Carnival Corporation & plc (NYSE:CCL) Q2 2023 Earnings Call Transcript

Carnival Corporation & plc (NYSE:CCL) Q2 2023 Earnings Call Transcript June 26, 2023

Carnival Corporation & plc beats earnings expectations. Reported EPS is $-0.31, expectations were $-0.34.

Josh Weinstein: Good morning. This is Josh Weinstein. Welcome to our Second Quarter 2023 Earnings Call. I’m joined today by our Chair, Micky Arison; our Chief Financial Officer, David Bernstein; and our Senior Vice President of Investor Relations, Beth Roberts. Before I begin, please note that some of our remarks on this call will be forward-looking. Therefore, I’ll refer you to the cautionary statement in today’s press release. There are many milestones we’ve hit over the last two years, and this past quarter is no exception. In fact, there was much to celebrate in the second quarter. We reached a meaningful inflection point for revenue with net yield surpassing 2019 strong levels. And on top of that, operating income, cash from operations, and adjusted free cash flow were all positive.

Adding to those achievements, we just hit all-time highs for bookings and customer deposits. And remarkably, we are still experiencing a phenomenal wave season, which started early, gained strength, and is still going strong midway through the year. This strength in demand delivered outperformance in the second quarter for revenue, adjusted EBITDA, and the bottom line, a credit to the dedicated efforts of our 160,000 amazing team members ship and shore. Net yields in constant currency turned positive in the second quarter, compared to 2019 as we drove cruise ticket prices above 2019, while maintaining record onboard revenue growth and continuing to close the gap on occupancy. In fact net per diems in constant currency were up 7.5% over 2019 in the second quarter.

This was 4.5 points better than the midpoint of guidance, which we were able to achieve while meeting our forecasted occupancy. Based on continued strength in pricing, we have also raised our expectation for net per diems in the second half by over 2.5 points while again maintaining our occupancy expectations, which is supporting our guidance of higher net yields in the second half of 2023 over 2019 in constant currency. This revenue growth will be significantly higher than the increase in our cost guidance which David will elaborate on. All told, we are bringing another $275 million to the bottom line for the year, thanks to the strength in revenue, as well as the interest expense benefit we are capturing from deleveraging. On a per ALBD basis and holding fuel price and currency constant to 2019 levels, we progressed from 59% of 2019 EBITDA in the first quarter to 73% back in our second quarter.

We expect to hit about 85% for the third quarter and be all the way back for the fourth quarter. We are now expecting adjusted EBITDA of $4.10 billion to $4.25 billion above the high-end of our prior guidance range. As I mentioned, booking volumes reached an all-time high in our second quarter, exceeding the record levels we achieved in the first quarter, which would normally be our peak period. Booking volumes were 17% higher than 2019, which is multiple of our capacity growth. We experienced double-digit growth in booking volumes on both sides of the Atlantic. Demand for our European brands has continued to strengthen and is now outpacing 2019 booking volumes at a rate that’s comparable to our North America brands. And the strength in demand has carried into June.

In North America, the booking curve is as far out as we have ever seen it while our European brands are quickly catching up to 2019 levels. With over 90% of this year on the books, 2023 is now essentially behind us and we are strategically building a strong base of revenue for 2024. In fact, our booked position for 2024 also stands at record levels. Reflecting this performance, our customer deposits are also at an all-time high of $7.2 billion significantly higher than our prior peak of $6 billion. Customer deposits grew 26% over the prior quarter and are multiples of our measured capacity growth as we strategically push out our booking lead times and pull forward more onboard spend through bundled packages and pre-cruise sales. Onboard revenues were once again off the charts this quarter as the strategy delivers an added benefit of elevating spending once onboard, enabling us to capture more of our guests’ vacation wallet.

Our brands are laser focused on our strategy to pull forward both ticket and onboard spend, which only enhances the visibility and predictability of our recurring revenue base. We have over 50% of the next 12-month booked at any given time and over one-third of onboard revenues now on the books in advance of sailing. Our demand generation efforts are in full swing. Our cumulative number of new to cruise and new to brand guests who sailed with us in the second quarter have already exceeded 2019’s levels. Our natural search performance is up across the board with an 87% increase over 2019, which is up from a 63% increase last quarter, affirming the success of our new marketing campaigns in driving awareness and consideration. Our lead generation efforts are also working with a 60% increase in Paid Search Clicks over 2019, which is nearly double the 35% increase just last quarter.

To accommodate this success and our increased demand profile, we’ve grown our sales and sales support staff by over 50% in recent months. At the same time, we can see the impact it is also having with the trade. As I’ve said before, in order for us to be successful, we need all of our sales channels to excel and that certainly includes our travel agent partners who are critical in helping us widen the pipeline for new to cruise guests. And I’ve got great news on that front. The trade is continuing to rebound significantly with sales volumes up 45% year-over-year as we increase training, engagement, and support activities. And of course, our advertising investments benefit not only us, but our trade partners as well. By any measure, our decision to increase our investment in advertising is paying off.

The sequential improvement in these important KPIs suggest the strength we are seeing in demand will continue. All of this has built confidence not just in our 2023 outlook, but in our ability to launch SEA Change. Three year target that will demonstrate our progress towards delivering strong profitability and rebuilding our financial fortress. The acronym SEA stands for sustainability through carbon intensity reduction, EBITDA per ALBD, and adjusted ROIC. Three very important key performance indicators. And for each of these items, we expect to see significant improvements from current levels and well above 2019. In fact, the two financial measures will be the best we’ve seen in almost two decades and the carbon intensity rates will be unprecedented.

For the S, or sustainability, we plan to reduce our carbon intensity by more than 20%, compared to 2019. Essentially, we plan to deliver on our 2030 decarbonization goal four years early, reducing our carbon intensity has been and continues to be a priority for our company. It is critical to improving our environmental impact and to improving our financial performance. We are widening the gap to peers on what is already the most [fuel efficient fleet] [ph] out there. For the E, we are targeting a 50% increase in adjusted EBITDA per ALBD, compared to our 2023 guidance. This would also represent a 25% increase over 2019 levels, holding fuel price and currency constant. EBITDA for ALBD best measures the increasing unit profitability of our business as we execute on our strategy to deliver revenue yield improvement on lower capacity growth.

And finally, for the A, we expect adjusted ROIC to reach 12% on more than doubling from 2023 levels. We already have the lowest investment base in our industry and our strategy is designed to deliver outsized returns through high quality yield driven revenue growth, while maintaining our industry leading cost structure. These targets are all grounded on low capacity growth of under 2.5% compounded annually, which will allow us to use our cash flow generation to pay down debt and rebuild the balance sheet as we work towards investment grade leverage metrics. Essentially, we’ve pulled forward our most important sustainability goal and expect a step change in both profitability and return on invested capital in just three years. And importantly, these targets are not our angle, they are measurable markers of continuous improvement.

To make this happen, we have a sense of urgency, to further our brand efforts, to drive net yield improvement, and while it’s working, we recognize these efforts do build over time. As mentioned on previous calls, to help support this growth and drive overall revenue generation over time, I’ve actively been working with each brand on their strategies and roadmaps to ensure they will truly own their space in the vacation market. This means having clearly identified target markets, capacity that is appropriately sized to the market potential, demand generation, and marketing capability to hone in on the target market at the lowest possible acquisition cost, revenue management execution to generate optimized pricing across the booking curve, and amazing onboard guest experience delivery to drive Net Promoter Scores and resulting advocacy higher.

This will allow us to continue building on our large base of loyal guests as we work to increase awareness and consideration among new to cruise guests. To make it happen, we also need to ensure we set our brands up for success [organizationally] [ph]. Accordingly, during the quarter, I completed the restructuring of our global executive leadership and company structure. By removing a layer of management between the corporate and brand levels, I now have the leads all six of our major brands, representing over 90% of our capacity reporting to me. This is up from one brand, and less than one-third of our capacity previously. This will facilitate more direct engagement between me and our brand [leads] [ph]. To provide me with more bandwidth to do this, I also consolidated several corporate functions under fewer leaders streamlining our organization.

While this leaves me with the same number of direct reports overall, these changes make for a more nimble, and accountable organizational structure, better able to respond to market opportunities. And we are also positioned to work smarter. Excluding sales and sales support, our shoreside staff count is down 18% from 2019. And the team is executing across the board at a high level. I recognize that we need to make sure we are doing our part to make Carnival Corporation an amazing place to work and grow each team member’s career. And so we are driving initiatives across the board ship and shore to meet our long-term goal of being travel and leisure’s employer of choice, and it is really showing. The improvement we’ve seen in our internal metrics on employee satisfaction and culture improvement have been phenomenal.

Turning from our most important assets, our best-in-class people to our hardware. We are actively managing our diverse portfolio of world-class brands, which are number 1 or number 2 in each of the largest markets for cruise travel. Following our portfolio and fleet optimization efforts, our capacity growth has been concentrated in our highest returning brands, Carnival Cruise Line, AIDA, and P&O Cruises UK. These efforts have also been driven by a purposeful reduction in our overall capacity growth, which combined with our strong and accelerating demand outlook, supports further yield improvement. And we still retained the excitement from 14 newly delivered ships representing nearly 25% of our capacity. Just this month, we completed the transfer of Costa’s Venezia to our highly successful Carnival Cruise Line brand launching fun Italian style with a spectacular naming ceremony featuring our very first ship godfather, comedic icon Jay Leno.

I couldn’t think of a better personification of Carnival Cruise Line than Jay Leno. With his unpretentious and gregarious personality, which aligns perfectly with the brand’s target segment. He fits seamlessly with Carnival Cruise Lines brand ambassadors who help amplify Carnival’s messaging and appeal, such as its Chief Culinary Officer, Emeril Lagasse, Chief Fun Officer, Shaquille O’Neal; and the Mayor of Flavortown himself, Guy Fieri. So far, fun Italian style has generated 1.5 billion earned media impressions. The instant success of Carnival’s fun Italian style supports the entry of Firenze, the second Costa ship transferring over to Carnival Cruise Lines next year. These transfers are part of our portfolio management strategy, which is contributing to Carnival Cruise Lines capacity, growing 22% more than pre-pause expectations.

And Costa’s capacity being reduced by 36%, compared to pre-pause expectations. The added capacity to Carnival Cruise Line will not only generate outsized returns for the company, but rightsizing the Costa brand is also having these desired effects of supporting its revenue profile confirmed by recent booking and pricing trends. We remain committed to our strategy of owning a portfolio of world-class brands, many of which are truly dedicated to specific markets and it’s clear the strength of this portfolio is now shifting into high gear. In fact, with respect to our European brands, bookings taken in the second quarter for the European deployment for each of the third and fourth quarters achieved double-digit percentage increases in both volume and price compared to 2019.

This is also supported by our home porting strategy that puts nearly 75% of our capacity where our brands’ guests live. We are also working to further leverage and monetize our industry leading land based assets in the Caribbean and Alaska. We are leaning into our strategic advantage in the Caribbean with the expansion of Half Moon Cay, consistently voted among the best private islands and the development of our largest Caribbean destination yet, Grand Bahama port. It’s being designed to deliver wow factors tailored to Carnival Cruise Line’s guests to drive higher revenue yields and margins. It’s also strategically located to deliver a wide array of lower fuel consumption itineraries furthering our carbon reduction efforts. Our Caribbean destinations already serve about 5.5 million of our brand’s guests each year.

And upon completion, Grand port will push that to 7.5 million annually. We also own cruising in Alaska with an unmatched strategic footprint across hotels, rail, and motor coaches to deliver unique, land fee packages of a lifetime, as well as the most itineraries by far featuring the iconic Glacier Bay. We plan to lean even more into marketing the benefits of all of these assets. Turning to our capital structure. As we indicated on our last call, we have now begun deleveraging our balance sheet and are already 1.4 billion off the peak. During the quarter, while used excess liquidity to opportunistically prepay over a $1 billion of debt, while still retaining $7.3 billion of liquidity, which we expect to ratchet down as we rebuild our balance sheet over time.

We remain disciplined in making capital allocation decisions and our lowest order book in decades provides a pathway for further deleveraging. We are clearly gaining momentum on an upward trajectory positioning us well to deliver strong profitability and rebuild our financial fortress. We are already executing on our strategy with a demonstrated ability to grow revenue by taking up ticket prices, even while maintaining record onboard spending levels, building occupancy, and growing capacity. We are implementing a range of initiatives to capture incremental demand for cruise vacations and working hard to close the outrageous and unwarranted 25% to 50% value GAAP to land based offerings over time. We are well-positioned to do so given our high satisfaction and low penetration levels.

And we are working hard to mitigate four years of inflation, maintain our industry leading unit costs, all while reinvesting in advertising and sales support to build future demand. We are focused on the durable revenue growth and margin improvement that will deliver on our SEA Change Program propel us on the path to de-levering and investment grade leverage metrics and drive the continued shift of the enterprise value of our company from debt holders back to equity holders. I can’t end without once again thanking our travel agent partners for their support and our best-in-class people, ship and shore, who deliver unforgettable happiness every day by providing extraordinary cruise vacations to our guests, while honoring the integrity of every ocean we sail, place we visit, and life we touch.

With that, I’d like to turn the call over to David.

David Bernstein: Thank you, Josh. Before I begin, please note all of my references to ticket prices, net per diems, net yields, and adjusted cruise costs without fuel will be in constant currency unless otherwise stated. I’ll start today with a summary of our 2023 second quarter results. Then I’ll provide a recap of our cumulative advanced booked position. Next, I’ll give some color on our 2023 full-year June guidance, and finish up describing the impact of our SEA Change Program on our financial position. As Josh indicated, in the second quarter, we outperformed our guidance. For the second quarter, our adjusted EBITDA was $681 million at the high-end of our March guidance range. The improvement was driven by $108 million of favorability in revenue from higher ticket prices.

Net per diems were up 7.5%, 4.5 points higher than the midpoint of our March guidance range. In fact, second quarter revenue of 4.9 billion was a record and we achieved a significant milestone with net yields turning positive as compared to 2019. However, our revenue favorability was partially offset by a $13 million unfavorable net impact from higher fuel prices and currency. And 52 million of unfavourability in adjusted cruise costs without fuel, due to the timing of expenses between the quarters, as well as other factors that will impact our cost guidance for the full-year. Turning to our cumulative advanced booked position. For the remainder of 2023, our cumulative advanced booked position is at higher prices when compared to strong 2019 pricing, despite headwinds from the loss of St. Petersburg as a marquee destination due to the suspension of cruises to Russia and normalized for future cruise credits with a booked occupancy position that is near the high-end of the historical range.

With the strength in booking volumes above 2019 levels, we are in a great position with less inventory remaining to sell for 2023 as compared to 2019 to achieve our guidance, despite the 5.7% capacity increase in the second half of the year. Next, I will give some color on our 2023 full-year June guidance. Full-year 2023 occupancy is expected to be a 100% or higher as we continue to close the gap each quarter on occupancy levels as compared to 2019, which is at the higher-end of the historical range. On the pricing front, we expect net per diems to be up 5.5% to 6.5% for the full-year 2023, compared to a strong 2019, which is 2.5 points higher than March guidance based on the acceleration of booking trends we saw during the second quarter. We increased our guidance for the second half of 2023 by over 2.5 points.

Substantially, all of the second half improvement in net per diems is driven by passenger ticket revenue on both sides of the Atlantic. We do see a continuation of strong onboard revenue trends we have been experiencing which were included in our previous guidance. Now turning to costs, off the base of our industry leading cost structure, adjusted cruise costs without fuel per available lower berth day or ALBD for the full-year 2023 versus 2019 are now expected to be up 10% to 11%. This is 1.5 points higher than our March guidance. The change was driven by three factors: First, increases in various incentive compensation programs reflecting the expected improvement in the company’s current and long-term performance consistent with June guidance and the SEA Change Program are worth half a point.

Second, further investments in advertising were two-tenths of a point, which we believe will benefit 2024 by multiple times the investment. And third, a slower than expected ramp down in inflationary pressures than previously anticipated, particularly in the area of port costs, freight, crew travel due to air costs, and crew compensation collectively worth seven-tenths of a point. While we are disappointed by the slower ramp down in inflation than previously anticipated, a 2.5 point increase in net per diem guidance far outweighs our cost guidance increase, improving margins and the bottom line. There is no doubt inflation has been a significant factor driving costs higher in 2023 versus 2019. However, let’s not forget we are talking about four years of inflation and our teams have managed this situation well mitigating much of the inflationary impact.

In fact, crew costs per available lower berth day in our June guidance are up less than 2% versus 2019, despite significant increases in airfares. This is a testament to the ingenuity and creativity of our teams, as well as the benefits of our scale around the globe. The details of depreciation and amortization, interest expense, and fuel expense can be found in the earnings press release we issued earlier this morning in the section titled guidance, so I will not take the time to walk you through the numbers. However, I would like to point out that the increased confidence in our future drove us to use a portion of our liquidity to prepay 1.4 billion of variable rate debt, mostly with 2023 and 2024 maturities, which combined with other factors will reduce our interest expense for the year by over $80 million and leave us with approximately 80% of our debt having fixed interest rates protecting us from rising rates.

Putting all these factors together, we expect 4.10 billion to $4.25 billion of adjusted EBITDA for the full-year 2023, which is above the high-end of the previous guidance. We expect to reach another milestone in the third quarter 2023 as we return to profitability with adjusted EPS expected be in the range of $0.70 to $0.77 per share. And now I will finish up describing the impact of our SEA Change Program on our financial position. As I said last quarter, I feel great as I report that we are beyond the peak of our total debt. Total debt peaked at over 35 billion in the first quarter of 2023 when we drew on the export credits for P&O Cruises Arvia at the time of delivery. We believe with over $7 billion of liquidity, our improving EBITDA and our return to profitability in the second half of 2023, we are very well positioned to pay down debt maturities for the foreseeable future.

With the debt prepayments announced in today’s earnings release, we now expect our total debt at year-end to be below $33 billion. Now, looking beyond 2023 using the SEA Change Program targets as our guide. We expect cash flow from operations will average over $5 billion per year during the next three years 2024 through 2026, and with optimized non-newbuild capital commitments and the lowest new build order book in decades, annual CapEx net of the $3 billion of export credits will average at less than 2 billion per year during the next three years. This will result in an average of over $3 billion in annual adjusted free cash flow to reduce debt driving more than $8 billion in total debt reduction through 2026, inclusive of the $3 billion of export credit financing drawn during the period, and over 10 billion of debt reduction from the $35 billion peak in first quarter 2023.

At the end of 2026, with a significantly lower level of debt and a 50% increase in adjusted EBITDA per ALBD we are expecting to approach investment grade leverage metrics. Our SEA Change Program from debt reduction alone will transfer over $10 billion of enterprise value from debt holders to shareholders, which represents approximately $8 per share. On top of that, it will also deliver improved operating metrics and an adjusted ROIC of 12% representing the highest level of ROIC in almost two decades. Before I turn the call over to the operator, let me remind you to visit our website for our second quarter earnings press release and presentation. Now operator, let’s open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Robin Farley with UBS. Please proceed.

Robin Farley: [Technical Difficulty]

Josh Weinstein : Hey, Robin. Robin, can you hear me?

Robin Farley: Yes.

Josh Weinstein : It’s a little hard to hear your question. You’re coming in and out, sorry.

Robin Farley: Hopefully this is a little bit better?

Josh Weinstein: Yes, thanks.

Robin Farley: Great. So, I wanted to ask a question about this three year guidance, but first it’s a quick clarification on the comments about 2024 bookings. In the release, you mentioned it’s ahead of volume and you say strong prices. Is it fair to assume that strong means that 2024 price in the books is up above 2023 price? I just want to clarify that strong means up year-over-year just that briefly? And then on your three year targets, just thinking about what is, kind of implied yield growth to get there? It seems like and I haven’t been able to do the full math just given the time constraints, but it looks like at least seven points of yield growth between 2023 and 2026 would just come from the occupancy gap closing, maybe even kind of 7 to 10 points based on the comments today? And can you sort of walk us through what you’re expecting in terms of price increase or per diem increase in that period, kind of implied in your EBITDA guidance for 2026? Thanks.

Josh Weinstein : Got it. So, with respect to 2024, the book position get record levels at strong price. What we’re going to do is, we’re going to give you some more color on that when we get into our next quarter and we’ll talk more in-depth about 2024 overall in the first half. But suffice it to say, the brands are doing a very good job at getting ahead and doing it at pricing that we’re happy with and still a long way to go for 2024, and a lot to play for. So, we’re very pleased with the progress that we’ve been making while still ratcheting down on the occupancy as we’ve talked about over the course of every quarter this year. So, the trajectory is very, very good. With respect to the three year targets, it’s probably on the low end of what you’re talking about for occupancy and we expect to make up, you know it’s probably sub-seven points at this point, but pretty close around there.

We’re probably going to make probably – I expect to make all of that up in 2024 as we get back to a normalized operations. On top of that, we’re looking at low-to-mid single-digits with respect to price increases as we get from [2024, 2025, 2026] [ph], and that type of profile we’ve got experience with, as we look back over the period from 2015 to 2019, so we feel real good about our ability to be able to make those types of steps over time.

Robin Farley: Okay, great. Thank you.

Josh Weinstein : Sure. Thanks.

Operator: Our next question comes from Steve Wieczynski with Stifel. Please proceed.

Steve Wieczynski: Hey, guys. Good morning and congrats on the solid quarter and the change in the full-year outlook. So Josh, I want to go back to actually the last question there in the SEA Change Program. So, you’ve talked about that low-to-mid single-digit kind of bump in yields, but can you also maybe help us think about how you’re thinking on the – from a cost perspective too? So, are we kind of thinking about a low to mid-single-digit kind of bump in yields? And then maybe like a 1 point to 2 point spread between net yield growth and NCCs, is that the right way to think about this?