Carnival Co. & Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
December 19, 2021

There are 13 speakers on the call.

Operator

Good morning and happy holidays, everyone. Welcome to our business update conference. I'm Arne O'Donnell, President and CEO of Carnival Corporation and TLC. And today, I'm joined telephonically by our Chairman, Nicky Arison as well as by David Bernstein, our Chief Financial Officer and by Beth Roberts, Senior Vice President, Investor Relations. Thank you all for joining us this morning.

Operator

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. What a difference a year makes. We are clearly on our way back to full cruise operations With 50 ships now serving guests as we end the fiscal year, and that's up from just one ship 1 short year ago, We've already returned over 65,000 crew members to our ships. And since resuming operations, Over 1,200,000 guests and counting have sailed with us.

Operator

Now we've achieved that while delivering an exceptional guest experience with historically high Net Promoter Scores. These are Strong accomplishments, especially in light of the uncertainty we faced just 1 year ago when vaccines were not yet available And effective protocols to mitigate the spread of the virus were still evolving. Today, our team members and the vast majority of guests Have received vaccines and many have received boosters. We have established effective protocols for COVID-nineteen and its variant, enabling occupancies to progress toward historical levels. In fact, occupancies at our Carnival Cruise Line brand, which currently operates itineraries that are most similar to its normally published itineraries, are now approaching 90%, And that's after the impact of the variance on near term bookings.

Operator

Again, Carnival Cruise Line continues to outperform with both occupancy and pricing strength. Even at this early stage, as a company, we are now generating meaningful cash flow at ship level to date and growing, helping to fund start up costs for the remaining fleet. Total customer deposits have grown by over $1,200,000,000 from the prior year end level as our book position continues to build and to strengthen. Importantly, we ended the year with $9,400,000,000 of liquidity, and that's essentially the same liquidity level as last year, But with significantly improved cash flow generation ahead as the aforementioned Ship operating cash Both and customer deposits continue to build. With 68% of our capacity now in operation and the remainder planned by Spring, we are well positioned by our important summer season where we historically have the lion's share of our operating profit.

Operator

Throughout 2021, we said that we expected the environment to remain dynamic, and it certainly has. Of course, agility has been a key strength of ours, and we continue to aggressively manage to optimize given this ever changing landscape. As we have demonstrated through the Delta variant and now with Omicron, we have navigated near term operational challenges. While the variance and their corresponding effect on consumer confidence have created some near term booking volatility, Our book position has remained resilient and in the case of Delta variant already recovered. Importantly, These variants have not had a significant impact on our ultimate plan to return our full fleet to guest operations in the spring of 2022.

Operator

It is clear we have maximized our return to service in 2021, and we have positioned the company well to withstand the potential volatility on our path to profitability. At the same time, we have not lost sight of our highest responsibility and and therefore, our top priority, which is always compliance, environmental protection and the health, safety and well-being of everyone, That's our guests, people in the communities we touch and serve and, of course, our Carnival family, our team members, Shipboard and Shoreside. And to that end, we've achieved many important milestones along the way in our return service. For example, broadening our commitment to ESG with the introduction of our 2,030 sustainability goals and our 2,050 aspirations, and that's building on the successful achievements of our 2020 goals. Increased our ESG disclosure by incorporating SASB and TCFD frameworks in our sustainability report, bolstering our compliance efforts with the addition of a new Board member with valuable compliance experience, a strong addition to our Board of Directors and our Board Compliance Committee.

Operator

Improving our culture through emphasizing 6 essential behaviors and incorporating them into our ethos through training and development and through everyday real time feedback. As we are already among the most diverse companies in the world with a global employee base representing over 130 countries, We are focusing our efforts on diversity and inclusion at every level and in all areas of our operations. And of course, there are many more operational milestones, such as reopening our 8 owned and operated private destinations and port facilities, Princess Key at Moon Key, Grand Turk, Mahogany Bay, Amber Cove, Cozumel, Santa Cruz to Tenerife and Barcelona, all delivering an exceptional experience to over 630,000 of the 1,200,000 guests since resuming operations, welcoming 9 new more efficient ships across our world leading brands, including Mardi Gras, powered by LNG. Mardi Gras is nothing short of a game changer for our namesake brand, Carnival Cruise Line. Premium brand, Holland America, introduced the new Rotterdam, Sisters ship to very successful Kony's Downs and New Soten Dunne.

Operator

Princess welcomed guests aboard a new medallion class ship, Enchanted Princess, and we'll welcome another new medallion class ship, Discovery Princess, early next year and ultra luxury brand, Seaborn. We'll welcome Seaborne Venture with its world class expedition team and its spectacular 360 degree view submarines. For the U. K, we successfully introduced Iona, also powered by LNG. For Germany, we shortly take delivery of our 6th LNG powered Just Aida Costa shifted to the also highly successful Aida Nova and for Southern Europe, Costa Marinze and LNG powered Casa Toscana will replace the exit of several less efficient ships.

Operator

Now these new ships, Mardi Gras, Iona, Atas Toscano have joined AIDA Nova and Atas Smeralda to be the only 5 and with the addition of AIDA Cosmo shortly, the only 6th large cruise ships in the world currently powered by LNG, demonstrating our leading edge decarbonization efforts. Now while the utilization of LNG is a positive step for the environment Since LNG is inherently 20% more carbon efficient, it is not our ultimate solution. We have announced our net zero aspirations by 2,050. Now where there is no known answer to 0 carbon emissions in our industry at this time, We are working to be part of the solution. We have and expect to continue to demonstrate leadership in executing carbon reduction strategies.

Operator

We are focused on decreasing our unit fuel consumption today, reducing even the need for carbon offsets. Our decarbonization efforts have enabled us to peak our absolute carbon emissions way back in 2011, and that's despite an approximately 25% capacity growth since that time. And while today, based on publicly available information, We believe we are the only major cruise operator to peak our absolute emissions. Our entire industry is moving in the right direction. And as a company, with a 25% reduction in carbon intensity already under our belt, we are well positioned to achieve our 40% reduction goal by 2,030 and are working hard to reach that deliverable ahead of schedule.

Operator

Now in addition to our cutting edge LNG efforts, we have many other ongoing efforts to accelerate To name just a few, they include itinerary optimization and technology upgrades to our existing fleet at an investment of over $350,000,000 in areas such as air conditioning, waste management, lighting and of course, the list goes on. We are actively increasing our shore power capability. Greater than 45% of our fleet is already equipped to connect to shore power, and we plan to reach at least 60% by 2,030. Now we helped develop the 1st port with shore power capabilities for cruise ships, leading to the development of 21 ports to date and pound. We are focused on expanding Shore Power to our high volume ports around the world.

Operator

That includes Miami, Southampton, England and Hamburg, Germany. To ultimately achieve net zero emissions over time, We are investing in research and development, partnering on projects to evaluate and pilot maritime scale battery and fuel cell technology and working with classification societies and engine manufacturers to assess hydrogen, methanol as well as bio and synthetic fuels as future low carbon fuel options for cruise ships. Also, these efforts, combined with the exit of 19 less efficient shifts, are forecasted to deliver, upon returning to full operation, a 10% reduction in unit fuel consumption on an annualized basis. Now that's a significant achievement on our path to decarbonization. Our strategic assistance to accelerate the exit of 19 shifts left us with a more efficient and a more effective fleet overall, And it's lowered our capacity growth to roughly 2.5% compounded annually from 2019 through 2025, and that's down from 4.5 since annually pre COVID.

Operator

While capacity growth is constrained, we will benefit from this exciting roster of new ships spread across our brands, enabling us to capitalize on the pent up demand and drive even more enthusiasm around our restart plan. We enjoy a further structural benefit to revenue from these enhanced guest experiences new shifts Due to the richer mix of premium priced balcony cabins, which will increase 6 percentage points to 55% of our fleet in 2023. And of course, as we mentioned before, we will also achieve a structural benefit to unit cost as we deliver these new, larger, more efficient shifts. Coupled with the exit of 'nineteen less efficient shifts, it will help generate a 4% reduction in ship level unit cost going forward, enabling us to deliver more revenue to the bottom line. Upon returning to full operations, nearly 80% of our capacity will consist of these newly delivered larger, more efficient shifts, expediting our return to profitability and improving our return on invested capital.

Operator

Now we are clearly resuming operations as a more efficient operating company, and we'll use our cash flow strength to reduce our leverage on our path back to investment grade credit. Last quarter, we discussed the initial impact of the Delta variant. We indicated we saw an impact on near term booking volumes in the month of August. Booking volumes have since accelerated sequentially and returned to pre delta levels in November. And as we said we would, we maintained price despite the disruption, achieving 4% higher revenue per passenger cruise day in our Q4 in the Q4 of 2019.

Operator

In fact, the Carnival Cruise Line brand, where we, as I mentioned, are able to offer more comparable itineraries to those in 2019, experienced its 2nd consecutive quarter of double digit revenue growth for PCU, while improving occupancy with nearly 60% of its capacity returned to service. Now that's a testament to the fundamental strength and demand for our Foods product, especially when you consider this was accomplished without the benefit of a major advertiser. We expect to build on this momentum with the brand's announcement just last week on its Thunderstruck campaign, engineered to highlight the joy and fun of a Carnival Cruise. That advertising campaign is launching over the holidays, including activations on Christmas Day and Times Square on New Year's Eve in time for our Wave season. Turning to something as Barry is present in the news today, Amit Ponder, we have also experienced some initial impact on near term bookings, although difficult to measure.

Operator

As said, we have a solid book position and intentionally constrained capacity for the first half of twenty twenty two. With the existing demand and limited capacity, we remain focused on maintaining price. Bookings continue to build for the remainder of 2022 and well into 2023, and we are achieving those early bookings with strong demand. In fact, pricing on our book position for the back half of twenty twenty two improved since last quarter, and that's despite the delta variant. The current environment while chopping has improved dramatically since last summer.

Operator

And as the current trend of vaccine rollouts and advancements Within therapies continues, it should improve even further by next summer. So looking forward, we remain on a path to consistently deliver cash flow from operations during the Q2 of 2022 and generate profit in the second half of twenty twenty two. Importantly, we believe we have the potential to generate higher EBITDA in 2023 compared to 2019, given despite our modest growth rate, additional capacity and our improved cost structure. Throughout the pause, We have been proactively managing to resume operations as an even stronger and more efficient operating conference to maximize cash generation and to deliver double digit return on invested capital. Once we return to full operations, our cash flow will be the primary driver to return to investment grade credit over time, creating greater shareholder value.

Operator

And we continue to move forward in a very positive way. And for that, I again express my deepest appreciation to our Carnival team members, both Shipboard and Shoreside, who consistently go above and beyond. I am very proud of all we've accomplished collectively to sustain our organization through these challenging times, and I am very humbled by the dedication I've seen from our teams throughout. Of course, we couldn't have done it without the overwhelming support from all of you. So once again, Thank you to our valued guests.

Operator

Thank you to our travel agent partners. Thank you to our home port and destination communities. Thank you to our suppliers and other many stakeholders. And of course, thank you to our investors for your continued confidence in us and for your ongoing support. Once again, We can't wait to welcome everyone back on board.

Operator

With that, I will turn the call over to Dave.

Speaker 1

Thank you, Arnold. I'll start today with some color on our positive cash from operations, followed by a review of guest crew's operations, along with a summary of our 4th quarter cash flows. Then I'll provide an update on booking trends and finish up with some insights into our financial position. Turning to cash from operations. I am so happy to report that our cash from operations turned positive in the month of November Ahead of our previous indication, driven by increases in customer deposits and other working capital changes.

Speaker 1

We all know that booking trends are a leading indicator of the health of our business, with Solid 4th quarter booking trends leading the way, driving customer deposits higher, positive EBITDA It's clearly within our sight. Over the next few months, we expect ship level cash contributions to grow as more ships return to service and as we build on our occupancy percentages. However, Cash from operations and EBITDA over the next few months will be impacted by restart related spending and drydock expenses As 28 ships, almost a third of our fleet will be in dry dock during the first half of fiscal twenty twenty two. Given all these factors combined, we expect both monthly cash flow operations and monthly EBITDA To consistently turn positive during the Q2 of fiscal 2022. So 2022 will be a tale of 2 half.

Speaker 1

While we expect a net loss for the first half of twenty twenty two, It makes me feel so good to say we expect a profit for the second half of twenty twenty two. Now let's look at guest cruise operations. During the Q4, we successfully restarted 22 ships. During the month of December, we will restart an additional 7 ships. So we will be celebrating on New Year's Eve with over 2 thirds of our fleet capacity in service.

Speaker 1

Our plans call for the remainder of the fleet to restart guest cruise operations by spring, putting us in a great position for our seasonally strong summer period. For the 4th quarter, Occupancy was 58% across the ships in service, and that was a 4 point improvement Over the 54% we achieved last quarter during the peak summer season, despite the slowdown in bookings just prior to the Q4 from the Delta variant. During the Q4, we carried over 850,000 guests, which was 2.5 times the number of guests we carried in the 3rd quarter. Our brands executed extremely well with net promoter scores continuing at elevated levels compared to pre COVID scores. Revenue per passenger cruise day for the Q4 2021 increased 4% compared to a strong 2019 Despite the current constraints on itinerary offering, once again, our onboard and other revenue per diems were up Significantly in the Q4 2021 versus the Q4 2019, in part due to the bundled packages as well as Onboard credits utilized by guests from cruises canceled during the pause.

Speaker 1

We had great growth in onboard and other per diems on both sides Over the past 2 years, we have offered and our guests have chosen more and more bundled package options. In the end, we will see the benefit of these bundled packages and onboard and other revenue as we did during the second half of twenty twenty one. As a result of these bundled packages, the line between passenger ticket revenue and onboard revenue is blurred. For accounting purposes, we allocate the total price paid by the guests between the 2 categories. Therefore, The best way to judge our performance is by reference to our total cruise revenue metrics.

Speaker 1

For those of you who are modeling our future results, based on our planned restart schedule for fiscal 2022, Available lower birthdays or ALBDs as they are more commonly called will be approximately 78,000,000. By quarter, the ALBDs will be for the Q1, dollars 14,100,000 for the 2nd quarter, $17,800,000 for the Q3, dollars 23,000,000 even and for the 4th quarter, $23,100,000 Fuel consumption will be approximately 2,900,000 metric tons. The current blended spot price for fuel is $5.63 per metric ton. I did want to point out that due to the cost of a portion of our fleet being in paused status during the first half of twenty twenty two, Restart related expenses, the cost of maintaining enhanced health and safety protocols and inflation, We are projecting net cruise costs without fuel per ALBD in 2022 to be significantly higher In 2019, despite the benefit we get from the 19 smaller, less efficient ships leaving the fleet, Remember that because a portion of the fleet will be in paused status during the first half, We are spreading costs over less ALBDs. We do anticipate that most of these Costs and expenses will end with 2022 and will not reoccur in fiscal 2023.

Speaker 1

In addition, we expect depreciation and amortization to be $2,400,000,000 for fiscal 2022. While net interest expense without any further refinancings is likely to be around 1,500,000,000 Next, I'll provide a summary of our Q4 cash flows. During the Q4 2021, Our liquidity increased by $1,600,000,000 to $9,400,000,000 at the end of the 4th quarter From $7,800,000,000 at the end of the third quarter, the increase in liquidity was driven by the $2,000,000,000 Senior unsecured notes we issued in October to refinance 2022 maturities. The $360,000,000 customer deposit increase added to the total. This was the 3rd consecutive quarter We saw an increase in customer deposits.

Speaker 1

Completion of a loan we previously mentioned, Supported by the Italian government with some debt holiday principal refund payments added another 400,000,000 Working capital and other items net contributed $300,000,000 All these increases totaled 3,100,000,000 Which was somewhat offset by our cash burn of $1,500,000,000 simply our monthly average Cash burn rate of $510,000,000 per month times 3. It should be noted that our monthly average cash burn rate for the Q4 2021 was better than planned, driven by lower capital expenditures. Turning to booking trends. Our cumulative advanced book position for the second half of twenty twenty two and the first half of twenty twenty three Are at the higher end of historical ranges and at higher prices compared to 2019, With or without FCCs, but normalized for bundled packages, this is a great achievement Given pricing on bookings for 2019 sailings is a tough comparison as that was the high watermark for historical yields. Booking volumes for the same period during the Q4 of 2021 were higher than the Q3.

Speaker 1

During the Q4 2021, we significantly increased our advertising expense compared to the Q3 In anticipation of the full fleet being in operation in the spring of 2022, generating demand and allowing us to improve pricing on our book position. However, the 4th quarter advertising Expense is still significantly below our spending in the Q4 2019. Finally, I will finish up with some insights into our financial position. What a difference a year makes, Except for our liquidity, as Arnold indicated, we entered 2022 with $9,400,000,000 in liquidity, essentially the Same liquidity level as last year, but with significantly improved cash flow generation ahead Ship operating cash flows and customer deposits continue to build. Through our debt management efforts, We have refinanced $9,000,000,000 to date, reducing our future annual interest expense by approximately $400,000,000 per year and extending maturities, optimizing our debt maturity profile.

Speaker 1

With our 2022 maturities Already refinanced, we do not have any financing needs for 2022. However, We will pursue refinancings to extend maturities and reduce interest expense at the right time. Given our long history of positive, strong, resilient and growing cash flows, unlike many other industries, In 2023, our focus will shift to deleveraging driven by cash from operations. We expect to return to investment grade credit over time, creating greater shareholder value. And now I'll turn the call back over to Arnold.

Operator

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

Speaker 2

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

Speaker 3

Conference. Yes. Hey, guys. Good morning and happy holidays. So just want to be clear about the near term booking Tom.

Speaker 3

Sure. Due to Omicron. Is it fair to say that the booking pressure is really just around bookings for the first half of twenty twenty two? And what I'm trying to get at is, We want to be sure that, that booking weakness hasn't started to impact further out bookings. And I know it's hard to understand which way Omicron might go, but would you expect a similar path that you witnessed around Delta, meaning bookings slowed and then rebounded Very quickly as that fizzled out and got out of the media.

Speaker 4

Hey, good morning, Steve, and happy holidays to you, man. I think We have the experience, sharing in my opening remarks about the delta variant. We recovered in November Completely from that. We'll have to see how this plays out. I think the great news is it appears to date from scientists around the world and medical experts that while this particular variant is highly infectious, It seems to have less damaging effects on people that contracted, especially those who conference.

Speaker 4

We encourage everyone to be vaccinated, everybody to get their boosters. We have very effective protocols. And so again, I think our actual performance, and we had these protocols in place, as you will recall, even before there were vaccines, We had effective protocols with sailings in Europe. So we're amongst the safest form of socializing and travel that there are. And so to your question on the bookings, at this point, we have not seen Any major impact on the second half 'twenty two, 'twenty three bookings, it's hard for us to even quantify any impact, Although we're kind of a reflection of overall consumer behavior globally, so we're sure we've had some impact.

Speaker 4

We do see Some a little spike in their term, cruise cancellations. But the booking patterns are strong, And we have not, at this point, seen anything in, based on limited experience of the delta variant and how this seems to be playing out, we're at this time not anticipating any. I hope that answered your question.

Speaker 3

Yes. That's great color. Appreciate that. And then second question is probably for David. But David, you guys have refinanced over, Tom.

Speaker 3

I think you said the number is $9,000,000,000 so far. And I'm wondering, how much more you think is available to refinance over the next 6 to 12 months. And maybe help us understand that you talked about interest costs for 'twenty two being around $1,500,000,000 and What that number might actually look like by the time we get to next year? And I'm not trying to get more I'm not here trying to get more on detailed guidance that you guys. I'm just trying to understand the magnitude of how much more you really could go from here.

Speaker 5

Sure. So Steve, if you look at our capital structure, the biggest piece that High interest rate debt are the 2L notes that we did in 2020. And those have high 9s or low Tens in terms of interest expense. So there is an opportunity there to do refinancing of those notes, and we'll look for the right Time to consider doing that during 2022. And that could on that few $1,000,000,000 standing that could lower interest expense even further.

Speaker 5

But we did give the forecast as with the guidance at 1,500,000,000 And depending on the timing of any refinancing and the exact interest rate on what we refinance, There should be a considerable amount of savings going forward. And of course, keep in mind that as Arnold indicated, We do expect that we believe we have the opportunity for higher EBITDA in 2023 as compared to 2019. And that should begin to drive debt down in 2023, our overall debt levels and Correspondingly drive interest expense down. So it's a little premature to give guidance, but we do expect Lower interest expense in 2023.

Speaker 3

Okay, great. Thanks guys. Appreciate it. Happy holidays again.

Speaker 4

Happy holidays.

Speaker 2

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

Speaker 6

Great. Thank you. I saw your commentary that pricing for second half of twenty twenty two has gone up over the last quarter. And realizing, of course, that Q1 of 'twenty two is still challenged, can you give us some color? Is there a firming point Sometime during Q2, where you see that sort of the near term impact sort of stopping and things being firm, is it from sort of May forward or is there such a affirming point or is it even earlier than May potentially Where you're seeing that, the bookings and pricing moving up that you are seeing in the second half, but where you can kind of see that point in Q2 where it's firming?

Speaker 6

Thanks.

Speaker 4

Okay. Dave, you want to take a first shot?

Speaker 5

Yes, sure. No problem. So listen, A lot of the the reason we're focused on the back half of the year and we've talked about the comparisons in the back half And also the first half of twenty twenty three is because you're talking about apples and apples comparisons relatively speaking, Because the whole fleet is in operation, the itineraries that we're running are looking are Similar to the itineraries that we ran in 2019, so it's an apples to apples comparison and you can See what the booking trends or the pricing trends look like. If you look at the first half Of 2022, remember, this is apples and oranges. In 2019, we had world cruises, we had long exotic voyages.

Speaker 5

Our whole fleet was in operation. That's not true for the first half of twenty twenty two. So on an apples to apples basis, the comparison doesn't look nearly as good as when you get down to The detail itinerary level. And at the detail level, we're very pleased with pricing. I mean, Just to give you some comparisons, I mean, look at the Q4.

Speaker 5

Our total cruise revenue yield per PCD was up 4%. And so overall, we're very, very pleased with the pricing that we're seeing for the whole year. It's just it's in apples and you for the first half.

Speaker 6

Okay, understood. Thank you. And then just for my other question, Your commentary about expenses is very helpful thinking about there are some non recurring higher things in 2022 and you said most of those won't Current 'twenty three. And I realize it's way too early for you to sort of give an expense guidance number in 2023. But is it reasonable to think that the improvement in efficiencies from having sold those 19 ships But the expense per unit savings from that would more than offset the inflation piece, which The inflation piece may be recurring, but whereas all the other sort of restart and the pause status, all of those expenses, Once those are gone, is it reasonable to think that your that the savings from those less efficient ships being gone Would more than offset any inflation.

Speaker 6

Thanks.

Speaker 4

Hey, Robin, thanks for the question, and happy holidays to Obviously, we can't forecast what inflation is going to be and all that, and I know you understand that. But what we can tell you is that Axing the ships and the other efficiencies that we are managing to, as I Said in my opening comments, put us in a fundamentally lower cost basis, and we'll have to see what happens with inflation and so But clearly, whatever revenue we're able to generate and prices look strong now, more of it will fall to the bottom line because of But I wouldn't want to try to predict inflation or anything, but we know we're coming out leaner and more efficient and will be better positioned. And we're expecting to be in position to deliver more EBITDA in 'twenty three than we did in 'nineteen.

Speaker 6

Okay, great. Understood. Thank you, both. Thanks.

Speaker 2

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

Speaker 7

Hi, good morning. Thanks for taking my questions.

Speaker 8

Hi. I would like To hear

Speaker 7

a little bit about the timing of marketing spend over the course of the next year, my guess is that it might be more front end loaded given The uncertainty around the first half. And then if you have any comments on the supply chain and what you guys are seeing from a procurement perspective, It would be very interesting to hear that given all of the publicity around such issues in the news. Thanks.

Speaker 4

Okay, sure. On the marketing spend, first of all, again, we're very pleased with the results we've been able to enjoy, especially With the Carnival brand, where the itineraries are more comparable to what they normally would be pre COVID, without any advertising or very limited. So as we get ready for WAVE, we are launching campaigns across the brands in anticipation of WAVE. Still less spend than we had, say, in previous years pre COVID, but a significant ramp up from where we are, and we're being very diligent as part of the We talked about and looking at how to effect that spend for the greatest impact. So we've got more efficient and the spend we believe as well.

Speaker 4

So we are starting to ramp up. But again, the full fleet won't be sailing until conference sometime in the spring or whatever. Obviously, we're looking for bookings now in second half of 'twenty two and beyond, so a lot of expense for that. But we'll ramp up and judge as we go what seems to make the most sense and what's really going to drive guest behavior. In terms of the supply chain and sourcing question, we're global.

Speaker 4

We source from all over the world. There's lots of dynamics everywhere. We've had single challenges, issue challenges at times with Provisions are procuring particular services in a particular area. But overall, We're able to sail in a great way for the guests, where the guests are having a great time, in a way that is Compliant and very much in the best interest of public health. And so we've been able to managed through.

Speaker 4

Any other color you want to add, David, on either

Speaker 5

point? No, I think you hit the points well. I just did want to add one point. I was on mute. I apologize when Robin asked the question about the cost.

Speaker 5

I just wanted to point out to everybody that by the time we get to 2023, remember there's 4 years of inflation there between 2023 2019. So just keep that in mind, in addition to the other comments that Arnold made about costs for 2023.

Speaker 8

Thank you, guys. Enjoy your holidays.

Operator

You enjoy yours. Thank you.

Speaker 2

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

Speaker 9

Great. Thank you, everyone. I wonder if you can just help me clarify sort of apples to apples on your commentary on bookings. And you said Advanced bookings for the second half of twenty twenty two and the first half of twenty twenty three are now at the higher end historical ranges. Previously, of course, you had just talked about The second half of next year.

Speaker 9

When you're talking about the advanced bookings for second half of twenty twenty two and first half of twenty twenty three, Is that a combined 2022 and 2023 together? Or is that for both periods separately? I'm just trying to Apples to apples to what you said just the single period last time. Does that make sense?

Speaker 10

Go ahead, David. Go ahead, Budd.

Speaker 5

Yes. So when we with the reason we labeled the period separately is because we looked at each individually and each Which one was at the higher end of the historical range, both individually.

Speaker 9

Okay. And then okay, so we're going to look individually. I want to be clear here apples to apples. You had said previously back half of next year Was at a new historical high, meaning new historical high, but now it's at the higher end. With that Is it fair to assume that it's not those bookings for the second half of next year are not quite as high As you had said last quarter, am I interpreting that correctly?

Speaker 9

Thank you.

Speaker 5

Yes, you are interpreting that correctly. But by the way, Nobody really wants to be breaking new records on the advanced booking curve because If you want to properly the goal is to maximize the pricing and maximize the revenue when the ship sails. So historically, if you're in that greater book position, it's time to raise price, go down the booking curve. You don't need to be that far ahead. If I told you that we were sold out for the back half of twenty twenty two, At this moment in time, you tell me we didn't manage it properly.

Speaker 5

We left money on the table. So it's not shocking that We pulled back a little bit and we raised price and you saw a slowdown in the booking trends.

Speaker 2

Our next question comes from Ben Chikin with Credit Suisse. Please proceed.

Speaker 10

Hey, how's it going? Another apples to apples question. Does this forgive me, does this when you guys give the forward commentary on pricing, Does this adjust for the 2019 ships removed? Or is it just a gross bookings versus gross bookings previously? If that didn't make sense,

Speaker 5

I can try a different

Speaker 10

Meaning, does that capture the mix shift, I guess?

Speaker 5

Yes. So essentially, We're just looking at the fleet in 2019 that existed in all of the bookings. And so we don't Tracked out ships that left the fleet, we're not doing consistent fleet. We're doing today's fleet versus the fleet we had For 2019 sailing. So yes, there is some benefit to as Arnold said, the newer ships We'll get a better price point, better mix of cabins and other things.

Speaker 5

And so that is Benefiting the price over time, but and they're also more cost efficient and they generate significantly more EBITDA as well. So Paul, you're seeing all of that flow through in the booking trends and ultimately flow through to the cash flow and P and

Speaker 4

The other thing that's another variable are itineraries. And so we don't adjust for itineraries either. And conference. Certain itineraries are more higher yielding than others and so on and so forth. But those are normal variances that conference year to

Speaker 10

year. Got you. That totally makes sense. Thank you. And then I guess just one other.

Speaker 10

You guys mentioned several Bundled packages. I guess, are you seeing I know we're kind of early in the return to cruise, but are you seeing passengers have an additional wallet once on board well as other incremental opportunities to spend?

Speaker 4

Absolutely, we're seeing higher spending levels on board. There's no question about that. In some cases, bundling is contributing to that. We've always done each brand is And over time, there's always been some bundling. There seems to be even more of it currently than there has been in the past.

Speaker 4

And it appears that when you have these bundled packages, that overall, you end up getting greater yield because there's additional spin. But right now, there's also, I'm sure, just this pent up demand, where people are anxious to go out and experience things and have a good time, and that's also showing up in onboard revenues right now, which are very John.

Speaker 10

Got you. Thank you.

Speaker 2

Our next question comes from Asia Georgiova with Infinity Research. Please proceed.

Speaker 8

Good morning. I had a couple of questions. Arnold, you mentioned in the prepared remarks that the Carnival ramp is already at 90% occupancy, which is fantastic news. Given that we have the restart dates for all the ships at this point, they're pretty much fixed. So we can be hopeful that there might be upside from Higher occupancy levels.

Speaker 8

Should we think that the Princess might be the next brand that is getting to Levels somewhat closer to the Carnival brand and possibly Costa. Is that a fair way to look at it?

Speaker 5

Can I

Speaker 8

get my upside for market potency?

Speaker 4

Yes. Thanks for the question. I think, First of all, we've had a number of shifts on the Carnival brand even at 100% occupancy, and the trend there It's very good. But again, those itineraries are most comparable to the itineraries that existed pre COVID. And so you have very similar itineraries going on and just great execution by the Carnival team.

Speaker 4

In terms of which brand is next, that's pretty complicated. As we bring shifts back, we don't bring them back right away anywhere near 100% occupancy. And so you have to look at the proportion of shifts returning to service and when they're returning to service. And then you have to look at the itineraries. We also have protocols around the world, we have a number of European sailings that still have social distancing or physical distancing The scene requirements and that caps the occupancy in the 6% to 80% range depending on itinerary and the ship and so on.

Speaker 4

So there are a lot of variables here, And we just have to see what the situation is around the speed of ramp up And what the required protocols are and which itineraries we're going to be able to bring the ships back into. With the plans we have, we can kind of predict, but this is a very dynamic situation and has Our team has been really able to adapt to it and execute well. Overall, the trend is positive, and the brands will Get to where they need to be given their particular circumstances, but the trajectory, overall trajectory despite the fits and the stops and the speed bumps potholes and so on and so forth and detours. The overall trajectory is positive. Thank you.

Speaker 8

You gave me such a great segue into my second question because you mentioned itineraries probably 3 or 4 times. And I understand Australia and New Zealand has basically been closed for the winter season. Coral Princess couldn't do Her long voyage this summer, I think partly because of Australia and New Zealand being such an uncertain Embarkation point at this point. And then referencing, again, itineraries and the new LNG ships conference. Costa Diadema had to replace Costa Smeralda in South America because we don't have Enough access to or reliable access to LNG facilities.

Speaker 8

Would you given that you're the only cruise company, large Sure. At places such as Brazil, for example.

Speaker 4

Yes. I think we have a strong partnership with Royal Dutch Shell. With Royal Dutch Shell in terms of LNG infrastructure access, etcetera. And then We go beyond that relationship to secure what we need. But it's when we built the first ship, When we started building it, there was no infrastructure.

Speaker 4

And so we made a commitment early because of our commitment on the environmental front. And now we're very excited to have the 6 shifts with another 5 coming. So again, you may have to adjust in the moment here or there or whatever. But overall, we see A clear line of sight on the infrastructure to support good yielding itineraries that are exciting for our with our LNG power ships. And then if absolutely necessary, the ships can use alternative fuel source, obviously.

Speaker 4

But our intention and purpose is because we built them as LNG power shifts to use LNG.

Speaker 8

So would you need to participate further? I'm sorry.

Operator

Yes, go ahead. Your follow on, do

Speaker 4

we have to Participate and help fund or something, the establishment of the infrastructure. We don't anticipate having to put capital in ourselves to help establish the infrastructure. We don't. We think there are plenty of players in that part of the business to do that. Timing may be You're a little off here or there, but we don't see a need at this point for us to commit our capital to building LNG Infrastructure and Ports.

Speaker 8

Okay, great. Thank you so much. And I'm really glad you've made such commitment to a cleaner environment. So I appreciate that. Great holiday season for me as well.

Speaker 4

Thank you. Thank you. Same to you.

Speaker 2

Our next question comes from Paul Golding with Macquarie Capital. Please proceed.

Speaker 11

Thanks so much. So I had a quick question on just structural evolution of the marketplace. David, I think you had mentioned earlier about the mix shift increasing a bit sequentially towards higher end Stateroom mix. And I'm wondering if that's something beyond the current order book you're looking to do more long term because you see higher propensity to spend? Should we expect As far as thinking, once we're in a clearer yield environment, should we expect just continued increase in higher end stateroom mix?

Speaker 11

And then I have a follow-up on inflation.

Speaker 5

Sure. So I think what Arnold in his prepared remarks talked about, I think it was 5 percentage points higher, 5 or 6 percentage points higher balcony cabins. And so the mix of balconies that's And our fleet in the future is higher than the mix historically. A lot of that has to do with the way in which we build ships and the designer ships, we've been able to get effectively more balcony cabins on each and every ship, which will hopefully We believe we'll drive yields and satisfaction levels of our guests. I don't think you're going to see for the ships we have on order Through 2025, it's all well set.

Speaker 5

We're beginning to start thinking about future new builds And we'll analyze that based off of customer trends and desires, and we'll work those into the plans. And You can be sure we'll be thinking about that and making sure that we optimize our return on invested capital over time as a result of what we do.

Speaker 11

Great. And then on the cost side, as we think about your commentary on inflation, your thoughts On 2022 fuel costs, should we start thinking more about whether hedging is going to play a role here again for your team versus what was Previously, not a robust hedging program on your side in the fuel space?

Speaker 4

We historically haven't hedged. And at this point in time, if that changes, we'll let you know. But historically, we haven't hedged. We have felt that over time, that all takes care of itself, and We have some natural hedges with the portfolio we have and revenues and costs in different currencies around the world. I know you're talking about fuel price hedging, but I'm just saying other than that, we really typically don't hedge.

Speaker 11

And other than the LNG, nothing meaningful on mix shift between bunker and NGO and Going into

Speaker 4

the I think over time, there's no question that over time, we'll see a lower The ratio of MGO, given the fact we're bringing LNG in and We have our advanced air quality systems on the ships, etcetera. So the combination of LNG and Extended use of Advanced Air Quality Systems. We should see A lowering of the requirements on MGO as we go forward. David, you want to add any Joe, color.

Speaker 5

No, I think that says it well. My blended fuel average for 2022 reflected probably a 10 point drop in the MGO mix from 2021 to 2022.

Speaker 9

Great. Thanks so much for that color and happy holidays.

Speaker 4

Yes. Happy holidays. Be safe.

Speaker 2

Our next question comes from Vince Seifel with Cleveland Research. Please proceed.

Speaker 12

Thanks. I wanted to follow-up on occupancy. I think you mentioned that August was about 59%, so it looks like it was pretty stable throughout your Fiscal 4Q. Definitely appreciate that it's a dynamic situation that you alluded to, but how are you thinking about that occupancy build Throughout 2022, do you anticipate it's more linear or more inflecting in the second half? Kind of what's built into the budget as it relates to your profitability assumptions?

Speaker 4

So I'll start just with an overall comment that Clearly, the occupancy trend is really positive. Now when you look at the comparison you just made, There are a lot of dynamics in that. For example, we brought on, as David mentioned, I think in some of his comments, 22 ships or something. And obviously, when you bring the ships on, they're not initially at full lock That's on purpose as we bring them in. And so that averages down your occupancy.

Speaker 4

So what we're looking at overall for occupancy Trends are where you have comparable itineraries and ships that have been sailing for a while, what's happening with the occupancy on those ships, And that's a very positive message. So you have a number of things weighting those occupancy numbers. David?

Speaker 5

Yes. So the other thing to keep in mind that affected the 4th quarter was the Delta variant in the month of August impacted Bookings, many of which might have been for the Q4. And as a result of that, We had hoped to have higher occupancy in the Q4, but between the Delta variant and everything else and a few January changes that we had, we were very pleased with the overall 59%. Looking forward, I will say, it's very difficult to predict exactly by month or by quarter what the occupancy is Going to be, we're in a good book position and we're expecting overall the trend to be positive and to see increasing occupancies Throughout 2022, but I think it'd be premature for us to give some sort of guidance.

Speaker 4

Okay, operator, we have time for one more question.

Speaker 2

We have a question from Ryan Sundby with William Blair. Please proceed.

Speaker 9

Yes, hi, thanks. I had a question around operating procedures. It feels like Proof of vaccination and negative test results have been a really effective tool for the industry to lean on here. But I guess given more breakthrough cases really around all life experiences in the past month or so, is that still an effective tool going forward? And when do you need to start considering requiring a booster, which I think a market like France is now requiring?

Speaker 4

Yes. Hey, thanks for the question. I think overall, we continue to be informed by, again, the scientists around the world and medical experts. And of course, we continue to act in compliance, whatever the rules are in the destinations and home ports that we're operating. But the bottom line is that this is a dynamic situation in the markets where we are requiring Vaccine we require testing everywhere.

Speaker 4

We require vaccines in most places, and we're encouraging boosters. Of course, our crew is vaccinated, and over 10,000 of them have already received boosters, and we'll be continuing with that. They are tested very frequently, the crew is. And those protocols have worked and have Helped us be amongst the safest forms, as I mentioned before, of socializing and travel of any in the travel and leisure sector. So they have worked and they are continuing to work.

Speaker 4

So we'll see how it plays out. We'll follow the science, and obviously, we'll be in compliance. But right now, we are sailing with confidence. As you noted, there are going to be some cases. There's a Far lower incidence of cases right now in crews than in society at large, and we want to work to continue to ensure that that's the case.

Speaker 4

And when there are cases, the risk of propagation or spread of the virus has Very effectively controlled to date. And as long as that continues to be the case, we'll continue to So but we'll adjust and adapt to what we need to. I think the most important thing is where we have had cases, In most instances, they're either asymptomatic or minor symptoms. We have not had lots of cases where people have to be conference. Or worse.

Speaker 4

And I think that's important, and that's also increasing trend in society at large. And hopefully, that trend will continue. Other question? I'm sorry, that was the last question?

Speaker 5

That was the last question. Okay.

Speaker 4

Hey, Look, everyone, thank you. Really appreciate your engagement. Please have a safe and joyful holiday, and We look forward to talking to you guys at the next business update. So thank you very much.

Speaker 5

Happy allheart, everyone.

Speaker 2

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.

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Earnings Conference Call
Carnival Co. & Q4 2021
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