or two or is that something that we shouldn't necessarily expect this year?

[Jason Liberty, Chief Executive Officer]

Well Robin I'll tell – we had a meeting a few days ago with our senior leadership team and I think my comment to them was we have now moved from scenarios to now a forecast and because we can see that visibility not predictability, and that's a big statement for us, and I'm sure others as I think Michael always remind us, but I think we're like on our 300th scenario since the start of the pandemic. So I think we're getting closer to that and our visibility within the quarter is much greater. And we do appreciate that – having that visibility and predictability is important to the investment community. So I would say that we're getting close to it, and so I would wait to see what happens on the next quarter call.

[Robin Farley, UBS]

Okay. That sounds great. Thank you.

[Jason Liberty, Chief Executive Officer]

Thanks, Robin.

[Operator]

Next question is from Ben Chaiken with Credit Suisse. Your line is now open.

[Ben Chaiken, Credit Suisse]

Hey, how's it going? Onboard spend continues to be particularly strong. Is this driven by a smaller number of core guests? Or is it a more kind of like widespread structural uptick in spend that you see even as load factors build on ships that are getting back to normal occupancy or close to it?

[Michael Bayley]

Yes. Hi Ben, this is Michael. I think this is a – what looks like, it could be a structural change. I mean, we've now got as I said earlier and many ships sailing at 100% and our big Oasis class ships have been sailing in the 80s and our onboard spend continues to perform at the same levels, so it's been really – it's been wonderful. I think a couple of things; one is the [indiscernible] and the investment that we made in the software for pre-cruise revenue, which continued through the pandemic.

And we've really leveraged that now and we've seen a significant increase in penetration and uptick with the pre-cruise sales. And of course we've always said that a one-pre-cruise dollar gives us another $0.50 on-board spend. So we really believe we're seeing that coming through now. So it continues and I think one of the things that we've been focused on in terms of the volume is that relationship between ticket and on-board spend. And if you even look at our first quarter net revenue APD, it was higher than back in 2019, and we see that continuing quarter-by-quarter through this year.

[Naftali Holtz, Chief Financial Officer]

Yes. And just to add to Michael's point, we also see the strength in on-board across all categories. So it's not just one category that you can draw the conclusion. It's everything like Jason said from spot to retail, shore excursions, casino, food and beverage. So it seems like the consumer is really willing to spend a great experiences and we've made all these investment that Michael mention to make sure that we capture that spend as much as we can as they're enjoying our cruises.

[Ben Chaiken, Credit Suisse]

And is the pre-cruise; is that like at the time of ticket purchase you're kind of offering incremental onboard? Or is it like following up with the consumer or the customer from time of ticket purchase up until crew? Like, can you just give a little color on how that works exactly?

[Michael Bayley]

Yes. I mean, it follows ticket purchase. As soon as we have a commitment from a customer that they're going to sell with us, then we have a whole cadence of communication to the customer, and we use all of this software development and the improvement we've had over the years with our analytics to provide them with options and offers and promotions, et cetera for onboard products. And we literally have that communication cadence in place until they sail with us. And by the way when they're sailing with us, we continue that communication cadence as well, giving them offers and what have you. So it's really – it's kind of the evolution of the sophistication of our communications and in terms of the pre-cruise software.

[Jason Liberty, Chief Executive Officer]

Yes. But I think just to jump in, I mean, we are in the early innings of this pre-cruise system. Having the commerce engine in place, having the capabilities that Michael just talked about to be able to curate the experiences or services that we can be offering to that guest through their journey from when they book a cruise all the way through the time when they're sailing with us. And being proactive about opportunities that might arise even during the voyage and being able to put that or position that in front of the customer based off of things that they may have already had planned or things that they may have done in the past, et cetera. That is kind of getting to that one-to-one spot of engagement is really kind of what we see as the North Star here. And that's kind of what these systems and the AI and analytics and the use of data effectively is all about.

[Ben Chaiken, Credit Suisse]

Got it. I appreciate it. Thank you.

[Operator]

Our next question is from Dan Pulitzer with Wells Fargo. Your line is now open.

[Dan Pulitzer, Wells Fargo]

Hey guys. Good morning. Thanks for taking my questions. So the first, I wanted to hit on, it's been obviously we've seen a lot of commentary in terms of robust travel and leisure spend and demand. You guys have certainly seen that as well. How would you break that out between the new to cruise customers? And are you seeing that kind of come in through longer term bookings or short end bookings?

[Jason Liberty, Chief Executive Officer]

Yes. Hi Dan. Yes we're seeing it come through all of our customer segments. So we know, I think we commented maybe on the last call that the new to cruise was a little slower to return. And when we first started back in service, we did rely heavily on our loyalty customers, but that's really shifted now. And we've kind of moving back into a far more normal environment where we see our new to cruise returning. I mean, it helps with the fact that we've got great products that really do attract new to cruise. We've got perfect day. I think even in this year in 2022 we'll take over 2 million guests to perfect day this year alone. So the right products, the right mix of experiences that we're seeing on new to cruise customers come back to us.

So, and then how they're spending is very similar. I mean, things shift and change around based upon age demographics, and what have you, but the kind of the product offerings that we have, that we provided to our customers and using the software and analytics seems to be really resonating.

[Dan Pulitzer, Wells Fargo]

And then I think you guys called out particular strength in North America and that customer base and maybe Europe a little bit softer. To what extent, if any, could you maybe bifurcate that that softness is it a reflection of kind of what's going on, on the geopolitical front in Europe or is that more relate to a slowing of the consumer, any color there?

[Jason Liberty, Chief Executive Officer]

Yes. I think in terms of what we see, because we've seen this return in demand from Europe for our different deployments, especially within Europe. It's definitely the Ukraine that I think it really kind of weighs especially within Central and Northern Europe. Sailings are inside the Baltic’s in the [indiscernible] is certainly I think of great interest. I mean, they are booking – they are now booking at levels that are above 2019 levels, but it is softer than what we had originally expected it would be. I think fortunately you see the North American consumer accelerating and very much focusing on North American products, but also very much willing to go to Europe. My comment was, I think on the psyche side, testing to get back into the U.S. which I know the cruise industry, the airline industries and other industries are trying to influence for that change is I think that that kind of last psychological point that weighs on the consumer to kind of travel freely globally.

[Michael Bayley]

And Dan, just to add to Jason's comment on the testing to return to United States, I mean, as we know many European countries now is stopping that requirement. So they kind of freeing up the ability for the Europeans to travel around and I think we're all hopeful that that's going to change very soon in returning to the United States.

[Naftali Holtz, Chief Financial Officer]

Yes. And just to add a quick – we, as I think we mentioned we do see an improvement in the European bookings, but also both from volumes from the – from North American, but also from some of the closer within the European sourcing markets. So we're definitely seeing the improvement there.

[Dan Pulitzer, Wells Fargo]

Great. Thanks guys.

[Operator]

Our next question is from Ryan Sundby with William Blair. Your line is now open.

[Ryan Sundby, William Blair]

Yes. Hey guys. Good morning. Thanks for taking the question. Somewhat similar to Ben's question around guest spending, I just wanted to follow up on the record to guest satisfaction scores. So have start to ramp up itinerate and load factors. Do you think you'll be able to maintain that or is there something structural there? And then as my follow up, if you do see [indiscernible] hold up, in the past when you've seen a jump in satisfaction for one reason or another, have you seen that translate into a material impact in terms of repeat selling or [indiscernible] referral?

[Michael Bayley]

Well Ryan its Michael. I think happy customers is a beautiful thing to have and I think that's – that formula's never changed when people really have an amazing time. They go back word-of-mouth, they tell their friends and families, they want to come back and repeat. And we know we've done obviously work on net promoter score and repeat cruises. And the correlation is relatively high. There is a relationship between net promoter score and loyalty guests. So it's a winning formula. And I think that's always been one of the great things about cruise is the value proposition connected to satisfaction has always been remarkably high.

So we think it's a great thing and we're always striving to deliver the highest level vacation that we possibly can. I think it's fair to say that in the beginning, the euphoria of excitement from primarily our loyalty guests was so incredibly high and the crew were so incredibly happy to be back that that for many months there was just this euphoria on our ships. And I think that comes through on the net promoter score.

Certainly we see those net promoter scores staying at a really high level. They've started to come down a little bit as we see the volume increasing if the load factors get to a 100% and beyond, then you start seeing a more normalization of those net promoter scores. But I think there's just a, I would say, there is a happiness, not only with our customers, but with our crew members. And that happiness, coming out of the pandemic, going on vacation, going on vacation with Royal Caribbean, reconnecting to all of those experiences that people have missed for two years, I think, that has somewhat translated into people just saying I'm having a fantastic time.

So, I think I would be naive to believe that these extremely high MPS scores will stay with us in the long run. But I think there has been a fundamental transformation in terms of how guests and customers are interacting with the experience. And it's a very positive thing for our business.

And just add to it when you look at it by segment, right. So you look at you even the ultra-luxury side with Silversea and you see the luxury side on the Celebrity side, it's really across all segments. You're seeing this euphoria that Michael referred to. So, it's as Michael said, I don't think we're naive to think it's going to stay at this levels, but I think we're also surprised as the mix has changed from the very loyal to now more first to cruise coming in, those levels have continued to be exceptionally high.

[Ryan Sundby, William Blair]

Got it. Maybe I could just squeeze one more in there. Naftali It sounds like you point a bunch of different levels there to navigate the current fuel and food inflationary environment. Can you guys talk about if you started to consider price there as a lever to help off those, these pressures? And how accommodating do you think the guests would be given that we still someone in a restart mode here?

[Naftali Holtz, Chief Financial Officer]

Sure. So, as you can imagine inflation or not, we're trying to maximize price every day. That's revenue management team's job, and that's what we do here. So we do it every day. And as you can see, the volumes are obviously picking up you see the pricing that we command for our product. So, we try to do that couple from the pressures maybe that we're seeing on the expenses side.

[Jason Liberty, Chief Executive Officer]

Yes. I think the other thing just to add, what we do see over time, whether it's with inflation or other related activities in the macro environment is as the consumer recalibrates its willingness to pay more for things and they see comparables and they're paying more, but there' this gravitational pull to those locations. So we do, as Naftali said, we try to ma maximize revenue each and every day whether it’s ticket or onboard. At the same time, what we do see is as the consumer begins to gravitate towards higher pricing, as they get calibrated to what they're paying for a hotel room, or they are paying for other services and restaurants and so forth.

[Ryan Sundby, William Blair]

Makes sense. Thank you.

[Jason Liberty, Chief Executive Officer]

Thanks.

[Operator]

Our next question is from Vince Ciepiel with Cleveland Research. Your line is now open.

[Vince Ciepiel, Cleveland Research]

Thanks. You alluded to kind of that value of cruising versus other land-based and the goal to close the gap over time. You look here recently, Marriott said March bookings, ADR were running 12 ahead. Booking sought ADR run 20% ahead in April, Airbnbs 2Q outlook calls for ADR to run like 30% ahead.

So I'm curious, kind of what you're seeing in your leading edge bookings on pricing for all future period. Has that been accelerating through the course of the last three to four months? And as that continues to layer in, is your book position for the second half and for 2023, the embedded pricing there moving higher over the last call it 60 days?

[Jason Liberty, Chief Executive Officer]

Yes, I think that's well – so guys, I mean that's exactly what we're seeing. I do think that in the backdrop of this the entire industry is coming back online at the same time. And so there's a lot of ships coming online, which I think, causes a little bit of noise in the system overall.

But I think we look at two things. One, we're looking real time at what people are paying. And as you noted, we're seeing those similar trends. So still at a discount to what the hotels and other operators are getting. And by operators, I mean, non-crews. And then we also look at what's happening on board. And I think you have to look at those two things in combination, because that's how the consumer looks at their travel experience in combination, it's not just a hotel room, it's not just an airplane seat, this is a kind of total vacation package, that's kind their consideration.

And what we've talked about as it relates to onboard spend combined with the ticket, certainly kind of all connects to that storyline.

[Naftali Holtz, Chief Financial Officer]

Yes. And then as we mentioned, obviously, as we look ahead in our book position, both for the second half and 2023, we are higher without even the impact of the FCCs compared to 2019.

[Vince Ciepiel, Cleveland Research]

Great. And then another on costs. I'm not sure if you've mentioned this or not, but obviously, through COVID you become more efficient newer ships, some cost changes made even on the land side. How are you thinking about longer term kind of non-fuel unit costs? Do you think they can get back to those 2019 levels just with everything going on right now with inflation, and wages, and labor food? How are you thinking about the longer term in cost opportunity?

[Naftali Holtz, Chief Financial Officer]

Yes, so you noted well that we had great margins before the pandemic, we had these leading margins. And our goal is to get back and beyond of those margins as soon as possible. You mentioned some of the factors we've done a lot throughout the pandemic and this is what we're working towards as soon as possible. So yes, there are some kind of inflationary pressures, we call it around food and fuel that we pointed out. We're seeing some stabilization. But all the things that that we've done, this is definitely our goal.

[Vince Ciepiel, Cleveland Research]

Great. Thank you.

[Jason Liberty, Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Stephen Grambling with Goldman Sachs. Your line is now open.

[Stephen Grambling, Goldman Sachs]

Hey, thanks. I just want to follow-up on your answer there to Vince's comments on price and onboard. I guess I would note that the hotel and others are also seeing very strong food and beverage, which I would think is kind of compliable to the onboard. And those are often running also double digits up versus 2019.

So make sure I heard you correctly. I think you said that there is a magnitude of both of these combined you feel like it’s effectively comparable to those peers, or is the higher capacity growth across the industry driving that perhaps a little bit lower, but the overall dollars are kind of ending up in the same place.

[Jason Liberty, Chief Executive Officer]

Yes, my point was that directionally, it's exactly what we're seeing. My comment was in the short run you have a lot of ships coming online and there is different category mixes that are in play that can cause some noise, as you guys are doing price checks and so forth. But what we're seeing in recent bookings, what we're seeing, obviously what our guests spend directionally is very much in line with what we're hearing from other travel providers.

[Stephen Grambling, Goldman Sachs]

Got it. That's helpful. And then this may be a difficult thing to assess, but given this the first time the entire fleet has really been shut down and restarted, is there any risk or any thoughts that we need to consider around kind of deferred maintenance CapEx, or other onboard maintenance type costs that that may need to be incurred as the full ship fleet gets up and running over the next couple of years here? Thank you.

[Naftali Holtz, Chief Financial Officer]

Yes. Thanks Steven. So we hope that that this will be the only time that we will see that we have shut down the fleet that's for sure. And what we've done throughout and I think we spoke about it in past quarters is even through the pandemic and even through the shutdown, the way we laid up the ships, the way we continue to maintain them was one of our key goals.

So we still maintain them, the layup was such that it will help us to get the ships back quicker and without many issues. And I think we're very pleased as we bringing the full fleet. We're not seeing something that is out of the ordinary. And that's kind of how we think about it. And we do not expect it to weigh on maintenance costs in the next couple years.

[Stephen Grambling, Goldman Sachs]

Helpful. Thanks so much.

[Operator]

Our next question is from Fred Wightman with Wolfe Research. Your line is not open.

[Fred Wightman, Wolfe Research]

Hey guys, good morning. Just another one on that gap versus what you're seeing versus land-based peers. I mean, Jason, you made a comment as far as just looking to reset that. Do you feel like the current environment is a situation to where you could look to close that gap, pretty materially versus land-based peers? Do you think that you want to maintain a bigger gap just to try to get back some of that market share that you guys might have seeded over the past year or two? How are you sort of thinking about that at a high level?

[Jason Liberty, Chief Executive Officer]

Yes, well, I think we had said earlier, like we're always trying to maximize our revenue. And price integrity is very much kind of important part of that. So, I don't think that we're doing anything to try to make – to kind of certainly maintain a gap. Pre-COVID the combination of things like Perfect Day, you could add things like the edge class ships and so forth, we saw a pretty significant reduction in that gap to land-based vacations, especially in key products, like in Orlando and other products that are out there.

And I think that we very much are focused on that. We have really managed to enhance the experience both on the ship and on land, based off of really tuning into the customer for us to be able to go ahead and do that.

So, I think that's why, we are seeing similar trends. But when you look at the overall fleet as a whole, and you compare those to a land-based vacation in Europe, where you look at that a land-based vacation in Alaska or Vegas, et cetera, there's still that gap and there's still that opportunity that we're very honed in on.

I mean, that's really where if you saw us pre-COVID or during COVID where we have focused, our energy is less about our cruise peers, but more about how do we close those gaps to land-based vacations.

[Fred Wightman, Wolfe Research]

Great. Thank you.

[Operator]

Our next question is from Paul Golding with Macquarie Capital. Your line is now open.

[Paul Golding, Macquarie Capital]

Great. Thanks so much. Just wanted to ask about China. I know in the prepared remarks you commented that you're poised to reenter that market. But just wanted to ask if there was anything longer term or structural that may be shifting in terms of future plans for itinerary deployment based on the volatility we've seen in Asia in terms of reopening. And what expectations you have in terms of a normalized period once you can redeploy ships there? And then I have a follow-up on labor. Thanks

[Michael Bayley]

Hi Paul, this is Michael. I think we've stated previously our strategic intent is to return to the China market. We've been in the market for over a decade. We've had some phenomenal years in the China market, and we've had a very successful operation there. The volatilities existed in all markets for the past two years, including China. I think it's regretful that the China market is still not accessible to us. And I think our current thinking was that 2023, we would be back in the China market. I'm not sure whether that'll come true or not it could be 2024, but we're ready to go. And we're looking forward to returning to the market.

I think when you look at the region of Asia-Pacific, it's always been a meaningful market for Royal Caribbean Group. And our intention is to return to that market and to leverage the opportunities that we have. We've spent time building our brand in China. In our space, we're a very well-known brand, we're very liked, and we have very good consumer following with the Royal Caribbean International brand. And we think that when the market opens back up, we'll be able to re access the market and get back to business. And that's exactly what we're thinking

[Paul Golding, Macquarie Capital]

Well then on the labor side, some of your land-based entertainment peers have cited waning wage increases this year as they tap international labor. I was wondering for sure, side operations, if you are seeing a similar picture what your thoughts are around rate increases on shore side labor for this year. Thanks so much.

[Jason Liberty, Chief Executive Officer]

Well, on a shore side standpoint, I think, we're experiencing – I mean, most of our shore side employees are sales and marketing, your accounting and supply chain, et cetera. So, what we're experiencing there is similar to what, I think, most organizations are experiencing though. I think because we wake up every day delivering the best vacations in the world, we tend to be more attractive than others in terms of attracting talent. So we're very fortunate for that.

I think what people are experiencing in hotels and others in terms of that labor force we're certainly getting 75,000 employees back up and running on our ships with a tremendous and Herculean effort by our teams. For the most part that's been able to be managed well and you can see that really through the NIM promoter scores that we're seeing on our ships.

[Paul Golding, Macquarie Capital]

Great. Thanks, Jason.

[Jason Liberty, Chief Executive Officer]

We have time for one more question, Abby Gail.

[Operator]

Sure. Our last question is from Ivan Feinseth with Tigress Financial, your line is not open.

[Ivan Feinseth, Tigress Financial]

All right. Thanks for taking my question and congratulations on the ongoing progress.

[Jason Liberty, Chief Executive Officer]

Thanks.

[Ivan Feinseth, Tigress Financial]

Can you go into a little more detail about your pre cruising planning app? And what kind of things it connect to? And what are some of the things that you can do with it? And how you're seeing that add incremental revenue specifically outside of just onboard spending?

[Michael Bayley]

Well, Ivan this is Michael. I mean the pre-cruise revenue is fundamentally about onboard spend. I mean, everything that we're marketing is about the products and services that customers, consumers are purchasing, historically when they boarded our ships, they would purchase different packages and products. Now we've over time developed the sophistication and the ability to not only use the analytics and the information that we know about the customer to offer them products, and experiences and services that we think they're going to like. And we've also been able to over time through testing, bundle these promotional products together to not only maximize revenue, but also ensure that we're delivering a great vacation experience to the guests.

So, in some cases we've got customers who prefer gaming and dining, in other cases, we've got families who prefer shore excursions, and we now have the ability to tailor our communications and our promotions to those customers based upon what we think their key preferences are.

And the fact that we can start that cadence of communication after the ticket purchase gives us the time to really engage with the customers. So we can start a dialogue about the kind of products and services that they want.

And I think over time as we've built this knowledge and expertise we've become – and to Jason's point, it really is the beginning of this journey. But I think what we've learned in this journey is how we can offer products, bundle, manage the right pricing to different customer groups and segments and be successful with it. So we continue to see the penetration rate increasing, and obviously the purchase is quite significant. So, that's kind of the journey that we're on with this.

[Jason Liberty, Chief Executive Officer]

And Ivan just diving to put this into context, as everyone here, who has heard us for years talk about project X caliber, which was our journey to take friction out of the guest experience. And that has come through engagement and providing tools, and technologies and app that allows you to whether it's booking your cruise, whether it is being able to just walk on and off of our ships in very short periods of time on-demand services. So it's really kind of just continuing to bake out this journey of taking friction out. And what we know is that we can take friction out of the experience and friction is also booking short excursions and spa appointments, et cetera, that, the guests is very much willing to spend when they're aware of what the offering is to them. The tools and technologies also allow us to be able to yield manage in real time as well, which allows us to take advantage when there are those opportunities.

[Michael Bayley]

And just to add Ivan, I think, one of the other beautiful things of this is to Jason's point with the development of the app the integration between the pre crews and the app is very harmonious. So when we're communicating with you before you sell and you purchase various packages and products, then when you board the ship and you sign into the app, all of those products and services are made available to you on a calendar there's reminders, there's communication to you. So it's a very seamless process.

[Ivan Feinseth, Tigress Financial]

Very good. And now also can, you let's say proactively market both before and/or use it to proactively market both before and onboard, let's say if there was downtime in the spa, you could connect…

[Jason Liberty, Chief Executive Officer]

Yes. Yes, exactly right on. Yes.

[Ivan Feinseth, Tigress Financial]

Right. Sounds great. Appreciated. Thanks. Thanks again,

[Jason Liberty, Chief Executive Officer]

Thanks Ivan.

[Naftali Holtz, Chief Financial Officer]

Thank you.

[Jason Liberty, Chief Executive Officer]

Well, thank you for assisting Abby Gail with the call today. And we thank all of you for participation and interest in the company. Michael will be available for any follow-up you might have. I wish you all a great day.

[Operator]

Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect.