Carnival Corporation

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.

Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for the first question. Our first question comes from Steve Wozinski with Stifel. Please proceed.

Yeah, hey, guys. Good morning. So, you know, I guess a bigger picture question here. I guess if we, you know, if we look out a couple years down the road, you know, whenever the business gets back to a so-called normal operating level, how do you think about the free cash flow potential of the business moving forward, given the ongoing CapEx needs plus the much higher debt levels you guys will be carrying moving forward? And Can you help us think about the excess free cash flow potential of the business and what it looks like down the road and maybe the path to get back to investment grade?

Good morning, Steve, and thanks for your question. What I'm going to do is kind of play quarterback because we're all in different locations, even though we're all on the phone together, and I'll just refer the questions as they come up. So, David, you might want to go ahead and address the cash flow.

Sure. Good morning, Steve. So, you know, Steve, our business has tremendous cash flow generation potential, as you know. I mean, in 2019, we generated $5.5 billion of cash flow. And one of the things that Arnold mentioned was the fact that, you know, we had some ship deliveries delayed. And so over time, when you start looking at the next few years or ship deliveries delayed, have been evened out. We talked two this year, three next year, three the year after. And so with two to three ships delivery per year, and by the way, when I'm doing this, I'm thinking about the fact that there are a couple of ships delivered in the last few weeks of the year, and I'm sort of counting them in next year's delivery. So with two to three ships a year over time and significant cash flow generation, we do, we should have, excess cash flow that can go to pay down the debt. And it may take a number of years, but as Arnold said, our target is to get back to investment grade credit rating.

Okay. Gotcha. And then second question would be around the booking patterns for next year. And I don't know if you can do this, but maybe if you could break those bookings down a little bit. And I guess what I'm trying to get at here is, you know, are people booking across, you know, all brands? Any insight there I think could be pretty helpful. And, you know, obviously some of your brands encountered significant negative press earlier in the year, you know, just, for example, like Princess. I'm just trying to figure out if, you know, if a brand like that is getting, you know, is booked as well as the rest of your fleet, and hopefully that makes sense.

Well, I'll start, and then I'll let David give more detail on the booking. First of all, we're very encouraged by the booking patterns we see right now. I mean, very encouraged. We have not only, obviously, a number of future cruise credits where people had their itineraries canceled, but they chose instead of a cash refund to book with us again. But we have substantial new bookings, and we even have new to cruise bookings, which given the current state of the environment in the world, is really a good testament to how strong a vacation experience and value cruising really is. And then even with Maida, we had one day so far as we prepare for an August resumption. And the bookings in that one day, we got over 1,000 bookings, taking up a significant portion. of the first sailing on a very short notice period. So there's a lot of pent-up demand. Your reference to Princess in particular, Princess actually at this point in time is trending with all the other brands in the industry and not disproportionately so in terms of consumer preference or attitude. And none of the brands in the industry have reached the trough that was reached back in 2012, 2013. when there was a plethora of incidents that made the media with the industry, a number of which were related to Voyages and some of our brands. And so none of the brands in the industry, none of ours or others, have gone to the low levels that we experienced at that time. So the trough in this period has been higher than the trough in that period. So there's a lot of pent-up demand, a lot of latent demand, That doesn't mean that we don't have work to do once we start cruising with much larger volumes of capacity to attract new to cruise. Of course, we're going to have work to do, but right now the brands are strong. The bookings are encouraging, and with the staggered start we're going to have to resumption of cruising, there should be plenty of pent-up latent demand. with previous cruise scores to fill the ships. But, David, you might want to add a little additional color.

Yeah, the only additional color, you know, in looking across the brands which you were trying to get at, the only things that I would comment on is that probably AIDA and Costa Europe are probably a little bit ahead of some of the other brands on a relative basis, but that probably has a lot to do with the the current situation in Europe and the potential resumption of cruising. I mean, we've already announced it in Germany, and as Arnold had mentioned, we're close in Italy. The only other brand I'll call out is maybe Costa Asia, and that's because of the last-minute booking trends. It's a very close, shortened booking cycle in China. That typically is in the last few weeks. Once we resume cruising in China, I'm sure we'll see those bookings, but Europe is ahead and China is probably a little bit behind. Everybody else is in a similar book position.

Okay, great. Thanks, guys. That's great color. Appreciate it. Best of luck. Thank you.

Our next question comes from Robin Farley with UBS. Please proceed.

Great, thank you. You commented that 21 bookings are in line with historical percentages, and you used the phrase of capacity that's available for sale. So I just wanted to clarify, is that everything except those ships that are going to be sold, or are you holding back capacity for sale? So just try to think about that percent booked for next year.

Go ahead, David.

Yeah, so it wasn't the exceptions. of the ships being sold because those, in most cases, haven't been announced yet except for two. And so that will occur very shortly. But the currently available for sale just referred to a few cruises that we had because of itinerary changes. I'll give you a great example, the Majestic Princess. Given its itinerary change, it wasn't currently available for sale in the system, and you probably saw the recent announcement where Majestic Princess would be going to Alaska. So there's a few nuances. So, of course, the lawyers had us put that in to make sure everybody completely understood, but it's really just a nuance.

So you're talking about 90-plus ships are included in that what's available?

Oh, yeah.

Okay.

It's a small amount.

I wasn't sure if that was some very limited amount, so no, that's helpful. No, no, no. And then my other question is, Arlene, you talked a lot in the beginning about discussions with various countries. The EU has already put out some very clear guidelines and suggestions. Are your discussions with the CDC – along similar lines to what the EU is suggesting? Or are you seeing a big difference there?

At this point, the conversations with the CDC have all been around the current pause and the handling of the ships during the pause, which has exclusively crew on board the ships. We have not actually gotten to the point of serious resumption of cruise discussions with the CDC, but of course, you know, that's coming. So in terms of the EU, while there is a EU kind of general thing that's out there, each nation is going to do what it thinks it needs to do. And so there you have to go country by country as well. And that's why in our case, we not only had to do in Germany, the German authorities, but because the ship's Some of the ships were plagued with Italy. We had to deal with Italy even for the German situation. And so that's just the nature of the business. So we'll have to deal and are dealing with various authorities everywhere. And even with the CDC, you have individual communities and individual ports. And the way this is going to work is port cities and destination cities all have to be aligned. That's number one. Number two, they will be informed by or influenced by CDC and other relevant authorities, depending where those destination cities are around the world and so on. And then it's going to be informed by our own degree of confidence that we're acting in the best interest of public health. And that's why we've engaged a plethora of medical experts and scientists around the world, That informed us what we're about to do with AIDA, for example, which we feel very good about the protocols there that have all been worked out, again, with the ports there and the overall governing authorities in Germany. And that's the process. So it's a very involved process, a lot of detail, a lot of different constituencies. But, yes, we are in conversations with the CDC, as is the entire industry, The industry is in conversations with each other because no one wants to compete on health or safety or environment or anything like that. And we're all working collectively. And I think the most important thing, Robin, is the first determinant is society's willingness to gather. So it's social gathering. And so what you're seeing, for example, in Germany where the community spread has become relatively low on an incident level basis, society is willing to socially gather. And that lays the foundation for us to be able to do things. And there's more information about the virus, better understanding of what to do and what not to do. And so all of that together makes it possible to, with confidence, begin to sail again. And we're not quite at that point, obviously, here in the U.S., where there's still surges in different portions of the country. in terms of incidents and so on, but we're working on it along with the rest of the industry.

Great. Thank you very much for that thorough answer. I wonder if I could squeeze in just one tiny clarification. Sure, Robin. David, in your remarks, you use the expression, I think, about accounts payable reversing itself. I guess I just want to clarify, are you saying then that as of now or over the course of June into now, that you are now bringing in more new deposits than what you are refunding in the last month. Is that what that referred to?

Bill Meyer, No, that's not exactly what that referred to. But I will answer the second part of what your question is there. So what I was referring to is once we process the customer deposits, and I'll give you a high-level answer. So customer deposits went down roughly $2 billion in the second quarter. but all the cash didn't go out the door. We actually paid about a billion, and the other billion wound up at the end of the quarter in AP, because it's no longer a customer deposit. And then we were able to process that billion dollars in the month of June, so AP came down. But to answer your question relative to customer deposits, I think we had said in an 8K we filed about a month ago, that we did expect to see a decline in customer deposits during the third quarter, but that it was, or actually we said the back half of the year, but we expected it all to occur in the third quarter, and that the decline in the third quarter would be significantly less than the decline in the second quarter. So, probably by the time we get to the end of the third quarter, we should be in a balanced position. Exactly what day of the week or month that occurs is somewhat dependent a little bit on the timing of extending the pause if and when that occurs as we move forward.

Perfect. Thank you very much. Thanks.

Thank you, Robin.

Our next question comes from Jamie Katz with Morningstar. Please proceed. Hi.

Good morning. I have a question on the AIDA launch. It looks like in yesterday's press release, the original launch of the cruises will have an adjusted passenger capacity. And some of your competitors were quoted in the Financial Times yesterday saying that constrained capacity would really put a crimp on profitability. So I'm curious what that restrained capacity looks like kicking off and how you're thinking about that across the fleet.

Yeah, so first of all, the important aspect of this to focus on is proper social distancing within what the particular country, society has determined at this point in time for them is what they're comfortable with. And then the social distancing occurs in the public venues on the ship. If you're in your cabin, you're naturally socially distanced from the other cabins. So it's actually the public venues, the restaurants, the theaters, et cetera. And there's also a lot of outdoor spaces on our ships, which again requires a slightly different understanding of social distancing than enclosed places like certain restaurants. So that's the context and the framework to begin with. Given that, we're looking at different ways to manage the flow, which we do all the time on the ships. to ensure that we don't have congregations that would compromise the social distancing requirements at the time. And it's not even requirements, it's more preferences. Right now it's one and a half meters in Germany, for example. And so that can then drive, depending on how you plan to manage the flow on the ship, that can drive what you ultimately might do with occupancy, along with the fact that you want to reserve an area on the ship, in the event anyone has COVID or there are cases of COVID, that you can isolate those individuals in a comfortable situation so that you can mitigate any possible spread on the ship. So those are the dynamics involved. So then a straight answer to your question is we're going to start slow, of course, because we're starting out. Our people have to be trained. We have to see how people's behaviors really are. We've got lots of ways to set up the social distancing and so on. So we're going to start with lower occupancy. But then we'll ramp up to higher occupancy as long as what we're doing is proven to be working. And so that's kind of the flow. In terms of profitability, we can be less than 50% occupancy and still generate significant positive cash flow. Initially, we'll probably start at less than 50%, you know, occupancy as we work out the details, see where the choke points are, and so on and so forth, and get experience with it. But then we'll ramp up, you know, above that level of occupancy, hopefully in a relatively short period of time, but we'll have to see how it goes. But even at less than 50% occupancy, we can generate on the ships that AIDA are putting into service right now, you know, substantial positive cash flow.

I was just going to add a little bit to Arnold's comment, just to kind of frame the overall picture. Generally speaking, the break-even point in terms of occupancy for cash flow generation at the ship level is probably somewhere in the 30% to 50% range, depending on the size of the ship. So as Arnold said, if we start a little below 50 as we work our way up, those initial ships are probably at the lower end of that scale, and we will be generating positive cash flow. But I want to try to give you a little bit of an example of the power of the cash flow generation of our business. And while I don't have a forecast for 2020 and I can't provide you guidance, let me try to use the 2019 actuals. to kind of help you understand what the situation we're in. So if I look at the 2019 actuals and I say, how many ships would we have had to operate to have a cash flow break even? The number is about 15 ships. The top 15 ships probably generate about 30, 31% of our cash flow. And of course, I guess if I have to account for the fact that we have Ships, the rest of the ships would be in pause status. Maybe I've got to operate 25 of the ships in our fleet to generate, you know, a little over 40% of our cash flow in order to cover the pause costs for the rest of the fleet and all of our shoreside SG&A. And we would still be cash flow break even. And by the way, If we were only operating 25 ships, I don't think we'd be spending as much as we did in 2019 on SG&A. And when I did these calculations, I just assumed the 2019 SG&A was flat. So it gives you a bit of context of the power of cash flow generation in our business. Thank you, Dave.

That's really helpful. That's really helpful. I think the other – one thing that might get you back to that is that Asia seems to be recovering a lot faster. And I believe Genting is going to start sailing at the end of the month. And so is there any timeline that you guys have sort of outlined, um, to get back into the region that you'd be willing to share? Thanks.

Yeah, you bet. No, we, we never try to predict regulatory, um, because you kind of, you can't. And so, um, Obviously, we are working closely, especially with our JV partners in China, to see when we can start sailing again. But at this point, we don't have a date certain or even probable for that. But like you said, this virus has moved from east to west. And so, like you, we're cautiously optimistic that that we will, in due time here, be in a position to reintroduce cruising in the Asian market as well. Thank you. Thank you.

Our next question comes from Tim Condor with Wells Fargo. Please proceed.

Gentlemen, thank you for the color. Very helpful. I wanted to continue, David, on your example that you just went through. Benchmarking off of 19, given the ships that you're divesting and given you said there will be, or Arnold, you all referred to that there will be costs, obviously, that will not come back into the equation, shoreside and so forth. What would be a rough guesstimate at this point? where your cost per ALB DX fuel should be relative to 19, just any color you could give us there.

Go ahead, David. Yeah, Tim, that's really very difficult at this point. You know, keep in mind, as Arnold and I both said, it's been 120 days, and that long list of things that we've done, It's very difficult. We have a lot of work to do. We've started that work on the initial AIDA cruises, but I'd be hesitant to extrapolate that across the whole fleet at this point. That would be providing some sort of guidance. As Arnold said, we're going to come back leaner and more efficient. Um, so I would expect some cost efficiencies versus prior year numbers, but that's the best I can do at this point, given the short period of time we've had.

Okay. And you know, we have so many variables with, you know, um, how quickly we ramp up back, which ships come in, which itineraries are they on, you know, on and on and on. And so there's a gazillion variables there, but what we do know is we're going to be back leaner.

Okay. Okay. And on the ships that you're divesting, any commentary that you can give to us as to whether the ultimate buyer, will the majority of those be outright scrapped, or will some of those ships stay in the global industry fleet?

Well, first of all, we don't scrap ships. We recycle them. So the first comment would be any ships that aren't sold into a – a market that doesn't directly interfere with our existing markets, which is what we would do. Our sales are basically into uses that are different than our uses for the ships and the markets that we're in. Then, yeah, those would go for recycling. David, I don't know if you want to add any additional color.

Yeah, of the 13, it's just a few that are recycled. The intention, we're told, is to use them for a variety of purposes. Just a few recycled at this point.

So on recycle, just to be clear, should we view it as, let me rephrase it, maybe those that would transport customers for cruise-related services or hotel-related services versus washing machines?

Yes.

Okay, okay, okay. And then lastly, if I may, when you're referring to historical bookings and pricing, just the definition of historical, are we talking the last three years, five years, just to make sure we're thinking about the definition correctly there?

We're primarily talking pre-COVID versus now, but go ahead, David, yeah.

Tim, I'm assuming you're referring to the historical range on bookings when you said what range. I think we went back to like 2011 on that. Okay, okay.

Thank you, gentlemen.

Okay, thank you.

Our next question comes from Jamie Rollo with Morgan Stanley. Please proceed.

Yes, thank you. My first question is just on the order book, please. It doesn't sound like it, but are you planning any cancellations of what's on order, or is it just a delay to the order book? Thank you.

I didn't quite hear the question, David. If you did, please go ahead.

Yeah, it sounded like I cut out, but Jamie, you were talking about any cancellations on the order book versus delay. Okay. There were no cancellations. What we were just talking about for each ship was a delay. On average, you're probably talking about a five-month delay for each of the 14 ships plus the two seaborne expedition ships that are on order.

I think the most important thing there is going down to five versus nine. between now and 22, though. But go ahead. You had a follow-on, Jamie. Go ahead.

Well, it was the same question, really, just wondering if you're planning any cancellations. I mean, nothing so far, but are you in discussions with the yards about canceling any of those ships?

No, we're not in discussions about canceling ships. We're in discussions with the yards about timing of deliveries and whatnot, but not in canceling ships. Again, We're far enough out with what we've talked about already that hopefully by then we're planning to be directionally back at the capacity that we would have available at that point in time actually being deployed globally. And at that point, again, the new ships are just far more efficient. We would regulate with demand. by, again, disposing of less efficient ships rather than trying to avoid bringing on the new ships. The timing of that is important to us, but we would like to have the new ships.

And, Jamie, in terms of timing, building on what Arnold was saying, essentially I think Arnold had indicated in his prepared remarks that given the the ships that were leaving the fleet as well as the new build schedule, it would be 2022 before we got back to the capacity that we had in the second quarter of 2020.

At the earliest.

At the earliest, correct.

Thank you. And then the other question is just on leverage. I think David, you said earlier, you expect to return to investment grade at some point. And I think market expectations for debt to get to about 20 billion or a bit more over the next six to nine months. I mean, at what point is that sort of too much debt and you might need to raise equity to bring that number down?

So, you know, I would just venture to say that, um, You know, going back to some of my other remarks that, you know, our cash flow generation is tremendous. And with the new build schedule stretched out, we have the ability to pay down debt over time. I will point out that $2 billion of that debt is converts. And I do hope that those converts over time, you know, convert to equity since the conversion price is only $10 a share. So, you know, we constantly take a look at our position. Our debt to cap ratio at the end of the second quarter was 50%. You know, even if I add in the $2.6 billion we raised in June, that only puts us at 53%. So, I think we're in a reasonably good position and with great cash flow generation. My expectation is we'll pay down the debt over time.

Can I clarify what you said to an earlier question? I think you said that you need about 25% of the ship's to break even, including the losses for the ships in cold layup. Is that based on any low occupancy or yield number based on the 2019, or is that just on the 2019 level of profitability? I guess the number might be a bit different if you bake in a lower load factor.

Agreed. I was just giving you, because instead of giving you guidance, I was giving you 25%. It was 25 ships. which I guess in our case is close to 25%. But I was just using the 2019 actuals as they exist by ship and for the whole company to give you some framework to do your modeling. And yes, obviously those ships did sail at 100% occupancy, but also keep in mind, when I did this math, I didn't adjust the SG&A either which would be considerably lower for 25 ships than for a fleet of over 100 ships. So, again, it was just to provide you information to help you model, not to provide any guidance.

And in that theoretical modeling, 25 ships would be at full occupancy. We've got plenty of demand to fill that level of volume once things are resumed. And so that's not going to be a major issue at that level for certain.

Gotcha. Okay, thank you. Good luck, guys. Thank you.

Thank you, Jamie. Appreciate it.

Our next question comes from Brandt Montour with J.P. Morgan. Please proceed.

Hey, good morning, everyone. Thanks for taking my questions. So ticket prices have held up better than other industries in hospitality and travel, and I was just wondering what kind of dynamics you expect to play out as operations start to resume and marketing engines start back up at the industry level.

Well, we'll have to see. But, again, because of the nature, and as I said in the remarks, that we have the third lever of capacity, just the nature of the restarts, So it's going to almost be country by country and destination by destination. There's going to be pent-up demand that we will not, as an industry, be able to service in the early going. And so that obviously creates a positive environment for yield with excess demand over the supply available. There's a good chance that will persist. you know, for, you know, some time as, um, you know, the world kind of comes back into, as I said, on the shore side, you know, social gathering, because that's the critical thing for us even begin to talk about, you know, um, cruising again, as is the case that's already happened in Germany and looks like it, it may happen in Italy soon. Um, So with those dynamics, it's a good environment field. And of course, we're going to be paying close attention. Obviously, our number one financial consideration is generating cash and positive cash flow. But we think we have the opportunity with the environment that should exist at the time and the fact that we can direct the capacity and manage the capacity introduction that we can keep it in line with demand where we have a good yield environment as well. David, any additional color you want to add to that?

No, I think that pretty well covers it. Thank you.

Okay. That's helpful, guys. Thank you. And then just a question on your bookings commentary. And, you know, it's great to see that you're seeing new cruisers booking. But just, you know, Since you're seeing most of your brands booking in similar ranges, that might imply that you're not seeing demand differences between older versus younger cruisers. So I'm just wondering if you could maybe cut the data by age cohort for us if you're seeing differentiation there.

Yeah, we're actually not seeing a big differentiation there except for one general trend, which is longer cruisers. So obviously, you know, world cruisers, you know, 21-day cruises. That is not booking as well, obviously, as shorter cruises, given the environment. At the time, those cruises go to lots of different places where potentially people say, well, what's the probability I'm going to be able to go to all those places given the current situation, you know, with community spread, et cetera. And so, you know, and that's the difference. But, you know, most of our brands on average were, For the bulk of the brands, we're at about a 45-age, median age, kind of, or average age demand, especially Carnival, Costa, Aida, those brands. And then even with the others, we haven't seen a booking pattern change between those 65 and older or those under 65, except for the dynamics. of the longer cruisers, which appropriately are not booking at the same rate at this point in time. Hopefully that answers your question.

That's excellent color. Thanks very much and good luck.

Hey, thank you.

Thank you.

Our next question comes from Patrick Scholes with SunTrust. Please proceed.

Hi, good morning. Quick question. Let's say hypothetically the CDC this afternoon said you're free to sail out of Miami. Realistically, how many weeks do you think it would take for you to set your first ship out at that point?

I think, again, it depends when that happens. But generally speaking, I'd say within 30 days we would be able to sail out. Again, there's a bunch of dynamics here, and there are a lot of other countries involved. So right now we're going to minimum manning on the ships in terms of crew to keep our ongoing costs down. We have to keep the ships operating there in what we call warm layup. We have to keep them operating, but it's with a minimum crew, so we have to get crew back. Depending on the circumstances and what the protocols are, You know, that could be a shorter or longer period of time if we're, you know, quarantining crew for a period of time before they go back on board, which could be the case, you know, et cetera. You know, that requires more time. But I would say in a lot of different scenarios, within 30 days of knowing when, you know, knowing when we could cruise, we would be in a position to be prepared to. Just a kind of... thumbnail.

Okay. Very good. Thank you much.

Thank you. One last question, operator.

Our next question comes from Felicia Hendricks with Barclays. Please proceed.

Hi there. Thank you for having me in. Hi. First, I did want to thank you all for the tremendous color and detail on this call, both in the Q&A and in the prepared remarks. It's been super helpful in a very cloudy time. And with that as a theme, Arnold, I know at this point it's probably really difficult for you to opine if you can actually sail in the U.S. as of mid-September, so I'm not going to ask you that. But I am just wondering, you know, at what point in time do you think Due delays in starting up start to affect the 2021 booking curve. And just on the booking curve, just the language in your release seems to have changed a tad. So I'm just wondering if I'm reading too much into this. Before you were saying that about almost two-thirds of the bookings for 2021 were cash bookings, and now the language is saying that it's almost 60%. Okay.

Okay. I'll let David add some details to it, but just in general, again, we are encouraged by the bookings, but the 21 booking curve has already been impacted with just the circumstances. Obviously, at this point in time, this year, if there had been no COVID, we'd be talking about different kinds of of booking numbers, but David, you might want to more directly address the question.

Yeah, so it's just different time periods. And so there was a time period, I don't remember, I remember the two-thirds distinctly. You'll excuse me, I don't remember the exact time period it referred to, but the 60% was more current as opposed to the two-thirds. You know, one of the things to keep in mind when you think about all this is it's not shocking that this is going to change over time because as people get their FCCs, many of them are not turning around and immediately rebooking. We have quite a number of FCCs that are still yet applied. And the reason for that, if you think about it, if your cruise was canceled in April, May, or June, you still have to, like, reorganize with your family. You have to plan vacation and do a lot of different things before you rebook your cruise. So logically, over time, we'll see the remainder of those FCCs booked. And we do have quite a few. In fact, the overwhelming majority have yet to rebook. And that is not in the booking statistics that we have provided.

That makes a lot of sense. And that kind of gets me on your customer deposits for 21. You've given us a lot of good color for cadence for 20. Can you give us the complexion of your 21 deposits? What is the cadence of cancellations, if any, have been there? And David, also, while I have you, just wondering if you can issue more secure debt.

Sure. So 21 deposits. So, you know, the overwhelming majority, I think we had indicated that there was about 500 million of deposits or 475 million relating to cruises in the back half of 2020. And so the overwhelming majority of the 2.9 billion was 21 deposits. Generally speaking, I mean, occasionally we get somebody calls and does a cancellation for a 21 deposit, but those are pretty normal. People occasionally get sick, plans change, things happen. That's in the normal course, and we haven't seen any dramatic changes in that environment. And as far as the additional secure debt, we do have some additional capacity for on a second lien basis to do additional secured debt.

Okay, thank you.

Thank you. All right, everyone, Robin, you asked an early on question, but all of you, I'd like to invite all of you, July 28th, you can go to the following site to register. It's covidsciencesummit.com. COVIDScienceSummit.com. We're producing for the WTTC, that's the World Travel and Tourism Council, a gathering of world-renowned scientists to give the current state of understanding and knowledge about COVID-19, everything from the epidemiology to transmission to detection, prevention, treatment, and practically everything um, giving where society is today, you know, what seems to be the best knowledge around, you know, how society can, uh, effectively manage, you know, through the virus. Uh, so it'll be, as you know, this information is constantly changing in terms of knowledge around COVID-19. Um, but it will be at that point in time, some of the best minds in the world, um, sharing their perspectives. So you're all welcome to attend. It's free and open to the public, and it's jointly hosted by ourselves at Carnival Corporation and WTTC. With that, I thank you for your time today. We really appreciate your interest and the questions. We're very much looking forward to resuming in Germany and eventually everywhere around the world. And, again, I couldn't be more proud of our entire team managing through what has been a very challenging time, but also a time that we're using to get leaner and stronger and come out even more powerful than we were before. So thank you all for your attention. Thank you, Operator.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.