Royal Caribbean Cruises (RCL) Q2 2017 Results – Earnings Call Transcript – Seeking Alpha

Royal Caribbean Cruises Ltd. (NYSE:RCL)

Q2 2017 Earnings Call

August 01, 2017 10:00 am ET

Executives

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Richard D. Fain - Royal Caribbean Cruises Ltd.

Michael Bayley - Royal Caribbean International

Adam M. Goldstein - Royal Caribbean Cruises Ltd.

Analysts

Harry Curtis - Nomura Instinet

David James Beckel - Sanford C. Bernstein & Co. LLC

Felicia Hendrix - Barclays Capital, Inc.

Robin M. Farley - UBS Securities LLC

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Timothy A. Conder - Wells Fargo Securities LLC

Jared Shojaian - Wolfe Research LLC

Stuart J. Gordon - Joh. Berenberg, Gossler & Co. KG (United Kingdom)

James Hardiman - Wedbush Securities, Inc.

Stephen Grambling - Goldman Sachs & Co. LLC

Assia Georgieva - Infinity Research Ltd.

Dan J. McKenzie - The Buckingham Research Group, Inc.

Vince Ciepiel - Cleveland Research Co. LLC

Operator

Good morning. My name Dorothy and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Cruises Limited Second Quarter 2017 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. I would now like to turn the call over to Jason Liberty, Chief Financial Officer. Sir, you may begin.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Thank you, Operator. Good morning and thank you for joining us today for our second quarter earnings call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, our President and Chief Operating Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Carola Mengolini, our new Vice President of Investor Relations.

During this call, we will be referring to a few slides, which have been posted on our investor website, http://www.RCLinvestor.com. Before we get started, I would like to refer you to our notice about forward-looking statements, which is on our first slide.

During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filing and other disclosures. Please note that we do not undertake to update the information in our filing 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 historical items can be found on our website. Unless we state otherwise, all metrics are on a constant-currency adjusted basis.

Richard will begin by providing a strategic overview of the business. I will follow with a recap of our second quarter results, provide an update on the booking environment and then provide an update on our full-year and third quarter guidance for 2017. We will then open up the call up for your questions.

Richard?

Richard D. Fain - Royal Caribbean Cruises Ltd.

Thank you, Jason, and good morning, everyone. I'm really very pleased to be able to speak with you all this morning and to give you some color on where we are. At the beginning of the year, I commented that we sensed an intangible tone in the market that was as good as or better than any time I could recall. This tone was hard to pinpoint or to define, but it gave us a very tangible sense that 2017 could be a particularly positive year. Since then, the outlook has only gotten better.

Our earnings forecast now exceed even the high end of our original range of expectations. In a normal year, we have a lot of pluses and minuses and they usually balance each other out. But this year, we are experiencing many more positive forces than negative ones. Part of this appears to be industry-wide. People have bought all the stuff that they need, and they're now looking towards gaining more experiences.

Instead of buying TVs and cars, they seem to be buying memories as never before. Since we're in an industry that specializes in providing great memories that trend plays to our sweet spot. Even better, the trend shows no respect for borders and seems to be occurring all around the world. Our sailings in the U.S., Europe, Alaska, Baltic, Asia, all demonstrate this marvelous phenomenon.

Now, looking to next year, we're conscious of the fact that a particularly strong 2017 also provides particularly difficult comparables for 2018. This is definitely a very nice problem to have, but it is nevertheless a very real issue. On top of this marvelous industry-wide growth in demand, we're also seeing powerful drivers coming from the unique positioning of our special brands.

All of our brands are performing at a level we've simply never seen. Our guest satisfaction ratings are at the highest point in our history, and they keep rising. Our onboard revenue figures are doing well, both in terms of sales and satisfaction.

Some of this is driven by our wonderful new ships, such as Harmony of the Seas, Mein Schiff 6, Symphony of the Seas or Celebrity Edge, but much of it also comes from greater engagement by our officers and our crew.

This is very much of a people business, and it is all about the people. In addition, there are a few specific programs at Royal Caribbean that have proven very attractive in driving change. The first, of course, is our DOUBLE-DOUBLE. This program has been extremely successful in galvanizing our entire workforce to a common set of goals. You all heard me say before that if we give our people focus and a clear vision, nothing stops them from achieving extraordinary results.

The success of the DOUBLE-DOUBLE provides very tangible proof of that fact. For that, I extend to all of them my sincerest thanks. Remember, however, that the DOUBLE-DOUBLE was never just about 2017. It's always been about positioning Royal Caribbean to the future.

I believe that's the real success of the DOUBLE-DOUBLE, not just the 2017 results. As we approach the end of DOUBLE-DOUBLE, we are putting thought into providing direction again for a multi-year period.

As you know, our mantra is continuous improvement, so I wouldn't expect our next announcement to be simply a clone of the DOUBLE-DOUBLE. First of all, that would be boring. But also we need to focus on the drivers of success. So I would expect that that's the kind of picture that we would be painting.

I know that the some of you have suggestions for the structure of this program, and you are absolutely free to share them with us. Be aware that any good idea you come up with will be shamelessly stolen without any credit to the author.

Now, as part of the DOUBLE-DOUBLE, we've adopted a number of specific initiatives that support our overall objectives. One of these is our price integrity program, which some of you have asked about.

Fortunately, we've only good news on that front. As we had predicted, the early stages of the program cost us revenue in both 2015 and 2016. That hurt, but once we established our consistency and credibility with the travel agents, with the public and with our own revenue managers, the benefits started flowing in.

Today, it's clear that the program is accomplishing our goal of rewarding those who book early, while disincentivizing those who push for last-minute discounts. The key to this success has been consistency.

We don't do it only when it's painless or convenient. We maintain the program even when it hurts, and sometimes we have to let cabins sail empty. That goes against every one of our instincts, but the focus and the discipline have proven their value.

Ironically, the program has been so successful that we're now expecting to achieve a record load factor this year. That, in turn, causes slightly higher operating costs per lower berth, but obviously the bottom line impact is very positive.

Now, since we last spoke, there have been several other developments, which I'd like to touch on today. First, we announced the deployment of the first Quantum Ultra sailing in China in 2019. With the Quantum class of ships, we're giving the most technologically-advanced hardware to a market that is very digitally focused. This move is a continuation of our strategy to have premium hardware in China. And that strategy is what has enabled us to gain and to hold a leadership position in the eyes of the Chinese consumers, such that today, Quantum is essentially synonymous with cruising in China.

It's hard to believe, but we've now been operating there for almost 10 years. There's been a tremendous growth during this period of time, and we're finding that China is starting to behave more like a typical market. Most markets have ups and downs, and we've seen both in China.

Most recently, the restrictions on travel to Korea have been painful. Nevertheless, throughout these variations, our outlook for the future in China has not changed. Our team on the ground is motivated, focused and making strides in driving the evolution of cruise distribution and destinations.

Speaking of evolution, one of the most important and most quickly changing is the use of digital tools for marketing, for product development and for delivering and enhancing the consumer experience. We are proud to have focused on this for several years, and that gives us a leg-up on expanding our capabilities. We're currently working on what some might call version 2.0 of our capabilities, but, as I previously reported, we've dubbed it Project Excalibur. One advantage with Excalibur is that we already have years of experience in the area that allows us to build on.

In addition, because we spent so much effort during these developmental years, we have an infrastructure in place today that allows us to scale our innovations quickly. For example, we expect to have Excalibur functioning on 15% of our fleet within five months of today, and over half of our fleet by the end of next year.

I said before that our efforts in this arena are not nice to have. They are vital to keeping cruises relevant as a great vacation experience. We are also aware that several of our competitors have announced plans to expand their digital capabilities as well. We welcome those plans, too, because it will make cruising even more powerful as a relevant vacation option.

Another aspect of the business that's sometimes underappreciated is the work to ensure the ocean and the communities surrounding it are healthy and protected. We're very proud that the World Wildlife Fund is our long-term partner in this journey, and they are the gold standard in environmental stewardship. With their help, we have established specific and measurable targets related to greenhouse gas emissions, sustainable food supply and destination stewardship. We remain committed to this effort. And we look forward to following a path to achieve our long-term targets in this endeavor as well as on the financial front.

As you can see, we've got lots of reasons to feel optimistic about the future. Demand is good. We're attracting new guests. We're developing young markets. Our employees are happy. All of this positions us beautifully for long-term success.

With that, it's a pleasure to hand the call back over to Jason. Jason?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Thank you, Richard. I will begin by talking about our results for the second quarter. Second quarter results are summarized on slide 2. For the quarter, we generated adjusted earnings of $1.71, which is 57% higher than same time last year.

These results are better than guidance due to strong close-in demand, better fuel trends and a better-than-expected performance from our equity investments. Net revenue yields are up 11.5%, which is better than previous guidance.

Strong demand for North American products allowed for better close-in pricing trends and record high load factors. Strong trend in beverage, shore excursion and high-speed WiFi all contributed to an 8.3% year-over-year increase in onboard revenue.

Net cruise costs excluding fuel were down 0.9% for the quarter. Costs in the second quarter came in slightly higher than our guidance, driven by higher load factors, timing and additional investments in revenue-generating activities.

Moving on to the booking environment, over the past three months, new bookings have been up double digits compared to last year and at higher prices. Booking volumes have been up more for sailings that are further out, due to the ongoing extension of the booking window.

As a result, both load factor and APD are higher than same time last year for 2017 and in each of the next four quarters. We are enjoying the benefits from our global sourcing model, revenue management strategies and the price integrity program.

When we first announced the price integrity program in 2015, we knew that it would have a negative impact on our load factors in the short-term, but that it would contribute to long-term yield growth.

Now, two years after its inception, we are experiencing the benefits of the program through an extended booking window, strong close-in pricing, higher overall APDs and record load factors.

North America remains our largest sourcing market and the strength in demand we have seen from U.S. and Canadian guests have been unwavering for sailings on both sides of the Atlantic.

Now, I'll provide an update on each of our key product groups, starting with Europe. While most itineraries have benefited from strength from the North American consumer, we have seen particularly strong trends on European sailings, both in the Mediterranean and in the Baltics.

Fewer geopolitical events and stable air pricing have contributed to a surge in demand from our higher-paying North American guests. As a result, North American guests will account for a larger percentage of Europe itinerary sourcing than in any other recent year.

This sourcing shift, which is made possible due to our significant global footprint and yield management capabilities, has contributed to higher ticket prices and higher onboard spend.

Our booked APDs for Europe sailings are significantly higher than same time last year and load factor is up nicely. North American itineraries account for about 58% of our 2017 capacity and have been trending well.

The Caribbean, our largest product group at close to half of our capacity, has continued to please and remains up year-over-year in both rate and load factor.

On our last earnings call, we noted that Alaska was outperforming last year's record season. That trend continued throughout the last three months, and we continue to expect record yields for the product.

In the Asia-Pacific arena, we increased capacity by 5% year-over-year, with a combination of China, Australia and Southeast Asia itineraries now accounting for 21% of our 2017 capacity. We achieved record load factors in the second quarter for our China itineraries and expect to meet or exceed prior year occupancies in both Q3 and Q4.

Unfortunately, the South Korea travel restrictions created a challenge for this year's China season, resulting in less-than-ideal itineraries and lower pricing. Our strong relationship with key travel partners, combined with expanding direct business, contributed to a relatively quick stabilization in demand after the travel restrictions were announced.

Lastly, the upcoming Australia season, which accounts for more than 10% of winter capacity, is in a strong book position, despite industry capacity growth. While it's too early in the booking window to provide a lot of color on our overall 2018 expected performance, what I am willing to say is that we are currently booked ahead of same time last year in both APD and load factor for 2018.

Now, we can turn to our updated guidance for full year 2017, which is on slide 3. We are now 95% booked for the year, and we now expect our net revenue yields to increase in the range of 5.5% to 6%. This is an increase versus prior guidance, driven mainly by the out-performance in the second quarter and further strength in demand from our North American sourced passengers.

Net cruise costs excluding fuel are expected to be up approximately 1%. The increase in the cost guidance is driven by higher-than-anticipated load factors, timing and investment in revenue-generating activities. We anticipate fuel expense of $706 million, which is down slightly relative to prior guidance.

We are 64% hedged for the remainder of the year at a price of $487 per metric ton. Based on current fuel prices, interest rates and currency exchange rates, our adjusted earnings per share guidance is in the range of $7.35 to $7.45 for the year.

In summary, a strong second quarter, coupled with the benefits of a weaker dollar, better fuel prices, better demand trends, some additional investment in revenue-generating activities and better-than-expected performance from our joint ventures, are driving the improvement in our guidance for the year.

Before getting into the third quarter guidance, I wanted to reiterate a point that we have emphasized on the past couple of earnings calls. Our yield improvement in the first half of the year was greater than the yield improvement we expect in the back half of the year, as we have already lapped the new entry benefits of Harmony of the Seas and Ovation of the Seas, as well as the impact from the 51% sale of Pullmantur. Additionally, Q3 yields are benefiting from very strong demand trends for Europe. Since Europe makes up about a third of our capacity in Q3 and approximately 10% in Q4, we expect Q4 yield growth to be lower than Q3.

Now, we can turn to our guidance for the third quarter, which is on slide 4. We anticipate a net yield increase of 4% to 4.5%. The year-over-year improvement is mainly being driven by strong North American demand trends for our core products on both sides of the Atlantic.

Net cruise costs excluding fuel are expected to be up approximately 4% on a constant-currency basis. The year-over-year increase in our cost metric is mostly due to a year-over-year capacity reduction for the quarter. Taking all of this into account, we expect adjusted earnings per share to be approximately $3.45.

Before we open up the call for a question-and-answer session, I wanted to note that our next earnings call is tentatively scheduled for November 7.

And with that, I would like to ask our operator to open up the call for a question-and-answer session.

Question-and-Answer Session

Operator

[Operating Instructions] Your first question comes from the line of Harry Curtis with Nomura Instinet.

Harry Curtis - Nomura Instinet

Hey, good morning, everyone. Two quick questions, we've gotten several questions on the sources of the $0.30 increase for the year. And when you back out roughly $0.08 for the beat, that leaves $0.22. Of that, is it fair to say that half of that is currency, but the balance of that is just stronger operating performance?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Yeah. That's exactly right, Harry. About half of the beat is driven by the weakening of the dollar and the balance of that is driven by improvement in business trends.

Harry Curtis - Nomura Instinet

Okay. And then my second question is given the strength of these trends and this is the year that you should be generating a significant amount of cash, any explanation as to your hesitancy to buy back stock in the quarter?

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Well, I wouldn't necessarily say it's hesitancy. I would point out that, one, we've said from the start of the program that we were going to be doing it opportunistically. And we also said we were going to be doing it in line with free cash flow. And most of the free cash flow gets generated really on the back half of the year.

Harry Curtis - Nomura Instinet

Okay. So the message is stay tuned.

Jason T. Liberty - Royal Caribbean Cruises Ltd.

Stay tuned.

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Royal Caribbean Cruises (RCL) Q2 2017 Results - Earnings Call Transcript - Seeking Alpha