Carnival Corp (NYSE:CCL)
Carnival Corporation, a leading cruise line company, recently made headlines with their decision to not issue stock to pay down debt. The company’s CEO explained that while issuing stock may be an option for some companies, it is not the right solution for Carnival at this time.
After several years of navigating the stormy seas of the COVID-19 pandemic, the newly appointed Chief Executive Officer of Carnival Corporation, Josh Weinstein, believes that it is high time for investors to chart a different view on the cruise company.
According to Weinstein, Carnival has been focused on reducing its debt through various initiatives, including selling off some of its assets, reducing its expenses, and suspending dividend payments. These efforts have helped the company to make progress in reducing its debt, without the need to issue stock.
To be fair, he does finally have a few potential catalysts that could allow him to finally face investors.
At the 2023 Milken Institute Global Conference, Weinstein stated to Yahoo Finance Live that he has no plans to sell the stock, which would raise cash and allow him to pay down a massive $32 billion in debt (which stood at around $12 billion before the pandemic).
Carnival racked up a significant portion of that debt in order to weather the pandemic and ensure that it would be able to resume sailing its ships once the restrictions imposed by the government were lifted. The interest expense the company incurred as a result of its debt in the first quarter was $539 million, which contributed to the net loss of $693 million that the company incurred.
According to the opinions of various industry experts, the possibility of an equity issuance to relieve pressure on the balance sheet has been looming over Carnival’s stock like a dark cloud. The price of the stock has decreased by 45% over the past year, whereas the S&P 500 has increased by 3%.
However, Weinstein does not believe that it is necessary to sell off stock on the market in order to make a quick buck because booking trends for the summer travel season has significantly improved due to the return of cruise passengers.
We have recently finished the wave period, which is the period of the year with the highest number of bookings in this industry. During that particular three-month period, we saw the absolute highest number of bookings in the entire history of our company. And that goes for both our brands in North America and our brands in Europe,” Weinstein said.
In addition, ticket prices have been on an upward trajectory over the past five quarters, as Weinstein pointed out.
If there is not a recession in the United States during the years 2023 and 2024, Carnival’s improved booking and pricing trends should result in an increase in the company’s free cash flow. That, by logical extension, makes it more feasible to pay down debt.
The fact that Carnival has practically no new ships in the works for the first time in quite some time is the other post-COVID-related twist in this story about the company. This could help boost free cash flow and contribute to the reduction of debt.
When looking at our capex profile over the next few years, it’s our lowest ship order book in decades, according to Weinstein. In 2007, when I was first appointed treasurer, our company had a total of 24 ships on order. We currently have orders in for four ships, one of which is a very modest expedition ship. And that’s the end of it!”
As a result, “what that means is that we can take that cash and we can pay down the debt, and we get back on the road to an investment grade credit rating,” he continued.
The Chief Executive Officer of Carnival acknowledges that it could take years for the company to regain its investment-grade status.
However, this highlights the severity of how the pandemic impacted Carnival and the cruise industry as a whole, as well as the appetite of investors to purchase shares in the company.
At the beginning of February 2020, a passenger who had been on Carnival’s Diamond Princess line and docked in Japan was found to have a positive COVID-19 test result. By March, the company had ceased all operations across the globe, which resulted in exponentially increasing financial losses.
According to the company’s SEC filings, Carnival suffered a combined net loss of approximately $15 billion for the years 2022 and 2021.
Arnold Donald was the long-time leader of the company until Weinstein took over as CEO in August 2022. During the pandemic, Weinstein served as the COO and ran point on operations. Although he acknowledges that it will be some time before the cruise industry completely recovers, he believes that the recovery is well underway.
“We are very well positioned for continued momentum and continued improvement,” Weinstein stated.
Alternative Strategies for Paying Down Debt
While not issuing stock is one way to pay down debt, there are other strategies that companies can employ. For example, companies can focus on generating more revenue through increased sales or by expanding into new markets. They can also look for ways to reduce their expenses by cutting back on unnecessary costs or by implementing more efficient operations.
Another strategy that companies can use to pay down debt is to sell off non-core assets. This can free up cash that can be used to pay off debt, while also allowing the company to focus on its core business operations.
In conclusion, Carnival Corporation’s decision to not issue stock to pay down debt is a strategic move that reflects their confidence in their ability to manage their finances and reduce debt through other means. While issuing stock can be an effective strategy for some companies, it is not always the best solution for every situation. By focusing on reducing debt through asset sales, expense reduction, and other initiatives, Carnival is positioning itself for long-term success in the cruise line industry.
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