CARNIVAL PLC (CUK) Q1 2021 Earnings Call Transcript

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 are we going to resume sailing here in the U.S.? Now 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, and 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.

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 advance booking position for the full year 2022 is ahead of a very strong 2019, which was at the high end of the historical range.

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

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

Good morning, everyone. I hope you’re doing well, Arnold. It appears that we received some additional comments from the CDC yesterday. It's hard to say if they are accurate, but it seems they might be considering allowing cruising from North American ports by mid-summer, which is encouraging. Before these comments emerged, we noted that some of your competitors have started to announce Caribbean itineraries departing from what they refer to as foreign ports. However, you did not pursue anything similar for your Carnival or Princess brands in North America. Is this an avenue you would still consider exploring, or are you opting to wait for the CDC's official guidance before making any decisions? I hope that makes sense.

Yes, Steve. Firstly, Princess has announced a few limited sailings from the UK. However, you are right that we haven't announced sailings specifically for Princess or Carnival. We have shared plans for Seabourn sailings starting from Greece, for example. The main point is that we are in discussions with the CDC and the administration. We are all committed to containing this virus, and public health is our top priority. As we mentioned on April 2, the current situation is not a feasible solution, and we are working to find one. We want to express our optimism about being able to set sail in July, and I believe that by collaborating, we can achieve that. Regarding the possibility of sailing or home porting out of the Caribbean, Carnival is America's original cruise line. We carry more passengers than any other line in the U.S. We offer 14 home ports, which is unique to Carnival. We prefer to support the jobs tied to the cruise industry at our ports. However, if we cannot sail, we will certainly consider other home porting options. I hope I answered your questions.

Thank you very much. My second question is likely for David. Pre-pandemic, your company consistently aimed for a double-digit return on invested capital. Assuming that cruising returns to some level of normalcy over the next couple of years, can you provide any insight into what that return could look like now, given the significantly lower cost structure, although there are also higher interest expenses? Any information on the expected return on invested capital moving forward would be very helpful. Thank you.

Sure, Steve. I want to clarify that while we do have higher interest expenses, the return on invested capital is based on all of our capital. Therefore, the interest expense does not affect the ROIC calculation. We are still aiming for a return on invested capital in the double digits. As we've mentioned previously, once we achieve double digits, we will continue to strive for more. We believe this business has the potential to exceed that and attain an ROIC in the low to mid-teens. We are moving forward with a lot of optimism and a positive outlook for our business.

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

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

Great. Thanks. On the comments last night from the CDC, and I was interested that you didn't mention the potential to have those brands operating from U.S. ports. And I guess it sounds like the April 2 specifications might be burdensome. I guess my question is, if you're reaching agreements with ports and local healthcare authorities in those places, isn't it possible that if you sort of probability weight the outcome of all of the scenarios that you need to take into account according to the specifications and the healthcare you have to provide in the land base, if you probability weight that outcome with a fully vaccinated ship, can't that get you to a number that's low enough, right? In other words, a fully vaccinated ship, the probability, I would think, would be so tiny that you would need to incur those costs. Isn't it workable in kind of a probability-weighted scenario?

Robin, your question covers a lot of areas. When it comes to negotiating with ports and local authorities, we engage in that process in a meaningful way based on specific criteria. To give you an example, the industry has successfully carried nearly 400,000 guests overseas this year, which requires arrangements with all the various destinations we visit. The criteria and paperwork involved help ensure that understanding is established. Initially, concerns arose over overwhelmed ICU units, but thankfully, with vaccines, improved treatments, and more accessible testing, the situation seems to be trending positively, reducing risks significantly. However, we still need to have contingency plans in place in case there are onboard cases, recognizing that community spread could lead to cases on our ships. We're closely monitoring the evolution of vaccination requirements and remain compliant with regulations in every location we operate. It's important to note that vaccinations are not universally accessible; children still aren't eligible for them. We hope this will change soon, and we encourage vaccination efforts. Currently, we can't acquire vaccines for distribution, so we must wait for developments. Presently, we’re operating safely without any major incidents, and while protocols are in place, no one onboard is vaccinated. Our hope is that the combination of vaccinations and existing protocols serves public health effectively, preventing cumbersome situations. The focus is on risk mitigation, and we would prefer not to be held to an unattainable zero-risk standard, which is not a consideration in other sectors of society. We seek to be treated like the rest of the travel and tourism industry. Notably, individuals can currently fly out of the U.S., take a cruise, and return, regardless of their vaccination status, while vaccinated individuals are unable to board a cruise from the U.S. We still have work to do, but we align with the CDC and the administration to find practical solutions that protect public health while supporting the many people who rely on the cruise industry for their livelihoods and providing vacations for travelers. Thank you.

I have a quick follow-up regarding the possibility of adding more ships this summer, considering the record booking levels and the high demand we're experiencing. How close to July could you schedule these additional departures? Specifically, would you need to finalize those decisions by the end of April to accommodate extra ships in July? I'm just contemplating that timing.

Thank you. Our biggest constraint right now, of course, is being able to ramp up with crew. And so, it will take us minimum 60 up to 90 days to be able to get a crew on board, trained up with new protocols, et cetera, to be able to execute a sailing. So you can backtrack from that in terms of when we'd be able to go with an announcement. And so that's the biggest challenge we have is ramping. But we do have the opportunity from a demand standpoint, assuming we have the crew available and ready to go and trained up that we can do closer in announcements on itineraries and sailings because the demand is there.

Our next question comes from James Hardiman with Wedbush Securities.

There has been considerable discussion about vaccines and their potential impact on the regulatory environment. I'm interested in the customer perspective. Some customers may view a vaccine requirement as a positive step, creating a sense of security. Conversely, others might see it as an infringement on their freedoms. Could you share your insights on how significant these differing viewpoints are among your customer base and how you plan to address both sides?

We strongly encourage everyone to get vaccinated if a vaccine is available, as combining that with other basic measures is the best defense against COVID-19 and helps minimize the severity if you do contract it. However, we acknowledge that individuals have their own personal liberties. From what I understand, no major countries are currently requiring vaccinations for travel; travelers have the option of choosing between vaccines, testing, or other measures. In many locations, including restaurants and entertainment venues, there are no mandates for vaccinations. Additionally, in some regions, it's not even legal to enforce vaccination mandates, which complicates the situation further. We'll stay informed by global and medical experts and adhere to the regulations in place wherever we operate. It's clear that many individuals are hesitant about being mandated to receive a vaccine, valuing their personal freedoms. We encourage vaccination, but we will develop our policies in response to the situation as it evolves. In the UK, we have announced additional sailings that require vaccinations, but we do not currently have an overarching company policy regarding vaccinations and will let things develop accordingly.

Very helpful. It does. I have a second question that you get frequently, but I think it's worth asking periodically. Can you share your latest thoughts on the timelines for mobilizing the fleet? How quickly do you believe you could achieve cash flow breakeven, and how long do you estimate it will take to have the full fleet operational? Additionally, regarding occupancy, Norwegian mentioned starting with a 60% occupancy level. Do you think that figure is reasonable, or do you have another number in mind?

I want to note that not everyone has access to vaccines currently, and I hope this situation changes swiftly. Right now, children are not authorized to receive vaccinations, but there is ongoing testing, and this could evolve in the coming months. As it stands, children are not eligible for vaccines. Regarding our initial sailings, particularly in the UK, we are starting with less than 50% occupancy to ensure we properly implement our protocols and make sure everything is functioning as intended. We expect to increase that occupancy fairly quickly as we gain confidence in our operations. This cautious approach is consistent with what others in the industry are likely doing as well. It's important for us to have our crew practicing these protocols effectively. From a financial perspective, we believe that achieving an occupancy level between 30% and 50% can reach breakeven financially for individual ships. Overall, we plan to stagger the return of our fleet, introducing a few ships at a time. If we get the necessary approvals and our destinations are ready, we aspire to have the fleet fully operational by the end of this year or early next year, and we are working diligently toward that goal. The U.S. market is crucial for us, but we are also focused on global operations. We have nine ships currently involved in different regulatory environments, which are ahead of us in the U.S. Hopefully, we can achieve a balanced playing field to bring our fleet back gradually. I hope that clarifies things, and I'll let David share any thoughts he has on reaching breakeven.

Yes. Let me just address the breakeven. It would be very difficult at this point to determine exactly where we breakeven because there are so many variables. We're talking about pricing, the cruise ticket, the price of fuel, and currency. So what I've been doing is referring people back to our 2019 actual results. In 2019, if we had the top 25 ships in our fleet operating at full capacity, those 25 ships would generate enough cash flow to cover the pause costs for the other 60 to 65 ships in our fleet, as well as cover the full $2.4 billion of SG&A that we had in 2019. Furthermore, with Arnold's comments about becoming more efficient, we hope to improve on our 2019 SG&A numbers. I hope this helps you build your own model because there are too many variables at this point for me to be specific about when we would reach cash flow breakeven.

Our next question comes from Patrick Scholes with Truist.

I have a couple of questions for you. Yesterday, the CDC released information in a Bloomberg article, stating, 'Hopefully, by mid-summer there will be restricted revenue sailing.' I'm curious, and I'm sure you've considered this. When they mention restricted revenue, do you view that as referring to test cruises or as limited occupancy on paying cruises?

Thank you for the question, Patrick. I think it would be best for the CDC to explain their thoughts on that. We want to collaborate with them and the administration to ensure that it ultimately aligns with revenue opportunities at this time. We look forward to working together to find a practical approach that achieves this while still supporting public health interests.

Understood. Do you have a specific date in mind? I don't expect you to reveal it, but is there a point at which you would consider discontinuing operations from the United States and possibly relocating ships to other countries?

No, I wouldn't say there's a date per se. Obviously, practically speaking, as a company, we'll have to make prudent decisions due to our investors. And so we'll do what we think we need to do to get people an opportunity to sail and to give an opportunity for people to work and earn and so on and so forth. But we don't have an arbitrary date. I would say it's sooner rather than later that we might have to announce some additional home porting outside the U.S. We're trying to hold back on that, but it could be sooner rather than later on that. But I continue to be very much focused on working with the CDC and the administration to come up with a solution that works for American workers and American public, and I think we can. I think if we all just continue to work together, we'll figure that out.

Okay, fair enough. And thank you for the…

Where we have figured it out, and I think we can figure it out here, too.

Our next question comes from Brandt Montour with JPMorgan.

Sorry, one more on vaccines and the CDC. I understand that you don't want to alienate any of your U.S. loyal guests. The other Norwegian's 100% vaccination plans are looking to increase load factors much more quickly than we would expect, considering the conditional sailing order, which I recognize is a work in progress. My question is, if that strategy for Norwegian is able to move forward, could you envision a scenario where some ships require vaccinations to ramp up loads quickly while others are available for those who did not want to get vaccinated? Is that something you are considering?

I think, again, that's one of probably 1,000 different scenarios. In my comments, I mentioned agilely and constantly changing dynamics and ability to adapt. And so certainly, that's one of a 1,000 different possibilities. Hopefully, we can come up with something that wouldn't require those kinds of dynamics. And more than cost, would be optimistic, we all can working together. But I guess there could be scenarios like that. So I'm hopeful that we'll have something much more straightforward that will accommodate the, and we'll let the appropriate authorities have the available information we have.

Okay. I'm surprised we haven't discussed the positive pricing commentary yet. Arnold, you mentioned looking for further pricing strength. David, you noted that recent pricing trends have been positive. The question is, since you haven't started marketing yet, could that be another catalyst? However, one concern we have is whether the lack of bookings for non-balcony or inner cabins currently affects the cabin mix in those numbers.

I'll just make a comment first, David, let to speak to the specifics. Generally, as you understand, I'm sure, what you have is a basic kind of supply-demand right now. I mean we have very limited sailings available and a lot of pent-up demand. And so therefore, there's an opportunity to give people a great value. The vacation experience they want still at a much better value than equivalent land-based experience. So still a great value. And so we're seeing that reflected, though, in the general pricing strength. But David, you can go ahead and answer the specific question.

So keep in mind that our pricing has increased, and we were examining the booking trends for the full year 2022. Overall, our fleet is available for the entire year 2022. We analyzed the data by quarter, brand, and category mix, and observed a consistent positive pricing trend across all aspects. We are optimistic about the overall booking position. Additionally, as I mentioned earlier, booking volumes and pricing in the past couple of weeks have been very promising, not just for the summer voyages we recently opened but also for 2022. There is a strong desire among everyone to travel, and I can tell you that planning a vacation is almost as satisfying as going away for real, which is evident from the current trend.

Our next question comes from Jaime Katz with Morningstar.

I'm actually curious to understand a little bit better what the mechanics behind the revenue management processes right now, particularly whether you guys are filling the ships to that 50% mark, leaving some incremental ability closer in, if you can fill more, or whether you're booking above and beyond that for maybe later this year where there may have to be some adjustment or some of those reservations may have to be walked back, if that makes sense?

Yes. Well, first, I'll make a few comments and then, David, add whatever you would like. When you think about revenue management, you think about the booking information we're sharing a lot of booking as well out into '22 and some is even in the '23, where we fully expect to have full occupancy and full fleet sailing and so on and so forth by that point in time, and where there's confidence obviously amongst those who want to cruise that is likely they'll be able to at that point in time. So that's a lot of what's driving what you're hearing much more so than the near end shorter-term stuff, which is more limited occupancy. But David, go ahead.

Yes, I think you expressed it well, Arnold. First, on the revenue management side, Micky, Arnold, and I have recently met with every revenue management team to discuss their activities and share best practices. It's important that everyone is considering what is optimal in the current circumstances. While our models are useful, they aren't a complete solution in this environment; we need to apply our own thought processes as well. The teams are carefully considering these factors. The occupancy limitations you're mentioning are more of a short-term issue that we are addressing for the announced summer voyages in the UK, including P&O Cruises, Cunard, Princess, as well as Costa and AIDA, and Seabourn in Greece. We will limit occupancy appropriately and leverage the positive cabin mix for pricing. This is a short-term concern, but looking ahead to 2022, the percentage of bookings is significantly lower, meaning capacity limitations are a factor. By then, we hope that with the full fleet operating, occupancy will be much higher. The vaccine rollout is progressing worldwide, and we are optimistic about reaching a better situation.

Okay. And then I think you had said demand quarter-over-quarter was up 90%. Is there a way to think about what the sort of organic part of that is and what part of that is attributable to itineraries that were open for 2021?

Let me share some insights I gathered to better understand the demand and related trends. I examined the first quarter bookings for 2022, which were higher than those in 2019, a year that was quite strong. Specifically, the bookings in March 2022 showed a notable increase compared to March 2019, indicating an acceleration in momentum. This reflects very positive booking trends when comparing 2022 to 2019. People are eager to travel and are planning their vacations, fueled by pent-up demand.

Our next question comes from David Hargreaves with Stifel.

Great job on controlling cash burn. With respect to the refinancing efforts that you talked about, I'm just wondering if there are any specific elements of the debt stack that you may be targeting and whether we should be thinking in terms of equity clawbacks? And then I have a follow-up.

David?

Yes. In general, you can look at all the debt we incurred early last year in the April, June, July, and August timeframe, which was quite expensive. We are focused on refinancing those debts. We have been clear that we are looking to refinance to achieve lower interest rates, and we are willing to be patient in reducing our debt load and utilizing the extra cash until we have a clear view that our fleet will be fully operational and we feel comfortable. My expectation is to prioritize refinancing the early expensive debt.

Okay. And…

I'm sorry. Finish your question, then we'll take one more, and that will be it. Go ahead.

Thank you. So with respect to the vessels that you've taken on and expect to take on, could you talk about secured borrowing capacity, if there have been changes to that and if you expect a need for any further covenant amendments?

We have export credit associated with each vessel we are taking on, which provides us with unsecured financing. The export credit agencies have been very supportive, and we are continuing to work with them, so we feel confident about this financing, which is already secured. Our banking partners have also shown strong support. Regarding covenant amendments, we have collaborated with our banks to obtain multiyear amendments for our agreements, and we are pleased with the outcome. In our latest 10-Q, it is indicated that the export credit agencies granted us covenant waivers until either August or November of 2022, citing their busy schedule with other clients. We are now engaged with them to finalize that transition and to secure the same covenant amendments that we obtained from our banks.

We have a question from Sharon Zackfia with William Blair.

I have a question about the efficiencies you’ve generated on the ships. I’m curious, at the corporate level, regarding the $2.4 billion from pre-pandemic annually, what do you think you’ve structurally removed from that number? Additionally, concerning marketing, which is a significant portion of that $2.4 billion, have you reconsidered what the appropriate level of marketing spend should be moving forward?

Yes. We're not providing specific guidance on costs at that level. However, we have historically become more efficient, and with the current pause, we've had the chance to thoroughly review everything due to our reduced staff. We are evaluating all processes and have time to implement new technologies that enhance our efficiency. We anticipate significant cost improvements across the board. As for marketing, it is naturally evolving in terms of delivery mechanisms for positioning, attracting, and securing bookings, especially as society shifts towards more digital and social media channels. Our most effective marketing has consistently been word of mouth because the product and experience are exceptional. Currently, there's considerable pent-up demand, particularly among repeat cruisers who have been unable to cruise for nearly a year. We have access to a substantial database of previous cruise scores as well. We'll assess how these dynamics may change, whether overall spending will differ or be reallocated. In short, we will emerge leaner with a greater impact per dollar spent. David, do you have anything to add?

No. I think that's perfect.

Okay. Well, look, I want to thank everyone for being on. Obviously, we feel, as I said, will come out operationally stronger, and we're excited that we're starting to sail again. And we're looking forward to working things through here in the U.S. It's a very important market, obviously, for us, extremely important. And we're looking forward to giving people the opportunity to have a great experience as they do in the rest of the travel and tourism sector. So thank you so much, everyone. Appreciate it.

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.