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 incurred during 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 geopolitical uncertainty, war and other military actions, 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 as well as negative impacts to 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-money laundering, anti-corruption, economic sanctions, trade protection, labor and employment, and tax may be costly and 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 targets, goals, aspirations, initiatives, and our public statements and disclosures regarding them, including those that are related to sustainability matters, 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. 21 Table of Contents • 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. • 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. • 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. • Our substantial debt could adversely affect our financial health and operating flexibility. 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. Our results are also impacted by ships being taken out-of-service for planned maintenance, which we schedule during non-peak seasons. In addition, substantially all of Holland America Princess Alaska Tours’ revenue and operating income is generated from May through September in conjunction with Alaska’s cruise season. Known Trends and Uncertainties • We believe the volatility in the price of fuel and foreign currency exchange rates are reasonably likely to impact our profitability. • We believe a global minimum tax could affect us in 2026, with the potential for a one-year deferral. Prior to any mitigating actions, we believe the annual impact could be approximately $200 million. We continue to evaluate the impact of these rules and are currently evaluating a variety of mitigating actions to minimize the impact. The application of the rules continues to evolve, and its outcome may alter our tax obligations in certain countries in which we operate. 22 Table of Contents • We believe the increasing global focus on climate change, including the reduction of greenhouse gas emissions and new and evolving regulatory requirements, is reasonably likely to have a material negative impact on our future financial results. We became subject to the EU ETS on January 1, 2024, which includes a three-year phase-in period. The impact in 2024 will be approximately $50 million. Statistical Information Three Months Ended February 29/28, 2024 2023 Passenger Cruise Days (“PCDs”) (in millions) (a) 23.5 20.2 Available Lower Berth Days (“ALBDs”) (in millions) (b) (c) 23.0 22.1 Occupancy percentage (d) 102 % 91 % Passengers carried (in millions) 3.0 2.7 Fuel consumption in metric tons (in millions) 0.7 0.7 Fuel consumption in metric tons per thousand ALBDs 31.8 33.4 Fuel cost per metric ton consumed (excluding European Union Allowance (“EUA”)) $ 686 $ 730 EUA cost per metric ton of emissions $ 81 $ — EUA expense (in millions) $ 3 $ — Currencies (USD to 1) AUD $ 0.66 $ 0.69 CAD $ 0.74 $ 0.74 EUR $ 1.09 $ 1.07 GBP $ 1.27 $ 1.22 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) For the three months ended February 29, 2024 compared to the three months ended February 28, 2023, we had a 4.2% capacity increase in ALBDs comprised of a 3.1% capacity increase in our NAA segment and a 6.1% capacity increase in our Europe segment. Our NAA segment’s capacity increase was caused by the impacts from: • One Carnival Cruise Line 4,090-passenger capacity ship transferred from Costa Cruises and entered into service in May 2023 • One Seabourn 260-passenger capacity ship that entered into service in July 2023 • One Carnival Cruise Line 5,360-passenger capacity ship that entered into service in December 2023 • One Princess Cruises 4,310-passenger capacity ship that entered into service in February 2024 The increase in our NAA segment’s capacity was partially offset by more ship dry-dock days in 2024 compared to 2023. Our Europe segment’s capacity increase was caused by the impacts from: • The return to service of two ships as part of the completion of our return to guest cruise operations • One P&O Cruises (UK) 5,280-passenger capacity ship that entered into service in December 2022 23 Table of Contents The increase in our Europe segment’s capacity was partially offset by the impacts from: • One Costa Cruises 4,090-passenger capacity ship that was transferred to Carnival Cruise Line in March 2023 • One AIDA Cruises 1,270-passenger capacity ship removed from service in November 2023 • One Costa Cruises 4,240-passenger capacity ship that was transferred to Carnival Cruise Line in February 2024 and is scheduled to enter service in April 2024 (d) 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. Three Months Ended February 29, 2024 (“2024”) Compared to Three Months Ended February 28, 2023 (“2023”) Revenues Consolidated Passenger ticket revenues made up 67% of our 2024 total revenues. Passenger ticket revenues increased by $747 million, or 26%, to $3.6 billion in 2024 from $2.9 billion in 2023. This increase was caused by: • $352 million - 12% increase in occupancy • $252 million - increase in passenger ticket revenues driven by continued strength in demand, which drove ticket prices higher • $120 million - 4.2% capacity increase in ALBDs • $32 million - net favorable foreign currency translational impact The remaining 33% of 2024 total revenues was comprised of onboard and other revenues, which increased by $227 million, or 15%, to $1.8 billion in 2024 from $1.6 billion in 2023. This increase was principally due to: • $147 million - 12% increase in occupancy • $56 million - 4.2% capacity increase in ALBDs NAA Segment Passenger ticket revenues made up 63% of our NAA segment’s 2024 total revenues. Passenger ticket revenues increased by $376 million, or 20%, to $2.3 billion in 2024 from $1.9 billion in 2023. This increase was caused by: • $216 million - increase in passenger ticket revenues driven by continued strength in demand, which drove ticket prices higher • $123 million - 6.5% increase in occupancy • $59 million - 3.1% capacity increase in ALBDs The remaining 37% of our NAA segment’s 2024 total revenues were comprised of onboard and other revenues, which increased by $120 million, or 10%, to $1.3 billion in 2024 compared to $1.2 billion in 2023. This increase was substantially all due to: • $77 million - 6.5% increase in occupancy • $37 million - 3.1% capacity increase in ALBDs Europe Segment Passenger ticket revenues made up 77% of our Europe segment’s 2024 total revenues. Passenger ticket revenues increased by $373 million, or 38%, to $1.4 billion in 2024 compared to $1.0 billion in 2023. 24 Table of Contents This increase was substantially all due to: • $230 million - 23% increase in occupancy • $61 million - 6.1% capacity increase in ALBDs • $36 million - increase in passenger ticket revenues driven by continued strength in demand, which drove ticket prices higher • $34 million - net favorable foreign currency translational impact The remaining 23% of our Europe segment’s 2024 total revenues were comprised of onboard and other revenues, which increased by $102 million, or 34%, to $404 million in 2024 from $302 million in 2023. This increase was principally due to: • $70 million - 23% increase in occupancy • $19 million - 6.1% capacity increase in ALBDs Costs and Expenses Consolidated Operating costs and expenses increased by $394 million, or 12%, to $3.7 billion in 2024 from $3.3 billion in 2023. This increase was driven by: • $134 million - 4.2% capacity increase in ALBDs • $126 million - higher commissions, transportation costs, and other expenses driven by higher commission on increased ticket pricing and an increase in the number of guests • $72 million - 12% increase in occupancy • $43 million - higher onboard and other cost of sales driven by higher onboard revenues • $30 million - higher repair and maintenance expenses (including dry-dock expenses) • $25 million - net unfavorable foreign currency translational impact • $25 million - higher port expenses These increases were partially offset by $52 million of lower fuel expenses. Selling and administrative expenses increased by $101 million, or 14%, to $813 million in 2024 from $712 million in 2023. This increase was caused by an increase in advertising costs and administrative expenses, which includes an increase in compensation costs. NAA Segment Operating costs and expenses increased by $213 million, or 9.7%, to $2.4 billion in 2024 from $2.2 billion in 2023. This increase was driven by: • $68 million - 3.1% capacity increase in ALBDs • $47 million - higher commissions, transportation costs, and other expenses driven by higher commission on increased ticket pricing and an increase in the number of guests • $44 million - higher repair and maintenance expenses (including dry-dock expenses) • $26 million - higher onboard and other cost of sales driven by higher onboard revenues • $26 million - 6.5% increase in occupancy • $20 million - higher port expenses These increases were partially offset by $30 million of lower fuel expenses. Selling and administrative expenses increased by $62 million, or 14%, to $502 million in 2024 from $440 million in 2023. This increase was caused by an increase in advertising costs and administrative expenses, which includes an increase in compensation costs. 25 Table of Contents Europe Segment Operating costs and expenses increased by $173 million, or 16%, to $1.3 billion in 2024 from $1.1 billion in 2023. This increase was caused by: • $79 million - higher commissions, transportation costs, and other expenses driven by an increase in the number of guests • $66 million - 6.1% capacity increase in ALBDs • $45 million - 23% increase in occupancy • $27 million - net unfavorable foreign currency translational impact • $17 million - higher onboard and other cost of sales driven by higher onboard revenues These increases were partially offset by: • $22 million - lower fuel expenses • $14 million - lower repair and maintenance expenses (including dry-dock expenses) Selling and administrative expenses increased by $21 million, or 10%, to $234 million in 2024 from $213 million in 2023. This increase was caused by an increase in advertising costs and administrative expenses, which includes an increase in compensation costs. Operating Income (Loss) Our consolidated operating income (loss) increased by $447 million to $276 million in 2024 from $(172) million in 2023. Our NAA segment’s operating income (loss) increased by $187 million to $272 million in 2024 from $86 million in 2023, and our Europe segment’s operating income (loss) increased by $286 million to $119 million in 2024 from $(166) million in 2023. These changes were primarily due to the reasons discussed above. Nonoperating Income (Expense) Interest expense, net of capitalized interest, decreased by $68 million, or 13%, to $471 million in 2024 from $539 million in 2023. The decrease was caused by a decrease in total debt. Debt extinguishment costs were $33 million in 2024 as a result of debt transactions occurring during the current period. Liquidity, Financial Condition and Capital Resources As of February 29, 2024, we had $5.2 billion of liquidity including $2.2 billion of cash and cash equivalents and $3.0 billion of borrowings available under our Revolving Facility, which matures in August 2024, at which point it will be replaced by the $2.5 billion New Revolving Facility available through August 2027. We will continue to pursue various opportunities to repay portions of our existing indebtedness and refinance future debt maturities to extend maturity dates and reduce interest expense. Refer to Note 3 - “Debt” of the consolidated financial statements and Funding Sources below for additional details. We had a working capital deficit of $7.9 billion as of February 29, 2024 compared to a working capital deficit of $6.2 billion as of November 30, 2023. The increase in working capital deficit was primarily due to an increase in customer deposits and the current portion of long-term debt as well as a decrease in prepaid expenses and other. 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 on our balance sheet 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 $6.6 billion and $6.1 billion of customer deposits as of February 29, 2024 and November 30, 2023, 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 capped reserve fund in cash. In addition, we have a relatively low level of accounts receivable and limited investment in inventories. 26 Table of Contents Sources and Uses of Cash Operating Activities Our business provided $1.8 billion of net cash flows from operating activities during the three months ended February 29, 2024, an increase of $1.4 billion, compared to $0.4 billion provided for the same period in 2023. This was driven by an increase in net cash provided by operating activities and an increase in cash provided by the release of substantially all credit card reserves (included in the change in prepaid expenses and other assets). Investing Activities During the three months ended February 29, 2024, net cash used in investing activities was $2.2 billion. This was driven by: • Capital expenditures of $1.7 billion for our ongoing new shipbuilding program • Capital expenditures of $0.4 billion for ship improvements and replacements, information technology and buildings and improvements During the three months ended February 28, 2023, net cash used in investing activities was $1.0 billion. This was driven by: • Capital expenditures of $0.8 billion for our ongoing new shipbuilding program • Capital expenditures of $0.2 billion for ship improvements and replacements, information technology and buildings and improvements • Proceeds from sale of ships of $23 million Financing Activities During the three months ended February 29, 2024, net cash provided by financing activities of $0.2 billion was caused by: • Repayments of $1.4 billion of long-term debt • Debt issuance costs of $77 million • Debt extinguishment costs of $31 million • Issuances of $1.7 billion of long-term debt During the three months ended February 28, 2023, net cash provided by financing activities of $0.1 billion was caused by: • Issuances of $0.8 billion of long-term debt • Repayments of $0.7 billion of long-term debt • Payments of $40 million related to debt issuance costs Funding Sources As of February 29, 2024, we had $5.2 billion of liquidity including $2.2 billion of cash and cash equivalents and $3.0 billion of borrowings available under our Revolving Facility, which matures in August 2024, at which point it will be replaced by the New Revolving Facility available through August 2027. Refer to Note 3 - “Debt” of the consolidated financial statements for additional discussion. In addition, we had $2.8 billion of undrawn export credit facilities to fund ship deliveries planned through 2027. 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) 2024 2025 2026 2027 Future export credit facilities at February 29, 2024 $ 0.6 $ 0.7 $ — $ 1.4 Our export credit facilities contain various financial covenants as described in Note 3 - “Debt”. At February 29, 2024 , 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. 27 Table of Contents