Carnival Corp. 2001 Q2 Earnings

Carnival Corporation has reported net income of $187.0 million, or $0.32 per share, on revenues of $1.08 billion for its second quarter ended May 31, 2001, compared to net income of $204.0 million, or $0.34 per share, on revenues of $875.1 million for the second quarter of 2000.

Carnival’s second-quarter numbers in 2001 include results for Costa Crociere, whose performance was previously accounted for under affiliated operations. Excluding Costa, Carnival reported an increase in operating income of 14.3 percent compared to the second quarter of 2000, an increase in net revenue yields of 1.8 percent, growth in revenues of 8.9 percent, and a rise in net per diems of 1.1 percent. According to Carnival Chairman and CEO Micky Arison, “In spite of the continuing weak economic environment, we were still able to achieve strong growth in the operating earnings of our cruise brands. A combination of an 8.4 percent increase in capacity, a 1.8 percent increase in net revenue yields, and lower operating cost per available berth day helped to drive the growth.”

In particular, Carnival executives stressed the importance of their 2001 cost-cutting strategy, which resulted in a drop in operating expense per available berth of 2.4 percent (excluding Costa) in the second quarter.

For the six months ended May 31, 2001, Carnival reported net income of $314.9 million, or $0.54 per share, on revenues of $2.09 billion, compared to net income of $375.5 million, or $0.61 per share, on revenues of $1.7 billion for the first six months of 2000.

Looking forward to the second half of this year, Arison predicted net revenue yields will drop approximately two to three percent (versus the earlier prediction of one to two percent), as a result of the slowing economy and pressures on cruise pricing. Yet he also noted that Carnival does not look at everything solely in terms of yields, but also profitability. “It’s important to note that both the Seabourn Sun’s transfer to Holland America Line (HAL) and the Westerdam’s move to Costa will lower yields – but they are meant to increase profitability, not increase yields.”

Second-quarter 2001 net income included increased losses of $11.3 million compared to 2000 from the company’s Airtours investment, which was recently sold. In addition, last year’s second­ quarter results included non-recurring net gains of $10.7 million from affiliated operations, and $6.6 million of net compensation related to the late delivery o f the Zaandam.

Exclusive of these various factors, Carnival CFO Gerald Cahill explained, “It was the best quarter we’ve had in the last year.” Carnival execs said Caribbean and European cruises were performing well, with “Alaska a bit softer.” The Carnival Cruise Lines brand performed best, followed by HAL, with luxury lines Seabourn Cruise Lines and Cunard Line continuing to struggle. Arison explained that during challenging economic times “people will trade down, so instead of taking a Seabourn cruise, they’ll decide to take a Holland America or Carnival cruise this year.”

“On the Cunard/Seabourn situation,” continued Carnival COO Howard Frank, “we have reorganized and are in the process of re-engineering the brands. We are hopeful we will see a positive impact on these brands’ performance in 2002.” He added, “It is very difficult to get decent returns on Seabourn, even under the new structure, but in terms of the size of our overall business, it is a peanut. What we’re really trying to do is neutralize it so it doesn’t have a negative impact.” Asked whether it makes sense for Carnival to continue to hold onto the brand, Frank responded, “It does, but we continue to look at other strategic alternatives.”

Carnival executives also addressed the subject of the $1.08 billion in new cash on band as the result of its issuance of convertible senior debentures and the sale of the company’s Airtours stake. Said Frank, “The proceeds currently sit in our treasury and there really are no immediate plans for the use of those funds. We don’t believe it is unusual for a company of our size to have that level of funds available in its treasury. It is a good safety value and good to have on hand if a potential investment should come up. There have been a lot of rumors that we are looking at virtually every company in the cruise industry, and there is no truth to that.”

Carnival executives made reference to four unnamed companies that they believed were now confronting serious financial difficulty, referring to them as companies with poorly designed ships, highly leveraged balanced sheets, subsidized ship financing, a lack of FMC bonding because their vessels do not call in U.S. ports, and/or recent layoffs – seemingly in reference to Renaissance Cruises, American Classic Voyages, and two other brands.

“With poorly designed ships, we do not think we could do any better than they (the current owners) are,” said Frank, adding, “If somebody runs into problems, everybody thinks we’re going to buy them.” As Arisen put it, “We’re not going to bail out these companies,” noting that the closure of the companies in question, if it occurred, would have greater ramifications than the earlier closures of Commodore cruise Line and Premier Cruise Lines.

Despite such comments, however, Frank conceded, “We don’t mean to say that we won’t look at other opportunities (in the future).”

Asked about any future interest in the Asian cruise market, Arisen said, “The fact that Star Cruises is shifting all of its newbuildings from the Asian market to the U.S. market tells you what the situation is in Asia.”

But Carnival continues to be bullish on the European front. “Costa is performing along with expectations, although they are beginning to see a little weakening of the markets in Europe,” said Frank. Carnival confirmed that the Costa Riviera will be sold or retired when the Westerdam is transferred into the Costa fleet in 2002.

Following the announcement of Carnival’s second-quarter results, which beat consensus analyst expectations by $0.02, major cruise stocks rose. Consensus analyst predictions of $1.65 for the full year were confirmed by Carnival, with Frank calling the figure “quite reasonable and achievable.”

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