Carnival Corp Ltd. quarterly report, Q2 FY2019

Carnival Corporation & plc — Q2 2019 Form 10-Q Summary

Business context and reporting period

Joint quarterly report for Carnival Corporation and Carnival plc, covering the three and six months ended May 31, 2019. The companies operate global cruise brands through North America & Australia, Europe & Asia, Cruise Support, and Tour and Other segments. Results are seasonal, with the largest share of operating income typically generated in the third quarter.

Effective December 1, 2018, Carnival adopted ASC 606, primarily changing the presentation of shore-excursion and other onboard revenues and costs from net to gross. The adoption increased reported revenue and expenses but did not affect operating income or net income; it also produced a $24 million cumulative reduction to retained earnings related to loyalty programs.

Financial performance and key metrics

Metric	Three months ended May 31, 2019	Three months ended May 31, 2018	Six months ended May 31, 2019	Six months ended May 31, 2018
Revenue	$4.838 billion	$4.357 billion	$9.511 billion	$8.589 billion
Operating income	$515 million	$559 million	$902 million	$978 million
Net income	$451 million	$561 million	$787 million	$951 million
Diluted EPS	$0.65	$0.78	$1.13	$1.33
Operating margin	10.6%	12.8%	9.5%	11.4%
Net margin	9.3%	12.9%	8.3%	11.1%

Passenger ticket revenue increased 2.0% to $3.257 billion in the quarter and 1.8% to $6.456 billion for the six-month period.
Onboard and other revenue increased 35% to $1.510 billion in the quarter and 35% to $2.955 billion for the six-month period. Approximately $343 million and $666 million, respectively, reflected the ASC 606 gross presentation change.
Capacity, measured by available lower berth days, increased 4.6% in the quarter and 4.4% for the six-month period. Occupancy was 105.3% and 105.0%, respectively, compared with 105.7% and 105.2% in the comparable periods.
Reported net revenue yield declined 2.6% in the quarter and 2.5% for the six-month period. On a constant-currency basis, net revenue yield increased 0.6% in both periods.
Net cruise costs excluding fuel per available lower berth day declined 4.0% in the quarter and 2.8% for the six-month period on a reported basis; constant-currency declines were 1.3% and 0.2%, respectively.
Fuel expense increased 14% to $423 million in the quarter and 10% to $804 million for the six-month period, primarily due to higher fuel prices and capacity growth. Fuel consumption per available lower berth day improved.
There were no fuel-derivative gains or losses in 2019, compared with net gains of $41 million in the quarter and $57 million for the six-month period in 2018.

Cash flow, debt, liquidity, and capital allocation

Six-month operating cash flow was $3.169 billion, compared with $3.087 billion in 2018.
Capital expenditures were $3.021 billion, including approximately $2.1 billion for new ships and $876 million for ship improvements, information technology, and buildings. Investing cash outflow was $2.918 billion.
Financing cash outflow was $26 million, including $694 million of dividends, $316 million of share repurchases, $338 million of long-term debt repayments, and $1.722 billion of long-term debt issuances.
Cash and cash equivalents were $1.202 billion at May 31, 2019; cash, cash equivalents, and restricted cash totaled $1.215 billion.
Debt consisted of $480 million of short-term borrowings, $1.614 billion of current long-term debt, and $9.080 billion of long-term debt, or approximately $11.2 billion in total reported debt.
Management reported liquidity of $14.1 billion, comprising $898 million of available cash, $2.4 billion available under revolving credit facilities net of commercial paper, and $10.8 billion of committed future export-credit financing.
Working capital deficit was $7.5 billion, primarily reflecting $5.8 billion of customer deposits collected before voyages. Management expects continued working capital deficits but believes operating cash flow and liquidity are sufficient to fund capital expenditures, debt maturities, and dividends.
Management stated that the company was in compliance with debt covenants and expected to remain compliant for the foreseeable future.

Material changes versus the prior comparable period

Revenue growth was more than offset by higher operating costs, resulting in operating income declines of 7.9% for the quarter and 7.8% for the six-month period.
Net income declined 19.6% in the quarter and 17.2% for the six-month period; diluted EPS declined from $0.78 to $0.65 and from $1.33 to $1.13, respectively.
The North America & Australia segment improved operating income 3.1% in the quarter and 5.1% for the six-month period. Europe & Asia operating income declined 16% and 26%, respectively, due principally to unfavorable currency effects, lower ticket revenue and occupancy, and higher costs.
Foreign currency translation and transaction effects reduced reported revenue by approximately $117 million in the quarter and $224 million for the six-month period, while also reducing reported costs.
Adjusted EPS was $0.66 in the quarter versus $0.68 in 2018, and $1.15 for the six-month period versus $1.21. These measures exclude selected fuel-derivative, ship-sale, and other items and are not GAAP measures.
Two North America & Australia ships, with passenger capacities of 1,680 and 1,260, were sold and transferred in March and April 2019.

Guidance, outlook, commentary, and risks

Management expected third- and fourth-quarter 2019 results to be unfavorably affected by Carnival Vista voyage disruptions, the U.S. policy change affecting travel to Cuba, and lower second-half net revenue yields than previously guided.
Annual capital expenditure forecasts were $6.7 billion for 2019, $5.7 billion for 2020, $5.9 billion for 2021, and $5.4 billion for 2022. Forecast annual capacity increases were 4.5%, 7.3%, 6.1%, and 5.3%, respectively.
Management identified fuel prices, foreign exchange, demand and pricing, competition and capacity, shipbuilding execution, weather and other world events, health and safety, environmental and regulatory compliance, cybersecurity, labor availability, and reputational damage as key risks.
At May 31, 2019, unhedged euro-denominated newbuild commitments for ships scheduled for delivery from 2020 through 2025 totaled $7.5 billion.
A 10% change in fuel prices was estimated to affect adjusted diluted EPS guidance by approximately $0.10 per share for the remaining two quarters of 2019 and $0.05 for the third quarter. A 10% change in relevant currency rates was estimated to affect adjusted diluted EPS guidance by approximately $0.14 and $0.08 per share, respectively.
Two Helms-Burton Act lawsuits filed in May 2019 relate to Cuban port facilities. Carnival stated that it had meritorious defenses and did not believe a material outcome was likely, while acknowledging litigation risk is inherently unpredictable.
In June 2019, Carnival agreed to additional environmental oversight, environmental goals, compliance restructuring, and a $20 million penalty in connection with alleged violations of the court-supervised environmental compliance plan arising from the prior Princess Cruises oily bilge-water matter.

Important facts for investors to verify

Separate underlying operating trends from the significant ASC 606 gross-presentation impact on onboard revenue and costs.
Review whether Europe & Asia yield, occupancy, pricing, and operating income stabilize amid currency pressure and increased capacity.
Assess the effect of Carnival Vista disruptions, Cuba travel restrictions, and second-half yield trends on full-year earnings.
Reconcile reported liquidity with substantial newbuild capital requirements, debt maturities, and the company’s working capital deficit.
Monitor fuel prices, foreign exchange rates, the $7.5 billion unhedged newbuild commitment, and the availability of committed export-credit financing.
Track the Cuban litigation and environmental compliance matter for potential penalties, restrictions, or reputational effects.