Carnival Corporation reported record net income of $1.03 billion, or $1.23 per share, on revenues of $3.2 billion for its third quarter ended Aug. 31, 2004, compared to net income of $734.2 million, or $0.90 per share, on revenues of $2.5 billion for the same quarter last year.

While revenues were up 44.0 percent and net income was up 39.6 percent year-over-year, passenger days were up by 18.5 percent with 77 ships and 128,000 berths from 70 ships and 110,800 berths during the same period last year.

Gerald Cahill, executive vice president and CFO, attributed the increases in earnings and net income to stronger pricing both in the U.S. and in Europe.

In addition, onboard spending was up about 7 percent, with efforts to increase onboard spending especially in Europe paying off, according to Cahill.

Broken down, $2.4 billion (75.4 percent) of revenues were attributed to passenger tickets, $579 million ( 17 .8 percent) to onboard spending, and $222 million (6.8 percent) to "other."

In 2003, the corresponding figures were $1.9 billion (73.8 percent), $467 million (18.5 percent) and $194 million (7.7 percent). 

While costs per passenger day were up, that was all due to increased fuel prices, according to Cahill. Excluding fuel, costs would have been down slightly, he said.

The food cost for the quarter was $149 million, compared to $118 million for the third quarter of last year. Including crew, Carnival's fleet-wide average food cost (for passengers and crew) per day in the third quarter of this year was approximately $7.80, according to Cruise Industry News' estimates, and $7.15 last year.

Cahill noted that food costs were up driven partially by upgraded food service in Holland America Line's (HAL) Signature of Excellence program.

Carnival's net margin was 31.6 percent in Q3 of this year, compared to 29.1 percent last year, 34.8 percent in 2002, and 33.2 percent in 2001.

Q3

Comments "We posted the strongest quarter in our history," commented Howard Frank, vice chairman and COO. He said that all the North American brands performed well and that at HAL, the Signature of Excellence program had a very positive impact on Q3. "It (the program) has been well executed and extremely well received," Frank said, adding that HAL's pricing was up nicely in Alaska and in Europe. He also said that HAL is now "clearly positioned as the premium cruise line of choice" - based on what he called excellent response from travel agents and consumers.

Although Princess Cruises was challenged by introducing three ships this past spring with a 45 percent increase in capacity, Frank said "they (Princess) executed flawlessly." He added that Princess performed strongly in Q3 and achieved higher pricing throughout the fleet. In addition, the Caribbean Princess was said to be performing extremely well, marking Princess' first time entry into the year-round Caribbean market.

Carnival Cruise Lines also saw what Frank described as an "excellent lift in its pricing during the quarter" with a 6 percent increase in capacity and with a very positive forward booking pattern.

Price-wise, Carnival is still 5 percent to 10 percent off peak pricing for its various brands, however, according to Cahill.

In Europe, the company's capacity was up 19 percent compared to the same quarter last year and pricing was up as well - "boding well for growth into 2005," according to Frank.

Nine Months

For the nine-month period, Carnival reported net income of $1.56 billion, or $1.90 per share, on revenues of $7.5 billion, compared to net income of $989 million, or $1.42 per share, on revenues of $4.9 billion last year.

Q4

"We are well positioned (for Q4) from a booking standpoint," said Frank. "We are extremely well booked with 98 percent (of the capacity) booked versus 91 percent a year ago ( despite a 13 percent increase in capacity). There is very little inventory left to sell for Q4."

Pricing for both the North American and European brands are also ahead this year compared to last year.

Carnival executives also indicated they are comfortable with earnings' estimates of $0.30 to $0.32 per share for Q4. Thus, year-end earnings per share could be in the range of $2.21 for 2004, compared to $1.66 for 2003, $1.73 for 2002, $1.58 for 2001, and $1.61 for 2000.

2005

Carnival expects a capacity increase of 16.1 percent in Q1 of 2005, 6.9 percent in Q2, 5.7 percent in Q3 and 8.6 percent in Q4.

Commented Frank: "We are very pleased with our advance bookings." He said that Carnival's occupancy for Q1 2005 was 15 points ahead oflast year.

As for forward bookings, Frank added, "we are approaching pre- 9/11 levels. It is very encouraging."

Carnival Chairman and CEO Micky Arison said that hurricanes tend to put a damper on bookings while they are front page news and sensationalized on television, but as soon as they are off the news, bookings pick up. He said he expects no negative long­ term impact from the hurricanes.

Meanwhile, Carnival has announced that Hurricane Jeanne will reduce Q4 net income by 2 cents a share. The reduction is in addition to the 3 to 4 cents lost because of the other recent hurricanes. Combined, the reductions translate into more than $48 million.

The integration with P&O Princess Cruises produced the biggest savings in 2003 and not as much a year later, Cahill said, adding, "we continue to work internally on profit improvements. The Cunard (Line) integration (with Princess) is one example."

Onboard spending has been on the increase, but Cahill cautioned that the same rate of growth should not be expected in the future. But he does expect onboard spending to grow at a rate of about 3 percent per year. Frank also noted new ships were designed to generate more onboard spending.

Frank added that the newly created corporate function Shared Services, headed up by Pam Conover as senior vice president, is just getting started in 2004 and will examine various areas of the business, looking for opportunities that may be implemented starting in 2005.

As for the significant free cash flow that Carnival is expected to generate in 2005 and beyond, Frank said that the company is examining alternatives, such as paying out larger dividends, paying down debt, and buying back shares. "We will review the options in the next several months," he said.