Carnival Corporation has not only reported record earnings for its second quarter ended May 31, 2004, but also expects the third quarter to be the most profitable Q3 in its history.

The company guidance for earnings per share is in the range of $2.10 to $2.20 for the full year, compared to previous guidance of $2.05 to $2.15, and actual earnings of$ 1.66 for 2003.

For 2005, occupancies for all the core brands are running ahead of last year despite the increase in capacity, according to Vice Chairman and COO Howard Frank, who noted in the quarterly conference call to analysts that while "it is very early (to forecast next year), we are off to a good start."

Q2 04

Carnival reported net income of $332.0 million, or $0.41 per share, on revenues of $2.3 billion for Q2 04, compared to net income of $128 million, or $0.19 per share, on revenues of$1.3 billion for Q2 03.

The load factor was 102.8 percent compared to 98.5 percent last year.

The 03 results include only six weeks of the results of Carnival PLC (the new name for P&O Princess Cruises, which Carnival acquired in April of 2003).

Commented Carnival Chairman and CEO Micky Arison: "This has been a remarkable quarter. Even with 22 percent capacity growth, we achieved a 13 percent improvement in revenue yields. This, along with the synergies we realized from the P &O Princess combination, contributed to earnings more than doubling during this year's Q2 compared to last year's Q2."

According to Gerald Cahill, executive vice president and CFO, the results were driven by capacity increases and revenue yield increases.

In Q2 04, Carnival had its largest organic capacity increase in any single quarter - 22 percent - while also increasing occupancy, pricing and onboard spending.

Cahill said that pricing and onboard revenue were up significantly year-over-year in both the U.S. and Europe.

Meanwhile, operating costs continued to be driven down by the synergies of the P&O Princess combination.

For the balance of the year, however, there will be less synergy effects, while fuel prices and advertising spending will be up, in addition to what Cahill called "some incremental costs" in conjunction with the implementation of Holland America Line's (HAL) Signature of Excellence program.

By Brand

Frank provided the following breakdown for what he called the core brands:
"Carnival Cruise Lines is performing extremely well," he said, noting that increased marketing spending is paying off and that occupancy is well ahead.

"Princess Cruises is (also) performing extremely well," Frank continued, despite absorbing three newbuildings in three months. Princess will see a 45 and 36 percent capacity increase, respectively, in Q3 and Q4.

"The reaction to the brand has been tremendous," he said, underlining that both occupancy and pricing are ahead.

According to Frank, HAL is the only pure premium product in the market. He said that the brand's new marketing is "now head-on and has been received very well by consumers," and that bookings into 05 are "quite favorable."

Added Arison: "The program HAL has put in place is really good - also based on real revenue on the books.

"For 05 so far, HAL's revenue is 100 percent more than last year's."

Costa Crociere is also very strong going into the summer season, Frank said, with bookings well ahead of last year, despite a 30 percent increase in capacity. He also noted that Costa is benefiting somewhat from the problems of some of the competitors.

"All the brands are performing well," Frank added.

"Our major European programs for HAL and Princess are showing nice increases in both occupancy and pricing; and the same is true for Alaska.

"All in all, Q3 is shaping up quite well," he said.

Q4

Bookings for Q4 are already running 20 percent ahead of Q4 last year, according to Frank, who also noted the company's 13.1 percent capacity increase for the quarter year-over-year.

Carnival has been using so-called strategic pricing, starting out with lower prices, then raising prices and applying what it called tactical pricing to fill the ships.

During the conference call on June 16, Frank said that there was 30 percent less capacity left to sell for Q4 than last year at this time.

Onboard Spending

Cahill attributed a 16 percent increase in onboard spending to sharing of best practices with P&O Princess and noted that onboard spending was up at all the brands.

"In Europe, the tradition l of onboard spending) has not been as strong as in the U.S.," he explained, ''but we are working to increase it to a comparable level to the U.S."

Cahill also attributed increased onboard spending to strong consumer demand and consumers willing to spend more."

Newbuildings

Carnival's model is to introduce two to four new ships a year across all brands. "But if pricing continues to strengthen, and if we see opportunities, that may change," Frank said. "It will be a brand by brand decision. We are not hung up on the two to four number.

"Our strategy is to continue to develop the European markets," Frank added.

Interjected Arison: "The euro-dollar relationship is not very favorable to newbuildings for the U.S.

"We continue to work on a new concept for Carnival (Cruise Lines)," Arison added, ''but we are in no rush.

"We look forward to a yard making us an offer we cannot refuse or the euro-dollar relationship changing."

Looking Forward

While Carnival is not yet where it was three years ago in terms of pricing, Frank said that he believes there are pricing opportunities going forward and that the present level of demand is sustainable.

Current pricing is now about 10 percent down from the previous peak pricing, according to Frank.

Carnival has successfully overcome what Arison described as its biggest hurdle - absorbing seven new ships in seven months - and can now refocus on the synergies from the P&O Princess combination.

Cahill noted that the synergy groups - established within each company to implement best practices have been renamed "continuous profit improvement groups."

In 2005, Carnival will be generating what Frank called "significant cash flow" to be used for dividend payments, debt payments, or share buy-backs.