Carnival’s second-quarter revenue increased by 9.5% to $6.3bn, driven by an uplift in both ticket sales and onboard revenue.
Underlying cash profit (EBITDA) was up 26% to $1.5bn (guidance $1.3bn). The uplift reflected strong pricing and prudent cost control.
Free cash flow more than doubled to $1.5bn reflecting improved operational performance and lower levels of capital expenditures. Net debt came in at $25.1bn, down from $26.3bn at the year-end.
Looking to the rest of the year, occupancy is at near record levels with pricing at all-time highs. Carnival increased its EBITDA guidance for the full year from $6.7bn to $6.9bn.
The shares were up 12.6% in afternoon trading.
Our view
Carnival’s second quarter results helped to quell any concerns that geopolitical unrest was denting customers’ willingness to take a voyage on the high seas. An earnings upgrade helped lift investors’ mood on the day, despite a slightly softer than expected outlook for the peak summer sailing season. However, the early signs for next year’s voyages are encouraging.
But cruising can be a fickle business. So far, Carnival’s navigated operational challenges and disruptions from regional conflicts with aplomb. But investors need to be aware that the industry can be particularly susceptible to a sudden change in fortunes.
The key question is how long will strong demand last? Much will depend on policymakers' ability to deliver a soft economic landing on both sides of the Atlantic. Despite the introduction of higher tariffs between the US and the rest of the world there appears to have been some strong progress in the fight against inflation.
However, the outbreak of conflict between Israel and Iran has seen fuel price volatility spike. And that’s something that Carnival with its fleet of thirsty ocean liners are more exposed to than most. There are some hopes that the situation can de-escalate quickly, but it’s a key risk to monitor.
The demographics of cruise passengers may provide some shelter from the storm should we see an economic slowdown. The cruise industry’s customer base tends to be dominated by the over-fifties, an age-group that is proving to be highly resilient when it comes to spending on travel.
Carnival is expanding its fleet slower than it has in the past, and we support this more cautious approach. But our biggest concern is the balance sheet, which is still feeling the after-effects of the COVID-19 pandemic. Net debt currently stands at $25.1bn. At 3.6 times expected underlying cash profits (EBITDA), it’s still very high but looking more manageable than it has for a while. Until it returns towards a low single-digit figure, there's unlikely to be a return of dividend payments to smooth investment returns.
Carnival is well-placed to have another good year, but it needs to have a few in a row to make a dent in the debt pile. And with macroeconomic uncertainty running that could still be a big ask. The high level of indebtedness and revival in investor sentiment means there's pressure for management to deliver, which increases the risk of ups and downs.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
According to Sustainalytics, the company's overall management of material ESG issues is strong, with a robust governance structure and reporting framework in place. However, Carnival still faces significant exposure to risks linked to emissions, effluents and waste as well as quality and safety issues. Carnival has implemented carbon reduction programmes but shipping is likely to be one of the last forms of transport to be decarbonised.
Carnival key facts
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