Carnival Sails Past Q3 Expectations

It’s Friday, September 29, 2023, and there’s got to be a lot of energy in Miami this morning as Carnival released Q3 earnings. The cruise operator provided insight into Q3 performance as well as full year guidance. With an alarm set in the 6am PST hour, I woke up to attend the investor call and it’s got me excited!

Record-Breaking Numbers

Carnival Corp. hit an all-time high of $6.9 billion in revenue in Q3. This resulted in net income of $1.07 billion – or $0.79 diluted earnings per share – beating analyst expectations. On an adjusted basis, net income came in at $1.18 billion, or $0.86 per share which exceeded the guidance range provided in June.

Adjusted EBITDA
Adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, also beat guidance provided in June coming in at $2.22 billion.

Carnival’s Massive Debt Load

It’s no secret that the cruise lines took on a lot of debt to survive the pandemic. However, based on 2023’s record performance, the cruise operator has reduced debt by more than $4 billion dollars from its peak. According to the investor call, Carnival Corp. expects to end the year with just over $31 billion in debt (better than plan by $2B).

Strong demand builds confidence as the brand works to reach investment grade in 2026, but there’s still a lot of work to be done. The reduced newbuild pipeline should help enhance the opportunity. Additionally, the company has called $1.2B of highest cost debt. The efforts to pay down debt and eliminate the highest cost debt have already resulted in $40 million in interest favorability.

80% of the company’s debt is now held at a fixed rate with an average interest of 5.5%.

Finally, an additional $900 million in customer deposits has generated more interest income than forecasted with another $45 million in favorability related to fuel, depreciation, and income taxes.

While the cruise operator has not issued 2024 guidance yet (despite multiple analysts who attempted to get that out of Josh and David during the Q&A!), work is underway to reduce debt and return the company to investment grade.

Booking Trend

2024 advanced booking position is “well above high end of historical range” with higher pricing than 2023. That’s with a capacity increase for the operator of about 5% when compared to this year.

Simply put: Even at higher prices, Carnival has less inventory to sell versus the same time last year, despite increasing overall capacity by 5%!

Costs to Operate Increase

With increased capacity of 5%, the operator anticipates a related cost to operate increase of about 1-2%. There will also be a significant increase in dry dock days in 2024 – a whopping 580 days ships will be in dry dock! This will impact year-over-year comparisons as that number is up nearly a quarter from 2023.

Analysts again tried to get additional information from Carnival’s leadership on 2024 guidance, however, the question was met with, “Another good try,” and the fact that the company has a “good amount of momentum going, starting with elongated booking curve, best book in our history.” So while costs will be up, Carnival is bullish that so too are revenues.

Fuel Costs
Fuel was called out multiple times. One investor asked if Carnival would consider a fuel charge like at least one of its competitors is actively considering. The response: nothing is off the table, however, there are no current plans. And if they were to implement a fuel surcharge, it would be 1) temporary, and 2) only on forward bookings.

Instead of a fuel surcharge, the cruise operator instead reiterated, “What we can do: Use less.” Carnival will save $375 million off the bottom line than 2019 because of energy efficiency and environmental efforts. That’s a win-win!

What’s Coming Next?

Josh and David both spoke about Celebration Key, Carnival’s new private island that will welcome its first guests in 2025. “Just yesterday, Carnival Cruise Line opened hundreds of sailings across 18 different ships, 8 different home ports. You’ll have to stay tuned for more details on this amazing destination.”

When pushed during the investor Q&A section about the features of Celebration Key and how Carnival plans to monetize this private destination, we got this: “in addition to premium on ticket side for such an amazing experience, F&B [food and beverage], Cabana rentals, other experiences, more will come.”

Fortunately, we’ve got lots more information on Celebration Key:

The team also referenced the second ship coming to Carnival’s Fun Italian Style program from Costa Cruises (Carnival Firenze) along with a new marketing campaign just released for Costa this morning.

Notably Missing

I do think it’s important to mention the fact that, despite a $1 billion investment and 6,500 additional passengers added to operations, neither leader even said the words “Carnival Jubilee.” This ship is currently slated to launch in December of this year, so we were anxiously awaiting today’s call to determine if we should be worried about the inaugural booking. While this is speculation, if all was going well with construction, you’d think both of these leaders would be excited to talk about the newest ship to the fleet. They could have easily mentioned it when talking about fuel efficiency as Carnival Jubilee is the 3rd Excel-class ship to Carnival Cruise Line’s fleet. They could have easily mentioned it when discussing Celebration Key as the port will support two Excel-class ships at a time. Or they could have mentioned it when discussing the future and what they’re excited about.

Not to say “Carnival Jubilee” even once in an hour-long call where the operator discussed the current year and all that’s coming is concerning to me.

You can read all about the history of Carnival Jubilee, including construction details, milestones, and the infamous delay that saw the inaugural transatlantic sailing canceled here:

Market Responds

As I’ve seen in the past when Carnival Corp. provides good news, the market responded negatively. The stock was down nearly 5% immediately following the investor call wrapping up. With that said, it gave me a chance to snag some additional shares and bring my average cost down a little bit more. There have been a lot of analyst upgrades the past couple months and average estimate is right around $20 (though, we’ve seen some estimates go even higher). Of course, buy/sell at your own risk as we always say – but at least buy enough to benefit from the Shareholder Benefit!

While I currently hold far too much Carnival Corp. in my portfolio, I’m definitely sticking around. I’m long on $CCL and this morning’s Q3 earnings call update gives me confidence that the cruise operator is on a great trajectory.

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