Carnival Corp Ltd. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . Cautionary Note Concerning Factors That May Affect Future Results Some of the statements, estimates or projections contained in this document are “forward-looking statements” that involve risks, uncertainties and assumptions with respect to us, including some statements concerning future results, operations, outlooks, plans, goals, reputation, cash flows, liquidity and other events which have not yet occurred. These statements are intended to qualify for the safe harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are statements that could be deemed forward-looking. These statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and the beliefs and assumptions of our management. We have tried, whenever possible, to identify these statements by using words like “will,” “may,” “could,” “should,” “would,” “believe,” “depends,” “expect,” “goal,” “aspiration,” “anticipate,” “forecast,” “project,” “future,” “intend,” “plan,” “estimate,” “target,” “indicate,” “outlook,” and similar expressions of future intent or the negative of such terms. Forward-looking statements include those statements that relate to our outlook and financial position including, but not limited to, statements regarding: • Pricing • Adjusted net income (loss) • Booking levels • Adjusted EBITDA • Occupancy • Adjusted earnings per share • Interest, tax and fuel expenses • Adjusted free cash flow • Currency exchange rates • Net per diems • Goodwill, ship and trademark fair values • Net yields • Liquidity and credit ratings • Adjusted cruise costs per ALBD • Investment grade leverage metrics • Adjusted cruise costs excluding fuel per ALBD • Estimates of ship depreciable lives and residual values • Adjusted return on invested capital Because forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by our forward-looking statements. This note contains important cautionary statements of the known factors that we consider could materially affect the accuracy of our forward-looking statements and adversely affect our business, results of operations and financial position. Additionally, many of these risks and uncertainties are currently, and in the future may continue to be, amplified by our substantial debt balance as a result of the pause of our guest cruise operations. There may be additional risks that we consider immaterial or which are unknown. These factors include, but are not limited to, the following: • Events and conditions around the world, including war and other military actions, such as the invasion of Ukraine, inflation, higher fuel prices, higher interest rates and other general concerns impacting the ability or desire of people to travel have led, and may in the future lead, to a decline in demand for cruises, impacting our operating costs and profitability. • Pandemics have in the past and may in the future have a significant negative impact on our financial condition and operations. • Incidents concerning our ships, guests or the cruise industry have in the past and may, in the future, negatively impact the satisfaction of our guests and crew and lead to reputational damage. • Changes in and non-compliance with laws and regulations under which we operate, such as those relating to health, environment, safety and security, data privacy and protection, anti-corruption, economic sanctions, trade protection, labor and employment, and tax have in the past and may, in the future, lead to litigation, enforcement actions, fines, penalties and reputational damage. • Factors associated with climate change, including evolving and increasing regulations, increasing global concern about climate change and the shift in climate conscious consumerism and stakeholder scrutiny, and increasing frequency and/or severity of adverse weather conditions could adversely affect our business. • Inability to meet or achieve our sustainability related goals, aspirations, initiatives, and our public statements and disclosures regarding them, may expose us to risks that may adversely impact our business. • Breaches in data security and lapses in data privacy as well as disruptions and other damages to our principal offices, information technology operations and system networks and failure to keep pace with developments in technology may adversely impact our business operations, the satisfaction of our guests and crew and may lead to reputational damage. • The loss of key team members, our inability to recruit or retain qualified shoreside and shipboard team members and increased labor costs could have an adverse effect on our business and results of operations. 26 Table of Contents • Increases in fuel prices, changes in the types of fuel consumed and availability of fuel supply may adversely impact our scheduled itineraries and costs. • We rely on supply chain vendors who are integral to the operations of our businesses. These vendors and service providers may be unable to deliver on their commitments, which could negatively impact our business. • Fluctuations in foreign currency exchange rates may adversely impact our financial results. • Overcapacity and competition in the cruise and land-based vacation industry may negatively impact our cruise sales, pricing and destination options. • Inability to implement our shipbuilding programs and ship repairs, maintenance and refurbishments may adversely impact our business operations and the satisfaction of our guests. • Failure to successfully implement our business strategy following our resumption of guest cruise operations would negatively impact the occupancy levels and pricing of our cruises and could have a material adverse effect on our business. We require a significant amount of cash to service our debt and sustain our operations. Our ability to generate cash depends on many factors, including those beyond our control, and we may not be able to generate cash required to service our debt and sustain our operations. The ordering of the risk factors set forth above is not intended to reflect our indication of priority or likelihood. Forward-looking statements should not be relied upon as a prediction of actual results. Subject to any continuing obligations under applicable law or any relevant stock exchange rules, we expressly disclaim any obligation to disseminate, after the date of this document, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based. Forward-looking and other statements in this document may also address our sustainability progress, plans and goals (including climate change and environmental-related matters). In addition, historical, current and forward-looking sustainability- and climate-related statements may be based on standards and tools for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions and predictions that are subject to change in the future and may not be generally shared. New Accounting Pronouncements Refer to Note 1 - “ General, Accounting Pronouncements ” of the consolidated financial statements for additional discussion regarding Accounting Pronouncements . Critical Accounting Estimates For a discussion of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that is included in the Form 10-K. Seasonality Our passenger ticket revenues are seasonal. Demand for cruises has been greatest during our third quarter, which includes the Northern Hemisphere summer months. This higher demand during the third quarter results in higher ticket prices and occupancy levels and, accordingly, the largest share of our operating income is typically earned during this period. The seasonality of our results also increases due to ships being taken out-of-service for maintenance, which we schedule during non-peak demand periods. In addition, substantially all of Holland America Princess Alaska Tours’ revenue and net income (loss) is generated from May through September in conjunction with Alaska’s cruise season. Known Trends and Uncertainties • We believe the increased cost of fuel and other related costs are reasonably likely to continue to impact our profitability in both the short and long-ter m. • We believe inflation and higher interest rates are reasonably likely to continue to impact our profitability. • We believe the increasing global focus on climate change, including the reduction of carbon emissions and new and evolving regulatory requirements, is reasonably likely to have a material negative impact on our future financial results. The full impact of climate change to our business is not yet known. 27 Table of Contents Statistical Information Three Months Ended May 31, Six Months Ended May 31, 2023 2022 2023 2022 Passenger Cruise Days (“PCDs”) (in millions) (a) 21.8 11.4 42.0 18.7 Available Lower Berth Days (“ALBDs”) (in millions) (b) 22.3 16.7 44.3 30.0 Occupancy percentage (c) 98 % 69 % 95 % 62 % Passengers carried (in millions) 3.0 1.7 5.7 2.7 Fuel consumption in metric tons (in millions) 0.7 0.6 1.5 1.2 Fuel consumption in metric tons per thousand ALBDs 32.5 37.9 33.0 40.0 Fuel cost per metric ton consumed $ 677 $ 869 $ 704 $ 765 Currencies (USD to 1) AUD $ 0.67 $ 0.73 $ 0.68 $ 0.72 CAD $ 0.74 $ 0.79 $ 0.74 $ 0.79 EUR $ 1.08 $ 1.08 $ 1.08 $ 1.11 GBP $ 1.23 $ 1.29 $ 1.23 $ 1.32 Notes to Statistical Information (a) PCD represents the number of cruise passengers on a voyage multiplied by the number of revenue-producing ship operating days for that voyage. (b) ALBD is a standard measure of passenger capacity for the period that we use to approximate rate and capacity variances, based on consistently applied formulas that we use to perform analyses to determine the main non-capacity driven factors that cause our cruise revenues and expenses to vary. ALBDs assume that each cabin we offer for sale accommodates two passengers and is computed by multiplying passenger capacity by revenue-producing ship operating days in the period. (c) Occupancy, in accordance with cruise industry practice, is calculated using a numerator of PCDs and a denominator of ALBDs, which assumes two passengers per cabin even though some cabins can accommodate three or more passengers. Percentages in excess of 100% indicate that on average more than two passengers occupied some cabins. 28 Table of Contents Results of Operations Consolidated Three Months Ended May 31, Six Months Ended May 31, (in millions) 2023 2022 Change 2023 2022 Change Revenues Passenger ticket $ 3,141 $ 1,285 $ 1,856 $ 6,011 $ 2,158 $ 3,853 Onboard and other 1,770 1,116 654 3,332 1,866 1,466 4,911 2,401 2,510 9,343 4,024 5,319 Operating Costs and Expenses Commissions, transportation and other 619 325 294 1,274 576 698 Onboard and other 549 314 235 1,033 523 510 Payroll and related 601 533 68 1,183 1,038 145 Fuel 489 545 (56) 1,024 910 114 Food 325 191 134 636 327 309 Ship and other impairments — — — — 8 (8) Other operating 875 774 101 1,619 1,331 287 Cruise and tour operating expenses 3,457 2,683 774 6,768 4,713 2,055 Selling and administrative 736 619 118 1,448 1,149 299 Depreciation and amortization 597 572 25 1,179 1,126 52 4,791 3,874 917 9,394 6,988 2,406 Operating Income (Loss) 120 (1,473) 1,593 (52) (2,964) 2,913 Nonoperating Income (Expense) Interest income 69 6 62 124 9 115 Interest expense, net of capitalized interest (542) (370) (172) (1,082) (738) (343) Gain (loss) on debt extinguishment, net (31) — (31) (31) — (31) Other income (expense), net (17) 6 (23) (47) (26) (21) (522) (358) (164) (1,036) (755) (281) Income (Loss) Before Income Taxes $ (402) $ (1,831) $ 1,430 $ (1,087) $ (3,719) $ 2,632 NAA Three Months Ended May 31, Six Months Ended May 31, (in millions) 2023 2022 Change 2023 2022 Change Revenues Passenger ticket $ 2,041 $ 862 $ 1,180 $ 3,933 $ 1,447 $ 2,486 Onboard and other 1,314 804 510 2,501 1,345 1,156 3,355 1,666 1,689 6,434 2,792 3,642 Operating Costs and Expenses 2,282 1,768 514 4,471 3,055 1,415 Selling and administrative 435 366 68 875 710 165 Depreciation and amortization 374 353 21 738 687 50 3,091 2,487 603 6,083 4,453 1,630 Operating Income (Loss) $ 265 $ (821) $ 1,086 $ 351 $ (1,661) $ 2,012 29 Table of Contents Europe Three Months Ended May 31, Six Months Ended May 31, (in millions) 2023 2022 Change 2023 2022 Change Revenues Passenger ticket $ 1,112 $ 490 $ 622 $ 2,104 $ 832 $ 1,273 Onboard and other 353 175 178 655 291 364 1,465 666 800 2,759 1,123 1,637 Operating Costs and Expenses 1,101 848 252 2,179 1,546 633 Selling and administrative 222 175 47 436 352 84 Depreciation and amortization 169 179 (10) 338 359 (21) 1,492 1,202 290 2,952 2,257 696 Operating Income (Loss) $ (27) $ (536) $ 510 $ (193) $ (1,134) $ 941 The effects of the pause in guest cruise operations in March 2020 and subsequent resumption of our guest cruise operations, inflation, higher fuel prices, higher interest rates and fluctuations in foreign currency rates are collectively having a material negative impact on all aspects of our business, including our results of operations, liquidity and financial position. We have a substantial debt balance and require a significant amount of cash to service our debt and sustain our operations. Our ability to generate cash will be affected by our ability to successfully implement our business strategy, which includes increasing our occupancy levels and pricing of our cruises, as well as general macroeconomic, financial, geopolitical, competitive, regulatory and other factors beyond our control. The full extent of these impacts is uncertain and may be amplified by our substantial debt balance. Three Months Ended May 31, 2023 (“2023”) Compared to Three Months Ended May 31, 2022 (“2022”) Revenues Consolidated Cruise passenger ticket revenues made up 64% of our total revenues in 2023 while onboard and other revenues made up 36%. Revenues in 2023 increased by $2.5 billion to $4.9 billion from $2.4 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our full fleet was serving guests as of May 31, 2023, compared to 86% as of May 31, 2022. ALBDs increased to 22.3 million in 2023 as compared to 16.7 million in 2022. Occupancy for 2023 was 98% compared to 69% in 2022. NAA Segment Cruise passenger ticket revenues made up 61% of our NAA segment’s total revenues in 2023 while onboard and other cruise revenues made up 39%. NAA segment revenues in 2023 increased by $1.7 billion to $3.4 billion from $1.7 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our NAA segment’s full fleet was serving guests as of May 31, 2023, compared to 90% as of May 31, 2022. ALBDs increased to 13.7 million in 2023 as compared to 10.1 million in 2022. Occupancy for 2023 was 102% compared to 79% in 2022. Europe Segment Cruise passenger ticket revenues made up 76% of our Europe segment’s total revenues in 2023 while onboard and other cruise revenues made up 24%. Europe segment revenues in 2023 increased by $0.8 billion to $1.5 billion from $0.7 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our Europe segment’s full fleet was serving guests as of May 31, 2023 , compared to 81% as of May 31, 2022. ALBDs increased to 8.5 million in 2023 as compared to 6.6 million in 2022. Occupancy for 2023 was 91% compared to 53% in 2022. Operating Cost and Expenses Consolidated 30 Table of Contents Operating costs and expenses increased by $0.8 billion to $3.5 billion in 2023 from $2.7 billion in 2022. These increases were driven by our resumption of guest cruise operations, an increase in ships in service and considerably higher occupancy. Fuel costs decreased by $56 million to $489 million in 2023 from $545 million in 2022. $137 million of this decrease was caused by a decrease in fuel prices and changes in fuel mix of $189 per metric ton consumed in 2023 compared to 2022, partially offset by $80 million from higher fuel consumption of 0.1 million metric tons, due to the resumption of guest cruise operations. Selling and administrative expenses increased by $118 million to $736 million in 2023 from $619 million in 2022. The increase was caused by higher administrative expenses and advertising costs incurred as part of our resumption of guest cruise operations. The drivers in changes in costs and expenses for our NAA and Europe segments are the same as those described for our consolidated results. Nonoperating Income (Expense) Interest expense, net of capitalized interest, increased by $172 million to $542 million in 2023 from $370 million in 2022. The increase was caused by a higher average interest rate in 2023 compared to 2022. Six Months Ended May 31, 2023 (“2023”) Compared to Six Months Ended May 31, 2022 (“2022”) Revenues Consolidated Cruise passenger ticket revenues made up 64% of our total revenues in 2023 while onboard and other revenues made up 36%. Revenues in 2023 increased by $5.3 billion to $9.3 billion from $4.0 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our full fleet was serving guests as of May 31, 2023 , compared to 86% as of May 31, 2022. ALBDs increased to 44.3 million in 2023 as compared to 30.0 million in 2022. Occupancy for 2023 was 95% compared to 62% in 2022. NAA Segment Cruise passenger ticket revenues made up 61% of our NAA segment’s total revenues in 2023 while onboard and other cruise revenues made up 39%. NAA segment revenues in 2023 increased by $3.6 billion to $6.4 billion from $2.8 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our NAA segment’s full fleet was serving guests as of May 31, 2023, compared to 90% as of May 31, 2022. ALBDs increased to 27.6 million in 2023 as compared to 18.8 million in 2022. Occupancy for 2023 was 100% compared to 70% in 2022. Europe Segment Cruise passenger ticket revenues made up 76% of our Europe segment’s total revenues in 2023 while onboard and other cruise revenues made up 24%. Europe segment revenues in 2023 increased by $1.6 billion to $2.8 billion from $1.1 billion in 2022 due to the significant increase of ships in service and considerably higher occupancy levels in 2023 as compared to 2022. Our Europe segment’s full fleet was serving guests as of May 31, 2023 , compared to 81% as of May 31, 2022. ALBDs increased to 16.7 million in 2023 as compared to 11.2 million in 2022. Occupancy for 2023 was 85% compared to 50% in 2022. Operating Cost and Expenses Consolidated Operating costs and expenses increased by $2.1 billion to $6.8 billion in 2023 from $4.7 billion in 2022. These increases were driven by our resumption of guest cruise operations, an increase in ships in service and considerably higher occupancy. Fuel costs increased by $0.1 billion to $1.0 billion in 2023 from $0.9 billion in 2022. $0.2 billion of this increase was caused by higher fuel consumption of 0.3 million metric tons, due to the resumption of guest cruise operations, partially offset by $0.1 billion from a decrease in fuel prices and changes in fuel mix of $60 per metric ton consumed in 2023 compared to 2022. 31 Table of Contents Selling and administrative expenses increased by $0.3 billion to $1.4 billion in 2023 from $1.1 billion in 2022. The increase was caused by higher administrative expenses and advertising costs incurred as part of our resumption of guest cruise operations. The drivers in changes in costs and expenses for our NAA and Europe segments are the same as those described for our consolidated results. Nonoperating Income (Expense) Interest expense, net of capitalized interest, increased by $0.3 billion to $1.1 billion in 2023 from $0.7 billion in 2022. The increase was caused by a higher average interest rate in 2023 compared to 2022. Liquidity, Financial Condition and Capital Resources As of May 31, 2023, we had $7.3 billion of liquidity including cash and cash equivalents and borrowings available under our Revolving Facility. We will continue to pursue various opportunities to refinance future debt maturities and/or to extend the maturity dates associated with our existing indebtedness and obtain relevant financial covenant amendments or waivers, if needed. We had a working capital deficit of $5.6 billion as of May 31, 2023 compared to a working capital deficit of $3.1 billion as of November 30, 2022. The increase in working capital deficit was caused by an increase in customer deposits and an overall decrease in cash and cash equivalents and restricted cash. We operate with a substantial working capital deficit. This deficit is mainly attributable to the fact that, under our business model, substantially all of our passenger ticket receipts are collected in advance of the applicable sailing date. These advance passenger receipts generally remain a current liability until the sailing date. The cash generated from these advance receipts is used interchangeably with cash on hand from other sources, such as our borrowings and other cash from operations. The cash received as advanced receipts can be used to fund operating expenses, pay down our debt, make long-term investments or any other use of cash. Included within our working capital are $6.9 billion and $4.9 billion of customer deposits as of May 31, 2023 and November 30, 2022, respectively. We have agreements with a number of credit card processors that transact customer deposits related to our cruise vacations. Certain of these agreements allow the credit card processors to request, under certain circumstances, that we provide a reserve fund in cash. In addition, we have a relatively low level of accounts receivable and limited investment in inventories. Refer to Note 1 - “General, Liquidity and Management’s Plans ” of the consolidated financial statements for additional discussion regarding our liquidity. Sources and Uses of Cash Operating Activities Our business provided $1.5 billion of net cash flows from operating activities during the six months ended May 31, 2023, an increase of $2.7 billion, compared to $1.2 billion used for the same period in 2022. This was driven by a decrease in the net loss compared to the same period in 2022 and other working capital changes. Investing Activities During the six months ended May 31, 2023, net cash used in investing activities was $1.5 billion. This was driven by: • Capital expenditures of $1.1 billion for our ongoing new shipbuilding program • Capital expenditures of $649 million for ship improvements and replacements, information technology and buildings and improvements • Proceeds from sales of ships of $255 million During the six months ended May 31, 2022, net cash used in investing activities was $3.1 billion. This was driven by: • Capital expenditures of $2.6 billion for our ongoing new shipbuilding program • Capital expenditures of $581 million for ship improvements and replacements, information technology and buildings and improvements • Proceeds from sale of ships and other of $55 million • Purchases of short-term investments of $315 million • Proceeds from maturity of short-term investments of $364 million 32 Table of Contents Financing Activities During the six months ended May 31, 2023, net cash used in financing activities of $1.6 billion was driven by: • Repayments of $0.2 billion of short term-borrowings • Repayments of $2.3 billion of long-term debt • Issuances of $1.0 billion of long-term debt • Payments of $94 million related to debt issuance costs • Purchases of $20 million of Carnival plc ordinary shares and issuances of $22 million of Carnival Corporation common stock under our Stock Swap Program During the six months ended May 31, 2022, net cash provided by financing activities of $2.5 billion was caused by: • Issuances of $3.3 billion of long-term debt • Repayments of $0.7 billion of long-term debt • Payments of $110 million related to debt issuance costs • Net repayments of short-term borrowings of $114 million • Purchases of $82 million of Carnival plc ordinary shares and issuances of $89 million of Carnival Corporation common stock under our Stock Swap Program Funding Sources As of May 31, 2023, we had $7.3 billion of liquidity including $4.5 billion of cash and cash equivalents and $2.9 billion of borrowings available under our Revolving Facility, which matures in 2024. In February 2023, Carnival Holdings II entered into the New Revolving Facility, which may be utilized beginning in August 2024, at which date it will replace our Revolving Facility. Refer to Note 3 - “Debt” of the consolidated financial statements for additional discussion. In addition, we had $3.1 billion of undrawn export credit facilities to fund ship deliveries planned through 2025. We plan to use existing liquidity and future cash flows from operations to fund our cash requirements including capital expenditures not funded by our export credit facilities. We seek to manage our credit risk exposures, including counterparty nonperformance associated with our cash and cash equivalents, and future financing facilities by conducting business with well-established financial institutions, and export credit agencies and diversifying our counterparties. (in billions) 2023 2024 2025 Future export credit facilities at May 31, 2023 $ 0.1 $ 2.2 $ 0.7 Our export credit facilities contain various financial covenants as described in Note 3 - “Debt”. At May 31, 2023 , we were in compliance with the applicable covenants under our debt agreements. Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, certain derivative instruments and variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our consolidated financial statements.