Carnival Corporation Ltd. Common Shares

Good morning, everyone, and welcome to our Business Update conference call. I'm Arnold Donald, President and CEO of Cornwall 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. 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. Of course, the thing on everyone's mind is when are we going to resume sailing here in the U.S.? And while we're very disappointed with the April 2nd additional guidance issued under the conditional sail order, all 30 of our ships in U.S. waters and that fall under the conditional sail order have achieved green status. and we are continuing to work with the CDC and the administration to find practical approaches to resuming cruising in a way that serves the best interests of public health. Now, it's been over a year since we paused our guest cruise operations, but we are on our way back, and we are coming back in even stronger company operationally. Throughout this pause, we have been positioning Carnival to return to operations in even stronger company. We're emerging with an exciting roster of new ships across our brands to capitalize on pent-up demand. We are achieving significant cost efficiencies from the exit of less efficient ships, along with ongoing streamlining of shoreside operations relative to pre-COVID levels. And we've continued progress on our sustainability efforts, with an emphasis on minimizing our carbon footprint. We are excited that the majority of our nine brands will resume sailing this summer, albeit on a limited basis. In fact, AIDA is already sailing from the Canary Islands to overwhelmingly positive feedback from our German guests. For Southern Europe, following a voluntary pause, Costa will resume sailing with two ships beginning next month in May. For the U.K., P&O Cruises will have two ships offering U.K. coastal cruising in June and August. including inaugural sailing for the brand's new flagship, Iona. Cunard will have the first of its three ships sailing in July, and Princess is offering summer sea occasions out of the U.K. with two ships, starting in July and August, respectively. And last but certainly not least, Seabourn will offer ultra-luxury cruises and signature Seabourn moments, sailing from Greece this summer. Again, as we have demonstrated, our portfolio of brands has clearly been an asset as we have announced resuming operations so far with nine ships representing 12% of our fleet. In addition, we are also opening our hotels and tour operations in Alaska this summer. Our ownership of the vast majority of land-based infrastructure has been key to our leading presence in Alaskan cruising. Opening our hotels will also help support our longtime partners in Alaska, who have been very strong advocates for our return to sailing. We are focused on resuming operations as quickly as practical, while at the same time demonstrating prudent stewardship of capital and doing so in a way that serves the best interests of public health. Our highest responsibility, and therefore our top priority, is always compliance environmental protection, and the health, safety, and well-being of our guests, of the people in the communities we touch and serve, and, of course, of our Carnival family, our team members Shipboard and Shoreside. We continue to be very encouraged about recent vaccine distribution and the positive progress this signals. Vaccines are a game-changer. They're another important tool, along with advancements in treatment therapies, contact tracing technology, and affordable rapid testing. Now, while we will have a limited number of failings catering to those who have already received vaccines, our decisions about vaccines and all of our health protocols continue to be informed by our global medical and science experts and the requirements of the places we operate and visit. We continue to work on securing the ability to resume cruising from U.S. ports in a manner consistent with the expected return of other forms of travel, leisure, and entertainment activities. At the same time, we are, of course, working toward resuming operations in other parts of the world, including Australia and Asia. In fact, 59 of our 90 ships are outside the U.S. conditional sail order. Meanwhile, despite minimal advertising, we've seen an acceleration in booking trends globally, with a near doubling in booking volumes during first quarter 21 compared to the previous quarter. We've also experienced significant latent demand upon opening new sailings this summer. In fact, P&O opened to its single biggest booking day in seven years on the announcement of coastal sailings for its two ships, this summer and generated significant buzz with nearly a billion media mentions so far. Likewise, Cunard's Summer at Sea Luxury UK Voyages drove their biggest booking day in the UK in over a decade, while Princess had its second biggest booking day in the UK ever. The strong initial demand has affirmed our confidence and indicates the potential for further pricing strength. Over the last 14 months, agility has been a key strength. 2021 will clearly be a transition year. We expect the environment to remain dynamic over the next 12 months as we roll out our fleet while continuing to adapt to an ever-changing situation. As expected, we are staggering the introduction of ships for each of our brands and will ramp up the number of vessels and the occupancy levels over time as destinations reopen and we gain further experience with our enhanced protocols. And each brand is coming back operationally stronger than before. While it will be some time before we return to prior capacity levels after accelerating the exit of less efficient ships, we have an exciting roster of new ships which will be rolling out across each brand. In fact, in conjunction with our return to service, nearly every brand will welcome a new ship by year end. These exciting new ships are considerably more efficient, and they will drive even more enthusiasm, excitement, and demand around our restart plans with both our brand loyalists and with Nuda Cruise. Beginning with our namesake brand, Carnival, introducing the new Mardi Gras, just in time to commemorate the upcoming 50-year anniversary of the original Mardi Gras. Now, the new Mardi Gras promises not to disappoint the brand's reputation built on 50 years of fun. And even after 50 years, Carnival Cruise Line continues to innovate, this time with the first ever Roller Coaster at Sea boat. Mardi Gras also boasts restaurants from Emeril Lagasse, Guy Fieri, and Shaquille O'Neal. The highly anticipated Mardi Gras was recently named Best New Cruise Ship by USA Today. for these exciting innovations, including its liquefied natural gas propulsion system, the first LNG cruise ship in North America, reflecting our ongoing commitment to improve our carbon footprint. Also in North America, premium brand Holland America will introduce a new Rotterdam featuring its iconic music walk experience, including B.B. King's Blues Club, Rolling Stones' Rock Room, and Lincoln Center Stage Princess will introduce two new ships, both of which will feature medallion class, as will, for the very first time, the entire Princess fleet. And Seabourn Venture will set a new standard in expedition cruising for ultra-luxury Seabourn with spectacular features, including two 360-degree view, battery-powered submarines capable of taking guests to depths of 1,000 feet. Seaborn Venture will have a world-class expedition team of 26 staff who specialize in destination-specific geology, oceanography, marine biology, penguins, and polar bears, among others. As exploring the underwater world of Antarctica at depths beyond 100 feet has only been done by a handful of people, Seaborn's guests will get to share in a true once-in-a-lifetime experience. In the U.K., we welcome Iona. also powered by LNG, with her inaugural sailing August 7th. Her maiden voyage will indeed be special as she sails from England with coastal cruising to Scotland, including her namesake, the beautiful island of Iona. For Germany, we will introduce yet another environmentally friendly LNG ship, Aida Cosma. For Southern Europe, Costa Toscana and Costa Firenze will replace the exit of several less efficient ships, Casa Toscana, curated by Adam Tahani, is Casa's second LNG ship and is a tribute to Tuscany. Casa Firenze's interior design is a celebration of the city of Florence. Casa Firenze has been recognized by RHNA with Green Star III for excellence in environmental performance. Of course, we will also achieve a structural benefit to unit costs as we deliver these new, larger, and more efficient ships. In addition, We will further benefit from the 19 ships leaving the fleet, which are among our least efficient ships. In fact, 17 of the 19 ships have already left the fleet. The combination of all of that will generate a 4% reduction in ship-level unit costs and a 3% reduction in unit fuel consumption going forward, enabling us to deliver more revenue to the bottom line. We also continue our efforts to right-size our shoreside operations and find efficiencies across our existing fleet to reduce our costs further. Importantly, during this pause, we have made continuous improvements in the environmental, social, and governance areas. Now, while we've made significant progress on many fronts, we continue to focus on the important issue of carbon intensity. For more than a decade, we've demonstrated our commitment to reducing our carbon footprint through the development of more efficient new ships, through the disposal of older, less efficient ships, and through our ongoing investments in efficiency enhancements for the existing fleet, which have averaged $70 million annually, and through our results. Despite fleet-wide capacity growth of 25% from 2011 to 2019, our absolute carbon emissions peaked in 2011, and we delivered a more than 30% reduction in our carbon intensity since 2005. We also lead the industry in the development of shore power. Over 40% of our fleet is capable of plugging in while in port, enabling power from more sustainable sources. To date, only 16 of the more than 700 ports we visit worldwide offer this shore power capability. but we are working with our port partners to increase availability as demonstrated by our recently announced plans with Mayor Calva and the Port of Miami. And we need the industry in development of and continuing improvements in advanced air quality systems. Currently, 78 of our 90 ships have been fitted with these systems. As a result, these ships achieve lower sulfur emissions and the same or lower nitrous in particulate matter as shifts operating on marine gas oil, or MGO, while avoiding the carbon impact from the additional refining needed for MGO. Through our research and development efforts, we have aggressively implemented new technologies, such as the aforementioned development of shifts powered by LNG, the most environmentally friendly fossil fuel. A clear demonstration of our level of commitment was shown. When we made the decision to build these ships, even though at the time the decisions were made, the infrastructure for LNG was not yet in place. We then partnered with Shell to develop the supply chains to support LNG operations. We now have 11 LNG ships either currently in the fleet or under construction, representing nearly 20% of our overall fleet capacity. The utilization of LNG is a positive step for the environment, but it is not the ultimate solution. Our goal is to eventually achieve net zero emissions. To get there over time, we are aggressively looking at other options like advanced lithium-ion battery technologies and fuel cell technologies. Moreover, we have also advanced our efforts on social responsibility and governance. For example, half of our operating companies are now led by women executives, reflecting our commitment to diversity and inclusion. Also, upon resuming operations, an even greater portion of executive pay will be tied to health, environment, safety, security, and sustainability performance. Turning to our financial objectives, first and foremost, is to maximize cash generation. While we have secured the liquidity to sustain us well into 2022, even with zero revenues, Our cash flow, once we return to full operations, will be the primary driver to return to investment-grade credit over time, creating greater shareholder value. Now, we've lowered our capacity growth to roughly 2.5% compound annually through 2025. We've structurally reduced costs. We're working to lower interest costs, and we are working aggressively to return our fee to guest operations as quickly as practical and still serving the best interests of public health. With the aggressive actions we've already taken, managing the balance sheet and reducing capacity, we are well positioned to capitalize on pent-up demand and to emerge a leaner, more efficient company, reinforcing our industry-leading position. Throughout these challenging times, we have received overwhelming support. So again, thank you to our valued guests. Thank you to our dedicated members of the Carnival family, Shipboard and Shoreside. Thank you to our travel agent partners. And thank you to our other many stakeholders for their ongoing support. And, of course, especially, thank you to our investors for their continued confidence in us and in our future. We can't wait to welcome everyone back on board. With that, I will turn the call over to David.

Thank you, Arnold. I'll start today with an update on booking trends. Then I'll provide our monthly average cash burn rate along with a summary of our first quarter cash flows. Next, for those of you who are modeling our net income and EPS, I will provide you with some key data and then finish up with some insights into our financial position. Turning to booking trends. Our booking volumes have been very strong given the circumstances. Booking volumes for all future cruises during the first quarter 2021 were approximately 90% ahead of booking volumes during the fourth quarter 2020. Just as positive, Our cumulative advanced book position for the full year 2022 is ahead of a very strong 2019, which was at the high end of the historical range. I would like to point out that our booking volumes and book positions are very encouraging given that they were achieved with minimal advertising and promotional activities. Pricing on a full year 2022 book position is higher than pricing on bookings at the same time for 2019 sailings if you normalize for bundled packages and exclude the dilutive impact of future cruise credits or more commonly known as FCCs. This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison. as that was a high watermark for historical yields. We normalized for bundle packages since over the past year or so, we have offered, and our guests have chosen, more and more bundle package options. In the end, we expect to see the benefit of these bundle packages in onboard and other revenue. Even more encouraging is the overall improved pricing trends we have seen over the last few weeks as we have announced the restart of cruise operations in several of our brands. I just want to remind everyone that due to the pause in guest cruise operations, the company's booking trends are being compared to booking trends for 2019 sailings and not the prior year. Now let's look at our monthly average cash burn rate. For the first quarter, our cash burn rate was $500 million, which was better than the previous expectation of 600 million, mainly due to the timing of capital expenditures. For the first half 2021, we now expect our monthly average rate to be approximately 550 million, which includes additional restart expenditures. I am happy to say that this monthly average rate includes more restart expenses as we have recently resumed or announced the resumption of guest cruise operations for six of our nine brands while we continue to plan for the others. Despite the additional restart expenses, our monthly average rate for the first half of 2021 is expected to be lower than previously indicated as our teams have worked tirelessly to opportunistically find ways to reduce our cash burn rate. Next, I'll provide a summary of our first quarter cash flows. We are currently in a solid liquidity position with $11.5 billion of cash and short-term investments on our balance sheet at the end of the first quarter. Even better, this is $2 billion more cash than we had on the balance sheet at the end of the fourth quarter. During the first quarter, we added to our liquidity position by completing two very well-received capital market transactions with cumulative net proceeds of 4.4 billion. The senior unsecured note offering, which was upsized due to the strong demand, raised 3.4 billion, while our overnight equity offering raised a billion. This was partially offset by two things. First, our total cash burn for the quarter was $1.5 billion, simply our monthly average cash burn rate of $500 million per month times three, and second, $900 million driven by principal debt payments. I would like to point out that our total customer deposits were unchanged this quarter compared to the fourth quarter 2020 at $2.2 billion, with cash inflows from new bookings offsetting cash refunds. This is a welcome point on the road to the full resumption of guest cruise operations. For those of you who are modeling our net income and EPS, let me provide you with some key data points. Depreciation expense for 2021 is expected to be approximately 2.2 billion. Net interest expense for 2021 is projected to be approximately 1.7 billion prior to our refinancing efforts later this year to reduce that number. While our refinancing efforts will only have a partial year impact on 2021, they will certainly have a more pronounced full year impact on 2022. Our dilutive weighted average shares outstanding for the second quarter 2021 and fiscal year 2022 is expected to be 1.132 billion. For fiscal year 2023 and beyond, it will be around 1.185 billion. The increase from 2022 to 2023 is driven by the conversion of our remaining convertible notes. I think it's worth noting that we also incurred almost 200 million of non-cash expenses during the first quarter 2021 for things like lease asset amortization and share-based compensation. It appears these items were not fully captured in consensus estimates given the focus on cash burn. Finally, I will finish up with some insights into our financial position. Since the pause in our guest cruise operations a little over a year ago, we raised $23.6 billion through a series of transactions. These transactions included equity offerings raising over $4 billion. These equity offerings, along with retiring $1.5 billion of our convertible notes through the issuance of common stock, considerably strengthened our balance sheet. From a financial position perspective, the last year was about obtaining sufficient liquidity to get through the pause in guest cruise operations. However, with $11.5 billion of cash and short-term investments on our balance sheet at the end of the first quarter, we believe we have enough liquidity to get us back to full guest cruise operations. As we look forward, Given the improvement in the debt capital markets where interest rates for companies like ours are less than half of what they were last year, we will be pursuing refinancing opportunities to reduce our interest expense and extend our maturities. And now I'll turn the call back over to Arnold.

Thank you, David. Operator, please open the call to questions.