CCL

Carnival Corp Ltd. 10-Q Summary: Period Ended August 31, 2008

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended August 31, 2008, and the nine months ended August 31, 2008, for Carnival Corporation & plc. The company operates as a dual-listed company (DLC) with Carnival Corporation incorporated in Panama and Carnival plc in England and Wales. The business is highly seasonal, with the third fiscal quarter (including Northern Hemisphere summer) historically generating the largest share of net income.

Key Financial Metrics

Note: Working capital deficit is primarily driven by $2.9 billion in customer deposits (deferred revenue) and current debt obligations.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 11.4% ($493 million) for the quarter and 14.5% ($1.4 billion) for the nine months compared to 2007. Growth was driven by an 8.8% increase in capacity (ALBDs) and higher ticket pricing, including fuel supplements.
• Profitability Pressure: Net income decreased slightly for the quarter ($44 million) and nine months ($91 million) year-over-year. This was primarily due to a 77.1% increase in fuel costs per metric ton (rising to $666/ton in Q3) and a weaker U.S. dollar against the euro.
• Cost Increases: Operating costs rose 20.3% for the quarter. Fuel expenses alone increased by $230 million in the quarter compared to 2007.
• Capacity Expansion: Passenger capacity (ALBDs) increased 8.8% in the quarter, driven by new ship deliveries and a 24.3% capacity increase in European brands.

Guidance, Outlook, and Risks

• Q4 2008 Guidance: Management expects diluted earnings per share for the fourth quarter of 2008 to be in the range of $0.36 to $0.38. This guidance assumes fuel prices of $598 per metric ton and specific currency exchange rates ($1.42 to the euro, $1.80 to sterling).
• Future Capacity: Year-over-year ALBD capacity growth is projected at 8.5% for Q4 2008, followed by 5.8% (2009), 7.6% (2010), 5.8% (2011), and 3.7% (2012). This includes the withdrawal of the QE2 in November 2008.
• Liquidity: The company reported $3.9 billion in liquidity as of August 31, 2008, consisting of cash, available borrowing under revolving facilities, and committed ship financing. Management maintains an A- credit rating.
• Key Risks:
  • Fuel Prices: Significant volatility in global fuel demand and pricing remains a primary risk to operating margins.
  • Currency Fluctuations: A weaker U.S. dollar increases reported expenses for European operations.
  • Contingencies: An investigation by the Florida Attorney General regarding fuel supplement pricing is ongoing. Additionally, a downgrade of AIG's credit rating (a counterparty in lease transactions) requires collateral pledges, though management believes AIG will perform obligations.
  • Legal: A copyright infringement lawsuit regarding musical plays on ships is pending, with damages currently indeterminable.

Investor Verification Checklist

• Fuel Cost Hedging: Verify the extent of fuel price hedging strategies and the sensitivity of future earnings to spot price fluctuations above $600/ton.
• Debt Refinancing: Confirm the status of the $232 million convertible debt subject to a put option in October 2008 and the company's ability to refinance maturing debt in tightening credit markets.
• Working Capital Structure: Understand the non-GAAP adjusted working capital of $324 million versus the GAAP deficit of $3.8 billion to assess true liquidity constraints.
• European Expansion ROI: Monitor the profitability of the 24.3% capacity increase in European brands, which typically have lower onboard revenue yields.
• Regulatory Outcomes: Track the Florida Attorney General's investigation into fuel supplements and the potential for fines or operational changes.