Ann Berry (00:00):
The cruise industry. If one sector has been boyed by post covid revenge travel, it's this one. The number of global cruise passengers is expected by trade association CLIA to reach 37 million this year. That's 25% more than in 2019 after hitting a low of 4.8 million in 2021. A slew of luxury hotel brands like Ritz Carlton and Four Seasons are launching their own yachts. But it's not all been plain sailing cruisers have been criticized for creating up to 25% of ocean waste. There are concerns about both labor and passenger safety and while all inclusive meal plans and opulent buffet phase attract some travelers, others are deterred from cruisers by the perception of increased risk of contracting norovirus. Although the industry has tried to debunk this. To break this all down, we spoke to Naftali Holt, CFO of Royal Caribbean Group, one of the world's largest cruise operators with a fleet of 66 ships traveling to nearly a thousand destinations.
(00:50)
It owns brands, Royal Caribbean International Celebrity Cruises and Silvery Cruises, and also a 50% owner of a joint venture that operates two e cruises and Haag Lloyd Cruises. A share price jumped over 12% on the day of its recent 2024 earnings release building on its 94% stock price rise last year to hit a 71 billion market cap as investors rewarded almost 19% revenue growth and more than 70% beat in earnings per share record bookings driving stronger 2025 guidance and the launch of a new River cruises business line. There's a lot to unpack, so let's get right to it. Let's talk about the broadening appeal of cruises. Na Ali millennials is one of the fastest growing group of cruises, really interesting numbers out from the CLIA. 36% of cruisers now under the age of 40 and one of the most enthusiastic groups about planning a cruise vacation. That hasn't always been the case. Tell us what Royal Caribbean is doing to adapt to the change in the typical cruiser demographic.
Naftali Holtz (01:49):
Yeah, so we're doing a lot for us, it's actually, the stat is actually even better. It's one of every two guests on our brands is actually a millennial or younger. And so we've done, and our teams have done an exceptional job over the last several years to make sure that we're building what guests, families, young generation, what their vacation looks like, what do they want to have, and it starts from all the way from effortless vacation and to making sure that they have the right frictionless experience, more variety, more diversity, more and more and more is a big theme. And so we've done a lot to make sure that our experiences match what they want. And so as an example, we just took a brand new ship, utopia of the Seas and it went into Port Canaveral on a weekend because we found that the younger generation actually wants to take shorter vacations but more frequent. And so that was a great product with an amazing ship and it's just an epic weekend and we've had great success with the younger generation around something like that. So just making sure that we get the right experiences, the right vacations, the right destinations. That's really what we obsess about here at the Royal Caribbean Group and making sure that we provide that and then making sure that they come back again and again,
Ann Berry (03:16):
I do want to just touch on the preferences of these younger generations. Naftali, millennials and younger are also called often conscious consumers. As a generation there seemed to be much more concerned about the environment, much more concerned about labor conditions. Historically, the cruise industry has had a bit of a tough wrap accused of contributing 25% of ocean waste accusing of being a contributor to greenhouse gases. How has that changed in your time at Royal Caribbean? What is your company doing to address some of those ESG concerns?
Naftali Holtz (03:51):
Yeah, so the most important thing is innovation. And so this company is all about innovation and it starts with the experiences on the ships and making sure that we design things that are right for them and also around sustainability. And if you kind of think about the way we talk about sustainability for the company, we have a very important program here, see the future where we talk about how can we continue to innovate and reduce emissions. It's a big part of what we do and a part of the innovation we have. And so we have our goals around that and we made significant progress around that, just experiences on the ships. I think you talked about food. We have a very robust food waste elimination program, recycling, things like that. And our mission at the end of the day after when you take that all is to basically deliver the best vacation experiences responsibly. And so we do that across the board on the ships, we partner with our destinations, with the communities we serve and we visit to make sure that we do it the right way.
Ann Berry (05:04):
So when you think about the amount of CapEx that you're spending in a typical year in Natali, roughly what proportion of that will go towards environmental sustainability?
Naftali Holtz (05:12):
So we invest substantial in dollars across multiple areas, first and foremost on the ships. So even if we develop, develop a class of ships, there are several ships in that class and we develop them one by one. So even when we invest in the next ship in the class, we make investments in sustainability, fuel efficiency, all those things to make sure that we make that progress even ship by ship. In addition, we have multiple programs around our existing fleet when we invest in energy efficiency, as I said, other programs like food Waste management and other things. So we continue, that's part of our investment portfolio and we view that as a good investment in our experiences as well as financially.
Ann Berry (06:02):
Royal Caribbean has been launching bigger ships, Naftali, and there's been a lot of coverage on how those ships have been able to command a premium and pricing. Talk to us about what your pricing trend has been and how you've been able to use more square footage available on these ships to generate higher yield.
Naftali Holtz (06:18):
So it's interesting because if you kind of look at the results that we have posted last year as well as kind of our outlook, really, we focused on that pricing across the existing and the new ships. And so we see both new hardware premiums as you mentioned, as well as for, and it really comes to the destinations we visit and the experiences we design on those ships. And so of course with every new ship we try to elevate and take it to the next level. And we've had tremendous success with those, but it's really across the board and it's really the variety of the experiences we can put on the ship, on the ship, some of the ability to increase our occupancy to make sure that we accommodating families. So our new hardware we set out in the past is typically 20% better revenue and two times our ebitda. And so as we continue to invest in those ships and bring more ships, we make sure that the experiences, the relevant ones, and of course the profitability increases, which obviously helps the overall margin for the business.
Ann Berry (07:31):
There was some exciting news in your recent earnings release Natali, that celebrity, one of your brands is moving into River Cruisers. I think it's 10 riverboats that are coming online that's sort of the opposite direction of bigger ocean going ships. Talk to us about why River Cruisers and why now
Naftali Holtz (07:47):
And what we are focused on in making sure that we are creating an ecosystem on vacation of vacations and that ecosystem of vacations is we want the customers and the guests to stay with us. And so River Cruising is a great example. When we actually asked our customers, we found out that half of them have either done a river cruise or actually intend to do that.
Ann Berry (08:10):
And is that the same millennial group Naftali wanting to do river cruises
Naftali Holtz (08:14):
Or is that a different group? Yes, it tends to be a little bit skews a little bit old, but not necessarily. And so because of that we kind of say, okay, they're doing that. They're doing it outside of our vacation system, not with us why we want to keep them with us. And also what we found that half of them are actually taking that as an incremental vacation, not cannibalizing or taking it instead of an ocean cruise. So for us it's really about that ecosystem play and leveraging celebrity cruises, which is the leader in that space and it's an attractive market. It's growing, it's large, but it's also very fragmented. So we think that we have a great opportunity to win share. And if you kind of think about what celebrity has done with this Edge class series, by the way, one of my absolute favorites.
(09:06)
So we go on it all the time, have really elevated that experience and we think we can do that in River as well. So we're very excited about that. We'll start taking deposit later deposits later this year, so you welcome to book one as well. And we'll start sailing in 2027 and as you said, we have an initial order of 10 chips, but our ambitions of course go way way beyond that. So we'll share more information with everybody as things and designs formalize. And I'm very excited about that. Actually, my wife told me last night that we need to get on it, so I need to start planning for that as well.
Ann Berry (09:46):
I'm really interested by this idea in Naali that Royal Caribbean made a decision to go into a new business line based on pretty specific feedback from your user base that you are listening to your customers and a lot of consumer facing brands are able to do that using loyalty programs. I'm fascinated to know more about the Royal Caribbean Group's loyalty program. Tell us how many members you have and how long it's been around.
Naftali Holtz (10:10):
Yeah, it's actually a great an ad because we also feel that if you think about loyalty, we have the loyalty with each brand and it's growing and as a company's obviously awareness and just scale grows. We see more and more new customers coming in and then also coming back and people really want to get recognized. So that's a great way to recognize our customers. Last year what we've done is we moved another step and make sure that regardless of the brand you go, we will have reciprocity. So while each brand will keep its loyalty identity, you will have reciprocity. So if you're a guest of Royal Caribbean International because you went with your family on it and your certain status and you're getting recognized when you get on another occasional celebrity maybe without just with your significant other or for equation, we want you to be recognized for what that is. And so that is really the idea. And so we think that going into River Cruises as well, it will allow us to have the customer stay with our ecosystem and within our loyalty and promote that. So we are excited about that. That's really, as I said, the mission is to deliver a lifetime of vacations and move away from what we've done very, very well, which is a vacation of a lifetime.
Ann Berry (11:34):
How many members do you have in your loyalty program right now?
Naftali Holtz (11:36):
Yeah, we have a lot on millions, tens of millions of members and we continue to grow. We have ambitions to grow it much beyond that.
Ann Berry (11:47):
Talk to us too about digital booking and some of the digital capabilities you've been developing and how do those tie into any of your loyalty program initiatives?
Naftali Holtz (11:56):
Yeah, so we believe that we need to create, we've been on a journey to create our ecosystem and also deepen the relationship with the customers. One of the things that we've learned from our customers is that effortless vacations are really important to them and so they pretend to stay loyal for those brands that allow them to have those effortless vacation. So we made a lot of innovation and the innovation I was talking before around the product, also around digital capabilities and making sure that we have a frictionless, a great personalized experience that our guests can do throughout their journey. And the journey starts really when you're dreaming and you're thinking about going somewhere and you just go on our website and type a destination and we need to kind of make sure that we are tailoring the vacation that you're looking for. And then once you booked, of course there's a period of time between then and until you actually cruise, when you can purchase more onboard experiences and depending on the occasions, those can be different when you get into the ship.
(13:04)
We've invested in multiple features on our app and making sure that you have a seamless, the embarkation is seamless, and also the ability to interact with the crew and others on the ship while you're there is seamless as well. And then when you get off the ship, we want you to come back because we want you to dream about the next vacation. So across that journey, we've invested a lot. We've had, as I said, 300 features in the last year added to the app. We invested in e-commerce, we're building a new reservation system that's focused on the vacation. And so there's a lot of excitement and effort going into that in the next couple of years.
Ann Berry (13:48):
How much are you using technology within the ships themselves? So if I think about some Asian cruise companies for example, have talked about using motion detectors or being able in some cases to use facial recognition to try and make sure that if they see certain parts of the shipper overcrowded, they can ping people on their cell phones to try and encourage them through promotional activity, through announcements to go somewhere else on the ship and clog some of that crowding. Is that the kind of thing that you are able to do at Royal Caribbean or the privacy rules a limitation to doing that, but talk to us about technology and how tech is being used to enhance the actual on ship experience.
Naftali Holtz (14:26):
So tech is actually infused throughout organization and not just technology but also ai. And we do that to make sure that we are enhancing the guest experience and we do it obviously in a respectful and obviously compliant but also respectful way. And so we use that on multiple things around the ship itself, like you said in safety and also making sure that we understand where things are going so it's easier for you on the ship to get the best experience possible.
Ann Berry (15:04):
You're moving into the non cruise part of the vacation market with some aggression I think though Naftali, talk to us about your private destinations business and some of your hotel brands. I think that listeners perhaps aren't as familiar with the fact that you're doing as land-based vacations as well.
Naftali Holtz (15:20):
Yeah. Yes. The first destination was developed several years ago and the genesis of that really was when we thought about our competition and where we want to take share. If you think about it, you have a $2 trillion vacation market and cruise is a 65 billion category that's really exciting for us to continue to win share from the global vacation market. And so as we were thinking about what are those experiences and almost talking about the innovation is really about what others are doing and what does the customers want to do that will allow us to win that share from them. And so we really trying to understand what are the Orlando and Las Vegas and other land-based vacations are doing and how can be relevant. And that is a very clear message from the consumers was several years ago that they're looking for those type of thrill and chill days, extension of the experience from the ship.
(16:21)
How was Coco K? Perfect that Coco K was born and it was a huge success and so we're replicating on that success and we believe we can have a portfolio of private destinations. We've expanded Coco K, it's going to take 13 and a half thousand people a day, so that's exciting. And then we were adding another perfect day in Mexico which will open up the western Caribbean market as well as the Texas area. And we are adding also beach clubs. And so if you kind of look at a lineup, we have perfect day at Coquet ready open this year. We're going to open the beach flop in Paradise Island in Ossa. Next year we're going to open a beach club in Cozumel and in 2027 we will have the perfect day in Mexico open up. And so we have a great lineup of new ships, big lineup of new destinations, and that's obviously very exciting as we continue to win share from that huge market.
Ann Berry (17:19):
And when you look ahead enough, Dali, five years from now, what percent of your revenue would you expect to come from land-based or non cruise business lines?
Naftali Holtz (17:29):
Yeah, it's hard to know, but it's probably going to be a significant, but you never know. We are very much focused on continuing to win share and so our strategy is to continue to build those ships. So moderate capacity growth, we're going to add those portfolio of destinations. We're going to continue to grow yields, manage costs, and that will be a great success for the company because it enhances margin and generates a lot of cashflow. And so the journey ahead is pretty exciting.
Ann Berry (17:59):
Let's talk about your margins and cashflow in Ali. There's been an amazing share price performance to your latest results north of a $20 pop in share price. And a lot of the street reaction was very positive. There were some though I've got in front of me Morgan Stanley's report saying Q4 beat. This is the headline solid demand commentary in line 2025 guidance. But is it enough? Is the question that this Morgan Stanley report asks and where a lot of the focus is on is around Royal Caribbean's capital structure, leverage level Norfolk three times. Talk to us about your debt burden and talk to us what it means for you as CFO as you think about buybacks share buybacks versus dividends, your ability to do m and a and what you're really going to use your cash for.
Naftali Holtz (18:45):
Yeah, okay. Well, I guess by the way, we always strive for more and so we're never satisfied and we'll continue to grow the business. I think what's great about this business is I talked about the opportunity and so you have the $2 trillion market, 65 billion category. If you kind of look at where we are in 24 versus 19, we have one share. So that's great. And as we look forward, we believe we can win share. So our formula is actually pretty simple and we've been talking about it for quite some time. Matter league grow your fleet, and we have a great lineup of new ships icons. We have Oasis seven, we have an Edge class, two edge classes for celebrity and we'll continue to grow the fleet moderately. Then we have moderate deal growth and that's where we're this year guiding and that's moderate and that's to us is kind of where moderate is.
(19:44)
And then you have strong cost control, so grow your yield faster than your costs and that translates to higher margin and higher cashflow. And so our EBITDA this year on that formula will grow 13%. Our margin is expected to increase by 150 basis points, and as you can see, the acceleration of the cashflow will just come. And so we've generated 5.2 billion of operating cashflow last year and obviously with the new performance we expect that to grow as well. Over the last couple of years we have made a tremendous effort obviously post the pandemic to make sure that we are getting back to our investment grade balance sheet metrics and a very significant portion of what we've done and the trifecta program we just completed last year was to get back to that investment grade balance sheet metric. And so we've used a lot of cash.
(20:38)
We grew with the business to make sure that we are getting to the low three times leverage, and that is investment grade balance sheet metrics. It was before the pandemic. We expect that to be as well. And so with that very strong balance sheet, completely unsecured, very, very strong liquidity. We believe that we have the balance sheet that really allows us to deliver on our ambition and so we'll continue to have an investment program as I talked about all the destinations, the ships, others around technology, very focused, higher creative investments that are very important to our future and we are very excited about it. We will maintain the balance sheet, we reinstated the dividend and we will talk more about our other capital allocation opportunities. Before the pandemic, we had a very balanced one, which included both share buybacks and dividends. And so we're excited about the cashflow generation and how the margin profile and the performances this year
Ann Berry (21:43):
Will we see you as a buyer nali when it comes to m and a possibly and land-based vacations, as you look at growing share,
Naftali Holtz (21:50):
We will see, right? I mean we're always evaluating opportunity and we'll see kind of how this plays out.
Ann Berry (21:56):
That wasn't a no take note, that wasn't a no. One of the biggest cost items for Royal Caribbean is oil prices. When you think about planning out for the next year or so, there has been a change in administration with a very different policy now on supporting President Trump has said he wants the US to drill baby drill. When you put out your projections for this year, how much uplift are you seeing from a potential decline in oil prices?
Naftali Holtz (22:22):
Yeah, so you're right and oil is a significant expense and we manage it very, very closely as you can imagine. And so I'll start actually with consumption and the way you can manage the cost possible on rate and consumption. So first on the consumption, as I talked about before, through the innovation and on sustainability and making the ships more efficient, it's actually good for the bottom line as well. And we see progress year over year around not only reduction in emissions but also reduction in consumption of per unit. Economics and the dealership in particular are very efficient and we make them really efficient as we kind of progress. In addition, we have a very robust program that invests in energy efficiency projects. Again, it's good for the environment, it's also good for consumption and for the bottom line. And so we continue to find ways how to lower the consumption and be more efficient.
(23:25)
So that's that. On the price side, we don't speculate on oil prices, so what we give as guidance to the street is what the current prices are. We do however, hedge and so we are coming in into the year 60% hedge and we hedge a couple years ahead making sure that we reduce that volatility and we do it in a way that reduces volatility. Sometimes there's opportunities to hedge because the prices are low and we take advantage of it and that's really how we use it. But as we go into the year, we feel very comfortable where we are on the hedging position such that we can manage the volatility, whatever that is.
Ann Berry (24:06):
Natal Holtz, thank you so much for joining. Really exciting time for Royal Caribbean. Great set of results for having me come back. I'm Anne Barry and thank you for tuning into After earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learn something today, don't forget to like, subscribe, and share with your friends. Upcoming episodes will feature CEOs and CFOs from Chipotle, DraftKings, and Udemy. See you next time.
