Carnival Co. & Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
December 21, 2023

There are 14 speakers on the call.

Operator

Good morning. This is Beth Roberts, SVP, Investor Relations. Welcome to our Q4 2023 Earnings Conference Call. I'm joined today by our CEO, Josh Weinstein our Chief Financial Officer, David Bernstein and our Chair, Vicki Arison. Before we begin, please note that some of our remarks on this call will be forward looking.

Operator

Therefore, I will refer you to the cautionary statement in today's press release. All references to ticket prices, net per diems, net yields and adjusted cruise costs without fuel will be in constant currency unless otherwise stated. References to per diems and yields will be on a net basis. Our comments may also reference cruise costs without fuel, EBITDA, net income, net loss, earnings per share, free cash flow and ROIC, all of which will be on an adjusted basis unless otherwise stated. All these references are non GAAP financial measures defined in our earnings press release.

Operator

A reconciliation to the most directly comparable U. S. GAAP financial measure and other associated disclosures are also contained in our earnings press release and in our investor presentation. Please visit our corporate website where our earnings press release and investor presentation can be found. With that, I'd like to turn the call over to Josh.

Speaker 1

Thank you, Beth. It's safe to say we ended the year on a high note and closed another quarter with record revenues, record booking levels and record customer deposits. In fact, we consistently set records in all 4 quarters this past year. We also achieved per diem, EBITDA and net income for the Q4 that all exceeded the high end of our September guidance range with cruise cost ex fuel in line with expectations. 4th quarter yields continued on a positive trajectory, significantly higher than a very strong 2019 And even higher than we had anticipated and enabled us to overcome 4 years of high cost inflation To deliver per unit EBITDA that eclipsed 2019 holding fuel and currency constant.

Speaker 1

We were encouraged to see both North American and European brand occupancy levels exceed 101% in the 4th quarter With per diems for our North American brands up double digits over 2019 and our European brands just shy of a double digit increase, We delivered per diem improvements of more than 7 points for the full year with even stronger acceleration in Q4, While closing the double digit occupancy gap at the start of the year to reach historical levels for the second half of twenty twenty three, And absolute spending on board was consistent across all four quarters as we drove improvements in ticket prices. We delivered $85,000,000 more to the bottom line in the 4th quarter than forecasted, which pushed us grew to positive adjusted income for the year. Strong EBITDA and cash from operations also propelled us On our journey to reduce the debt load necessitated during deposit operations, we've made debt payments of $6,000,000,000 this year alone, And we still have well over $5,000,000 of liquidity on top of strong and improving cash flow, which will contribute to further debt reduction over time. All of this leaves us firmly placed on our path back to achieve Investment grade leverage metrics by 2026.

Speaker 1

And most importantly, our brand delivered happiness to over 12,000,000 guests this year, laying the foundation upon which all of our SeaChange targets are built. Turning to bookings. We reached an all time high in booking volumes for the 2 weeks around Black Friday, Cyber Monday and ended the year in the best Booked position we have ever seen on both price and occupancy setting 2024 off to an amazing start. We now have nearly 2 thirds of the business on the books for 2024 and at considerably higher prices. And during the 4th quarter, We essentially maintained the significant occupancy advantage we had built for 2024 going into the quarter, while improving Year over year price position of our book business even further.

Speaker 1

At this point, much of the first half is already behind us With approximately 85% of the business on the books, we've essentially closed the double digit occupancy gap to historical levels On higher capacity and at higher prices. For our peak summer period, all major products are better booked at higher prices, Benefiting from improving trends in both occupancy and price during the Q4. Our yield management strategy The baseload bookings has clearly set us up for another record year. And again, we have seen no signs of our business slowing. The book position for our North American brands remains as far out as we have ever seen and well ahead of last year at pricing that is considerably higher.

Speaker 1

Our European brands just delivered record 4th quarter booking volume at considerably higher prices and with a booking window now Fully back historical norms. As expected, our European brands are poised to become an even greater contributor to our 2024 Operating Improvement. At the same time, we are continuing to pull forward onboard revenue through bundling and pre cruise sales. This strategy coupled with even more features onboard our newer ships for our guests to enjoy positions us well for further onboard revenue growth next year. All told, we expect occupancy for the full year to return to historical levels on 5% higher capacity, While delivering nicely higher per diem, building on this year's record results.

Speaker 1

In 2023, We captured over 3,500,000 new to cruise guests and remain well positioned to continue to take share from land based alternatives. In other words, we are gaining momentum in our ability to close the un warranted value gap to land based alternatives. And to aid in that effort, we can further chance the fact that while many land based alternatives have pulled back on service levels, We still deliver incredible service to our guests, thanks to our amazing crew. This pairs exceedingly well With the expansive amount of guest pleasing amenities offered onboard our newer fleet. In fact, while almost 4 years have passed Since the pause in our operations, our fleet actually came out of the pause a year younger through our fleet optimization efforts.

Speaker 1

This past year alone, we benefited from 3 fantastic new ships, including Carnival Celebration And P&0 Cruises' Arvia, both of which are flagships for their respective brands, yet leverage our scale As the 7th 8 vessels in our popular and exceptionally efficient series of XL class ships and we welcome Seabourn Pursuit, Our second expedition ship, Seabourn has truly raised the bar for expedition cruising in extreme luxury. And while not technically new, Carnival Cruise Lines also welcomed Carnival Venezia into its fun Italian style platform Via the transfer from Costa and it has been going gangbusters. It's the biggest example yet of how we leverage our scale And we'll be doubling down when we bring over her sister ship, Carnival Firenze in 2024. Looking forward, This year is set to match the excitement level with the introduction of Carnival Jubilee, a new icon for Carnival Cruise Line And which no doubt will be the pride of Texas as she has her inaugural home in Galveston. The innovative Sun Princess, The first of its class and a real game changer for Princess.

Speaker 1

And Queen Anne, a new flagship for Cunard And its first new ship in 14 years. With all of these additions, roughly 30% of our capacity will be newly delivered ships. We also made meaningful headway on other strategic asset projects. We began construction on Celebration Key, which will be the largest and closest exclusive destination in our destination portfolio and a real game changer for Carnival Cruise Line. We'll bring 18 Carnival ships departing from 9 home ports to Celebration Quay.

Speaker 1

And while we are still about a year and a half from go live, We are already amping up the awareness and excitement around this fantastic destination. We've also started the process for a significant upside in guest Traffic at Half Moon Cay, our exclusive and beautiful pristine island destination in the Bahamas With the creation of a pier side berth that can accommodate even our largest vessels, we've begun work with our Grand Bahamas Shipyard partners On the construction of 2 floating dry docks, one of which will have the largest lifting capacity in the world. This will result in significant benefit in the future as we reduce travel time, preserve revenue days and at the same time reduce our fuel consumption. As you know, we've also been investing more in advertising over the last 18 months and it has definitely paid off With elevated awareness and consideration for our brand and record booking levels and revenue results, in fiscal 2023, Our web visits were up over 35%, our paid search was up roughly 50% and our natural search was up almost 75%, All many, many multiples of our 5% capacity growth. In the Q4, we carried more new to crews and more new to brand gas that we did in the Q4 of 2019.

Speaker 1

Given our success on generating demand, at this point in time, We plan to maintain a similar level of advertising on a unit basis in 2024 compared to 2023, Optimizing around each brand. This will help us continue to build demand and bookings well outside of the current year. We're working aggressively to keep our strong momentum going through WaveSeas and beyond. Just to list a few examples, Costa recently launched a spectacular new campaign in its core markets focusing on moments where guests are left speechless. Holland America launched a sequel to its highly successful Time of Your Life campaign and AIDA just kicked off its new campaign, Experience yourself differently in conjunction with the holiday season.

Speaker 1

Carnival will launch a new marketing campaign highlighting Celebration Key in Time For Waves. P&0 Cruises' new campaign, holiday like never before launches Christmas Day in the UK and Cunard As planned, our welcome Fit for a Queen to introduce Queen Anne early next year, which is short, capture huge fanfare. We've been talking about upping our game across the commercial space and we've made good progress. Of course, we're not done. And as you'd expect, we never will do as there is always room to improve.

Speaker 1

There's much more to come as we roll out Advancements to our yield management tools and lead generation techniques continue to invest in sales and sales support And build on already strong relationships with our trade partners. Turning to costs, as we previously indicated, Unit cruise costs ex fuel for 2024 are expected to be higher than inflation due to the impact of closing the occupancy gap And the higher volume of drydock sales. David will walk you through in more detail. With that said, we have been working aggressively to mitigate inflation through our cost optimization initiatives, including leveraging our scale. In some cases, we're investing today for future benefits.

Speaker 1

Just to cite a couple of examples of initiatives underway. We're essentially complete with the rollout of StarLink across the fleet. This will produce more than a 20% reduction in cost per megabit in 2024 and significantly increase our bandwidth pipeline, resulting in both better guest experience and higher onboard revenues, a clear win win. And with our new vendor neutral platform, We are positioned to quickly capture cost savings in future years. We've also launched our Maritime Assets Strategy Transformation or what we refer to internally as Mast.

Speaker 1

Mast is a centralized system developed to optimize the management of equipment and machinery Across all brands and all of our ships. Math will allow us to leverage spare parts more effectively across the entire fleet And optimize our maintenance schedules and practices, all of which will strengthen our efficiency and reduce unplanned maintenance over time. While we won't see the P and L benefits from math this year as we ramp up its implementation in 2024, we expect a multiyear benefit well Are expected to lead to a 4 point margin improvement in 2024. We're guiding to record EBITDA of over $5,500,000,000 which is 30% higher in 2023. Thanks to a strong second half of twenty twenty three, we're already tracking ahead of our plan To achieve SeaChange, our 3 year financial targets calling for the highest ROIC and EBITDA for ALBD in nearly 2 decades.

Speaker 1

And our 2024 guidance delivers another step change towards these deliverables. EBITDA for Birthday is expected to be up by more than 25% over our target starting point, hence more than halfway to the 50% increase expected in our SeaChange target. Today's guidance would also deliver 9% ROIC, A 4 point increase from the starting point of our target. This leaves just 1.5 point annual increases in 20252026 To hit our 12% target, not surprisingly, our brands dedicated to a single market, Carnival, AIDA And P and O Cruises in the UK are again leading the charge with the highest ROIC levels in the company. And with regard to our greenhouse gas target included in our 2026 sea change program, our GHG intensity in 2024 is expected to be just shy of the 20% reduction from 2019 we're targeting.

Speaker 1

It is worth noting this was a 2,030 goal we had already pulled forward by 4 years. We have been and continue to work aggressively to reduce our environmental footprint and fuel costs at the same time. This deep commitment has not only resulted in Industry leading fuel efficiency, it has also resulted in lower absolute GHG emissions. Our absolute emissions are over 10% lower than the 2011 peak and that's despite capacity growth of 30% since then. Last year, we also exceeded our industry leading shore power capability goal.

Speaker 1

We are ahead of the curve and now have twice as many ships Capable of shore power, then there are ports around the world available to plug into. Again, I credit all of these important achievements to our people, Ship and Shire, collectively, they continue to outperform, allowing us to make good headway on our SeaChange target. We're poised for another step change in operating improvement this year with nearly 2 thirds of the business on the books at considerably higher prices, Ongoing momentum from improvements across the commercial space, the amazing vacation experiences we delivered day in, day out At way too good of a relative value to land based alternatives and an even greater experience gap, all while growing onboard revenues Managing costs. All of this combined sets us up well to deliver another year of record revenues and record EBITDA. Our cash flow strength coupled with excess liquidity, the return of credit card reserves in a few weeks and the lowest order book in decades Will allow us to continue to actively manage down debt and aggressively reduce interest expense over time.

Speaker 1

It will also propel us On our path to deleveraging, investment grade credit rating and higher ROIC. I remain confident in our continued execution With an unparalleled portfolio of best in class brands, an amazing fleet that just keeps getting better and better and our greatest assets Our people, this has been a truly remarkable year and we've come a long way in an incredibly short amount of time. I would like to thank our team members, Ship and Shore, the best in all of Travel and Leisure, for delivering unforgettable happiness to over 12,000,000 guests this year by providing them with extraordinary cruise vacations, while honoring the integrity Of every ocean we sail, place we visit and life we touch. And thank you for the strong support from our travel agent partners as well as our loyal guests, destination partners, investors and our many other stakeholders. With that, I'll turn the call over to David.

Speaker 2

Thank you, Josh. I'll start today with a summary of our 2023 Q4 and full year results. Next, I will provide a recap of our refinancing and deleveraging efforts during 2023 and finish up with some color On our 2024 full year and Q1 December guidance, our 4th quarter bottom line exceeded the better end of our guidance range As we outperformed our September guidance, the $85,000,000 improvement was driven by favorability Revenue from higher ticket prices as net per diems were up over 10%, 3 points Better than the midpoint of our September guidance range. In fact, 4th quarter revenues of 5,400,000,000 We're a 4th quarter record and net yields were up nearly 8% as compared to 2019. A great way to close out the year and another indication that we do not see a slowdown in our consumers.

Speaker 2

For the full year, thanks to the tremendous efforts of our team members Ship and Shore, We closed the books on 2023 with positive adjusted net income. That is a far cry from our March guidance As we delivered over $550,000,000 to the bottom line, which was partially offset by a drag The fuel price and currency exchange rates of over $100,000,000 The improvement was driven by delivering 7.5% increase in net revenue per diems versus 2019, which was over double the 3.5% mid point of our March guidance, while closing the double digit occupancy gap at the start of the year to reach historical occupancy levels. Absolute spending per diems on board were consistent across all four quarters as we drove improvements in ticket prices On both sides of the Atlantic and ended the year with net yields up nearly 1% over 2019. Next, I will provide a recap of our refinancing and deleveraging efforts during 2023. As Josh indicated, our full year 2023 strong EBITDA of 4,200,000,000 And strong cash from operations of $4,300,000,000 propelled us on our journey to pay down debt and reduce the debt burden necessitated by the pause in guest cruise operations.

Speaker 2

During 2023, we made debt payments of $6,000,000,000 And ended the year with just over $30,000,000,000 of debt, which is $3,000,000,000 better than we forecasted just 9 months ago During our March conference call, an almost $5,000,000,000 up the 1st quarter peak, transferring enterprise value During 2023, we proactively addressed our debt profile As we successfully started our refinancing and deleveraging program, we accelerated our debt repayment efforts And aggressively managing our interest expense. In 2023, we effectively stretched out a 2025 maturity on favorable terms by replacing it with a $1,300,000,000 Term Loan B Facility through 2027 And a $500,000,000 offering of senior secured notes in 2029. This refinancing, Along with our optimism about our future and the return of customer deposit reserves gave us the confidence to accelerate our debt repayment by calling $1,200,000,000 of our highest cost debt. In addition, we opportunistically prepaid $2,800,000,000 of additional debt for a total of $4,000,000,000 of debt prepayments, including the $1,200,000,000 of debt pull. Our credit card processes returned to us $800,000,000 of credit card reserves and we now expect an additional to be returned this current quarter, representing substantially all of the remaining credit card reserves at year end.

Speaker 2

We took actions in both 2022 and early in 2023 to increase the fixed rate percentage of our debt portfolio Over 80%, up significantly from our 58% fixed levels at the end of 2021, Which provided us protection for rising interest rates. Our overall average interest rate is just over 5.5%. All these actions to address our debt profile alongside our improved business performance drove $200,000,000 of interest savings Compared to our March guidance, our maturity powers have been well managed in 2026 with just $2,100,000,000 of debt maturities Next year, dollars 2,200,000,000 in 2025 $3,200,000,000 in 2026. And looking forward, we will continue to evaluate refinancing opportunities and opportunistically prepay additional debt. So in 2024, we will be replacing higher cost fixed rate debt with lower cost export credit financing As we take delivery of ships during 2024, our leverage metrics will also continue to improve throughout 2024 As our EBITDA continues to grow.

Speaker 2

Now turning to our 2024 full year December guidance. We are forecasting a capacity increase of about 5.5% compared to 2023. We are expecting to deliver strong 2024 net yield improvement with our guidance forecasting an increase of approximately 8.5% for the full year 2024 when compared to 2023. And that is on top of our improved 2023 results where we delivered a 7.5% increase in net revenue per diems versus 2019. The strong improvement in 2024 net yields is a result of the increase in all the component parts, Higher ticket prices, higher onboard spending and higher occupancy, with all three components improving on both sides of the Atlantic.

Speaker 2

We are well positioned to drive 2024 ticket pricing higher with significantly less inventory remaining to sell At the same time last year, despite a capacity increase of over 5%, occupancy for the full year 2024 is on track to return to historical levels. Keep in mind, 2019 was a high watermark for occupancy. For 2024, we forecast to be well within our historical occupancy range as we balance pricing volume to optimize total revenues and achieve record deals. Now turning to costs. Cruise costs without fuel per available lower birth date or ALBD is currently expected to be up approximately 4.5% For 2024 versus 2023, broadly speaking, there are 4 main drivers of the cost change.

Speaker 2

First, our forecast is for decelerating inflation, but nonetheless inflation with an average 3.5% increase across All our cost categories globally. 2nd, with occupancy returning to historical levels, the impact on cost 586 dry dock base an increase of 14% versus 2023, which And 4, countering these headwinds, we expect these cost increases will be somewhat mitigated by a couple of points Given economies of scale from our capacity growth, which is enhanced by picking delivery of larger, more efficient ships, Along with various other cost optimization initiatives, fuel consumption for ALBD is expected to decrease Another 4% and that is on top of the 15.5% reduction achieved from 2019 to 2023. The net impact of fuel price and currency is expected to favorably impact 2024 by $90,000,000 With lower fuel prices favorable by $94,000,000 while the change in currency exchange rates slightly goes the other way. And finally, a few things to note about the outsized increases in the Q1 2024. The higher net yield guidance for Q1 2024 of 16.5% versus the full year 8.5% It's driven by the larger improvement in 1st quarter occupancy.

Speaker 2

Let's not forget that we did not reach historical occupancy levels So there is much more occupancy driven net yield opportunity in the first half. On the cost side, the higher cruise costs without fuel per available lower bird feed guidance for the Q1 of 2024 9.5% is driven by 4 main factors. 1st, the largest improvement in occupancy will occur in the first Quarter. And while it drives greater yield increases in the Q1, it also drives greater cost increases, Which means a total of 3 to 4 point cost drag in the quarter. 2nd, while dry dock costs impact our full year guidance, The seasonality of dry dock costs in the Q1 2024 as compared to the prior year drives a cost increase of about 1.5 points for this 3rd, the seasonality of advertising expense and a variety of other expenses between the quarters Differs in 2024 as compared to 2023, which will put a total cost increase of approximately 3 points into this quarter.

Speaker 2

Advertising alone is one of the 3 points. And 4th, like the full year inflation Mitigated by economies of scale from our capacity growth along with various other cost optimization initiatives. Given the higher first quarter cruise costs without fuel per available lower birthday, the implied guidance for the cost in the second The 4th quarter is approximately 3%. In summary, putting all these factors together, Our net income guidance for the full year 2024 is approximately $1,200,000,000 with EBITDA forecasted at 5,600,000,000 A significant improvement from 2023. For those of you who are modeling EPS, let's not forget That when you calculate diluted EPS, you need to add back the $94,000,000 of interest expense related to the company's convertible notes, Our improved financial results and our successful refinancing and deleveraging efforts in 2023, Along with our 2024 December guidance, Lisa is firmly placed on our path to achieve our 2026 SeaChange goals, Moving us further down the road to rebuilding our financial fortress and delivering long term shareholder value.

Speaker 2

And now, operator, let's open up the call for questions.

Speaker 3

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

Speaker 4

Yes. Hey, guys. Good morning and happy holidays To all of you. So Josh or David, if we think about the yield guidance for the year, just based on the fact Your occupancy should return to somewhat normal levels and then pricing has momentum at this point. It seems to be pretty strong or healthy across the majority of your geographies.

Speaker 4

It seems like that plus 8.5% yield guidance might end up being somewhat conservative when we have this call A year from now. So I guess the question is, can you give us a little color about the more of the makeup of the of your yield forecast? And it seems like You might be taking a somewhat conservative view around onboard trends and then potentially underestimating the opportunity around Taking close in pricing. Thanks.

Speaker 5

Hey, Steve. Happy holidays to you too. So I hope you're right. I look forward to the call in a year. Look, we've given our good faith estimate on how we're seeing the world right now.

Speaker 5

We come in with a good amount of visibility because of how well booked we are. And as you said, we have seen accelerating momentum In the volume and the price, we're very pleased with the trajectory That we've been seeing, obviously, this is also before WAVE. We do have a little bit of a disadvantage of doing this in December versus end of January into February. All I can tell you is we've baked in what we see and we always want to outperform. I mean, obviously, that's a given.

Speaker 5

So I think best thing I can tell you is we'll talk in March with WAVE under our belt. Having said that WAVE hasn't ended since last year. So We'll continue to ride it as long as we can.

Speaker 4

Let me ask that in a different way then, Josh. So If we think about what you guys are embedding in terms of onboard, is it fair to assume you are being pretty conservative With the way onboard should shake out in 2024, basically meaning you potentially could see a little bit of a slowdown in onboard or Are you still guys kind of assuming that onboard remains as robust as it has been?

Speaker 5

Yes. We're coming off a great performance when it comes to onboard and we expect our onboard per diems to be increasing in 2024 versus 2023. Brands are doing a real good job of pulling forward more spend, providing differentiated experiences. So we absolutely expect An increase in 2024 versus 23.

Speaker 4

Okay, got you. And then real quick, one more question if I could. David, in terms of the cost, you gave some pretty good color around the impact to everything that's going into the Q1 and why it's so high. As we think about the rest of the year, the cadence of costs, I think you said, if we think about the Q2 through the Q4, Those should all be around 3%. I just want to make sure I heard that right.

Speaker 4

And if there is anything in 2Q through 4Q that we should be thinking about that might Now move one of those quarters one way or the other.

Speaker 6

Yes. No. So I was not trying to give individual guidance for each Quarter, what I was trying to do is say that the 3 quarters collectively together would average 3%. We will see some year over year differences versus 2023. A great example of that Is that the dry dock days will be down in 2nd quarter, but they'll be up in 4th.

Speaker 6

So there will be differences. There's also Advertising, seasonalization differences and other things. So I was not trying to say 3% every quarter, just 3% on average for the 3.

Speaker 4

Okay. That is great. Thank you very much guys. Happy holidays. Appreciate it and great quarter.

Speaker 5

Thank you very much. Take care, Steve.

Speaker 3

Our next question comes from Brad Montour with Barclays. Please proceed.

Speaker 7

Great. Thanks everyone and congratulations on the results this morning. So Josh, you gave us an update on the SeaChange long term targets And the drastic improvement toward that target that you've made so far in 2023 and then 2024 expected. And I guess Fuel has been a nice tailwind. If you take fuel out and maybe just focus on your yield growth target within 'twenty four guidance, is that In line with your internal expectations for that 3 year ramp or how do you think about it?

Speaker 5

Yes. I think it's fair to say that. When we talked about it in June for the first time and we laid out what will it take, we talked about the fact that Excuse me, getting back to historical occupancy, we expect pretty much all of that in 2024 versus 2020 Where we were in 2023 and that's as far as we can tell, that's exactly how it's going to play out. And on top of that, we predict price we Estimated pricing to be up low to mid single digits every year 2024, 2025, 26. And so we feel like we are we entered the year Little bit ahead given how we ended the second half of twenty twenty three and we'll keep pushing forward.

Speaker 7

Okay, great. Thanks for that. And then You said you were 2 thirds booked for 2024. That struck me as incredibly impressive. I mean, if you could give us A sense of what that would have been in prior years, but also the crux of the question is, did that baseloading strategy, Do you think that impacted your pricing meaningfully versus what it would have been if you had just kept this sort of historical booking curve?

Speaker 7

And as you go into January and WAVE season, you've never been this booked. So has that changed your strategy with pricing as you move through WAVE?

Speaker 5

So this is playing out as we would expect it to play out by pulling forward all the volume, it gives us Better control over our pricing environment and our ability to keep pricing at an elevated level. And so it's literally playing out As it should, this is we are 10 points higher than we were when we entered the Q1 of 2024, 10 points higher year over year. It's higher than 2019 as well, which is a very long normalized booking window. And it's important that we do that, right? I mean, let's keep in mind, being 10 points above last year is good progress, but we expect to And our occupancy significantly higher than last year.

Speaker 5

So that's all feeding into the strategy and pricing is playing along. As I tried to say in my notes, I'm not sure how clear it was. When we entered the Q4 of this year, We were about 10 points higher than prior year in the occupancy position and prices were higher. As we've made our way through the quarter, We've managed to pretty much keep that occupancy advantage and prices on everything that's booked is now considerably higher. So it is working the way we anticipated.

Speaker 7

Crystal clear. Thanks, Ergon.

Speaker 1

Excellent. Thanks, Brett.

Speaker 3

Our next question comes from James Hardiman with Citi. Please proceed.

Speaker 8

Hey, good morning guys. Thanks for taking my question. So

Speaker 5

I'm going

Speaker 8

to ask, I think Steve's question in a slightly different way. There was a lot of conjecture that you would only give Q1 guidance similar to last year. Obviously, your peers are at a bit of an advantage They get that 1st month of wave as they try to assess what the demand environment looks like. Obviously, you gave us the full year guide anyway. As we interpret that guide, then take us through that thought process and whether or not that plays into Sort of your level of conservatism being effectively ahead of wave.

Speaker 5

Yes. Well, we are Effectively back to normal. This is what we used to do before the last few years, and I think it was quite important that we get back into this cadence. Now good news, we are highest book we've ever been. So we do have more visibility than even we had Before 2020.

Speaker 5

So I think that's setting us up well to be able to be in a pretty good position to give you this preliminary Guidance for 2024, obviously, we have I have high expectations in my brands and what I expect them to achieve, including during Wave. And you got to remember, The whole focus of Wave this year, we have the benefit of being able to focus on different things. Last year in Wave, a lot of what we were trying to accomplish Brands we're trying to accomplish was just filling the ships because we were in such a different position from an occupancy perspective. This time, we actually get to go through Wave And really be more strategic in how we are trying to advance the needle, not just on the short term, but on the longer term. So I think it sets us up Well, and I keep asking David to change the fiscal year end and like, can we please start on January 1st like everybody else, but apparently that's a lot of work.

Speaker 5

So we're not going to do that.

Speaker 8

Got it. And then there was a comment in the prepared remarks About not only are you seeing better new to cruise numbers, but better new to brand Numbers relative to 2019. Josh, you talked about having confidence in your brands, but that latter point Seems like a big one, right? So much of the conversation just seems to be about the cruise industry. But maybe talk to what you think might be a Carnival specific story as in terms of Improving consideration among people that are already into cruising.

Speaker 5

Yes. I think our brands are doing Phenomenally in really understanding who that target audience is, and how to speak to them, with their creative marketing. And then on the performance side, Just making sure that, that consideration and awareness gets converted into bookings. So we gave I said in my prepared remarks, We've got several campaigns that are either started or about to start. We've got a few examples you can click through on the prepared materials of slides that have been put up.

Speaker 5

They're doing a great job at captivating the market and I think getting cut through, not just with New to brand and new to Cruise on the value that we have. For us, as much as we've improved on the pricing front in 2023, it's still a big gap versus land. So all of those things are wind at our backs And I expect more of that over time.

Speaker 8

Got it. Thanks guys and good luck during the wave.

Speaker 1

Thank you.

Speaker 3

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

Speaker 9

Good morning. Thank you. I'm hoping you can talk a little bit about changes to the sourcing strategy. I know Shifted back a little bit more to North American Cruisers in the last couple of years, but given the strength in the European Market or the fact that they might be closing the gap, should we expect that to move back to a normal mix?

Speaker 5

Good morning, Jamie. So I think we should kind of Take a step back and think about our portfolio and how we operate. We've got dedicated brands to European markets With P and O Cruises in the UK and AIDA in Germany, Costa, not just for Italy, but really Italy, Spain and France And all of those are either, the biggest in their market or the 2nd biggest in the case of Costa across the Mediterranean. And we didn't deviate from our strategy, when it comes to our dedicated market brands. And so They have continued to view those markets as the right thing to be in, in the long term, and we absolutely support that.

Speaker 5

And we're starting to see the Strength of that really come through as we've started talking about the last few quarters. With respect to our North American brands, Carnival has been and will continue to be America's cruise line and they're knocking the cover off the ball. And there hasn't been that much dramatic change when it comes to sourcing for Holland America and Princess other than the fact that for Princess, They had so much sourcing that was really geared towards markets that have been slow to open In Asia, etcetera. So we've repositioned. We've done a bit of that, but I think we are very well positioned to Take the strength of the European consumer and the UK consumer and continue to ride that into 2024.

Speaker 10

Okay. And then there

Speaker 9

was a lot of positive commentary obviously on this call. So I'm curious if there's anything left out there that concerns you that you would like to share with the audience. Thanks.

Speaker 5

No. Great question. No. Thank you.

Speaker 9

Okay. You're welcome. Thanks. Happy holidays.

Speaker 5

You too.

Speaker 3

Our next question comes from Patrick Scholes with Twist. Please proceed.

Speaker 11

Hi, good morning everyone.

Speaker 1

Good morning, Patrick. Good

Speaker 11

morning. Josh, I am not going to ask you if you are planning on hedging fuel this time, But I do

Speaker 5

have. Thank you, Patrick.

Speaker 11

Sometimes you should listen to us, sometimes not, but Yes, here we are.

Speaker 2

I want to hear from

Speaker 11

you what trends of late, Especially around Black Friday, Cyber Monday, you've seen with new to Cruise. Is that becoming a larger Part of the booking mix? And if so, what would be the impact On your margins, I imagine new to cruise typically calls the 800 number of books direct, which probably saves you travel agency commissions. Can you just talk about those trends and the potential impacts on revenues and costs? Thank you.

Speaker 5

Thank you. So candidly, I don't have literally for the period that you're referencing the Cyber Monday and Black Friday, I don't have A breakdown of new to cruise versus new to brand versus brand loyalist. I do have the 4th quarter obviously, which includes some of that Where our new to Cruise is obviously up significantly year over year 51%. And so That is part of the strategy, right? Taking that was sale, pardon me, I'm sorry, that was sale.

Speaker 5

But taking a greater share of folks who have never cruised before is Part of the strategy to increase overall demand, get them in our pipeline and allow us to raise pricing over time for frankly everybody. With respect to What's the most cost efficient? Obviously, coming direct on the web is always going to be the most cost effective. I wouldn't make a categorization though that new to cruise comes in a particular way because it really depends on the characteristic of the new to cruise guests themselves, what brand it is, what's the itinerary length, Etcetera. Now clearly, a lot of new to cruise will over index on the shorter cruises because they're trying it out for the first time and that lends itself to maybe Also a younger crowd, which is more comfortable, just playing around on the net and doing things direct.

Speaker 5

But, I mean, frankly speaking, Historically, and I expect this to continue, our trade partners are absolutely critical in driving New to Cruise to us, and we've relied on them for decades to do that and we will rely on them And they have done a great job of really catching up to where we've been in the curve And year over year, they're showing great strength as well.

Speaker 1

Okay. Thank you very much. Thanks, Patrick.

Speaker 3

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

Speaker 12

Great. Thank you. I wanted to circle back to your yield guidance and just Looking at the recovery in occupancy to previous levels being maybe 600 to 700 basis points, it kind of implies that your per diem guidance is Maybe less than 2% growth. So I just I don't know if I'm doing the math wrong there, if there's anything to clarify. And then also, You've talked about the price on the books for next year being considerably higher, but your yield guidance for the year, it's Just nicely higher, which I think the David Bernstein glossary is like a would be a deceleration in yield.

Speaker 5

I'm laughing at the glossary. Yes, keep going, Robin.

Speaker 12

If I remember if I'm interpreting glossary correctly, I think that implies Sort of a deceleration in the price there. So just is that just because the onboard growth rate while up is lower and so that brings like considerably a higher I used to just nicely higher yield or maybe my glossary definition is wrong, but maybe you could help us with that and with the math on the per diem to begin with. Thanks.

Speaker 5

Thanks, Robin. Well, actually, David said it in the prepared remarks. I thought he said it pretty well. So David, you want to repeat what you said?

Speaker 6

Yes. Keep in mind that 2019 was the high watermark for occupancy. And we look back to like 2,005 and the historical occupancy levels were in the range of 104% to 107%. So what we're saying is we will be solidly back to historical occupancy levels, but we weren't saying we're going to be back to The high watermark of 2019. So keep that in mind.

Speaker 6

The other thing about the considerably higher versus the nicely higher, Keep in mind that last March when we gave guidance, we had thought that our expectation for per diem increases It was about 3.5%, and we wound up, up 7.5%. So we saw some very strong pricing In the back half of the year and as a result of that on a year over year comparison basis, a book position may be considerably higher. But what we're looking to see is at least nicely higher pricing on a per diem basis built into our guidance. So when you put those two factors together, hopefully you can understand how we built our guidance.

Speaker 5

Yes. And the other thing I'd add, Let me just add one thing, Robin, which is our focus is on generating the most revenue possible When that ship leaves, on its cruise. And that's going to be a combination of optimizing that price and occupancy relationship. So there's no magic to getting back to 2019 high watermark of 107%, and we play in the fringes. We play in that 104% to 107% to make sure that when you combine that ending point along with the pricing, it's the happiest we can be.

Speaker 12

Understood that occupancy, right, that you don't manage to a certain occupancy once you're in that range. But just that the Price comment that you're what you're saying on the books being considerably up versus the nicely up Does seem to imply like that you would be expecting a deceleration from current levels. And so I mean, maybe the answer is you're just being conservative, but I just if that's correct in interpreting considerably moving to nicely as Being a lower rate of growth, I guess that's what I was trying to clarify.

Speaker 5

So one thing to stress, right, we just came off of the 4th quarter, Which everybody is glossing over real quick, but it was up 10.5 points in price. That's what we're going to lap when we get through 2024. If you think about our booked business, We have the most to go in the Q4, not surprisingly, so far the stout. So as we build Towards that and we cycle through the Q1 and the Q2 where we're the most booked, we just have to fill and get over a larger hurdle, which we expect to do. But we have to take that whole thing into the equation when we're giving full year guidance.

Speaker 12

That makes perfect sense. Thank you. Thank you. And then just one last clarification. On your, fee change on the expense side, you've talked about the 3 year being up low single digit In like 2024, 2025, 26 each year, this year up 4 or 2024 guidance up 4.5%, probably Above low single digit kind of implies very, very low Expense growth in 2025 and 2026, is that how we should think about in other words, there's not a change in your the 3 year average would be up And again, possibly you're just being conservative, but I don't know if you had a thought on How we should think about how much better that would be in 2020 would have to be in 2025 and 2026 to keep your SeaChange expense target?

Speaker 12

Thank you.

Speaker 6

Sure. So when we were presenting our SeaChange program, I guess it was in June, we were Talking about the fact that low single digits, but I did say we'd have some outsized impacts in 2024 due to occupancy, Both on the yield and on the cost. So the 4.5%, I also had indicated that occupancy would probably cost 1.5% to 2 points this So we are in that low single digits equation that was built into the model. So I feel like we are very well positioned. And as Josh indicated, we're ahead of where we expected to be on our way towards achieving those targets.

Speaker 5

I would say Robin,

Speaker 1

I didn't think we'd get through

Speaker 5

the call without you trying to get ahead of 'twenty four guidance and looking at 'twenty five.

Speaker 12

Well, but I almost didn't get the last 5 minutes of the call. I'm glad I got it in. So thank you.

Speaker 5

Yes, there you go. No problem.

Speaker 3

Our next question comes from Dan Politzer with Wells Fargo. Please proceed.

Speaker 13

Hey, good morning, everyone, and thanks for taking my questions. I just actually wanted to touch on the Q4 a little bit more. The uptick in revenues on pricing certainly was impressive. Can you maybe unpack that a little bit more? I mean, was that really just the Carnival centric line or was it Europe or North America more broadly?

Speaker 13

Or was this alternatively related to your strategy of more base loading and maybe benefiting from some of the compression we've seen?

Speaker 5

This was portfolio wide. So we're very pleased with where we headed into the Q4? Jay, I don't know if you want to give any color. Yes.

Speaker 6

No, I mean, you're right. It was all brands and we saw strength in bookings and Our brands did a great job yield managing the revenue and taking price up. And so as a result of that, you saw the end result.

Speaker 13

Got it. And then, Grand Bahama, I know you've started to talk a little bit more about that. Are there any parameters you can give us there in terms of Capacity per day, amenities, the CapEx or return profile you're looking at? And also I know you started to see some booking activity that's going there. Are you receiving premiums on those bookings?

Speaker 13

I think you mentioned like 100 of sailings in the release.

Speaker 5

Yes. Let me start with that. We have it's tiny in the grand scheme of things still. I mean, because you're talking about Carnival Cruise Line, which It doesn't have a lot of short programs, etcetera, that don't really start booking. So it's a tiny amount now.

Speaker 5

We'll give color as we get through 2024 in that respect. So we'll come back to that. With respect to your other points, We've said this is a big investment. This is $500,000,000 type of investment, and we can do that obviously in 20 25, we only have one chip and we have none in 2026. So we think this is the right way to optimize our resources and really benefit The Carnival brand and you've heard us say 18 ships from day 1.

Speaker 5

So we are very, very excited about that. I don't want to get ahead. I really want to do a Good job of disciplining myself to not get ahead of Christine Duffy, who really wants to and should talk about what this It's going to be like and more to come in 2024 and I can't wait for you to listen to Christine and hear all about it.

Speaker 13

And then just if I could squeeze in one quick housekeeping. Panorama, that was I think out of service a little bit in the Q4 and in the Q1. Is there any way to just quantify the impact of that?

Speaker 5

In the grand scheme of things, it's probably a couple of

Speaker 6

pennies. Between Like maybe $0.01 in the 4th quarter and a couple in the first.

Speaker 13

Got it. Thanks so much and happy holidays.

Speaker 5

Thanks. Frank, we have time for one last question.

Speaker 3

We have a question from Asia Georgiova with Infinity Research. Please proceed.

Speaker 12

Congratulations

Speaker 10

guys on a great Q4. So happy that we're back to looking at yields as opposed to per diems. And the 10.5% was a great metric, but the 7.8 percent I like better. So I apologize, but again, I wanted us To finally get back to where we're looking at the more usual metrics, given that we have a very Healthy outlook in terms of yields in Q1 and Q2. Drydocks, I think I at least understand well.

Speaker 10

So we have a good view into EBITDA throughout the year. David, would you mind taking us through sort of the debt and interest expense burdens that you Maybe trying to modify including as part of the SeaChange program by fiscal year end 2024?

Speaker 6

Sure. So to start with, you saw our interest expense guidance in the press release. It was Close to $100,000,000 less than 2023. And keep in mind that while We did pay down quite a bit of debt. The average balance for the year is for 2024 is probably like 2 point 5 $1,000,000,000 less than 2023, so that will lower interest expense by $200,000,000 But also keep in mind that we have less cash on the books And with declining interest income rates, that probably is offsetting the savings by about $100,000,000 So That's why it's a net decline of about $100,000,000 in interest expense on a year over year basis.

Speaker 6

Looking at the debt level, I actually said this in my notes. In 2024, we are looking at About 2 point I think it's $2,100,000,000 of scheduled maturities, but we will be replacing that debt With the $2,300,000,000 of export credits, that we take on. So but in addition to that, we have built in Some prepayments of debt into our guidance. And as I said, we are evaluating that. So we do expect to see debt to go down In 2024, however, we do expect to see strong deleveraging from a metrics Perspective because our EBITDA grows substantially, so our debt to EBITDA will also improve.

Speaker 10

Makes perfect sense. And just as a quick follow-up before I ask my second question, if I may. Would we be looking at refinancing as opposed to repayment?

Speaker 6

So we are looking at both. As far as we expect to continue to prepay debt And to continue the deleveraging, but on top of that, we also expect to look at some potential refinancing, Which really would drive the interest cost down. And so we'll see how what These presenters are presented to us in 2024. And if it makes sense, we'll take advantage of them.

Speaker 10

Sounds great. And so if I can ask my second question, and I don't think anyone has touched on this. Given geopolitical pressures and we are comparing used to be comparing 2023 to 2019 when we had St. Petersburg, which clearly the Eastern Baltics have been kind of off the books. Now we have an issue with the Middle East And, Kostas Cana, I believe, is, in the Persian Gulf, But we'll be one of the ships that will have to come back to Europe in going through Kinau, a trade that is has been targeted by Yemeni military Sales, any thoughts on this or

Speaker 5

Obviously, our first priority is going to be safety. And we have that's already On our radar screen and we've got mitigation plans should we need it, but keep in mind this is months away. And so we will do the right thing, But there's always something. I hate to say it that way, but there is always something and our brands

Speaker 10

I've been around long enough 26 years, so there is always something, Josh, I agree.

Speaker 5

Yes. So All right. I think with that, we do have to end it, but I'd say happy holidays to everybody and thank you very much. Have a good New Year.

Speaker 3

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day. Thank you.

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Earnings Conference Call
Carnival Co. & Q4 2023
00:00 / 00:00