Carnival's second-quarter revenues more than doubled to $4.9bn, an all time high. The main driver was ticket sales, but onboard and other revenues also grew strongly.
Underlying cash profits (EBITDA) of $681m was at the higher end of previous guidance, but at the bottom line, Carnival remained in loss-making territory. One contributor to the losses was the increase in interest expenses from $358m to $522m.
Underlying free cash flow was $625m compared to an outflow of $487m. Net debt was $29.2bn, a reduction of $1.3bn since the year-end.
Looking ahead to the full-year underlying EBITDA guidance now stands at between $4.10bn to $4.25bn, a midpoint increase of $175m. The company noted a continued acceleration of demand. But Carnival also guided higher on cruise costs due to factors including a slower expected ramp down in inflationary pressures than previously estimated.
The shares were down 6.4% following the announcement
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Our view
Carnival is doing everything it can to bounce back from the nightmare that was the pandemic. The move towards larger, newer, and more efficient ships should give margins a push in the right direction as passenger numbers continue to recover. That's just as well given that cost pressures are taking longer than thought to subside.
Record bookings have given management the confidence to promise full ships in the key summer season and positive underlying free cash flows for the full year.
Things are looking good for 2023 and in 2024 analysts expect the strong momentum to continue, with operating profits predicted to rise 77% to over $3bn, off revenue growth of just 10%. That level of expectation presents some risks.
On the revenue side, a prolonged cost-of-living crisis and any potential uptick in unemployment could jeopardise consumers' appetite for travel. Similarly, prolonged high fuel prices could see Carnival's gas guzzlers cause a further blow to profitability. And whilst reservations are surging ahead, consumers will likely feel the pinch if high inflation persists, and recessionary fears become reality.
The industry's also a big contributor to carbon emissions and other pollutants. Carnival's looking to innovation to mitigate this through both the increased usage of biofuel blends, and a series of technology upgrades which are designed to reduce both fuel usage and greenhouse gas emissions - while also contributing to cost savings.
But our biggest concern is the balance sheet which is still feeling the after-effects of the COVID-19 pandemic. At the last check, Carnival's net debt stood at $29.2bn. That's 65% higher than Carnival's total market value, meaning that for now, it's very much debt holders who influence Carnival's course. Although Carnival is hopeful of generating underlying free cash flow this year, it could be a long while before that balance is redressed in shareholders' favour.
Despite the recent strong performance, the equity valuation remains a long way below the long-term average. Carnival is well-placed to have a good year, but it needs to have a few in a row to make a dent in its debt pile. And with consumers under pressure from all angles, that could still be a big ask. Net debt is sitting at about 7x the mid-point of this year's underlying EBITDA guidance. That's very high. Until it returns towards a low single-digit figure, the risk of default on debt repayments remains higher than we would ideally like.
Carnival key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
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