Q4 2019 Earnings Call
Good morning, everyone and welcome to fourth quarter 2019 earnings Conference call.
Arnold Donald President and CEO Carnival Corporation, and PLD today, I'm 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 Forwardlooking. Therefore, I must refer you to the cautionary statements in today's press release.
First I sincerely. Thank the 150000 members of the Carnival family, who collectively work to offset numerous headwinds and still deliver memorable crews experiences for our 13 million guess as well as another year of record adjusted earnings per share for our shareholders.
We achieved fourth quarter adjusted earnings of 62 cents per share that's higher than the midpoint of our guidance by 14 cents per share.
We ended the year with full year adjusted earnings per share of 4040 cents.
Which is a new record for adjusted EPS, 3% better than last year's historical high.
Broadly in line with our capacity growth.
Hi, a plethora of negative events and circumstances.
With that said, we were disappointed not to deliver the level of earnings growth, we do plan to achieve overtime.
We believe our business is inherently capable of and we are working hard to ensure we are in fact doing even better.
After five years of very strong adjusted earnings growth for our company 29 team brought with it more than our fair share of challenges, including the abrupt regulatory change preventing travel to Cuba geopolitical events in Arabian Gulf Hurricane Dorian.
A costly on scheduled dry dock and multiple shipyard delays all of which necessitated the cancellation of cruises and in many instances resulted in a shorter booking windows negatively impacting yield.
Even though these unusual events where outside our direct control as always we go above and beyond to accommodate our guess who are an inconvenience providing them with generous credits toward their next crews Virgin.
In total we estimated these unusual event cost the company approximately 23 cents per share.
These events do have a tail effect going into 2020 and of course the impact from these events with compounded by an unanticipated decline and consumer attitude affecting leisure travel broadly in our continental European source market, especially Germany.
While quantifying the impact from macro conditions is always difficult the decline in revenue yield for our come in the European brands was worth approximately 30 cents per share for fiscal 2019, clearly without this downturn, we would have achieved double digit adjusted earnings per share growth even in the face of the higher number and scale of unusual.
Even.
Unfortunately, we do see a continuation of that environment in continental Europe into 2020.
As a global company with nearly 50% of our guess source from outside the U.S., we are subject to uneven economies around the world. We have a large percentage of our portfolio weighted in regions that are currently challenge and this will remain a headwind in 2020.
In Germany, we carry more than half of all crews get.
Either outperformed overall in that travel market with revenue up mid teens last year compared to a decline Volvo tour operator revenue over the same period.
Looking forward is entering a period of slower cruise industry supply growth in Germany, beginning in the second quarter.
We expect capacity growth either brand of just 5% next year and Thats down from 20% in 2019 that said, we expect yield challenges similar to 2019, given the ongoing headwinds which are impacting the entire leisure travel category in Germany.
Despite that difficult environment, either remains among the highest return on invested capital brands in our portfolio and our team. There has done an outstanding job growing demand for cruise given the environment.
In southern Europe , we have 13% capacity growth in the face of what is also a difficult travel environment. We've already taken actions to adapt to what is proving to be a persistent challenges there.
These actions include changes tied temporaries to optimize our performance by reducing exotic programs, replacing them with more convenient and affordable cruises closer to home eliminating the costly air component.
As previously announced we also implemented in action plans to accelerate demand and right size capacity source from southern Europe , very moving to shift from the cost of your fleet for fiscal 2020, bowels, but there in 2021.
The capacity of these three smaller ships will be somewhat offset by the delivery of the much more efficient cost the smaller Aldo so routers of first new ship deliver for cost in Europe in five years and has been well received by the market.
By accelerating our long term strategy to replace existing capacity with larger and more efficient vessels. We can improve return on invested capital for cost over time.
In the UK our brands have also outperformed the overall these are travel market and have grown revenue yields and profits in 2019, despite the ongoing uncertainty around Brexit.
And 2020, where again experiencing strong demand, particularly for Iona. The first new ship for our UK brand in five years and the largest ever purpose built shift for the UK.
I want to continues to book at a significant premium to our other UK ships on a comparable cruises now this has been somewhat muted in our overall projected 2020, UK performance by increasing overhang from Brexit that previously announced close and deployment changes due to the tensions in the Raven and go.
And our plan, but many dries out for the high yielding Queen Mary two.
Turning to North America, we're seeing a continuation of positive trends in 2020.
The Caribbean remains strong and occupancy in a yield growth overall for our brands and with even stronger without the continuing yield drag from future crews credits and the regulatory change in Cuba.
In Alaska, where yields remain high relative to other trades the industry as in the process of absorbing the 10% capacity increase in 2020 on top of last years, 15% increase while growing and profitable with our scale Alaska remains a year to year yield growth challenge that we are working hard to address.
We continue to focus on creating demand there, including some new approaches without travel agent partners as well as new consumer communications efforts, specifically targeted for Alaska.
Concerning other trades are brands collectively are deploying a number of innovative gas offerings to further stimulate demand.
We've conducted a deep dive analysis of our marketing activities and spend to drive demand in all the countries and brands. We operate now while we're pleased with our overall combine earned and purchase marketing share of voice, we found pockets of opportunity to increase marketing impressions to generate demand to support future year growth to that end.
Beginning in the fourth quarter of 29 team, we've increased investments in media spend leading into and including 2020 wave to support our brands that destinations around the world. We've also been successful an increase in our analytical rigor in marketing and in media spend to drive demand generation and to better balanced brands.
Port activities with price promotion efforts.
On the guest experience side, we continue to deliver both our guest experience scores and our net promoter scores or towards the top in a prior ranges with many hitting new highs, we're stepping up investments in the guest experience even further through the new build schedule, which peaks this year in 2020 with six.
New ships entering service across six distinct markets.
Before I mentioned cost us more out of Continental Europe , and piano island in the UK as well as Carnival Panorama. The first new ship Homeport a year round for the Carnival brand on the West coast in nearly 25 years and Enchanted Princess the second new ships delivered with Ocean medallion.
Toward the end of fiscal 2020, we will while commodity grades to carnival cruise lines on the east coast and cost difference to cost the Asia.
We continue to roll out our most popular features on our existing fleet with significant Reimagination like recently introduced Carnival Sunrise to be joined by Carnival radios in mid 2020 in the Princess fleet. The Ocean medallion rollout continues with five ships already completed and six more to be completed in 2012.
Yes.
And to facilitate onboard revenue growth the expansion of App based technology across our other brands continues including pre cruise purchases.
Concerning destination development, we have two major developments underway on Grand Bahama Island, and a second destination on half Moon key complementing the six destinations we had already developed in our operating in the Caribbean.
Importantly, we are elevating the guest experience without dramatically increasing operating costs and.
In fact, we achieved over $125 million of cost savings in 2019 through global sourcing, bringing the cumulative total to over $480 million. These efforts will continue in 2020.
And of course, our highest responsibility and therefore top priorities are excellent and safety environmental protection and compliance.
On the sustainability front, we achieved a 4% reduction in per unit fuel consumption in 2019, and we expect another 4% and 2020, which will bring the cumulative reduction in fuel consumption per lbd to 35%.
We continue to lead the industry in the development of environmentally friendly fuel solutions, we joined the getting to zero coalition and alliance of organizations across the maritime energy infrastructure finance sectors committed to accelerating the de carbonization of the international shipping industry.
Yes. This year, we delivered the first cruise ship to be solely power by LNG. The most environmentally friendly fossil fuel and just this month deliberate the second of the 11 LNG shifts we've ordered.
We're also making significant investment in fuel cell technology, and electrical energy storage capabilities, we announced a groundbreaking pilot on I eat apparel. The first lithium ion battery storage system to power, albeit for limited periods of time, a cruise ships propulsion and operations and as early as 2021 either.
Crews will be the world's first cruise company to test the use of fuel sales on a large passenger ship the fuel cells will be powered by hydrogen derived from ethanol.
These will complement our the industry, leading technology, we have already deployed to reduce emissions, including cold ironing.
Sure power, which we have the capability for on over 40% of our fleet and advanced their quality systems already deployed on nearly 80% of our fleet.
The investments we've made an advanced air quality systems also helps to mitigate increased costs and we get benefit from any increases spread and fuel type in the wake of IMO 2020.
Beyond Carver, we're focused on other areas concerning environment with the rollout of additional advanced waste water treatment systems and food filed adjusters. In addition, we're making considerable progress on our goal to significantly reduce single use classes.
Moreover, as part of our environmental efforts. We have also partnered with digital Michel who stole and Ocean future Society.
Of course, we have much more work to do in our sustainability efforts remain at the forefront of our strategic goals.
So in summary, we fully appreciate that the supply growth in continental Europe , if not well time, given the macro environment that has unfolded, we bill 30 year assets that we take decisions many years and advanced fully aware that we can't time, the economic cycle that we deliver them into.
Accordingly, we assume every ship, we'll see more than one recession and his 30 year life.
Like the again acknowledge the successful efforts of our dedicated team members for.
For our consumer company with a meaningful portion of his business exposed to significant macro headwinds to deliver record adjusted earnings as a strong accomplishment and I'm very proud of our team members and the phenomenal guest experiences they deliver every day.
Importantly over time, we are focused on measured capacity growth after peaking at 6.6% in 2020 capacity growth slows to just under 5% in 2021.
We've been accelerating shift sales with two more announced just this month, bringing the cumulative total to 30 shifts in 14 years. In addition, we're working with the shipyard toward moderating the timing of Newbuilds and at the same time mitigates the risk of further delays and shipbuilding, we're continuing to work to improve outperformance of fiscal.
2020, and beyond to make progress towards double digit earnings growth. However, our adjusted earnings per share guidance of 4030 cents to four of 60 cents today reflect that I will likely take beyond 2020 to achieve that level of earnings growth given the current environment in Europe , and the relative weighting of European sourcing in.
Our portfolio as we've shown in the past we believe our crews brands will continue to be recession resilient, given the low penetration levels of cruise attractive value proposition and high satisfaction levels relative to land base vacation alternatives.
Although there are multiple external impacts outside of our control we are aggressively managing those levers, we do control or at least can strongly influence demand supply and controlling costs.
We are investing to stimulate demand through advertising marketing and public relations efforts to maintain price disciplined source supply, we're working to moderate capacity additions that at the same time accelerate less efficient capacity, leaving the fleet.
And we are leveraging our scale to achieve efficiencies and the fund investments without a significant net increase in costs.
In the best interest of long term shareholders were making disciplined decisions to optimize our performance in the short term, while leaving US best positioned to capture the full benefit of global travel and tourism growth over the long term.
With that I'll turn the call over the David.
Thank you are now 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 29 team fourth quarter and full year results.
Then I'll provide an update on our full year 2020 booking trends.
Finish up with some color on our 2020 December guidance.
As Arnold indicated our adjusted EPS for the fourth quarter with 62 cents.
This was 14 cents above the midpoint of our September guidance.
The improvement was driven by three things.
First increase net ticket yields benefited from stronger pricing on close in bookings on both sides of the Atlantic worth three cents.
Second.
Favorability in net cruise cost without fuel was or seven cents driven by cost improvements realized during the quarter and the timing of expenses between the quarters.
Third we benefited by five cents from the net impact of fuel pricing currency.
Lower fuel prices were worth four cents, while favorable currency movements were worth a penny.
Now, let's look at our fourth quarter operating results versus the prior year.
Our capacity increased 2.4%.
North America, and Australia segment, more commonly known as our M&A brands were essentially flat.
While our Europe , and Asia segment, or commonly known as our EA brands were up almost 7%.
Total net revenue yields were down 1.8%.
Now, let's break apart to two components as net revenue yields.
Net ticket yields were down 3.3% normalized for a small accounting uptake.
Our M&A brands were down 1.4% also normalized driven by yield declines in late season, Alaska and European programs, which were partially offset by improvements in the Caribbean, which were tempered by the redemption of future crews credit.
More commonly known as Fccs, which were issued earlier in the year.
While our EA brands were down 4.4% as a result that previously discussed economic challenges our continental European brands are facing.
Net onboard and other yields increased almost 2% also normalized for the same accounting update with increases on both sides of the Atlantic.
Net cruise cost per lbd, excluding fuel were up 2.6%.
Mainly due to higher advertising expense and higher dry dock days in the quarter.
While the fourth quarter was out let's not forget the full year 2019 costs were down <unk>, 0.3%.
In summary, our fourth quarter adjusted EPS with eight cents less than last year has the result of lower net revenue yields which cost us 10 cents.
And higher net cruise cost per hail BD, excluding fuel, which cost that eight set.
Both of which were partially offset by the net benefit of fuel pricing currency worth 11 set.
Lower fuel prices or 14 cents, while unfavorable currency movements cost us three cents.
Had it not been fit the voyage disruptions due to weather a ship delayed delivery and the previously announced US covenants policy change on travel to Cuba, which cost us approximately eight cents.
Our fourth quarter adjusted EPS would have been in line with last year.
Looking back at the full year 29 team.
We grew our earnings 3.3% with adjusted EPS, writing to $4 in 40 cents versus $4.26 that the prior year.
Our capacity increase 4.2%.
Our M&A brands were up 1.8%, while our EA brands were up 8.6%.
Our total net revenue yields were down 0.2%.
Again, let's break apart to two components have net revenue yield.
Net ticket yields were down 1%.
Our any brands were up 8.7% driven by yield increases in the Caribbean, which were partially offset by declines in our Alaska program.
As we previously indicated we had an 8% increase in our Alaska capacity during 29 team, while the industry capacity increased 15%.
Our EA brands were down 2.7% as a result, as previously discussed economic challenges our continental European brands are facing.
As Arnold indicated we did see yield increases at our UK brands.
The ongoing uncertainty around Brexit.
Net onboard and other yields increased 2% with increases on both sides of the Atlantic.
During 2019, we had to navigate a long list of challenges and unusual events than Arnold summarize.
We estimate that the unusual events in 2019 costs the company approximately 23 cents.
These events unfavorably impacted both net revenue yields in net cruise cost without fuel per LPD by about four tenants have a point.
During 29 team. We also benefited from the gross accretive impact of the share repurchase program, where 12 cents.
Fuel prices and currency each had significant year over year individual impacts however, the net impact only cost us a pending.
Lower fuel prices contributed 17 cents, while the stronger dollar cost us 18 set.
Turning to our cash flows for 2019.
Cash provided by operations with $5.5 billion.
As a result of our strong cash flows during the year, we were able to return almost $2 billion to our shareholders via the regular quarterly dividend and share repurchases of almost $600 million.
Now turning to 2020 booking trends.
We are entering fiscal year 2020, with a record book occupancy position.
At this point in time, our cumulative advanced bookings for the full year 2020, a slightly ahead of the prior year on occupancy with a 6.6% capacity increase at prices that are slightly lower than last year on a comparable basis, which does not include the net revenue.
Yield mix headwind of approximately a half a point for the full year 2020.
Now lets drill down into the cumulative book position.
Cumulative advanced bookings for any brands are higher than the prior year on occupancy and in line on price.
Higher prices in the Caribbean, which are tempered by the redemption of the Fccs issue. During 2019 are offset by lower pricing in Alaska.
While for EA brands cumulative advanced bookings are in line with the prior yearend occupancy at lower prices.
Finally, I want to provide you with some color on 2020.
Based on current booking trends, we expect 2020 net cruise revenues to be approximately 5% with capacity growth of 6.6%.
While net revenue yields are expected to decline approximately 1.5%.
Similar to 2019 to 2020 net revenue yield decline is driven by the challenging economic environment pacing, our continental European brands.
The forecasted capacity increase of 6.6% is broken down by quarter its columns.
First quarter is 6% second quarter is also 6% for the third quarter is 5.7% and the fourth quarter is 8.9%.
Given that 2020 capacity increased by brand, we will have a mix headwind, which will impact our reported net revenue yields by approximately a half a point for the full year.
Now turning to costs.
Net cruise costs without fuel per hail BD is expected to be flat for 2020 versus 2019.
Broadly speaking there at three main drivers of the cost change.
First our forecasted for an average 2.7 inflation across all cost categories globally.
Second we are able to more than offset this inflation from the economies of scale, we achieved by taking delivery of larger more efficient shipped while disposing of less efficient ships as well as the cost savings from further leveraging our global sourcing scale.
The third and final point relates to investments, we will make in or 2020 deployment advertising. Our recently formed ethics and compliance department as well as other small investments in 90 and other areas as a business.
Full year 2020 earnings is estimated to include 12 to 17 cents incremental impact from prior year at Penn and previously announced 2020 voyage disruptions, including ship delivery delays.
These events are expected to win favorably impact net revenue yields by almost half a point.
On the cost side. These events plus an accounting difference are expected to end favorably impact net cruise costs without fuel per hail BD by seven tenths of a point.
Net cruise costs without fuel per Lbd guidance would have been down seven tenths of a point instead of flat.
We currently expect depreciation to be around 2.41 billion for 2020 versus 2.16 billion for 2019.
For net interest expense, our current expectation for 2020 is around $220 million versus $183 million per 2019.
The net impact of fuel price currency and fuel mix is expected to favorably impact 2020 by 17 to 24 cents.
Fuel expense for 2020 is now forecasted to be 1.42 billion for the full year versus 1.56 billion for 2019.
Putting all these factors together, our adjusted EPS guidance for 2020, $4 in 30 cents to $4.60 versus 4040 cents per 2019.
And now I'll turn the call back over to Arnold.
Thank you David operator, please open the lines for questions.
I'd like to Register question. Please press the one Paul by the four on your telephone.
Three tone concert nod to request if your question has been answered.
Hi registration. Please press star one fall by the three what's going to register question. It's one for on your telephone keypad. Our first question comes swine Felicia Hendrix with Barclays. Please proceed.
Hi, good morning.
Good morning, France, Hi, good morning.
Thanks.
So you guys gave us a lot of really good color on the call, which is always very helpful and it sounds like while issues are continuing in Europe , and Alaska here starting programs to mitigate those challenges.
You touched on this a bit in your prepared remarks, but said moving ships out of the region in Europe , what else can you do to stimulate demand there.
So basically what I'm trying to get too is that some investors have been concerned that you would use price discounting to stimulate demand versus tactical marketing and promotions.
I'm, just hoping that you could remind us of your corporate philosophy in terms of yield management, what your typical strategic response that yes demand doesnt change after some of the structural changes you're making yes set in place.
Yes, Thanks solution, yet no definitely we have a bias towards discipline in pricing and in Europe .
And I can't emphasize on though what a great job our team has done in Germany, given the environment.
That they havent and how cost is responding as well.
As a persistent challenges they've had so with all that moves we made with regards to itinerary planning and capacity movement. Obviously the teams also done quite a bit with the trade and with no marketing and using digital marketing and other things more effectively and refining our model with the older which is the revenue management.
Two we have I eat is adopting yoder and.
Particular to that cost as we put additional revenue management talent on that and so from the combination of things again. They fill the ships is robust given the nature of the market. There in terms of actual demand we do.
Yep.
Record bookings at peak capacity, and so and that regardless of the strong.
And in Alaska, which sort of strategic things could you do there to stimulate demand given all the supply.
Yes, we said on the call there is what some people would probably call it temporary over concentration of supply and Alaska, but I'll ask is premium price to the Caribbean.
Very profitable for us and obviously follows which is why isn't there.
And we have also a little bit of a mix challenge because as we grow capacity, we can grow the land portion as well, which naturally gives us kind of a yield drag because obviously the excursion portion how several while youre performance in Alaska, but we've got very good initiatives and the key brands, serving Alaska, we'll have to see.
They play out we're right before waves, but they have some tools and some great marketing.
Techniques, we revisit the digital aspect of our marketing and enhance that already dramatic that we've seen some early results from that so those are things we're doing but.
I don't want to make it sounds like Alaska is a bad market as a great market, we make really good money. There. The reason why capacity is going in is because it is a strong market.
Well a lot of demand from gas and we're doing everything to put us in position over time will yield there along with growing the classic.
Thanks, and then for David but I was just wondering if you could.
Help us understand the yield and CCX steel cadence for the quarters I mean, obviously, you've given us that first quarter and the full year, but maybe if you could help us understand better how those would kind of just the cadence and then also DNA and interest guidance for the first quarter and the full year. Thanks.
Sure. So on costs, we did say that net cruise costs would be flat.
For the full year in the first quarter is down 2% to 3%.
So obviously the remaining three quarters have to average up each quarter something close to 1% just to get back to flat.
I'm reluctant to give guidance by quarter because of all the seasonalization and it's very difficult, but I will say that in terms of dry dock days, which does to some extent drives some of the net cruise costs.
I had mentioned dry dock days were down in the first quarter and Thats why it was driving cost out you will see higher dry dock days in the second and lower dry dock days in the fall, which will to some extent impact that average 1%.
But thats not guidance I'm, just giving you the math to get to the flat.
And then you on that just on that on the outside so in the first quarter two down once it too and the full year, you're down one and a half I mean, just cadence I'm not asking for guidance, but just.
And to be even through the year do you think the first half will be worse than the second half.
Hi, eight you now it's very early.
You know wave hasn't started.
There's a lot left to go we're doing a lot of in marketing and advertising activities that Arnold mentioned to shape. The number in the yen and so I'd be reluctant to give you quarterly.
Guidance, but yes, obviously the full year is similar to the first quarter. So on average included in that is something similar for all three quarter.
Okay, Great and then the DNA interest.
Let me get back to you on that I, just I don't have to the quarter end Psivida Fivenine Dan.
Instead of course, if you have to 16.
And then for the year.
Two plant.
4 billion.
1 billion for the year into training center for intact.
My question.
Tony for intent, thank you Melissa Happiology us to it.
The next question comes online Craig about Ishkanian with Citigroup. Please proceed.
Yes.
Great. Thanks, Yes.
First quarter of 21 full year 2020, net yield guidance is roughly the same it's Randy.
According to half do you look at the mid term.
With that midpoint guidance.
What's the cumulative.
Well positioned in pricing for Q1, you had talked about.
Any higher bookings with slightly higher pricing for the full year guidance for the for Q1.
So we just gave the book position, but we always talk about the fact that are booked position.
For the first quarter is typically 80% to 90%, but then we're at the higher end of the range.
We've been at the higher end in the range on year.
For the last couple of quarters and that at this point in time.
Thats is bounded Mike for competitive reasons, that's about as much information as pointed disclosed.
Okay, Okay fair enough and.
Looking at.
You look in the UK, you mentioned that you're seeing in increasing overhang from Brexit.
Can you talk about whats just riding that I would think that with greater certainty around Brexit happening maybe that you see improvement trends over the over the coming months maybe.
Maybe I need to conclude if it does look like it's.
More likely to happen with the recent elections.
Anything we would say now would be pure speculation just happened and we'll just have a monitor.
Consumer attitudes, what we do know historically is uncertainty definitely trace cautiousness, the greater the certainly the less costs cautious there will be.
But having said that.
Be too early for us to make any additional comment.
Yes, I understand that thank you for next year. Thank you yes.
The next question comes final Jared associated with Wolfe Research. Please proceed.
Hi, Good morning, everyone. Thanks for taking my question.
Good that your yield guidance for 2020, the minus 1.5% have you tried to account for any negative effect from the election or maybe any positive contribution from some of the additional marketing spend that you have for this year.
Going into next year, and then you called out some booking improvement in the last eight weeks can you just talk about what's changed in the environment over that time period is that comment.
Have improved bookings more specific to the Caribbean and Bahamas, suppose Dorian or more broad based thank you.
Concerning just some it is pretty wave.
We have a number of initiatives in our guidance, we have not factored in dramatic shifts and.
Consumer attitude positive or negative.
And that relates also to election time, we do know historically elections can create uncertainty.
So in our guidance right now we've just taken our approach that.
Things will trend the way they are.
But hopefully.
Restaurants, we've made perhaps we're obviously made them intending to drive some change, but it's too early.
Turning again is concerning bookings just keep in mind, we pointed out the last eight week, because we also mentioned that.
At the beginning in the quarter booking trends were impacted by the hurricane.
And so as a result to that I think we've said many times.
We do see a little bit of up left when something like that happens and then it bounces around that.
And that's basically what happened during the fourth quarter.
Okay. Thanks, So is that primarily Caribbean Bahamas, that's driving that improved bookings or would you fit in terms of behind it.
In terms of volumes, we did see volumes during that week period up in a number of areas, but the big driver was the Caribbean.
Great. Thank you and then just as I look at your guidance for next year.
You are implying minimal earnings growth into next year with a fairly sizable amount of Capex I think the implication would be that ROI scene is going to contract in 2020 that would seem to be driven by the older hardware I think obviously newer hardware is getting better returns thats coming online presumably so my question is are all the.
Ships in your fleet, particularly older ones are they earning your cost of capital right now and what do you view your cost of capital to be.
I was there will evolve the ships that we have in the fleet are earning them. Those that are not are either about to the.
Actually are there plans and so the bulk of the fleet, our as well and I'll go ahead, David So.
Generally speaking.
And you do a mathematical calculation, our weighted average cost capital is probably about 8.5%.
But we look at it very differently because our expectation is for double digit return on invested capital over time and elevated ROI c.
So when we look at investments, we're looking at hurdle rates significantly higher than our weighted average cost of capital.
I think with regard to return on invested capital the primary driver as that source markets and the brand to soften source market secondarily would probably be itinerary and third might launch pad with them.
Hmm ages.
Right now.
Okay, great. Thank you just one quick housekeeping what date you Mark your fill tool guidance.
Yes, we indicated in the press release it was December six.
Oh, Okay. Thank you very much.
Sure.
The next question comes from Weiner Robin Farley with yes. Please proceed.
Great. Thank you.
You guys have been very clear about you know the challenge really coming from Continental Europe .
I know that you historically don't give guidance is for yields by brand or by region, but I wonder if just too.
Good for to make it easier for investors to compare sort of across the industry can you give us a little bit more insight into what your north American yield expectations are I'm, just because I think we'd probably see some positive underlying performance there that maybe we can't see with the continental European drag it just maybe.
Helpful. If you can add some color around that thanks, giving good morning, Robin and I describe it as you know we've got home we don't give.
Got it as though going forward.
They were pretty wave et cetera. So we just on the I mean, it's fair to say that we do expect the any brands to do better than the EPA brands right.
Our 2019 the actuals.
As you could see you know.
It was <unk> 0.8 increase for around and a and EA was down 1.7%.
Okay, and I guess, maybe just any mathematically when Mr. Color that you gave on.
The last eight weeks with.
Volume being higher priced flat.
Unless there are some change in the environment from the last eight weeks that that would suggest.
The things are trending positively in terms of how.
Things are coming in now last eight weeks it sort of where we are now that that directionally. If you're if your volume is up in your prices the line mid.
Seems like.
They would be positive yield following that the tempered by the fact that you obviously had bookings on their from before the last few weeks and future crude Craig you talked about and.
And the continental she is that we're.
In in what's on the books already but I mean, directionally watching weeks explored sounds like whats coming at us and positive territory is that mathematically fair to conclude.
Okay. That's mathematically fair, but I will say is 52 week engineer that's eight weeks.
And there's a lot left to go and wave season hasn't even started so I just caution you will take every positive but I'd just caution you.
We got a lot left to go and we're working very hard with all the initiatives that Arnold mentioned.
To impact the results.
Positive okay.
All right great. Thank you very much.
The next question comes line of Harry Curtis Rip and Smith. Please proceed.
Hey, good morning, two quick questions.
Good morning.
So for the year your.
In 2019, your SDMA was up 1.2% how do you see that trending for news for next year it sounds like that that.
And focus on on marketing is going to lift that presented in percentage increase somewhat and I'm trying to get a sense of.
A better sense sense of what that that might look like.
Hi, David gave you the actual presents Wow, they look it up real quickly.
What we've done is and we have the sourcing savings.
That we generate and to see that pass some to the bottom line and invest others and we just as I mentioned in my call nodes.
We've been very rigorous and getting more efficient weather's media spend.
Whether the digital.
As et cetera, So we've actually been able to increase our share of voice and.
Without a direct.
Correlated increase and costs, but yes, we are spending more yes, and I know you're probably looking at the has reported Pierre now when you give that percentages remember those earning current dollars not constant currency.
But to answer your question on advertising from 18 to 19 advertising was up double digits in constant currency.
All right and you would expect that as well in 2020.
We're not giving detailed guidance on advertising alone just that the net cruise cost per lbd as flat.
Thank you and then moving onto your.
Capex I just wanted to check.
Are you still for 2020 and 21.
Looking at about five and a half billion each year.
Yes, well there was a shift in the timing of the delivery schedule. Some so as a result of that we had originally talked about capex in 2019 being over 6 billion, but that came down to 5.4 because of the deliberately late delivery of the cost us.
Morale does so now what we're looking after 2020.
7 billion and for 2021 5.7 in 2022 5.2.
Okay and.
Can you give us sense of how much of that is renovation capex and maintenance capex.
So you know it.
All of the non new build Capex is roughly 2 billion give or take.
That includes renovation shore side port destination development and everything.
Okay, and that'll be fairly constant looking ahead to 20 and 21.
Yes.
Okay very good thanks very much.
Thank you.
The next question comes might have Steve Kaczynski with Stifel. Please proceed.
Hey, good morning, guys and happy holidays tell you guys. So.
If I, if we strip out the half percent impacts.
Did you guys are talking about for for hardware mix, and then and then delays.
With some of your shipped as well, obviously, that's going to want to like for like basis, you're kind of guiding down about a half percent in my thinking about and maybe I'm I'm going crazy here, but I think you guys have talked about that you've been embedded typically at the start of each year something in your guidance for for other things too.
To go wrong.
Is that fair for this year as well meaning.
That like you know felt like for like down 5% yield guidance do you have some cushion there for other potential event.
I would call it cushion, but yes, we do include that our guidance for things to go wrong and.
You can see already this year were like barely a month into it though a number of things have so we always included our guidance and expectation.
Or unusual events on a 19, we had an included as well and as you can see from all the results in my team with the extraordinary number of unusual events and the heavy hit from Europe , which was unexpected.
We missed the original guidance net a few occurrence of only 10 cents. So we do factor in.
Because you know things happen.
Okay got it and then when I ask about your fuel guidance for this year and it looks like there's around a 300 million delta on your fuel guidance today versus.
When you gave kind of soft guidance back in September I, just want I understand what changed so much there over the over the last three months.
So back in September we use the current prices for HFO.
And as well as mgo and everything else, but you know as we talked back in September a lot of people were pointing out that the forward curve for HFO was a lot lower than the current price and we did not at that time speculate that that would happen, but it has in fact happened HFO has.
It's come down considerably and that is now reflected in our current fuel guidance.
Okay got it and then.
That represents 50% to 55% of our consumption.
Okay got you and then one of the thing we get a lot of questions about or gotten a lot of questions. About recently is just the you know as we kind of go into 2020 with the scrubber technology and stuff like that and not just want to make sure you guys feel like you're in a pretty good spot at this point as we head into next year and I think one of the concerns out there is obviously around kind of this open versus close loop type of.
Of technology, just one makes for you guys feel pretty comfortable that you're open loop technology at some point won't be a headwind moving forward.
Yes first of all up just with open loop the put things in context.
That's import you're talking 10%.
What we use and even with that only a few ports have taken a hard positioning us open loop. So at this point those positions are immaterial in terms of our earnings results.
But more importantly than that we feel strongly open loop is a real plus from an environmental standpoint as a in advance air quality system technology, and so we're doing the work to ensure that we educate.
Ports around the world. So open loop is available for use even if it wasn't which is not going out but even if it wasn't.
You're talking about 10% of the fuel use and there are many boards that already have bought into.
The fact that opened lupus.
Excellent events or quality approach.
Okay, great. Thanks, guys happy holidays. Thank.
Thank you happy holidays.
The next question comes line of James Hardiman with Wedbush Securities. Please proceed.
Hi, Good morning, So wanted to circle back to this idea that that you had about 100 basis points of of headwinds between the brand mix.
In some of the MSIP delays, so I think about that underlying 50 basis point.
Can you maybe.
Walk me through how to think about that over the course of the year I would assume that the Mardi Gras NPAC either.
You're sort of a an impact that yields I'm guessing that that would also be the case with respect to brand I guess, what I'm trying to get out and I think about that underlying growth number with respect to yield does that actually accelerating over the course of the year based on the way you're you're guiding.
So it varies by quarter, so for the first quarter, which I happened to have the numbers hi in detail because we gave guidance.
The impact of the unusual events is probably a little bit less than a half, but the mix impact the brand mix impact is a little bit greater than a half and it's still turns out to be in total about 1% for the first quarter as it is 1% for the full year I don't happen to have that too.
Through for Q numbers handy.
But if you get back to bat, she can give you more detail.
Okay. That's helpful and then the commentary on working with shipyards to moderate.
Some of the ships you have plan, maybe I'm, just hoping you could get into a little bit more depth, what seem realistic we'd be done and how quickly can be done.
So we're obviously in conversations with your but when you have prototypes like we had was more Aldo.
You know.
The situation is that.
Historically, we've had occasional delays with prototypes, but where would they are working with the ours and are in the process of negotiating what we need to do to ensure that future deliveries on time.
No I guess I was speaking more towards the the slowing of ships being built is that not sort of what you're you're aiming to do just given the environment or did I read that wrong.
I'm not so much the slowing of ships being built we do have capacity plans over time that might be less capacity.
But but we are a we're currently in a lot of discussions with the shipyard. So let let US continue those discussions and let us get back to you when we have more announcements, which should get this governance we.
We should hopefully yeah, yeah, we'll get it done by the end of January .
Okay, and then lastly from me I think is.
As we think about the European consumer being the primary headwind here.
Can you quantify your exposure to that consumer I think you talked about a 30% number.
For 2019, obviously, there are a lot of moving parts for 2020 that number still about 30% or is the movement of cost does that bring that down a little bit.
Yeah. It's.
I don't actually for 19 have been numbers I think sourcing wise in terms of sourcing guests across all of our brands I think was about 50% source.
Upsized asset I'll try to use.
Yeah, Europe is about low thirtys, yes.
And then hasn't changed 2020 versus 29 team.
Yes, correct, but I am actually talking when I say, 30% more revenue wise revenue, then and get US right. Okay, but the revenue is what the exposure is the revenue rise.
Right.
Got it okay. Thanks, guys. Good luck.
Thank you.
The next question comes lineup.
You bet with Infinity Research. Please proceed.
Good morning. Thank you for taking my question I wondered whether if we look towards Q3 in Q4.
And having the seasonal markets and hopefully Europe Continental Europe coming.
Better than in 2000 2019.
We see again, the cadence revealed slightly increase relative to what we're looking at a in Q1.
Hi.
So I guess you know your big assumption, there is that continental Europe coming back and doing that or were not necessarily assuming.
If we just do it assuming a continuation of the current trends in Continental Europe , and Arnaud talked about.
The over concentration of supply in Alaska, and the capacity increase in that.
Third quarter and fit for us in the industry and as a result to that.
David that is why I didn't mention Alaska [laughter], Yes, we just as you could see as I said before your guidance for the rest of the year is similar to the first quarter and the full year.
In total for the three quarters.
Now we with that said, we're working hard we have a lot of programs in place.
And remember that fourth quarter is also a hurricane season.
Oh, I do know that [laughter] given that we experienced the every two years in terms of Q4. This was a perfect segue Mardi Gras I'm being delayed the now being a tweet when you won a new build the capacity additions and Arnold I kind of suspect Q4, having something to do it.
The the name of the ship.
[laughter], what do the shipyards provide compensation both first of all around the end the Mardi globally, where they can offset some of the lost revenue in additional cost that you have incurred.
Generally speaking there there is settlements with the yard. Unfortunately, those go into our balance sheet whatever they are and so they don't show up in the income statement, so from a shareholder standpoint.
Were often able to balance.
The operating income hit Leveaux value of the firm, but it doesn't show up in the income statement.
Okay. Thank you for this clarification. Thank you guys happy holidays. Thank.
Thank you, saying to you.
Thanks.
Well.
The next question comes line of Stephen Grambling with Goldman Sachs C.
Thanks Happy holidays, one quick follow up what are the expected proceeds from the two asset sales do you expect a gain on these and where they cash flow positive.
When you say you talked about the two ships, we just announced sale in 2020.
Yes, I mean, those will be announced over time, but you're talking I mean, you know you're not talking about but with a company that Scott five and a half to $6 billion. The cash flow, that's not kind of significantly move the needle if we sell to shifts.
Small this game, it's a small gain yeah.
And then well those effectively go into non competing markets are they going out of service.
Generally know there, they're not going out of service we sold them.
To another cruise company, but generally speaking.
When we sell ships they go to tour operators and other operators that don't have our brands.
And our selling two different source markets and different types of products. So our belief is hopefully they continue to expand and grow the market with their capacity as we do with our new bills.
Yes.
So much like this year.
Thank you.
The next question comes when it Tim Conder with Wells Fargo. Please proceed.
Thank you and Merry Christmas happy holidays, everyone.
Yeah.
Thank you.
Wanted to circle back Arnold I know again the capacity the rate of capacity growth that you all had in Germany, and then the rate of capacity growth that.
Some other competitors are doing predominantly in the bad debt has been a challenge to that you can still grow.
Earnings yet the pricing headwinds.
Any any I know it was difficult question to answer, but when do you see the ability to maybe stabilize pricing in Europe , then I guess.
Kind of taking a little derivatives that in Alaska. It appeared that you all ceded price your competitors largely gain price.
And yet you have as you as you mentioned and David mentioned before also you have a very great asset on the land side.
This is Ken it should we anticipate over the next couple of years the ability to to grow that is that would help your yield mix and thats kind of I guess spend a little bit of a headwind both in 18 and 19.
Yeah, I'll give you.
Answer directorship question, then I think we want to just talk to do the capacity plans going forward for next year's I'll, let David do that but but in general.
We focus on earnings growth and return on invested capital and so generally speaking clubs collectively as a corporation to get that ultimately.
We'll need a little yield growth given the capital were employing to build these new ships and so we don't necessarily have a lot of yield growth, but we do need yield growth to get to the.
Level of earnings growth, we'd like to have and to get notably the return on invested capital.
We know is inherently capable in our business model.
So with that in mind, if you look at Europe again, what we've done in the guidance is simply projected to trends to continue now we're doing everything we can from a marketing standpoint from a management standpoint.
To to try to deliver against that kind of an environment. If that environment changes then clearly no. It's a tailwind.
The environment worsens, obviously would be I had one of the state the obvious.
But I think over time is going to be a combination.
There are a cycles as you know that's going to be combination of the macro environment and our continued ability and for example in the case of cost to replace the less efficient capacity, which is what we're in the process of doing and we have now accelerated that.
With much more efficient capacity.
Which in case of cost this morale. The for example, and so thats. The plan, we're accelerating that process cost them. We believe that's going to give us elevated over time return on invested capital and earnings growth in the case about either which isn't a very strong market is already one of the highest return brands we have.
And have been able to absorb a substantial amount of capacity in what otherwise would be a down overall travel market.
We feel.
Very confident about I eat his ability to perform in terms of growing earnings and ultimately growing return on invested capital all the that are very high return on invested capital now.
Dave you might want to give the parent.
So just looking at our total capacity increase next year is 6.6% if you break that out by segment.
The E segment is up 8.4% and the any segment is up 5.5%. If if you look at it by program.
The Caribbean is kind of flattish, it's only up by like 1% Europe is up double digits, Alaska is up almost nine in all the other markets are up double digits.
So and that gets back to the 6.6% denim with Alaska I'm also just want to point out that over time, we've had periods and other Marcus.
Barry over concentration of supply.
Thank you best of the will will settle out there and as I said, we're growing profitably there and we expect that to continue and eventually you'll probably see a little youll lived overtime.
On the Alaska side should we also anticipate again you.
Maybe bulking up a little on that on the on the land tour side.
Given your dominants, there and how that should should help the mix.
We continue to invest in our properties, there and with limited in total expansion I'm, just because of the nature of Alaska.
But we have very happy we have our joint venture.
Hi, Good way for example, with the railroad. So we look for ways to expand our offerings that will help drive ULIN additional no profit.
But it won't be able to grow at the rate that we've grown overall capacity there.
Okay.
And then on fuel.
Two two last questions here on fuel the in the third quarter call.
You mentioned that that mix of Mgo would gravitate up from the anticipated 30 335 area to 40 in 2020 given IMO.
And then today, you're saying 40 to 45.
What's driving those changes is it maybe some delays in getting scrubbers on the timing the delivery some of the LNG ships is at the those 10% of ports that are focused only on those to the close loop.
A little more color on that.
Yes, itinerary Atlanta is definitely not the 10% reports or whatever it is definitely not that.
As simply you know refining that generate one.
Okay, and then lastly, David on leverage just maybe any changes or just remind us of your targeted comfort leverage range.
So we finished the year at 2.11% in the debt to EBITDA ratio, but that's a bit lower than I, probably quoted on an earlier conference call, but that had a lot to do it to delay delivery of the cost December elder and so with that shipped.
The way.
You also had the debt fall into the being drawn in the first quarter and at the end of and given the midpoint of our guidance, we would be at 2.34% debt to EBITDA leverage.
In the range of what our target is to to join a half time.
I'm very encouraged on one.
Thank you. Thank you.
The next question comes find them for Brandt Montour with JP Morgan. Please proceed.
Good morning, everyone. Thanks for taking my questions. So one more on Europe , and I, just want to sort of dig into how we should think about how you guys kind of think about the demand side.
The other local European economies and a lot of we're looking for reasons and seeing some resisting more positive on those economies in 220 20 and later in 2020 I guess.
And just looking back at history, when we see sort of a troughing in and everybody knows a car in those particular economies. How long do you think it usually takes start seeing some of that impacting your bookings.
I would.
Speculate because every situation is different but what I would tell you is that over over time.
Obviously, we're in the travel business and we expect travel overtime.
Hello.
Any point in time, there could be pockets of consumer confidence crisis or.
Decline in travel et cetera, and that happens periodically.
As I said on the knows we plan ahead in this particular case, we planned ahead and we walk right into a sudden turned in a market that had been robust for many many years and it's still a robust travel market is just that.
Is it a decline versus continue to grow as overall travel market.
That will pass through at some point. Meanwhile, we have to adapt and I again, I just can't say enough about our people in terms of their ability to continue to produce results in that environment and and so we wouldn't speculate on what it will turn it in our guidance.
So I assume the trends will continue and I just want to point out the obvious when it does start turning in the booking trends because of the were booked well ahead, there is that delayed impact and the actual revenue in the piano.
On the other one is.
Well positioned to take advantage of it.
That's helpful. Then just we haven't we haven't talked about China at all I was curious your game plan for 2020.
Going to change at all next year and maybe just an update on your.
The charter model, and you're sort of and sort of your mix from your distribution standpoint, there would be helpful.
They are once again for US you know China is a very small percent of our capacity today, we're really focused on our joint venture.
Very.
Pleased with our partners, there and the progress with that and I'm looking forward to the first new build in China and 2023.
But in terms of the market itself, we had a good year in China. This year teams done a great job.
The cost of and this is performing very well those are the other other ships.
There and so we're looking for the year in China next year.
In terms of the charge them all in all that we continue to get more and more.
So called kind of direct business and but we are very please also went on charter partners in China.
Thank you. Thank you everyone happy holidays I'm very much appreciate your continued interest in the company and be assured that we're looking forward to working hard to continuously elevate our performance. Thank you.
That does conclude the conference call for today, we thank you for your participation in that state you. Please disconnect your lines.
Yeah.