Reporting its Q2 earnings, the new Carnival Corporation & PLC is one of the most profitable leisure companies in the world. But net earnings dropped dramatically from last year, and company executives, who sounded very confident and bullish on a conference call, dodged most direct questions from analysts.

Q2 03

Carnival reported net income of $127.8 million, or $0.19 per share, on revenues of $1.3 billion for its second quarter ended May 31, 2003, compared to net income of $194.2 million, or $0.33 per share, on revenues of $989.2 million for the same quarter in 2002.

Earnings were affected by slow bookings and price cuts. In addition, Q2 earnings were reduced by $0.02 per share due to litigation and other charges associated with the dual listed company (DLC) transaction with P&O Princess Cruises (POC), and by $0.01 per share due to the seasonality of POC's business, according to Carnival.

Carnival and POC entered into the DLC structure on April 17, 2003. The financial results include Carnival for the entire period and the new combined company since April 17.

Fleet capacity was up 45.7 percent in Q2, with 21.9 percent coming from the merger with POC and 16.6 percent being organic growth (new ship introductions) within Carnival.

Looking Forward

A very bullish Carnival Chairman and CEO Micky Arison said in a conference call that he believed the company is "setting the stage for a very good performance in 2004."

Skirting some specific questions from analysts, especially about the North American market, Arison said Carnival is now a different company - a global company with 13 brands - implying that the previous North American market orientation is not as applicable or relevant as before.

This is a new business, he said, referring to Carnival Corporation & plc.

"We anticipated that we will be the most profitable company in leisure," Arison said, taking a somewhat defensive stand, when noting that "lots of companies are underwater."

Arison also used the opportunity to plug the Queen Mary 2, which he called "an incredible ship," and added that bookings were going strong with high prices.


Vice Chairman Howard Frank said Carnival's performance should be seen in light of the events of the last four quarters. "I cannot recall being challenged by so many events ever," he said. First it was the Norwalk virus then the threat of war and the actual war, coinciding with the Wave Period, ongoing security warnings, and terrorist attacks in Saudi Arabia and Morocco. All these events unsettled the travel market, according to Frank, who added: "Still our brands performed well."

Meanwhile, the events of the last several months have had an impact on summer and fall bookings.

Frank said, however, that the company has seen what he called a significant pick-up in bookings in the last five weeks. "We are now starting to run significantly ahead," be said, "and pricing is starting to firm up. We now feel a whole lot better about our business, but it is too early to promise a recovery in the second half of the year," Frank said.

"We dug ourselves a hole in the spring and we are tweaking prices as much as we can," added Arison, who also said it was "realistic to believe that pricing will improve once the company gets a handle on events."


Looking at the different markets for Q3, Frank said that capacity was up 20 percent in the U.S. and that pricing was soft. Princess Cruises was perhaps performing better than the other brands, he noted, although its European programs are still lagging.

In the U.K., the company's brands are performing "reasonably well," according to Frank, who also said that occupancy and pricing was down year-over-year.

In Germany, absolute bookings were up, but occupancy rates and pricing were also down.

On a somewhat contradictory note, Frank said: "Long-term we feel very good about our German strategy, but expect changes over the next 18 months."

Costa is seeing a surge in bookings, similar to the North American brands, according to Frank, who said the company was using lower pricing to drive demand, especially for cruises in the Eastern Mediterranean.

Down under, P&O Australia was said to be doing well and will receive the Jubilee from Carnival Cruise Lines in the fall of 2004.

Peter Ratcliffe, who beads up the POC brands for Carnival, said that with the Jubilee the company now has a low-cost ship that enables it to expand its version of fun cruises in Australia and to go into New Zealand as well. "Our long-term view is that we are now better able to develop new markets," Ratcliffe said.

Added Arison: "We worked on moving the Jubilee before the merger, but you cannot announce you are moving a ship while you are still selling it in that market."

New Ships

Arison said that while the company is looking at new projects, he believes that newbuilding activity beyond 2003 and 2004 will slow down substantially.

But taking a stab at the competition, Arison said that Princess has been working on a 170,000 to 180,000-ton ship with 3,600 to 4,000 passengers, which Carnival will continue to work on. While orders will depend on certain criteria being met, including the euro exchange rate, deliveries in 2006 and 2007 were possible. The concept can work with multiple brands, Arison said, for instance, for both Carnival and Princess. He said be did not yet know what the construction price would be.

Carnival is also focusing on upgrading its older capacity, according to Arison, who pointed to the Crown Princess, which was rebuilt as the A 'Rosa Blu, and the Jubilee which will join P&O Australia.

"As far as movement of ships is concerned, anything is possible," said Arison. "We will do everything we can to maximize the power of our brands," be underscored.

Merger Progress

The synergy work is progressing rather well, said Frank. There are a number of so-called synergy teams working. He said that the previously estimated $100 million in savings was quite achievable and that 25 percent should be in place by the end of 2003 and the rest in 2004.

Synergies are being found in purchasing and concessionaire contracts, according to Frank, as well as in efforts to bring shore excursion prices in line.

Frank also said that central reservations would be consolidated across the brands in two to three years. The company is working with Princess' system, which Frank called very scalable. First, Holland America Line is being added to the Princess platform. He said that while there was some front-end cost, it was less than if the company had to build its own system and would be recovered in savings over time.

Frank also noted how Carnival's casino staff was the best in the business and was expected to drive a "whole lot more revenue" from Princess.

"We are not going to stop at $100 million," Frank said. "We will look for more and there will be greater benefits going forward."