Carnival Corporation & plc
Q4 2019 Earnings Call Transcript

Published: 20 Dec 2019

[Arnold Donald:]

Good morning everyone. And welcome to our Fourth Quarter 2019 Earnings Conference Call. I'm Arnold Donald, President and CEO of Carnival Corporation & plc. Today, I'm joined by our Chairman, Micky Arison, as well as David Bernstein, our Chief Financial Officer; and Beth Roberts, Senior Vice President, Investor Relations. Thank you all for joining us this morning. Now before I begin, please note that some of our remarks on this call will be forward-looking. Therefore, I must refer you to the cautionary statement in today's press release. First, I sincerely thank the 150,000 members of the Carnival family who collectively work to offset numerous headwinds and still deliver memorable cruise experiences for our 13 million guests, as well as another year of records adjusted earnings per share for our shareholders. We achieved fourth quarter adjusted earnings of $0.62 per share that's higher than the midpoint of our guidance by $0.14 per share. We ended the year with full year adjusted earnings per share of $4.40, which is a new record for adjusted EPS, 3% better than last year's historical high and broadly in line with our capacity growth, despite a plethora of negative events and circumstances. With that said, we were disappointed not to deliver the level of earnings growth we do plan to achieve over time. We believe our business is inherently capable of and we are working hard to ensure we are in fact doing even better. After five years of very strong adjusted earnings growth for our company, 2019 brought with it more than our fair share of challenges, including the abrupt regulatory change preventing travel to Cuba, geopolitical events in Arabian Gulf, Hurricane Dorian, a costly unscheduled dry dock, and multiple shipyard delays. All of which necessitated the cancellation of cruises and in many instances, resulted in shorter booking windows negatively impacting yield. Even though these unusual events were outside our direct control, as always, we go above and beyond to accommodate our guests who are in convenience, providing them with generous credits towards their next cruise purchase. In total, we estimated these unusual events to cost the company approximately $0.23 per share. Now these events do have a tail effect going into 2020. And of course, the impact from these events was compounded by an unanticipated decline in consumer attitudes affecting leisure travel broadly in our continental European source markets, especially Germany. While quantifying the impact from macro conditions is always difficult, the decline in revenue yield for our Continental European brands was worth approximately $0.30 per share for fiscal 2019. Clearly without this downturn, we would have achieved double digit adjusted earnings per share growth even in the face of the higher number and scale of unusual events. Unfortunately, we do see a continuation of that environment in continental Europe into 2020. As a global company with nearly 50% of our guest source are from outside the U.S., we're subject to uneven economies around the world. We have a large percentage of our portfolio weighted in regions that are currently challenged, and this will remain a headwind in 2020. In Germany, we carry more than half of all cruise guests, AIDA outperformed overall in that travel market with revenue up mid-teens last year compared to a decline for overall to the client overall revenue over the same period. Looking forward, AIDA is entering a period of slower cruise industry supply growth in Germany beginning in the second quarter. We expect capacity growth for our AIDA brand of just 5% next year, and that's down from 20% in 2019. That said we expect yield challenge is similar to 2019 given ongoing headwinds, which are impacting the entire leisure travel category in Germany. Despite that difficult environment, AIDA remains among the highest return on invested capital brands in our portfolio and our team there has done an outstanding job, growing demand for cruise given the environment. In Southern Europe, we have 13% capacity growth in the face of what is also a difficult travel environment. We've already taken actions to adapt to what is proving to be a persistent challenge there. These actions include changes to itineraries to optimize our performance by reducing exotic programs, replacing them with more convenient and affordable cruises closer to home, eliminating the costly air components. As previously announced, we also implemented an action plan to accelerate demand and right size capacity sourced from Southern Europe by removing two ships from the Costa Europe fleet for fiscal 2020 followed by a third in 2021. The capacity of these three smaller ships will be somewhat offset by the delivery of the much more efficient Costa Smeralda. Smeralda is the first new ship delivered for Costa in Europe in five years, and has been well received by the market. By accelerating our long term strategy to replace existing capacity with larger and more efficient vessels, we can improve return on invested capital for Costa overtime. In the UK, our brands have also outperformed the overall leisure travel market and have grown revenue yields and profits in 2019 despite the ongoing uncertainty around Brexit. And 2020 we are again experiencing strong demand particularly for Iona, the first new shift for our U.K brand in five years and the largest ever purpose-built ship for the U.K. Iona continues to book at a significant premium to our other U.K ships on a comparable cruises. Now this has been somewhat muted in our overall projected 2020 U.K performance by an increasing overhang from Brexit. The previously announced close-in deployment changes due to the tensions in the Arabian Gulf and a plan dry-dock for the high yielding Queen Mary 2. Turning North America, we're seeing a continuation of positive trends in 2020. The Caribbean remains strong in occupancy and yield growth overall for our brands, and will be even stronger without the continuing yield drag from future cruise credits and the regulatory change in Cuba. In Alaska, where yields remain high relative to other trades, the industry is in the process of absorbing the 10% capacity increase in 2020 on top of last year's 15% increase. While growing and profitable with our scale, Alaska remains a year-to-year yield growth challenge that we are working hard to address. We continue to focus on creating demand there, including some new approaches with our travel agent partners, as well as new consumer communications efforts, specifically targeted to Alaska concerning others trades. Our brands collectively are deploying the number of innovative guest offerings to further stimulate demand. We've conducted a deep dive analysis of our marketing activities and spin to drive demand in all the countries and brands we operate. And while we're pleased with our overall combined, earned and purchased marketing share of voice, we found pockets of opportunity to increase marketing impressions to generate demand and support future yield growth. To that end, beginning of the fourth quarter of 2019, we've increased investments in media spin, leading into and including 2020 wave to support our brands and destinations around the world. And we've also been successful in increasing our analytical rigor in marketing and in media spend to drive demand generation and to better balance brand support activities with price and promotion efforts. On the guest experience side, we continue to deliver. Both our guest experience scores and our net promoter scores are towards the top end of prior ranges, with many hitting new highs. We are stepping up investments and guest experience even further through the new build schedule, which peaks this year in 2020 with six new ships entering service across six distinct markets. The aforementioned Costa Smeralda, Continental Europe and P&O Iona in the UK, as well as Carnival Panorama, the first new ship home for a year round for the Carnival brand on the West Coast in nearly 25 years and Enchanted Princess, the second new ship delivered with OceanMedallion. Toward the end of fiscal 2020, we will welcome Mardi Gras to Carnival Cruise Line on the east coast and Costa Firenze to Costa Asia. We continue to roll out our most popular features on our existing fleet with significant reimaginations like the recently introduced Carnival Sunrise to be joined by Carnival Radiance in 2020. In the Princess fleet, the OceanMedallion rollout continues with five ships already completed and six more to be completed in 2020. And to facilitate onboard revenue growth, the expansion of app-based technology across our other brands continues, including pre-cruise purchases. Concerning destination development, we have two major developments underway; on Grand Bahama Island and the second destination on Half Moon Cay, complementing the six destinations we had already developed and are operating in the Caribbean. And currently, we are elevating the guest experience without dramatically increasing operating costs. In fact, we achieved over $125 million of cost savings in 2019 through global sourcing, bringing the cumulative total to over $480 million. These efforts will continue in 2020. And of course, our highest responsibility and therefore, top priorities are excellence and safety, environmental protection, and compliance. On the sustainability front, we achieved 4% reduction in per unit fuel consumption in 2019, and we expect another 4% in 2020, which will bring the cumulative reduction in fuel consumption per ALBD to 35%. We continue to lead the industry in the development of environmentally friendly fuel solutions. We joined the Getting to Zero Coalition and alliance of organizations across the maritime, energy, infrastructure and finance sectors, committed to accelerating the de-carbonization of international shipping industry. Just this year, we delivered the first cruise ship to be solely powered by LNG, the most environmentally friendly fossil fuel and just this month, delivered the second of the 11 LNG ships we've ordered. We're also making significant investment in fuel cell technology in electrical energy storage capabilities. We announced the groundbreaking pilot on our AIDAperla, the first lithium-ion battery storage system to power, albeit for limited periods of time, a cruise ship's propulsion and operations. And as early as 2021, our AIDA Cruises will be the world's first cruise company to test the use of fuel cells on a large passenger ship. The fuel cell will be powered by hydrogen derived from ethanol. Now these will complement our industry leading technologies we have already deployed to reduce emissions, including cold ironing at shore power, which we have the capability for on over 40% of our fleet and advanced air quality systems already deployed on nearly 80% of our fleets. The investments we've made in advanced air quality systems also helps to mitigate increased costs, and we get benefit from any increase in spread and fuel types in the wake of IMO 2020. Beyond carbon, we are focused on other areas concerning environment with the rollout of additional advanced wastewater treatment systems and food bio- digesters. In addition, we're making considerable progress on our goal to significantly reduce single use plastics. Moreover, as part of our environmental efforts, we have also partnered with Jean-Michel Cousteau, an ocean future society. Of course, we have much more work to do and our sustainability efforts remain at the forefront of our strategic goals. So in summary, we fully appreciate that the supply growth in Continental Europe is not well timed, given the macro environment that is unfolded. We build 30-year assets and we take decisions many years in advance fully aware that we can't time the economic cycle that we deliver them into. Accordingly, we assume every ship will see more than one recession in its 30-year life. I'd like to again acknowledge the successful efforts of our dedicated team members. For our consumer company with a meaningful portion of this business exposed to significant macro headwinds to deliver record adjusted earnings is a strong accomplishment, and I'm very proud of our team members and the phenomenal guest experiences they deliver every day. Importantly, overtime, we are focused on measured capacity growth after peaking out 6.6% in 2020, capacity growth flows to just under 5% in 2021. We've been accelerating ship sales with two more announced just this month, bringing the cumulative total to 30 ships in 14 years. In addition, we're working with the shipyard toward moderating the timing of newbuilds and at the same time, mitigate the risk of further delays in shipbuilding. We're continuing to work to improve our performance in fiscal 2020 and beyond, to make progress towards double-digit earnings growth. However, our adjusted earnings per share guidance of $4.30 to $4.60 today reflect that we'll likely take beyond 2020 to achieve that level of earnings growth, given the current environment in Europe and the relative weighting of European sourcing in our portfolio. As we've shown in the past, we believe our cruise brands will continue to be recession resilient, given the low penetration levels of cruise, attractive value propositions and high satisfaction levels relative to land based vacation alternatives. Although, there are multiple external its impact outside of our control, we are relatively managing those levers we do control or at least can strongly influence; demand, supply and controlling costs. We are investing in to stimulate demand through advertising, marketing and public relations efforts to maintain price discipline. For supply, we are working to moderate capacity additions and at the same time, accelerate less efficient capacity leaving the fleet. And we are leveraging our scale to achieve these efficiencies and to fund investments without a significant net increase in cost. In the best interest of long-term shareholders, we are making disciplined decisions to optimize our performance in the short-term, while leaving us best positioned to capture the full benefit of global travel and tourism growth over the long-term. With that, I will turn the call over to David. David Bernstein