Carnival Corporation Ltd. Common Shares

Good morning, everyone, and welcome to our Business Update conference call. I'm Arnold Donald, President and CEO of Carnival Corporation and PLC. Today, I'm joined telephonically by our Chairman, Mickey Arison, as well as David Bernstein, our Chief Financial Officer, and Beth Roberts, Senior Vice President, Investor Relations. Thank you all for joining us this morning. Now, before I begin, please note that some of our remarks on this call will be forward-looking. Therefore, I must refer you to the cautionary statement in today's press release. It is hard to believe that it's been just 120 days since we voluntarily paused operations across our global fleet. In that relatively short time, we returned over 260,000 guest homes. We've already repatriated 77,000 crew members. and we'll repatriate over 80,000 in total, hopefully before the month is over. We've processed billions of dollars, euros, and sterling of guest refunds, and billions of future cruise credits in those currencies as well. We've moved 53 ships into full pause status, and with the remainder expected to be in a similar position within the next month. We've reached agreements for the disposition of nine vessels, while negotiating the delay in delivery of 16 ships on order. We've secured over $10 billion in new capital while working to extend debt maturity and secure covenant waivers with over 20 lenders and over 40 different agreements. We've engaged with medical experts and scientists around the world to inform our development of return to cruise protocols. And we are now preparing for the imminent return to cruising in Germany. So we've come full circle from entering a voluntary pause to planning a staggered resumption. Now I couldn't be more proud of how collectively our team has handled this. We looked after our guests, we looked after each other, and the more than 700 places we go each year. We've honored what we stand for as a company, and we are well positioned for our existing shareholders to still experience attractive returns over time. We will emerge a leaner, more efficient company. So thanks. Thanks to our crew for continuing to exceed guest expectations through challenging circumstances while taking care of each other, taking care of our ships, and protecting the environment. Thanks to our ShoreSide team members for working 24-7 to repatriate first our guests, then our crew, all while handling incredible, unprecedented, huge volumes of calls and inquiries from guests, ports, vendors, travel professionals, and other partners, and while coordinating with the myriad of government authorities and agencies globally, all in the context of a constantly changing and evolving situation. Thanks to our travel partners for their support, and thanks to our guests, with a countless number of heartfelt outreaches expressing support and concern for our crew, our shoreside personnel, and the brands they love. Thanks to those investors who have expressed their confidence by staying with us, and thanks to those who have expressed their confidence by becoming new investors. Look, these are truly unprecedented times for our industries. They are clearly trying times for all of travel and tourism, and they are extremely challenging times for the world at large. I extend my personal deepest sympathy to those around the globe who have suffered directly themselves individually or whose loved ones have suffered with the virus. For our company, it has been not only challenging, but frankly, at times it has been painful. We are aware that so many people depend on us for their livelihood and well-being, not only our own employees, but those in many other businesses around the world, both small and large. And we've been on a journey since COVID began to manifest, a journey we've aggressively managed throughout. Our highest responsibility, our highest responsibility, and therefore our top priorities, are always compliance, environmental protection, and the health, safety, and well-being of our guests, the communities we touch, and our Carnival family, our team members' shipboard and shoreside. We initiated a voluntary pause in operations in the early days of this global pandemic, including being the first to halt sailings here in the U.S., an action that was taken before shelter-in-place was implemented in the U.S. and before the CDC no-sail order was issued. We recently extended our pause in the U.S., through late September, which of course is well beyond the timeframe of the current CDC no-sale order expiring July 24th. Again, our teams worked tirelessly to return over 260,000 guests safely home. And then they focused on repatriating our more than 80,000 shipboard team members to their homes in over 130 different countries. This was a daunting task, given the limited availability of air, the real barrier of closed borders, and a fluid, constantly changing context that made planning and even execution extremely challenging. In the end, we got the job done through chartering planes and, in many cases, using our own vessels to transport our teams safely home. So far, we've sailed 50 ships, that's nearly half our fleet, and over 400,000 nautical miles in this repatriation process. We also quickly focused on securing sufficient capital to provide a financial runway to withstand an extended pause. That effort included cash preservation, motivating our guests around deposit retention, and the wind down of our fleet. Now David and our finance team, with support from our legal team, worked nonstop to secure funding to sustain our path forward in a prolonged cost. We were able to access the capital markets in the early days and in a meaningful way, initially raising $6.6 billion of capital and doing so at a time when the capital markets were still closed to many. And while it was certainly financially painful for a company that had always managed to an investment-grade credit rating, Bearing the cost of the initial raise was prudent to ensure our long-term viability. Now, because of our strong balance sheet, we were able to raise the majority of that $6.6 billion of capital, along with an additional $2.8 billion on a secured basis, minimizing dilution. Historically, as you know, we've managed a strong balance sheet and an investment-grade credit rating. In the current environment, our national brands have been an additional advantage, supplementing our access to liquidity across a number of countries at attractive rates. Our success in maintaining a strong balance sheet and the strength of the national brands has been a differentiator, providing a softer landing for our company and our shareholders. In fact, our overall blended interest rate is just 5%. despite the recent expansion of debt, and we still retain meaningful flexibility going forward to manage further uncertainty. Importantly, we have capacity to issue additional debt. Beyond that, we are also evaluating the potential to monetize non-core assets to provide additional liquidity or potentially reduce our debt burden over time. we are confident that we are prepared for a wide range of scenarios for the next 12 months. Additional cash conservation efforts combined with future liquidity measures will enable us to sustain ourselves beyond 12 months into late next year, even in a zero-revenue scenario. Concerning cash conservation, our workforce reductions, while painful, were necessary to make it through to the other side of the impact of this global pandemic. In the face of no meaningful revenue, we were able to forestall the financial impact on our employees, deferring employee actions beyond the timeframe of many others during that period, without compromising the interests of our shareholders, honoring our fiscal responsibilities. We also, of course, significantly reduced non-essential capital expenditures in excess of $2 billion and significantly reduced marketing costs as well. And while we continue to expect new shifts to provide greater cash generation and higher returns over time once we return to sailing, we have also worked to defer new bill CapEx given the near-term environment. In fact, we expect to reduce ship deliveries through the end of fiscal 2021 from nine as originally planned down to five, two this fiscal year and three next, deferring over $3 billion of capital expenditures into fiscal 2022 and beyond. To reduce our cash burn and to have a more efficient fleet once we do resume cruising, we have aggressively shed less efficient ships. A total of 13 ships are expected to leave the fleet, representing a nearly 9% reduction in our current capacity. We are also reorganizing the company to emerge stronger, leaner, and more efficient. Even when we return to full-scale operations, we don't expect to return to the same staffing requirements as we are addressing our workstreams to work in a more efficient manner. At the same time, we are focused on developing new and enhanced protocols. Now, we've dealt with many types of viruses in the past. Historically, we've had effective protocols in place onboard our ships, including screening measures, medical centers, and sanitation procedures, which prevent and reduce the spread once brought onboard from land. Now, during this pandemic, we had less than our market share of incidents. Again, we had less than our market share of incidents. However, as is often the case, being the largest in the industry, we had a disproportionate amount of media attention. Now, having said that, as evidenced by the global shutdown, this virus is unique, and the world is discovering together how to most effectively address it. we're working diligently to determine what enhancements to our existing protocols will best serve the interests of public health. Now, our protocols are being informed by global learnings, and to that end, we are engaged with external advisors, which include world-renowned epidemiologists and other medical experts and scientists, utilizing their collective inputs. Once people are gathering again, which is clearly happening on a country-by-country basis, society will determine the risk it is willing to accept going forward. And we're working so that our guests will not incur any greater risk versus engaging in similar experiences on land. And, of course, we're working to achieve less risk and exposure to similar shoreside activities as we have often achieved in the past, with prior health risks, such as, for example, norovirus. But to be clear, we will fail when we feel we will honor our commitment to operate in the best interest of public health. In that regard, we're in active discussions around the world with appropriate authorities and agencies. In addition to Germany, Italy seems to be closest to resuming cruises at this time. and we're in very active dialogue with them as well as others concerning procedures based on the best available science to specifically address the risks associated with COVID-19. Upon resuming service, we are well positioned to optimize the latent pent-up demand for our leading brands around the world. Having national brands as a portion of our portfolio at this moment, as I've already mentioned, is clearly an asset. As nations reintroduce social gathering, including cruise, they are most likely initially to restrict reactivations to their own residents exclusively. With brands like AIDA, that is roughly 95% German source, P&O UK, which is 98% British source, Casa Europe, which is nearly 80% continental European source, P&O Australia, which is more than 99% Australian and New Zealand source, and Carnival Cruise Line, which is 92% U.S. source, we are very well positioned. Additionally, the fact that these brands are characterized by ready access with drive-to markets and a prevalence of shorter-duration cruises strengthens the possibility for success in today's environments. Clearly, cruise will not come back all at once. As we are demonstrating with AIDA, we intend to resume operations with a small percentage of the fleet, which inherently will make us less reliant on new to cruise in the early days. Now, with nearly two-thirds of our guests globally, that's almost 8 million guests, each year repeat cruisers, an active database of nearly 40 million and frequency to repeat amongst cruisers every two plus years on average, we expect demand to be more than adequate to fill ships in a staggered restart. Again, we expect demand to be more than adequate to fill ships in a staggered restart. Our overriding financial objective going forward is to maximize cash generation. At the same time, we're focused on staggering the reintroduction of capacity. which will help to manage yields. Now, this is even more relevant since historically we've had only two levers to pull in the down cycle, occupancy and rate. In this environment, we will have a third, capacity. Capacity will be the third real-time demand lever we can leverage to produce the best short and long-term outcomes. Our long-term prospects are especially bright given we've moderated our overall capacity. we shed less efficient vessels and lowered our overall cost base. We've reduced near-term capacity, and going forward, we'll introduce newer, far more efficient vessels over time in line with demand generation. Based on the actions we've taken to date, our fleet will not return to 2020 second quarter capacity levels until 2022 at the earliest. and will be inherently more efficient with a roughly 10% larger average birth size and reduced average age. In summary, we have appropriately brought down our operating costs by over $7 billion on an annualized basis, and we've reduced capital expenditures by more than $5 billion over the next 18 months. We've transitioned the fleet into a prolonged pause, and we right-sized our shoreside operations and will continue to do so. We are aggressively shedding assets while actively deferring new ship deliveries. We have secured over $10 billion of additional liquidity to withstand another full year in a zero-revenue scenario. We are working aggressively on protocols, with Germany set to resume cruising. We will emerge a leaner, more efficient company to optimize cash generation, pay down debt, and position us to return to a strong investment-grade credit rating over time. We're working hard to resume guest operations, and we are working hard to ensure when we do resume guest operations, we do so in a way that serves the best interests of public health. In time, we expect to continue to deliver extraordinary vacation experiences to our guests and, over time, strong returns to our shareholders. With that, I'll turn the call over to David.

Thank you, Arnold. As Arnold said, it is hard to believe it has been just 120 days since we paused our guest cruise operations across the globe. We quickly recognized the situation and took swift action to protect our company and all of its stakeholders. Our financial action plan has had two main paths, cash preservation by reducing our monthly cash burn rate and improving our overall liquidity position. I'll start today with an update on our full year 2021 booking trends. Then I'll provide a summary of our reduced monthly average cash burn rate for the second half of 2020 and finish up with some insights into our improved liquidity position. Turning to our 2021 booking trends. At this point in time, our cumulative advance bookings for the full year 2021 remain within historical ranges at prices that are down in the low to mid single digit range, including the negative yield impact of FCCs and onboard credit supplied. Our book position is encouraging given that we have essentially suspended all advertising and promotional activity. It is particularly reassuring to see that approximately 45% of the 2021 book position are guests that are new to brand, with the remaining 55% of guests being brand loyalists, which is just a little higher than the norm. And it's also promising to see that 55% of the 2021 booking volume during the last two months were new bookings, with the remainder being FCC's rebookings. Now let's look at our monthly average cash burn rate. During the pause in our guest operations, our monthly average cash burn rate for the second half of 2020 is estimated to be $650 million per month. If the pause in guest operations were to continue into 2021, we believe that there are opportunities to further lower the monthly rate. Our monthly cash burn rate includes four items. First, $250 million per month of ongoing ship operating and administrative expenses. This monthly estimate is much lower than the second quarter actuals, which included returning guests to their homes and a significant portion of the cost of shipboard team member repatriations. In addition, the second half monthly estimate benefits from the fact that we expect substantially all of our ships to reach their full pause status during the third quarter. Furthermore, the second half will be lower than the second quarter because of the combination of layoffs, furloughs, reduced work weeks, and salary reductions generally implemented late in the second quarter or early in the third quarter across the company. Finally, the monthly estimate will be further reduced as additional ships leave our fleet. Second, interest expense is expected to be approximately $85 million per month. Third, capital expenditures are forecasted to be approximately $115 million per month net of export credit financings, and this includes an expectation of two ship deliveries and the receipt of other capital commitments contracted for prior to the pause in our guest operations. The fourth and final component is an unusually high item due to the timing of guest refund payments flowing through Accounts Payable. It is expected to be approximately $200 million per month. In fact, the increase in Accounts Payable has already completely reversed itself in the month of June. At this point, I would like to apologize to those guests who had to wait for their refunds. We had to address several hurdles to normal business operations, which included an unprecedented number of guests impacted by canceled voyages, a shift to work at home for call center employees, a need to reprogram systems to handle the volume, and the need to develop new procedures to ensure accurate processing for our guests. We have worked very hard at all of our brands around the globe to expedite our refund processing, and with limited exceptions, we are back to pre-COVID service level. Now I'll provide some insights on our overall liquidity positions. Our available liquidity at the end of the second quarter was $7.6 billion, which includes $6.9 billion of cash and $700 million from the government commercial paper program we qualified for in the U.K. We added to that liquidity position by completing the offering of a first priority senior secured term loan on June 30th with net proceeds of approximately $2.6 billion. Looking ahead, our European brands will continue to work on government-backed financing in both Germany and Italy that we hope to complete over the coming months. Looking beyond that, we will continue to work on extending 2021 maturities. In addition, over time, we will opportunistically look to further enhance our liquidity position. In recent weeks, our liquidity focus has begun to change. Back in March and April, our thought process was to obtain enough liquidity to sustain the company during the pause in our guest operations and get to the other side. Now that AIDA has announced the resumption of guest cruise operations, we are looking at a variety of financial models where we resume guest operations in a phased manner, with specific brands and ships returning to service over time to provide our guests with enjoyable vacation experiences and our company with positive cash flow and additional liquidity. So with plenty of available liquidity in hand to withstand the impact of no sailings or no revenues well into 2021, our focus has now shifted to projecting the additional liquidity that the resumption of our guest operations will provide. And now I'll turn the call back over to Arnold.

Thank you, David. Operator, please open the line now for questions.