Carnival Corp Ltd. quarterly report, Q2 FY2018

Carnival Corporation & plc — 2018 Q2 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, 2018. Carnival operates cruise brands, cruise-support businesses, and tour and other operations. Results are seasonal, with the largest share of operating income typically generated during the third quarter.

Key financial metrics

Metric	Three months ended May 31, 2018	Three months ended May 31, 2017	Six months ended May 31, 2018	Six months ended May 31, 2017
Revenue	$4.357 billion	$3.945 billion	$8.589 billion	$7.736 billion
Operating income	$559 million	$500 million	$978 million	$868 million
Net income	$561 million	$379 million	$951 million	$730 million
Diluted EPS	$0.78	$0.52	$1.33	$1.00
Operating margin	12.8%	12.7%	11.4%	11.2%
Net margin	12.9%	9.6%	11.1%	9.4%

Revenue increased 10.4% in the quarter and 11.0% year to date. Cruise passenger ticket revenue increased 11.2% and 11.7%, respectively; onboard and other revenue increased 8.3% and 8.9%.
Operating income increased 12.0% in the quarter and 12.7% year to date. Net income increased 48.0% and 30.3%, respectively.
Net income benefited from fuel derivative gains of $41 million in the quarter and $57 million year to date, compared with a $53 million loss and $27 million loss in the comparable periods.
Net revenue yield increased 5.1% on a constant-dollar basis and 4.8% on a constant-currency basis in the quarter; year-to-date increases were 4.5% and 4.4%, respectively.
Net cruise costs excluding fuel per available lower berth day increased 3.6% on a constant-dollar basis and 3.6% on a constant-currency basis in the quarter; year-to-date increases were 2.3% and 2.3%.
Occupancy was 105.7% in the quarter and 105.2% year to date, compared with 104.1% and 104.3% in the prior-year periods. Available lower berth days increased 1.4% and 1.8%, respectively.
Fuel cost per metric ton increased to $455 in the quarter and $446 year to date, from $374 and $368, respectively. Fuel expense increased 20% in the quarter and 21% year to date.

Cash flow, liquidity, debt, and capital allocation

Six-month operating cash flow was $3.087 billion, up from $2.849 billion.
Investing cash use was $2.092 billion, including $2.201 billion of property and equipment purchases, partially offset by $102 million of ship-sale proceeds.
Financing cash use was $339 million, including $1.181 billion of long-term debt repayments, $1.618 billion of long-term debt issuance, $646 million of dividends, and $513 million of share repurchases.
Cash and cash equivalents were $1.053 billion at May 31, 2018, compared with $395 million at November 30, 2017. Management’s liquidity calculation used $781 million of available cash, excluding $272 million used for current operations.
Total reported borrowings, including short-term borrowings, current long-term debt, and long-term debt, were approximately $9.857 billion at May 31, 2018, versus approximately $9.195 billion at November 30, 2017. Debt fair value was $10.119 billion.
Reported liquidity was $13.7 billion, consisting of $781 million of cash, $2.3 billion available under revolving facilities net of commercial paper borrowings, and $10.6 billion of committed future ship-export-credit financing.
Working capital deficit was $7.0 billion, primarily reflecting $5.3 billion of customer deposits collected before sailings. Management considers this structure normal for its business model and stated that operating cash flow and liquidity should fund capital projects, debt service, and other commitments.
Planned annual capital expenditures were $4.5 billion in 2018, $5.4 billion in 2019 and 2020, $5.0 billion in 2021, $4.3 billion in 2022, and $2.4 billion in 2023.
The company increased its quarterly dividend to $0.50 per share from $0.45 and had $827 million remaining under its repurchase authorization at May 31, 2018.

Material changes versus the prior comparable period

EA segment operating income rose 75% in the quarter and 83% year to date, while NAA segment operating income declined 0.7% in the quarter but increased 2.4% year to date.
Reported revenue benefited from a weaker U.S. dollar, which contributed $121 million to quarterly ticket revenue growth and $270 million to year-to-date ticket revenue growth.
Operating cost increases included higher fuel prices, foreign-currency translation, capacity growth, commissions, dry-dock and repair costs, and depreciation. Quarterly operating costs increased 10%; year-to-date costs increased 11%.
The company added capacity through new ships, including Carnival Cruise Line and Seabourn ships in the NAA segment and the full-period impact of an AIDA ship in the EA segment. Two ships were sold or transferred under a bareboat charter during the period.
Share count declined: diluted weighted-average shares were 715 million in the quarter and 717 million year to date, versus 727 million in both prior-year periods.

Outlook, risks, contingencies, and unusual items

The filing references June 25, 2018 guidance, but the supplied filing text does not provide a clear full-year adjusted EPS or operating outlook value.
Management expects contracted ship orders and dispositions to increase annual capacity by 2.0% in 2018, 5.6% in 2019, 7.1% in 2020, 7.9% in 2021, 4.6% in 2022, and 3.9% in 2023.
A 10% change in currency exchange rates relative to assumptions used in the June 25 guidance was estimated to affect adjusted diluted EPS by $0.13 for the remaining two quarters of 2018 and $0.07 for the third quarter. A 10% fuel-price change was estimated to affect EPS by $0.12 and $0.06, respectively.
Principal risks include weaker cruise demand, geopolitical and travel-safety events, ship or security incidents, contagious disease, weather and natural disasters, regulatory and environmental compliance, cybersecurity and data privacy, fuel prices, foreign exchange, competition, vendor and travel-agent viability, staffing, and shipbuilding or repair delays and cost overruns.
Fuel derivatives produced significant period-to-period earnings volatility. The company excludes unrealized fuel derivative gains and losses, ship-sale gains or losses, and other non-core items from adjusted results.
Remaining unhedged euro-denominated newbuild commitments were $7.6 billion for ships scheduled for delivery in 2019 through 2022.
Pending legal matters were not expected by management to have a material financial impact. A French proceeding concerning alleged sulfur-content violations could impose a fine of up to €200,000 per defendant, among other sanctions.
Management stated that debt covenants were satisfied at May 31, 2018 and expected continued compliance. Cross-default provisions could accelerate substantially all debt and derivative payables following an event of default.
Disclosure controls and procedures were assessed as effective, and no material change in internal control over financial reporting was reported.

Important facts for investors to verify

Reconcile reported earnings with adjusted earnings, particularly the effect of fuel derivative gains, ship sales, and other unusual items.
Assess whether revenue-yield growth continues to exceed cost growth, including fuel, dry-dock, repair, labor, and capacity-related expenses.
Review the $13.7 billion liquidity figure, its exclusions, committed financing availability, and the timing of substantial planned capital expenditures.
Evaluate leverage, floating-rate and foreign-currency exposure, debt maturities, covenant requirements, and cross-default provisions.
Monitor the $7.6 billion unhedged euro newbuild commitment and sensitivity to foreign exchange rates.
Consider the sustainability of customer deposits and the $7.0 billion working capital deficit under weaker bookings or operational disruptions.
Verify the full June 25, 2018 guidance and assumptions for fuel prices, foreign exchange, bookings, yields, costs, and adjusted EPS, which are not clearly included in the supplied text.