Carnival Corporation Ltd. Common Shares

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.