Carnival Corp reaches inflection point

2023-06-30T16:40:41+00:00 June 30th, 2023|Finance|

Carnival Corp has reported a US GAAP net loss of $407 mill, or $(0.32) diluted EPS, and adjusted net loss of $395 mill, or $(0.31) adjusted EPS, for the second quarter of this year.

This was above the better end of the March guidance range of $425 to $525 mill net loss, the Group said.

Adjusted 2Q23 EBITDA was $681 mill, coming in at the high end of the March guidance range of $600 mill to $700 mill.

Carnival also reported record second quarter revenue of $4.9 bill and said that it saw continued acceleration of demand, with total bookings made during the quarter reaching a new all-time high for all future sailings.

Total customer deposits reached a record $7.2 bill (as of 31st May, 2023), surpassing the previous record of $6 bill (31st May, 2019), a 26% increase compared to the previous quarter.

Cash from operations and adjusted free cash flow were positive in 2Q23. The company expects continued growth in adjusted free cash flow to be the driver for paying down debt over time, it said.

The 2Q23 ended with $7.3 bill of liquidity following the prepayment of over $1 bill in near term variable rate debt.

In addition, Carnival is introducing its SEA Change Programme, a set of key performance targets designed to achieve important strategic goals over a three-year period ending in 2026.

Carnival Corp’s CEO, Josh Weinstein (pictured), said, “We reached a meaningful inflection point for revenue this quarter, with net yields surpassing 2019’s strong levels, and we achieved positive operating income, cash from operations and adjusted free cash flow.

“We are already executing on our strategy to grow revenue by taking up ticket prices, even while maintaining record on board spending levels, building occupancy and growing capacity.

“Based on continued strength in pricing, we delivered out performance in the second quarter and raised our expectation for revenue in the second half, which coupled with the interest expense benefit we are capturing from deleveraging will bring another $275 mill dollars to the bottom line for the year.

“With bookings and customer deposits hitting all-time highs, we are clearly gaining momentum on an upward trajectory. We are focused on the durable revenue growth and margin improvement that will deliver on our SEA Change Programme and propel us on the path to delevering and investment grade leverage metrics,” he said.

Operating income for 2Q23 was $120 mill, turning positive for the first time since the resumption of guest cruise operations and marking a significant milestone.

While gross margin yields were down compared to 2019, the company achieved a significant milestone of net yields in constant currency surpassing 2019 levels, above March guidance by 3.2% in constant currency.

Cruise costs per available lower berth day (ALBD) increased 8.3%, compared to 2Q19.

In constant currency, adjusted cruise costs excluding fuel per ALBD increased 13.5%, compared to 2Q19 and were above the high end of March guidance, primarily due to the timing of expenses between the quarters.

Costs were higher, compared to 2019, as a result of rising drydock related expenses, higher advertising investments to drive revenue for 2023 and beyond, incentive compensation increases, reflecting expected improvements in the company’s current and long-term performance, as well as partially mitigating the impacts of a high inflation environment.

Speaking about bookings, Weinstein said; “Our momentous wave period, typically a first quarter event, started in record breaking fashion at the end of the fourth quarter, set a record in the first quarter, actually accelerated in the second quarter and has continued into the third quarter.

“Booking volumes have been tremendous and we are gaining momentum with favourable pricing trends, which reflects improved commercial execution and returns on our advertising investments.

“The booking lead times for our North America and Australia (NAA) segment are now further out than we have ever seen, while lead times for our Europe segment continue to lengthen and are now within 10% of 2019 levels, which is an improvement of 10 points from the last quarter.

“In fact, our European brands’ bookings taken this past quarter for second half 2023 sailings for European deployments achieved double digit percentage increases in both volume and price compared to 2019. Clearly the strength of our portfolio of world class brands is now shifting into high gear,” he said.

For the full year 2023, Carnival forecast:

  • adjusted EBITDA of $4.10 bill to $4.25 bill, above March guidance’s range and with a midpoint increase of $175 mill
  • includes about$0.5 bill unfavourable impact from fuel price and currency, compared to 2019
  • continued sequential improvement in each quarter in adjusted EBITDA per ALBD, compared to 2019, driven by maintaining net per diems above 2019 levels while closing the gap in occupancy to 2019 levels
  • occupancy of 100% or higher
  • net per diems of 5.5% to 6.5% (in constant currency) two and a half points higher than March guidance, based on the acceleration of its strong demand profile
  • adjusted cruise costs, excluding fuel per ALBD (in constant currency), one and a half points higher than March guidance, due to a slower expected ramp down in inflationary pressures than previously estimated, incentive compensation increases reflecting expected improvements in the company’s current and long-term performance and continued increases in advertising investments.

For 3Q23, the company expected:

  • adjusted EBITDA of $2.05 bill to $2.15 bill, a significant improvement, compared to 2Q23 and adjusted net income of $0.95 bill to $1.05 bill
  • occupancy of 107% or higher.

Carnival also expected net yields, compared to 2019 (in constant currency) to be positive for the second half of the year, despite the headwinds from the loss of St Petersburg as a marquee destination, due to the suspension of cruises to Russia.

Turning to the SEA Change Programme, this includes:

  • sustainability – More than 20% reduction in carbon intensity, compared to 2019, improving upon the company’s industry leading fuel-efficiency and pulling forward its stated 2030 carbon intensity reduction goal by several years
  • EBITDA – 50% increase in adjusted EBITDA per ALBD, compared to 2023 June guidance, representing the highest level in almost two decades
  • adjusted ROIC – 12% adjusted return on invested capital (ROIC), more than doubling adjusted ROIC from 2023 to 2026, and representing the highest level in almost two decades. Adjusted ROIC excludes goodwill and intangibles to compare against historical performance.

By the end of 2026, the company said that it expected to approach investment grade leverage metrics.

The targets are built on measured net capacity growth of less than 2.5% compounded annually from 2023. To achieve these three-year targets, Carnival will continue with its focus across the portfolio on a range of initiatives to drive net yield growth, while maintaining its industry leading cost base and fuel efficiency to continue to improve margins and grow adjusted free cash flow, which the company believed will enable further debt reduction over time.

Weinstein explained, “These financial targets are anchored on optimising capital allocation through measured capacity growth and will set our course back to strong profitability and investment grade leverage metrics.

“We are gaining momentum with continued strength in demand. We are excited about all the opportunities ahead and the potential to create outsized value for our shareholders as we work towards our 2026 targets,” he concluded.

Carnival Corp’s CFO, David Bernstein, added, “We reached a meaningful turning point this quarter as we began deleveraging our balance sheet and are already $1.4 bill dollars off our peak debt.

“We believe with over $7 bill of liquidity, our improving EBITDA and our return to profitability in the second half of 2023, we are very well positioned to pay down debt maturities for the foreseeable future.

“We remain disciplined in making capital allocation decisions, and our lowest orderbook in decades provides a pathway for further deleveraging,” he said.

The company also said that it continued its drive to return to strong profitability by optimising its organisational and leadership structure to ensure continued momentum and to help expedite the achievement of its long-term goals.

It realigned around a simplified structure that removes layers between corporate and its brands.

The leadership of its six largest brands, representing over 90% of the company’s expected capacity at year-end, now report directly to Weinstein, compared to one brand representing less than a third of the company’s capacity reporting directly to Weinstein as in the past, with three of the six brands continuing to support smaller-capacity brands for scale and efficiency.

This enhanced structure enables its brands to operate with greater speed and responsiveness to market demands and opportunities. In addition, building on the company’s leadership rejuvenation efforts, seven of Weinstein’s 12 direct reports are new to the role, since the pause in guest cruise operations.