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CCL 1Q 2013 REPORT CARD

Takeaway: Getting everything out on the table was a good move but too much uncertainty remains.

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

  • WORSE:  As we saw in our pricing survey, Europe remains weak.  But lower onboard spend guidance is the new worry. 

CCL 1Q 2013 REPORT CARD - ccl234 

 

BOOKINGS

  • MIXED:  While NA bookings are now running higher, EAA bookings (ex Costa) are well behind for the rest of FY 2013.
  • PREVIOUSLY: 
    • "During the last 13 weeks, fleet-wide bookings and pricing excluding Costa for the first three quarters of 2013, are at the same levels against the very strong booking volumes we experienced last year. Not surprisingly, Costa's pricing is still running behind last year's pricing, but we expect that to change once we lap January of 2012."
    • "For our North American brands, during the 13-week period, bookings are running slightly behind with slightly higher pricing. For EAA brands, the bookings excluding Costa are running at higher levels than last year at lower pricing. We are encouraged by the recent North American booking pattern, especially given consumer distraction from the elections and post-election consumer nervousness about the pending fiscal cliff, and the recent pattern excludes some negative impact on bookings from the Northeast resulting from the Hurricane Sandy. So we are hopeful that once the fiscal cliff issue is resolved and we get into January, and the wave season begins, consumers will start to turn their attention getting on with their lives and booking their cruise vacations." 

COSTA

  • SAME:  Costa is doing well in Asia and is holding strong in Europe.
  • PREVIOUSLY: 
    • "In 2013, operating plan forecasts a nice increase in Costa Asia's profitability."
    • "Recovery of Costa is not a one-year issue, it's going to be multiple years; and we're forecasting a recovery of about half the yield deterioration, that's one item. Two is it's important to understand that we don't cycle through this until the second quarter because the first quarter was done, and the timing of first quarter in this instant versus competitors is very important because it did happen in the middle of our first quarter when the first quarter was done."

CARIBBEAN

  • SAME:  Caribbean pricing continues to be robust
  • PREVIOUSLY: "Caribbean looks strong now."

 2013 COST GUIDANCE

  • WORSE:  Higher dry dock/repair costs mostly attributed to the recent ship problems drove NCC ex fuel costs guidance for 2013
  • PREVIOUSLY: 
    • "There are a few unique items in 2013 that will be difficult to totally overcome which will push our unit costs higher. To begin with, we are expecting that Costa will fill their ships in 2013, which will lead to higher food and other unit costs associated with this higher occupancy. Also, as I have previously indicated, our insurance costs will be higher in 2013. Furthermore, we are anticipating a charge from a closed pension plan for certain British officers. Finally, we are investing in new market development initiatives in Japan, China and Australia including deployment decisions not yet announced. These unique factors alone in 2013 will drive up unit costs 2%."
    •  "And if you take into account the prior year's ship incident cost, we would've been flat year-over-year."

EUROPE

  • WORSE:  Southern Europe demand was weaker than previously thought.  
  • PREVIOUSLY: "In Europe where we have a strong market presence, we anticipate continuing struggling economies during 2013, much as we experienced during 2012."

UK/GERMANY

  • MIXED:  UK/Germany bookings did improve, though at lower prices to fill occupancy.
  • PREVIOUSLY:  "We're starting to have – to see some effect of a weaker economy both in the UK and Germany, which we really didn't see a whole lot in 2012. So if there's anything different, I'd say we're a little bit more concerned. Although those brands are performing well, we are a little bit concerned going forward as the booking curve has tightened in those countries." 

EUROPEAN CAPACITY

  • SAME:  A 17% increase in AIDA capacity drove EAA capacity up 5.1% in 1Q. 
  • PREVIOUSLY:  
    • "The other thing that I haven't seen a lot of focus on is some of our competitors have talked about reducing capacity in Europe. But in reality, our two largest competitors together have increased the Northern Europe capacity by over 20% next year. So, the Northern Europe itineraries have tended to be the highest yielding itineraries in the European market, and that capacity increase will be interesting to see how that all plays out."
    • "All of our capacity increase in Europe next year is in Germany." 

ONBOARD SPENDING

  • WORSE:  Lower onboard spending than anticipated contributed 6 cents to the lowered EPS guidance
  • PREVIOUSLY:  "Our onboard trend overall around the globe for 2013 is very similar to 2012. 2012 we were up like a little over 2% and our guidance for 2013 is in the similar range with increases in all the major categories. Our operating companies have done a great job with some new initiatives and so we're expecting those to be driven higher as well."



PM and Currency: Does it Matter?

Takeaway: PM is unique in our coverage, not because it has significant currency exposure (all multinationals do), but because it matters more for PM.

This note was originally published March 15, 2013 at 11:17 in Consumer Staples

The quick answer to our title question is either:

  1. No, not really, but....or...
  2. Yes, however...

Translation doesn't impact the value of a business, hyperinflationary events aside.  However, to the extent that multiple market participants make buy and sell decisions based on factors impacted by translation, the share price can certainly be impacted.  The difference between the two answers above is one of duration.  Longer-term, number one is the correct answer.

 

Philip Morris has no domestic U.S. business, a fact that makes it unique within our coverage universe. We tend not to get bent out of shape because of currency, preferring to look at revenue and EBIT trends on a currency neutral basis as we recognize that translation from one currency to the other at a point in time doesn't have any impact on the value of the business.  However, we also realize that optics do matter to the extent that machines (and people) purchase stocks based on positive EPS revisions, or accelerating revenue growth, or any of a number of factors that are impacted by translation.

 

PM is also unique in that, as a tobacco company, it aggressively returns cash to shareholders via dividends and share repurchases, both of which are dollar denominated.  So, to the extent cash generated by the business is actually translated into dollars, currency movements do matter, as well as the market's perception being altered by the impact of translation.  In the example of PG or KO, for example, domestic operations can partially fund dividends or share repurchases, and cash generated outside the U.S. can be reinvested in local currency assets.

 

So, while PM posted one of the more impressive quarters in staples in Q4, with both robust top line and the ability to leverage revenue growth with EBIT growth and has an attractive multiple compared with other, slower growth staples assets, the recent moves in the currency market are worrisome in terms of sentiment and represent a potential overhang on the share price relative to the balance of the staples group.

 

To that end, we have examined PM's performance in relation to the DXY (a basket of currencies) since 2007.  While the relationship has weakened in recent years, it is apparent that periods of "strong dollar" have, by and large, meant tough sledding for PM's share price.

 

PM and Currency: Does it Matter? - PM and DXY1

 

PM and Currency: Does it Matter? - PM and DXY2

 


CCL 1Q CONF CALL NOTES

Commentary was better than the awful press release but concerns (e.g. Europe, dry dock costs) remain at the forefront

 

 

"Booking volumes during our seasonally strong wave period have remained solid with pricing comparisons improving in recent weeks. However, economic uncertainty in Europe continues to hinder yield growth.  "Despite considerable attention surrounding the Carnival Triumph, we had been encouraged to see booking volumes for Carnival Cruise Lines recover significantly in recent weeks. Attractive pricing promotions, combined with strong support from the travel agent community and consumers who recognize the company's well-established reputation and quality product offering, were driving the strong booking volumes. "Our long term business fundamentals remain strong as we broaden our customer base of new and repeat cruisers through attractive product offerings, high satisfaction levels and compelling value propositions. We expect to drive return on invested capital higher through a measured pace of capacity growth and a continued focus on fuel consumption savings.  We continue to expect over $3 billion of cash from operations this year and remain committed to returning free cash flow to shareholders in 2013 and beyond."

 

-CCL CEO Micky Arison

 

CONF CALL

  • Q1: +3.9% capacity (+3.1% NA, +5.1%EAA (+17% in AIDA brand)
  • Q1: net ticket yields : -3.3% (-5.8% EAA, -1.5% NA (2/3 of capacity in Caribbean); net onboard yield +1.1% (increase in NA brand offset by EAA brand weakness)
  • Q1 Fuel price were down 4% YoY--saved them 3 cents
  • 2013 Wave bookings (JAN 6-MARCH 10):  fleetwide pricing slightly ahead, bookings running ahead;  NA bookings running higher with slightly higher pricing; EAA bookings substantially higher with slightly lower pricing
  • Post Triumph, ex Carnival brand, NA booking were higher ; EAA bookings were higher
  • Post Triumph, Carnival brand, bookings trended lower but expect bookings to improve and normalize over the next several weeks
  • Carnival Dream may have some effect on bookings and have taken that into guidance
  • Will not break out quarter by quarter but overall bookings are behind last year at slightly lower pricing.  NA bookings behind at slightly higher pricing; EAA bookings behind on lower prices.
  • Caribbean/Alaska pricing is higher on lower occupancies
  • Europe pricing/occupancies is lower; however, seeing significant uptick in European brand bookings
  • Reduced ticket price trends contributed $0.14 decline (1/2 NA, 1/2EAA); lower onboard yields 6 cents; 5 cents ship modification costs (aka dry docks)
  • Carnival Triumph: issues will take time to review and resolve

Q&A

  • Hopeful Legend will sail its normal itinerary
  • Will be more promotions, factored into guidance
  • Won't see a huge incremental in sales and marketing
  • Maintenance capex more  like $600MM+ recently--the forecast CCL gives is around 800+
    • Spending more on per berth basis as ships get older
    • CCL doesn't capitalize dry dock costs
  • Dry dock days are between 12-13; scheduled routinely twice every five years or once every three years for each ship
  • 2013:  425 dry dock days planned
  • Since 1Q Onboard spend was only up 1%, CCL took down 2Q, 3Q, and 4Q a little bit from previous guidance.  All major categories will still be up but not as much as previously
  • 30 cent guidance range is attributed to economic uncertainty in Europe and all the recent ship events
  • UK/Germany:  while bookings curve is still closer in,  bookings have improved.  For summer/early Fall, price cuts were taken to maintain occupancy.
  • Still struggling with Italian uncertainty but encouraged by Costa brand
  • Spain continues to be a challenge but our presence is small; we expect better performance in 2013 vs 2012
  • Overall, Southern Europe was tougher than they thought
  • Moving up dry docks that would have occurred in 2015 to 2013
  • The 'hiccups' seen in the past couple of weeks are not major issues 
  • Huge decline in bookings (Carnival brand) immediately following Triumph but did not last very long
  • From a consumer standpoint, most look at each brand but don't really connect to the corporate level.
  • Costa had added a 2nd ship in Asia--pricing is good.
  • Princess ship in Japan in late April; a second Princess ship in 2014 in Japan
  • Why were commission/transportation expenses lower? Air cost as a % of mix is lower--less guests buying from CCL overall does not affect that #

 

HIGHLIGHTS FROM RELEASE

  • The change in net yields is due to the economic uncertainty in Europe and pricing promotions for the Carnival brand combined with less than expected growth in onboard revenue across the group.  The company also expects net revenue yields on a current dollar basis to be flat for the full year.
  • The company expects net cruise costs excluding fuel per ALBD for 2013 to be up 2.5 to 3.5 percent on a constant dollar basis compared to up 1 to 2 percent in the December guidance. The change in cost guidance is due to the impact of repair costs, as previously announced, as well as, expenses related to the enhancement of vessels in the remainder of the fleet as a result of the ship incident.

CCL 1Q CONF CALL NOTES - ccc1


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PM and Currency - Does It Matter?

The quick answer to our title question is either:

  1. No, not really, but....or...
  2. Yes, however...

Translation doesn't impact the value of a business, hyperinflationary events aside.  However, to the extent that multiple market participants make buy and sell decisions based on factors impacted by translation, the share price can certainly be impacted.  The difference between the two answers above is one of duration.  Longer-term, number one is the correct answer.

 

PM has no domestic U.S. business, a fact that makes it unique within our coverage universe. We tend not to get bent out of shape because of currency, preferring to look at revenue and EBIT trends on a currency neutral basis as we recognize that translation from one currency to the other at a point in time doesn't have any impact on the value of the business.  However, we also realize that optics do matter to the extent that machines (and people) purchase stocks based on positive EPS revisions, or accelerating revenue growth, or any of a number of factors that are impacted by translation.

 

PM is also unique in that, as a tobacco company, it aggressively returns cash to shareholders via dividends and share repurchases, both of which are dollar denominated.  So, to the extent cash generated by the business is actually translated into dollars, currency movements do matter, as well as the market's perception being altered by the impact of translation.  In the example of PG or KO, for example, domestic operations can partially fund dividends or share repurchases, and cash generated outside the U.S. can be reinvested in local currency assets.

 

So, while PM posted one of the more impressive quarters in staples in Q4, with both robust top line and the ability to leverage revenue growth with EBIT growth and has an attractive multiple compared with other, slower growth staples assets, the recent moves in the currency market are worrisome in terms of sentiment and represent a potential overhang on the share price relative to the balance of the staples group.

 

To that end, we have examined PM's performance in relation to the DXY (a basket of currencies) since 2007.  While the relationship has weakened in recent years, it is apparent that periods of "strong dollar" have, by and large, meant tough sledding for PM's share price.

 

PM and Currency - Does It Matter? - PM and DXY1

 

PM and Currency - Does It Matter? - PM and DXY2

 

Have a great weekend,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst

 


Expert Call TODAY With Peter Tchir

Expert Call TODAY With Peter Tchir  - Tchir 3.15.13

 

We will be hosting an expert call today, March 15th at 11:00am EST entitled "Fixed Income: Opportunities and What It Means for Equity Markets." Peter Tchir, the founder of TF Market Advisors, will discuss what he sees as being most impactful from a macro perspective and break down the current trends in fixed income and equity markets.

 

 

KEY TOPICS WILL INCLUDE

  • Fixed Income: Opportunities and signals versus stocks
  • Europe: Current state of play
  • Treasuries: The lack of float and what the Fed is doing
  • U.S. Corporate Credit: A focus on high yield, leveraged loans and the LBO names
  • Emerging Markets: A focus on currency wars

 

CALL OBJECTIVE

  • Synthesize what is happening in today's global economy  
  • Unveil actionable items in fixed income (via bonds or ETFs)

 

ABOUT PETER TCHIR

  • Traded over $1 trillion of fixed income products during his career, including complex structured transactions, bonds, loans, CDS and index products
  • Previously a portfolio manager at KLS Diversified where he employed a strategy that included single name credit positions and macro trades while actively taking advantage of short term mispricing of securities and indices
  • Founding board member of the CDX suite of indices and started and headed the credit derivatives index businesses at UBS and then RBS
  • Started his career at Bankers Trust where he ran high yield credit derivatives
  • Received BS in mathematics and computer sciences from the University of Waterloo and his MBA with distinction from Vanderbilt University

 

CALL DETAILS

  • Date: Today, March 15th at 11:00am
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 818259#
  • Materials: CLICK HERE

The Energy Sector and the VIX

Takeaway: With the VIX hitting lower lows and with the XLE (the broad energy sector ETF) hitting higher highs, it’s creating a bit of concern.

In the chart below, you’ll see the divergence between the VIX and the performance of the XLE, a broad energy sector ETF, over a five-year period. VIX is a function of price, so there will be an inverse relationship with the XLE.

 

From a longer-term perspective, with the XLE approaching all-time highs and the VIX all-time lows is not a great set-up for future returns. In the immediate and intermediate terms, though, the sector is bullish TRADE and TREND, says our Energy Sector team.

 

The Energy Sector and the VIX - VIX XLE

 

 


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