Carnival Reports 2Q2023 Earnings; Sets Sights On 2026 Sea Change Program

June 27, 2023

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Carnival Corporation & plc (NYSE/LSE: CCL; NYSE: CUK) reports second quarter 2023 earnings and sets sights on 2026 SEA Change Program.

U.S. GAAP net loss of $407 million, or $(0.32) diluted EPS, and adjusted net loss of $395 million, or $(0.31) adjusted EPS, above the better end of the March guidance range of $425 to $525 million net loss for the second quarter of 2023 (see “Non-GAAP Financial Measures” below).
Adjusted EBITDA for the second quarter of 2023 was $681 million, at the high end of the March guidance range of $600 million to $700 million (see “Non-GAAP Financial Measures” below).
Record second quarter revenue of $4.9 billion.
The company 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 an all-time high of $7.2 billion (as of May 31, 2023), surpassing the previous record of $6.0 billion (as of May 31, 2019) by over $1 billion, a 26% increase compared to the prior quarter.
Cash from operations and adjusted free cash flow were positive in the second quarter of 2023. The company expects continued growth in adjusted free cash flow to be the driver for paying down debt over time (see “Non-GAAP Financial Measures” below).
Second quarter 2023 ended with $7.3 billion of liquidity following the prepayment of over $1 billion in near term variable rate debt.
The company is introducing its SEA Change Program, a set of key performance targets designed to achieve important strategic goals over a three-year period ending in 2026.

Carnival Corporation & plc’s Chief Executive Officer Josh Weinstein commented, “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.”

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

Weinstein added, “Based on continued strength in pricing, we delivered outperformance 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 million dollars to the bottom line for the year.”

Weinstein noted, “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 Program and propel us on the path to delevering and investment grade leverage metrics.”

Second Quarter 2023 Results and Statistical Information

Operating income for the second quarter of 2023 was $120 million, turning positive for the first time since the resumption of guest cruise operations and marking a significant milestone.
Adjusted EBITDA for the second quarter of 2023 was $681 million, at the high end of the March guidance range of $600 million to $700 million.
Record second quarter revenue of $4.9 billion.
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 (see “Non-GAAP Financial Measures” below).
Cruise costs per available lower berth day (“ALBD”) increased 8.3% as compared to the second quarter of 2019.
In constant currency, adjusted cruise costs excluding fuel per ALBD (see “Non-GAAP Financial Measures” below) increased 13.5% compared to the second quarter of 2019 and were above the high end of March guidance primarily due to the timing of expenses between the quarters. Costs were higher as compared to 2019 as a result of higher dry-dock 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.
Total customer deposits reached an all-time high of $7.2 billion (as of May 31, 2023), surpassing the previous record of $6.0 billion (as of May 31, 2019) by over $1 billion, driven by strong demand, bundled package offerings and pre-cruise sales, and a 26% increase compared to the prior quarter.

Bookings

The company saw continued acceleration of demand, with total bookings made during the quarter reaching a new all-time high for all future sailings. Booking volumes for the second quarter exceeded the first quarter’s booking volumes, which was the previous record high.

Weinstein noted, “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 favorable 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 percent 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.”

The company’s cumulative advanced booked position for the remainder of 2023 is at higher ticket prices in constant currency, despite headwinds from the loss of St. Petersburg as a marquee destination due to the suspension of cruises to Russia (normalized for future cruise credits), as compared to strong 2019 pricing and a booked occupancy position that is near the high end of the historical range. (The company’s current booking trends are compared to booking trends for 2019 as it is the most recent full year of guest cruise operations.)

Aligned with the company’s yield management strategy, and while still early, the cumulative advanced booked position for full year 2024 is above the high end of the historical range at strong prices.

2023 Outlook

For the full year 2023, the company expects:

Adjusted EBITDA of $4.10 billion to $4.25 billion, above March guidance’s range and with a midpoint increase of $175 million
- Includes approximately $0.5 billion unfavorable impact from fuel price and currency compared to 2019
- Continued sequential improvement in each quarter in adjusted EBITDA per ALBD as compared to 2019, driven by maintaining net per diems above 2019 levels while closing the gap in occupancy to 2019 levels (see “Non-GAAP Financial Measures” below)
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 the third quarter of 2023, the company expects:

Adjusted EBITDA of $2.05 billion to $2.15 billion, a significant improvement compared to the second quarter of 2023 and adjusted net income of $0.95 billion to $1.05 billion
Occupancy of 107% or higher

The company expects 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.

See “Guidance” and “Reconciliation of Forecasted Data” for additional information on the company’s 2023 outlook.

SEA Change Program

Carnival Corporation & plc is introducing its SEA Change Program, a set of key performance targets designed to reflect the achievement of important strategic goals over a three-year period ending in 2026, including:

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 (see “Non-GAAP Financial Measures” below)

By the end of 2026, the company is expecting to approach investment grade leverage metrics.

The company’s targets are built on measured net capacity growth of less than 2.5% compounded annually from 2023. To achieve these three-year targets, the company 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 believes will enable further debt reduction over time.

Weinstein noted, “These financial targets are anchored on optimizing 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.”

Financing and Capital Activity

Carnival Corporation & plc Chief Financial Officer David Bernstein noted, “We reached a meaningful turning point this quarter as we began deleveraging our balance sheet and are already $1.4 billion dollars off our peak debt. We believe with over $7 billion 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.”

Cash from operations and adjusted free cash flow were positive in the second quarter of 2023 and both are expected to be positive for the second half of the year. The company expects continued growth in adjusted free cash flow to be the driver for paying down debt over time.

The company has taken the following actions to address its debt portfolio since February 28, 2023:

Opportunistically paid down over $1 billion of variable rate debt mostly with 2023 and 2024 maturities, that carried above average rates compared to the rest of its debt portfolio
In June, paid down $300 million of 2024 maturities
Aligned its interest coverage covenant at a ratio of not less than 2.0:1.0 for testing dates from May 31, 2024 until May 31, 2025, across substantially all its debt instruments with an interest coverage covenant

Following these actions, fixed rate debt now represents approximately 80% of the company’s debt portfolio, which provides protection from rising interest rates.

During the second quarter, the company repaid $1.8 billion of debt principal including the remaining $0.2 billion outstanding under its revolving credit facility. The company ended the second quarter of 2023 with $7.3 billion of liquidity, including cash and borrowings available under the revolving credit facility.

Simplifying Structure, Removing Senior Layers and Aligning Around Its Brands with Rejuvenated Leadership

The company continues its drive to return to strong profitability by optimizing its organizational and leadership structure to ensure continued momentum and to help expedite the achievement of its long-term goals. The company 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 (up from one brand representing less than a third of the company’s capacity reporting directly to Weinstein), with three of the six brands continuing to support smaller-capacity brands for scale and efficiency. The enhanced structure enables its brands to operate with greater speed and responsiveness to market demands and opportunities. Additionally, building on the company’s leadership rejuvenation efforts, 7 of Weinstein’s 12 direct reports are new to the role (since the pause in guest cruise operations).

Environmental, Social and Governance (“ESG”)

Expanding shore power capabilities to improve fleet energy efficiency

In April 2023, AIDA Cruises reached a milestone when AIDAsol became the first cruise ship in its fleet to connect to shore power facilities in four out of the five ports during its voyage. Additionally, AIDAmar and AIDAsol were the first two cruise ships to be supplied simultaneously with renewable shore power in a German port. As of year end, based on the company’s itineraries, less than 5% of the ports it calls on offer shore power connections while 57% of the fleet is shore power enabled. The company continues to work with local port authorities in many locations to support their shore power development efforts.

Advancing Sustainability Initiatives

In April 2023, the company released its 13^th annual sustainability report, “Sustainable from Ship to Shore,” detailing industry-leading initiatives and momentum across environmental, social and governance focus areas. The report describes significant progress made by the company toward its aspirations of carbon neutral operations by 2050 and a circular economy model focused on waste reduction, recycling and management. Having peaked in absolute carbon emissions in 2011 despite 31% capacity growth since that time, the company is on track to achieve a 40% reduction in carbon intensity by 2030 vs 2008, and has pulled forward its stated 2030 carbon intensity reduction goal by several years, now targeting more than a 20% reduction in carbon intensity by the end of 2026 vs 2019. This is the result of its four-part decarbonization strategy: fleet optimization; energy efficiency; itinerary efficiency; and new technologies and alternative fuels. Collectively, these strategic initiatives are expected to drive a 15% reduction in fuel consumption per available lower berth day in 2023, along with a 15% reduction in emissions per ALBD, both relative to 2019. The company has continued to deliver on its commitment to advancing a circular economy, achieving a 30% decrease in food waste per person in 2022 and is making significant progress towards its interim goal to achieve 40% per person food waste reduction by 2025 relative to its 2019 baseline.

Additionally, the company completed its first inventory of Scope 3 “value-chain” emissions associated with purchased goods and services, fuel and energy distribution/delivery, and waste management, among others. Using the Greenhouse Gas (“GHG”) Protocol standard, in the future, the company will track these emissions annually vs a full-year 2019 operations baseline, which will support the company’s decarbonization efforts and provide transparency on its progress.

Other Recent Highlights

Carnival Corporation was recognized on Forbes’ annual listing of Best Employers for Diversity for the fifth consecutive year.
Carnival Cruise Line was voted Best Ocean Cruise Line in USA Today’s 10Best Readers’ Choice Awards, and named one of America’s Best Brands for Social Impact by Forbes and recognized for its overall trustworthiness and values, social stances, sustainability and community support.
Carnival Venezia officially joined the Carnival Cruise Line fleet, becoming the first ship to feature “Fun Italian Style,” combining Italian themes with Carnival’s signature fun with Jay Leno as the brand’s very first godfather.
Holland America Line celebrated its 150^th anniversary and Costa Cruises celebrated its 75^th anniversary.
Costa Cruises signed an agreement to start using bio-liquefied natural gas (“LNG”) powered trucks to transport supplies needed by its cruise ships.
Carnival Corporation continues to expand next generation internet across its fleet with the installation of SpaceX’s Starlink on both Seabourn expedition ships and Holland America’s Koningsdam, following its introduction on Carnival Cruise Line and AIDA ships.

Guidance

(See “Reconciliation of Forecasted Data”)

	3Q 2023	Full Year 2023
Change compared to 2019	Current Dollars	Constant Currency	Current Dollars	Constant Currency
Net per diems	2.0% to 3.0%	3.5% to 4.5%	4.0% to 5.0%	5.5% to 6.5%
Adjusted cruise costs excluding fuel per ALBD	12.5% to 13.5%	14.5% to 15.5%	8.0% to 9.0%	10.0% to 11.0%

			3Q 2023	Full Year 2023
ALBDs (in millions) (a)			23.8	91.3
Capacity growth vs 2019			4.6 %	4.5 %
Occupancy percentage (a)			107% or higher	100% or higher

Fuel consumption in metric tons (in millions)			0.7	2.9
Fuel cost per metric ton consumed			$ 620	$ 660
Fuel expense (in billions)			$ 0.5	$ 1.9

Depreciation and amortization (in billions)			$ 0.6	$ 2.4
Interest expense, net of capitalized interest and interest income (in billions)			$ 0.5	$ 1.95

Adjusted EBITDA (in millions)			$2,050 to $2,150	$4,100 to $4,250
Adjusted net income (loss) (in millions)			$950 to $1,050	$(250) to $(100)
Adjusted earnings per share			$0.70 to $0.77	$(0.20) to $(0.08)
Weighted-average shares outstanding – diluted			1,390	1,263

Currencies (USD to 1)
AUD			$ 0.68	$ 0.68
CAD			$ 0.76	$ 0.76
EUR			$ 1.09	$ 1.09
GBP			$ 1.28	$ 1.25

(a) See “Notes to Statistical Information”

Sensitivities (impact to adjusted net income (loss) in millions)			3Q 2023	Remainder of 2023
1% change in net per diems			$ 51	$ 90
1% change in adjusted cruise costs excluding fuel per ALBD			$ 22	$ 45
1% change in currency exchange rates			$ 7	$ 11
10% change in fuel price			$ 46	$ 89
100 basis point change in variable rate debt (including derivatives)			—	$ 38

Capital Expenditures

The company’s annual capital expenditures, which include year-to-date actuals for 2023, are as follows:

(in billions)	2023	2024	2025	2026
Contracted newbuild	$ 1.8	$ 2.4	$ 0.9	$ —
Non-newbuild	1.5	1.7	1.7	1.7
Total (a)	$ 3.3	$ 4.1	$ 2.6	$ 1.7


(a)	Future capital expenditures will fluctuate with foreign currency movements relative to the U.S. Dollar. These figures do not include potential ship additions that the company may elect in the future.

Outstanding Debt Maturities

As of May 31, 2023, the company’s outstanding debt maturities are as follows:

(in billions)	2023	2024	2025	2026
First Lien	$ 0.0	$ 0.1	$ 2.6	$ 0.0
Second Lien	—	—	—	1.2
Export Credits	0.6	1.2	1.1	1.1
All other (a)	0.2	1.2	0.5	2.1
Total Principal payments on outstanding debt	$ 0.8	$ 2.4	$ 4.3	$ 4.5