Carnival Corporation Ltd. Common Shares

Good morning, this is Beth Roberts, SVP Investor Relations. Welcome to our fourth quarter 2023 earnings conference call. I'm joined today by our CEO, Josh Weinstein, our Chief Financial Officer, David Bernstein, and our Chair, Vicki Arison. Before we begin, please note that some of our remarks on this call will be forward-looking. Therefore, I will refer you to the cautionary statement in today's press release. All references to ticket prices, net per diem, net yields, and adjusted cruise costs without fuel will be in constant currency unless otherwise stated. References to per diems and yields will be on a net basis. Our comments may also reference cruise costs without fuel, EBITDA, net income, net loss, earnings per share, free cash flow, and ROIC, all of which will be on an adjusted basis unless otherwise stated. All these references are non-GAAP financial measures defined in our earnings press release. A reconciliation to the most directly comparable U.S. GAAP financial measure and other associated disclosures are also contained in our earnings press release and in our investor presentation. Please visit our corporate website where earnings press release and investor presentation can be found. With that, I'd like to turn the call over to Josh.

Thank you, Beth. It's safe to say we ended the year on a high note and closed another quarter with record revenues, record booking levels, and record customer deposits. In fact, we consistently set records in all four quarters this past year. We also achieved per diem, EBITDA, and net income for the fourth quarter that all exceeded the high end of our September guidance range, with cruise cost ex-fuel in line with expectations. Fourth quarter yields continued on a positive trajectory, significantly higher than a very strong 2019 and even higher than we had anticipated and enabled us to overcome four years of high cost inflation to deliver per unit EBITDA that eclipsed 2019, holding fuel and currency constant. It was encouraged to see both North American and European brand occupancy levels exceed 101% in the fourth quarter, with per diems for our North American brands up double digits over 2019, and our European brands just shy of a double digit increase. We delivered per diem improvements of more than seven points for the full year, with even stronger acceleration in Q4, while closing the double digit occupancy gap at the start of the year to reach historical levels for the second half of 2023. An absolute spending on board was consistent across all four quarters as we drove improvements in ticket prices. We delivered $85 million more to the bottom line in the fourth quarter than forecasted, which pushed us through to positive adjusted income for the year. Strong EBITDA and cash from operations also propelled us on our journey to reduce the debt load necessitated during the pause in operations. We've made debt payments of $6 billion this year alone, and we still have well over $5 billion of liquidity on top of strong and improving cash flow, which will contribute to further debt reduction over time. All of this leaves us firmly placed on our path back to achieve investment grade leverage metrics by 2026. And most importantly, our brand delivered happiness to over 12 million guests this year. laying the foundation upon which all of our sea change targets are built. Turning to bookings, we reached an all-time high in booking volumes for the two weeks around Black Friday, Cyber Monday, and ended the year in the best booked position we have ever seen on both price and occupancy, setting 2024 off to an amazing start. We now have nearly two-thirds of the business on the books for 2024 and at considerably higher prices. And during the fourth quarter, we essentially maintain the significant occupancy advantage we had built for 2024 going into the quarter, while improving year over year price position of our book business even further. At this point, much of the first half is already behind us. With approximately 85% of the business on the books, we've essentially closed the double digit occupancy gap to historical level on higher capacity and at higher prices for our peak summer period all major products are better booked at higher prices benefiting from an improving trend in both occupancy and price during the fourth quarter our yield management strategy the baseload bookings has clearly set us up for another record year and again we have seen no signs of our business slowing The book position for our North American brands remains as far out as we have ever seen and well ahead of last year at pricing that is considerably higher. Our European brands just delivered record fourth quarter booking volume at considerably higher prices and with a booking window now fully back to historical norms. As expected, our European brands are poised to become an even greater contributor to our 2024 operating improvements. At the same time, we are continuing to pull forward onboard revenue through bundling and pre-cruise sales. This strategy, coupled with even more features onboard our newer ships for our guests to enjoy, positions us well for further onboard revenue growth next year. All told, we expect occupancy for the full year to return to historical levels on 5% higher capacity while delivering nicely higher per diems building on this year's record results. In 2023, we captured over 3.5 million new to cruise guests and remain well-positioned to continue to take share from land-based alternatives. In other words, we are gaining momentum in our ability to close the unforrented value gap to land-based alternatives. And to aid in that effort, we can further champion the fact that while many land-based alternatives have pulled back on service levels, we still deliver incredible service to our guests thanks to our amazing crew. This pairs exceedingly well with the expansive amount of guest-pleasing amenities offered on board our newer fleet. In fact, while almost four years have passed since the pause in our operation, our fleet actually came out of the pause a year younger through our fleet optimization efforts. This past year alone, we benefited from three fantastic new ships, including Carnival Celebration and P&O Cruises Arvia, both of which are flagships for their respective brands, yet leverage our scale as the seventh and eighth vessels in our popular and exceptionally efficient series of XL class ships. And we welcome Seabourn Pursuit, our second expedition ship. Seabourn has truly raised the bar for expedition cruising in extreme weather. luxury. And while not technically new, Carnival Cruise Line also welcomed Carnival Venezia into its fun Italian-style platform via the transfer from Costa, and it has been going gangbusters. It's the biggest example yet of how we leverage our scale and will be doubling down when we bring over her sister ship, Carnival Forense, in 2024. Looking forward, this year is set to match the excitement level with the introduction of Carnival Jubilee, a new icon for Carnival Cruise Line and which no doubt will be the pride of Texas as she has her inaugural home in Galveston. The innovative Sun Princess, the first of its class and a real game changer for Princess. And Queen Anne, a new flagship for Cunard and its first new ship in 14 years. With all of these additions, Roughly 30% of our capacity will be newly delivered ships. We also made meaningful headway on other strategic asset projects. We began construction on Celebration Key, which will be the largest and closest exclusive destination in our destination portfolio and a real game changer for Carnival Cruise Line. We'll bring 18 Carnival ships departing from nine home ports to Celebration Key. And while we are still about a year and a half from go live, we are already amping up the awareness and excitement around this fantastic destination. We've also started the process for a significant upsize in guest traffic at Half Moon Keep, our exclusive and beautiful, pristine island destination in the Bahamas, with the creation of a pier-side berth that can accommodate even our largest vessels. We've begun work with our Grand Bahamas shipyard partners on the construction of two floating dry dimes. one of which will have the largest lifting capacity in the world. This will result in significant benefit in the future as we reduce travel time, preserve revenue days, and at the same time, reduce our fuel consumption. As you know, we've also been investing more in advertising over the last 18 months, and it has definitely paid off with elevated awareness and consideration for our brand and record booking levels and revenue results. In fiscal 2023, our web visits were up over 35%, our paid search was up roughly 50%, and our natural search was up almost 75%. All many, many multiples of our 5% capacity growth. In the fourth quarter, we carried more new to cruise and more new to brand guests than we did in the fourth quarter of 2019. Given our success on generating demand, at this point in time, We plan to maintain a similar level of advertising on a unit basis in 2024 compared to 2023, optimizing around each brand. This will help us continue to build demand and bookings well outside of the current year. We're working aggressively to keep our strong momentum going through wave season and beyond. Just to list a few examples, Costa recently launched a spectacular new campaign in its core markets, focusing on moments where guests are left speechless. Holland America launched a sequel to its highly successful Time of Your Life campaign, and AIDA just kicked off its new campaign, Experience Yourself Differently, in conjunction with a holiday season. Carnival will launch a new marketing campaign, highlighting Celebration Key in time for waves. P&O Cruise's new campaign, Holiday Like Never Before, launches Christmas Day in the U.K., And Cunard has planned a welcome fit for a queen to introduce Queen Anne early next year, which is sure to capture huge fanfare. We've been talking about upping our game across the commercial space, and we've made good progress. Of course, we're not done. And as you'd expect, we never will be, as there is always room to improve. There's much more to come as we roll out advancements to our yield management tools and lead generation techniques continue to invest in sales and sales support, and build on already strong relationships with our trade partners. Turning to costs, as we previously indicated, unit cruise costs ex-fuel for 2024 are expected to be higher than inflation due to the impact of closing the occupancy gap and the higher volume of dried octopuses. David will walk you through in more detail. But that said, we have been working aggressively to mitigate inflation through our cost optimization initiatives, including leveraging our scale. In some cases, we're investing today for future benefits. Just to cite a couple of examples of initiatives underway, we're essentially complete with a rollout of Starlink across the fleet. This will produce more than a 20% reduction in cost per megabit in 2024 and significantly increase our bandwidth pipelines. resulting in both better guest experience and higher onboard revenues, a clear win-win. And with our new vendor-neutral platform, we are positioned to quickly capture cost savings in future years. We've also launched our Maritime Asset Strategy Transformation, or what we refer to internally as MAST. MAST is a centralized system developed to optimize the management of equipment and machinery across all brands and all of our ships. MAF will allow us to leverage spare parts more effectively across the entire fleet and optimize our maintenance schedules and practices, all of which will strengthen our efficiency and reduce unplanned maintenance over time. While we won't see the P&L benefits from MAF this year as we ramp up its implementation in 2024, we expect a multi-year benefit well in excess of $100 million that really begins to ramp up in 2026. All the efforts we're making to drive revenue and manage costs are expected to lead to a four-point margin improvement in 2024. We're guiding to record EBITDA of over $5.5 billion, which is 30% higher than 2023. Thanks to a strong second half of 2023, we're already tracking ahead of our plan to achieve fee change, our three-year financial targets, calling for the highest ROIC and EBITDA for ALBD in nearly two decades. And our 2024 guidance delivers another step change toward these deliverables. EBITDA for birthday is expected to be up by more than 25% over our target starting point, hence more than halfway to the 50% increase expected in our C-Change targets. Today's guidance would also deliver 9% ROIC a four-point increase from the starting point of our target. This leaves just one-and-a-half-point annual increases in 2025 and 2026 to hit our 12% target. Not surprisingly, our brands dedicated to a single market, Carnival, AIDA, and P&O Cruises in the UK, are again leading the charge with the highest ROIC levels in the company. And with regards to our greenhouse gas target included in our 2026 change program our GHC intensity in 2024 is expected to be just shy of the 20% reduction from 2019 we're targeting. it's worth noting this was a 2030 goal we had already pulled forward by four years, we have been and continue to work aggressively. to reduce our environmental footprint and fuel costs at the same time. This deep commitment has not only resulted in industry-leading fuel efficiency, it has also resulted in lower absolute GHG emissions. Our absolute emissions are over 10% lower than the 2011 peak, and that's despite capacity growth of 30% since then. Last year, we also exceeded our industry-leading shore power capability goal. We are ahead of the curve and now have twice as many ships capable of shore power than there are ports around the world available to plug into. Again, I credit all of these important achievements to our people, ship and shore. Collectively, they continue to outperform, allowing us to make good headway on our sea change targets. We're poised for another step change in operating improvement this year, with nearly two-thirds of the business on the books at considerably higher prices, ongoing momentum from improvements across the commercial space, the amazing vacation experiences we deliver day in, day out, at way too good of a relative value to land-based alternatives and an even greater experience gap, all while growing onboard revenues and managing costs. All of this combined sets us up well to deliver another year of record revenues and record EBITDA. Our cash flow strength coupled with excess liquidity, the return of credit card reserves in a few weeks, and the lowest order book in decades will allow us to continue to actively manage down debt and aggressively reduce interest expense over time. It will also propel us on our path to deleveraging investment grade credit ratings and higher ROIC. I remain confident in our continued execution with an unparalleled portfolio of best-in-class brands, an amazing fleet that just keeps getting better and better, and our greatest asset, our people. This has been a truly remarkable year, and we've come a long way in an incredibly short amount of time. I would like to thank our team members, ship and shore, the best in all of travel and leisure, for delivering unforgettable happiness to over 12 million guests this year by providing them with extraordinary cruise vacations while honoring the integrity of every ocean we sail, place we visit, and life we touch. And thank you for the strong support from our travel agent partners, as well as our loyal guests, destination partners, investors, and our many other stakeholders. With that, I'll turn the call over to David.

Thank you, Josh. I'll start today with a summary of our 2023 fourth quarter and full year results. Next, I will provide a recap of our refinancing and re-leveraging efforts during 2023 and finish up with some color on our 2024 full year and first quarter December guidance. Our fourth quarter bottom line exceeded the better end of our guidance range as we outperformed our September guidance. $85 million improvement was driven by favorability and revenue from higher ticket prices as net per diems were up over 10%, three points better than the midpoint of our September guidance range. In fact, fourth quarter revenues of $5.4 billion were a fourth quarter record and net yields were up nearly 8% as compared to 2019. a great way to close out the year and another indication that we do not see a slowdown in our consumers. For the full year, thanks to the tremendous efforts of our team members, ship and shore, we closed the books on 2023 with positive adjusted net income. That is a far cry from our March guidance as we delivered over $550 million more to the bottom line which was partially offset by a drag from fuel price and currency exchange rates of over $100 million. The improvement was driven by delivering a 7.5% increase in net revenue per diems versus 2019, which was over double the 3.5% midpoint of our March guidance, while closing the double digit occupancy gap at the start of the year to reach historical occupancy levels. Absolute spending per diems on board were consistent across all four quarters as we drove improvements in ticket prices on both sides of the Atlantic and ended the year with net yields of nearly 1% over 2019. Next, I will provide a recap of our refinancing and deleveraging efforts during 2023. As Josh indicated, our full year 2023 strong EBITDA of $4.2 billion and strong cash from operations of $4.3 billion propelled us on our journey to pay down debt and reduce the debt burden necessitated by the pause in guest cruise operations. During 2023, we made debt payments of $6 billion and ended the year with just over $30 billion of debt. which is $3 billion better than we forecasted just nine months ago during our March conference call, and almost $5 billion off the first quarter peak, transferring enterprise value from debt holders to shareholders. During 2023, we proactively addressed our debt profile as we successfully started our refinancing and deleveraging program. we accelerated our debt repayment efforts and aggressively managed down our interest expense. In 2023, we effectively stretched out the 2025 maturity on favorable terms by replacing it with a $1.3 billion term loan fee facility through 2027 and a $500 million offering of senior secured notes through 2029. This refinancing along with our optimism about our future and the return of customer deposit reserves, gave us the confidence to accelerate our debt repayment by calling $1.2 billion of our highest cost debt. In addition, we opportunistically prepaid $2.8 billion of additional debt for a total of $4 billion of debt prepayments, including the $1.2 billion of debt calls. Our credit card processes returned to us $800 million of credit card reserves, and we now expect an additional $800 million to be returned this current quarter, representing substantially all of the remaining credit card reserves at U.N. We took actions in both 2022 and early in 2023 to increase the fixed rate percentage of our debt portfolio to over 80%. up significantly from our 58% fixed levels at the end of 2021, which provided us protection from rising interest rates. Our overall average interest rate is just over 5.5%. All these actions to address our debt profile alongside our improved business performance drove $200 million of interest savings compared to our March guidance. Our maturity powers have been well managed in 2026 with just $2.1 billion of debt maturities next year, $2.2 billion in 2025, and $3.2 billion in 2026. And looking forward, we will continue to evaluate refinancing opportunities and opportunistically prepay additional debt. So in 2024, we will be placing higher cost fixed rate debt with lower cost export credit financing as we take delivery of ships during 2024. Our leverage metrics will also continue to improve throughout 2024 as our EBITDA continues to grow. Now turning to our 2024 full year December guidance. We are forecasting a capacity increase of about 5.5% compared to 2023. We are expecting to deliver strong 2024 net yield improvement with our guidance forecasting an increase of approximately 8.5% for the full year 2024 when compared to 2023. And that is on top of our improved 2023 results where we delivered a 7.5% increase in net revenue per dam versus 2019. The strong improvement in 2024 net yields is a result of the increase in all the component parts. Higher ticket prices, higher onboard spending, and higher occupancy, with all three components improving on both sides of the election. We are well positioned to drive 2024 ticket prices higher with significantly less inventory remaining to sell at the same time last year despite a capacity increase of over 5%. Occupancy for the full year 2024 is on track to return to historical levels. Keep in mind 2019 was a high watermark for occupancy. For 2024, we forecast to be well within our historical occupancy range as we balance price and value to optimize total revenues and achieve record yields. Now turning to cost. Cruise costs without fuel for available lower birth date, or ALBD, is currently expected to be up approximately 4.5% for 2024 versus 2023. Broadly speaking, there are four main drivers of the cost change. First, our forecast is for decelerating inflation, but nonetheless inflation with an average 3.5% increase across all our cost categories globally. Second, with occupancy returning to historical levels, the impact on costs should be 1.5 to 2 percentage points higher in 2024 as compared to 2023. Third, in 2024, we are expecting 586 dry dock days, an increase of 14% versus 2023 which is expected to impact our overall year-over-year cost comparisons by about three-quarters of a point. And four, countering these headwinds, we expect these cost increases will be somewhat mitigated by a couple of points, giving economies a scale from our capacity growth, which is enhanced by taking delivery of larger, more efficient ships, along with various other cost optimization initiatives. Fuel consumption per ALBV is expected to decrease another 4%, and that is on top of the 15.5% reduction achieved from 2019 to 2023. The net impact of fuel price and currency is expected to favorably impact 2024 by $90 million, with lower fuel prices favorable by $94 million, while the change in currency exchange rates slightly goes the other way. And finally, a few things to note about the outsized increases in the first quarter of 2024. The higher net yield guidance for first quarter 2024 of 16.5% versus the full year 8.5% is driven by the larger improvement in first quarter occupancies. let's not forget that we did not reach historical occupancy levels until the second half of 2023. So there is much more occupancy-driven net yield opportunity in the first half. On the cost side, the higher cruise costs without fuel for available lower birthday guidance for the first quarter of 2024 of 9.5% is driven by four main factors. First, the largest improvement in occupancy will occur in the first quarter. And while it drives greater yield increases in the first quarter, it also drives greater cost increases, which means a total of three to four point cost drag in the quarter. Second, while dry dock costs impact our full year guidance, the seasonality of dry dock costs in the first quarter of 2024 as compared to the prior year drives a cost increase of about one and a half points for this quarter. Third, the seasonality of advertising expense and a variety of other expenses between the quarters differs in 2024 as compared to 2023, which will put a total cost increase of approximately three points into this quarter. Advertising alone is one of the three points. And fourth, like the full year inflation, mitigated by economies of scale from our capacity growth along with various other cost optimization initiatives. Given the higher first quarter cruise costs without fuel for available lower berth day, the implied guidance for the cost in the second through the fourth quarter is approximately 3%. In summary, putting all these factors together, Our net income guidance for the full year 2024 is approximately $1.2 billion, with EBITDA forecasted at $5.6 billion, a significant improvement from 2023. For those of you who are modeling EPS, let's not forget that when you calculate the rooted EPS, you need to add back the $94 million of interest expense related to the company's convertible notes. Our improved financial results And our successful refinancing and deleveraging efforts in 2023, along with our 2024 December guidance, leaves us firmly placed on our path to achieve our 2026 C-Change goals, moving us further down the road to rebuilding our financial fortress and delivering long-term shareholder value. And now, operator, let's open up the call for questions.