Carnival Corporation

Welcome to our Business Update Conference. I'm Arnold Donald, President and CEO of Cornwall Corporation and CLC, and today I'm joined telephonically by our Chairman, Nikki Aronson, as well as by David Bernstein, our Chief Financial Officer, and by 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 forwarded. Therefore, I must refer you to the cautionary statement in today's press release. What a difference a year makes. We are clearly on our way back to full cruise operations, with 50 ships now serving guests as we end the fiscal year. And that's not from just one ship one short year ago. We've already returned over 65,000 crew members to our ships. And since resuming operations, over 1.2 million guests and townies have filled with us. And we've achieved that while delivering an exceptional guest experience with historically high net promoter scores. These are strong accomplishments, especially in light of the uncertainty we faced just one year ago when vaccines were not yet available and effective protocols to mitigate the spread of the virus were still evolving. Today, our team members and the vast majority of guests have received vaccines and many have received boosters. We have established effective protocols for COVID-19 and its variants, enabling occupancy to progress toward historical levels. In fact, occupancy that our Carnival Cruise Line brand, which currently operates itineraries that are most similar to its normally published itineraries, are now approaching 90% and that's after the impact of the variance on their return bookings. Again, Carnival Cruise Line continues to outperform with both occupancy and pricing strength. Even at this early stage, as a company, we are now generating meaningful cash flow at the ship level to date and growing, helping the fund start up costs for the remaining fleet. Total customer deposits have grown by over $1.2 billion from the prior year-end level, as our book position continues to build and to strengthen. Importantly, we ended the year with $9.4 billion of liquidity, and that's essentially the same liquidity level as last year, but with significantly improved cash flow generation ahead, as the aforementioned ship operating cash flows and custom-emerged houses continue to build. With 68% of our capacity now in operation and the remainder planned by spring, We are well positioned for our important summer season, where we historically have the lion's share of our operating process. Throughout 2021, we said that we expected the environment to remain dynamic, and it certainly has. Of course, agility has been a key strength of ours, and we continue to aggressively manage to optimize given this ever-changing landscape, as we have demonstrated through the Delta variant and now with Omicron. we have navigated near-term operational challenges. While the variance and their corresponding effect on consumer confidence have created some near-term booking volatility, our book position has remained resilient. And in the case of Delta variants, already recovered. Importantly, these variants have not had a significant impact on our ultimate plan to return our full fleet to guest operations in the spring of 2025. It is clear we have maximized our return to service in 2021, and we have positioned the company well to withstand the potential volatility on our path to profitability. At the same time, we have not lost sight of our highest responsibility and therefore our top priority, which is always compliance, environmental protection, and the health, safety, and well-being of everyone. That's our guest. people in the communities we touch and serve, and, of course, our Carnival family, our team members, shipboard, and shoreside. And for that end, we've achieved many important milestones along the way in our return service. For example, broadening our commitment to CSG with the introduction of our 2030 sustainability goals and our 2050 aspirations, and that building on the successful achievement of our 2020 goals. Increase our ESG disclosure by incorporating SASB and TCFD frameworks in our sustainability report. Bolstering our compliance efforts with the addition of a new board member with valuable compliance experience. A strong addition to our board of directors and our board compliance committee. Improving our culture through emphasizing six essential behaviors and incorporating them into our ethos, training and development, and through everyday real-time feedback. As we are already among the most diverse companies in the world, with a global employee base representing over 130 countries, we are focusing our efforts on diversity and inclusion at every level and in all areas of our operations. And, of course, there are many more operational milestones, such as Reopening our eight owned and operated private destinations and port facilities. Princess Key at Moon Key. Grand Turk. Mahogany Bay. Amber Cove. Cozumel. Santa Cruz to Tenerife. And Barcelona. All delivering an exceptional experience to over 630,000 of the 1.2 million guests that's resuming operations. Welcoming nine new more efficient ships. across our world-leading brands, including Mardi Gras, powered by L&G. Mardi Gras is nothing short of a game-changer for our namesake brand, Carnival Cruise Lines. Premium brand, Holland America, introduced the new Rotterdam. Sister Ships is very successful, Coney Town and New Staten Island. Princess welcomed guests aboard a new medallion-class ship, Enchanted Princess. And we'll welcome another new medallion-class ship, Discovery Princess, early next year, and ultra luxury brand Seabourn. We welcome Seabourn Venture with its world-class expedition team and its spectacular 360-degree view submarines. For the UK, we successfully introduced Iona, also powered by LNG. For Germany, we shortly take delivery of our sixth LNG-powered ship, AIDA Cup, sister to the also highly successful AIDA Nova, And for Southern Europe, Casa Marenze and LNG-powered Casa Toscana will replace the exit of several lefty fishing ships. Now, these new ships, Mardi Gras, Iona, Casa Toscana, have joined Aida Nova and Casa Esmeralda to be the only five, and with the addition of Aida Cosma shortly, the only six large cruise ships in the world currently powered by LNG. Demonstrating our leading edge decarbonization efforts. Now while the utilization of LNG is a positive step for the environment, since LNG is inherently 20% more carbon efficient, it is not our ultimate solution. We have announced our net zero aspirations by 2050. Now where there is no known answer to zero carbon emissions in our industry at this time, we are working to be part of the solution. We have and expect to continue to demonstrate leadership in executing carbon reduction strategies. We are focused on decreasing our unit fuel consumption today, reducing even the need for carbon offsets. Our decarbonization efforts have enabled us to peak our absolute carbon emissions way back in 2011. and that's despite an approximately 25% capacity growth since that time. And while today, based on publicly available information, we believe we are the only major cruise operator to peak our absolute emissions, our entire industry is moving in the right direction. And as a company, with a 25% reduction in carbon intensity already under our belt, we are well-positioned to achieve our 40% reduction goal by 2030 and are working hard to reach that deliverable ahead of schedule. Now, in addition to our cutting-edge LNG efforts, we have many other ongoing efforts to accelerate decarbonization. And they ain't just a few. They include itinerary optimization and technology upgrades to our existing fleet at an investment of over $350 million. in areas such as air conditioning, waste management, lighting, and, of course, the list goes on. We are actively increasing our shore power capability. Greater than 45% of our fleet is already equipped to connect to shore power, and we plan to reach at least 60% by 2030. Now, we helped develop the first port with shore power capability for cruise ships. leading to the development of 21 ports to date and panels. We are focused on expanding shore power to our high-volume ports around the world. That includes Miami, Southampton, England, and Hamburg, Germany. To ultimately achieve net zero emissions over time, we are investing in research and development, partnering on projects to evaluate and pilot maritime-scale battery and fuel cell technology, and working with classification societies and engine manufacturers to assess hydrogen, ethanol, as well as bio and synthetic fuels as future low-carbon fuel options for cruise ships. Also, these efforts combined with the exit of 19 less efficient ships are forecasted to deliver, upon return to full operation, a 10% reduction in unit fuel consumption on an annualized basis. That's a significant achievement on our path to decarbonization. Our strategic assistance to accelerate the exit of 19 shifts left us with a more efficient and a more effective fleet overall. And it's lowered our capacity growth to roughly 2.5% compounded annually from 2019 through 2025. And that's down from 4.5% annually pre-COVID. While capacity growth is constrained, we will benefit from this exciting roster of new ships spread across our brand, enabling us to capitalize on the pent-up demand and drive even more enthusiasm around our restart plan. We enjoy a further structural benefit to revenue from these enhanced guest experiences 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, Now, of course, as we mentioned before, we will also achieve a structural benefit to unit costs as we deliver these new, larger, more efficient shifts. Coupled with the exit of 19 less efficient shifts, it will help generate a 4% reduction in shift-level unit costs going forward, enabling us to deliver more revenue to the bottom line. Upon returning to full operations, nearly 15% of our assets will consist of these newly delivered larger, more efficient shifts, expediting our return on profitability and improving our return on investment capital. And we are clearly resuming operations as a more efficient operating company. And we'll use our past folks to reduce our leverage on our past back to investment-grade credit. Last quarter, we discussed the initial impact of the Delta variant. the indicator we saw an impact on near-term booking volumes in the month of August. Booking volumes have since accelerated sequentially and returned to pre-Delta levels in November. And as we said we would, we maintained price despite the disruption, achieving 4% higher revenue per passenger cruise bay in our fourth quarter than the fourth quarter of 2019. In fact, the Carnival Cruise Line brand where we, as I mentioned, are able to offer more comparable itineraries to those in 2019, experienced its second consecutive quarter of double-digit revenue growth for PCD, while improving occupancy with nearly 60% of its capacity return to service. Now, that's a testament to the fundamental strength and demand for our food product, especially when you consider this was accomplished without the benefit of a major advertiser. We expect to build on this momentum with the brand's announcement just last week on its Thunderstruck campaign, engineered to highlight the joy and fun of a carnival cruise. That advertising campaign is launching over the holidays, including activations on Christmas Day and Times Square on New Year's Eve, in time for our wave season. Turning to something that's very present in the news today, comic fondness. we have also experienced some initial impact on near-term bookings, although difficult to measure. At this, we have a solid book position and intentionally constrained capacity for the first half of 2022. With existing demand and limited capacity, we remain focused on maintaining price. Bookings continue to build for the remainder of 2022 and well into 2023, and we are achieving those early bookings with strong demand. In fact, pricing on our book position for the back half of 2022 improved since last quarter, despite the Delta variant. The current environment, while choppy, has improved dramatically since last summer. And as the current trend of vaccine rollouts and advancements in therapies continues, it should improve even further by next summer. So looking forward, we remain on a path to consistently deliver cash flow from operations during the second quarter of 2022 and generate profit in the second half of 2022. Importantly, we believe we have the potential to generate higher EBITDA in 2023 compared to 2019, given, despite our modest growth rate, additional capacity, and our improved cost of goods. Throughout the pause, we have been proactively managing to resume operations as an even stronger and more efficient operating company to maximize cash generation and to deliver double-digit return on investment capital. 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. And we continue to move forward in a very positive way. And for that, I again thank express my deepest appreciation to our Cornwall team members, both shipboard and shoreside, who consistently go above and beyond. I am very proud of all we've accomplished collectively to sustain our organization through these challenging times. And I am very humbled by the dedication I've seen from our teams throughout. Of course, we couldn't have done it without the overwhelming support from all of you. So once again, thank you to our valued guests. Thank you to our travel agent partners. Thank you to our home port and destination communities. Thank you to our suppliers and other many stakeholders. And of course, thank you to our investors for your continued confidence in us and for your ongoing support. Once again, 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 some color on our positive cash from operations, followed by a review of guest crew's operations, along with a summary of our fourth quarter cash flows. Then I'll provide an update on booking trends and finish up with some insight into our financial position. Turning to cash from operations, I am so happy to report that our cash from operations turned positive in the month of November ahead of our previous indication, driven by increases in customer deposits and other working capital changes. We all know that booking trends are a leading indicator of the health of our business. With solid fourth quarter booking trends leading the way, driving customer deposits higher, positive EBITDA is clearly within our sights. Over the next few months, we expect ship-level cash contributions to grow as more ships return to service and as we build on our occupancy percentages. However, cash from operations and EBITDA over the next few months will be impacted by restart related spending and dry dock expenses as 28 ships, almost a third of our fleet, will be in dry dock during the first half of fiscal 2022. Given all these factors combined, we expect both monthly cash flow operations and monthly EBITDA to consistently turn positive during the second quarter of fiscal 2022. So 2022 will be a tale of two halves. While we expect a net loss for the first half of 2022, it makes me feel so good to say we expect a profit for the second half of 2022. Now let's look at guest cruise operations. During the fourth quarter, we successfully restarted 22 ships. During the month of December, we will restart an additional seven ships, so we will be celebrating on New Year's Eve with over two-thirds of our fleet capacity in service. Our plans call for the remainder of the fleet to restart S-Cruise operations by spring, putting us in a great position for our seasonally strong summer period. For the fourth quarter, occupancy... with 58% across the ships in service. And that was a four-point improvement over the 54% we achieved last quarter during the peak summer season, despite the slowdown in bookings just prior to the fourth quarter from the Delta variant. During the fourth quarter, we carried over 850,000 guests, which was two and a half times the number of guests we carried in the third quarter. our brands executed extremely well with net promoter scores continuing at elevated levels compared to pre-COVID scores. Revenue per passenger cruise day for the fourth quarter 2021 increased 4% compared to a strong 2019, despite the current constraints on itinerary offering. Once again, Our onboard and other revenue per diems were up significantly in the fourth quarter 2021 versus the fourth quarter 2019, in part due to the bundled packages as well as onboard credits utilized by guests from cruises canceled during the pause. We had great growth in onboard and other per diems on both sides of the Atlantic. Increases in bar, casino, shop, spa, and internet led the way on board. Over the past two years, 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 and onboard and other revenue as we did during the second half of 2021. As a result of these bundled packages, the line between passenger ticket revenue and onboard revenue is blurred. For accounting purposes, we allocate the total price paid by the guests between the two categories. Therefore, the best way to judge our performance is by reference to our total cruise revenue metrics. For those of you who are modeling our future results, based on our planned restart schedule, For fiscal 2022, available lower birthdays, or ALBDs as they are more commonly called, will be approximately $78 million. By quarter, the ALBDs will be for the first quarter $14.1 million, for the second quarter $17.8 million, for the third quarter $23 million even, and for the fourth quarter $23.1 million. Fuel consumption will be approximately 2.9 million metric tons. The current blended spot price for fuel is $563 per metric ton. I did want to point out that due to the cost of a portion of our fleet being in pause status during the first half of 2022, restart related expenses the cost of maintaining enhanced health and safety protocols, and inflation, we are projecting net cruise costs without fuel per ALBD in 2022 to be significantly higher than 2019, despite the benefit we get from the 19 smaller, less efficient ships leaving the fleet. Remember, that because a portion of the fleet will be in pause status during the first half, we are spreading costs over less ALBDs. We do anticipate that most of these costs and expenses will end with 2022 and will not reoccur in fiscal 2023. In addition, we expect depreciation and amortization to be $2.4 billion for fiscal 2022. while net interest expense without any further refinancing is likely to be around $1.5 billion. Next, I'll provide a summary of our fourth quarter cash flows. During the fourth quarter 2021, our liquidity increased by $1.6 billion to $9.4 billion at the end of the fourth quarter from $7.8 billion at the end of the third quarter. The increase in liquidity was driven by the $2 billion senior unsecured notes we issued in October to refinance 2022 maturities. The 360 million customer deposit increase added to the total. This was the third consecutive quarter we saw an increase in customer deposits. Completion of a loan we previously mentioned, supported by the Italian government, with some debt holiday principal refund payments added another $400 million. Working capital and other items net contributed $300 million. All these increases totaled $3.1 billion, which was somewhat offset by our cash burn of $1.5 billion, simply a monthly average cash burn rate of $510 million per month times three. It should be noted that our monthly average cash burn rate for the fourth quarter 2021 was better than planned, driven by lower capital expenditures. Turning to booking trends. Our cumulative advance book position for the second half of 2022 and the first half of 2023 are at the higher end of historical ranges and at higher prices compared to 2019. with or without FCCs, but normalized for bundled packages. This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison as that was the high watermark for historical yields. Booking volumes for the same period during the fourth quarter of 2021 were higher than the third quarter. During the fourth quarter 2021, we significantly increased our advertising expense compared to the third quarter, in anticipation of the full fleet being in operation in the spring of 2022, generating demand and allowing us to improve pricing on our book position. However, the fourth quarter advertising expense is still significantly below our spending in the fourth quarter 2019. Finally, I will finish up with some insights into our financial position. What a difference a year makes, except for our liquidity. As Arnold indicated, we entered 2022 with $9.4 billion in liquidity, essentially the same liquidity level as last year, but with significantly improved cash flow generation ahead. as SHIP operating cash flows and customer deposits continue to build. Through our debt management efforts, we have refinanced $9 billion to date, reducing our future annual interest expense by approximately $400 million per year and extending maturities, optimizing our debt maturity profile. With our 2022 maturities already refinanced, we do not have any financing needs for 2022. However, we will pursue refinancing to extend maturities and reduce interest expense at the right time. Given our long history of positive, strong, resilient, and growing cash flows, unlike many other industries, in 2023, our focus will shift to deleveraging driven by cash from operations. We expect to return to investment-grade credit over time, creating greater shareholder value. And now, I'll turn the call back over to Arnold.

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

Thank you. If you would like to register a question, please press the 14 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. Once again, to register a question, please press the 1-4 on your telephone keypad. One moment, please, for the first question. Our first question comes from Steve Wozinski with Stifel. Please proceed.

Hey, guys. Good morning and happy holidays. I just want to be clear about the near-term booking pressure due to Omicron. Is it fair to say that the booking pressure is really just around bookings for the first half of 2022? What I'm trying to get at is we want to be sure that that booking weakness hasn't started to impact further around bookings. I know it's hard to understand which way Omicron might go, but Would you expect a similar path that you witnessed around Delta, meaning booking slowed and then rebounded very quickly as that fizzled out and got out of the meteor?

Hey, good morning, Stephen. Happy holidays to you, man. I think we have the experience. I shared in my opening remarks about the Delta variant. We recovered in November completely from that. We'll have to see how this plays out. I think the great news is is it appears to date from scientists around the world and medical experts that while this particular variant is highly infectious, it seems to have less damaging effects on people that contract it, especially those who are vaccinated. And we encourage everyone to be vaccinated and everybody to get their boosters. We have very effective protocols. And so, again, I think our actual performance and we had these protocols in place, as you will recall. Even before there were vaccines, we had effective protocols with sailors in Europe, so we're amongst the safest form of socializing and travel that there are. And so to your question on the bookings, at this point we have not seen any major impact on the second half, 22, 23 bookings. it's hard for us to even quantify any impact, although we're kind of a reflection of overall consumer behavior globally. So we're sure we've had some impact. We do see a little spike in their term cruise cancellations, but the booking patterns are strong. And we have not at this point seen anything in, you know, based on limited experience of the Delta variant and how this one seems to be playing out when at this time not anticipating any. I hope that answers your question.

Yeah, that's great, Keller. Appreciate that. And then, you know, second question is probably for David. But, you know, David, you guys have refinanced over, I think you said the number is $9 billion so far. And I'm wondering, you know, how much more you think is available to refinance over the next six to 12 months and maybe help us understand that, you know, you talked about interest costs for 22 being around, you know, a billion and a half dollars and what that number might actually, you know, look like by the time we get to next year. And I'm not trying to get more, I'm not here trying to get more detailed guidance out of you guys. I'm just trying to understand the magnitude of how much more you really could go, you know, from here.

Sure. So, you know, Steve, if you look at our capital structure, the biggest piece that high interest rate debt are the 2L notes that we did in 2020. And those have high nines or low tens in terms of interest expense. So there is an opportunity there to do refinancing of those notes. And we'll look for the right time to consider doing that during 2022. And that could, on that few billion dollars that's outstanding, that could lower interest expense even further. But we did give the forecast with the guidance at $1.5 billion. And depending on the timing of any refinancing and the exact interest rate on what we refinance, there should be a considerable amount of savings going forward. And, of course, you know, keep in mind that, as Arnold indicated, we do expect that we believe we have the opportunity for higher EBITDA in 2023 as compared to 2019, and that should begin to drive debt down in 2023, or overall debt levels, and correspondingly drive interest expense down. So it's a little premature to give guidance, but, you know, we do expect, lower interest expense in 2023.

Okay, great. Thanks, guys. Appreciate it. Happy holidays again.

Happy holidays.

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

Great. Thank you. I saw in your commentary that, you know, pricing for second half of 22 has gone up over the last quarter. And realizing, of course, that, you know, Q2, Q1, it's still a challenge. Can you give us some color? Is there a firming point sometime during Q2 where you see that sort of the near-term impact sort of stopping and things being firm? You know, is it from sort of May forward or, you know, is there such a – affirming point, you know, or is it earlier than May potentially, where you're seeing that the bookings and pricing moving up that you are seeing in the second half, but where you can kind of see that point in Q2 where it's affirming? Thanks.

Okay. Dave, you want to take a first shot?

Yeah, sure. No problem. So, you know, listen, a lot of the reason we're focused on the back half of the year and we've talked about the comparisons in the back half and also the first half of 2023 is because you're talking about apples and apples comparisons, relatively speaking, because the whole fleet is in operation. The itineraries that we're running are looking, you know, are similar to the itineraries that we ran in 2019. So it's an apples to apples comparison and you can see what the booking trends or the pricing trends look like. If you look at the first half of 2022, remember, you know, this is apples and oranges. In 2019, we had world cruises. We had long exotic voyages. You know, our whole fleet was in operation. That's not true for the first half of 2022. So on an apples to apples basis, You know, the comparison doesn't look nearly as good as when you get down to the detail itinerary level. And at the detail level, we're very pleased with pricing. I mean, you know, just to give you some comparisons, I mean, look at the fourth quarter. Our total cruise revenue yield per PCD was up 4%. And so overall, we're very, very pleased with the pricing that we're seeing for the whole year. It's just the thin apples and oranges for the first half.

Okay, understood. Thank you. And then just for my other question, your commentary about expenses was very helpful, thinking about, you know, there are some non-recurring higher things in 2022, and you said, you know, most of those won't recur in 2023. And I realize it's way too early for you to, you know, sort of give an expense guidance number in 2023, but is it reasonable to think that – the improvement in efficiencies from having sold those 19 ships, that the expense per unit savings from that would more than offset the inflation piece, which, you know, the inflation piece may, you know, be recurring, but whereas all the other sort of restart and the pause status, all of those expenses, once those are gone, is it reasonable to think that the savings from that less efficient ships being gone would more than offset any inflation?

Thanks. Hey, Rob. Robin, thanks for the question. Happy holidays to you. Obviously, we can't forecast what inflation is going to be and all that, and I know you understand that. But what we can tell you is that exiting the ships and the other efficiencies that we are managing to As I said in my opening comments, put us in a fundamentally lower cost basis, and we'll have to see what happens with inflation and so on. But clearly, whatever revenue we're able to generate and prices look strong now, more of it will fall to the bottom line because of that. But I wouldn't want to try to predict inflation or anything, but we know we're coming out leaner and more efficient and we're expecting to be in position to deliver more EBITDA in 2023 than we did in 2019.

Great. Understood. Thank you both. Thanks.

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

Hi. Good morning. Thanks for taking my questions. Hi. to hear a little bit about the timing of marketing spend over the course of the next year. My guess is that it might be more front-end loaded given the uncertainty around the first half. And then if you have any comments on the supply chain and what you guys are seeing from a procurement perspective, it would be very interesting to hear that given all of the publicity around such issues in the news.

Thanks. Okay, sure. On the marketing spend, first of all, again, We're very pleased with the results we've been able to enjoy, especially with the Carnival brand where the itineraries are more comparable to what they normally would be pre-COVID without any advertising or very limited. So as we get ready for WAVE, we are launching campaigns across the brands in anticipation of WAVE. Still, you know, less spend. than we had, say, in previous years pre-COVID, but significant ramp up from where we are. And we're being very diligent. That's part of the efficiency we talked about in looking at how to effect that spend for the greatest impact. So we've gotten more efficient in the spend, we believe, as well. So we are starting to ramp up. But, again, you know, the full fleet won't be failing until, sometime in the spring or whatever. Obviously, we're looking for bookings now in the second half of 22 and beyond, so a lot of it's finished for that. But we'll ramp up and judge as we go what seems to make the most sense and what's really going to drive guest behavior. In terms of the supply chain and sourcing question, we're global. We're sourced from all over the world. There's lots of dynamics everywhere. We've had single challenges, issue challenges at times with provisions or procuring particular services in a particular area. But overall, we're able to sail in a great way for the guests, where the guests are having a great time, in a way that is compliant and very much in the best interest of public health. And so we've been able to manage through that. Any other comments you want to add, David, on either point?

No, I think you hit the points well. I just did want to add one point. I was on mute. I apologize. When Robin asked the question about the cost, I just wanted to point out to everybody that by the time we get to 2023, remember there's four years of inflation there between 2023 and 2019. So just keep that in mind in addition to the other comments that Arnold made about costs for 2023.

Thank you, guys. Enjoy your holidays.

And you enjoy yours. Thank you.

Our next question comes from Patrick Schultz with Truist Securities.

Please proceed. Thank you, everyone. I wonder if you can just help me clarify sort of apples to apples on your commentary on bookings. And you said, advanced bookings for the second half of 22 and the first half of 23 are now at the higher end historical ranges. Previously, of course, you had just talked about the second half of next year. When you're talking about the advanced bookings for second half of 22 and first half of 23, is that a combined, you know, 22 and 23 together, or is that for both periods separately? I'm just trying to apple to apple to what you said just now. the single period last time.

Does that make sense? It does make sense.

Go ahead, David. Go ahead. Yeah. So the reason we labeled the period separately is because we looked at each individually, and each one was at the higher end of the historical range. Okay. Individually.

Okay. And then... Okay, so we're going to look individually. I want to be clear here. Apples to apples, you had said previously back half of next year was at a new historical high, meaning new historical high, but now it's at the higher end. Is it fair to assume that those bookings for the second half of next year are not quite as high as you had said last quarter? Am I interpreting that correctly? Thank you.

Yeah, you are interpreting that correctly, but by the way, nobody really wants to be breaking new records on the advanced booking curve because if you want to properly, the goal is to maximize the pricing and maximize the revenue when the ship sails. So historically, you know, if you're in that great a book position, it's time to raise price. Go down the booking curve. You don't need to be that bad. If I told you that We were sold out for the back half of 2022 at this moment in time. You tell me we didn't manage it properly. We left money on the table. So it's not shocking that we pulled back a little bit and we raised price and you saw a slowdown in the booking trends.

Fair enough. I appreciate the color on that. Thank you.

Our next question comes from Ben Chicken with Credit Suisse. Please proceed.

Hey, how's it going? Another apples to apples question. Does this, forgive me, does this, when you guys give the forward commentary on pricing, does this adjust for the 19 chips removed, or is it just a gross bookings versus gross bookings previously? If that didn't make sense, I can try a different way. Meaning to capture the mid-shift, I guess.

Yeah. So essentially, we're just looking at the fleet in 2019 that existed in all of the bookings. And so we don't subtract out shifts that left the fleet. We're not doing consistent fleet. We're doing today's fleet versus the fleet we had for 2019 sales. So yes, there is some benefit to... As Arnold said, you know, the newer ships will get a better price point, better mix of cabins and other things, and so that is benefiting the price over time. And they're also more cost-efficient, and they generate significantly more EBITDA as well. So you're seeing all of that flow through in the booking trends and ultimately flow through to the cash flow and P&L.

You know, the other thing that's very important. Another variable are itineraries. So we don't adjust our itineraries either. Certain itineraries are more higher yielding than others and so on and so forth. But those are normal variances that happen year to year.

Gotcha. That totally makes sense. Thank you. And then I guess just one other. You guys mentioned several times bundled packages. I guess are you seeing – I know we're kind of early in – the return to cruise, but are you seeing passengers have an additional wallet once on board as well? Are there incremental opportunities to spend it?

Absolutely. We're seeing higher spending levels on board. There's no question about that. In some cases, bundling is contributing to that. We've always done that each brand is different, and over time there's always been some bundling. There seems to be even more of it. you know, currently than there has been in the past. And it appears that when you have these bundled packages that evolve, you end up getting, you know, greater yield because there's additional spend. But right now there's also, I'm sure, just this pent-up demand, you know, where, you know, people are anxious to go out and experience things and have a good time. And that's also showing up on board revenues right now, which are, They're very strong.

Gotcha.

Thank you.

Our next question comes from Asia Georgieva with Infinity Research. Please proceed.

Good morning. I have a couple of questions. Arnold, you mentioned in the prepared remarks that the Carnival brand is already at 90% occupancy, which is fantastic news. Given that we have the restart dates for all the chefs at this point, they're pretty much fixed. So we can be hopeful that there might be upside from higher occupancy levels. Should we think that Princess might be the next brand that is getting to levels somewhat closer to the Carnival brand and possibly Costa? Is that a fair way to look at it? Can I get my upside from occupancy?

Yeah, thanks for the question. I think, first of all, we've had a number of shifts on the Carnival brand. You had 100% occupancy, and the trend there is very good. But again, those itineraries are most comparable to the itineraries that existed pre-COVID. And so you have various itineraries going on and just great execution by the Carnival team. In terms of which brand is next, that's pretty complicated. As we bring ships back, we don't bring them back right away anywhere near 100% occupancy. And so you have to look at the proportion of ships returning to service and when they're returning to service. And then you have to look at the itineraries. We also have different protocols around the world. We have a number of European sailings that still have social distancing or physical distancing requirements, and that caps the occupancy. in the 60% to 80% range, depending on the itinerary and the ship and so on. So there are a lot of variables here, and we just have to see what the situation is around the speed of ramp-up and what the required protocols are and which itineraries we're going to be able to bring the ships back into. With the plans we have, we can kind of predict, but This is a very dynamic situation and has been. Our team has been really able to adapt to it and execute well. Overall, the trend is positive. And, you know, the brands will get to where they need to be given their particular circumstances, but the trajectory, overall trajectory, despite the fits and the stops and the speed bumps and potholes and so forth and detours, the overall trajectory is positive. Thank you.

You gave me such a great segue into my second question because you mentioned it probably three or four times. And I understand that Australia and New Zealand has basically been closed for the winter season. Coral Princess couldn't do her long voyage this summer, I think, partly because of Australia and New Zealand being such an uncertain, you know, embarkation point at this point. And then... Referencing again itineraries and the new LNG ships coming in, Costa Diadema had to replace Costa Sinaloa in South America because we don't have enough access to or reliable access to LNG facilities. Would you, given that you're the only cruise company, large cruise company that is operating LNG ships, would you have to participate in building out the infrastructure at places such as Brazil, for example?

Yeah, I think we have a strong partnership with Royal Dutch Shell in terms of LNG infrastructure access, et cetera. And then, obviously, we go beyond that relationship to secure what we need. But when we built the first ship, when we started building it, There was no infrastructure, and so we made a commitment, you know, early because of our commitment on an environmental front. And now we're very excited to have the six shifts with another five coming. So, again, you may have to adjust in the moment here or there or whatever, but overall, you know, we see a clear line of sight on infrastructure to support um, good yielding itineraries that are exciting for our guests, you know, with our, uh, LNG power ships. And then if, if absolutely necessary, the ships can use alternative fuel source, obviously. Um, but our, our intention and purpose is, uh, because we built them as LNG, you know, power ships to, to, to use LNG.

So would you like to participate further? I'm sorry, uh,

Do we have to participate in health fund or something, the establishment of the infrastructure? We don't anticipate having to put capital in ourselves to help establish the infrastructure. We think there are plenty of players in that part of the business to do that. Timing may be a little off here or there, but we don't see a need at this point for us to commit our capital to building LNG infrastructure in ports.

Okay, great. Thank you so much, and I'm really glad you've made such a commitment, you know, to a cleaner environment. So I appreciate that. A great holiday season for me as well.

Thank you. Thank you. Same to you.

Our next question comes from Paul Golding with Macquarie Capital. Please proceed.

Thanks so much. So I had a quick question on just structural evolution of the marketplace. David, I think you had mentioned earlier about the mix shift increasing a bit sequentially towards higher end state room mix. And I'm wondering if that's something beyond the current order book you're looking to do more long term because you see higher propensity to spend. Should we expect, as far as thinking, you know, once we're in a clear yield environment, Do we expect just continued increase in higher-end stateroom mix? And then I have a follow-up on inflation.

Sure. So, you know, I think what Arnold in his prepared remarks talked about, I think it was five percentage points higher, five or six percentage points higher balcony cabins. And so the mix of balconies that's in our fleet, in the future is higher than the mix historically. A lot of that has to do with the way in which we build ships and the design of ships. We've been able to get effectively more balcony cabins on each and every ship, which will hopefully, we believe, will drive yields and satisfaction levels of our guests. I don't think you're going to see for the ships we have on order, you know, through 2025, it's all well set. We're beginning to start thinking about future new builds, and we'll analyze that based off of, you know, customer trends and desires, and we'll work those into the plans. And you can be sure we'll be thinking about that and making sure that we optimize our return on invested capital over time as a result of what we do.

Great. And then on the cost side, as we think about your commentary on inflation, your thoughts on 2022 fuel costs, should we start thinking more about whether hedging is going to play a role here again for your team versus what was previously discussed? not a robust hedging program on your side in the fuel space?

You know, we historically haven't hedged. And, you know, at this point in time, if that changes, we'll let you know. But, you know, historically we haven't hedged. We have felt that, you know, over time, you know, that all takes care of itself. And we have some natural hedges with the portfolio we have and, you know, revenues in. and costs and different currencies around the world. I know you're talking about fuel price hedging, but I'm just saying other than that, we really typically don't hedge.

And other than the LNG, nothing meaningful on mixed shift between bunker and NGO and going into the... I think over time, there's no question that over time we'll see a lower ratio

of MGO given the fact we're bringing LNG in and we have our advanced air quality systems on the ships, etc. So the combination of LNG and extended use of advanced air quality systems, we should see a lowering of the requirements on MGO as we go forward. David, do you want to add any additional comments?

No, I think that does it well. A blended fuel average for 22 reflected probably a 10-point drop in the MGL mix from 21 to 22. Great.

Thanks so much for that, caller, and happy holidays.

Hey, happy holidays. Be safe.

Our next question comes from Vince Heaple with Cleveland Research. Please proceed.

Thanks. I wanted to follow up on occupancy. I think you mentioned that August was about 59%, so it looks like it was pretty stable throughout your fiscal 4Q. I definitely appreciate that it's a dynamic situation that you alluded to, but are you thinking about that occupancy build throughout 2022? Do you anticipate it's more linear or more inflecting in the second half? What's built into the budget as it relates to your profitability assumptions?

So I'll start just with an overall comment that clearly the occupancy trend is really positive. Now, when you look at the comparison you just made, there are a lot of dynamics in that. For example, you know, we brought on, as David mentioned, I think, in some of his comments, you know, 22 ships or something. And obviously when you bring the ships on, they're not initially at full occupancy. That's on purpose as we bring them in. So that averages down, you know, your occupancy. So what we're looking at overall for occupancy trends are, you know, where you have comparable itineraries and shifts that have been sailing for a while, what's happening with the occupancy on those shifts. And that's a very positive message. So you have a number of things weighting those occupancy numbers. David?

Yeah, so the other thing to keep in mind that affected the fourth quarter was the Delta variant in the month of August impacted bookings, many of which might have been for the fourth quarter. And as a result of that, we had hoped to have higher occupancy in the fourth quarter, but between the Delta variant and everything else and a few itinerary changes that we had, we were very pleased with the overall 59%. Looking forward, I will say it's very difficult to predict exactly, you know, by month or by quarter what the occupancy is going to be. We're in a good book position, and we're expecting overall the trend to be positive and to see increasing occupancies throughout 2022. But I think it would be premature for us to give some sort of guidance.

Okay, operator, we have time for one more question.

We have a question from Ryan Semby with William Blair. Please proceed.

I have a question around operating procedures. It feels like pre-vaccination and negative test results have been a really effective tool for the industry to lean on here. I guess given more breakthrough cases really around all life experiences in the past month or so, is that still an effective tool going forward? And when do you need to start considering requiring a booster, which I think a market like France is now requiring?

Yeah. Hey, thanks for the question. You know, I think overall we continue to be informed by, you know, again, the scientists around the world, medical experts. And, of course, we continue to act in compliance with whatever the rules are in the destinations and home ports, you know, that we're operating in. But the bottom line is that this is a dynamic situation in the markets where we are requiring testing everywhere. We require vaccines in most places, and we're encouraging boosters. Of course, our crew is vaccinated, and over 10,000 have already received boosters and will be continuing with that. They're tested very frequently. the crew is and those protocols have worked and have helped us be amongst the safest forms as I mentioned before of socializing and travel of any of the travel and leisure sectors so they have worked and they are continuing to work so we'll see how it plays out we'll follow the science and obviously we'll be in compliance But right now, we are sailing with confidence. As you noted, you know, there are going to be some cases. There's a far lower incidence of cases right now on crews than in society at large. And, you know, we want to work to continue to ensure that that's the case. And when there are cases, you know, the risk of propagation or spread of the virus has been, you know, very effectively controlled to date. And as long as that continues to be the case, we'll continue to sail with confidence. But we'll adjust and adapt to what we need to. I think the most important thing is where we have had cases, in most instances, they're either asymptomatic or minor symptoms. We have not had lots of cases where people have to be hospitalized or worse. And I think that's important, and that's also important uh, increasing trend in society at large. Uh, and hopefully, um, you know, that trend will continue.

Yeah. Thank you.

Thank you. Other questions? That was the last question.

Okay.

Hey, uh, look, everyone, thank you. I really appreciate your engagement. Um, please have a safe and, and joyful holiday. And, um, We look forward to talking to you guys at the next business update. So thank you very much.

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.