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Marine Log

June 19, 2008

Carnival results beats expectations

While the Dow and SP500 continued to wilt, Carnival Corporation & plc (NYSE/LSE: CCL; NYSE: CUK) shares were up this afternoon after second quarter profits--though flat-- beat analysts' expectations, despite soaring fuel costs.

And Fitch Ratings confirmed Carnival's credit ratings at "A-" and declared the cruise giant's rating outlook as stable.

Carnival reported net income of $390 million, or $0.49 diluted EPS, on revenues of $3.4 billion for its second quarter ended May 31, 2008. Net income for the second quarter of 2007 was $390 million, or $0.48 diluted EPS, on revenues of $2.9 billion.

Carnival Corporation & plc Chairman and CEO Micky Arison said that second quarter results were better than the guidance provided in March 2008 due primarily to stronger than expected revenue yields and lower than expected cruise costs.

"Our North American and European brands continue to perform well in the current difficult economic environment and we were pleased with our second quarter results. We enjoyed strong revenue growth supported by solid cost controls, however higher fuel prices cost the company $158 million, or $0.19 per share, during the quarter," Arison said.

Key metrics for the second quarter of 2008 compared to the prior year were as follows:

Net revenue yield (revenue per available lower berth day) for Q2 2008 increased 7.3 percent (3.7 percent on a constant dollar basis). Gross revenue yields increased 7.6 percent.

Excluding fuel, net cruise cost per available lower berth day ("ALBD") for Q2 2008 decreased 1.1 percent on a constant dollar basis primarily due to lower selling and administrative costs.

Including fuel, net cruise costs per ALBD increased 10.8 percent (7.2 percent on a constant dollar basis). Gross cruise costs per ALBD increased 10.3 percent.

Fuel price increased 59 percent to $530 per metric ton for Q2 2008 from $333 per metric ton, and was in line with the company's March 2008 guidance of $528 per metric ton.

During the second quarter, the company successfully introduced AIDA Cruises' 2,050-passenger AIDAbella in Germany and P&O Cruises' 3,076-passenger Ventura in the UK, as part of its planned strategy of expansion in the European marketplace.

Outlook

Carnival says occupancy levels for advance bookings for the next twelve months are in line with the prior year, with ticket prices for these bookings at higher levels.

"Despite the current difficult economic environment, our booking trends continue to be solid. Consumers continue to plan leisure travel but appear more cost conscious placing greater emphasis on finding more economical options. A cruise vacation is an attractive alternative for those seeking the most value for their vacation dollar," said Arison. "However, the impact of skyrocketing fuel prices on our operating results has overshadowed the revenue yield improvement we have experienced."

Primarily as a result of changes in currency exchange rates, the company now forecasts a 4.5 to 5.5 percent improvement in net revenue yields for the full year 2008 compared to 2007, versus March 2008 guidance of an increase of 5.5 to 6.5 percent. On a constant dollar basis, the company continues to expect net revenue yields to increase 2.0 to 3.0 percent, although lower in the range than the previous guidance due primarily to slightly lower expectations for both cruise ticket and onboard revenues for the remainder of 2008.

The company continues to expect net cruise costs excluding fuel for the full year 2008 to be down slightly on a constant dollar basis, although it expects a modest increase in cruise costs for the remainder of the year compared to the previous guidance. However, based on current spot prices for fuel, forecasted fuel costs have increased $224 million, or $0.27 per share, since the previous March guidance. For the full year 2008 fuel expense is now forecast to increase by $752 million compared to 2007, which reduces full year 2008 earnings by $0.92 per share. Taking all the above factors into consideration, the company now forecasts full year 2008 earnings per share to be in the range of $2.70 to $2.80 compared to its previous guidance of $3.00 to $3.20.

Third Quarter 2008

For the third quarter of 2008, net revenue yields are expected to increase approximately 4.0 percent (approximately 1.0 percent on a constant dollar basis). Net cruise costs excluding fuel for the third quarter 2008 are expected to be up modestly on a constant dollar basis. Based on current spot prices for fuel, third quarter 2008 fuel expense is expected to increase by $241 million compared to 2007, which reduces earnings by $0.30 per share. As a result, the company expects earnings for the third quarter of 2008 to be in the range of $1.56 to $1.58 per share, down from $1.67 per share in 2007.

During the third quarter, the company will add two new ships to its fleet. Holland America Line's 2,104-passenger Eurodam was successfully delivered June 16, 2008, and will be named by Her Royal Majesty Queen Beatrix of Holland on July 1, 2008; and Carnival Cruise Lines' 3,006-passenger Carnival Splendor will be delivered on June 30, 2008. Both of these vessels will operate European itineraries this summer, which is proving to be a popular way for North American guests to visit Europe while paying in U.S. dollars thus minimizing the impact of unfavorable currency exchange.

Fitch's View

In affirming Carnival's ratings, Fitch noted that the company had $9.45 billion of outstanding debt as of May 31, 2008.

Fitch said Carnival's ratings reflect the company's market-leading competitive position, geographic and market segment diversification, its access to capital at attractive rates, and adequate liquidity position.

Key credit concerns center on the significant increase in fuel costs and the tenuous state of the U.S. economy.

Fitch says that over the three quarters ending May 31, 2008, the dramatic 51% increase in per unit fuel costs has more than offset solid net revenue yield growth of 6%, which has benefited from favorable currency movements due to Carnival's international exposure. As a result, cruise EBITDA per unit has declined by roughly 7% over the last three quarters. However, Carnival's 9% capacity growth has more than offset the impact to aggregate cruise EBITDA, resulting in a 1% increase during that time.

While the underlying per unit revenue trend has softened, says Fitch, it remains in line with long-term historic trends and the advance booking curve remains comfortably extended. The softening was due to reduced onboard spending which has been more impacted by economic pressure than ticket prices. Industrywide supply growth in North America is likely to be only 2% in 2008-2009, well below long-term historic averages. That should help the supply/demand scenario and mitigate negative demand trends given the current U.S. economic environment.

Capital allocation and rating context:

Incorporated into current ratings is Fitch's expectation that Carnival continues to manage its capital allocation within the context of its credit rating given the weakening operating outlook. Carnival generated $3.89 billion of adjusted EBITDA and $4.07 billion of cash from operations (CFO) in 2007. Its 7%-8% average annual capacity growth from 2008-2010 should enable it to mostly offset per unit profit pressure and continue to grow aggregate EBITDA.

The cruise line industry is capital intensive; firm contracts for ship orders are typically placed 3-4 years in advance of delivery. As a result, most of the company's cash generation over the next few years will support its shipbuilding program and maintenance/other expenditures. Carnival will spend roughly $3.5 billion-$4.0 billion in total capex annually to fuel capacity growth that is more heavily weighted toward its European brands than its North American brands.

Over the last few years, Carnival has significantly increased the level of capital returned to shareholders as it had room within the rating category, but has scaled back recently in the current economic environment. Carnival returned $1.27 billion of capital to shareholders (dividends and share repurchase, net of issuance) in FY 2007, following $1.58 billion in FY2006 and $889 million in FY2005. The policy has skewed toward stickier dividend payments rather than discretionary share repurchase. Carnival has maintained a steady quarterly dividend since late last year after two increases in 2007 raised the dividend by 45%. As a result, dividends now total roughly $1.26 billion annually. In addition, Carnival has not repurchased shares after buying back $84 million in December 2007, which followed $326 million of share repurchases in FY2007 and $841 million in FY2006.

Liquidity and access to capital:

A key factor in Carnival's 'A-' rating, says Fitch, is its financial flexibility through its solid liquidity position and multiple sources of capital at attractive rates. As of Feb. 29, Carnival had $4.9 billion of liquidity supported by:

Cash and equivalents: $966 million;

Credit facility availability (LT and ST): $2.1 billion;

Committed ship financing (export credits): $1.8 billion.

Carnival's export credit financing is likely to fund much of the upcoming shipbuilding program currently at rates below 5%. Carnival's ability to obtain this financing at attractive rates and on an unsecured basis has been viewed positively in the rating, says Fitch.


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