Carnival Co. & Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
June 23, 2022

There are 13 speakers on the call.

Operator

Good morning, and welcome to our business update conference call. I'm Arnold Donald, President and CEO of Carnival Corporation and PLC. I'm joined today telephonically by our Chairman, Mickey Arison, Within Europe and here with me in Miami, David Bernstein, our Chief Financial Officer Beth Roberts, Senior Vice President, Investor Relations And as part of our previously announced transition, our Chief Operations Officer, Josh Weinstein. Thank you all for joining us this morning. Before I begin, please note that some of our remarks on this call will be forward looking.

Operator

Therefore, I must refer you to the cautionary statement in today's press release. This is my final business update as CEO. While very disappointingly, our share price unfortunately reflects the current market conditions. I am nonetheless very proud of all that the team has accomplished over the last 9 years. I am especially proud of how well we have collectively overcome what seemed like insurmountable obstacles at times these last few years, and I remain very excited about our future.

Operator

With cash From operations now turning positive, we have reached an inflection point and, in fact, turned the corner and are headed on a positive trajectory. I am not only excited about, I am also very confident in the future of our company, and I'm looking forward to its continued success. I strongly believe in this team, and we are enjoying a smooth transition. As Vice Chairman, far and away, my number one responsibility will be to for Josh and his management team as they work to build on the current momentum. Josh is a proven executive.

Operator

He is well respected throughout the company. He served in key leadership roles. He's driven strong business results during his tenure, Andy played an integral part in stewarding the company through the global pandemic. Josh's thorough understanding of our industry, Of our operations and our business strategy puts him in a strong position to lead the next phase of our company's journey. With his vision, intensity and core values truly aligned with those that characterize our company, I cannot think of Anyone better suited for this role than Josh.

Operator

Now turning to our business results. It is reinforcing to see the continued strength and demand for Cruise. We are aggressively, yet thoughtfully, ramping up to full operations with over 90% of the fleet now in service. And at the same time, we are driving occupancy higher on those ships that have been sailing, and we are focused on improving pricing compared to pre COVID levels. As we had indicated for the 20 shifts that restarted over the last quarter, occupancy have been intentionally constrained.

Operator

That said, Occupancy increased from 54% last quarter to 69% this quarter, while we also increased available lead by 25%. Now the combination drove an over 60% sequential improvement in passengers carried. In fact, We carried over 1,600,000 guests this past quarter. And partly in the month of June, We are already approaching 80% occupancy and again, on even higher capacity. Now what makes that even more impressive is we were able to achieve that in an environment of uncertainty given frequently changing protocols, including those that were far more restrictive than those in broader society and that were far more within those found even in other portions of the travel and leisure sector.

Operator

While thankfully vaccination and test requirements are starting to relax, Given the improvement in the state of the virus, we continue nonetheless to face constraints in the pool of potential guests due to ongoing requirements in a number of places. Yet, we have been able to make very meaningful progress. As you know, the CDC recently lifted the testing requirements for reentry into the U. S. For air travel, which going forward clearly removes Some of the friction from our North American brand's deployment in both Europe and due to Canadian evocations, Alaska.

Operator

Usually requiring a longer duration flight, these itineraries are typically associated with longer lead times. Consequently, we expect the real benefit to be realized in 2023 and beyond. Importantly, customer deposits increased by $1,400,000,000 in our 2nd quarter, topping $5,000,000,000 Now we have seen a continued increase in express demand, and we expect to see that demand continue to build as protocols are further relaxed and as society becomes increasingly comfortable managing the virus. Concerning the threat of global recession, While not recession proof, our business has proven to be recession resilient time and again. As we have seen in prior cycles, even in downturns, employed people take vacations.

Operator

And that's even more true in today's where people prioritize spending on experiences over spending on things. Cruise remains an especially appealing vacation options during downturns because of its compelling value proposition relative to land based alternatives. Also, there is pent up demand for travel globally, which is a powerful tailwind. Currently, We are seeing success for close to home cruises, with many sailings achieving occupancy at or above 100%, where guests perceive far less friction than with international embarkations. In fact, our Carnival Cruise Line brand, Selling its entire fleet is expected to reach nearly 110% occupancy during our Q3.

Operator

We also saw an improvement in new to cruise guests in the Q2, and we have begun to ramp up our advertising efforts selectively to help support attracting first time cruisers. Concerning pricing, we remain focused on improving price through next year. We are focused on optimizing the occupancy, while preserving long term pricing. In this current environment of travel restrictions and health protocols where we have close in availability, we use opaque channels and limited promotions to capitalize on near term demand. We are building on our aggressive fleet optimization efforts.

Operator

Given challenges in parts of Europe, we have reallocated to capitalize on markets where there is stronger demand. In fact, we just announced an especially creative approach that we think holds great promise, the launch of Costa by Carnival. With Costa by Carnival, we bring the ambiance and beauty of Italy to Carnival Cruise Line guests. Casa Venezia, Casa Firenze, both newly introduced and both spectacular, We'll be managed by Carnival Cruise Line, catering to Carnival's guest base beginning in the spring of 'twenty three and 2024, respectively. This new concept will offer unique experience for Carnival guests to choose fun Italian style, While capitalizing on Casa's beautiful Italian design elements, deployment for Venezia will be shortly and will represent a new itinerary option for Carnival guests.

Operator

Separately, we also announced the transfer of Casa Lumanosa to the Carnival brand, beginning in November 2022 catering to Australian guests. Now with these changes, the Carnival brand will replenish capacity that have been removed from recent ship exits and contribute to managed growth for the brand. These new and differentiated product offerings enable us to capitalize on demand among Carnival Cruise Line guests and strengthen return on invested capital across our portfolio. In addition, We continue to further optimize our fleet and have announced the remove of an additional smaller, less efficient ship, bringing the total to 23 ships to be removed from the fleet since 2019. The accelerated removal of these less efficient ships, Coupled with the delivery of 9 larger, more efficient ships delivered since 2019 fosters higher revenues Over time, through a 7 percentage point increase in the mix of premium priced balcony cabin and an even better platform for onboard revenue opportunities as well as generating a 6% reduction in ship level unit costs, excluding fuel, moderating the effects of inflation and enabling us to deliver more revenue to the bottom line.

Operator

Upon returning to full operations, nearly a quarter of our capacity will consist of newly delivered ships, expediting our return to profitability and improving our return on invested capital. Moreover, next year, our Capacity growth compared to 2019 is concentrated in brands with our highest returns. Concerning recent fuel prices, we continue to aggressively manage our fuel consumption. Upon reaching full fleet operations, we anticipate that we will achieve a further 10% reduction in unit fuel consumption and 9% reduction in carbon intensity as compared to 2019. With our proactive efforts to reduce Fuel consumption, we actually peaked our carbon footprint in 2011, and that's despite an over 30% recent capacity expected through 2023.

Operator

In fact, we have reaffirmed and strengthened our carbon intensity reduction goals for 2,030 and are on an accelerated path to achieve them through our fleet optimization efforts, investing in projects that drive energy efficiency, Designing Energy Fishing Itineraries and Investing in Ports and Destination Projects. During the quarter, Carnival Cruise Line broke ground on an exciting new destination project, Carnival Grand Bahama Cruise Port. This destination is expected to open in late 2024 and will offer guests a uniquely Bahamian experience with many exciting features and amenities. Now this private guest experience destination will join Princess Key, Half Moon Key, Grand Turk, Mahogany Bay, Amber Cove and Cozumel securing our strong foothold in the Caribbean. In fact, we benefit from a total of 9 owned or operated private destinations and port facilities, including terminals in Santa Cruz, Tenerife and Barcelona.

Operator

Again, I believe we have operationally reached an inflection point, And we are heading in the right direction with cash from operations turning positive this quarter. We have a strong liquidity position of $7,500,000,000 and have already managed our debt maturity towers down through 2024. We have 91% of the fleet now operating and at improving occupancy levels, which bodes well for future cash generation. And while to date, Travelers perceived uncertainty and friction continues to be a headwind as protocols become less restrictive As society continues to become increasingly more comfortable managing the virus, we expect to see demand continue to build, As we have already seen with the strength for Carnival Cruise Lines closer to home cruises, The attractive value proposition relative to land based alternatives, which is even greater today, and the continued strength in onboard revenues Should help foster a good environment for pricing and should help to accelerate our momentum going forward. Once again, I don't have the words to adequately convey how personally rewarding and inspiring The commitment, the dedication, the creative ingenuity and the phenomenal execution of our Carnival teams shipboard in Shoreside Around the World has been.

Operator

And that, of course, includes our Chairman, Mickey Arison and the rest of our Board of Directors. In the face of constantly changing barriers and constraints, in an environment of continuous and extreme uncertainty, Our global team of tens of thousands successfully tackled challenge after challenge after challenge, honoring our commitment to our highest priority of compliance, environmental protection and the health, safety and well-being of everyone, while stewarding the shareholders' assets and positioning us for great success over time. I simply Can't thank them enough, and it's truly a privilege and an honor to work with them. Thank you also to our valued guests. Their loyalty to our 9 world leading brands and the countless letters and calls of support are so deeply appreciated.

Operator

Thank you to our travel agent partners who are more critical than ever and helping to deliver the great story of our crews. Thank you to our homeport and destination communities We have stood by us throughout these challenges, among other contributions, providing vaccines and lobbying for workable protocols. Thank you to our suppliers and other many stakeholders who stood by us and worked hard to meet our needs While facing challenges of their own and of course, of course, thank you to our shareholders, our bondholders, the banks, the export credit agencies, for continued confidence in us and for ongoing support. We are indeed poised for a great future because of the efforts and contributions of so many. With that, I would like to take the opportunity to introduce Josh and give him the chance to say a few words before turning the call back to David.

Operator

Josh?

Speaker 1

Thank you, Arnold, and thanks again to Mickey 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 2 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 9 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 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.

Speaker 1

In addition, We have an exciting sustainability roadmap that underlies all of our efforts. What also gives me tremendous confidence As our determined and resilient team around the world, they've proven time and time again for the last 2.5 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.

Speaker 1

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.

Operator

Thanks, Josh. We're looking forward to your leadership. David?

Speaker 2

Thank you, Arnold. I'll start today with a review of Guess Crew's operations along with a summary of our Q2 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 Q2 2022, we restarted 20 additional ships, Resulting in 74% of our total fleet capacity in guest cruise operations for the whole of the second quarter.

Speaker 2

This was substantial increase from 60% during the Q1 2022. As of today, 91% of our fleet capacity is in guest cruise operations. We were pleased to see that the 2nd quarter 2022 revenue increased by nearly 50% compared to Q1 2022, Reflecting continued sequential improvement. For the Q2, occupancy was 69% across the ships in service, A significant increase from the 54% in the Q1. We were encouraged by the very close in demand we During the Q2 for the Q2, resulting in nearly double the close in Occupancy gains in Q2 2022 versus Q2 2019, a trend we had anticipated.

Speaker 2

Revenue per passenger day for the Q2 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 credits or FCC as they are more commonly called, which costs us a couple of percentage points in Q2 2022 versus Q2 2019. Excluding the impact of FCC's revenue per passenger cruise date for the Q2 would have been higher than a strong 2019. Once again, our onboard and other revenue per diems were up significantly in the Q2 2022 1st, Q2 2019, in part due to the bundled packages as well as onboard credits utilized by guests From cruises canceled during the pause.

Speaker 2

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 3rd quarter, You will see more of the revenue left in ticket and less allocated to onboard, impacting the onboard and other revenue per PCD CD comparisons for the Q3 as compared to the Q2. 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 birth date or ALBD as it is more commonly called The Q2 2022 was up 23% versus Q2 2019.

Speaker 2

The increase in adjusted cruise costs without fuel per ALBD is driven by essentially 5 things. 1st, The cost of a portion of the fleet being in paused status second, restart related expenses for 20 ships 3rd, 24 ships being in dry dock during the quarter, which resulted in over double the number of dry dock days during the second quarter 1st, the Q2 2019 4th, the cost of maintaining enhanced health and safety protocols And finally, inflation. Remember that because a portion of the fleet was in paused status during the Q2 And the higher number of drydock days, we spread costs over less ALBD. The first half of twenty twenty two At 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 guests back on board. However, the second half twenty twenty two dry dock schedule looks more normal by historical standards.

Speaker 2

We anticipate that many of these costs and expenses driving adjusted cruise costs without fuel per ALDD higher We'll 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 twenty twenty two to the second half of twenty twenty two with a mid teens increase expected for the full year 2022 compared to 2019. Next, I'll provide a summary of our Q2 cash flow. We ended the Q2 2022 with $7,500,000,000 liquidity versus $7,200,000,000 at the end of the first quarter. The change in liquidity during the quarter was driven essentially by 6 statements.

Speaker 2

1st, negative adjusted EBITDA of approximately $900,000,000 due to our ongoing redemption of guest cruise operations and improvement from the Q1. 2nd, our investments of $500,000,000 in capital expenditures 3rd, $200,000,000 of debt principal payments and $400,000,000 of interest expense during the quarter, All of which was more than offset by a $1,400,000,000 increase in customer deposits during the quarter, along with the $1,000,000,000 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 dualistic company structure, is subject to U.

Speaker 2

K. Law, which requires mandatory audit of rotation. Therefore, PricewaterhouseCoopers or PWC as they are more commonly called, must be changed as Carnival Plc's audit us 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.

Speaker 2

We completed the RFP process in the first half of twenty twenty two 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 TLC would like to thank PricewaterhouseCoopers for its continued service 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 Q2 2022 Being nearly double the booking volumes during the Q1 2022. 2nd quarter 2022 booking volumes I am happy to report that booking volumes since the beginning of April for the second half of twenty twenty two sailing Have been higher than 2019 level.

Speaker 2

All of this reflects the previously expected extended waste season. And as I said before, we were very encouraged by the close in demand we experienced during the Q2 for the Q2, resulting in nearly double the close in occupancy gain in Q2 2022 versus Q2 2019, a trend we had anticipated. While the cumulative book position for the second half of twenty twenty two Is below the historical range, we believe we are well situated with our current second half twenty twenty two 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 twenty twenty two was lower With or without FCC normalized for bundled packages as compared to 2019 sailing. For the full year 2023, our cumulative advanced book position continues to be at the higher end Of the historical range and at higher prices with or without FCC's normalized for bundled packages as compared to 2019 sailing.

Speaker 2

This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison As that was a high watermark for historical yield. During the Q2 2022, we once again increased our advertising expense And our 8% capacity increase for 2023 versus 2019. Q2 2022 is the first time since the pandemic That advertising expense was above 2019 level. I will finish up with our adjusted EBITDA Thank you, 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.

Speaker 2

Adjusted EBITDA over the first half of twenty twenty two was impacted by restart related spending and drydock expenses As 34 ships, nearly 40% of our fleet were in drydock during the first half of fiscal twenty twenty two. For the Q3, with over 90% of our capacity back in guest crews 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 Q3 2022, which after everything we've been through will be something worth celebrating. With EBITDA turning positive, More liquidity than last quarter. Debt 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.

Speaker 2

And now I will turn the call back over to Arnold.

Operator

Thank you, David. Operator, please open the call

Speaker 3

Thank Our first question comes from the line of Steve Wieczynski with Stifel. Please go ahead.

Speaker 4

Yes. Hey, guys. Good morning. Arnold, congratulations, and it was a great run. So thanks for your service.

Speaker 4

So first question would be around the booking patterns, which clearly here are continuing to strengthen. However, I guess investors At this point, based on where your stock is, they're going to look past booking 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?

Operator

A couple of quick comments. First of all, I wouldn't comment on what the others would do. You can talk to them directly. For us, we have, as we've Been hit with different variants and invasion of Ukraine and other things and bringing more capacity on board. We've had to Consider all of that.

Operator

And at this point in time, largely, we have done everything in mind of trying to keep our pricing strong Going forward, because we think that's the right move right now. The positive thing here is that there is pent up demand. And so even if there was a global recession, the reality is We are, as I said in my comments, recession resilient historically. And this time, If there was a recession, there's tremendous pent up demand, which in the past wasn't necessarily the case because it's been a couple of years where people have not been able to travel the way they wanted to. So a combination of things.

Operator

One is, We are naturally somewhat recession resilient. We have added tailwind of pent up demand. And yes, we're focused on Doing what we can to ultimately drive the cash we need, but at the same time, do in a manner where we can maintain pricing David, may I have

Speaker 5

your comments? Yes. Just one thing I'd add to that. 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.

Speaker 5

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 we'll do very well in a recessionary environment.

Operator

And then there's we'll see if a recession comes right now. Savings are really high. As David pointed out, unemployment rates are really low. And so there's economic strength for the time being, but we'll see what happens. Okay.

Speaker 4

Got you. Thanks for that, guys. And then second question, I guess, Probably for you, David, around the recent debt raise. And 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 10% and maybe what drove you or maybe there was underlying reason as to why you had to raise debt at those levels. 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?

Speaker 5

Yes. So if you as I said on the last conference We were looking to over time refinance the $3,000,000,000 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 $1,000,000,000 at 10.5%. It was a difficulty in the market.

Speaker 5

Nobody could have predicted what would happen in the In the overall market, but what's interesting is despite the market backdrop, we were able to raise $1,000,000,000 Within the price talk that we wanted on that day and we felt very good about that. We're looking to do $2,000,000,000 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. 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 $2,000,000,000 over the ensuing months ahead.

Speaker 5

And we're just averaging in. Keep in mind, despite, I will say, 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.

Speaker 3

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

Speaker 6

Great. Thank you. Arnold, best wishes since this is the last earnings call. You'll be joining us for good luck with everything.

Operator

Thanks, Rob.

Speaker 6

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 And new ships going into service at lower levels and how much in other words, to try to kind of see the pent up demand there. I wonder if you could Give us a little bit of color on sort of the sequential build on 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 Kind of are you seeing for ticket price relative to 2019 and occupancy With that level of visibility, I don't know if you can comment a little more specifically. Thanks.

Operator

Yes, you bet, Robin. I'll have David share some details. But The overarching comment would be that we have real strength in occupancy, and We had some intentionally constrained occupancy as we brought ships on back online because of protocols in different places and so on. We also had some isolated situations where we're moving crew around temporarily as we were staffing up with crew and Constrained capacity for those reasons as well. But overall, our occupancy but our occupancy rates have, as we shared, Have really improved over time here.

Operator

And as we mentioned, the Carnival brand is looking at 110% in the Q3. So we have more capacity sailing and occupancy is rising nicely. And as the world It continues to relax and become comfortable managing the virus, and restrictions are relaxed. We see things moving more to direction of the Carnival brand where things are more normalized even though they still have some restrictions right David?

Speaker 5

Yes. So during the Q2, I mean 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. So and as Arnold said, we're Approaching 80% for the month of June. And with booking trends good, we continue to build. So but keep in mind Matt, as I had indicated, we started 20 ships in the Q2.

Speaker 5

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 Q3 and into 2023.

Speaker 6

Okay, great. And maybe just as a follow-up question. On the expense commentary, you mentioned a lot of sort of buckets about Pause status, ship restart costs, drydock, all of those, as being part of that 23% 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 in health and safety.

Speaker 6

In other words, The other factors all being somewhat temporary, the pause status, the restart costs, the dry dock, how much of those sort of 23 points are Go away automatically just by having your 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.

Speaker 5

Yes. I think the best way to For you 2, you can do your own quantification and it's pretty easy. If you think about we were sort of 24 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, then 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.

Speaker 5

So but that's probably the best way to back into it.

Speaker 6

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 kind of the end of the year, really thinking about 2023,

Speaker 2

that's why I

Speaker 6

was looking for sort of

Speaker 5

Well, Peter, maybe go to your Understand and I'm not in a position to give cost guidance for 2023 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 6 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.

Speaker 6

Okay, understood. Thank you very much. Thanks.

Operator

Thanks,

Speaker 3

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

Speaker 7

Hi, good morning and thanks for taking my question. 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 this rebranding with Carnival and whether or not that's signaling anything?

Operator

Yes. I think just generally, obviously, Europe in many ways is more challenged From consumer demand standpoint as it relates to travel, North America and what you're seeing in the move with Costa by Carnival and transfer Luminosa in Australia to Carnival is part of a rightsizing of Costa for what we see as a European environment, Which is complicated not only by COVID and macroeconomic conditions somewhat triggered by Invasion of Ukraine, but also the invasion of Ukraine. And so all of those things are impacting the European market sector. So we're reallocating to brands that have stronger demand, they're in a stronger position. That's one of the beautiful things, our assets are mobile.

Operator

So but overall, we still see strong demand in Europe, and there are portions of Europe, the U. K. In particular. And Also, we see some continued strength in portions of Germany and what have you. And So we see a good market in Europe, a strong market in North America, and we're just reallocating across Brands to optimize our portfolio and maximize, the cash generation and position us for the long term.

Speaker 5

If I can build on that a little bit, I did want to point out, so we talked about our bookings in the 2nd quarter nearly doubling The what they were in the Q1, so the NAA brands were a little bit Over double in the EA brands, which includes Costa, were a little bit less than double. Both I mean, everything is heading in the right direction. There is Good solid strong demand in all the brands, but the NAA brands are doing from a booking Tremperspective a little bit better than the EA 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.

Speaker 5

So we feel very good about all of our brands and the direction and we are Managing it appropriately, as you could see, what Arnold talked about the moves of the ships.

Speaker 7

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?

Speaker 5

So I said that quite a number of times. I think we are have what I've always said is we have the potential for EBITDA to be greater in 20 23, then 2019. That one big wildcard of costs 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.

Speaker 6

Thank you.

Speaker 3

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

Operator

Thank you, Patrick.

Speaker 8

Thank you. Can you 2 questions. Well, first question is, can you comment on your Potential willingness to sell brands to 1 or more brands to help shore up the balance sheet?

Operator

Well, we're very And so we would absolutely, again, evaluate any and all But we're only going to do what makes sense for the shareholders given our projections of opportunity given the portfolio we have.

Speaker 8

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 twenty twenty two are Now below the historical range, which implies obviously, it was lowered from the previous Where you said it was at lower end. Specifically, you noted here this position is consistent with its expected improving occupancy levels for the second half of twenty twenty two. Can you explain a little bit more what that last phrase means?

Speaker 8

I'm not quite understanding what you mean by consistent with expected improving occupancy levels.

Speaker 5

Yes. So what we were trying yes, what we're just trying to say there Yes. 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 twenty twenty two 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.

Speaker 2

Okay. Thank you for the clarification.

Speaker 9

Sure. Thank you, Beth.

Speaker 3

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

Speaker 10

Hey, good morning. Thanks for taking my questions. And Arnold, I wanted to Reiterate, congratulations, and good luck with what's next. Thanks. 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.

Speaker 10

There was some A little bit of an FCC headwind there. But I think that same number was up north 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 3rd Should we expect that pricing number to go down further?

Speaker 10

And obviously, we're going to get back some of that FCC But sort of excluding that piece, how should we think about revenue per passenger cruise day as we continue to raise occupancy?

Speaker 5

So, okay. I think overall, Arnold in his notes talked about the fact that we were Focused on maximizing occupancy while preserving price in the long And so we are very keen on that. We did increase advertising In the Q2 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.

Speaker 5

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 3rd and 4th quarter gross revenue per PCD, which by the way, If you just think about the Q3, one of the things to remember is we hope to have a lot of kids on board in the Q3. And those 3rds and 4ths 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 births, both for the ticket and the onboard, the kids don't generally spend as much onboard either, 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 3rd to 4th quarter and beyond.

Operator

And with the increase in We experienced in the second quarter, even with also the capacity increase we had in the second quarter. When you normalize the FCC's, our pricing did not decline.

Speaker 10

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 Turn to that. We were pre pandemic, we were, it seemed like, in a better place, thinking more about long term pricing opportunity. Maybe speak 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.

Speaker 5

So one of the things that you have to think about in all of this Yes, over time, we are already seeing it, but we the protocol friction is reducing. Just recently, they dropped the U. S. Dropped the testing requirements for people to get back into the U. S.

Speaker 5

From International places. And we are seeing we are starting to see the ability for us to reduce our protocols and reduce The frictions. And I think that will bring back people from the sidelines and will create additional demand, which will allow us to get better We feel very good about the future over the next few quarters in 2023.

Operator

And keep in mind as you track all of this that there are mix issues in here too, just portfolio mix and Overall brand positioning as well as specific itinerary, itineraries available and what have you. So the average price is There's a lot of noise in that. And the overall, the message we're sending and what we are experiencing It's an encouragement of a strong market coming back, pent up demand and And us carefully managing that, thoughtfully managing it as we create the cash, and at the same time position the business well

Speaker 3

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

Speaker 11

Hey, good morning, everyone. Arnold, best of luck and Josh, congratulations on the new position. So I had a question on customer deposits and how we should about this for the rest of the year. Obviously, it was very strong in the Q2. I mean, there's typically a decline sequentially.

Speaker 11

So just as we think about cash flow For the rest of the year and how customer deposits flow through, is it safe to say that the Q3 should It's not going to be cash flow positive or just given that there's that sequential decline or given the extent that you guys continue to recover in terms of your bookings and operations, The Q3 could continue to be cash flow positive.

Speaker 5

So that's a great question, and we've been trying To answer that, I will tell you that in the last since the end of May, customer deposits have continued to increase. They're up a few $100,000,000 So that at least directionally in the last, What has it been? 3.5 weeks, that's where we're at. Normally during the Q3, there is a reduction because we Reached 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.

Speaker 11

Got it. And then just

Operator

Go right ahead.

Speaker 11

Yes. One more quick one, if I could just squeeze it in. And just the newer cruise product, a lot of your fleet has been refreshed. To what extent have you been able to capture that pricing? Typically, these the newer product gets a premium price, But this is kind of a weird environment.

Speaker 11

Have you been able to capture that? And if so, any kind of metrics or way to quantify that?

Speaker 5

Yes. It's very hard to tell. I mean, we look at so many things, but

Operator

There's so many variables

Speaker 9

right now.

Speaker 5

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 See 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 20 23 are newly delivered.

Speaker 5

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 4 years, the average age of our fleet went down 1 year. So that 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 And better fuel consumption. So we are very excited about the future and delivering memorable vacation experiences, Probably 14,000,000 people in 2023 as we go for historical occupancy levels.

Speaker 3

Our next question comes from the line of Assia Georgiaba, Infinity Research. Please go ahead.

Speaker 12

Good morning, Arnold. You'll be missed, but Josh, very happy that you received this great position responsibility and 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 2 or 3 years.

Speaker 12

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 costs 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?

Operator

I'm going to have Josh comment on the overall The brand positioning is tough as we go forward. But real quickly on the LNG fuel question. LNG, as you know, is cleanest Burning fossil fuel, it gives us a 20% reduction in carbon emissions, etcetera. But the shifts are dual, they can also burn MGL. And so that, unto itself, wouldn't impact the future of Acosta The brand, we'll burn LNG whenever it makes sense to do so, which we think will be the majority of the life of the ships.

Operator

But there are times when we'll obviously opt to burn MGO. But in terms of the Carnival positioning, it's a new concept, and I'll let Josh share his thoughts about it. Go ahead, Josh.

Speaker 9

Thanks. Just one thing to clarify. Obviously, The 2 ships that we're talking about that are going under this Costa by Carnival umbrella are not LNG Shipt, so that obviously didn't enter into our mindset at all. So just to reiterate Arnold's 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 standalone 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.

Speaker 9

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 will be something that works and we can build upon.

Speaker 12

Okay. So currently, no further plans. Obviously, you've made plans for 2023 2024, so that's plenty of time and capacity coming in the 2 Chips, so at this point, it's too early to discuss whether this would become sort of a mini brand on its own?

Speaker 9

Yes. I think let's try it out with 2 ships and then we'll see how we do. But that's it for now.

Operator

So thank you everyone. Really go ahead. Go ahead. I'm sorry. Okay.

Operator

Thank you, everyone. Really appreciate it and looking forward To listening to these as we go forward and hearing the great news coming from Josh and our team. So thank you all very much and have a great day.

Speaker 3

That concludes today's call. We thank you for your participation and ask

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Earnings Conference Call
Carnival Co. & Q2 2022
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