Carnival plots course for slower growth due to fuel and currency headwind

Cruise operator Carnival warned that strong growth in the second-quarter was not likely to continue into the third.

Following a second-quarter where earnings per share grew 31% to $0.68 on revenue up 11.7% to $4.4bn, beating market expectations, the third quarter is expected to see adjusted EPS in a range of $2.25-2.29 compared to $2.29 a year ago.

Based on current booking trends, Carnival expects full year 2018 net revenue yields in constant currency to increase roughly 3% on last year, up from March's 2.5% guidance, with net cruise costs still expected to be up 1%. Changes in fuel prices (including realized fuel derivatives) and currency exchange rates are expected to decrease earnings by $0.19 per share compared to March guidance and $0.13 per share compared to the prior year.

However a $0.19 per share swing of fuel and currency against the company over the past three months now means management expects adjusted EPS to be up 8.6-11.3% to $4.15-4.25 for the full year, compared to the guidance given in March for $4.2-4.4.

President and chief executive officer Arnold Donald focused on the positives, pointing to record revenues and adjusted EPS for the second quarter, exceeding the high end of the March guidance range.

He attributed the record second quarter to "strong operational execution" and "the strength of our core strategy to create demand that outpaces measured capacity growth through outstanding guest experience efforts coupled with innovative actions to increase consideration for cruising across all global markets".

The three months to 31 May saw gross revenue yields, a measure of revenue per available lower berth day, increased 8.8% or by 4.8% on a net basis at constant currencies, which was better than previous guidance of 2.5-3.5%. Net costs excluding fuel were up 3.6% versus March guidance of 4-5%.

For the third quarter, management expect adjusted EPS to be no better than flat as constant currency net revenue yields are expected to be up roughly 1.5-2.5% year-on-year, while net cruise costs excluding fuel are expected to be up 3-4%.

After a $0.01 benefit to EPS for fuel and currency costs in the second quarter, changes in fuel prices and FX are expected to decrease earnings by $0.06 per share for the third quarter.

Donald said the unfavourable swing of fuel and currency since the first-quarter had been partly mitigated by "strong operational results coupled with sustained strength in booking trends".

Shares in Carnival fell 9% on Monday afternoon to under 4,250p, their lowest level since January last year.

Balancing record second quarter and downgraded full year, analyst Greg Johnson at broker Shore Capital remained on an even keel as he felt the outlook for the remainder of the year "remains broadly unchanged", though the strong second quarter means the forward booking position "appears less favourable than during the last few years; at a time when capacity growth is set to accelerate sharply".

He noted cumulative bookings for the next three quarters are said to be “line with the prior year at slightly higher prices”, with volumes “running slightly ahead of the prior year at prices that are in line with the prior year”, with Caribbean market said to be a drag on price.

"This would suggest that there is less scope for material outperformance in yield development for the full year, albeit strong close-in bookings have been a key driver in yield outperformance."