Carnival Corporation Ltd. Common Shares

Good morning, and welcome to our Business Update conference call. I'm Arnold Donald, President and CEO of Carnival Corporation and PLC. Today, I'm joined telephonically by our Chairman Mickey Arison, our Chief Financial Officer David Bernstein, and Beth Roberts, Senior Vice President, Investor Relations. We'd like to 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. Prior to getting into the details of the update, I just first want to say my heart goes out to all those affected by the invasion of Ukraine. I know thousands of members of our carnival family are directly impacted and have loved ones in the area. We, along with the rest of the world, are praying for a peaceful resolution. Now concerning our business, we're well on our way back to full cruise operations with three-fourths of our capacity having resumed guest operations and a plan to return the balance of the fleet for the summer seasons. And while the conversation around COVID-19 is greatly reduced, we still have to and are successfully actively managing. Our enhanced protocols have helped us become among the safest forms of socializing and travel with far lower incident rates than on land. In fact, we have carried more than 2 million since resuming guest operations. Our guests are enjoying great vacations, and we are enjoying historically high guest satisfaction scores. Of course, 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. our guests, the people in the communities we touch and serve, and, of course, our Carnival family, our team members Shipboard and Shoreside. I'd like to start today by sincerely thanking our Carnival team members for their significant contributions which collectively have gotten us to where we are today despite a multitude of challenges. Through their collective efforts so far, we successfully returned 64 ships to guest operations, enabled over 70,000 crew members to return to work happy, healthy, and vaccinated through our team's considerable efforts to secure and distribute vaccines, reopened our eight owned and operated private destinations and port facilities, which about half of our guests have experienced since resuming operations, Princess Key, Half Moon Key, Grand Turk, Mahogany Bay, Amber Cove, Cozumel, Santa Cruz Itineraries, and Barcelona. And most importantly, delivered 2.2 million joyful vacations and counties. At the same time, we also managed down operating costs, reducing our monthly adjusted EBITDA losses by 40% since mid-2020. completed a continuous stream of capital raising exceeding $29 billion, refinanced more than $9 billion of debt, improving interest rates, amended over 100 different lender agreements, and successfully addressed our maturity tower out through 2024, all of which culminated in a consistent liquidity position exceeding $7 billion, an integral part of reinforcing stakeholder confidence. At our scale, the sheer volume of these accomplishments is no small feat, yet these challenging operational deliverables were achieved while encountering strong headwinds like Delta, Omicron, complex, constraining, and constantly changing regulations and protocols, and more recently, the very troubling invasion of Ukraine. all of which undermined consumer confidence and generated greater friction on cross-border travel, labor, supply chain, itinerary planning, and more. Now, concerning the invasion of Ukraine, for the 4.6% of our capacity that was expected to call on Russian ports in the remainder of the year, we have decided to totally withdraw from Russia and have found attractive alternatives. That said, St. Petersburg was a marquee port for us, and while there have been times where we were unable to offer certain types of itineraries, in this instance, the close-in nature of the deployment change does lead to some regional disruption in recent booking patterns. Now, while the invasion has added some volatility to our business and does impact consumer confidence, with 50 years under our belt, We have successfully managed through a plethora of headwinds, like spikes in fuel prices, the Gulf War, Arab Spring, September 11th, Ebola, Zika, SARS, MERS, and more. And once again, the mobility of ships continues to be an asset. Time and time again, we have seen guests travel through challenges. In fact, Carnival Cruise Line turned 50 this month. and recently enjoyed its three best weeks of bookings since resuming operations. As we previously disclosed, we had experienced an impact on booking patterns more broadly at the start of our fiscal year due to the Omicron variant. Despite Omicron, guests carried grew by nearly 20% in the first quarter. Of course, albeit less than we would have otherwise achieved without the elevated cancellations which occurred, in part, due to a higher incidence of pre-travel positive COVID test results, as well as the difficulties that many prospective guests experienced obtaining timely tests. Moreover, there was just an overall impact Omicron had on our society over the course of our first quarter. However, we did maintain price as we said we would, and we fully expect an extended wave season. In fact, we're already achieving occupancies in the month of March that are nearing 70%, with more than 40 sailings exceeding 100% occupancy, a testament to the underlying demand for crews and closer in nature of booking patterns. Concerning recent fuel prices, this is certainly not the first time we've seen a dramatic spike in fuel prices. Helping to address that, we aggressively manage our consumption. and we are stepping up our efforts to further reduce consumption. Now, historically, we have not used fuel derivatives. And while there is an obvious benefit of smoothing earnings, over time, prices have gone up and they've also come down. But there is an economic cost to derivatives. Over the past few years, we're very glad not to have speculated with fuel derivatives because there would have been a further drain on cash. With our proactive efforts to reduce our carbon footprint since 2007, we have reduced our unit fuel consumption nearly 30% and carbon intensity nearly 25% through 2019. And thanks to accelerated efforts across the board, upon reaching full fleet operations, we anticipate that we will achieve a further 10% reduction in unit fuel consumption and 9% reduction in carbon intensity. as compared to 2019. In fact, we've been working hard to resume operations, not only a strong operating company, but a more sustainable, better all-around company. We made further strides toward those efforts again this quarter. During the quarter, we enhanced our fleet optimization efforts, delivering three new ships, Costa Toscana, Aida Cosma, and Discovery Princess, bringing the total to nine larger, more efficient shifts delivered since 2019. Moreover, we've announced the removal of an additional three smaller less efficient shifts, bringing the total to 22 shifts to be removed from the fleet also since 2019. The accelerated removal of these less efficient shifts has lowered capacity growth to 2.2% compound annually from the previous 4.5% through 2025. which should enable us to capitalize on pent-up demand on intentionally constrained capacity. The fleet optimization effort will also foster higher revenues through a 7 percentage point increase in premium price balcony cabins and an even better platform for onboard revenue opportunities, as well as generating a 5% reduction in ship level unit costs, excluding fuel, going forward, enabling us to deliver more revenue to the bottom line. Upon returning to full operations, nearly a quarter of our capacity will consist of newly delivered shifts, expediting our return to profitability and improving our return on invested capital. Again, we have long since recognized the importance of reducing our carbon footprint, having peaked our absolute carbon emissions more than a decade ago, and we are continuing to innovate to effect change. AIDA Green will become our first ship to pilot battery power, enabling her to optimize the efficiency of the engines while at sea, reducing emissions. We also signed groundbreaking agreements throughout subsidiary EcoSpray to partner in the production of green bioenergy generated from waste sources. In addition, we continue to invest to drive energy efficiency, rolling out our fourth in a series of 23 ships with innovative air lubrication systems. which reduces drag on the hull and generates nearly 5% reduction in carbon emissions. We've also taken strides to reduce our impact on climate change and mitigate climate risk in our business. We are working toward full adoption of the recommendations of the Task Force on Climate-Related Financial Disclosures, that's TCFD, and have begun by reinforcing our strong governance framework with Maya assuming the role of Chief Climate Officer. and with the formation of our Strategic Risk Evaluation Committee to further support climate-related strategic decision-making and risk management processes. Having broadened our commitments to ESG with the introduction of our 2030 sustainability goals and our 2050 aspirations, we are tracking ahead on both our important food waste and single-use plastic reduction efforts. and we are nearing completion on the role of more than 600 food waste biodigesters across our fleet, the most advanced technology of its kind. We believe we have clearly maximized our return to service, and we have positioned our company well to withstand volatility on our path to profitability. 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 invested capital over time. Again, our cash flow will be the primary driver to return to investment-grade credit over time, creating greater shareholder value. There have been multiple demonstrations of the resilience of the human spirit and the resilience of our business. It is heartening that our company can be a part of bringing our guests much-needed social enjoyment with family and with friends, along with the excitement of experiencing new destinations and cultures, all dearly missed throughout the pandemic. I referenced Carnival Cruise Line celebrating 50 years. Fifty years, frankly, seems such a short time ago that Ted Arison started Carnival Cruise Line and, along with Mickey, built the modern-day cruise industry. bringing joy from millions upon millions of guests and creating hundreds of thousands of jobs with all that means and creating better quality of life around the world. Of course, it could not have been done without the overwhelming support from everyone. 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 shareholders, bondholders, banks, and the export credit agencies for your continued confidence in us and for your ongoing support. And again, I would like to thank our team members for their dedication, their commitment, and their outstanding execution. We are excited to welcome everyone back on board. With that, I'll turn the call over to David.

Thank you, Arnold. I'll start today with a review of guest cruise operations along with a summary of our first quarter cash flows. Then I'll provide an update on booking trends and finish up with adjusted EBITDA and net income expectations. Turning to guest cruise operations, during the first quarter 2022, we restarted 10 additional ships, resulting in 60% of our fleet capacity in guest cruise operations for the whole of the first quarter. This was a substantial increase from 47% during the fourth quarter 2021. As of today, 75% of our fleet capacity has resumed guest cruise operations. Agility to continuously adapt to the ever-changing landscape has been one of our greatest strengths during the pandemic. In the first quarter, we continued to demonstrate this skill as we adjusted restart dates to optimize our guest cruise operations, and we now expect each brand's full fleet to be back in guest cruise operations for its respective summer season where we historically generate the largest share of our operating income. I am happy to report that just last week we announced plans for our Australia restart commencing at the end of May after the government advised that cruising would be permitted beginning in April. For the first quarter, occupancy was 54% across the ships in service, We never expected to achieve our historical 100 plus percent occupancies for the first quarter since many of these sailings were confirmed just a number of months before departure, which resulted in less than the normal booking lead time. However, we had anticipated first quarter occupancy would exceed the 58% achieved in the fourth quarter of 2021. We started the quarter with over 55% cabin occupancy booked for the first quarter and expected to improve upon that during the quarter. However, during the first quarter 2022, as a result of the Omicron variant, we experienced an impact on bookings for near-term sailings, including higher cancellations resulting from an increase in pre-travel positive test results challenges in the availability of timely pre-travel tests and the disruption that Omicron caused on society during this time. All of this inhibited our ability to build on our cabin occupancy book position for the first quarter 2022 during the first quarter, resulting in occupancy for the first quarter 2022 at 54% being lower than the 58% occupancy we achieved in the fourth quarter of 2021. Despite all that, during the first quarter, we carried over a million guests, which was nearly a 20% increase from the fourth quarter of 2021. Once again, our brands executed extremely well, with Net Promoter scores continuing at elevated levels compared to pre-COVID scores. Revenue per passenger day for the first quarter 2022 increased approximately 7.5% compared to a strong 2019, despite our lucrative world cruises and exotic voyages being shelved this year. Our revenue management teams held on price when we experienced an impact on booking for near-term sailings, optimizing our longer-term prospects for future revenue and pricing. Once again, our onboard and other revenue per diems were up significantly in the first quarter 2022 versus the first 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 onboard. Over the past two and a half 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 in onboard and other revenue. As a result of these bundled packages, the line between passenger tickets 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. On the cost side, our adjusted cruise costs without fuel per available lower birthday, or ALBD as it is more commonly called, For the first quarter, 2022 was up 25%. I did say adjusted cruise costs and not net cruise costs, a term we had previously used. The calculation of adjusted cruise costs and net cruise costs are the same. However, we felt the new name more appropriately lined up with our other non-GAAP measures of adjusted net income and adjusted EBITDA. which are also referenced in our business update press release issued earlier this morning. The increase in adjusted cruise costs without fuel per ALBD is driven essentially by five things. First, the cost of a portion of the fleet being in pause status. Second, restart-related expenses. Third, 15 ships being in dry dock during the quarter which resulted in nearly double the number of dry duct days during the first quarter versus the first quarter 2019. Fourth, the cost of maintaining enhanced health and safety protocols, and finally inflation. Remember that because a portion of the fleet was in pause status during the first quarter and the higher number of dry duct days, we spread cause over less ALBDs. I did want to point out that in the second quarter of 2022, we expect a further 24 ships to enter dry dock as part of our resumption of cruising ramp up, optimizing our dry dock schedule while the ships are not in service, and ensuring that the ships look great when they welcome their first guests back on board. This will again result in a doubling of the dry dock days during the quarter compared to 2019, which will impact adjusted cruise costs without fuel per ALBD during the second quarter. We anticipate that many of these costs and expenses driving adjusted cruise costs without fuel per ALBD higher will end during 2022 and will not reoccur in 2023. As a result of all of the above, we expect to see a significant improvement in adjusted cruise costs excluding fuel per AOBD from the first half of 2022 to the second half of 2022, with a low double-digit increase expected for the full year 2022 compared to 2019. Next, I'll provide a summary of our first quarter cash flows. We ended the first quarter 2022 with 7.2 billion in liquidity versus 9.4 at the end of the fourth quarter. Looking forward, we believe we remain well positioned given our liquidity. The change in liquidity during the quarter was driven essentially by four things. First, an improved negative adjusted EBITDA of a billion dollars due to our ongoing resumption of guest cruise operations despite the impact of the Omicron variant. We had thought adjusted EBITDA was going to improve more. But as I said before, the Omicron variant inhibited our ability to grow occupancy during the quarter, which limited the improvement in adjusted EBITDA. Second, our investment of $400 million in capital expenditures, net of export credits. Third, 500 million of dead principal payments, and fourth, 400 million of interest expense during the quarter. Now let's look at booking trends. Since the middle of January, we have seen an improving trend in booking volumes for future sailings. Recent weekly booking volumes have been higher than at any point since the restart of guest cruise operations. During the first quarter, we increased our book occupancy position for the second half of 2022, albeit not at the same pace as a typical wave season due to the Omicron variant. As a result, the cumulative advance book position for the second half of 2022 is at the lower end of the historical range. However, We believe we are well situated with our current second half 2022 book position, given the recent improvement in booking volumes, coupled with closure in booking patterns and our expectation for an extended wave season. We continue to expect that occupancy will build throughout 2022 and return to historical levels in 2023. And importantly, I am happy to report that prices on these bookings for the second half of 2022 continue to be higher, with or without future cruise credits or more commonly called FCCs, normalized for bundled packages, as compared to 2019 sailings. Our cumulative advance book position for the first half of 2023 continues to be at the higher end of the historical range Also, at higher prices, with or without FCCs, normalized for bundled packages as compared to 2019 sailings. This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison as that was a high watermark for historical yields. I will finish up with our adjusted EBITDA and net income expectations. We all know that booking trends are a leading indicator of the health of our business. With improved recent booking trends leading the way, driving customer deposits higher, positive adjusted EBITDA is clearly within our sights. Over the next few months, we expect ship-level cash contribution to grow as more ships return to service and as we build on our occupancy percentages. However, as I've already said, adjusted EBITDA over the first half of 2022 has been or will be impacted by the restart related spending and dry dock expenses as 39 ships over 40% of our fleet will have been in dry dock during the first half of fiscal 2022. Given all these factors combined, we expect monthly adjusted EBITDA to continue to improve and turn consistently positive at the beginning of our summer season. We continue to expect a net loss for the second quarter of 2022 on both a US GAAP and adjusted basis. However, we expect a profit for the third quarter of 2022. For the full year, we do expect a net loss. Looking to brighter days ahead in 2023, with the full fleet back in service all year, 8% more capacity than 2019, an improved fleet profile with nearly a quarter of our capacity consisting of newly delivered ships, continuing momentum on our outstanding net promoter scores, and occupancy returning to historical levels, we are looking forward to providing memorable vacation experiences to nearly 14 million guests and generating potentially greater adjusted EBITDA than 2019. And now, I'll turn the call back over to Arnold.

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