Carnival Corp. Q2 Earnings Call: Prices Stabilize, Profits Dip

June 22, 2010
Earnings Call
(6:25 p.m. EST) -- Cruise fares continue to stabilize, European cruisers are less put off by geo-political turmoil in southern Europe than Americans, and the Gulf oil spill has not affected cruising's bottom line. That was the word this morning from Carnival Corp.'s second-quarter earnings call.

The world's largest cruise company -- which operates 96 ships with 187,000 lower berths across 11 cruise lines that include Princess Cruises, Costa Cruises and luxury line Seabourn -- posted earnings of $252 million on $3.2 billion in revenue during the second quarter of 2010. Revenues were higher than in Q2 2009, when the company earned $2.9 billion, but profits dipped from $264 million to $252 million due to much higher fuel costs and unfavorable changes in currency exchange rates. Looking forward, Carnival maintained its outlook for the remainder of 2010.

Do the Math

While net revenue was up year-over-year -- and it was the first time the brand had seen a positive net revenue yield since 2008 -- fuel costs slashed into profits. Increased fuel prices negatively impacted earnings by $162 million ($0.20 per share) during the quarter. Fuel prices increased 64 percent to $498 per metric ton for Q2 2010 from $304 per metric ton in Q2 2009. And based on the current spot price for fuel, fuel costs for all of 2010 are expected to increase $440 million compared to 2009. Currency weakness in Europe further cut into profits. Since March guidance, given at the company's Q1 earnings call, unfavorable changes in currency exchange rates have reduced earnings by $97 million.

The Chilean earthquake and the volcanic eruptions in Iceland that grounded planes all over Europe negatively impacted earnings by two cents. "Over the past six weeks, volcanic ash did cause nervousness about air travel, compounding this was the euro sovereign debt crisis, and we believe this caused consumers to rethink discretionary spending," said Chairman and CEO Micky Arison."If you look at our [investor] risk section, I don't think volcanoes are in there," he added with a chuckle.

Carnival has attempted to offset these costs by reducing fuel consumption (itinerary tweaks), among other cost control measures. Additionally, onboard spending is up. "As of the end of May, essentially all of the categories, except for casino, were up," noted Chief Financial Officer David Bernstein. "We expect this trend to continue."

Deals or No Deals?

Prices continue to stabilize and trend upward -- even in places like the Mexican Riviera, a destination often labeled as soft during previous calls. Another previous point of concern was Alaska, but the executives noted that pricing was up, albeit on much lower supply. Howard Frank, Carnival Corp.'s vice chairman and COO, specifically mentioned that the company was enjoying strong volumes and pricing for was Caribbean programs, which makes up 52 percent of North American capacity.

In fact, the big-wigs mentioned only one specific point of weakness during today's call. For Spanish- and Portuguese-speaking cruisers, pricing for Iberocruceros, Carnival Corp.'s Spain- and Brazil-based line, is expected to fall -- mostly as the result of a 37 percent increase in capacity.

Several analysts asked about the impact of the Gulf oil spill on cruising. "The gulf cruises have been virtually unaffected by the spill," said Arison. "We are operating and passengers are not even aware of it. Ships are navigating around it, and there may be some increased fuel consumption there, but ships are being inspected every time they return to the U.S., and we haven't had to clean a hull yet. We've seen no slowdown in bookings."

Future Tense: Gulf Oil Spill, Fuel Costs, New-Builds

And if cruise ships couldn't get around the spill in the future, would there be operational flexibility for the Mobile- and New Orleans-based ships? "We don't believe that it's necessary," responded Arison. "There is a cleaning process that the ships would go through. It would delay our arrivals and departures, and we'd have to adjust for that."

"Hopefully by August we can get this thing capped and we can move on," concluded Frank.

While it was clear that the company expects fuel to continue to cut into profits, a variety of counter measures are in place over the next few quarters, including fewer scheduled dry docks for 2010 and a low inflationary environment. And although pain at the pump continues, the line made no mention of making consumers help to foot the bill via fuel surcharges.

As usual, the question of new-builds, one of the analysts' favorite subjects, came up. Arison reiterated his previous comments, saying that starting in 2013, the average would probably be two to three new ships per year, spread out across the brands.

Interesting Moment: Europeans vs. Americans

It was a rather dry call, but there were a few particularly notable comments from Howard Frank about the differences in consumer habits between North American and European cruisers. Said Frank: "The European consumer is a much more stable consumer. They don't have a lot of consumer debt ... vacations are really right at the top of their priorities for how they spend their money ... and they have a strong social system that supports that kind of mindset." On the other hand, North American passengers are more concerned with geo-political turmoil, like we've seen in southern Europe, and have become tighter with their discretionary spending as a result.

In Case You Missed It

Carnival Corp. took delivery of two new ships during Q2, P&O Cruises' 3,100-passenger Azura and Seabourn Cruise Line's 450-passenger Seabourn Sojourn. In addition, contracts were finalized between Princess Cruises and Fincantieri for the construction of two 3,600-passenger ships for delivery in May 2013 and 2014.

--by Dan Askin, Associate Editor