Carnival Corporation & plc (NYSE:CCL) Q1 2024 Earnings Call Transcript
Carnival Corporation & plc (NYSE:CCL) Q1 2024 Earnings Call Transcript March 27, 2024
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Beth Roberts: Good morning. This is Beth Roberts, SVP, Investor Relations, Carnival Corporation & plc. Welcome to our First Quarter 2024 Earnings Conference Call. I'm joined today by our CEO, Josh Weinstein; our Chief Financial Officer, David Bernstein; and our Chair, Micky Arison. Before we begin, please note that some of our remarks on this call will be forward-looking. Therefore, I will refer you to the forward-looking statement in today's press release. All references to ticket prices, net per diem, 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. A reconciliation to the most directly comparable US GAAP financial measures and other associated disclosures are also contained in our earnings press release and on 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.
Josh Weinstein: Thank you, Beth. Before I begin, I would like to express my support and heartfelt sympathy for all those impacted by yesterday's event at the Francis Scott Key Bridge in Baltimore and extend our appreciation to the co-stars and all first responders. The City and the Port of Baltimore have been our long-time partners and a home to many loyal guests as well as business and community colleagues. We proudly sail year round out of Baltimore through one of our Carnival Cruise Line ships, which was scheduled to return this weekend. Fortunately, our team has quickly secured a temporary home port in Norfolk for as long as it's needed, which should help to minimize operational changes. So we look forward to getting back to our home in Baltimore as soon as possible.
Now, given that this happened just yesterday and the situation is fluid, we did not build this into our earnings materials or full-year guidance. However, we did provide a current perspective that we expect this situation to have less than a $10 million impact on a full-year guidance. With that, I'll turn to our prepared remarks which address the accomplishments included in our strong results and outlook. The first quarter has been fantastic across the board and yet another set of records. We delivered record revenues, record bookings and record customer deposits again this quarter, a great start to the year. I want to acknowledge our global team right off the bat. Everyone has worked very hard to deliver another strong quarter in a very strong way.
In fact, we outperformed our first-quarter guidance on every measure. Yields, cruise cost, ex-fuel, and EBITDA enabling us to take our expectations up for the full year. Yields increased over 17% year-over-year, another record, and more than double the increase in unit costs. This was driven not only by closing the occupancy gap but also through solid mid-single digit price increases. Customer deposits beat last year's record by another $1.3 billion, contributing to our strong cash flow and enabling us to prepay another $1.8 billion of debt already this year, which is on top of the $4 billion we prepaid last year. This is meaningful progress on our return to investment grade credit. Most important, we achieved all-time high booking volumes at considerably higher prices.
In fact, our North American and European brands both set booking records in the first quarter with pricing strong across all core deployments and across all quarters. Prices ran up double-digits on limited inventory left for Q2. They ran considerably higher for our peak summer period in Q3. And they were also considerably higher for Q4 while still building on our occupancy advantage. Our record book position and activity did not just happen and it is not the result of pent-up demand from repeat guests built up during the pause, which is now years in the rear-view mirror. It is because we have been creating more consideration and broad-based demand for cruise travel in all of our source markets across our well-balanced portfolio. And as a result, we are capturing more new guests than ever before which coupled with our growing base of repeat guests, delivers greater overall demand.
Our brands are delivering sustainable revenue growth that hits the bottom line. At the same time, our brands are continuing to pull the booking curve forward in line with our yield management strategy to base load bookings and ultimately support higher overall pricing over the course of the booking curve. As you know, before even entering the year, we already had the best book position on record with less 2024 inventory remaining for sale after absorbing double-digit guest growth, half of which was from closing the occupancy gap and half from higher ship capacity. Those efforts have enabled us to maintain price integrity on the remaining '24 inventory and sets us up nicely to deliver a nearly double-digit improvement in yields this year. This also allowed us to focus more of our efforts through wave on further out bookings, helping to lay the foundation for an early build 2025.
It is remarkable that we are even better positioned now for 2025 than we were last year at this time, heading into what is shaping up to be a phenomenal 2024. To aid in that effort, we have been rolling out an enhancement to YODA, our yield management tool designed to facilitate an even more optimal booking curve and which will continue to pay dividends well into the future. Of course, we have more in the pipeline to sustain our momentum and capitalize on this untapped revenue opportunity. For instance, we have three fantastic new ships driving increased consideration and demand to their respective brands. Carnival Jubilee, Carnival Cruise Line's third Excel-class ship was recently christened by Gwen Stefani at her inaugural home port in Galveston, Texas.
Sun Princess was recently delivered the first of its class and a real game changer for Princess and soon to be delivered is Queen Anne, a new flagship for Cunard and its first new ship in 14 years. Of course, as you've heard me say before, we do not need new ships to increase yield as we continue to position our brands to drive demand in excess of supply and address the unreasonable value gap to land-based alternatives. We are also continuing to invest in the existing fleet with AIDA evolution, the largest modernization program in that brand history. The planned enhancements to the guest experience are designed to deliver a meaningful revenue uplift across the brand while further reducing its environmental footprint and bolster the performance of one of our highest-returning brands.
And speaking of brands that truly outperform, we are also continuing to strategically invest in growth for Carnival Cruise Line. Celebration Key, our exclusive destination purpose-built for that brand's target guest is really starting to capture the imagination as they launched a new marketing campaign right in the heart of wave season. Although early days Celebration Key is already delivering an initial halo for bookings in the second half of 2025 across 18 Carnival Cruise Line ships departing from 10 home ports. We also announced the second phase of development for Celebration Key with a peer extension that can berth two additional ships in future years, further leveraging what will be a best-in-class asset for us. We expect ticket revenue uplift from this incredible destination as the guest experience delivers unmatched funds as well as incremental in-port spending.
And this will be coupled with cost benefits driven by considerable fuel savings as it will be the closest destination of our seven owned and operated ports in the Caribbean. This destination is designed to support the continued growth plan for Carnival Cruise Line, including the two recently announced additions to its highly successful Excel-class for delivery in 2027 and 2028. All of these investments demonstrate our disciplined capital allocation strategy. We continue to prioritize our investments towards our highest returning brands and biggest opportunities. This includes investments to reduce our carbon footprint, which will not only have a measurable impact on the environment, but also improve our bottom line. Our strategic investment in advertising is also paying dividends, driving demand across our portfolio with several new campaigns launched during wave.
In fact, our web visits are up over a very strong 2023 with increases in both natural search and paid search. We increased our advertising efforts around our strategic foothold in Alaska. Alaska has long been the lifeblood for both Princess and Holland America, and they have launched new campaigns to build even greater awareness for our unmatched land-sea experiences. This initiative isn't just US based. We have stepped up our marketing efforts across Europe with new campaigns for all our major European brands. AIDA's new campaign, Experience Yourself Differently launched in Germany to rave reviews, P&O Cruises' new campaign, Holiday Like Never Before, really hit home with its British guest base. And Costa's newly released campaign focusing on moments where guests are left speechless, has been met with much success in its core markets of Italy, France and Spain.
These campaigns have contributed to the continued strength of our European brands, which has been a meaningful driver of our improved outlook. It is particularly rewarding to see our European brands flexing their muscles across their core European deployments. It is a real testament to the strength of our portfolio. The outperformance we've experienced this quarter has been a continuation of the strong demand we've been experiencing for all our core deployments. The Caribbean, Alaska and Europe have all helped deliver over a point of incremental yield improvement. This more than offsets the impact of the Red Sea rerouting as well as changes in the price of fuel and currency exchange rates since our last update. It has also enabled us to raise our full-year guidance for EBITDA and net income.
Our improving operational performance coupled with excess liquidity and the lowest order book in decades leaves us well positioned to continue to opportunistically manage down debt and interest expense while reducing the complexity of our capital structure. This is very much aligned with our return to investment grade credit over time and our treasury team has been quick to capitalize on this trajectory with an ongoing stream of well-executed transactions to strengthen our balance sheet. With the vast majority of this year's business now booked, we have even more conviction in delivering record revenues and EBITDA, along with a step change improvement in operating performance lasting well beyond 2024. While we continue to optimize yield on the limited inventory we have remaining and still manage down costs, we have been turning more of our attention to delivering an even stronger 2025.
We're gaining traction on improvements across the commercial space along our path of continued margin enhancement and increased returns. Again, I would like to thank our team members, ship and shore, the best in all of travel and leisure for delivering unforgettable happiness to another 3 million guests this past quarter by providing them with extraordinary cruise vacations. Of course, we couldn't do it without the support from our travel agent partners and so many other stakeholders. With that, I'll turn the call over to David.
David Bernstein: Thank you, Josh. I'll start today with a summary of our 2024 first-quarter results. Next, I will provide a couple of highlights about our second quarter and some color on our improved full-year March guidance. Then I'll finish up with an update on our refinancing and deleveraging efforts. Let's turn to the summary of our first quarter results. Our bottom line exceeded December guidance by $100 million as we outperformed once again. The improvement was essentially driven by two things, favorability in revenue from higher ticket prices as yields were up over 17%, nearly three-quarters of a point better than December guidance worth almost $30 million, while cruise costs without fuel per available lower berth day or ALBD came in over two points better than December guidance due to the timing of expenses between the quarters, which was worth over $50 million.
Per diems improved 5% with improvements on both sides of the Atlantic driven by considerably higher ticket prices. At the same time, we saw outsized growth in occupancy of nearly 20 percentage points at our European brands on their path back to historical occupancy. Our North American brands of occupancy grew strong mid-single digits. The difference in occupancy growth on the two sides of the Atlantic resulted in a sizable mix impact on our consolidated onboard revenue per diems since as we have discussed in the past, our North American brand customers naturally spend more on board than their European counterparts. However, the underlying fact is that we saw an increase in onboard revenue per diems on both sides of the Atlantic, driven in part by the acceleration of strong pre-cruise sales growth.
In fact, we saw a continuation of strong consumer behavior by guests onboarders trips, much like our booking trends this past quarter. As Josh indicated, first quarter was fantastic across the board with strong demand for our brands delivering record revenues, record yields and record per diems. Before I discuss our second quarter and full year guidance, I would like to add that given the timing of yesterday's events in Baltimore that Josh mentioned, our guidance does not include the current estimated impact of up to $10 million for the full year 2024 from the temporary change in homeport. Now a couple of things to highlight about our second quarter March guidance. The positive trends we saw in the first quarter are expected to continue in the second.
Yield guidance for the second quarter is set at a strong 10.5%. The difference between the yield guidance for the second quarter and the first quarter yield improvement of over 17% is simply the result of the greater opportunity we had in occupancy in the first quarter 2024. With the improving trends we experienced during the first half of last year, 2023 second quarter occupancy was already seven percentage points higher than the first quarter. In addition, I did want to point out that nearly three-quarters of the full-year impact from the Red Sea rerouting is expected to occur in the second quarter with the remainder expected in the fourth quarter. Turning to our improved full-year March guidance. We are now forecasting a capacity increase of 4.5% compared to 2023.
March guidance for net income of $1.28 billion is an $80 million improvement over our December guidance. The improvement was driven by two things, more than a point increase in yields to approximately 9.5% based on the considerably higher prices we have seen in booking trends so far this year and the continued strength in demand we anticipate going forward worth about $200 million. In addition, we are forecasting a collective improvement in all our cost lines, excluding fuel of over $50 million, including an improvement in cruise costs without fuel. This improvement of over $250 million is partially offset by the Red Sea rerouting impact of $130 million and the net impact from higher fuel price and currency of almost $45 million. The strong 9.5% improvement in 2024 yields is a result of an increase in all the component parts, higher ticket prices, higher onboard spending and higher occupancy at historical levels with all component parts improving on both sides of the Atlantic.
I did want to point out that cruise costs, excluding fuel is expected to be better than December guidance due in part to cost savings related to Red Sea rerouting as certain ships reposition without guest as well as other efficiencies we identified that are included in our March guidance. While absolute costs are lower, the change in cruise costs without fuel per available lower berth day of 0.5 point from December to March guidance is simply the math of spreading all costs over the lower ALBDs resulting from the Red Sea rerouting as certain ships reposition without guests. We recognize that even within our industry-leading cost structure, there are opportunities which we can focus on and harvest over time. A great example is our Maritime Asset Strategy Transformation system, or what we refer to internally as MAST.
As previously mentioned, MAST is a centralized system developed to optimize the management of equipment and machinery across all brands and all our ships. As we continue to roll-out MAST, it 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 costs from unplanned maintenance over time. I will finish up with a summary of our refinancing and deleveraging efforts. During the first quarter, we generated cash from operations of $1.8 billion and free cash flow of $1.4 billion. We took delivery of two spectacular new ships and utilized two export credit facilities, continuing our strategy to finance our new build program at preferential interest rates.
Also during the quarter, we successfully extended the maturity of our forward starting revolving credit facility by two years to August 2027 and upsized the borrowing capacity by $400 million, bringing the total commitment to $2.5 billion. We will continue to look for opportunities to upsize the facility through its accordion feature that allows us to add new banks and grow the commitment. Our efforts to proactively manage our debt profile continue throughout the quarter between open market repurchases early in the quarter and then our call of the remaining 9.9% second priority secured notes, we redeemed over $600 million of debt, removing the secured second lien layer from our capital structure. In addition to our second lien notes, we were able to repurchase almost $400 million of debt at a discount, adding power to our deleveraging efforts.
We expect to continue our open market repurchase program on an opportunistic basis. We will continue to call some of our existing debt. In fact, yesterday we prepaid our $837 million euro term loan due in 2025 removing higher-than-average interest rate debt and another secured instrument from our capital structure. This further demonstrates our commitment to an investment-grade balance sheet. Our leverage metrics will continue to improve throughout 2024 as our EBITDA continues to grow and our debt levels improve. Using our March guidance EBITDA of $5.63 billion, we expect a two-turn improvement in net debt to EBITDA leverage positioning us more than halfway down the path to investment grade metrics. In summary, continued execution coupled with strengthening demand for our brands is driving increased confidence in our ongoing performance.
We are pleased this has been recognized by S&P and Moody's with their recent upgrades as well as by our banking partners with their recent upsizing and two-year extension of our revolving credit facility. Looking forward, over the next several years, substantial free cash flow will significantly reduce our leverage, moving us further down the road to rebuilding our financial fortress, while continuing the process of transferring value from debt holders back to shareholders. Now, operator, let's open the call for questions.
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