Carnival Corporation Ltd. (CCL) Earnings Call Transcript & Summary

Okay. Great. Thanks, everyone, for joining this afternoon. I'm Steve Wieczynski, the gaming and leisure analyst at Stifel. And I'm thrilled to be joined today from Carnival Corporation by David Bernstein, their Chief Financial Officer; and Beth Roberts, their Vice President of Investor Relations.

So we only have a little over 30 minutes this afternoon. So I'm going to get right into some questions and try to get through as many questions as possible. [Operator Instructions] So let's get right into it. So David, first of all, thanks for doing this. But we get asked a lot by investors, and this is going to be a little bit of an accounting question, but we get asked a lot about future cruise credits. And we've asked some of the other cruise operators about this. And how are these accounted for? I think -- and I guess what I'm getting here is, I think, there's a big misunderstanding about how those will or will not impact yields in 2021. So maybe if you could help explain once and for all how those cruise credits will be handled. That would be super helpful. And maybe to add on to that, is your 2021 booked position materially inflated because of those FCCs? Hopefully, that all made sense.

Sure. Well, first of all, I guess there are 2 parts to the future cruise credits because when somebody -- when we cancel somebody's cruise, we offer them a sweetener. And in most -- many cases, it was 105% future cruise credit to just retain the cash and let the person, at some point, book a future cruise. And I think we had said in our last release that was back in mid-May that less than 38% of the people were choosing a cash refund to date, and so we were retaining a lot of the deposits. So let's just say you had a booking for $1,000, and we gave you a $1,250 future cruise credit. And if you book a future cruise, when you do that, the $1,000 is going to be eventually when you sail, that $1,000 is just like cash, that's the amount of money you paid, and that's what our revenue will be for your cabin. That extra $250 future cruise credit, it's not revenue to us. It -- because it was a sweetener that we added. Now we recognize that people have these future cruise credits, and we balance all the supply and demand and the pricing accordingly. And we think that through over time to make sure that we optimize our revenue management strategy. So we're very -- we're cognizant of what's out there, and we're very careful to manage accordingly to maximize revenue. But as far as how many of these future cruise credits and has it inflated 2021 bookings, some of these people have rebooked, and we haven't given any details publicly. But just -- if you just think about it, all of this cancellation has occurred over the last 85 days. It hasn't been that long since we suspended operations. And a lot of these people, they were -- they're at home. They're working from home. And so as a result of all of this, they take the -- you take the future cruise credit, but a lot of them have to figure out, "When do I want to go on my next holiday? Which month? I got to make sure I can get the days off of work." So it will take a long time for all these people to actually rebook their next holiday. So I don't think it's -- the future cruise credits has materially inflated our 2021 bookings. Has it impacted it? Yes. But materially inflated it? No, because a lot of people just haven't really made that decision at this point in time.

So as you look at those 2021 bookings, and I know you can only say as much as your May 14 update, is it -- when you look at the brands or you look at different demographics, is there any material or big difference between the brands, I guess, or demographics, meaning is it more younger people booking, older people, different -- I mean is there -- is it skewed towards one brand? Or is it all pretty much equal across all the brands, all demographics?

I can't give you all since we have 9 brands. I can tell you, we are seeing positive bookings in all 9 brands for 2021. Very pleased with the fact that all our brands have loyal guests that want to come back. And we have -- I haven't gone through the demographics of every single brand. But as you can imagine, the brands are different. And we have seen all brands have bookings for 2021.

Okay. Got you. And as cruising starts back up, whenever that is, can you help us think about -- I mean in terms of what you guys would be looking for, is it -- I mean would you rather have more ships out there sailing at lower occupancies? Or I would assume it'd be better to have less ships out there at higher occupancies. And I guess also, what are you watching from -- I guess, technically, now, we're in a recessionary period, so what are you looking for from economic data points as well as to when you bring ships back online?

So I wish -- I don't -- we haven't answered all those questions, okay? But I can tell you -- and the reason is, like I said before, it's been 85 days. We've spent a lot of time getting guests and crew home, raising money, rightsizing our shoreside operations. I mean -- so it's been a busy 85 days. It's only really in the last 2, 3 weeks or so that we've really begun to focus our attention on restarting operations. And -- but there has been a lot of conversations. I will tell you to start with, everything that you've ever known and thought about the cruise industry, just for the moment, throw that rulebook out the window, because if we're going to optimize the world in a post-COVID-19 environment, we're going to have to do things very differently. And a great example of that is we used to put our itineraries out 2 years in advance. And you very rarely saw changes from those itineraries going forward. But now our itineraries are out there through the spring of 2022, but in all likelihood, we're going to go slow, bring ships back, and we're going to make changes. So just to give you an example, and I'll use Germany as an example, simply because they're probably, from a COVID-19 perspective, in better shape as a country than most places. I either could start with cruising out of Hamburg, maybe 3, 4 days, maybe a cruise to Norway, or maybe just a cruise to German ports and only for Germans. And perhaps Costa could start out of Italy and maybe at a realm with short cruises, but only for Italians and only to Italian ports. And Costa could do the same in France and also in Spain, out of Barcelona, just for Spaniards and only the Spanish ports. So there is a way to get started, which means changing itineraries, starting with just a couple of ships. And we'll see how those ships book. We'll see how those itineraries work. We'll show that we can operate safely. And we can begin to, as time goes on, expand the fleet that's operating and make those decisions real-time, bringing out more and different itineraries and more ships. So there isn't like going to be some preplanned everything necessarily. It could be that we know enough that we'll preplan everything for the first 6 months or it could be that we take it month-by-month or maybe we take a month-by-month for 3 months, and then we preplan things for the next 3 or 6 months. So there's so many possibilities here that we're thinking through. But like I said, throw the old rulebook out the window, and we're writing a new rulebook. The companies that will do the best are the companies that will change. And I'm not talking about just cruise companies, all companies. Those that are adapting and changing the most are the ones that will be most successful post COVID-19.

Okay. Got you. And I don't know if you can answer this, but I guess everybody wants to know when will cruising start again? Nobody has any idea. But how is there such a big difference between some of the brands in terms of some of their current potential restarting dates? I think the Carnival brand is still talking, I think it's still early August. While a brand like P&O U.K., I think, has already cut everything until mid-October. So I guess, what are those differences between -- in between the different brands?

So each brand is analyzing their country, their source market, what is likely to happen. In the U.K., actually, today, they just implemented a new standard that said any international person who lands in the U.K. has got to go into a 14-day quarantine before they can go out in public. So clearly, the U.K. is in a different place in terms of COVID-19 than other countries. I think a lot of other countries are in much better shape than they are. And because of that, P&O Cruises had to make a decision. And they had to decide what was optimal for that brand, even their guests. They also thought through like the average age of their guests and what they're likely to do and how they're likely to behave. They figured that they were better off waiting until mid or late October. I think it was last Tuesday they announced -- I think it was actually October 31. They extended the pause until October 31 last Tuesday. And they felt that was in the best interest of their guests. I guess they didn't think they were going to get cruising up and going before the end of August in the U.K., given the status and decided to extend the pause, given the circumstances within their country. So each one is different, where -- I was just talking before about AIDA in Germany. They're -- Germany is in much better shape. They've only extended the pause through the end of July and, as a result of that, likely to start up much sooner than somebody like P&O in the U.K.

Okay. Going to liquidity now, and obviously, you've been a very busy man over the past couple of months. And I know as of your last update as of mid-May, you guys were saying you have enough liquidity through this fiscal year. But as the days kind of go on, we're getting closer and closer to the end of your fiscal year, so I guess the question actually is, what is left? Or what can you do from here? Maybe what type of raise could that look like? And then the second part of that is, I guess, if there is debt capacity out there left to tap into, why did you guys go down the equity path last month or 6 weeks ago?

So we did our offering on April 1. And we actually -- probably about 10 days before that, we tried to do -- we never launched, but we tried to do an offering, all debt. And the feedback that we got from investors -- remember, though, you've got to think about the world on, call it, March 20, I think. That was a couple of days before the Dow hit 18,000. I think that was about the low. And so at that point in time, the feedback was -- from investors was, "We love the story, but we'd love to see something which is as part of this solution that's subordinate to us as part of the overall offering." So we tried. It didn't work. That was around, give or take, March 20. And then we came back 10 days later with the offering that you saw, which had the convert in the equity, raised $6.6 billion. And as you said, we still have both first lien and second lien debt. And we can do more debt going forward, but we did what we had to, to secure our financing to ensure that we get to the other side. It was also a period of time when, because of the circumstance, the rates were pretty high. You saw what we paid for the debt. We figured we got enough runway, and we could always come back and get more runway, if need be. In the meantime, we've been working on a lot of things, including, as we said then, in the first quarter filings, was getting all the covenant waivers, getting the debt holidays on the export credits and a bunch of other things. So it's not like we're sitting around just waiting. And we'll continue to evaluate. Your point's well taken. We're 6 months away from year-end. We're not going to wait till the last minute. And we're thinking through all the possible alternatives. It's a much better backdrop today than it was on April 1, and we'll look to see what makes the most sense going forward.

Okay. I guess one of the biggest topics or overhangs on the industry before we went into this pandemic was around supply. And obviously, a lot of investors were always concerned. There was way too much supply coming into this industry. So obviously, the ships that are on order are still going to be delivered. Obviously, they'll probably be delayed. But I guess, given you guys are the biggest operator out there, how has your view changed in terms of maybe on the retirement side? Or looking at ships that are 25 or 30 years old and deciding what to do with those, not only because of what we're living through right now, but also just because of the fuel environment that we'll eventually be living in as well, which, I guess, we are right now.

So yes, there's a couple of pieces to that. To start with, you mentioned the newbuild schedule likely to be stretched out, which is likely to be the case. I mean Bernard Meyer, who owns MEYER WERFT, both in Germany and Finland, has indicated publicly that his expectation is, given the impact of COVID on his business, his contractors, his subcontractors, his suppliers, that each year for the next couple of years, he's likely to be producing less cruise ships than he did before. And so that order book will be stretched out, and that will reduce the supply. You'll also likely see some companies -- maybe some of the companies that we or our competitors sold some of our older ships to. We had sold like 28 ships in the last 14 years, the people -- maybe some of those companies don't make it to the other side because they're not well financed, and maybe those ships don't come back. There may also be companies with newer ships if they don't make it to the other side, it might take a couple of years before those ships come back. So on that side, there may be some less supply -- capacity as well. And we took a look and we said to ourselves, well, there are probably 10 ships that we'd likely sell over the next 5 years. We've been selling 2 a year. And we identified those, and we left those out of the collateral pool. And those ships -- I guess the real question will be, as time goes on, one of the questions will be, do those ships come back? Or do we do something else and sell them more quickly? So clearly, we're looking at other alternatives and we'll evaluate that. But there could very well be a handful of the older ships that we might have gotten rid of over the next 3 to 5 years anyway that may never come back in our fleet. But that's some of the work we're looking at. And once we make decisions that we know for sure, we'll let everybody know what we're doing, but those are possibilities.

Got you. What would -- so you've given us kind of an idea of what your monthly cash burn looks like. But I guess as cruising does start to commence again and you start taking ships out of cold layup, any way to help us think about what that cash burn would look like? Just as you have to take some of those ships back out of the cold layup, how much of a cost or how much of a drag would that be on your cost structure until they are essentially in service?

Yes. Well, our ships are not going into cold layup. Technically, cold layup's where you like turn off the electricity and everything. So our ships, we're calling it pause from operations with minimum safe manning crew and movable at all times. So if we put ships back into service, there's really just 2 things we have to do. If the ship has, let's say, 100 or 150 crew on it, maybe you need another 700 or 800 for full manning. So you got to fly those people back to the ship, and they come in from all over the world. So maybe it's $1,000 per person for, call it, 800 people to get back to the ship. And then you've got to order some food and hotel supplies to get back on the ship before you have guests. We would do that over some period of time. It'd just be -- that would likely take a few weeks. Maybe from the day we decided that ship is going to go back into service, you might need 4 weeks to handle all that because you've got to coordinate the crew and get them all back, and then the crews got to get back. And I'm sure they've got to clean the ship. I'm sure it's gotten dusty. But the crew themselves will clean the ship and will be ready to go. It's not going to take all that much money to get the ship back in service because the ship's kept in class and certified and everything else, and it's operational. And on the flip side, too, once you start announcing that ships are going back into service, I would expect that the cash inflow from deposits would increase. So consistent with some expenditures to get these ships in service will also be cash from bookings. And as a result of that, I think that is likely to more than take care of the extra needed cash. But we do have quite a bit of liquidity. We're not going to wait until we get down to our last dollar. And we'll make sure we maintain a substantial cushion of liquidity over time. We've never operated down to our last dollar, even when we were -- if you would ask me a question, and I know nobody would regularly ask us this because they weren't worried about it, but typically, we -- excluding the export credits, which are committed, we would typically operate with $2 billion to $3 billion of liquidity. In fact, our liquidity on February 28 and when we -- if you look back at the first quarter Q, was $3 billion. So we typically operate in that fashion. So we'll always have the extra money to help get the ships back into service.

So -- okay, we've got about 5 minutes left. So what is -- I got a couple more questions for you. What would -- what's the best -- I don't know how to phrase this, but what is the best outcome you guys are looking for? And I guess what I mean by that is, is that getting back to eventually investment-grade? Is that vaccine comes sooner rather than later? I mean if you guys are modeling out different scenarios of this business, what is the best outcome you guys would be looking for?

Well, the best outcome for the whole world would be a vaccine to come as soon as possible and for the world to return back to as close to the old normal. I'm not sure the world will completely go back to the old normal, only because you talk to people, and I think this experience has changed people. Probably going to see -- I'll just throw this out. I would be surprised if people's order -- if this has accelerated the movement to people ordering more things online as opposed to retail shopping in a store or shopping mall. So we'll never go back to the old normal the way it was before. But for us, an -- a vaccine and being able to get back quickly, a V-shaped recovery would be the best scenario, and we bring back most, if not all, our ships, and be carrying 13-plus million people who love to cruise all over the world again. That's the best scenario. Do I think that will happen? Eventually, that will happen. It's just going to -- it may not happen as soon as I'd like it to. And we'll adapt in between, maximize cash flow and work our way to the -- to that over a number of years. Wouldn't surprise me if it takes a number of years to get back to investment-grade. I mean, actually, our senior secured debt is still investment-grade. The company itself is rated one notch below. But it wouldn't surprise me if it takes us a number of years to get back to an A- credit rating and a strong balance sheet. That will take time.

And is -- so you touched on this a little bit earlier. But I mean, obviously, you've got a deep, deep database of loyal customers. You've got millions and millions of people in your loyalty program. Any idea how many of the people in your database are legitimate cruisers? And what I mean by that is, how many of those are actual active cruisers, meaning they've taken more than 1 cruise over the last 5 years or so? Hopefully, that makes sense.

Yes. I don't have all that data on hand. But last year, we carried 13 million people. So over the last 3 years, we've probably carried 35 million people or more. Probably not 35 million unique people, but wouldn't surprise me if it was 20 million or 25 million unique people just in the last 3 years. So we have got quite a database of individuals that we can market to. And I think we've said before, almost half of our cruisers are loyal -- brand loyalists who have cruised over and over on that brand. And 2/3 in total are cruise -- have -- past cruisers, some are brand switchers. And probably about 1/3 of our cruisers are new cruise guests, first-timers. In all likelihood, as we begin to cruise again and we start up, it's going to be an easier sell to those brand loyalists and those past cruisers. But we're going to have a lot less ships when we first start up. So it's not like we have to go out there immediately and convince somebody who's never cruised before to take our cruise. We'll be convincing them to take the cruise, but that may be some number of months after we're operating when we're increasing the capacity. And by that point, it's a much easier sell. So we see this happening progressively over time.

Okay. My last question, and I'll let you guys go. So if we look out couple of years down the road, whenever the business gets back to a so-called normal operating level, how do you think about the free cash flow potential of this business now, given, obviously, CapEx needs will still be in place plus the much higher debt levels you guys will be carrying moving forward. Is there any way to help us think about the excess free cash flow potential of this business in that kind of environment?

Yes. So the best way to -- the best example I can give is to look back at 2019 and to just say, okay, 2019, our EBITDA was $5.5 billion. Our ongoing CapEx was less than most -- I think it was about $1.8 billion or something like that in 2019. So you're generating -- before growth CapEx, you're generating over $3.5 billion of free cash flow that can be used for a variety of purposes, including paying down that existing debt load. The growth CapEx, remember, most of that is financed through export credits, and that will pay for itself over time. So there is the potential, because I can't give you numbers going forward, but assuming the EBITDA, at some point in the future, is even greater than 2019, your number -- the amount of free cash flow you can use to pay down debt can be substantial. I just don't want to give you a particular number because I'd be giving guidance for some future years, just trying to use historical averages, so you can appreciate the level of free cash flow.

Understood. Okay. Well, David and Beth, thank you so much for participating today in our virtual fireside chat. And can't thank you guys enough. And thanks, everyone, for dialing in this afternoon. And I hope everyone has a great rest of the day. Thanks, everybody.

Yes. Thank you, Steve. Have a good day, everybody.

Thanks.