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THE WEEK AHEAD

The Economic Data calendar for the week of the 25th of June through the 29th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - weeek

 


DRI: ORLANDO, WE HAVE A PROBLEM

As we expected (DRI: SHAPING UP TO DISAPPOINT 6/21/12), 4QFY12 traffic trends disappointed at Olive Garden.  What we didn’t expect, is that Red Lobster and LongHorn would also post such poor same-store sales numbers.  Hiking the dividend is one way to keep investors happy but tough questions have to be asked of management.

 

Darden is an impressive company that has earned the investment community’s respect through years of producing strong financial results.  CEO Clarence Otis, speaking on CNBC immediately after the print, was shining light on the full year results but the trajectory of comps during this most recent fiscal quarter is a concern going forward.  What’s more concerning to us, is the lack of clarity on when consistent results can be expected at Olive Garden and how they will come about.

 

 

FY2013 Guidance and Outlook

 

Management's FY13 guidance lowered the bar versus the company’s long-term guidance.  EPS growth is expected to be 8-12% versus the 10-15% longer term target while blended same restaurant sales growth guidance is 1-2% versus long-term guidance of 2-4%.  During FY13, we expect EPS growth to benefit from more favorable food costs and other cost reduction initiatives.  We cannot advise clients, with sufficient confidence, that a turnaround is afoot at Olive Garden.  While we respect the operational acumen of the companies’ management teams, we are adopting a “show me” stance toward Darden’s numbers over the next couple of quarters.  Hiking the dividend by 16% this morning is likely to help retain long-term holders, but believe that more intermittent volatility is likely for Olive Garden before the chain achieves consistency in its operational performance. 

 

Olive Garden’s new menu and remodel program not being finalized at this point does not inspire confidence that a solution to the difficulties at Olive Garden is around the corner.  Management cannot possibly predict consumer reaction to promotions and, while investors are waiting for the transition at Olive Garden to be completed, we feel that results at Olive Garden are going to continue to be inconsistent.

 

Below we go through our thoughts on the company’s three largest brands, their 4QFY12 results, and their individual outlooks for FY13.

 

 

Olive Garden

 

Darden’s largest chain, and a key focus for investors heading into this morning’s print, posted a disappointing same-restaurant sales number of -1.8% for the fourth fiscal quarter.  According to Consensus Metrix, the Street was looking for 0.5% growth.  Management apportioned most of the blame for Olive Garden’s disappointing comp store sales growth to performance during the month of May; the “Taste of Tuscany” promotion, which started at a price point of $10.95, failed to live up to management’s expectations.  The Tuscany promotion extended into June so, as far as read-through for 1QFY13, the promotion proving ineffective is a negative indication.  A decision not to advertise around Mother’s Day this year was also cited as a factor in the poor momentum at Olive Garden.

 

Looking forward to 2013, management is shifting towards a more “single-minded” approach to affordability.  To that end, management is launching a new promotion, 2 for $25, which offers unlimited soup, salad, or bread sticks plus an appetizer or dessert plus an entrée. We are not convinced that this strategy will meet management expectations; there are many similar offers in the casual dining space.

 

One short-term concern we have is that the new menu is not going to be released at Olive Garden until 3QFY13.  The menu is currently being tested at 40-50 stores.  In the event that any adjustments need to be made to that menu, the start date could be pushed back further.  Additionally, the Olive Garden remodel program – aimed at updating and refreshing 430 of the total ~800 stores – is in its final testing phase.  The Street will be looking for more specificity from the company on the timetable of this initiative.  Any protraction of the remodel program will only delay Olive Garden becoming a more consistent business.

 

DRI: ORLANDO, WE HAVE A PROBLEM - olive garden comps versus unit growth

 

DRI: ORLANDO, WE HAVE A PROBLEM - olive garden pod1

 

 

A Darden earnings call without commentary on the Gap-to-Knapp (performance versus industry benchmark Knapp Track) is about as perturbing as a visit to Olive Garden without breadsticks.  This break from tradition, while unsettling, is not a major surprise when we consider that Knapp Track results comfortably outperformed Olive Garden and Red Lobster monthly comps during 4QFY12.  As keen as COO Andrew Masden was to highlight Olive Garden’s increasing strength versus the industry during 3QFY12, no such color was provided this morning.  Here is the comment from 3/23, on Olive Garden trends versus the industry “Olive Garden same-restaurant sales were up 2% during the third quarter, roughly 60 basis points below the full-service restaurant industry benchmark. However, this is a sharp improvement from the 320 basis point shortfall in the second quarter.”

 

The new menu and remodel program may help end Olive Garden’s travails, but our near-term view is that the concept needs to find a way to become less price-dependent for top-line growth.  On mix at Olive Garden, management had the following to say this morning: “the biggest dynamic is that we experienced at all of our large casual dining brands during 2012, we experienced a meaningful amount of menu mix, negative menu mix. So, guests trading down to lower priced items. Ordering fewer appetizers, fewer desserts. And we think that step-down is going to moderate during fiscal '13. So we wouldn't expect that negative trend in guest behavior to continue.”  Looking at the chart paints a different picture.  Mix was positive in May and negative for 17 consecutive months prior to that. 

 

DRI: ORLANDO, WE HAVE A PROBLEM - olive garden comps monthly

 

 

Red Lobster

 

The Lenten period shift negatively impacted Red Lobster’s 4QFY12 results by 130 basis points.  Same-restaurant sales came in at -3.9% versus Consensus Metrix expectations of +1.3%.  Lobsterfest, a signature promotion for Red Lobster that typically coincides with the Lenten season, performed poorly this year due to the spike in gasoline prices occurring during the Lenten season.

 

The Festival of Shrimp promotion began at Red Lobster in late April and continued through May.  The company took a price increase for the promotion of $1 from $11.99 to $12.99 based on its success last year and on research that suggested consumers were largely indifferent between $11.99 and $12.99.  The same-restaurant sales decrease in May, according to management, shows that the price increase turned out to be too aggressive.  This highlights a key concern we have for the Red Lobster business, as well as Olive Garden; the comps at their two largest businesses are overly dependent on price and the customer is highly sensitive to increases in price.

 

DRI: ORLANDO, WE HAVE A PROBLEM - RL pod1

 

DRI: ORLANDO, WE HAVE A PROBLEM - RL comps monthly

 

 

LongHorn Steakhouse

 

LongHorn’s comps came in lower than expected, which we highlighted as a possibility in our preview post.  Increased competition in the steak category is making it difficult for LongHorn to take share as rapidly but, as a part of the Darden portfolio, we see this concept as a bright spot for the company.  As the chart below indicates, comps sequentially slowed to 3% from 6.7% the quarter prior and Consensus Metrix 4QFY12 expectations of 4.5%.  This stock is important for the longer-term TAIL story, but as we wrote in our preview note published yesterday morning, Olive Garden and Red Lobster are more important for the immediate-term TRADE and intermediate-term TREND.

 

DRI: ORLANDO, WE HAVE A PROBLEM - longhorn pod1

 

DRI: ORLANDO, WE HAVE A PROBLEM - longhorn comps monthly

 

 

Conclusion

 

The underlying fundamentals of Olive Garden are a concern for Darden’s business over the near-term.  We see the transition period as possibly lasting longer than some investors are expecting and there is substantial risk, in our view, of mishaps occurring as the company makes adjustments to its most important brand while accelerating unit growth.   We are content to sit on the sideline for now.  The dividend yield will continue to provide support for the stock but our expectation is for the first and (possibly) second quarter to be a difficult period for Darden. 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


Weekly European Monitor: No Bazooka! Go Figure!

-- For specific questions on anything Europe, please contact me at to set up a call.

 

No Current Positions in Europe: Covered EUR/USD (FXE) on 6/21; Covered Spain (EWP) on 6/18; and Sold German Bonds (BUNL) on 6/18

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +1.0% week-over-week vs +2.9% last week. Top performers:  Greece +8.6%; Finland +5.0%; Cyprus +3.0%; Portugal +2.9%; Spain +2.3%; Italy +2.0%; Denmark +1.7%. Bottom performers: Russia (RTSI) -5.0%; Slovakia -1.9%; Norway -1.8%; Ireland -0.9%; Austria -0.8%.
  • FX:  The EUR/USD is down -0.59% week-over-week vs -0.58% last week.  W/W Divergences: HUF/EUR +2.28%, NOK/EUR +0.70%, TRY/EUR +0.54%, GBP/EUR -0.24%; PLN/EUR -0.53%, CZK/EUR -1.27%, RUB/EUR -1.84%.
  • Fixed Income:  Yields came in dramatically this week. Portugal saw the biggest move, falling -104bps week-over-week to 9.54%. [Portugal’s 10YR has not seen sub 10% in over a year!] Greece also saw a large decline, falling -67bps to 27.06%.  Spain dropped -35bps and Italy fell -20bps to 6.53% and 5.80%, respectively.   Germany bounced +5bps week-over-week to 1.55%.

Weekly European Monitor: No Bazooka! Go Figure! - 111. yields

 

 

No Bazooka! Go Figure!


With the Greek elections over, and some insight into Spain’s bank recapitalization needs behind us, what’s next for Europe? This week we saw a few interesting phenomenon: peripheral yields and risk metrics (CDS) came down dramatically, while new peripheral sovereign paper was issues at significant premiums (vs pervious auctions as recent as last month), and data—including confidence figures and PMIs—were bombed out! [See below in Data Dumb].  Now all eyes are peeled on the EU Summit next week (June 28-9) for the delivery of a “panacea” to cure Europe’s ails. Even a major investment bank was out this morning saying that it has heard from participants at the recently ended G-20 meetings in Mexico that there could be a “bazooka” of sorts in the works!

 

Our response: there’s a fat chance Eurocrats can craft anything close to a bazooka/panacea next week.

 

What will the Eurocrats discuss? Well, there’s actually a ton of programs on the table for discussion, which in and of itself lends to a higher probability that nothing concretely gets issued. The main topics of discussion should include:

  • Fiscal Compact
  • Pan-European Deposit Insurance
  • Eurobonds
  • European Redemption Fund
  • ESM (and EFSF)
  • European Financial Transactions Tax

We continue to view Ms. Merkel as the Eurozone’s paymaster, the lead horse pulling the Eurozone cart along, but also a party at the table not willing to fold her cards. In this light, we expect Merkel to argue for more fiscal integration (signatures on the Fiscal Compact from a majority of the 27 EU members), the first step before such programs as Eurobonds and a European FDIC can even be imagined. This week the Germans largely pressed forward in support of a financial transaction tax, with or without the backing of the other member states. We’re slightly surprised by the positioning and will wait to see how this development plays out.   

 

However, a more pressing question that should be discussed in earnest at the Summit surrounds the capabilities of the existing EFSF and ESM. Importantly, the ESM still needs to be ratified by the German Parliament, which is expected to take place on June 29th. Already, EU leaders have said that it is now expected to come online on July 9, versus the original proposal of July 1. In any case, there needs to be clarification on the terms of the ESM, namely if it can be directed for bank recapitalizations, and if borrowing from the ESM contributes to the debt of the borrowing country. Here the problem is that Europe doesn't have a TARP-like facility to lend directly to the banks, but must lend to the sovereigns first. 

 

Our longer-term read through is that this Summit, like most in the past, will disappoint investors. We believe that 1.) the IMF may need to take a larger role in bailing out Europe, as individual countries will not post more money to existing bailout facilities, and 2.) Eurobonds may be the only quasi “bazooka” left, however the coordination of such subsidized bonds are many months, if not years, ahead.

 

Enjoy today’s match between Germany and Greece at 2:45pm EST!

 

 

EUR-USD:


Below is an updated EUR/USD price level chart. Our immediate term TRADE support is $1.24 and resistance is $1.27. Our intermediate term TREND support level remains at $1.23. Our call is that if $1.23 breaks, look out below! We’re not EUR parity folks because we see Eurocrats stepping in to prevent it.

 

Weekly European Monitor: No Bazooka! Go Figure! - 111. EUR USD

 


Call Outs:

 

Spain - According to stress tests conducted by the consultants Roland Berger and Oliver Wyman, Spanish banks recapitalization needs could reach €62 billion in a worst-case scenario. The base line scenario implies a 1.7% drop in real GDP this year and a 0.3% fall in 2013 alongside a 5.6% fall in housing prices this year and 2.8% the following year.

 

Spain - Spain has notified the four firms (Deloitte, KPMG, PwC and Ernst & Young) currently working on a second and more detailed audit of Spanish banks that the deadline to present their reports has been moved to September from 31-Jul.

 

IMF - says that emerging market economies have formalized funding pledges bringing total size of firewall up to $456 billion from $430 billion in April (China will give $43 billion while Mexico, Russia, India, Brazil commit to $10 billion each). 

 

Eurogroup Chief - The press is reporting that French President Hollande will lobby his German, Italian and Spanish peers about the possibility of making his finance minister, Pierre Moscovici, head of the Eurogroup. Hollande's efforts may challenge German Finance Minister Wolfgang Schaeuble’s path forward; he was long thought to be the frontrunner to take over for Jean-Claude Juncker.

 

ECB - ECB Executive Board member Benoit Coeure, said in an interview that an interest rate cut was likely to be discussed at next month's meeting (5-July). However, he noted that while cutting rates was certainly an option as far as monetary policy is concerned and could help to some extent, it would not fix the fundamental problems in Europe. Recall that ECB President Draghi said that three members had pushed for a rate cut at the last ECB meeting on 6-June.

 

UK - Minutes from the BOE’s latest meeting showed that Governor King was overruled 5-4 to keep its bond- purchase target at 325 billion pounds this month. This is the first time since 2009 that King was overruled. King, Adam Posen and David Miles called for a 50 billion-pound expansion, and Paul Fisher’s bid for 25 billion pounds. 

 

 

CDS Risk Monitor:


Like sovereign yields, sovereign CDS saw a large down move this week. Portugal saw the largest decline in CDS w/w at -195bps to 847bps, followed by Ireland -44bps to 625bps, Italy -28bps to 509bps, and Spain -21bps to 569bps. [Portugal hasn’t been sub 900bps since 7/6/2011!].

 

Weekly European Monitor: No Bazooka! Go Figure! - 111. cds   a

 

Weekly European Monitor: No Bazooka! Go Figure! - 111. cds   b

 


Data Dump:


Manufacturing PMIs JUN Preliminary:

Eurozone 44.8 JUN vs 45.1 MAY

Germany 44.7 JUN vs 45.2 MAY

France 45.3 JUN vs 44.7 MAY

 

Services PMIs JUN Preliminary:

Eurozone 46.8 JUN vs 46.7 MAY

Germany 50.3 JUN vs 51.8 MAY

France 47.3 JUN vs 45.1 MAY

 

*Eurozone Composite PMI 46.0 JUN vs 46.0 MAY

 

Eurozone ZEW Economic Sentiment -20.1 JUN vs -2.4 MAY

Eurozone Construction Output -5% APR Y/Y vs -2.6% MAR   [-2.7%  APR M/M vs 11.4% MAR]

 

Germany ZEW Current Situation 33.2 JUN (exp. 39) vs 44.1 MAY

Germany ZEW Economic Sentiment -16.9 JUN (exp. 2.3) vs 10.8 MAY

Germany IFO Business Climate 105.3 JUN (105.6) vs 106.9 [2yr low]

Germany IFO Current Expectations 113.9 JUN (exp. 112) vs 113.2 MAY

Germany IFO Expectations 97.3 JUN (exp. 99.8) vs 100.8 MAY

Germany Producer Prices 2.1% MAY Y/Y vs 2.4% APR (slows to a 23-month low)

 

France Own Company Production Outlook -4 JUN vs -4 MAY

France Production Outlook Indicator -30 JUN vs -28 MAY

France Business Confidence Indicator 92 JUN vs 93 MAY

 

UK Retail Sales w Auto Fuel 2.4% MAY Y/Y vs -1.1% APR   [1.4% MAY M/M vs -2.4% APR]

UK CPI 2.8% MAY Y/Y (exp. 3%) vs 3.0% APR   [-0.1% MAY M/M vs 0.6% APR]

UK RPI 3.1% MAY Y/Y vs 3.5% APR

UK ILO Unemployment Rate 8.2% APR vs 8.2% MAR

UK Jobless Claims Change 8.1K MAY (exp. -4K) vs -12.8K APR

 

Italy Consumer Confidence 85.3 JUN (exp. 86) vs 86.5 MAY

Italy Industrial Orders -12.3% APR Y/Y (exp. -8.6%) vs -14.3% MAR

Spain Mortgages on Houses -31.3% APR Y/Y vs -42.0% MAR

 

Switzerland ZEW Credit Suisse Expectations of Economic Growth -43.4 JUN vs -4 MAY

Switzerland Exports 1.8% MAY M/M vs -0.7% APR

Switzerland Imports -0.1% MAY M/M vs 3.1% APR

Switzerland M3 Money Supply 6.2% MAY Y/Y vs 6.3% APR

 

Holland Unemployment Rate 6.2% MAY vs 6.2% APR

Holland House Price Index -5.5% MAY Y/Y vs -5.2% APR

Holland Consumer Confidence -40 JUN vs -38 MAY

 

Austria Industrial Production 0.4% APR Y/Y vs 0.8% MAR

 

Sweden Unemployment Rate 8.1% MAY (exp. 7.8%) vs 7.8% APR

Sweden Consumer Confidence 3.1 JUN (exp. 4) vs 5.9 MAY

Sweden Manufacturing Confidence -4 JUN (exp. -2) vs -1 MAY

 

Russian Industrial Production 3.7% MAY Y/Y vs 1.3% APR

Russia Disposable Income 3.6% MAY Y/Y vs 2.1% APR

Russia Real Wages 11.1% MAY Y/Y vs 11.1% APR

Russia Producer Prices 3.1% MAY Y/Y vs 6.7% APR

Russia Retail Sales 6.8% MAY Y/Y vs 6.5% APR

Russia Unemployment Rate 5.4% MAY vs 5.8% APR

Russian Investment in Production Capacity 7.7% MAY Y/Y vs 7.8% APR

 

Poland Core Inflation 2.3% MAY Y/Y vs 2.7% APR

Poland Producer Prices 5.0% MAY Y/Y vs 4.3% APR

Poland Producer Prices 3.2% MAY Y/Y vs 3.6% APR

 

Slovakia Unemployment Rate 13.2% MAY vs 13.4% APR

Slovenia Unemployment Rate 11.8% APR vs 12.0% MAR

Ukraine Industrial Production 1% MAY Y/Y vs 0.0% APR

Turkey Consumer Confidence 92.1 MAY vs 91.1 APR

 


Interest Rate Decisions:


(6/20) Norwegian Deposit Rate UNCH at 1.50%

(6/20) Bank of England voted 5-4 to maintain asset purchase program

 

 

The Week Ahead:

 

Sunday: Jun. Germany Import Price Index (Jun. 24-30)

 

Monday: Jul. Germany GfK Consumer Confidence Survey; May Spain Producer Prices

 

Tuesday: Jun. France Consumer Confidence Indicator; May France Jobseekers; May UK Public Finances, Public Sector Net Borrowing; May Italy Hourly Wages; Apr. Italy Retail Sales; Spain Budget Balance YtD

 

Wednesday: Jun. Germany Consumer Price Index - Preliminary; May Germany Import Price; Jun. UK CBI Reported Sales; May UK BBA Loans for House Purchases; May Spain Retail Sales; Jun. Italy Business Confidence

 

Thursday: EU Summit in Brussels (Jun 28-29) aim to formally sign off on growth proposals; EC meets to discuss Institutional Affairs; Jun. Eurozone Consumer Confidence – Final, Business Climate Indicator, Economic Confidence, Industrial Confidence, Services Confidence; Jun. Germany Unemployment Data; 1Q Germany GDP – Final, Current Account, Total Business Investment – Final; Jun. UK Nationwide House Prices, GfK Consumer Confidence Survey; Jun. Spain CPI - Preliminary; Apr. Spain Total Housing Permits; Jun. Italy CPI - Preliminary; May Italy  PPI

 

Friday: Jun. Eurozone CPI Estimate; May Eurozone Money Supply; May Germany Retail Sales; May France Producer Prices, Consumer Spending; 1Q France GDP – Final; Apr. UK Index of Services; Apr. Spain Current Account; Apr. Greece Retail Sales; German Parliament to ratify the ESM and Fiscal Compact

 

Saturday: June 30th is the deadline for EU Banks to meet 106 Billion EUR capital target.

 


Extended Calendar Call-Outs:

 

JULY:  France – extraordinary session of parliament in July is due to re-draft the 2013 budget 

 

1 July:  ESM to come into force

 

5 July: ECB governing council meeting

 

19 July: ECB governing council meeting

 

18-19 October: Summit of EU Leaders

 

 

Matthew Hedrick

Senior Analyst


Early Look

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CCL 2Q 2012 CONF CALL NOTES

Lower fuel and a weak Europe were already priced in but a less robust outlook on North America is disappointing.

 

 

"The increase in booking volumes indicates that a progressive recovery is well underway and we are catching up following the slowdown in bookings during wave season, our peak booking period. The attractive pricing we have in the marketplace is clearly stimulating demand, especially for the Costa brand. We are pleased to see the resurgence in consumer demand for Costa"

 

- Carnival Corporation & plc Chairman and CEO Micky Arison

 

 

CONF CALL NOTES

  • 2Q was 13 cents above the midpoint of their guidance range  -- 5 cents came from better close-in bookings and onboard spend.  The litigation settlement (2 cent benefit) was related to the Queen Mary 2 Propulsion.
  • Capacity in 2Q increased over 2%, similar for NA and EAA brands
  • In 2Q, NA brands were up 1.5% on net ticket yields, driven by improved yields and the Caribbean and Alaska, partially offset by lower yields in European and other itineraries. Slightly more than 50% of NA's capacity was in the Caribbean.
  • Excluding Costa, our EA brands net ticket yields were down 2.7%
  • Consumption per ABLD declined 3.2% this Q
  • Stronger USD cost them 2 cents this quarter and higher fuel prices cost them 9 cents this q (compared to last year)
  • Feel comfortable with their level of protection on fuel costs for the next 18 months (through 2013). Will look to opportunistically increase their hedges for 2014 & 2015.
  • Their 2012 guidance already includes 7 cents of derivative losses on fuel costs
  • FY outlook commentary: 
    • Expenses related to the Costa Concordia incident were less then they expected which coupled with one-time costs 
    • 10% change in fuel for the remaining half of 2012 will impact earnings by 13 cents per share but will be partly offset by 4 cents of losses on the derivative hedge
    • 10% change in all relevant currencies for the remaining half of 2012 will impact earnings by 11 cents/ share
    • 30 cent improvement in lower fuel prices, offset by 7 cents of hedges and 3 cents of FX
    • Operating cash flow: $3.2BN; $1.9BN of capex; leaving ~$500MM of FCF
  • The percentage improvement over these last 7 weeks has been evenly spread between NA and EAA brands
  • At the end of March, they restarted their marketing programs for Costa Concordia which included significant pricing initiatives
    • Pricing incentives offered cruises at a 20-30% discount to last year.  The pricing initiatives led to a rebound in volumes in April.
  • Significantly higher air prices impacted NA customers traveling to Europe.  During this past spring, NA brands experienced slightly lower pricing originally forecasted.  European brand itineraries experienced the largest declines in pricing not just because of the slowing of the American market but also because of the challenges in locally sourcing business from the softer European markets.
  • NA revenue yields are now forecasted to be flat for the rest of the year and ticket yields are modestly lower for 2H12
  • Revenue yields are also forecasted to be slightly lower for European brands for the balance of the year. Ibero has suffered a significant decline revenue yields, luckily there are only 3 ships operating there.  Bookings and pricing for the UK and German customers have held up reasonably well.
  • For the last 15 weeks, Costa's booking volumes are running 13% ahead on a YoY basis.  Expect that when occupancies begin to improve, they will increase pricing.  Costa is expected to be down in the mid-teens YoY and their loss for the year will be in the range of $100MM (same as guided on the March call). 
  • 2013 capex: $1.8BN and FCF is expected to improve
  • 3Q12 outlook (ex Costa): 
    • 3Q capacity 2.9% increase; 1.6% in EAA and 3.4% in NA. 
    • Prices and occupancies are lower YoY across EAA and NA brand itineraries
    • NA brands: 38% Caribbean (up slightly YoY) and 24% in Alaska (slighty up YoY), and 25% in Europe (same YoY)
      • Pricing on Caribbean itineraries is flat YoY; pricing for both Alaska and European cruises are lower
      • Occupancies are slightly lower 
    • EAA brands: 85% Europe (vs. 82% in 2011)
      • Pricing and occupancy slightly lower
      • Uk pricing is higher, German pricing is slightly lower, Spanish pricing is significant lower
    • Currency and fuel are expected to negatively impact EPS by 83 cents (YoY)
  • 4Q12 outlook (ex Costa):
    • 3-4% capacity increase; 3.9% in NA and 2.1% in EAA
    • NA: 43% in the Caribbean and 13% in Europe (similar to last year)
      • Pricing is slightly lower YoY  on lower occupancies. Caribbean pricing is higher YoY on flat occupancy, while all other itinerary pricing is slightly lower on lower occupancy
    • EAA: 61% of intineraries in Europe
      • Pricing is slightly higher vs. a year ago at lower occupancies
      • Expect pricing for EAA brands to decline through the year and expect pricing to end up lower YoY for 4Q
  • 2013 outlook:
    • 4% increase in capacity; 3.4% in NA and 4.9% in EAA
    • Fleetwide occupancies are currently lower with pricing slightly lower
    • 1Q13 will be the toughest comp given strong NA performance in 1Q12
    • NA: occupancies flat YoY with pricing lower overall but mix changes will help pricing. 
    • EAA occupancies are lower with higher pricing
    • Expect that lower fuel pricing will provide a boost to EPS - by 23 cents in just the 1H2013

 

Q&A

  • Estimated that Q3 and Q4 net yields (ex Costs) will be down in the 3-4% range (so a similar amount). 
  • They are about 80% booked for 3Q and around 50% booked for 4Q
  • Feels good about their guidance based on everything they know today.  They are taking all the stimulas programs into account, which are working well for them
  • 2013 should have more FCF and less capex. Thoughts on share repurchase? 
    • They only bought back 150k shares last quarter, right now $330MM remains on the program
    • It's the board's decision on how much to buyback. Still expect to buyback stock and issue dividends next year.
    • $300-400MM FCF for 2012
  • The marketing program is only a little more expensive than what they thought after missing a significant portion of wave season because of the Concordia issue.  They are heavy with the promotions on programs with an air ticket component.
  • AIDA's business has come back nicely.  They picked up a lot of booking momentum recently.  Normalized quite nicely. 
  • Promotional activity is filling the Costa Concordia ships. Even though the ships are filling well, the loss from the ships is still projected to be unchanged, so it's been a tradeoff between price and occupancy
  • All of their brands are being more creative to stimulate onboard spend. Hard to tell how much of the higher onboard spend is due to better programing or truly better consumer spending. Higher onboard spending was skewed towards the NA brands. 
  • Seeing a little bit of challenge in Australia. Lots of capacity increases so pricing has been down, but that market is still profitable.  Maybe the worst of the capacity increases is over.
  • In Asia, it's a really positive situation.  Expect to be break even to slightly positive from a FCF basis there this year. Bringing the Costa Atlantica to Asia next Spring and bringing Princess to Japan.
  • South America business for them mostly begins this winter, but it's shaping up nicely
  • Summer quarter is usually the strongest demand quarter in the business. Q4 is more of a demand struggle - so 4Q is always more of a challenge for demand stimulation. In terms of the capacity mix it's not as different as you would think. Med is 28% in 3Q going to 29% in 4Q,  Caribbean is 25% going 28%. 4Q includes September for them, which is still peak season for the Med 
  • Cost declines? 
    • Significantly less dry docking fees this quarter than last year, and Euro was 1.43 vs. 1.31.
  • UK held up pretty well throughout this whole process, Germany took a hit and bounced back. Italy is still being impacted though. Spain is still terrible.
  • First time cruisers have been more impacted by the Concordia accident. First time cruisers declined post event.
  • Not clear if the bookings are closer in or if it's just that they had a bigger whole to fill created by the incident. See no reason why the booking curve won't normalize once occupancies recovery. 
  • Costa is selling at 20-30% below prior year levels. Expect yields to be down in the mid-teens for the year on Costa.
  • Don't think it's realistic to expect Costa to go back to normal next year, although they expect to see improvements. Will take a few years for things to get back to where they were. They also have 3 less ships so they won't get back to where they were in 2011.
  • Direct bookings were 19% of their total bookings last year. Expect that over time that number will creep up. Have no plans to reduce commission rates. They don't actually believe that they reduced comp in UK - they just changed the way that travel agents were being compensated and it was just specific to the UK. Travel agency distribution system is still a critical part of their strategy.
  • There are still surcharges for fuel in Germany and the UK on some of the itineraries
  • They haven't increased the marketing budgets of any of their brands aside from Costa
  • Originally they didn't want to do price stimulus because they didn't think it would work to stimulate demand for Costa. However, they continued to do pricing surveys and by April their surveys indicated that stimulus would work. The marketing they did was pricing centric - simple message of 75 euros a day/pp for May, 85 for June and 95 for July -- and it worked.
  • A lot of 2013 pricing in Europe will depend on how fast occupancies come back.  Not likely that things will improve enough to make Q1 positive

 

HIGHLIGHTS FROM THE RELEASE

  • "Since March, fleetwide booking volumes have continued to improve and are running well ahead of the prior year at lower prices. For the last seven weeks, booking volumes excluding Costa have increased 8%..., while booking volumes for Costa....are up 25%. For the remainder of the year, cumulative advance bookings excluding Costa are three occupancy points behind the prior year at slightly lower prices while cumulative advance bookings for Costa are at lower occupancies and lower prices compared with the prior year." 

CCL 2Q 2012 CONF CALL NOTES - 123

  • "Excluding Costa, the company forecasts full year 2012 net revenue yields, on a constant dollar basis, to be down slightly. The company has slightly reduced the mid-point of its 2012 yield guidance as the price incentives required to drive the booking volumes needed to close the occupancy gap was more than had been previously anticipated for the second half of the year.  Full year 2012 revenue yields for the North American brands are expected to be in line with the prior year. Full year 2012 revenue yields for the European brands, excluding Costa, are expected to be lower than the prior year." 
  • "Lower net revenue yield expectations have been offset by greater than anticipated cost reductions. The company expects net cruise costs, excluding fuel, per ALBD for the full year 2012 to be down slightly compared with the prior year on a constant dollar basis. In addition, lower fuel prices (net of forecasted realized losses on fuel derivatives) partially offset by changes in currency exchange rates are expected to increase full year 2012 earnings by $0.30 per share compared to March guidance."
  • FY2012 EPS: $1.80 to $1.90, compared to the March guidance range of $1.40 to $1.70
  • "The long term fundamentals of our business remain sound. As we look toward the future, we are excited by the prospect for continued global expansion beyond our established markets in North America and Western Europe. We are pursuing multiple opportunities to develop emerging cruise markets including positioning a second Costa ship in China and through a series of Princess cruises dedicated to the Japanese market in 2013." 
  • "CEO Micky Arison noted that non-GAAP earnings were better than anticipated in the company's March guidance due primarily to a combination of higher than expected revenue yields and lower than expected costs, partly attributed to non-recurring items, in the second quarter."
  • Non-recurring items in 2Q12: "included $17 million, or $0.02 per share, of insurance proceeds in excess of net book value which were previously expected to be received in the third quarter, and $17 million, or $0.02 per share, received from a litigation settlement."
  • "Cruise ticket prices (excluding Costa) held firm close to sailing which, combined with stronger than expected onboard revenues, drove yields above prior year levels. Our North American brands performed well, achieving a 3% revenue yield improvement..., which more than offset slightly lower yields for our Europe, Australia and Asia brands (excluding Costa).  In addition, continued focus on cost controls and fuel consumption helped to mitigate the impact of higher fuel prices in the quarter."  
  • 2Q highlights:
    • On a constant dollar basis net revenue yields per ALBD decreased 1.4% (vs. March guidance -2.5% to -3.5%)
    • Excluding Costa, net revenue yields: +1.1%;  higher than March guidance of flat to down slightly
    • Gross revenue yields:-4.2% in current dollars.
    • NCC per ALBD (excluding fuel and non-recurring items): -2.2% (in constant dollars), better than March guidance of 0 to -1%. 
    • Gross cruise costs per ALBD including fuel and non-recurring items: -3.6% in current dollars.                  
    • Fuel prices increased 12% to $756/metric ton, costing CCL an additional $71MM. Fuel prices were slightly lower than March guidance of$772/ metric ton.
    • In March, the company entered into zero cost collars for an additional 19% of its estimated fuel consumption for the second half of fiscal 2012 through fiscal 2013, bringing the total covered to 38% over this period. The company also has zero cost collars in place that cover 19% of its estimated fuel consumption for fiscal 2014 and 2015. 
    • 3 new ships were delivered:  Costa Fascinosa, AIDAmar and Carnival Breeze

CCL 2Q 2O12 CONF CALL NOTES

Lower fuel and a weak Europe were already priced in but a less robust outlook on North America is disappointing.

 

 

"The increase in booking volumes indicates that a progressive recovery is well underway and we are catching up following the slowdown in bookings during wave season, our peak booking period. The attractive pricing we have in the marketplace is clearly stimulating demand, especially for the Costa brand. We are pleased to see the resurgence in consumer demand for Costa"

 

- Carnival Corporation & plc Chairman and CEO Micky Arison

 

 

CONF CALL NOTES

  • 2Q was 13 cents above the midpoint of their guidance range  -- 5 cents came from better close-in bookings and onboard spend.  The litigation settlement (2 cent benefit) was related to the Queen Mary 2 Propulsion.
  • Capacity in 2Q increased over 2%, similar for NA and EAA brands
  • In 2Q, NA brands were up 1.5% on net ticket yields, driven by improved yields and the Caribbean and Alaska, partially offset by lower yields in European and other itineraries. Slightly more than 50% of NA's capacity was in the Caribbean.
  • Excluding Costa, our EA brands net ticket yields were down 2.7%
  • Consumption per ABLD declined 3.2% this Q
  • Stronger USD cost them 2 cents this quarter and higher fuel prices cost them 9 cents this q (compared to last year)
  • Feel comfortable with their level of protection on fuel costs for the next 18 months (through 2013). Will look to opportunistically increase their hedges for 2014 & 2015.
  • Their 2012 guidance already includes 7 cents of derivative losses on fuel costs
  • FY outlook commentary: 
    • Expenses related to the Costa Concordia incident were less then they expected which coupled with one-time costs 
    • 10% change in fuel for the remaining half of 2012 will impact earnings by 13 cents per share but will be partly offset by 4 cents of losses on the derivative hedge
    • 10% change in all relevant currencies for the remaining half of 2012 will impact earnings by 11 cents/ share
    • 30 cent improvement in lower fuel prices, offset by 7 cents of hedges and 3 cents of FX
    • Operating cash flow: $3.2BN; $1.9BN of capex; leaving ~$500MM of FCF
  • The percentage improvement over these last 7 weeks has been evenly spread between NA and EAA brands
  • At the end of March, they restarted their marketing programs for Costa Concordia which included significant pricing initiatives
    • Pricing incentives offered cruises at a 20-30% discount to last year.  The pricing initiatives led to a rebound in volumes in April.
  • Significantly higher air prices impacted NA customers traveling to Europe.  During this past spring, NA brands experienced slightly lower pricing originally forecasted.  European brand itineraries experienced the largest declines in pricing not just because of the slowing of the American market but also because of the challenges in locally sourcing business from the softer European markets.
  • NA revenue yields are now forecasted to be flat for the rest of the year and ticket yields are modestly lower for 2H12
  • Revenue yields are also forecasted to be slightly lower for European brands for the balance of the year. Ibero has suffered a significant decline revenue yields, luckily there are only 3 ships operating there.  Bookings and pricing for the UK and German customers have held up reasonably well.
  • For the last 15 weeks, Costa's booking volumes are running 13% ahead on a YoY basis.  Expect that when occupancies begin to improve, they will increase pricing.  Costa is expected to be down in the mid-teens YoY and their loss for the year will be in the range of $100MM (same as guided on the March call). 
  • 2013 capex: $1.8BN and FCF is expected to improve
  • 3Q12 outlook (ex Costa): 
    • 3Q capacity 2.9% increase; 1.6% in EAA and 3.4% in NA. 
    • Prices and occupancies are lower YoY across EAA and NA brand itineraries
    • NA brands: 38% Caribbean (up slightly YoY) and 24% in Alaska (slighty up YoY), and 25% in Europe (same YoY)
      • Pricing on Caribbean itineraries is flat YoY; pricing for both Alaska and European cruises are lower
      • Occupancies are slightly lower 
    • EAA brands: 85% Europe (vs. 82% in 2011)
      • Pricing and occupancy slightly lower
      • Uk pricing is higher, German pricing is slightly lower, Spanish pricing is significant lower
    • Currency and fuel are expected to negatively impact EPS by 83 cents (YoY)
  • 4Q12 outlook (ex Costa):
    • 3-4% capacity increase; 3.9% in NA and 2.1% in EAA
    • NA: 43% in the Caribbean and 13% in Europe (similar to last year)
      • Pricing is slightly lower YoY  on lower occupancies. Caribbean pricing is higher YoY on flat occupancy, while all other itinerary pricing is slightly lower on lower occupancy
    • EAA: 61% of intineraries in Europe
      • Pricing is slightly higher vs. a year ago at lower occupancies
      • Expect pricing for EAA brands to decline through the year and expect pricing to end up lower YoY for 4Q
  • 2013 outlook:
    • 4% increase in capacity; 3.4% in NA and 4.9% in EAA
    • Fleetwide occupancies are currently lower with pricing slightly lower
    • 1Q13 will be the toughest comp given strong NA performance in 1Q12
    • NA: occupancies flat YoY with pricing lower overall but mix changes will help pricing. 
    • EAA occupancies are lower with higher pricing
    • Expect that lower fuel pricing will provide a boost to EPS - by 23 cents in just the 1H2013

 

Q&A

  • Estimated that Q3 and Q4 net yields (ex Costs) will be down in the 3-4% range (so a similar amount). 
  • They are about 80% booked for 3Q and around 50% booked for 4Q
  • Feels good about their guidance based on everything they know today.  They are taking all the stimulas programs into account, which are working well for them
  • 2013 should have more FCF and less capex. Thoughts on share repurchase? 
    • They only bought back 150k shares last quarter, right now $330MM remains on the program
    • It's the board's decision on how much to buyback. Still expect to buyback stock and issue dividends next year.
    • $300-400MM FCF for 2012
  • The marketing program is only a little more expensive than what they thought after missing a significant portion of wave season because of the Concordia issue.  They are heavy with the promotions on programs with an air ticket component.
  • AIDA's business has come back nicely.  They picked up a lot of booking momentum recently.  Normalized quite nicely. 
  • Promotional activity is filling the Costa Concordia ships. Even though the ships are filling well, the loss from the ships is still projected to be unchanged, so it's been a tradeoff between price and occupancy
  • All of their brands are being more creative to stimulate onboard spend. Hard to tell how much of the higher onboard spend is due to better programing or truly better consumer spending. Higher onboard spending was skewed towards the NA brands. 
  • Seeing a little bit of challenge in Australia. Lots of capacity increases so pricing has been down, but that market is still profitable.  Maybe the worst of the capacity increases is over.
  • In Asia, it's a really positive situation.  Expect to be break even to slightly positive from a FCF basis there this year. Bringing the Costa Atlantica to Asia next Spring and bringing Princess to Japan.
  • South America business for them mostly begins this winter, but it's shaping up nicely
  • Summer quarter is usually the strongest demand quarter in the business. Q4 is more of a demand struggle - so 4Q is always more of a challenge for demand stimulation. In terms of the capacity mix it's not as different as you would think. Med is 28% in 3Q going to 29% in 4Q,  Caribbean is 25% going 28%. 4Q includes September for them, which is still peak season for the Med 
  • Cost declines? 
    • Significantly less dry docking fees this quarter than last year, and Euro was 1.43 vs. 1.31.
  • UK held up pretty well throughout this whole process, Germany took a hit and bounced back. Italy is still being impacted though. Spain is still terrible.
  • First time cruisers have been more impacted by the Concordia accident. First time cruisers declined post event.
  • Not clear if the bookings are closer in or if it's just that they had a bigger whole to fill created by the incident. See no reason why the booking curve won't normalize once occupancies recovery. 
  • Costa is selling at 20-30% below prior year levels. Expect yields to be down in the mid-teens for the year on Costa.
  • Don't think it's realistic to expect Costa to go back to normal next year, although they expect to see improvements. Will take a few years for things to get back to where they were. They also have 3 less ships so they won't get back to where they were in 2011.
  • Direct bookings were 19% of their total bookings last year. Expect that over time that number will creep up. Have no plans to reduce commission rates. They don't actually believe that they reduced comp in UK - they just changed the way that travel agents were being compensated and it was just specific to the UK. Travel agency distribution system is still a critical part of their strategy.
  • There are still surcharges for fuel in Germany and the UK on some of the itineraries
  • They haven't increased the marketing budgets of any of their brands aside from Costa
  • Originally they didn't want to do price stimulus because they didn't think it would work to stimulate demand for Costa. However, they continued to do pricing surveys and by April their surveys indicated that stimulus would work. The marketing they did was pricing centric - simple message of 75 euros a day/pp for May, 85 for June and 95 for July -- and it worked.
  • A lot of 2013 pricing in Europe will depend on how fast occupancies come back.  Not likely that things will improve enough to make Q1 positive

 

HIGHLIGHTS FROM THE RELEASE

  • "Since March, fleetwide booking volumes have continued to improve and are running well ahead of the prior year at lower prices. For the last seven weeks, booking volumes excluding Costa have increased 8%..., while booking volumes for Costa....are up 25%. For the remainder of the year, cumulative advance bookings excluding Costa are three occupancy points behind the prior year at slightly lower prices while cumulative advance bookings for Costa are at lower occupancies and lower prices compared with the prior year." 
  • "Excluding Costa, the company forecasts full year 2012 net revenue yields, on a constant dollar basis, to be down slightly. The company has slightly reduced the mid-point of its 2012 yield guidance as the price incentives required to drive the booking volumes needed to close the occupancy gap was more than had been previously anticipated for the second half of the year.  Full year 2012 revenue yields for the North American brands are expected to be in line with the prior year. Full year 2012 revenue yields for the European brands, excluding Costa, are expected to be lower than the prior year." 
  • "Lower net revenue yield expectations have been offset by greater than anticipated cost reductions. The company expects net cruise costs, excluding fuel, per ALBD for the full year 2012 to be down slightly compared with the prior year on a constant dollar basis. In addition, lower fuel prices (net of forecasted realized losses on fuel derivatives) partially offset by changes in currency exchange rates are expected to increase full year 2012 earnings by $0.30 per share compared to March guidance."
  • FY2012 EPS: $1.80 to $1.90, compared to the March guidance range of $1.40 to $1.70
  • "The long term fundamentals of our business remain sound. As we look toward the future, we are excited by the prospect for continued global expansion beyond our established markets in North America and Western Europe. We are pursuing multiple opportunities to develop emerging cruise markets including positioning a second Costa ship in China and through a series of Princess cruises dedicated to the Japanese market in 2013." 
  • "CEO Micky Arison noted that non-GAAP earnings were better than anticipated in the company's March guidance due primarily to a combination of higher than expected revenue yields and lower than expected costs, partly attributed to non-recurring items, in the second quarter."
  • Non-recurring items in 2Q12: "included $17 million, or $0.02 per share, of insurance proceeds in excess of net book value which were previously expected to be received in the third quarter, and $17 million, or $0.02 per share, received from a litigation settlement."
  • "Cruise ticket prices (excluding Costa) held firm close to sailing which, combined with stronger than expected onboard revenues, drove yields above prior year levels. Our North American brands performed well, achieving a 3% revenue yield improvement..., which more than offset slightly lower yields for our Europe, Australia and Asia brands (excluding Costa).  In addition, continued focus on cost controls and fuel consumption helped to mitigate the impact of higher fuel prices in the quarter."  
  • 2Q highlights:
    • On a constant dollar basis net revenue yields per ALBD decreased 1.4% (vs. March guidance -2.5% to -3.5%)
    • Excluding Costa, net revenue yields: +1.1%;  higher than March guidance of flat to down slightly
    • Gross revenue yields:-4.2% in current dollars.
    • NCC per ALBD (excluding fuel and non-recurring items): -2.2% (in constant dollars), better than March guidance of 0 to -1%. 
    • Gross cruise costs per ALBD including fuel and non-recurring items: -3.6% in current dollars.                  
    • Fuel prices increased 12% to $756/metric ton, costing CCL an additional $71MM. Fuel prices were slightly lower than March guidance of$772/ metric ton.
    • In March, the company entered into zero cost collars for an additional 19% of its estimated fuel consumption for the second half of fiscal 2012 through fiscal 2013, bringing the total covered to 38% over this period. The company also has zero cost collars in place that cover 19% of its estimated fuel consumption for fiscal 2014 and 2015. 
    • 3 new ships were delivered:  Costa Fascinosa, AIDAmar and Carnival Breeze      

CCL 2Q REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.

 

 

OVERALL:  SLIGHTLY WORSE: Lower fuel and a weak Europe was already priced in but a less robust outlook on North America in 2H 2012, which we addressed with Alaska in "2012 MARCH CRUISE PRICING MATRIX" (4/12/2012), is disappointing. 

  • FY 2012 GUIDANCE
    • SLIGHTLY BETTER:  The midpoint of guidance was raised from $1.55 to $1.85, driven mainly by lower fuel expense.  The guidance band has been reduced from 30 cents to 10 cents.
  • 2Q GUIDANCE
    • BETTER:  better revenue yields (higher booking volumes) and better controls on net cruise costs resulted in a 12 cent beat. 
  • 3Q GUIDANCE
    • WORSE:  For NA brands, CCL lowered the NA pricing outlook with Alaska and Europe having a greater impact.  EAA brand pricing is also weaker across all itineraries.
  • 4Q GUIDANCE
    • WORSE:  Higher capacity, lower pricing across the board relative to March guidance
  • COSTA FY 2012 OPERATING LOSS
    • SAME:  $100 million loss is expected for the Costa brand.  Higher occupancy offset lower deeper price cuts.
  • AIRFARE
    • SAME:  higher airfares to North America resulted in lower itinerary prices
    • "Higher airfares between North America and Europe have been a challenge"
  • UK/GERMANY IMPROVING DEMAND
    • SAME: UK and Germany revenue yields continue to hold up reasonably well
    • "Our U.K. brands are holding up relatively well as compared to our Continental European brands. We have recently seen ...improving trends in Germany so we're hopeful that we have finally turned the corner there."
  • GOOD CLOSE-IN PATTERNS
    • SLIGHTLY WORSE:  Q2 close-in bookings were good but they are incentivizing more going into Q3 as they have more capacity to sell than historically
  • AIDA COMING BACK
    • SAME:  AIDA is picking up more booking momentum and maintaining pricing.
    • [AIDA] "I think they're starting to see business come back. But there will be some level of hit because... in order to fill close-in, they've had to take pricing down a little bit."
  • EX COSTA ONBOARD YIELD
    • BETTER:  CCL raised onboard guidance by almost 1%, relative to March guidance

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