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Takeaway: Good 3Q beat but the focus is now on 2015 costs and whether Europe momentum can be sustained.

Given trends seen from our pricing survey, we believed a F3Q beat was already in the bag with the Caribbean, while slowly improving, still limping along in a tough promotional environment.  The ECA cost impact may be a little above expectations but more importantly, we wonder if the exuberance on Europe is overstated heading into 2015.



  • Steady progress in both Carnival and Costa brands in F3Q
  • 3Q confirmed Carnival turned the corner
  • Notable lengthening of bookings curve across European brands
  • NA/Europe bookings/pricing higher for 1H 2015
  • Yield growth can be sustained
  • Without mitigation, ECA requirements were originally expected to reduce EPS by $0.75.  But with new technology, limited ECA impact to $0.10.
    • Technology initiatives:  propelling, lighting and air conditioning.
  • Costa:  seeing steady improvement in yield and profitability
  • New Princess ship:  only new build for 2014 and will sell Ocean Princess
  • China:  expect double digit growth over next few years
    • Already the largest cruise operator in mainland China (1st in market through Costa brand in 2006).
    • China operations have and are profitable.
    • 4 homeports (shifting) and 12 marketing offices
  • 3Q
    • Better rev yields (11 cents) - split btw ticket and onboard
    • Lower NCC ex fuel (3 cents)
    • Lower fuel prices (2 cents)
    • Net ticket yields turned positive in 3Q
    • Capacity increased 2% (NA: +4%, EAA: flat)
    • Occupancy:  point higher than June guidance
    • Net ticket yields:  + 0.7% (EAA: +4% led by continental Europe and China); NA yields: down just over 1% due to continued promotional pricing environment in Caribbean
    • Net onboard and other yields:  +5.5% (considerably more positive than anticipated), increases in almost all categories.
    • NCC ex fuel: up +0.5%, better than guidance due to timing of certain expenses
  • 4Q yield: expect NA brand net ticket yields will turn positive
  • Higher EPS for FY 2014 due to:  11 cents (better 3Q), 4 cents from fuel prices and currency.
  • 1H 2015:  
    • NA
      • Caribbean ahead on price and occupancy (56% of 1H 2015 capacity)
      • European program:  ahead on price and occupancy
      • Booking volumes good at nicely higher prices
    • EAA
      • Ahead on occupancy; prices in-line with prior year
      • Booking volumes higher YoY at slightly higher prices.
  • Expect to offset inflation in 2015
  • Aggressively rolling out EGCs.  16 ships beginning in FY 2015; 42 ships by end of 2015.

Q & A

  • 2015 costs:  2/3 of cost increases due to dry docks; 1/3 due to 'investment in various areas of the business in terms of deployment and occu.  Not afraid to reinvest in business to drive yields.
  • Double digit ROIC target:  3-5 yrs
  • Holding price while sacrificing occupancy is only a tactic; they will continue to use the tactic as long as it works
  • Casino to-date has not been strong on CCL ships.  CCL is purely a cruise product.
  • Chinese govt has a plan for cruise development
  • China:  Lost money in 2006, broke even in 2012, made money in 2013/2014
  • Additional onboard opportunities:  casino/restaurants/beverages
  •  $75-80m cost investments
  • Negotiations with airlines ongoing
  • NCC ex fuel (excluding dry costs):  flattish over 2015/2016
  • Carnival brand:  recovery a little faster than where mgmt forecasted
  • Caribbean:  very tough environment
  • Capex 2014:  $3 billion  (similar levels for 2015 and 2016)
  • China challenges:  challenge is to communicate what is a cruise to the consumer; cruise port development; availability of international ports; infrastructure development.
  • China:  most ships are chartered; customers purchasing through a distribution network
  • 2015 yield:   late 2Q and onward should show better yields for Caribbean due to capacity reduction.
  • Evaluating where some of Costa's/Princess's Asia ships will continue to use Euro functional currency
  • May explore China partnership; Carnival chief operating officer Alan Buckelew will relocate to Shanghai.
  • 2014 NCC ex fuel guidance raised:  unexpected pension expense and some other expenses bumped the range up slightly.
  • 2/3 of dry dock costs in 2015 will disappear in 2016. 
  • Optimistic on both NA and Europe in 2015
  • 10 cent ECA cost:  early season dry dock may offset a little of that; much of 10 cents will be eliminated in 2016 and gone by 2017 due to ECG implementations.
  • 1% change in fuel efficiency equates to 2.6 cents in EPS.  Expect 2-3% fuel consumption improvement going forward. 
  • Raised ticket and onboard guidance for 4Q
  • Industry seems to be at or very near 2007 peak levels (mostly not coming from Carnival)
  • Not worried about the new ships coming on line; industry capacity growth still manageable.  Expect Asia to absorb much of the additional capacity.
  • 2014 Net ticket yield increase:  50% from occupancy, 50% from higher prices
  • Booking curve:  85%-95% (next Q), 50% (2Q out) 25% (3Q out).