Royal Caribbean Cruises Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Royal Caribbean Group First Quarter 2023 Earnings and Business Update Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Michael McCarthy, Vice President, Investor Relations. Please go ahead, sir.

[Michael McCarthy, Vice President, Investor Relations at Royal Caribbean Cruises]

Good morning, everyone, and thank you for joining us today for our First Quarter 2023 Business Update Conference Call. Joining me here in Miami are Jason Liberty, our Chief Executive Officer; Naftali Holtz, our Chief Financial Officer; and Michael Bayley, President and CEO of Royal Caribbean International. Before we get started, I'd like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP items can be found on our website and in our earnings release available at www.rclinvestor.com. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our first quarter 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 at Royal Caribbean Cruises]

Thank you, Michael, and good morning, everyone. I'm thrilled to be here this morning to share our incredible first quarter results and the strong trajectory of our business. When we turn the page from 2022 into 2023 with the full strength of our operating platform deployed and numerous tailwinds related to the consumers' desire to travel and experience the world, we believe this would be a great year. We expect it to finally return to yield growth in the first quarter and accelerate even more through the rest of the year. Well, as you saw in the press release this morning, what transpired over the past four months was much better than we had anticipated. Our brands are stronger than ever and our yield in Q1 blew away previous records. Before getting into the detail, I want to thank the entire Royal Caribbean Group team, 100,000 plus strong for another outstanding quarter. Their dedication and commitment allow us to deliver the very best vacation experiences responsibly while generating strong financial results. As highlighted on slide four, it has been a tremendous first quarter that set us well on the path to a year that is significantly better than we expected just a few months back. We knew that demand for our business was strong, but what has transpired was a record-breaking extended wave season that translated into robust bookings and meaningfully better prices.

In the first quarter, we delivered a record 1.9 million memorable vacations, achieved 102% load factor at higher pricing than 2019 and earned exceptional guest satisfaction scores. Yields grew 5.8% compared to record 2019 levels, and were significantly above our guidance. Strong demand for Caribbean itineraries, translated into higher load factors had better-than-expected pricing for both ticket and onboard. Our yields are now exceeding record highs, and we expect this trend to continue for the rest of the year and beyond. This is particularly significant because while we thought the first quarter would be a transition period, we always expected the rest of the year to be strong. The fact that demand for the coming nine months is so much stronger than our already robust expectations says a lot about the strength of the consumer and the strength of our brands. Adjusted EBITDA and adjusted EPS in the first quarter were both considerably higher than our guidance, and we generated $1.3 billion of operating cash flow. Strong revenues, our continued focus on increasing margins and favorable timing of operating expenses contributed to the better-than-expected earnings performance. The acceleration of demand, coupled with our team's incredible execution is also translating into higher revenue and earnings expectations for the full year.

As you can see on Page Five a, we are more than doubling our full year yield growth expectations to 6.75% to 7.75% on increased expectations for ticket and onboard revenues. We are also increasing earnings per share expectations by 40% to $4.40, to $4.80 as we continue to focus on expanding margins as revenue accelerates. Now I'll provide some insight into the robust demand environment and our incredible wave season. Bookings outpaced 2019 levels by a very wide margin throughout the entire first quarter and into April. Pricing was also significantly higher as our commercial apparatus across all channels has been driving quality demand into our vacation ecosystem. The strong wave season resulted in an acceleration of our book position in relation to prior years. The booking window is now completely back to normal, demonstrating consumers' desire to continue to plan their vacation travel with us well in advance. While demand has been strong across all products and markets, we continue to see exceptional strength from the North American consumer. This strength in combination with the incredible, Perfect Day at CocoCay has resulted in record yields for our Caribbean sailings. In addition, European bookings are nicely outpacing 2019 levels with peak summer sailings trending particularly well in recent weeks.

The robust demand we see for our products as a result of our superior brands, hardware, enhanced destination offerings, a nimble and global sourcing model and strong execution by our teams. As you heard me say on prior earnings calls, we continue to see financially healthy and engage consumers, who are eager to vacation and build memories with us. Our customer sentiment remains strong and is bolstered by strong labor markets, high wages and excess savings. Secular tailwinds continue to benefit us as consumers continue to shift preferences and spend from goods to experiences, resulting in a strong entertainment and travel spend. This trend continued in the first quarter where spend on experience was 24% higher than 2019 and double the spend on goods. Further, our research shows that consumers plan to continue prioritizing leisure travel over other spend. Our addressable market is plentiful and continues to be meaningfully larger than it was in 2019. Our product appeals to a broad range of vacationers who are seeking everything from a short getaway to a Perfect Day to a luxury world cruise. Cruising remains an exceptional value proposition. I would actually say it's too attractive of a value proposition, which is allowing us to outperform broader leisure travel as we seek to close the gap to land-based vacations and drive better revenue and happy customers.

Cruise search is up 15% versus 2019, significantly outpacing the growth in general vacation search and contributing to the doubling of visitors to our website when compared to 2019. Our vacations are popular among a broad range of consumers, which allows us to attract more and more new customers into our ecosystem. In the first quarter, the percentage of guests, who are either new to brand or new to cruise, surpassed 2019 levels by a wide margin. The improvements we have made in our commercial capabilities have allowed us to capture quality demand and expand our share of guest wallet. In the first quarter, about 2/3 of our guests booked some of their onboard activities in advance of their cruise. The comparable figure in 2019 was 48%, so you can see we have used our time well to upgrade our systems. Every dollar a guest spends pre-cruise translates into approximately $0.70 of incremental spend once on board. While we have made a significant leap in our commercial capabilities, we are still in the early innings of our journey, and we'll continue to add features and capabilities to our app and commercial engines. Looking to the rest of 2023, we expect to deliver amazing vacation experiences to over eight million guests a record yields as we deploy our best-in-class fleet across the best global itineraries.

We expect to return to historical load factors in late spring and continue to benefit from a strong pricing environment. We expect to deliver record yields that are 6.75% to 7.75% higher than 2019 with every one of our brands generating positive direct profit this year. Our strong yield growth outlook is driven by the performance of new hardware, a strong pricing environment, especially for Caribbean itineraries and continued growth from onboard revenue areas. New hardware has been a great differentiator for us, and we are benefiting from the eight ships that joined our fleet since 2019. This year, each of our wholly owned brands will welcome a new vessel. These ships are sure to continue elevating vacation experiences for our guests and will continue to further drive the competitive advantage and deliver very attractive financial returns. Since all three of these ships will be delivered in the second half of this year, they will be a key yield driver next year. Silversea will welcome Silver Nova this summer, the first of the new evolution class. Celebrity Cruises will welcome the fourth in the award-winning Edge series, and Royal Caribbean International will take delivery of the game-changing Icon of the Seas. Let me spend a minute talking about Icon of the Seas and the excitement she is generating with our customers.

With Icon, we set out to create the ultimate vacation for thrill seekers, the chill enthusiasts and everyone in between without compromise. She is getting exceptional demand with bookings well surpassing previous records. Despite being on sale for only five months, Icon is significantly more booked for her inaugural season at materially higher rates than any other Royal Caribbean ship launch. Icon will join the fleet later this year and will debut in the Caribbean in January 2024, with itineraries that include Perfect Day at CocoCay and its new expansion, Hideaway Beach. Moving to costs. Our team have been working hard for several years to reshape our cost structure with the goal of enhancing margins. Our cost outlook for the year reflects our commitment to enhancing profitability while focusing on delivering the best vacation experiences. We continue to expect the business to deliver a record yield and adjusted EBITDA in 2023. Our proven formula for success remains unchanged. Moderate capacity growth, moderate yield growth, though I wouldn't define this year's growth as moderate, and strong cost controls will lead to enhanced margins, profitability and superior financial performance.

We just published our 15th Annual Seastainability Report, providing an in-depth update on our strategy and performance of delivering the best vacation experiences responsibly. In this report, we outlined our progress towards reducing our carbon intensity by double digits by 2025 versus 2019. We expect to deliver on significant milestones of our decarbonization pathway this year including the introduction of advanced technologies on our new ships, such as LNG, fuel cells and a first-of-its-kind onboard waste-to-energy system. To wrap up, the business continues to accelerate, and we are uniquely positioned to grow earnings and cash flow in 2023 on our way to achieving our Trifecta goals. The strength of our brands and operating model continues to grow. We are committed to delivering the best vacation experiences responsibly, and I couldn't be more excited about what's ahead for the Royal Caribbean Group. With that, I will turn it to Naftali. Naf?

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Thank you, Jason, and good morning, everyone. Let me begin by discussing our results for the first quarter. As you can see on slide four, we reported an adjusted net loss of approximately $59 million or $0.23 per share. These results were significantly above our expectations and the high end of our guidance range. Total revenue was $2.9 billion. Adjusted EBITDA was $642 million, and operating cash flow was $1.3 billion, again, significantly above our expectations. We finished the first quarter with a load factor of over 102% at net yields that were up 5.8% for the quarter or 440 basis points higher than the midpoint of our guidance. Better-than-anticipated close-in demand for Caribbean sailings and improving pricing environment and continued strength in onboard revenue were the main drivers for these exceptional results. Higher load factors drove 2/3 of the yield outperformance and higher pricing drove the remainder. Net cruise costs, excluding fuel per APCD, increased 5.8% in constant currency, compared to the first quarter of 2019. Net cruise costs for the first quarter included $2.87 per APCD or 240 basis points impact of structural costs. Operating costs also benefited from approximately 160 basis points of favorable timing compared to guidance. First quarter results are a testament to the continued robust demand environment attractive, value proposition of our cruise vacations and strong commitment by our teams to deliver the best vacation experiences responsibly.

Turning to the booking environment. Bookings have consistently been higher than the same time in 2019, with the gap widening as Wave extended further into the year than ever before. The booking strength has been particularly evident on Caribbean sailings where our superior hardware and Perfect Day at CocoCay continue to be winning combination. More than half of our Caribbean sailings visit Perfect Day at CocoCay, which is Royal Caribbean International's highest-rated destination in the Caribbean. Since Perfect Day opened midway through the second quarter of 2019, these itineraries are driving outsized yield and pricing growth. While the Caribbean has seen booking strength, performance of our European itineraries is also aligned with our initial expectations. European itineraries account for 17% of full year capacity peaking at 35% in the third quarter. Bookings for our European sailings have been nicely outpacing 2019 levels with peak summer trending particularly well in recent weeks. Several of our newest ships, including Celebrity Beyond, Odyssey of the Seas and Silver Dawn, are sailing in Europe this summer and are attracting quality demand and rates. Now let me review our 2023 outlook. If you turn to slide eight, you will see our updated guidance for the full year 2023. We expect net yield growth of 6.75% to 7.75% for the full year. This represents an approximately 400 basis point increase from the midpoint of our prior guidance.

About 1/3 of the increase is due to strong Q1 results with the remainder due to better business outlook for the rest of the year. The underlying yield improvement is driven by the performance of new hardware, strong demand for our core products, particularly Caribbean itineraries and continued strong growth from onboard revenue areas. While yield growth is expected to ramp up for the rest of the year, there is some variability at the quarter level. Yield growth is likely to be the highest in Q2 where we lapped the opening of Perfect Day at CocoCay and benefit from our Caribbean deployment mix. As you can see from our guidance, yields for the back half of the full year are expected to be up by more than 6%. From a cost perspective, net cruise costs, excluding fuel, are expected to be up 5.5% to 6.5% for the full year as compared to 2019. Our cost outlook reflects our culture of continuous improvement and innovation. And we are benefiting from all the actions we have taken over the last several years to support enhanced margins. Net cruise costs also include 210 basis points of structural cost that we did not have in 2019. Those include, for example, costs related to the full year operations of Perfect Day at CocoCay and our new Galveston terminal. We continue to actively manage persistent inflation across categories, including food and beverage, airfare and shoreside human capital.

Our teams continue to find ways to manage through inflation while maintaining exceptional guest experience and increasing profitability. Fuel expense is expected to be approximately $1.1 billion for the year and we are 54% hedged for the remaining of the year. Looking ahead, fuel consumption is 25% hedged for 24% and 5% hedged for 2025. Based on the current business outlook, along with current fuel pricing, currency exchange rates and interest rates, we expect record adjusted EBITDA and adjusted earnings per share of $4.40 to $4.80. Now turning to slide nine. I'll provide some color on second quarter capacity and guidance. We plan to operate about 11.7 million APCDs during the second quarter. Net yields are expected to be up 10.1% to 10.6% compared to 2019. Exceptional strength in Caribbean itineraries combined with our amazing private island destination, Perfect Day at CocoCay is driving the increase in yields. Net cruise costs, excluding fuel, are expected to be up approximately 8.9% as we continue to focus on margin expansion while revenue accelerates. Second quarter operating costs carry approximately 430 basis points of incremental expenses to weigh on NCCx, when compared to 2019, of which half are structural and half are timing from the first quarter.

So in summary, based on current currency exchange rates, fuel rates and interest rates, we expect adjusted earnings per share of $1.50 to $1.60 for the second quarter. Turning to our balance sheet. We ended the quarter with $3.9 billion in liquidity. Our liquidity remains very strong, and we are focused on expanding our margins to further enhance EBITDA and free cash flow. During the first quarter, we repaid $286 million of debt maturities as well as $2.4 billion of revolver advances. In February, we issued $700 million of senior guaranteed notes at 7.25% coupon to refinance 2023 and 2024 debt maturities. Our access to capital remains strong, and our execution and performance resonate with our investors and financial partners. We will proactively and methodically continue to improve the balance sheet through debt pay downs and opportunistic refinancings. Our remaining scheduled maturities for 2023 are $1.8 billion, made up predominantly of ECA debt amortization, which we expect to pay down with cash on hand and operating cash flow. As the business continues to accelerate and generate strong and growing cash flows, we are committed to a disciplined capital allocation and to return to an investment-grade balance sheet profile in line with our Trifecta goals. In closing, our business continues to accelerate, and we expect to grow yields and margin, so we can achieve record adjusted EBITDA in 2023. We remain committed and focused on executing on our strategy and delivering on our mission while achieving Trifecta goals.

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

Questions and Answers

[Operator]

[Operator Instructions] We'll go first to Steven Wieczynski, Stifel.

[Steven Wieczynski, Analyst at Stifel Nicolaus]

Hi guys. Good morning. So first off, congratulations on a strong quarter. Jason, in the release, you mentioned that for 2023, you're expecting 2023 EBITDA to significantly exceed 2019 levels, which is a change in wording relative to where you were back in February. And look, I understand I'm probably knit taking here a little bit, but I just want to understand maybe how we should think about EBITDA trajectory now for the year and the progression you guys are on now to get north of $5 billion in EBITDA by 2025 according to your Trifecta program?

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Steve, it's Naftali. So as you can see, we are very pleased with the results. And as we think about EBITDA and how this translates to the progression throughout the year, you can see that we are increasing yields, and we expect the EBITDA growth to be higher than our yield growth. And that's because a lot of the revenue is dropping to the bottom line, because we are very much focused on costs and enhancing margins. So if we look at what we kind of look at the guidance that we provided, we're going to -- we expect to be an eyelash away from our previous EBITDA per APCD record in 2019. And a lot of the things that we're doing and a lot of the strategies that we're employing should benefit to us as we continue to execute towards our Trifecta goal.

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

And I mean, just to add on to it, Steve, as we think about it on the Trifecta side. Obviously, this year -- the performance of this year is better than we -- it's much better than we had expected. And I think the commentary we talked about Icon. Obviously, we have Nova coming online, which is a high-yielding ship. We have Ascent coming online, which is high-yielding. You have Hideaway coming online. And of course, the commentary that we've been talking about that we've seen acceleration in price in volumes is also what we're seeing for like-for-like for 2024, though it's early. And for us to get to the marks for Trifecta, we really just need moderate yield growth in good cost control, which you continue to show. And so that's kind of very much on our path. And as Naf mentioned, it's great to see that really almost every penny of the outperformance on revenue is dropping right down to the bottom line, which would be dropping right down to EBITDA.

[Steven Wieczynski, Analyst at Stifel Nicolaus]

That''s great color. And then second question, as we think about the back half of the year, obviously, we can back into your yield guidance. But if we kind of break down those yields a little bit, are you assuming your customer from an onboard, onboard has obviously been extremely, extremely healthy. And are you assuming that your customer kind of stays in the same ballpark that they are now? Do you have them slowing a little bit in terms of spend levels? And then second part of this question, which is a little bit different, but we get a lot of questions from investors about demand and demand into 2024. And can the demand levels that are there right now persist into next year? Or is '23 being -- is '23 benefiting from just still kind of reopening and COVID bookings and stuff like that? So hopefully, all that makes sense. Yes, sure. Well, I think, obviously, we don't have a crystal ball. What we know is what we see happening basically every minute of every day. We're taking tens and tens of thousands of bookings a day. We've got 160,000, 170,000 people spending on our ships. And so we have a very good idea of the customer in terms of what's happening today. We also obviously do a lot of surveying of our customers in terms of what they're looking to do in the future. And it's obviously clear to us that they are very focused on gathering experiences and creating memories with their friends and family. So the other point I'll just add is, and this is more on the pre-cruise side and what they're booking on the ship for the future. That number continues to rise, which also just shows their appetite to spend more and more on non-ticket related spend. So I think for us, when we think about the back half of this year, our expectation is that we're going to continue to see what we're seeing. However, the mix changes a little bit. Q3, we have a little bit more Europe. We have a little bit less Caribbean. And of course, you've heard our commentary on the Caribbean is exceptionally strong, which is really what's driving the overall outperformance. While Europe is now very much coming in as we expected for the year. So I think that probably talks a little bit about how we think about the back half of next year. Now again, going to demand level for 2024, what we have, again, is what we're seeing day in and day out. And at this point in the year, the customer now and of course, we began to position ourselves and orient ourselves to 2024 more and more. Certainly, the majority of the bookings we're now taking are focused on 2024. And we see very similar strength and acceleration from what we've been seeing close in as well as what we've been seeing for the bookings for 2023.

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

Steve, I just have to add one comment because it's -- I have to talk about Icon of Seas. I think -- if you think about '24 and the comments we made earlier about Icon. Icon is literally the best-performing new product launch we've ever had in the history of our business, and we're delighted with volume and rate, and that really is a full '24 product. So you can see if you wanted to use Icon as a proxy, I know it's a brand-new product, and it's stunning, but it's really driving a huge amount of demand and great rate.

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

That probably won't be the first time you hear about Icon from Michael -- just to...

[Steven Wieczynski, Analyst at Stifel Nicolaus]

Thanks guys.

[Operator]

Your next question comes from Brandt Montour, Barclays.

[Brandt Montour, Analyst at Barclays]

Hi. Good morning everybody. Obviously, an exceptional quarter, congratulations. A question about load factors. I know you guys are going to hit historical load here in the spring. But curious, looking past that, what the new normal for load looks like given maybe you have some regional mix shift, which could affect it, but more so, you have obviously a lot of new capacity that's different and has more onboard and more space. So any comments about what the new normal looks like for you guys for loads?

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

So on an expectation standpoint, I mean, just mathematically, our load factor -- our normalized load factor will begin to rise. And that's really leading with Icon coming on, which will have a higher load factor profile. Now we're also taking on Nova, which has a lower load factor than the Royal Caribbean brand and the Celebrity brand, and we're also taking on Ascent, which has lower load factors than Royal. But with Icon coming on next year, Utopia coming on next year, you would expect our load factors to be up one point or two when we look into 2024 and beyond.

[Brandt Montour, Analyst at Barclays]

That's super helpful. And then my second question is just on China. Back in 2019, if I recall, you guys had something like mid-single digits of your global demand coming from China traveling outside of China. And I know there's outbound international flight constraints limiting China outbound travel, but you're probably engaged with your database over there. I'm just curious what you're seeing from them now that they're starting to travel again? And if it's even showing up sort of on the radar in terms of what's booked for this -- for later this year?

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

Yes. It's Michael. Yes, outbound has always been a relatively small percentage of our China business. I think we're now more encouraged by all of the signals that we've had for our reopening in China in '24. And we still got some work to do, but we've now started to rebuild our sales organization in China, and we expect, hopefully, by late spring, early summer to be back operating out of China..

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

'24.

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

'24.

[Brandt Montour, Analyst at Barclays]

And then sorry, that's in terms of actual capacity in China? The question was more about China outbound to other areas.

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

Right. Yes, that's correct. That's in actual capacity operating out of China in '24. As it relates to outbound, outbound started to return, but it's obviously coming now from a smaller base.

[Brandt Montour, Analyst at Barclays]

Great. Thank you so much.

[Operator]

Next, we'll hear from Robin Farley, UBS.

[Robin Farley, Analyst at UBS Group]

Hi. Great. Thanks. With that yeild guidance increase, I don't even have a question on demand, because that was kind of a mic drop if that increased. I actually have a question kind of -- just looking at -- related to balance sheet issues, another cruise line has talked about getting ECA funding for a significant amount of money that's not related directly to a ship order, but that's for owners extras. And I'm just wondering, is there potentially opportunity, because obviously, those would be at sort of 1% and 2% interest rate. Is there opportunity for Royal? I know you guys aren't doing any big change orders that we know of at the moment, but is there an opportunity for you to get some ECA funding for things not directly related to a ship delivery?

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Yes. Robin, it's Naftali. The ECAs have been fantastic partners to us. We're obviously very committed to our new build program, and they provide us very attractive financing. There's always puts and takes, but we don't expect any material changes from our financing arrangements at this point.

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Yes. The only point I would just add, Robin, what you're describing is not a new concept. We've actually probably been doing that for about a decade. So if we have change orders or we have owners extras that the same concept of the 80-20, 20% down, 80% financed is how those ships have been financed, whether it is for the contract price or other elements that we're adding on to the ship.

[Robin Farley, Analyst at UBS Group]

I guess it was really more, I was thinking that it's the first time we've seen sort of like incremental ECA funding that wasn't tied to ships ordered before the pandemic, which -- and again, I know it's tied to a very big change order. So not your situation. And then just one other quick clarification on the expense side of things. When you look at your expenses for the full year, obviously, some of it you mentioned structural, because you have a full year of CocoCay and Galveston. But you said some of it's transitional. And I don't know if I heard you say, I'm just wondering what amount because, obviously, some of the structural that will be recurring next year. But some of the transition costs would, as they fall away, create an expense decline next year. So I just -- I don't know if you can quantify how many basis points of your full year increase is onetime?

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Yes. So it's predominantly structural. Some of the two examples that you mentioned are there. And obviously, there will be now in our base as we go forward. As we get to our full -- our historical load factors, those transitional costs are very minimal, and we are expecting them to go away. So it's predominantly the structural costs.

[Robin Farley, Analyst at UBS Group]

And I mean, for the transition costs, is there -- is it 100 basis points or 200 basis points of the full year expense this year that...

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

It's roughly -- it's even less than -- yes, it's even less than 100 basis points. And with some of the COVID protocols that we had a little bit in Q1 and some of our crew movements that we need to finish up, but that's generally the ballpark.

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Yes. And in reality on the cost side, if you take out the transition that Naf just talked about and you take out the structural, our costs for the year were basically up around 3%. So just to kind of give you the sense of the level of all the actions we took over through COVID to get our cost structure and operating model align has effectively absorbed a tremendous amount of inflation. So our costs in the assets are really just up 2% to 3%.

[Robin Farley, Analyst at UBS Group]

And would you say that inflation is sort of now moderating if we think about 2024, that like the rate of increase in 2024? Or is that 3% something that you would expect to recur?

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

No. I mean it's definitely moderating. I mean it's -- all -- but it's still a pain and it's still coming at you in different ways. But we have -- I mean, our teams are really exceptional and trying their very best to combat it and come up with great solutions. Sometimes it's around how do we get goods from point A to point B. And in some cases, how do we just leverage more of our buy across our brands, but it is painful.

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Yes. And the way -- the word I would say is just persistent right, which it's not unique to us. You see it everywhere. It's definitely moderating. I think the other thing just to point out that our focus is also what you saw in the first quarter, which is as our revenue accelerates, how do we keep the costs down and really try to get that revenue all the way to the bottom line.

[Robin Farley, Analyst at UBS Group]

Great. Rhank you very much. Thanks.

[Operator]

We'll go next to Vince Ciepiel, Cleveland Research Company.

[Vince Ciepiel, Analyst at Cleveland Research]

Great. Thanks. I wanted to dig a little bit more into pricing. Obviously, with the net yield guidance, it looks like net for DMs for this year, to be up high singles, maybe even approaching 10% versus '19? I'm curious kind of how you might break out or talk directionally about how much of that is like-for-like versus new hardware versus CocoCay lift? And then maybe just zeroing in on the like-for-like, your ability to continue to move that up in years ahead when you consider the value gap versus land?

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Yes. So first, you're right. If you kind of look at the pricing. It is an eyelash away from double digits. We do have some structural costs, especially on the back end of the year. We eliminated some of the lag -- reporting lag for Silversea. If you take that out, we are double digits. So we're very pleased with that. And it comes from different things. Yes, we have eight new ships that we did not have in 2019. That's a great yield driver and price driver. We have a lot of these ships going to CocoCay that continues to track yield premiums, we have the onboard strength that we are -- that we continue to execute on. So all of these are driving the pricing increase and the pricing strength. And we also see like-for-like pricing increase as well. So it's a demand environment. It's all these actions that we have taken that we think are going to continue to benefit us beyond 2023.

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Yes. I just want to add, what's also just very encouraging when you see -- which is effectively a double-digit price increase for us. That also does not include -- I mean -- or the negative side of this is we don't have China, obviously, here in 2023, which had a substantial APD differential to the average. We also sold Azamara, which was a higher-yielding versus the average. And so to be at a double-digit price increase and which has been accelerating, I think, really just shows the strength of leisure, the strength of cruise and the strength for our brands.

[Vince Ciepiel, Analyst at Cleveland Research]

Great. And then a little bit longer-term question. Your 1Q margin looks like it was basically back in line with pre-COVID levels if you ex out fuel and the guide suggest that, that builds further as you move through '23. So I think that's really reflective of gains in the core operations of the business. And in light of that, curious how you're feeling about the ROIC target long term? I think you said teens, which feels like a pretty broad range. But in light of the progress you're making in '23 on the margin front, just how you're feeling about longer-term ROIC?

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Yes. Well, I think first off, we are -- based off of this latest guide, we are now in double digits on an ROIC basis. And so our focus here is to have a business model that during good times and bad times stays within the teens on an ROIC basis. The focus on margin and also the capital discipline that you're seeing us employ each and every day, we think very much gets us there with moderate yield growth and good cost control.. So we feel very good about our Trifecta goals. We talked about that as that's really us just getting to base camp, which is your kind of pre-COVID levels scaled up for the additional capacity on our business. And really, if you just think about 2023 in itself, if it wasn't for the crisis actions we had to take, we will be well north of our 2019 earnings and well north of our '19 ROIC. So that's how I think we think about the business and the organic growth we have with the ships coming online and the activities we have on the destination side is really well positioning us.

[Vince Ciepiel, Analyst at Cleveland Research]

Great. Thanks.

[Operator]

Next, we'll go to Benjamin Chaiken, Credit Suisse.

[Benjamin Chaiken, Analyst at Credit Suisse Group]

Hi. Just one for me. On CocoCay, are you still seeing the same pricing premiums to those itineraries as you did to the rest of the portfolio as you did in '19? And I asked that in the context of there just being much more capacity at the island today than a few years ago. And then part 2, I think Hideaway Beach is a 4Q opening. Any color on demand or pricing there?

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

Benjamin, yes, I mean I think we're truly delighted with Perfect Day, and I think the comments earlier, we spoke about the volume that we're attracting to Perfect Day. This year, we'll take around 2.5 million of our guests to Perfect Day and the pricing premiums continue to be really robust, and the spend on the island continues to be really robust as well. So we've seen -- as we've increased the volume, we've seen no decline in the power of the pricing. And in fact, it continues to accelerate. With Hideaway Beach, that will accommodate approximately 2,500 more gas. So today, we're -- I think in March, we had close to 250,000 guests in Perfect Day. And on average now, we're having around 11,000 guests a day in CocoCay. With Hideaway, we can add another 2,000, 3,000 guests. And that's really for design to be open in time for Icon of Seas. And of course, Icon will visit at the end of January, and Icon will be going to Perfect Day every single week. We've also got Utopia coming online in June. We haven't announced the deployment, but Utopia will also be going to Perfect Day. And the demand is just very strong. I mean we've seen -- there's a lot of demand for that particular product in any of our ships that have Perfect Day on their itinerary demanded, and there's strong pricing premium that we see there.

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Ben, just one point on Hideaway for modeling purposes. Just keep in mind that it's coming online at the very end of this year. But its ramp-up of operations and so forth, as Michael said, is kind of in line when Icon comes online, which will be towards the end of January. So just as you're thinking about yielding costs, just keep that in mind.

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

Also, Benjamin, just to add a quick comment, not on Perfect Day, but we did receive the kind of the greenlight approval from the Bahamian government to proceed through the environmental and permitting and planning process now in the Bahamas. So our intention is to have the Royal Beach Club open in -- towards the end of the spring, summer of '25. And that new addition to the portfolio is also going to really produce an incredible experience for -- certainly for the short product and the short product is doing exceptionally well at the moment. We continue to increase our short product and put really great ships into that market. So the combination of Perfect Day on one day and the Beach Club on the second day really is a winning combination.

[Benjamin Chaiken, Analyst at Credit Suisse Group]

And forgive me, is the expectations around the Royal Beach Club, is that a similar size to Hideaway or large -- smaller or larger, just from a capacity standpoint?

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

Actually, from a capacity perspective, it's very similar to Hideaway. Remember, Hideaway is part of the Perfect Day experience. So the Perfect Day experience capacity will be around 13,000 a day. But the Beach Club's capacity will be around 2,500 to 2,750 a day.

[Benjamin Chaiken, Analyst at Credit Suisse Group]

Thanks.

[Operator]

Your next question comes from Conor Cunningham from Melius Research.

[Conor Cunningham, Analyst at Melius Research]

Everyone, thank you for the time. Just on the $5.3 billion in customer deposits that you have. I was curious if you could parse out what percentage of the bookings are people that are new to cruise versus historical levels? It just seems like that you're gaining a lot of momentum there. Just curious on where that sits?

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Yes. So as we -- I think Jason said this in his prepared remarks, this quarter, and it's been consistent in the last several quarters, the combination of new to our brands and new to our cruise significantly exceeded 2019 levels. So we're very pleased with seeing this quality demands and our brands attracting new people to our ecosystem. And at the same time, we also focused on making sure that they stay there, right, then increase repeat rates. This is all in line with our strategies. So some of the benefit you see in the first quarter in these customer deposits is just more people booking with us, new to our brands and new to cruise.

[Conor Cunningham, Analyst at Melius Research]

Okay. That's helpful. And then just I was hoping if you could unpack a little bit just on this close-in pricing momentum that you saw in the quarter. What did you assume originally? And then first, how it played out? And just how you're thinking about that trend through the remainder of the year? I realize load factors are stepping up. So there's probably less to fill. But just curious on how you're thinking about that going forward?

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Yes. Well, I think first, what I would say is it was a -- it was an incredible surprise at the differential between our Wave expectations close-in versus the realities of what occurred. There was a substantial difference versus '19 levels, which were already at a record high. And so we built another three or four load factor points. As you pointed out, Conor, we are -- our expectations for the balance of the year was to be at normal load factors. So those book positions were higher, so there is less inventory. But certainly, there is the opportunity. And of course, we've we recognize a lot of that opportunity in terms of the expectation that those volumes will continue and at higher rates. I think the thing that was of a great, I wouldn't say a surprise, but delight to us was while the volumes were building at those large volumes, we were also able to continue to raise pricing during that period of time, which is not always what you see as you -- times in which you're looking to fill certain volume gaps.

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Yes. And just as I think I said it in my prepared remarks, 2/3 of our yield outperformance in the quarter were just load factors. We built 200 basis points more, and the remaining was just higher pricing, both on ticket and exceptional strength on onboard revenue.

[Conor Cunningham, Analyst at Melius Research]

Okay. Appreciate the time. Thank you.

[Operator]

Matthew Boss from JPMorgan is up next.

[Matthew Boss, Analyst at JPMorgan Chase & Co.]

Great. Thanks. Congrats on a really nice print. Maybe to follow up on demand. As we think about the drivers and the magnitude of the top line upside relative to where we stood three months back, I guess maybe if you could help to maybe rank order the upside? And then could you elaborate on your most recent momentum that you cited in bookings that you've seen? And finally, maybe just relative to the Trifecta plan that you laid out in November '22, what's your confidence today? Or just help us to think about puts and takes to consider relative to when you initially laid this out?

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Okay. Well, I'll take a stab at it and for my teammates here to add in. I think, first, just starting off on Trifecta. We feel very good about our Trifecta program. Obviously, the results of what we're talking about today in terms of the acceleration, the higher pricing, our continued ability to manage our costs, is all very encouraging as we kind of think through what 2025 is going to look at or look like. There's always headwinds that you're dealing with. But we do really believe that by just continuing to moderately grow our yields and managing our costs and managing our capital allocation, we see kind of clear skies towards those goals. There's obviously things in which when we think about negative carry, we think about and how to manage that and get that down to the levels to get our earnings power back from there, that's also kind of top of mind for us. As it relates to on the demand side, just to be -- I think, which we kind of laid out in our remarks, there are several things.

First is the Caribbean has been exceptionally strong, especially ships that are touching a Perfect Day we saw a huge strength from. Onboard spend has been very, very strong. It's not one area of onboard. It's really across the board. So that's really -- that's been very encouraging. Our North American products have all been booking well, Alaska, Northeast and so forth. And for Europe, I think we were a little bit concerned going into the year. But because of our global and nimble sourcing model, we really have seen a surge in European bookings, and we feel very good on how Europe is going to play out this year, but not to the level that we saw in the Caribbean. And so that just broader combination is what's driving acceleration and demand acceleration and pricing, and while we doubled our yield and increased our earnings by 40%.

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Yes. Just to add, it's Naftali, I think first on the latest points around the demand, I think if you kind of zoom out a little bit, we did talk about and we've been talking about the value proposition of cruise being very attractive, and you see that played out. So our goal is to close the gap and we do that with the ships that we have, the experiences we deliver, Perfect Day at CocoCay, some of the itineraries we designed. But those are things that if you the consumer are, obviously, it's very attractive. On the Trifecta, I just want to make one comment, which is, as we were designing it, we weren't designing it for a perfect environment, right? So as Jason said, there's puts and takes, there's headwinds, tailwinds. And as we were designing those coordinates, we're confident we can get there.

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

And Matthew, you just to add, when just using the Royal Caribbean International as a proxy for the company. When I think about 2024 and 2025, we've got Icon of the Seas coming online. We've got Utopia of Seas. We've got Hideaway Beach and Perfect Day coming online in late this year. We've got expectations that China will be up and operating in '24, and we've got the Beach Club coming online in '25. So just from the Royal brands perspective, we've got an incredible lineup of really new and exciting products. And we've seen that these products really to ignite the market and generate significant demand. So we feel pretty optimistic about the future.

[Matthew Boss, Analyst at JPMorgan Chase & Co.]

Great color. Congrats again. And good luck.

[Operator]

Next up, we'll hear from Daniel Politzer, Wells Fargo.

[Daniel Politzer, Analyst at Wells Fargo & Company]

Hi. Good morning everyone. Congrats on the quarter. Just a quick one for me. The Caribbean itineraries, I mean it sounds like pricing is tracking -- pricing and demand is tracking well above your expectations. And you've talked about this shift to short-term product. Could you see a prolonged shift there? And how do you think about your capacity allocation over the next kind of year or two as it relates to Europe and some of the more premium itineraries relative to kind of the lift you're probably getting now from CocoCay?

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

I think we feel pretty good about the balance of our deployment. We have been -- I think we have shown that having great assets like Perfect Day, putting great assets in the short product, which connects very well to millennials and Gen X and so forth that are looking for more volume vacation experiences and they do that over shorter periods of time. And so that really kind of zones in to that clientele. But I think when we look -- and of course, our deployment will shift a little bit in our expectations as we look forward as we expect China to come online and Asia Pac to kind of light back up here in '24 and 2025. But Caribbean is going to continue to be where the majority of our capacity is. And I think our broader portfolio of deployment will more or less look like it does this year with a little bit more indexing into short and play a little bit more indexing into China.

[Daniel Politzer, Analyst at Wells Fargo & Company]

Got it. And just for my follow-up, I wanted a little bit more color on China and maybe that cruise customer, if you can maybe put a little bit more color around what looked like historically in terms of mix of pre-board spend versus onboard, the EBITDA relative to the rest of your portfolio per APCD yields, kind of any additional color as we think about the reopening and take that into account given the strong and robust demand from the travel and leisure customer there?

[Michael Bayley, President and Chief Executive Officer at Royal Caribbean Cruises]

So then, pre-pandemic, we built a significant business for cruise in the China market. I think Royal was the number one cruise brand in China by volume, and we had a few of our ships that were operating there. And in fact, before the pandemic, we had Wonder of the Seas originally planned to deploy into the China market, which, of course, subsequently changed. Our expectation is that this market will return to how it was pre-pandemic. The value of a Chinese customer is very high. When you look at the net revenue from a Chinese consumer, it's typically around the same level as an American and slightly higher. So we see that returning. The spend changes somewhat in terms of onboard spend. They skew differently in different areas. But overall, the aggregate of their spend is very high. So we believe that, that market will return, and we're hoping in '24, we'll see that.

[Daniel Politzer, Analyst at Wells Fargo & Company]

Got it. Thank you so much.

[Operator]

Your next question comes from Fred Wightman, Wolfe Research.

[Fred Wightman, Analyst at Wolfe Research]

Hi guys. Good morning. I was hoping you could just talk a bit more about -- if you think about the really strong demand you're seeing for the Caribbean and sort of in-line European demand, what is driving sort of that divergence? Is it just that CocoCay is that attractive? Are you hearing pushback on European airfare? Like where is the biggest difference?

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Well, I think in the earlier part of the year, we were a little bit concerned about the airlift for Europe, but that has kind of normalized, at least for our guests. And also don't forget, we source as well in Europe for our European product. And that just goes back to our business model of having this kind of global nimble sourcing model. So I think that's how we kind of think about that. As it relates to the Caribbean, I think it's a combination of things. And as Naf pointed out, there's still a significant value gap between land-based vacation and cruise. I think we've closed some of that gap this year, which is encouraging. And we saw pre-pandemic that ships that touched Perfect Day, as an example, had really kind of closed the gap to land based, especially Orlando and Vegas. And what we're doing is -- what we're seeing is that is starting to kind of get back to '19 levels. So the gap still exists as that -- as those businesses got stronger during the period. And so I don't think it's one thing, but I think the value gap, I think that the demand to spend time with people's friends and family and gather experiences and buy less stuff, all these secular and demographic trends are just huge tailwinds for the demand environment.

[Fred Wightman, Analyst at Wolfe Research]

Makes sense. And then on the expense side, you guys called out some benefits from expense timing in the quarter. I think that was sized at 180 basis points. Is that all showing up in the 2Q guide? Does some of that get punted into 3Q and 4Q. How should we think about that?

[Naftali Holtz, Chief Financial Officer at Royal Caribbean Cruises]

Yes. It's -- I mean, majority of it, almost all of it is in -- should be expected in Q2.

[Fred Wightman, Analyst at Wolfe Research]

Perfect. Thank you.

[Operator]

And we'll go to Paul Golding, Macquarie Capital.

[Paul Golding, Analyst at Macquarie Capital]

Just one for me, a longer-term question here. I know you're still building load factor. But as you think about Q1 and the strength in close-in bookings, does this change the way you think about Wave and how you manage the booking curve and inventory as you go into the next wave cycle, the next booking cycle and just in the context of what we had through the pandemic, which was a bit protracted booking curve?

[Jason Liberty, Chief Executive Officer at Royal Caribbean Cruises]

Yes. Well, we actually -- through the COVID period had kind of shifted how we go to market with our inventory. We used to kind of put everything out there and all the suites would be sold basically right off the bat, and then you would kind of work your way down to the inside cabins. While now we hold back inventory, and we release it based off of our much more sophisticated revenue management models that we have today. And so all of that takes into account the demand environment we're seeing. And that's why I think sometimes when we get into conversations around what percent booked are you, how does it relate to this period versus that period. What we're really focused on is optimizing yield. And so there might be periods where quarter-over-quarter or year-over-year, we want to be in a stronger book position or less than what we were booked in a previous period, because what we're focused on is maximizing yield, which sometimes you come with us having more inventory to sell. Thank you. We thank everyone for their participation and interest in the company. Michael McCarthy will be available for any follow-up. So we wish you all a great day. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Michael McCarthy, Vice President, Investor Relations
• Jason Liberty, Chief Executive Officer
• Naftali Holtz, Chief Financial Officer
• Michael Bayley, President and Chief Executive Officer

Analysts

• Steven Wieczynski, Stifel Nicolaus
• Brandt Montour, Barclays PLC
• Robin Farley, UBS Group AG
• Vince Ciepiel, Cleveland Research
• Benjamin Chaiken, Credit Suisse Group AG
• Conor Cunningham, Melius Research
• Matthew Boss, JPMorgan Chase & Co.
• Daniel Politzer, Wells Fargo & Company
• Fred Wightman, Wolfe Research
• Paul Golding, Macquarie Capital