Earnings Call Transcript - CCL Q1 2021

Arnold Donald, President and CEO

Good morning, everyone, and welcome to our Business Update Conference Call. I am Arnold Donald, President and CEO of Carnival Corporation & plc. Today, I'm joined telephonically by our Chairman, Micky Arison; as well as David Bernstein, our Chief Financial Officer; and Beth Roberts, Senior Vice President, Investor Relations. Thank you all for joining us this morning. Now before I begin, please note that some of our remarks on this call will be forward-looking. Therefore, I must refer you to the cautionary statement in today's press release. Of course, the thing on everyone's mind is when we are going to resume sailing here in the U.S. While we're very disappointed with the April 2nd additional guidance issued under the conditional sail order, all 30 of our ships in U.S. waters that fall under the conditional sail order have achieved green status, and we are continuing to work with the CDC and the administration to find practical approaches to resuming cruising in a way that serves the best interest of public health.

David Bernstein, Chief Financial Officer

Thank you, Arnold. I'll start today with an update on booking trends. Then I'll provide our monthly average cash burn rate, along with the summary of our first quarter cash flow. Next, for those of you who are modeling our net income and EPS, I will provide you with some key data and then finish up with some insights into our financial position. Turning to booking trends: our booking volumes have been very strong given the circumstances. Booking volumes for all future cruises during the first quarter 2021 were approximately 90% ahead of booking volumes during the fourth quarter 2020. Just as positive, our cumulative advanced book position for the full year 2022 is ahead of a very strong 2019, which was at the high end of the historical range.

Arnold Donald, President and CEO

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

Operator, Operator

Thank you. Our first question comes from Steve Wieczynski with Stifel. Please proceed.

Steve Wieczynski, Analyst (Stifel)

Hey, guys, good morning. So it seems like yesterday we got some additional comments from the CDC which could suggest they might be open to allowing cruising from North American ports by mid-summer, which is encouraging. Before those comments came out, we've seen some of your competitors start to announce Caribbean itineraries that embark from so-called foreign ports, and you really didn't do anything like that for your Carnival or Princess core North American brands. Is that something you would still explore at this point? Or do you just wait to see what the CDC officially comes out with before you make that type of decision? Also, pre-pandemic you were targeting a double-digit ROIC. If cruising returns to a normal level over the next couple of years, any color you could give around what that ROIC could look like now given the much lower cost structure but higher interest costs would be helpful. Thanks.

Arnold Donald, President and CEO

Princess has announced some limited sailings from the UK, and we have announced Seabourn sailings out of Greece. We are in dialogue with the CDC and the administration. Public health is paramount. The April 2 guidance is not necessarily a workable or practical solution, and we are working to come up with an approach that balances public health and the practicalities of operating. We share the optimism that we can be sailing in July, and by working together we can make that happen. Regarding home porting, Carnival is America's original cruise line and sails more people from America than anyone else; we have 14 U.S. home ports, which is unique. We prefer to support the U.S. ports and the people who depend on the cruise industry for their livelihoods. If we are unable to sail from the U.S., we will consider home porting elsewhere, but our preference is to operate from U.S. ports. I hope I answered your questions.

Steve Wieczynski, Analyst (Stifel)

Okay, great. Thanks, guys. Thanks for the color.

Operator, Operator

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

Robin Farley, Analyst (UBS)

On the CDC comments last night, I was interested that you didn't mention the potential to have brands operating from U.S. ports. It sounds like the April 2 specifications might be burdensome. If you're reaching agreements with ports and local healthcare authorities, isn't it possible that if you probability-weight the outcomes—considering the specifications and the healthcare you must provide ashore—that a fully vaccinated ship could reduce the probability of an incident to a level where the costs are manageable? In other words, wouldn't a fully vaccinated ship make the probability so tiny that you wouldn't need to incur the full burden of those costs?

Arnold Donald, President and CEO

There is a lot in your question. We do negotiate meaningfully with ports and local authorities, and depending on the criteria and paperwork involved, it may not be overly burdensome—indeed, the industry has sailed almost 400,000 guests overseas so far with arrangements for destinations. Early in the pandemic, there were concerns about ICUs being overwhelmed; with vaccines, better treatments, rapid testing and other advances, that risk has trended down. That said, we need prearranged agreements for what to do if there is a case onboard, because there is a chance of it occurring. The idea of fully vaccinated ships is something we'll have to see how it evolves; we're informed by global medical and science experts and will comply with protocols where we go. Keep in mind vaccine access is uneven today and children are not yet broadly eligible. We would encourage everyone to get vaccinated, but we cannot buy vaccines for people; we must let the situation play out. We are currently sailing overseas without mass vaccination using protocols in place and without major incidents. We hope a combination of vaccinations and protocols leads to practical solutions that protect public health without imposing an unworkable standard of zero risk. We want to be treated similarly to other travel and entertainment sectors. People can fly out of the U.S. and take cruises abroad today regardless of vaccination status, but if vaccinated they still cannot take a cruise ship from the U.S. We have work to do with the CDC and administration, but we stand with them and want to find practical solutions that let the roughly half million U.S. workers dependent on cruising return to work while protecting public health.

Robin Farley, Analyst (UBS)

One quick follow-up: Thinking about the opportunity to put additional ships into service this summer, with record booking levels and pent-up demand, how far in advance could you add additional July departures? Would you likely need to decide by the end of April to reasonably add other ships in July?

Arnold Donald, President and CEO

Our biggest constraint is ramping up crew. It takes a minimum of 60 up to 90 days to get a crew onboard, trained with new protocols, and ready to execute a sailing. You can backtrack from that to determine when an announcement would need to be made. From a demand standpoint, if we have the crew available and trained, we can make closer-in announcements on itineraries and sailings because the demand is there.

Operator, Operator

Our next question comes from James Hardiman with Wedbush Securities. Please proceed.

James Hardiman, Analyst (Wedbush Securities)

A lot of discussion about vaccines and how that may or may not help the regulatory landscape. I'm curious about the consumer landscape. You have customers who would see a vaccine requirement as reassuring, creating a bubble at sea, and another contingent that would see that as taking away freedoms. What have you learned from surveying your customer base and how do you think about serving both?

Arnold Donald, President and CEO

We encourage everyone to get vaccinated if available; combined with other basic measures, vaccination is the best defense against COVID and serious outcomes. People have individual liberties, and to my knowledge no major country is mandating vaccines for travel today; options often include vaccines or testing. Some jurisdictions make mandates illegal. We will be informed by global medical experts and will follow protocols regulated where we go. Some people do not want to be mandated to take a vaccine, so while we encourage vaccination, our ultimate policies will evolve. In the UK we've announced some sailings and Seabourn has one available to vaccinated guests, but we do not have company- or brand-wide vaccine policies at this time. We'll let this play out and make decisions that make the most sense.

James Hardiman, Analyst (Wedbush Securities)

Very helpful. Walk us through your latest thoughts on timetables around mobilizing the fleet, how quickly you could get to cash flow breakeven, how long to get the full fleet up and running, and your thoughts on initial occupancy—Norwegian mentioned 60% to start. Do you think that's reasonable?

Arnold Donald, President and CEO

First, vaccine access is uneven and children are not yet approved in many places, which factors into our planning. Initially, for UK and other sailings where we can practice protocols, we are starting with less than 50% occupancy and will ramp up quickly as execution proves sound. For breakeven, depending on brand and ship size, 30% to 50% occupancy can be better than breakeven for a given ship. We will bring the fleet back in a staggered manner—a few ships per brand at a time. Ideally, if approved and destinations are ready, we'd like to have the fleet fully operational by the end of this year or early next year; that's our aspiration. The U.S. market is very important, but we also benefit from having brands operating globally. Nine of our ships are operating under other jurisdictions that are a bit ahead of the U.S., and we hope to get to a level playing field to bring the fleet back over time.

David Bernstein, Chief Financial Officer

On breakeven, it's difficult to determine exactly because of many variables—pricing, fuel, currency. I refer people to 2019 results. If the top 25% of ships in our fleet were operating at full occupancy, those 25 ships would generate enough cash flow to cover the pause costs for the other 60 ships in our fleet as well as cover the full $2.4 billion of SG&A we had in 2019. With improvements and efficiencies since then, we hope to do better than 2019 on SG&A. That framework may help you build your own model, but it's too early to be specific on when we'd be cash flow breakeven.

Operator, Operator

Our next question comes from Patrick Scholes with Truist. Please proceed.

Patrick Scholes, Analyst (Truist)

Yesterday the CDC was quoted as saying, 'Hopefully, by mid-summer there'll be restricted revenue sailing.' Do you interpret 'restricted revenue' to mean test cruises or limited-occupancy paying cruises? Also, do you have any date in mind where if you haven't made progress you would pivot to sailing U.S. ships from other countries?

Arnold Donald, President and CEO

I'd prefer the CDC clarify what they meant, but we want to work with them and the administration to ensure those are revenue cruises. We look forward to finding a practical approach that protects public health. We don't have an arbitrary cutoff date. Practically, we must make decisions for our investors, and we may need to announce additional home porting outside the U.S. sooner rather than later, but we continue to focus on working with the CDC and administration to find a solution that works for American workers and the public.

Operator, Operator

Our next question comes from Brandt Montour with JPMorgan. Please proceed.

Brandt Montour, Analyst (JPMorgan)

Norwegian's 100% vaccination plan is designed to ramp up load factors quickly. Is there a world where you could envision a hybrid approach where some ships require vaccination to ramp loads quickly while others are available to guests who choose not to vaccinate? Also, you mentioned positive pricing trends. Is the current booking mix skewed toward balconies such that cabin mix is driving pricing, or is pricing strength more broad-based?

Arnold Donald, President and CEO

That's one of many possible scenarios. We are agile and constantly adapting, so a hybrid approach could be considered, but we hope for a more straightforward solution that accommodates people and public health. We'll continue to work with authorities and the evolving situation to determine appropriate approaches.

Brandt Montour, Analyst (JPMorgan)

On pricing, you mentioned further pricing strength and David noted positive trends in the last few weeks. Is there any concern that the current booking mix, such as fewer interior cabins being booked, could be skewing reported pricing strength?

Arnold Donald, President and CEO

Generally, we are seeing supply-demand dynamics: limited sailings and pent-up demand allow us to deliver great value compared with equivalent land-based vacations, and that's reflected in pricing strength. David can speak to the specifics on mix and the data.

David Bernstein, Chief Financial Officer

Our pricing comments reflect full-year 2022 booking trends across most of our fleet that is already open for 2022. We looked by quarter, by brand, and by category mix and saw a consistent positive pricing trend regardless of how we sliced it. The last couple of weeks showed especially encouraging booking volumes and pricing, not just for summer voyages but for 2022 overall. Many people are planning vacations now, and planning is driving bookings as much as immediate travel.

Operator, Operator

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

Jaime Katz, Analyst (Morningstar)

Can you explain the revenue management mechanics right now—are you filling ships to that roughly 50% mark and leaving incremental capacity closer in? Or are you booking above those limits for later in the year and potentially having to walk back reservations later if conditions require?

Arnold Donald, President and CEO

When you think about revenue management, consider that much of our booking visibility extends into 2022 and even into 2023, where we expect full occupancy and full fleet sailing. That longer-term confidence is driving bookings more than short-term limited-occupancy sailings. David will add specifics.

David Bernstein, Chief Financial Officer

We've met with every revenue management team to share best practices. Traditional models are helpful but not definitive in this environment, so teams are layering judgment on top of models. For announced voyages this summer, especially in the UK and other markets where we're testing protocols, we will limit occupancy as appropriate and take advantage of positive cabin mix in pricing. Those short-term capacity limits are a focused issue, while 2022 has much lower percentage on the books and thus capacity limitations are less of a factor looking further out. We remain hopeful the vaccine rollout improves the situation.

Jaime Katz, Analyst (Morningstar)

You mentioned demand quarter-over-quarter was up 90%. Can you separate how much of that is organic versus attributable to itineraries that were open for 2021?

David Bernstein, Chief Financial Officer

To understand demand, I looked at first-quarter bookings for 2022 because those sailings were already open. For 2022, first-quarter bookings were higher than in 2019, which was a robust year. In March alone, 2022 bookings accelerated compared with 2019. So when you do an apples-to-apples comparison for 2022 versus 2019, you see positive booking momentum driven by pent-up demand and people planning vacations.

Operator, Operator

Our next question comes from David Hargreaves with Stifel. Please proceed.

David Hargreaves, Analyst (Stifel)

Great job on controlling cash burn. With respect to the refinancing efforts you discussed, are there specific elements of the debt stack you are targeting, and should we be thinking about equity clawbacks? Also, regarding vessels you expect to take on, has secured borrowing capacity changed and will you need further covenant amendments?

Arnold Donald, President and CEO

David, please respond.

David Bernstein, Chief Financial Officer

We are focused on refinancing the expensive debt we issued early last year in the April, June, July and August timeframe. We are looking to lower interest rates and will be patient about reducing overall debt until we have clear visibility that the fleet is fully back in operation; we want to be prudent. Regarding vessels, each vessel has committed export credit associated with it that we will use upon delivery; those are unsecured financings and the export credit agencies have been supportive. Our bank groups have also been supportive. On covenants, we have worked with all our bank groups and obtained multiyear covenant amendments. In the 10-Q you'll see that with the export credit agencies we have covenant waivers through either August or November of 2022, and we are working to extend those as needed and get consistent covenant amendments across our lenders.

Operator, Operator

We have a question from Sharon Zackfia with William Blair. Please proceed.

Sharon Zackfia, Analyst (William Blair)

Thanks for the detail on efficiencies on the ships. At the corporate level, looking at that roughly $2.4 billion pre-pandemic, what do you think you have structurally taken out of that number? And on marketing, which is a large part of that $2.4 billion, have you rethought what the right marketing spend should be going forward?

Arnold Donald, President and CEO

We won't give a precise guidance cut to that level, but with the pause we've had an opportunity to take a hard look at everything, streamline processes, and introduce technology to increase efficiency. We see substantial cost improvement opportunities on the shoreside. Marketing is evolving: the most powerful delivery mechanisms have shifted toward digital and social channels, and word of mouth remains our strongest marketing tool because the product is compelling. We have a large database of prior cruisers to engage. Whether absolute marketing spend changes or gets reallocated is being worked on, but the short answer is we will come out leaner and achieve more impact per dollar spent.

David Bernstein, Chief Financial Officer

I have nothing to add—Arnold covered it well.

Arnold Donald, President and CEO

Thank you, everyone. We will come back operationally stronger and we're excited to be starting to sail again. The U.S. market is extremely important to us, and we're looking forward to working with the CDC and other partners to give people the opportunity to have a great experience as travel and tourism reopens. Thank you so much for joining us today.

Operator, Operator

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.