[CCL stock] Carnival Q2 2022 Earnings Call (6/24/22)

Thank you, Arnold. And thanks again to Micky and the entire Board of Directors for this great opportunity. I strongly believe in our company and our ability to create happiness by delivering unforgettable and much-needed vacations for our guests. This need is even more important in the current environment given the stresses of the past two years and the value that we all place on shared experiences with friends and family. Now, we are uniquely placed to deliver on this through our nine leading cruise brands, each with a focus on meeting their specific guests' needs and wants. We plan on renewing our efforts to ensure each brand achieves clarity of positioning and effectively reaches their target audience. This, alongside providing cruise experiences that really resonate with their distinct guest base, will help each brand optimize its yield and growth aspirations to drive revenue.

We also expect to capitalize on our revitalized fleet, our continued portfolio optimization efforts, and our unparalleled destination footprint, particularly in the Caribbean and Alaska. In addition, we have an exciting sustainability roadmap that underlies all of our efforts. What also gives me tremendous confidence is our determined and resilient team around the world. They've proven time and time again for the last two and a half years that they can absolutely achieve anything. And they do it while staying true to Carnival Corporation's collective values and positive culture. All of this will help us accelerate revenues and returns, drive durable earnings growth, and improve the balance sheet. As you said, Arnold, we are clearly at an inflection point and have a bright future ahead. I'm looking forward to putting the perspectives I've gained here in my 20 years and multiple roles to work for the benefit of our shareholders and our many other stakeholders.

Thank you, Arnold. I'll start today with a review of guest cruise operations along with a summary of our second quarter cash flow. Next, I will touch on our 2024 mandatory auditor rotation. Then I'll provide an update on booking trends and finish up with adjusted EBITDA expectations and our current financial position. Turning to guest cruise operations: during the second quarter 2022, we restarted 20 additional ships, resulting in 74 percent of our total fleet capacity in guest cruise operations for the whole of the second quarter. This was a substantial increase from 60 percent during the first quarter 2022. As of today, 91 percent of our fleet capacity is in guest cruise operations. We were pleased to see that the second quarter 2022 revenue increased by nearly 50 percent compared to first quarter 2022, reflecting continued sequential improvement.

For the second quarter, occupancy was 69 percent across the ships in service, a significant increase from the 54 percent in the first quarter. We were encouraged by the very close-in demand we experienced during the second quarter, resulting in nearly double the close-in occupancy gain in second quarter 2022 versus second quarter 2019, a trend we had anticipated. Revenue per passenger day for the second quarter 2022 decreased slightly from a strong 2019. As Arnold indicated, we are focused on optimizing occupancy while preserving long-term pricing. However, let's not forget the impact due to the future cruise credit, or FCC, as they are more commonly called, which cost us a couple of percentage points in second quarter 2022 versus second quarter 2019. Excluding the impact of FCCs, revenue per passenger cruise day for the second quarter would have been higher than a strong 2019.

Once again, our onboard and other revenue premiums were up significantly in the second quarter 2022 versus second quarter 2019, in part due to the bundled packages as well as onboard credits utilized by guests from cruises canceled during the pause. We have recently expanded our bundled package offerings given their popularity. The new bundled offerings require us to make changes to the accounting allocation. As a result, in the third quarter, you will see more of the revenue left in ticket and less allocated to onboard, impacting the onboard and other revenue per PCD comparisons for the third quarter as compared to the second quarter. Just another reason to add to the list of reasons why 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 berth day, or ALBD, as it is more commonly called, for the second quarter 2022 was up 23 percent versus second quarter 2019. The increase in adjusted cruise costs without fuel per ALBD is driven by essentially five things: first, the cost of a portion of the fleet being in pause status; second, restart-related expenses for 20 ships; third, 24 ships being in dry dock during the quarter, which resulted in over double the number of dry dock days during the second quarter versus the second 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 second quarter and the higher number of dry dock days, we spread costs over less ALBD. The first half of 2022 had an unusually large number of ships in dry dock as part of our resumption of cruising ramp-up, optimizing our dry dock schedule while the ships are not in service, ensuring that the ships look great and work great when they welcome their first guest back on board. However, the second half 2022 dry dock schedule looks more normal by historical standards. 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 ALBD from the first half of 2022 to the second half of 2022, with a mid-teens increase expected for the full year 2022 compared to 2019.

Next, I'll provide a summary of our second quarter cash flow. We ended the second quarter 2022 with $7.5 billion in liquidity versus $7.2 billion at the end of the first quarter. The change in liquidity during the quarter was driven essentially by six things: first, negative adjusted EBITDA of approximately $900 million due to our ongoing resumption of guest cruise operations and improvements from the first quarter; second, our investment of $500 million in capital expenditures; third, $200 million of debt principal payments; and fourth, $400 million of interest expense during the quarter. All of which was more than offset by a $1.4 billion increase in customer deposits during the quarter, along with the billion-dollar principal amount of senior unsecured notes we issued last month.

Now, I will touch on our 2024 mandatory auditor rotation. I wanted to take a moment to explain our situation, as it is very different from most publicly listed companies outside the UK and the EU. Carnival plc, our UK publicly listed company, which is part of our dual-listed company structure, is subject to UK law, which requires mandatory auditor rotation. Therefore, PricewaterhouseCoopers, or PwC, as they are more commonly called, must be changed as Carnival plc's auditor for the fiscal 2024 audit at the latest. Therefore, we conducted a competitive RFP process for the independent audit of Carnival plc as well as the consolidated entity, Carnival Corporation and plc. As a result of the recently completed RFP process, yesterday our Board of Directors appointed Deloitte as the company's independent auditor for fiscal 2024. We completed the RFP process in the first half of 2022 to ensure an orderly transition of non-audit services for the remainder of 2022 and to ensure independence by Deloitte in 2023, as required under UK law. Before I continue, I would like to add that the Board of Directors and management of Carnival Corporation and plc would like to thank PricewaterhouseCoopers for its continued service as the company's independent auditor.

Now, let's look at booking trends. The higher March weekly booking volumes we talked about on our last business update continued throughout the quarter. This resulted in booking volumes for all future sailings during the second quarter 2022 being nearly double the booking volumes during the first quarter 2022. Second quarter 2022 booking volumes for all future sailings were the best quarterly booking volumes we have seen since the beginning of the pandemic, although they were still below the 2019 level. I am happy to report that booking volume since the beginning of April for the second half of 2022 sailings have been higher than 2019 levels. All of this reflects the previously expected extended wave season. And as I said before, we were very encouraged by the close-in demand we experienced during the second quarter, resulting in nearly double the close-in occupancy gain in second quarter 2022 versus second quarter 2019, a trend we had anticipated.

While the cumulative book position for the second half of 2022 is below the historical range, we believe we are well situated with our current second half 2022 book position, given current booking volume coupled with closer-in booking patterns. We continue to expect that occupancy will build throughout 2022 and return to historical levels in 2023. Pricing on our cumulative book position for the second half of 2022 is lower, with or without FCCs, normalized for bundled packages, as compared to 2019 sailings. For the full year 2023, our cumulative advance book position continues to be at the higher end of the historical range and 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-water mark for historical yields. During the second quarter 2022, we once again increased our advertising expense compared to the first quarter 2022 in anticipation of our full fleet being in guest cruise operations and our 8 percent capacity increase for 2023 versus 2019. Second quarter 2022 is the first time since the pandemic that advertising expense was above 2019 levels.

I will finish up with our adjusted EBITDA expectations and our current financial position. 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. Adjusted EBITDA over the first half of 2022 was impacted by restart-related spending and dry dock expenses, as 34 ships, nearly 40 percent of our fleet, were in dry dock during the first half of fiscal 2022. For the third quarter, with over 90 percent of our capacity back in guest cruise operations and occupancy percentages building, we expect ship-level cash contribution to grow. As a result, we expect adjusted EBITDA to be positive for the third quarter 2022, which, after everything we've been through, will be something worth celebrating. With EBITDA turning positive, more liquidity than last quarter, and maturity towers that have been well managed through 2024, we have already refinanced a portion of our 2023 maturities and we will do the rest over time. And now, I will turn the call back over to Arnold.

Thank you. To queue up for a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt. One moment, please, for the first question. Our first question comes from the line of Steve Wieczynski with Stifel. Please go ahead.

Yeah, hey guys, good morning. Arnold, congratulations, and it was a great run, so thanks for your service. So, first question would be around the booking patterns, which clearly here are continuing to strengthen. However, I guess investors are going to, at this point based on where your stock is, they're going to look past current booking patterns and they're going to focus on what could come next given an uncertain macro backdrop. And I guess my question is, how would you guys attack a slowdown in bookings? Or load factors in the past, you would have typically cut prices in order to keep load factors high, but this time around, if you do see bookings slow, do you think you guys and your peers would be able to stay more disciplined on the pricing side of things so the recovery wouldn't be as steep on the other side?

Yeah, just one thing I'd add to that. You know, remember, Steve, not every recession is the same, and we are currently in a very strong labor market. And given that, if people have jobs and they feel comfortable in their jobs, they're likely to need a vacation. And remember, vacations are no longer a luxury; they're a necessity in today's world. So I think we will do very well. As Arnold said, we are recession resilient and will do very well in a recessionary environment.

Okay, gotcha. Thanks for that, guys. And then second question, I guess probably for you, David. Around the recent debt raise, we got a lot of questions from investors about why you guys would go out and raise debt north of 10%, and maybe what drove you, or maybe there was an underlying reason as to why you had to raise debt at those levels. And I guess from here, the question is going to be what is the opportunity moving forward to refinance, or maybe there isn't a chance to refinance given where rates are at this point.

Yeah, so as I said on the last conference call, we were looking to over time refinance the $3 billion of 2023 maturities, and we were focused on that. And we took a look, and we believe that we're in a rising interest rate environment. And so we did go out and we raised a billion dollars at 10.5%. It was a difficult day in the market; nobody could have predicted what would happen in the overall market. But what's interesting is, despite the market backdrop, we were able to raise the billion dollars within the price talk that we wanted on that day, and we felt very good about that. We're looking to do $2 billion to refinance the remaining portion, as I said in my notes, over time. But we're just averaging in. If you look at it today, interest rates are higher than they were a month or so ago when we actually did our bond offering. So I'd say that we were in a good position. We feel good about what we did, and we'll look to refinance the other $2 billion over the ensuing months ahead, and we're just averaging in. Keep in mind, despite adding 10.5%, if you look at our portfolio of debt, our average interest rate today is 4.5%. So we've done a great job managing the whole portfolio, and this is just one minor piece in the portfolio.

Okay, great. Thanks, guys. Really appreciate it. Best of luck.

Steve, next question from the line of Robin Farley, UBS. Please go ahead.

Great. Thank you. Arnold, best wishes since this is the last earnings call you'll be joining us for. Good luck with everything. I had a question on occupancy. I think investors kind of struggle with how much of the lower occupancy is sort of temporary, like the Omicron cancellations in Q1 and new ships going into service at lower levels, and how much, in other words, to try to see the demand there. I wonder if you could give us a little bit of color on the sequential build in occupancy through Q2. I know you normally wouldn't give that level of detail, and or maybe something with your visibility on Q3, which I think normally you would be 80% to 90% booked by now. And just kind of, are you seeing for ticket price relative to 2019 and occupancy with that level of visibility? I don't know if you could comment a little more specifically. Thanks.

Yeah. So during the second quarter, the variance between the months, it went from 67% to 71%, which is why we wound up overall with that 69% occupancy for the quarter. And as Arnold said, we're approaching 80% for the month of June. And with booking trends good, we continue to build. But keep in mind that, as I had indicated, we started 20 ships in the second quarter, and of course, there are a number of cruises where early on we constrain occupancy to ensure we practice and the guests have a great time. And so we build on those ships, and you can see the benefit of that when we got to June. So we feel very good about the overall trend. It is positive, moving in the right direction, and we do expect to see an improving trend in the third quarter and into 2023.

Okay, great. Thank you. And just as a follow-up question on the expense commentary, you mentioned a lot of buckets about pause status, ship restart costs, dry dock, all of those as being part of that 23-point increase. And I know you mentioned that will improve significantly by year-end. I wonder if you could quantify a little bit of how much of that increase was just inflation and health and safety. In other words, the other factors all being somewhat temporary—the pause status, the restart cost, the dry dock—how much of those 23 points go away automatically just by having the fleet back in service, just so we can think about where you could get to by the end of the year in terms of expense per passenger cruise day. Thanks.

Yeah, I think the best way for you to do your own quantification, and it's pretty easy, if you think about we were sort of 24 points up per ABD for the first half, and all you have to do is if you're mid-teens for the full year, you come back into where we were for the second half, taking out the pause status, the restart, the dry docks, because I did say that the dry docks in the back half of the year were going to be sort of more normal-like in terms of the number of dry dock days. So if you're back into the number, you'll be able to see where we are for the back half of the year, which is a better reflection overall than the first half. Now, there's still noise in that because of supply chain disruption and other things, and we are working really hard to manage that down, and we will do that. But that's probably the best way to back into it.

And I know that simple average would get you to kind of a mid-single digit for the second half, but I guess I was wondering by the end of the year, really thinking about 2023, that's why I was looking for what pieces would maybe go to.

I understand, and I'm not in a position to give cost guidance for 2023 at this point. But I was just trying to give you some directional. You can see what the back half is, and we'll manage through all of those items effectively over the next six months. And like I always say, we hope to do better, but at this point, it would be premature for me to give you cost guidance.

Okay, understood. Thank you very much.

Our next question comes from the line of Jamie Katz with Morningstar. Please go ahead.

Hi, good morning, and thanks for taking my questions. I'd be interested in hearing how you guys are seeing differences between domestic and international consumers, particularly because of this transition of Costa ships maybe being rebranded with Carnival, and whether or not that's signaling anything.

If I can build on that a little bit, I did want to point out, so we talked about our bookings in the second quarter nearly doubling what they were in the first quarter. So the North American brands were a little bit over double, and the European brands, which includes Costa, were a little bit less than double. Both, I mean, everything is heading in the right direction. There was good, solid, strong demand in all the brands, but the North American brands are doing, from a booking trend perspective, a little bit better than the European brands. I'd also like to point out, add to Arnold's comments about Costa by Carnival, because keep in mind, a big chunk of Costa's capacity in 2019 was in China. And so with that market at the moment closed, rather than take all of that capacity and put it in Europe, we created a new market for the Carnival guests, which we think will expand the market here in North America, and we'll be in a much better position overall. So we feel very good about all of our brands and the direction, and we are managing it appropriately, as you could see with that Arnold talked about the moves of the ships.

Okay. And then David, I don't think it was explicitly noted, but in the past, I think you guys had pointed to 2023 EBITDA above 2019 levels. And do you still feel like the business is tracking in the right direction to achieve that?

So I've said that quite a number of times. I think we have what I've always said is we have the potential for EBITDA to be greater in 2023 than 2019. You know, one big wild card, of course, is the price of fuel, which has risen quite a bit in the last few months. So just keep that in mind. But there is, with the occupancy improving over time, there certainly is that potential.

Thank you.

Our next question comes from the line of Patrick Scholes with Truist. Please go ahead.

Hi, good morning, everyone. Arnold, best wishes as well.

Can you comment on your potential willingness to sell one or more brands to help shore up the balance sheet?

Okay, fair enough. And then my second question is a bit of a clarification on some of the text in the earnings release, where you noted that cumulative advanced bookings for the second half of 2022 are now below the historical range, which implies obviously it was lowered from the previous where you said it was at the lower end. Specifically, you noted here this position is consistent with expected improving occupancy levels for the second half of 2022. Can you explain a little bit more what that last phrase means? I'm not quite understanding what you mean by consistent with expected improving occupancy levels.

Yeah, so what we were just trying to say there is, like Arnold indicated that in the month of June, in his prepared remarks, he said occupancy was approaching 80%. And so what we were trying to say is, despite the fact that we were below the historical range, we do expect, because of the closer-in nature of the booking patterns, to see occupancy in the back half of 2022 to be higher than the 69% in the second quarter. And that's all we were really trying to indicate to people with that statement.

Okay, thank you for the clarification.

Next question from the line of James Hardiman with Citi. Please go ahead.

Hey, good morning. Thanks for taking my questions. And Arnold, I wanted to reiterate congratulations and good luck with what's next. Wanted to hone in a little bit on some of the pricing commentary, particularly the revenue per passenger cruise day. I think you said that number was down a little bit; there was a little bit of an FCC headwind there. But I think that same number was up north of 7% in the last quarter. Obviously, there's this growing concern that the industry is going to need to push price a little bit to fill these ships. Maybe speak to that idea as we continue to fill up the ships in the third quarter and beyond. Should we expect that pricing number to go down further? And then obviously, we're going to get back some of that FCC impact, but sort of excluding that piece, how should we think about revenue per passenger cruise day as we continue to raise occupancy?

So, I think overall, Arnold in his notes talked about the fact that we were focused on maximizing occupancy while preserving price in the long term. And so we are very keen on that. We did increase advertising expense in the second quarter for that purpose, to create more demand. We are seeing more first-timers. We had mentioned the fact that we saw a significant improvement in first-timers. So what we're trying to do here is we're building towards historical occupancy levels in 2023 with better pricing. As we indicated, the pricing for 2023 is up. But with the shorter booking window and the use of opaque channels and the use of limited promotions, we are driving occupancy in the short term in order to optimize the EBITDA and the cash flow from operations of the business. So while I'm not prepared to give you guidance on the third and fourth quarter gross revenue per PCD, which by the way, if you just think about the third quarter, one of the things to remember is we hope to have a lot of kids on board in the third quarter, and those thirds and fourths will also generally—they add to the revenue, they add to the bottom line—but they will also, on a per PCD basis, be lower than the lower berths, both for the ticket and the onboard. The kids don't generally spend as much onboard either, but we're happy to have them all on board. So there are factors in there that you have to consider as you think about the trend per PCD from third to fourth quarter and beyond. And with the increase in occupancy that we experienced in the second quarter, even with also the capacity increase we had in the second quarter, when you normalized to FCCs, pricing did not decline.

That's really helpful color. And maybe you already answered this to some degree, but if I sort of zoom out here for a minute, historically the industry has largely used this price-to-fill paradigm. And I think with some of these metrics, the concern is that we'll return to that. Pre-pandemic, we seemed like we were in a better place, thinking more about long-term pricing opportunities. Maybe speak to if there's been any change in your philosophy pre-pandemic to now, just given the importance of filling up these ships and getting to positive free cash flow.

That's really helpful color. Thank you both.

Next question from the line of Dan Politzer, Wells Fargo. Please go ahead.

Hey, good morning, everyone. And Arnold, best of luck. And Josh, congratulations on the new position. So, a question on customer deposits and how we should think about this for the rest of the year. Obviously, it was very strong in the second quarter. I mean, there's typically a decline sequentially. So just as we think about cash flow through for the rest of the year and how customer deposits flow through, is it safe to say that the third quarter is not going to be cash flow positive, or given the extent that you guys continue to recover in terms of your bookings and operations, the third quarter could continue to be cash flow positive?

So that's a great question, and we've been trying to answer that. I will tell you that since the end of May, customer deposits have continued to increase. They're up a few hundred million dollars. So that, at least directionally, in the last three and a half weeks, that's where we're at. Normally, during the third quarter, there is a reduction because we reach the seasonal high peak at the end of May. But there are offsetting factors this year that we would expect to see with more ships coming back online and higher occupancies that should mitigate any normal seasonalization. Whether it completely mitigates it or not, it's very hard for me to predict at this point. But there are some mitigating factors to the normal seasonalization of customer deposits.

Yeah. One more quick one if I could just squeeze it in. With the newer cruise product, a lot of your fleet has been refreshed. To what extent have you been able to capture that pricing? Typically, the newer product is a premium price, but this is kind of a weird environment. Have you been able to capture that, and if so, any kind of metrics or way to quantify that?

Yeah, it's very hard to tell. I mean, we look at so many things, but there's so many variables right now. It is just very, very difficult to tell in the comparison going back to 2019. So we look at the total; we manage it appropriately. I will tell you those new ships are performing very well, high levels of occupancy, generating significant cash flows. And as we move forward, I suspect that we will be able to continue to generate a premium there. Arnold indicated nearly a quarter of our fleet will be new in 2023 or newly delivered. The average age of our fleet, believe it or not—I think I've said this before, maybe on one of the previous calls—but from 2019 to 2023, despite the passage of four years, the average age of our fleet went down one year. So we've got a lot of new capacity, which should help very well both on the revenue side and on the cost side from an efficiency perspective and better fuel consumption. So we are very excited about the future and delivering memorable vacation experiences, probably 14 million people in 2023, as we go for historical occupancy levels.

Operator, we'll take one more question. Let's make it a good one for Josh. Go ahead.

Our next question comes from the line of Asiya Gorgi, Infinity Research. Please go ahead.

Good morning. Arnold, you'll be missed, but Josh, very happy that you received this great position, responsibility, and the triple promotion. So I do have a good question for you, hopefully. With the Costa by Carnival concept, that is obviously something that would be a long-term fixture. We're not just moving ships around for the next two or three years. Do you believe that this is something that could be expanded? And does the cost of fuel play any role in terms of what ships might actually continue to join the new concept? LNG deliveries have been somewhat difficult, I guess. In Europe, we had issues with Costa in South America last winter season. So how do you see the development of the concept, and what are the key parameters that would actually play into it?

Thanks. Just one thing to clarify: obviously, the two ships that we're talking about that are going under this Costa by Carnival umbrella are not LNG, so that obviously didn't enter into our mindset at all. So just to reiterate Arnold's points with respect to the positioning, I think this is a great example of leveraging the scale of this corporation. Because what we could have done is taken those ships, new beautiful ships, solely under the Costa name and tried to introduce them into the North American market on a stand-alone basis. But this is actually the opportunity to leverage everything that Carnival does so well here in the United States and Canada for its guest base. So by marrying that along with Costa's beautiful tonnage and onboard experiences, we have the ability to marry that up and make a best go of creating something really special. So the short answer is, we absolutely expect this to be successful, and we don't look at this as something short-term, but ideally it'll be something that works and we can build upon.

Okay. So currently, no further plans. Obviously, you've made plans for 2023 and 2024, so that's plenty of time and capacity coming in the two ships. So at this point, so early to discuss whether this would become sort of a mini-brand on its own?

Yeah, I think let's try it out with two ships, and then we'll see how we do. But that's it for now.

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