Carnival Corp (CCL) Q1 2019 Earnings Conference Call Transcript

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Carnival Corp (NYSE:CCL)Q1 2019 Earnings Conference CallMarch 26, 2019, 10:00 a.m. ET

Contents:
Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:

Arnold Donald — President and Chief Executive Officer

Good morning, everyone, and welcome to our First Quarter 2019 Earnings Conference Call. I am Arnold Donald, President and CEO of Carnival Corporation and PLC. Today, I am 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.

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.

We delivered first quarter adjusted earnings per share of $0.49. That’s higher than the midpoint of December guidance by $0.07 per share and $0.03 per share lower than last year, which includes a $0.03 drag from fuel and currency.

For the full year, we are updating out adjusted earnings guidance range, previously $4.50 to $4.80, now $4.35 to $4.55, to reflect the significant drag from fuel and currency moving against us, impacting our full year by $155 million or $0.22 per share since the time of our December guidance.

Our guidance reflects continued improvement in operating performance and we are maintaining the operational guidance we gave for the year with an update for changes in fuel prices and currency. Included in the midpoint of our guidance is $0.25 per share earnings growth from operations over the prior year, which is a reflection of our 120,000 plus employees who go above and beyond every day, as well as hundreds of thousands of travel professionals who support our world-leading cruise brands.

It is their combined efforts that are helping us to once again withstand multiple headwinds, including cyclones in Australia, Brexit uncertainty in the UK, heightened political uncertainty in Germany and France, as well as ongoing economic malaise in much of Europe, including Italy. Despite those headwinds, Wave Season was consistent with the strength of demand we experienced going into the year, building further confidence in our full-year revenue expectations.

For our North American and Australia brands, NAA, our book position is ahead of the prior year at higher prices, while our EA brands are well ahead of the prior year at lower prices. Our brands are strong and growing, including continental Europe, where we continue to expect revenue growth driven by double-digit capacity increases.

We remain confident we are on a path that includes delivering, over time, double-digit earnings growth and elevated, sustained double-digit return on invested capital through a consistent strategy of creating demand in excess of measured capacity growth while leveraging our industry-leading scale.

While our strategy is consistent over time, the relative contribution from the components of our earnings model, as we have stated previously, may change a bit. Going forward, our earnings growth will include a higher contribution from capacity growth. That increase in capacity will lend itself to more predictable revenue growth and enable us to better contain costs, in essence, enhancing reliability of future earnings growth.

There are multiple factors that we put in place over the years to ensure sustained earnings growth and improvement in return on invested capital. For example, reducing our fuel exposure. This year, our unit fuel consumption will be down nearly 4%, bringing the cumulative unit fuel reduction to 33% compared to our 2007 baseline. Our ongoing efforts to leverage our scale through global sourcing has taken over $350 million of non-fuel costs out of the business so far.

A higher weighting of fixed rate debt at historically low rates reduces interest rate exposure. Our consistently strong balance sheet and credit rating ensures, through our access to $11 billion of committed export credit facilities, that we will be able to comfortably meet future capital needs while further heightening our relentless focus on driving continuous improvement in health, environment, safety, and security.

Of course, our ongoing new build program is integral to the growth in earnings and return on invested capital over time. Not only are our new builds, on average, roughly 15% to 25% more cost-efficient and approximately 25% to 30% more fuel-efficient, they also help to create further demand for cruising.

We are introducing several exciting new ships this year. We just took delivery of Costa Venezia, purposely designed to offer our Chinese guests the best of Italy. This ship introduces Italian culture and lifestyle with interiors inspired by the city of Venice, including authentic gondolas, retail shops featuring iconic Italian brands, and, of course, Italian cuisine, while at the same time offering many comforts of home, like Chinese-style karaoke and food options that are popular in China. This ship is currently on its maiden voyage along the Silk Route before beginning service in Shanghai from mid-May onward. Costa Venezia is just another step in the growth of a strong and sustainable cruise industry in China.

Late this year, we will welcome three more vessels to our portfolio of leading brands. Throughout the year, we are ramping up ahead of these deliveries and expect to reap the benefit in 2020.

In October, Sky Princess, the first new build activated with Medallion Class, blending many Princess hallmarks with new guest experience features, like Sky Suites, the largest balconies at sea, as well as a brand new jazz experience. Sky Princess is nearly sold out for this fall and booked 40 percentage points ahead for the winter Caribbean 2020, all at consistently higher rates.

Costa Smeralda, also expected to enter service late this year, was designed to celebrate the Sardinian culture, serving continental Europe, including Italy, France, and Spain. Booking trends for Costa Smeralda are also reflecting strong demand and capturing a double-digit price premium.

And last but not least, in December, Carnival Cruise Line will launch its new flagship, Carnival Panorama, their first new ship home-ported on the West Coast. Bookings are ahead more than double digits in both rate and occupancy in 2020 compared to the same itinerary in 2019. Our marketing efforts on the West Coast, including the Carnival AirShip in the Rose Parade, have generated over 1 billion media impressions and are attracting a broad audience, particularly those new to cruise.

Bookings for Mardi Gras, to be delivered in August 2020 and the first of the new generation of ships for the Carnival brand, were opened this past quarter. Mardi Gras generated record bookings for a new ship launch by the Carnival brand, with almost 10 times the number of bookings as the very strong Carnival Vista launch back in 2016 and with more than 65,000 guests pre-registering in advance of the inventory even opening. Overall, Carnival continues to outperform in the Caribbean, with bookings ahead in both occupancy and rate across all future quarters.

In April, we will welcome the totally transformed Carnival Sunrise after undergoing nearly a $200 million dry dock, adding all the culinary and entertainment experiences Fun Ship 2.0 is known for, such as Guy’s Pig & Anchor Barbecue Smokehouse and outdoor fun with SportSquare, WaterWorks, and Serenity adult-only retreat. All of these new features are resonating well with the brand’s guests, with bookings for Carnival Sunrise up double digits in both occupancy and price.

Rollout continues on OceanMedallion. The Medallion Class experience is now full-ship active on two vessels, with a third ready to go, but it’s still early. There are many features available through Ocean that guests have not yet become familiar with to take full advantage. While we continue to garner innovation accolades, including IoT Wearables Innovation of the Year and finalist for the prestigious Edison Awards, clearly the most important impact is on our guests and on our bottom line. And while it’s still early to determine the impact on earnings, guest satisfaction stores for Medallion Class are consistently among the highest in the Princess fleet.

Since the announcement of full activation on the two Princess ships late last year, we believe Medallion Class has garnered increased demand, which we expect will drive yield. Additional ships are expected to come online later this year, as Medallion Class expands across the Princess fleet. So, while early, indicators are very, very positive.

There were many marketing and public relations efforts that kicked off during Wave Season to generate demand in excess of measured capacity growth and continue our momentum. In the U.S., Holland America captured over 4 billion media impressions around Oprah’s Girls Getaway Cruise and the naming ceremony for Nieuw Statendam, with Oprah serving as godmother.

For Carnival cruise line, the new rollercoaster experience on Mardi Gras alone generated over 1 billion media impressions. Our award-winning proprietary television programs have now reached more than 525 million views cumulatively. One of the programs, Ocean Treks with Jeff Corwin, has just been nominated for two Emmys.

In Europe, Costa launched a new marketing program with Penelope Cruz, which has been well-received and is outperforming all previous brand campaigns.

All told, our brands captured 75% of the positive coverage for our industry so far this year, five times that of our closest peer.

We also made meaningful progress this past quarter putting our industry-leading scale to work. As you know, Yoda, our revenue management tool deployed on six of our brands, we believe will continue to drive incremental revenue, particularly in the second half of 2019 and beyond. On the cost side, we remain committed to delivering nearly a point of cost savings this year, helping to mitigate inflation and contributing to our cost guidance above just 50 basis points for the year.

Our fleet replenishment efforts are purposely designed to achieve greater economies. We will welcome 17 larger, more efficient ships and continue to divest our less efficient ships, representing net capacity growth of approximately 5% compounded annually through 2022.

We’ve been consistent with our execution around measured capacity growth. Overall, we operate in an industry that is both underpenetrated and capacity constrained, which bodes well for creating new demand in excess of capacity increases. That should allow us to continue to fill our ships at increasingly attractive rates while still providing a better value relative to the equivalent land-based alternatives.

During the quarter, we also completed additional share repurchases of $266 million, bringing the cumulative total to nearly $5 billion since 2015. The share repurchase, of course, is in addition to our recurring dividend distributions.

We remain on track to deliver our full-year guidance as we continue with sustained double-digit return on invested capital and continued growth in both earnings and returns over time. And we actually don’t need things to be very different in order to deliver sustained double-digit earnings growth. Even with minimal yield increases, the capacity we have coming online and the inherent efficiencies and scale advantages we gain from that capacity will help to contain costs and enable us to achieve double-digit earnings growth and elevated return on invested capital. Having said that, of course, we will continue to work to create excess demand over our measured capacity growth to produce even stronger results.

With that, I would like to turn the call to David.

David Bernstein — Chief Financial Officer

Thank you, Arnold. Before I begin, please note all of my references to revenue, ticket prices, and cost metrics will be in constant currency unless otherwise stated. I’ll start today with a summary of our 2019 first quarter results, then I’ll provide an update on current booking trends for the remaining three quarters of 2019, and finish up with some additional color on our 2019 March guidance.

As Arnold indicated, our adjusted EPS for the first quarter was $0.49. This was $0.07 above the midpoint of our December guidance. The improvement was driven by two things: $0.02 of favorability in net cruise revenue and $0.06 of favorability in net cruise costs without fuel and other expense items, mainly due to timing between the quarters. Both favorable items were partially offset by a $0.01 unfavorable net impact from fuel price and currency.

Now, let’s look at our first quarter operating results versus the prior year. Our capacity increased 4.1%. Our North American and Australia segment, more commonly known as our NAA brands, was up 5%, while our Europe and Asia segment, more commonly known as our EA brands, was up 2.5%. Our total net revenue yields were up 0.5%.

Now, let’s break apart the two components of net revenue yields. Net ticket yields were down 0.4%. Our NAA brands were flat while our EA brands were down 0.7%. Both segments had tough prior-year comparisons. However, I did want to note that Caribbean yields turned positive in the first quarter on an 8% capacity increase, also against tough prior-year comparisons. Net onboard and other yields increased 3.1%, with similar increases on both sides of the Atlantic.

In summary, our first quarter adjusted EPS was $0.03 lower than last year as a result of the net impact of fuel price and currency costing $0.03, with small operational pluses and minuses offsetting each other.

Turning to 2019 booking trends, as Arnold indicated, Wave Season was consistent with the strength in demand we experienced going into the year. Booking volumes for the remaining three quarters of 2019 have been running ahead of the prior year at prices that are in line with last year. Let’s not forget that this Wave Season activity is on top of two consecutive years of record Wave Seasons.

While prices on overall bookings during Wave Season are in line with the prior year, prices for our NAA brands were higher but were offset by our EA brands, driven by their sourcing in continental Europe. At this point in time, cumulative advanced bookings for the remaining three quarters of 2019 are ahead of the prior year at prices that are in line with last year.

Now, let’s drill down into the cumulative book position for 2019. Cumulative advanced bookings for our NAA brands are ahead of the prior year on both occupancy and price, driven by nicely higher prices in the Caribbean and the seasonal European program, while prices in Alaska are lower than last year’s record levels. Cumulative advanced bookings for our EA brands are well ahead of the prior year at lower prices, again driven by our EA brands’ sourcing in continental Europe.

During the last year, we have made revenue management decisions which we believe will optimize our net revenue yield growth for 2019. In fact, even with an overall 4.6% capacity increase, we have less inventory remaining for sale than we had at this time last year.

Finally, I want to provide you with some additional color on 2019. Our adjusted EPS guidance for 2019 is $4.35 to $4.55 versus $4.26 for 2018. The midpoint of our March guidance is $0.20 less than the midpoint of our December guidance, driven by the net impact of fuel price and currency costing $0.22. We expect higher fuel prices will cost us an additional $0.28, while we are forecasting to benefit from currency movement by $0.06. In addition, we flowed through the $0.02 revenue beat from the first quarter. All other operational changes were small and netted out.

One final note for those of you who are trying to forecast the remaining quarters of 2019. We expect most of the 2019 adjusted EPS improvement versus 2018 to occur in the third quarter, which has the easiest prior-year yield comparison. And now I’ll turn the call back over to Arnold.

Arnold Donald — President and Chief Executive Officer

Thank you, David. Operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you would like to register a question, please press “14” on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press “13”. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question.

Our first question comes from the line of Robin Farley with UBS. Please proceed.

Robin Farley — UBS — Analyst

Great. Thank you. And just had a question on the guidance. I think you had previously said that you expected Q2 yield growth would have been higher than Q1 yield growth. And I know Q1 came in higher than flat but Q2 guidance seems to not be ahead of the prior guidance either for Q1. I wonder if you could talk a little bit about — it sounded like the trends in Wave Season have been consistent and how you expected, but maybe it sounds like Q2 wasn’t as strong as what you had thought three months ago. Thank you.

Arnold Donald — President and Chief Executive Officer

Good morning, Robin. It’s good to see you in the front of the queue again.

Robin Farley — UBS — Analyst

I know. I work this thing.

David Bernstein — Chief Financial Officer

So, Robin, when we put together our December guidance, the numbers were relatively close. Some of it was driven, in the first quarter, by the improvement that we saw, a 3.1% increase in onboard and other revenue. Those numbers are very difficult to pinpoint each quarter. So, overall, we started out the year with about flat in the first half of the year. We beat the first quarter and we didn’t see anything changing significantly in the second quarter so we just maintained the flat yield guidance for the second quarter. The difference between the quarters is small and we’re just not that good for a half a point between the first quarter and the second quarter.

Robin Farley — UBS — Analyst

So, if the upside, though, in Q1 mostly came from the onboard, and obviously you don’t have the advanced visibility on that, is there anything about the itinerary differences or trends? Or are you just assuming that the onboard upside won’t happen in Q2 until you actually see it? Maybe is that how to think about it?

David Bernstein — Chief Financial Officer

Yeah. You know that, overall, for the year, I think I said in December, we guide to approximately 2% in onboard overall. The number isn’t exactly 2% by quarter but the overall is approximately 2%. And as I said before, it’s very difficult to say exactly what comes in. The itineraries in the markets are very different. There are lots of factors and programs we continue to roll out and we continue to see a strong demand in onboard revenue and we hope we can continue to do better in future quarters as well.

Arnold Donald — President and Chief Executive Officer

I think, Robin, just the overall guidance for the year just reinforces what we’ve seen so far. It just gives us confidence in the guidance we’ve given for the year and we certainly don’t see any weakening or anything like that, in terms of yield.

Robin Farley — UBS — Analyst

Okay. Great. Thank you.

Operator

Our next question comes from Steve Wieczynski with Stifel. Please proceed.

Steve Wieczynski — Stifel Nicolaus — Analyst

Yeah, hey, guys. Good morning. So, I guess the first question would be around Europe and maybe if you could help us think about that market today versus where you were back in December. And I guess what I’m getting at is have things over there gotten better, have they stayed the same, or have certain markets weakened? And then maybe, also, if you could talk about the promotional environment over there as well.

Arnold Donald — President and Chief Executive Officer

I think, first of all, as you know, we’v

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