Carnival Corporation & plc
Q2 2020 Earnings Call Transcript

Published: 14 Jul 2020

[Arnold Donald:]

Good morning, everyone, and welcome to our Business Update Conference Call. I’m Arnold Donald, President and CEO of Carnival Corporation & Plc. Today, I’m joined telephonically 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. It is hard to believe that it has been just 120 days since we voluntarily paused operations across our global fleet. In that relatively short time, we’ve returned over 260,000 guests home. We’ve already repatriated 77,000 crew members, and we’ll repatriate over 80,000 in total, hopefully before the month is over. We process billions of dollars, euros and sterling of guest refunds and billions of future cruise credits and those currencies as well. We moved 53 ships in the full pass status, and with the remainder expected to be in a similar position within the next month. We’ve reached agreements for the disposition of nine vessels, while negotiating the delay in delivery of 16 ships on order. We secured over $10 billion in new capital, while working to extend debt maturity and secure covenant waivers with over 20 lenders and over 40 different agreements. We’ve engaged with medical experts and scientists around the world to inform our development of return to cruise protocol, and we are now preparing for the imminent return of cruising in Germany. So we’ve come full circle from entering a voluntary pause of planning of staggered resumption. Now I couldn’t be more proud of how collectively our team has handled this. We looked at our guests, we looked after each other and the more than 700 places we go each year. We’ve honored what we stand for as a company, and we are well positioned for our existing shareholders to still experience attractive returns over time. We will emerge a leaner, more efficient company. So thanks – thanks to our crew for continuing to exceed guest expectations through challenging circumstances, while taking care of each other, taking care of our ships and protecting the environment. Thanks to our shoreside team members for working 24/7 to repatriate first our guests, then our crew, all while handling incredible unprecedented huge volumes of calls and inquiries from guests, ports, vendors, travel professionals and other partners, and while coordinating with the myriad of government authorities and agencies globally, all in the context of a constantly changing and evolving situation. Thanks to our travel partners for their support and thanks to our guests for the countless number of heartfelt outreaches, expressing support and concern to our crew, our shoreside personnel and the brands they love. Thanks to those investors who have expressed their confidence by staying with us, and thanks to those who have expressed their confidence by becoming new investors. Look, these are truly unprecedented times for our industry. They are clearly trying times for all of travel and tourism and they are extremely challenging times for the world at large. I extend my personal deepest sympathy to those around the globe who have suffered directly themselves individually or whose loved ones have suffered with the buyers. For our company, it has been not only challenging, but frankly, at times, it has been painful. We are aware that so many people depend on us for their livelihood and well-being, not only our own employees, but those and many other businesses around the world, both small and large. And we’ve been on a journey since COVID began to manifest, a journey we’ve aggressively managed throughout. Our highest responsibility, and therefore, our top priorities are always compliance, environmental protection and the health, safety and well-being of our guests, the communities we touch and our Carnival family, our team members shipboard and shoreside. We initiated a voluntary pause in operations in the early days of this global pandemic, including being the first, the half sailings here in the U.S., and action that was taken before shelter in place was implemented in the U.S. and before the CDC no-sail order was issued. We’d recently extended our pause in the U.S. through late September, which, of course, is well beyond the timeframe of the current CDC no-sail order expiring July 24. Again, our team worked tirelessly to return over 260,000 guests safely home and then they focused on repatriating our more than 80,000 shipboard team members to their homes in over 130 different countries. This was a daunting task, given the limited availability of air, the real barrier of closed borders and a fluid constantly changing context that may planning and even execution extremely challenging. In the end, we got the job done through chartering planes and in many cases, using our own vessels to transport our teams safely home. So far, we sailed 50 ships, that’s nearly half our fleet and over 400,000 nautical miles in this repatriation process. We also quickly focused on securing sufficient capital to provide a financial runway to withstand an extended pause. That effort included cash preservation, motivating our guests around deposit retention and the wind down of our fleet. Now David and our finance team with support from our legal team work nonstop to secure funding to sustain our path forward in a prolonged pause. We were able to access the capital markets in the early days and in a meaningful way initially raising $6.6 billion of capital. And doing so at a time when the capital markets were still close to many. And while it was certainly financially painful for a company that it always manage to an investment-grade credit rating, bearing the cost of the initial raise was prudent to ensure our long-term viability. Now because of our strong balance sheet, we were able to raise the majority of that $6.6 billion of capital, along with an additional $2.8 billion on a secured basis, minimizing dilution. Historically, as you know, we’ve managed a strong balance sheet and an investment-grade credit rating. In the current environment, our national brands have been an additional advantage, supplementing our access to liquidity across a number of countries at attractive rates. Our success in maintaining a strong balance sheet and the strength of the national brands has been a differentiator, providing a softer landing for our company and our shareholders. In fact, our overall blended interest rate is just 5%, despite the recent expansion of debt, and we still retain meaningful flexibility going forward to manage further uncertainty. Importantly, we have capacity to issue additional debt. Beyond that, we are also evaluating the potential to monetize non-core assets to provide additional liquidity or potentially reduce our debt burden over time. We are confident that we are prepared for a wide range of scenarios for the next 12 months. Additional cash conservation efforts, combined with future liquidity measures, will enable us to sustain ourselves beyond 12 months into late next year, even in a zero-revenue scenario. Concerning cash conservation, our workforce reductions while painful were necessary to make it through to the other side of the impact of this global pandemic. In the face of no meaningful revenue, we were able to forestall the financial impact on our employees, deferring employee actions beyond the timeframe of many others during that period without compromising the interest of our shareholders, honoring our fiscal responsibilities. We also, of course, significantly reduced nonessential capital expenditures in excess of $2 billion and significantly reduced marketing costs as well. And while we continue to expect new ships to provide greater cash generation and higher returns over time once we return to sailing, we have also worked to differ newbuild CapEx given the near-term environment. In fact, we expect to reduce ship deliveries through the end of fiscal 2021 from nine as originally planned down to five, two this fiscal year and three next, deferring over $3 billion of capital expenditures into fiscal 2022 and beyond. So reduced our cash burn and to have a more efficient fleet once we do resumed cruising, we have aggressively shared less efficient ships. A total of 13 ships are expected to leave the fleet, representing a nearly 9% reduction in our current capacity. We are also reorganizing the company to emerge stronger, leaner and more efficient. Even when we return to full-scale operations, we don’t expect to return to the same staffing requirements, as we are addressing our work streams to work in a more efficient manner. At the same time, we are focused on developing new and enhanced protocols. Now we’ve dealt with many types of viruses in the past. Historically, we’ve had effective protocols in place onboard our ships, including screening measures, medical centers and sanitation procedures, which prevent and reduce the spread once brought onboard from land. During this pandemic, we had less than our market share of incidents, again, we had less than our market share of incidents. However, as this often the case being the largest in the industry, we had a disproportionate amount of video attention. Now having said that, as evidenced by the global shutdown, this virus is unique and the world is discovering together how to most effectively address this. We’re working diligently to determine what enhancements to our existing protocols will best serve the interests of public health. Now our protocols are being informed by global earnings. And to that end, we are engaged with external advisors, which include world-renowned epidemiologists and other medical experts and scientists utilizing their collective inputs. Once people are gathering, again, which just a clearly happening on a country-by-country basis, society will determine the risk it is willing to accept going forward. And we’re working, so that our guests will not incur any greater risk versus engaging in similar experiences on land. And, of course, we’re working to achieve less risk and exposure to similar shoreside activities as we have often achieved in the past with prior health risks, such as, for example, norovirus. But to be clear, we will sail when we feel we will honor our commitment to operate in the best interest of public health. In that regard, we’re in active discussions around the world with appropriate authorities and agencies. In addition to Germany, Italy seems to be closest to resuming cruises at this time. And we’re in very active dialog with them, as well as others since there are any procedures based on the best available science to specifically address the risks associated with COVID-19. Upon resuming service, we are well-positioned to optimize the latent pent-up demand by our leading brands around the world. Having national brands as a portion of our portfolio at this moment, as I’ve already mentioned, is clearly an asset. As nations reintroduce social gathering, including cruise, they are most likely initially to restrict reactivation to their own residents exclusively. With brands like AIDA, that is roughly 95% German source; P&O UK, which is 98% British source; Costa Europe, which is nearly 80% continental European source; P&O Australia, which is more than in the 99% Australian and New Zealand source; and Carnival Cruise Line, which is 92% U.S. source, we are very well-positioned. Additionally, the fact that these brands are characterized by ready access would drive to markets any prevalence of shorter duration cruises strengthened the possibility for success in today’s environment. Clearly, cruise will not come back all at once. As we are demonstrating with AIDA, we intend to resume operations with a small percentage of the fleet, which inherently will make us less reliant on new to cruise in the early days. Now with nearly two-thirds of our guests globally, that’s almost 8 million guests, each year repeat cruises, an active database of nearly 40 million and frequency to repeat among cruises every two-plus years on average, we expect demand to be more than adequate to fill shifts in a staggered restart. Again, we expect demand to be more than adequate the field ships in a staggered restart. Our overriding financial objective going forward is to maximize cash generation. At the same time, we’re focused on staggering the reintroduction of capacity, which will help to manage yields. Now this is even more relevant since historically, we’ve had only two levers to pull in the down cycle