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We expected 2013 yield guidance that will disappoint the Street but 1-2% is alarmingly low.

 


"We remain well positioned for a recovery in 2013 and beyond ...as consumers continue to capitalize on cruising's superior value versus land-based vacation alternatives. We continue to focus on a measured growth strategy through the introduction of two to three new ships per year and the development of emerging cruise markets in Asia. Based on 2013 guidance, we estimate that cash from operations will reach $3.3 billion for the year while our capital commitments will be just $2.0 billion.  As a result, we anticipate significant free cash flow in 2013, which we intend to continue to return to shareholders."

- Carnival Corporation & plc Chairman and CEO Micky Arison

CONF CALL NOTES

CCL 4Q CONF CALL NOTES - h23

  • 2 cent impact from Hurricane Sandy. Pricing on close-in bookings were higher than expected, favorable currency exchange rates also helped the quarter
  • Almost half of the yield decline in the 4Q were driven by Costa.  Ex Costa, the decline was 2.4%. 
  • EAA brands: Net ticket yields in Asia were up nicely
  • Ex Costa, they had a 2% increase in onboard yields across all major categories
  • Consumption per ALBD declined 4.4% this quarter.
  • Over the next few years, they expect to fully recover from the Costa incident
  • By the end of December, they will pay a 25 cent share regular dividend, special dividend of 50 cents, and buyback of $3.5 million. This will mark the second year where they will return all of their FCF
  • Few unique items in 2013 which will push unit costs higher
    • Higher costs due to higher occupancy on Costa
    • Higher insurance costs
    • Charge from closed pension plans for certain British officers
    • Investment in new markets
    • Bottom line, costs will be up 1-2% (ex fuel) YoY/ per ALBD
  • Expect to use 24% fuel per berth in 2013 than they did in 2005
  • 10% change in fuel impact:  $0.30/share
  • Fuel derivative portfolio: 10% change would result in no impact in first move, and then $4MM for the next 10% move. Protection begins when Brent goes above $127. They pay one of the fuel derivatives when Brent falls below $100. 
  • 10% change in FX impact: $158MM or $0.20/share
  • 3.6% increase in cruise capacity in 2013
  • Guidance for 2013 assumes no fiscal cliff
  • Anticipate continued struggling economies in Europe in 2013 similar to 2012.  Longer term, they believe that Europe will improve over time and their scale in Europe provides them with a significant competitive advantage.
  • In Asia, they are planning a significant increase in their SQFT. Sun Princess Japanese deployment. In SE Asia, they are adding a new ship doubling their capacity. They achieved profitability in China in 2012. Recently established an Asia office in Singapore.
  • In Australia, Carnival introduced Carnival Spirit which was well-received. 
  • Booking outlook for 2013:
    • Costa's pricing is still behind 2012, but they expect to lap that post Jan
    • Encouraged by recent NA booking patterns especially with the recent elections and fiscal cliff looming. Think things will pick up once fiscal cliff is resolved
  • 1Q13
    • Very little inventory remaining to be sold
    • Revenue yield comparisons are tougher for NA which was up 5% last year. 
  • 2Q13: 
    • Continue to expect to see similar close in booking patterns
    • Expect to see a catch up in booking and revenue yields for 2Q during 1Q

Q&A

  • EAA revenue yield color:
    • Will have higher yields in NA
    • Will have higher yields in Costa (but will only recover 1/2 of their losses from 2012- full occupancy recovery but not full pricing recovery given the weakness in the European economy).  Also pricing for Costa will be down in 1Q13 so that impacted FY guidance.
    • Rest of Europe will have lower yields. Some of this is due to absorption of increased capacity in a weak economy.  It's also very difficult to forecast yields given the very close-in booking patterns.
  • Travel agents are implying that NA yields are more robust than what their guidance implies.  Their guidance implies that NA yields are more muted than what the sell-side is seeing.
    • Caribbean is strong but European and longer cruises are not doing well
    • Remember they are going to be down 2-3% in 1Q because when Costa happened they were already almost fully booked so they had a very strong prior year.  
    • Likely that travel agent feedback doesn't relate to the lapping of the tough 1Q comp and is more reflective of 2Q-4Q
  • NA challenges are more pace/ booking related -more so than pricing. That could change in WAVE season.  They are also facing the challenge of higher air fares for long cruises. 
  • Has their outlook changed meaningfully from the last time they reported?
    • Northern Europe and the UK have been strong. They are starting to see some effects of economic weakness in Germany and UK. So they are a little concerned going forward, especially as the booking curve has tightened.
    • They also have a large capacity in Germany this year. However, all the research they are seeing is predicting a bounce back in Germany.  Their 2 largest competitors have increased their N. European capacities by 20%.
  • Directionally, they are satisfied with 1-2% net yield increases. Consensus doesn't always meet reality. They have more capacity increases in 2013 (on top of 2012 increases) than some of their competitors. They like the German / N European markets. They still get excellent returns with yields down 1-2% there. They don't think that moving ships around to Asia is a very poor short-term solution. You need to look at the yield improvement post 1Q which is better.
  • Their focus is profitability more so than yields.  In order to get fuel down 5%, they made some itinerary changes that may lower yields. They would take lower yield for better profit per berth.
  • There will be more announcements related to Asia going forward regarding deployments to that region
  • It is more expensive to operate in Asia than Europe. If you look at Australia and the Princess deployment, yields are still up. They have a very limited fleet in Asia. As they get more infrastructure there, over time costs will decrease.
  • What they are seeing is a close-in booking pattern in both Germany and UK. They haven't seen pricing issues yet, but if bookings don't pick up they may need to discount to fill the ships. Clearly, the German economy weakened in the 2H12 so it's not surprising that they are seeing some weakness given that that is where they are increasing capacity
  • UK does have a longer booking pattern but they also have some very long around the world cruises
  • Onboard trends for 2013 are very similar to 2012 when they were up just over 2%.  Their guidance for 2013 is very similar.
  • They will return cash to shareholders and once they know what the changes to the tax laws are, they will review their strategy with the board.
  • Thomas Cook and TUI implied that things are flattish for the next 6 months in Europe for them.  Why the difference? 
    • Not sure how to compare. They can control capacity to some extent. 
  • Only have one ship coming online for Costa until 2014 - so they wouldn't see profitability increase until 2015 as a result of that addition. 
  • They are typically 85-90% done booking wise for 1Q at this point and their guidance includes their best guess on yield guidance.  They built in solid close in booking patterns for the remaining 10% of available capacity.
  • They will be building 2-3 ships a year and that's still their plan regardless of exact ship pricing. So given that they just announced 2 new ships, there is nothing imminent. So for 2016 and beyond there is no need for them to make commitments today. They have plenty of time.
  • Given that this part of the year is usually difficult to give guidance in, coupled with the recent elections and the fiscal cliff, and the close-in booking patterns, there is just limited visibility into 2013 at this point.

HIGHLIGHTS FROM THE RELEASE

  • 4Q earnings "were better than anticipated in the company's September guidance. Stronger than expected revenue yields combined with lower than expected fuel costs more than offset higher than anticipated operating costs"
  • "Through the significant efforts of our brand management teams, we were able to maintain full year 2012 net revenue yields (excluding Costa) in line with the prior year. In addition, we drove down net cruise costs, excluding fuel, slightly and fuel consumption by four percent... Unfavorable changes in fuel prices and currency exchange rates reduced earnings by $300 million, or $0.39 per share, compared to the prior year."
  • In 4Q, CCL "announced it had reached an agreement for the construction of two new cruise ships – a 2,660-passenger ship for its Holland America Line brand to be delivered in 2015 and a 4,000-passenger vessel for its Carnival Cruise Lines brand to be delivered in 2016.  Both are the largest ships ever built for those brands."  
  • FY 2013 outlook:
    • "Since September, booking volumes for the first three quarters, including Costa, are running in line with the strong volumes experienced last year at slightly lower prices. At this time, cumulative advance bookings for 2013 continue to be behind the prior year at slightly lower prices."
    • "During 2013, the company expects to carry over 10 million guests on its global fleet and will introduce two new ships, the 2,192-passenger AIDAstella which is scheduled for delivery in March and the 3,560-passenger Royal Princess, which is scheduled for delivery in May."

CCL 4Q CONF CALL NOTES - g