Royal Caribbean Cruises Ltd. (RCL) Earnings Call Transcript & Summary

Yes. Thanks, everybody, for joining this afternoon. I'm Steve Wieczynski, Gaming and Leisure Analyst at Stifel, and I'm thrilled to be joined today, from Royal Caribbean by Jason Liberty, their Chief Financial Officer and Executive Vice President; and Carola Mengolini, their Vice President of Investor Relations.

So we have only a little over 30 minutes this afternoon. So I'm going to get right into some questions and try to get through as many of these as possible. And I've got a lot of questions come in from different investors. So I've got a ton of questions, I don't have a lot of time. [Operator Instructions] And I will try to get that answered as best I can, if Jason will actually answer any of these questions. So let's start. So okay. So Jason, I think what we get a lot of questions about is, it seems there's a ton of confusion around when you guys might fail again, and I know that's a very difficult question, but there's been newspapers out there saying the CDC has not even had discussions with you guys or the cruise lines. It sounds like you guys are having discussions with the CDC. They're saying they aren't. So I guess, where do we stand with that? Or what can you fill us in at this point?

Sure. So Steve, I guess, your question really relates specifically to the U.S. versus conversations we're having in other parts of the world for other markets.

Correct.

So I'll just -- okay. So I'm not quite sure why there are news articles saying that we're not in -- we're not having conversations with the CDC and we are having conversations with the CDC on a regular basis. We've also kind of created a panel of experts in each of the disciplines, whether it's sanitation or testing or medical support and so forth, and we've been actively -- they've been actively -- they're also working with us to engage with the CDC. There's been dialogue -- there's been discussions and documents exchanged about changes in practices and protocols and so forth. So I think I would describe it as there are consistent and constructive conversations happening with the CDC. We do not have a definitive [ PO opposition ], but I think that we're making sure that people are aware of our practices and our policies and things that we'll be looking to enhance. And obviously, we've canceled our sailings all the way through the point in time of their new sail order. And we're, I would say, cautiously optimistic about being able to operate here in the latter part of the summer. But it's not something that we can control. It's not fully in our control outside of being -- trying to be as highly cooperative as we possibly can be. I would add that conversations in Europe and other parts of the world are far -- very far along, and Europe is -- has provided what are the protocols that they're looking for cruise lines to be doing and all in line with things that we were thinking about, same thing in China and in other markets. So I think the CDC is the one where we're waiting for just their -- an additional reaction to our -- are already, I think, that we've submitted to the CDC for their review.

So if, let's say, the CDC next month comes out and extends that non -- the non sailing so-called agreement further out, I mean, are you guys prepared for that?

Well, we are. We're certainly financially prepared for that, and we've taken significant actions on the liquidity front, so we're fortunately financially prepared for that. But if they chose to extend it, then we will manage to that, and we're obviously trying to, again, be very thoughtful, and we all want to get to a place where it's a healthy return to service. And so I think, again, conversations, I think, have been very good. But if they decide to extend it further for whatever reason, we are certainly financially prepared for that.

And then I wanted to ask about China specifically. It seemed like that's a market that you guys probably thought could start a little bit sooner rather than the U.S., and now it seems like there might be some mixed messaging coming out of that market. So any kind of insights in terms of the conversations you've had about getting operational in China again?

Well I'm not sure about mixed messages. I would describe that I think we have a point of view that we haven't announced yet on when we're going to start up and running, and I think it's going to be relatively soon. And a lot of it is more dependent on things that we're doing to the ships and some practicing, if you will, that we want to do on some of these protocols before we let passengers come on to our ships. So I think that things are progressing very well there. The government is very engaged in a very proactive manner to -- just to get us ready to get back into service. They take the screening process very seriously there. And of course, they're more advanced in their technology on contact tracing and so forth, which allows their screening process before the passengers get on our ships to be very thorough, and so we feel very good about that.

So as you guys do start up, I mean, how do you not only give the governments, but the consumers as well, confidence that as you do restart, it's going to be safe? And how do you address if there is a problem further down the road on a ship? And I think a lot of investors would like to hear of maybe some of the specific procedures that you guys will put in place. Are there tests that are going to have to be done to get on board? How often would you do those tests? I mean anything like that, I think, would be pretty helpful.

I'm sure it would, Steve. So I'm not going to go -- the reason why we're not going to go into specifics because we have not agreed to all of those things with the CDC. What I would say is, is that I would expect that the practices and protocols for our guest and our crew will be at a higher level than what you see as the country and the world is returning to some level of normal. So it's become, obviously, very -- it's become a social norm to get your temperature checked at a restaurant. I would expect those type of things. Our sanitation practices, our practices around social distancing on the ships, having individuals to help promote social distancing, et cetera, will be all kind of fair game in this. But I think that in terms of establishing confidence with the consumer, what we -- I think what we want the consumer to perceive is that the cruise ship environment is the safest place you can be, and we look to show that by -- as we start talking about some of these policies and practices, that they are above and beyond what you're seeing in the day-to-day or any social norm activity that you've been witnessing.

So as a customer comes on board in this new environment, will you change kind of the legal fine print that's embedded in that ticket in any way to, I don't know if the right way to say it is to, cover yourselves a little bit better? I feel like you guys already are pretty well covered for incidents onboard ships, but is there anything there that needs to change from a legal standpoint?

I think a lot of it depends on how things develop here. We're watching very closely what's happening as other businesses are coming back up and running. And I think based off of that, we'll evaluate whether or not we need to make any changes to our ticket contracts and so forth. At the end of the day, we want -- our main goal is to deliver the best vacations on earth, and we're very sensitive to things in which could compromise that. And so we're sensitive with what might be in a ticket contract. We're sensitive to how our guests get on and off our ships, and doing our very best to make sure they're safe and secure.

Okay. Got you. From a liquidity standpoint, can you fill us in a little bit, I guess, where you are today? I mean as of the end of April, you had, what, about $2.3 billion of liquidity. You've raised since then, if my math is correct, about $3 billion. So if my math is correct, that's $5.2 billion, I'm not very smart. I assume that kind of liquidity does not include your cash that you burned since the April -- since the end of April, does that -- and it also does include refunds. So am I thinking about it the right way?

Well one of the points that it might be factually correct, I'm just not going to know which one is right, Steve, because you also brought your intelligence into that as well.

I got that.

I mean -- yes. I think that how you're thinking about it is generally right. You obviously -- in the month of May, you're considering, I think, a few things. One is we're getting the fleet into its kind of final out-of-service form and get -- trying to get our guests -- I mean, not our guests, but our crew home as quickly as we possibly can. There's obviously refunds that would take effect there. And then there's also the tail of spend that would more relate to the February, March period of time. Because if you perform a service for us in the month of February or March, you may not get paid for 30, 45, 60 days later, so there's some tail associated with that as we kind of get into this kind of prolonged out-of-service burn rate. But we -- the actions we've taken, I think, has added a significant amount of liquidity to the picture. And I think we believe that under any circumstance that we can currently think of, so of course, it can always change, that there is sufficient liquidity to not only be in a prolonged out-of-service, but also that even as you're out of service, you begin to ramp yourself up. We have the financial wherewithal to sell and market. We have the financial wherewithal to get our crew back on and trained and so forth as we also need to be able to ramp up service.

And right now, that leaves you with about $700 million, is that correct on the debt side?

$700 million in terms of?

What you could borrow from here on out?

Oh, I'm sorry. Well, from here on out, we could still borrow $1 billion. We've got $700 million that we'd love to do on an opco guarantee, but the balance of that could be an unsecured or further convert.

Okay. So I guess the question we get next at the time is why did you -- how -- maybe help us think about how you thought about that rate in terms of the -- using the convert or maybe why not use equity or how you came to that decision?

Okay. Well, I think in terms of -- the first is why did we raise more, it's completely in the bucket of insurance. There's not something to point to and say that. It's because -- there's nothing that's changed, if you will, in the cards over the past 30 days, but -- so it really is insurance, it's being prudent. The capital markets improves further. Our share price had increased significantly from where it was when others had done their converts or their equity. And we were able to: one, utilize the opco guarantee on that side of it; and on the convert side, we were able to do that without having to issue any equity. So to your earlier point, while we have $1 billion left that we can do on the debt side, there's obviously still equity that we could do if need be. But our intention is not to spend any of this money. Our intention is to hopefully be able to use it sooner rather than later to further delever the balance sheet.

Okay. I think you've indicated that your '21 booked position today is within your historical range. I guess is it fair to say that you were kind of well ahead of where you would have been kind of pre-COVID. And has that booked position deteriorated? Or am I thinking about it the wrong way?

Well, it looks to reverse what -- to ask the questions, so I wouldn't look at it that way at all. I think that kind of pre-COVID, the amount of business we have on the books for '21 is very little. Certainly, there were moments in time in the, call it, end of March, early April time frame, when bookings were basically nonexistent. And if you were to look at it as we -- as I said, on the call, if you just look at it over the -- from past, call it, 30 to 40 days, you've seen acceleration for sure, relative to even where we were in the pre-COVID time frame for bookings for 2021. So it is very, very clear that, in the consumer's mind, that we should be back to some level of normal in the '21 period of time, and they want to make sure they get access to those vacations.

Okay. So if you look out a couple of years, and I'm not sure how much you can say here, but if you go back to 2019 and you look at where your EBITDA base was in 2019, given what you can see today, which, again, visibility isn't that great, is there any way to help us think about when you potentially could get back to that '19 EBITDA level or even potentially surpass that?

Yes. Well, I mean, it's obviously -- it's difficult in the current position to kind of -- even in good times, it's tough to forecast out several years, let alone in the current state of situations. But I think the way that I would look at it is we kind of average up and we average down because we're taking on bookings now for '21 and early '22 in a more challenging period. So it's -- obviously, '21 will be affected, and I think '22, to a degree will be affected. We'll also have more APCDs and newer capacity. That newer capacity is -- has very rich inventory, great onboard revenue centers, very fuel-efficient. And so I think it's a question on whether it's probably a couple of years or maybe a little bit more until we return to those EBITDA levels. And a lot will depend on the economy. I don't think, when we look out to '22 or '23, it's a COVID thing, I think it's just a question of what's the state of the economy and how much have we sold already for those previous years that could potentially be at lower rate than we're getting in those current times. So I don't want to kind of point to a specific day, but I do think that '21 will be affected, '22 might be a little bit affected. I mean depending on where you want to talk about your forward 12 months as we kind of get to some level of normal in our booking patterns so we can build a book of business that we typically do, that should put us in a pretty good position.

Okay. Let me try asking that a little bit differently. So if that's kind of your -- the answer is kind of an unknown, let me say, what if -- okay, let's make up dates, but let's say a vaccine is found in November. People can get it, it's widely distributed in, let's say, the first quarter of next year. How quickly, after that vaccine is in place, do you feel like your business would get on a normalized run rate?

So I think if it had played out that way, Steve, then I think you would see -- I think '22 would be a pretty normal year. If you were kind of in that early first quarter of next year where everybody has vaccines or available to the -- at least to the masses, I think that's an appropriate period of time to create a really strong book of business for the following year.

Okay, makes sense. And then in terms of ship CapEx over the next couple of years, I guess, maybe how do we think about that? How do you think about that? How far out will you be able to push deliveries? When is the day that you guys would actually even consider putting in a new order?

Well, certainly, in the current environment, we're -- until there's visibility in terms of the return to service, and not only just when we're starting, but at what the cadence will be to kind of return to a level of normal, until there's that visibility, I don't think there's a -- likely a conversation about ordering any additional ships. Now I'm saying that for the ships that we do have on order, and I think it's probably more generally the same thing for the industry, is that because of the state of the yards, there's likely a, call it, 9- to 10-month delay in all ships in terms of their deliveries. So I think there's this permanent shift that's going to occur, and it is possible that some of these cruise ships end up getting canceled as well. But I think for us, we're focused on shifting installment payments, making sure we can leverage the financing to its fullest extent and getting the ships when it's the right time for us to the extent that we can. But I think at a minimum, you're going to see a 9- or 10-month delay in all these ships.

Nine to 10 months you said? Okay. So if you look at your new -- new-to-cruise, I think it was about 1/3 of your business, give or take, a little bit last year. I mean I assume at this point, for '21 bookings, the split between new cruisers and past cruisers, I mean it has to be 99:1 in terms of past cruisers. Is that kind of the right way to think about it? And then also, how in the world do you guys ever convince a new-to-cruise passenger to come on board?

Well, the 1/3:1/3:1/3 has been more or less the mix of our new-to-cruise, first-to-brand and loyalty base for some time. You are correct that the uptick in demand for '21 is driven mainly by our loyalty guests, but there are still a lot. So it's not 99:1, and it's also not 1/3, but it's much closer to 1/3 than it is to 1% of our new bookings are new-to-cruise.

Okay. And is -- I assume -- I think the last time that we kind of talked to you, you said that when you look to '21 bookings, it's still very heavily weighted to cash bookings versus the FCC usage. Is that still pretty fair at this point?

Yes. I think yes. So most of the -- I mean the vast majority, so I would say, a very low percentage of our '21 bookings are the application of future cruise certificates. And when we talk about our book of business, whether it's on a rate basis, that rate basis assumes also that FCC has been applied. And if that's been applied, it's effectively a 25% discount to the price.

Okay. So if you guys were typically -- where are we, early June, I assume you guys would probably be about 20% to -- let's say, 20% to 25% booked for next year. Can you give us some of the milestones where you would kind of be booked historically over the next, I guess, between now and kind of year-end? And I would assume -- I would assume that...

I'm sorry that this is happening. Okay, sorry. Also, my screen turned on in my office. We are all good. All good, sorry about that.

So can you give us kind of -- yes, sorry. Can you give us some milestones in terms of where you would be booked historically between now and kind of the end of the year? And I would assume kind of bookings over the next couple of months historically would have been pretty low anyway, just given summer and kids are out of school and summer vacations, but any way to kind of think about how the rest of the year typically plays out?

Well, I mean it's certainly a pretty linear build. We haven't talked for a long time at what percent we're booked 12 months out or when we cross the year and so forth. But what I would say is a very, very long time ago, we talked about being 50% booked crossing the year. And I think for almost a decade, we were always better than that. And so if you're looking 12 months out, we're obviously significant -- we're typically significantly more booked than 50%, so just as -- if you want to use things that we've said a long time ago and try to extrapolate that forward. But it's a linear build, and I think your comment about the summer is not completely accurate because it's very common when people are finishing their holidays, they book their next holiday, and they do get a lot with us on our ships.

Okay. So I know you guys don't want to talk about kind of load factors when you start to resume sailing again and what ships we'll be failing at, but we've seen kind of a crappy cruise operator like a Bahamas Paradise, say they'll sail around 40% of the ships' capacities. I mean I don't know if you can even answer this, but I mean, is that a fair level? Is that too low? Is it too high? I mean I know you guys have talked about the breakeven -- EBITDA breakeven level around 30%. So I guess the question actually is, I mean, do you -- does it make more sense, and I assume the answer is yes, to sale less ships, so whether that's 5 ships at 80% to 90% occupancy versus 10 ships at 30% to 40%.

So -- okay. So on the occupancy side, I think there's a few different questions. So one is, will there be any, in the early days, some type of governor, a mandated governor put on cruising? And so you can only have x percent of your ship being utilized, that's a question. The second one would be, as an organization, what governor do we want to put on to ourselves for 2 purposes, one of which is you're effectively restarting operations, so it's basically like launching a ship. And so you want to have less load factors anyway to make sure you can deliver the product. And also, we're going to have new practices and protocols that we need to make sure we get right. And so I think likely, the governor might come more from us in the early days just to make sure we get it right. I don't think the governor is going to come from, necessarily, demand. I think it's going to be more of something that we place on ourselves or potentially, a government body or a port might say, "Well, let's kind of limit your number of people in the early days." I think for us, one of the things that I think is just a differentiator between us and our competitors is that we have the HVAC systems, HEPA filters. We have sanitation practices, but we also have a lot more public space per passenger. And so if our ships are 80% full and they're built to be at 120% full, with still a lot of public space per passenger, that when you start getting around that 70% to 80% mark, it's still -- the ship is pretty airy in terms of -- I mean, there's a lot of space -- I mean -- and you should easily be able to socially distance your guests for their vacation. So we don't know the answer. I don't know why people would say 30% or 40% or why they've done that to themselves. I think we need to see how this is going to somewhat play out. And I think for us, we want to make sure that we have a healthy return to service, and we don't do anything or create a situation where there's a larger-than-normal type of outbreak of COVID on our ships.

Okay. And last question, I'll let you guys go. But it does seem like you guys are trying to hold price as long as possible for 2021 and beyond, and it seems like you might be trying to stimulate demand a little bit more through -- like onboard credits and stuff like that. So I guess the question is, how impactful -- so if you give a customer a $300 onboard credit, how impactful is that to you guys? Or I guess the question is how would you technically account for that?

Okay. Well, you -- really, for some time, and well before COVID-19, packaging has been a significant part of our kind of go-to-market strategy, so we've been -- if -- Steve, if you're a blackjack player, we would offer you incentives as part of your ticket price to go ahead and offer you some money towards playing blackjack, or another family -- might be, beverage is really important to them, or internet inclusion and so forth. So we've been doing that for some time. The accounting for that has been clear that whatever the rack rate is for Internet or beverage or whatever it is, that goes into onboard revenue, not into ticket revenue. The consumer today is not -- they're not price-sensitive. Yes, some of them are looking for a deal, but they're more looking for it on a package basis, and this is really just all about when are we going to return to service and how do we make sure and to build confidence in the consumer that, their return to service is a healthy one.

Okay. Got you. So Jason, Carola, thanks, you guys. Thank you guys so much for participating today in our virtual fireside chat, and I can't thank you guys enough. And thanks, everyone, for dialing in this afternoon. I hope everybody has a great rest of their day. And if you missed any of the call or had any audio issues, there will be a replay available very shortly. So thanks, everyone. And have a great day.