Carnival Reports Strong Q3; Raises Earnings Forecast

Carnival Corporation & plc (NYSE/LSE: CCL; NYSE: CUK) has announced non-GAAP net income of $1.2 billion, or $1.58 diluted EPS for the third quarter of 2014 compared to non-GAAP net income for the third quarter of 2013 of $1.1 billion, or $1.38 diluted EPS.

For the third quarter of 2014, U.S. GAAP net income, which included net unrealized gains on fuel derivatives of $15 million, was $1.2 billion, or $1.60 diluted EPS. For the third quarter of 2013, U.S. GAAP net income, which included impairments net of unrealized gains on fuel derivatives of $139 million, was $934 million, or $1.20 diluted EPS. Revenues for the third quarter of 2014 were $4.9 billion, compared with $4.7 billion the prior year.

Carnival Corporation & plc President and Chief Executive Officer Arnold Donald noted, “Strong close-in demand and higher onboard spending helped drive significantly better than expected third quarter results and 15 percent year-over-year earnings improvement. Our Asia operations performed particularly well during the quarter, driven by a double-digit yield increase in our China program, further solidifying our industry leading presence in this important emerging cruise market.  Our continental European operations also enjoyed strong yield and profit improvement in the quarter, reflecting continued progress for the Costa brand. In addition, our summer Caribbean product successfully attracted nearly 20 percent more guests than the prior year, reinforcing the popularity of the world’s largest cruising region,” Donald added. 

Key metrics for the third quarter 2014 compared to the prior year were as follows:  On a constant dollar basis, net revenue yields (net revenue per available lower berth day or “ALBD”) increased 1.8 percent for 3Q 2014, better than June guidance of flat to down 1 percent. Gross revenue yields increased 2.5 percent in current dollars.

Net cruise costs excluding fuel per ALBD increased 0.5 percent in constant dollars,  better than June guidance of up 1 to 2 percent due to the timing of certain expenses. Gross cruise costs including fuel per ALBD in current dollars decreased 5.8 percent.

Fuel prices declined 3.5 percent to $650 per metric ton for 3Q 2014 from $674 per metric ton in 3Q 2013 and were less than June guidance of $673 per metric ton.
Fuel consumption per ALBD decreased over 3 percent in 3Q 2014 compared to the prior year.

During the third quarter, YouGov’s BrandIndex ranked Carnival Cruise Lines the most-improved U.S. brand in consumer perception in its mid-year 2014 Buzz Rankings Report.  A number of initiatives introduced by Carnival Cruise Lines, such as the Great Vacation Guarantee, Carnival LIVE Concert Series, Camp Ocean and Seuss at Sea, appear to be resonating with consumers. In addition, Princess Cruises recently announced an agreement with Italian shipbuilder Fincantieri to construct a new 3,600-berth vessel, which will enter service in 2017 based on the design platform introduced by sister ships Royal Princess and Regal Princess.  In keeping with the company’s strategy for measured capacity growth, this is the only newbuild scheduled to be delivered in 2017.

In June, Seabourn signed a multi-year agreement with UNESCO (United Nations Educational Scientific and Cultural Organization) to support the organization’s mission of safeguarding unique cultural and natural features around the world.  That announcement came on the heels of a five year agreement to support The Nature Conservancy’s global marine protection priorities.  These programs, combined with the company’s commitment to install exhaust gas cleaning technology on more than 70 ships, are among many initiatives underway to support the preservation of marine, environmental and cultural resources around the globe.

Based on the strength of third quarter net revenue yields and current booking trends, the company has increased its expectations for full year 2014 net revenue yields on a constant dollar basis to be in line with the prior year, from its previous guidance of down slightly.  Excluding fuel, the company expects full year net cruise costs per ALBD to be slightly higher compared to the prior year on a constant dollar basis. Taking the above factors into consideration, the company has increased its forecast for full year 2014 non-GAAP diluted earnings per share to be in the range of $1.84 to $1.88, better than both June guidance of $1.60 to $1.75 and 2013 non-GAAP diluted earnings per share of $1.58.

At this time, cumulative advance bookings for the first half of 2015 are ahead of the prior year at higher prices. Over the last quarter, fleetwide booking volumes for the first half of 2015 have been running ahead of the prior year at higher prices.

“The sustained improvement in booking trends as we have progressed through the year combined with yield increases in the second half of 2014 builds confidence that we will see continued yield growth in 2015 and beyond,” said Donald.  He also noted that new product initiatives and innovative marketing campaigns implemented across the brands over the past year are driving the improvement in consumer demand and pricing trends. 

For fiscal 2015, net cruise costs excluding fuel per ALBD are expected to increase approximately three percent due primarily to a significantly higher level of dry-dock days scheduled next year to install new air emissions technology as well as other  technology designed to improve fuel efficiency.  The company expects the exhaust gas cleaning system or scrubber technology will be installed on approximately 70 percent of its fleet by 2016, thus enabling the company to meet the 2015 stricter air emissions standards as well as mitigate escalating fuel costs that will result from the new requirements.  The company anticipates the new regulations will result in higher fuel costs in 2015 of approximately $0.10 per share with that increase expected to be reduced by half in 2016 and mostly offset in 2017 based on the system roll-out.  Also, in 2016, the company will revert back to a more normalized dry-dock schedule, which will offset approximately half of the increase in 2015 net cruise costs excluding fuel.

“Our implementation of the air emissions technology is a sound investment in our company’s future and more importantly it will benefit the environment for years to come,” said Donald. “These technology investments are laying a solid foundation towards sustainable earnings improvement. Combined with our other strategic initiatives designed to foster revenue growth and contain costs, we are gaining momentum towards our goal of achieving double digit returns on investment over time,” Donald added.

Fourth quarter constant dollar net revenue yields are expected to be up 1.5 to 2.5 percent compared to the prior year. Net cruise costs excluding fuel per ALBD for the fourth quarter are expected to be lower by 1.0 to 2.0 percent on a constant dollar basis compared to the prior year.

Based on the above factors, the company expects non-GAAP diluted earnings for the fourth quarter 2014 to be in the range of $0.15 to $0.19 per share versus 2013 non-GAAP earnings of $0.04 per share.

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