Carnival Corporation Ltd. Common Shares

Good morning, everyone, and welcome to our Business Update conference call. I'm Arnold Donald, President and CEO of Cornable 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. Excitedly, we are on a path to return to full fleet operations, and we are very happy to continue to welcome our loyal guests back on board, as well as to welcome new guests. And we're working diligently to have offerings that serve all of our guests in a way that is compliant in the home ports and destinations we touch while serving the best interests of public health. So far, we've announced the resumption of operations for 42 shifts across eight of our nine brands by fiscal year-end. And that represents over half of our fleet capacity returning to guest cruise operations. And this includes what we expect to be a very successful relaunching of cruising in the U.K. later this week with P&O Cruises Britannia and sailing once again from the United States on Carnival Horizon over the 4th of July. In fact, Carnival Horizon will be joined by nine other ships restarting in the United States by the end of August. We're evaluating additional deployment options throughout the fall and winter period with a focus on maximizing future cash flow while delivering a great guest experience in a way that, of course, serves the best interest of public health. Again, 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, our Carnival family, our team members shipboard and shoreside. We continue to work toward resuming operations also in Australia and Asia. And while we can't predict the pace of the ramp up to full fleet operations, we continue to expect full operations well before our important summer season next year. In the near term, we will be impacted by physical distancing requirements on a portion of our cruises, which limits our historically high occupancy level. And also near term, we'll be impacted by restricted deployment options as not all of the 700 ports we visit are receiving guests just yet. As more people receive vaccines as treatments continue to advance, and as mitigation of the spread of the virus continues, Current restrictions, of course, will also evolve. And we're confident we will eventually be able to sail without these restrictions. Throughout this pause, we have been proactively managing to resume operations as an even stronger operating company. Our strategic decision to accelerate the exit of 19 ships has lowered our capacity growth to roughly 2.5% compounded annually from 2019 through 2025. That's down from 4.5% pre-COVID. Moreover, we have opportunistically rebalanced our portfolio through the SHIP access as well as the SHIP transfer and a modification to our new bill schedule. a combination of which will transfer 8,000 birds from our continental European brands to America's favorite cruise line, Carnival Cruise Line, to optimize the current environment, maximize cash generation, and improve our return on invested capital. While overall fleet capacity growth is constrained, we will benefit from an exciting roster of new ships spread across our brands to capitalize on the pent-up demand and drive even more enthusiasm, excitement, and demand around our restart plan. Nearly every brand will soon have a new ship welcoming guests for the first time, beginning with our namesake brand, Carnival, introducing the new Mardi Gras. Now, it's no small task to successfully address the challenge of honoring the original Mardi Gras, the ship that began the advent of our corporation and has been said the advent of modern-day cruising. But the new Mardi Gras does just that. Recently featured on Good Morning America, Mardi Gras has many features, including the first-ever roller coaster at sea. And trust me, I know from personal experience it is indeed a thrill to ride. Premium brand Holland America will introduce the new Rotterdam, sister ship to the very successful Coney's Dam and New Stock Dam. Princess will welcome guests aboard another new medallion-class ship, Enchanted Princess. And ultra-luxury brand Seabourn will welcome Seabourn Venture with its world-class expedition team and spectacular 360-degree view submarines. For the UK, we enjoyed a phenomenal virtual zany ceremony for Iona. Iona's inaugural sailing will be August 7th. For Germany, we will introduce LNG-powered Aida Cosma, sister to the also highly successful Aida Nova. And for Southern Europe, Casa Firenze and LNG-powered Casa Toscana will replace the exit of several lefty fisherships. We enjoy a structural benefit to revenue from these exciting new ships due to the richer mix of premium price balcony cabins, which will increase six percentage points to 55% of our fleet in 2023. And we will achieve a further structural benefit to unit costs as we introduce these new, larger, more efficient ships, coupled with the 19 ships leaving the fleet, which were among our least efficient. Again, the combination of which 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. Moreover, we've continued to find efficiencies across our existing fleet to reduce our costs further, as well as planning for streamlined shoreside operations as we ramp back up to full fleet operations. Our advertising efforts continue to evolve with heavy utilization of direct mail and other lower-cost channels, such as digital and public relations-driven earned media, as compared to higher-cost traditional channels. In fact, we have outstanding public relations opportunities coming up, such as the 50-year anniversary for both our namesake brand, Carnival Cruise Line, and the origin of our corporations. Also, we celebrated the 25th anniversary for our AIDA brand. AIDA initiated an exclusive cooperation with Germany's number one newspaper in conjunction with the Jubilee and their return to service. The sweepstakes went viral, creating continuous news and onboard content that captured front-page news, both print and online. Of course, we always leverage the excitement of our new bills to draw media attention. So just a couple of weeks ago, the arrival of Mardi Gras into the U.S. and Port Canaveral attracted extensive media attention. And just last month, our virtual naming ceremony that I mentioned earlier for P&O UK's Iona captured record-breaking media coverage, receiving billions of media impressions, far exceeding the reach of any prior UK naming event. Meanwhile, despite our minimal advertising spend, we continue to experience an acceleration in booking trends globally, including capturing significant latent demand for our new sailings opening this summer. The strong initial demand has affirmed confidence in our future and indicates the potential for pricing strength over time. Also, we see the potential for improved EBITDA in 2023 compared to 2019, driven primarily by the revenue growth from the introduction of new ships, along with the potential for higher revenue yield given pent-up demand and the benefit of a richer mix of premium cabins, coupled with structurally lower costs from the replacement of smaller, less efficient vessels with larger, more efficient vessels. And at the same time, we are working aggressively to lower interest costs. I want to acknowledge your David Bernstein and our entire financing for their very successful efforts in helping us to manage the balance sheet. As we said in our press release this morning, the company successfully refinanced a $2.8 billion term loan and an annual future interest savings of over $120 million. This is the first of many opportunistic refinances that we expect to undertake. Also importantly, we've continued to make advancements in our sustainability efforts. In fact, earlier this week, we published our 2030 sustainability goals and our 2050 sustainability aspirations, which you can find in the press release issued earlier this week and online at our sustainability website. www.carnivalsustainability.com. A key focus of those sustainability efforts is our continued emphasis on the important issue of carbon emission reduction. As we previously shared, our absolute level of carbon emissions peaked in 2011. That's despite over 20% capacity growth since that time. And it will remain below those levels. as we capitalize on our industry-leading efforts to develop and roll out new technology. This includes examples such as shore power. Over 40% of our fleet is capable of plugging in while in port, and liquefied natural gas. We have 11 LNG ships either currently in the fleet or under construction, which will power nearly 20% of our total fleet capacity by 2025. In addition, 77 of our ships are fitted with advanced air quality systems, which benefit our overall emissions profile. And we will continue to aggressively explore new technologies as we work toward net zero emissions over time. During this pause, we have made continuous improvements in other environmental, social, and governance areas. We consider food waste another important place to focus our efforts. Food production, much of which is wasted, is among the largest contributors to global warming. Now we've taken measures to dramatically reduce our per person food waste and have made good progress toward our initial goal of reducing our food waste by 30% by 2022. Among many efforts to honor our commitment to reduce our impact on the environment, we are installing food waste adjusters on board our fleet where needed. These units will help to mitigate the risk of any non-food waste discharge. And we are honoring our commitment to diversity and inclusion. Now, we already have a diverse workforce with our crew hailing from nearly 150 countries. In addition, half of our operating companies are led by women executives. We've been recognized by Forbes as America's best large employers, as well as America's best employers for diversity, and America's best employers for women. We were named the Glassdoor Employees' Choice Award winner in 2021, recognizing the company as one of the best places to work. But we are still striving for diversity at all levels and in all areas of our greater enterprise. Therefore, we are working proactively to engineer diversity through our recruiting and development efforts. And we're also striving for greater inclusion, where every employee feels they have the opportunity to make the contribution they want to, to be recognized or rewarded for those contributions, and to realize their individual career aspirations. Agility has been a key strength over the last 15 months. We expect the environment to remain dynamic as we roll out our fleet while continuing to adapt to an ever-changing situation. So we're working aggressively to return our fleet against operations as quickly as practical while still serving the best interests of public health. With the aggressive actions we've already taken, optimizing our portfolio and reducing capacity, we are well positioned to capitalize on pent-up demand and to emerge a leaner, more efficient company, reinforcing our global industry-leading position. We have secured sufficient liquidity to see us through to full operations. And once we return to full operations, our cash flow will be the primary driver to return to investment-grade credit over time, creating greater shareholder value. Throughout these challenging times, we have received overwhelming support. So once again, thank you to our valued guests. Thank you to our travel agent partners. Thank you to the port communities for continuing to work with us to prepare for a successful restart around the world. Thank you to the governments and health agencies in numerous countries and states who have partnered with us to vaccinate so many of our thousands and thousands of crew members. Thank you to our other many stakeholders for their ongoing support. Thank you to the dedicated members of our Carnival family, Shipboard and Shoreside, who have worked tirelessly to get us to this turning point in our global restart effort. And, of course, thank you to our lenders and 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 second quarter cash flows, 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 and are clearly improving. Volumes for all future cruises during the second quarter 2021 were 45% ahead of booking volumes during the first quarter. The increase was driven by both close-in bookings associated with the recent restart announcements, as well as strong booking volumes for 2022. This is a clear demonstration of the pent-up demand for cruises, as well as the long-term potential for the market. Just as positive, our cumulative advance 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 activity. Pricing on our full year 2022 book position is higher than pricing on bookings at the same time for 2019 sailings driven in part by the bundled pricing strategy for a number of our brands, but excluding the dilutive impact of future cruise credits, or more commonly known as FCCs. This is a great achievement, given pricing on bookings for 2019 sailing is a tough comparison, as it was a high watermark for historical yields. Over the past year or so, we have offered, and our guests have chosen, more and more bundled package options. In the end, we will see the benefit of these bundled packages in onboard and other revenues. I just want to remind everyone that due to the pause in guest cruise operation, the company's current booking trends are being compared to booking trends for 2019 sailing and not the prior year. Now let's look at our monthly average cash burn rate. For the first half of 2021, our cash burn rate was $500 million per month, which was better than the previous forecast of $550 million. The improvement was mainly due to the timing of cash receipts from ship sales just before the end of the second quarter and some other small working capital changes. During the third quarter, we are forecasting positive cash flow from the 27 ships that will have guest cruise operations during the quarter. However, keep in mind that many of those ships do not begin operations until late in the quarter. As a result, the available lower birthdays or AOVDs as they are more commonly called for the third quarter will only be 3.8 million. However, As we have previously discussed, not all these ALBEs will be sold for our third quarter cruises. Despite the forecasted positive cash flow from guest cruise operations, we are anticipating an increase in the third quarter monthly cash burn rate versus the first half of 2021 because of several good news positive factors. First, Restart expenses are accelerating as we have announced 42 ships will be in guest cruise operations by November 30th, our fiscal year end. Second, capital expenditures will be higher driven by the restart. And third, we have a number of progress payments on future new builds, which are timed to be paid during the third quarter. All of these expenditures have been anticipated and given the announced restart, many of them are now occurring in the third quarter. Because of the difficulty in projecting the timing between the quarters of all the restart expenses and capital expenditures, as well as the exact amount of revenue associated with third quarter guest cruise operations as a result of the atypical short booking window, given that these cruises were now so close to departure, we will not be providing a forecast of the third quarter monthly average cash burn rate. For those of you who are trying to model our future results, don't forget that margins on these third quarter cruises will be less than our normal margins, given the lower level of occupancy that is anticipated during the third quarter. However, with $9.3 billion of cash and short-term investments on our balance sheet, we believe we have enough liquidity to get us back to full guest cruise operations in the spring of 2022. Next, I'll provide a summary of our second quarter cash flows. During the second quarter, our total cash burn was $1.5 billion. simply our monthly average cash burn rate of $500 million per month times three. And we used an additional $1 billion of cash primarily for debt principal payments. This was somewhat offset by a $300 million increase in customer deposits. During the second quarter, customer deposits on new bookings exceeded the impact of refunds driven partially by the receipt of payments from guests for cruises sailing in the current quarter. This is a welcome milestone and truly a sign that we are now solidly on the road to full resumption of guest cruise operations. Finally, I will finish up with some insights into our financial position. As I said before, we believe we have sufficient liquidity to get us back to full guest cruise operations. Therefore, we are focused on pursuing refinancing opportunities to extend maturities and reduce interest expense. During the second quarter, three European export credit agencies, SACE, Hermes, and Invera, provided approval in principle to Debt Holiday II for the deferral of approximately a billion dollars of principal payments that would have otherwise been due over a one-year period. These transactions should be completed during the third quarter. The deferred principal payments will instead be made over the five-year period following the completion of the transaction, extending the maturity profile of these loans. I want to thank everyone involved in these transactions for the support that they have demonstrated toward the company. In addition, last month we repriced our $2.8 billion term loan B. It was an incredibly successful transaction. It was well oversubscribed, which is unusual in the term loan B market. The U.S. dollar portion of the term loan B facility now has an interest rate of LIBOR plus a margin of 3%, which is 4.5 percentage points less than the LIBOR margin was before repricing. The Euro portion of the term loan facility now has an interest rate of URIBOR plus a margin of 3.75%, which is 3.75 percentage points less than the URIBOR margin was before repricing. This was the largest repricing change of a term loan ever achieved by any company in the Term Loan B market and will reduce our future annual interest expense by over $120 million per year. Clearly, this transaction is an affirmation from investors on our bright future and their confidence in our management team. As we look forward, given how supportive the debt capital market investors and commercial banks have been, we will be pursuing additional refinancing opportunities to meaningfully reduce our interest expense and extend our maturities over time. And now, I'll turn the call back over to Arnold.

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