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.
CONF CALL
- 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).
