CCL F3Q CONF CALL NOTES

Carnival confirmed pricing weakness suggested by our pricing survey last week.  The surprise was the release of FY2014 yield guidance early.

"During the past few months, Carnival Cruise Lines has seen a steady improvement in brand perception among U.S. consumers based on national market research data.  While some of our current challenges and cost pressures will continue well into next year, we have tremendous opportunities to enhance shareholder value over time. I have spent my initial months gaining a much deeper understanding of our people and our operations" 

CONF CALL

  • Impairments:  from 2 small Costa ships (one will be serviced Nov 2014), $27MM Ibero trademark
  • Accounting changes:  net cruise costs and earnings will now exclude gains/losses on ship sales and impairment charges 
  • 3Q:  
    • Fleetwide capacity:  +3.4%
      • NA:  +4%,  EAA brands: +2.5%; 
    • Ticket yield: -4.6% (NA: -5.4%, EAA: -3.0% (Northern Europe declines offset by Costa and P&O Australia)
    • Onboard yield & other:  -1% (EAA slight increase offset by NA declines)
  • 4Q:  NCC ex fuel (+4%) - low end of previous guidance
  • 2014 cost guidance:  NCC ex fuel similar to 2013 (This increase is driven by more marketing activity, investments and onboard products such as food and entertainment, hiring dry dock costs including vessel enhancements and various other costs and inflation partially offset by ongoing efforts to reduce costs).
  • (Ex Carnival brand): 
    • Covering next 3 Qs, bookings volume last 12 wks:  unchanged YoY (at higher prices)
      • NA:  higher bookings at lower prices
      • EAA:  bookings are lower at nicely higher prices
  • Carnival brand
    • Last 6 wks, bookings improving; expect prices to gradually improve over long-term
  • 4Q
    • Fleetwide (ex Carnival): occu lower, same pricing
      • NA:  occu slightly lower, slightly lower pricing
      • Carnival:  occu lower, lower pricing
      • EAA:  occu lower at slightly higher pricing
    • Yield:
      • NA ex Carnival:  down slightly
      • Carnival:  lower double-digit
      • EAA:  higher
  • 1Q 2014
    • Fleetwide: higher pricing at lower bookings
      • NA ex Carnival:  higher pricing, lower occu
      • Carnival:  lower pricing, lower occu
      • EAA:  flat pricing, lower occu
  • 1H 2014
    • Fleetwide:  pricing higher, lower occu
    • Revenue yields: low single-digit decrease similar to 2H 2013
      • NA:  lower 
      • EAA:  higher
      • Expecting yields to be higher in 2H 2014
  • Carnival perception improving faster than expected; began fall marketing program with advertising campaign yesterday
    • Carnival changes:  
      • More in-house travel - in-house call center agents new bonus commission plans, providing complimentary cabins and a variety of other changes to make it easier for travel agents to book Carnival.
      • A new and simplified cabin pricing plan also to make it easier to book Carnival is expected to be announced shortly. The response to these changes by travel agents has been very positive
    • Expect higher pricing 2H 2014
    • Recent strategy:  holding prices even at slightly lower occu
  • Costa Concordia:  take to scrapyard next spring
  • Expect Costa's performance to strengthen over 2013 and throughout 2014
    • Brand perception improved in Italy and France
  • Asia:  2 Costa in China/Southeast Asia markets, 1 Princess ship; 2 ships in Japan during Spring/Summer
  • Expected Holland America/Princess to have solid performance in 2014; Seabourn performing extremely well

Q & A

  • Wanted to give 1H 2014 guidance because "people didn't understand what is happening in the business"
    • Mainly Carnival driven; positive yields on EAA side
    • Sees Carnival not down as much and Costa not up as much
  • Quite a few dry docks in 2014 (longer in length because of vessel enchancements); more agent support costs in 2014
  • Costa:  3Q mostly occu driven recovery;  4Q:  mix of occu and pricing
  • Would not comment on NA yields ex Carnival in 1H 2014
  • Process of selling 2 Costa ships:  intention to sell off older, small, less efficient ships at very low prices given weakness in market; has already written down one of them
    • Carnival didn't build these ships; they came through acquisitions
  • Upcoming cost savings through centralization of resources?
    • Too early to say, will know in upcoming board meetings
  • Carnival:  early stages of recovery; continuing improvements in occupancy since they fell way behind earlier
  • Most people who have cruised extensively continue to cruise; not much brand overlap among repeat cruisers as people may think
  • Pressure is on 1st time cruisers
  • Carnival's hold pricing may last 1-2 quarters
  • Impact from big increase in Caribbean capacity in 2014?  No visibility at this time.
  • Carnival improvement in pricing for Q3, Q4, and Q1?  Hard to say.
  • Challenge in 1Q:  large increase in Caribbean capacity
  • % booked:  4Q: 85-95%, 1Q:  50-70%,  2Q:  30-50%
  • Have increased level of advertising for F4Q
  • Too early to say how much of the expected cost increases are permanent
  • Q1 2014 will likely be worse than Q2 2014