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Carnival Executives Explain Latest Outlook Downgrade

Demitrios Kalogeropoulos, The Motley Fool

Carnival (NYSE: CCL) investors knew fiscal 2019 would likely bring weaker operating results than they've seen in the past few years. Yet they were still surprised by the scope of the slowdown that the cruise ship giant recently announced. The company just lowered its earnings outlook for the second straight quarter due to several negative trends, including a few that threaten to weigh down returns into the start of 2020.

In a conference call with Wall Street analysts, CEO Arnold Donald and his team sought to communicate to investors the fact that they're focused on quickly returning Carnival to strong growth. Below we'll look at a few highlights from that discussion.

Two men and two women on a beach, with a cruise ship behind them.

Image source: Getty Images.

Straying from the course

We acknowledge that we would not deliver for this year the growth rates in earnings and returns that our business is capable of and that we are committed to deliver over time, and we are disappointed in the reduction to that guidance.
-- Donald

Carnival's lowered outlook now sees the company posting flat net revenue yields compared to the 1% uptick management had predicted last quarter and the 4% gain it posted in fiscal 2018. Until recently, executives had believed the sluggish sales growth would support a double-digit earnings increase consistent with their annual goals. But because of several headwinds, including weak booking trends in parts of Europe and the loss of its Cuban destinations from the U.S., core earnings are now on pace to rise just 5% compared to 12% last year.

"We had anticipated better pricing and booking volumes during the second quarter," CFO David Bernstein explained while citing weak demand in Southern Europe.

Costs trending down

We are now positioning, beginning in 2020, to take advantage of the natural cost containment that comes from leveraging the increased capacity from newbuilds [new ship launches]. And we've also initiated a zero-based planning pilot for our 2020 planning process. Now this is in addition to our efforts to leverage our industry-leading scale, estimated at $75 million or more annually, and the greater economies of scale afforded by our higher capacity growth.
-- Donald

Carnival is shifting its focus toward cutting costs and maximizing efficiency during this period of sluggish demand. The outlook is bright on this score, thanks to several new ships that have come on line in recent years. It also helps that sailings are still being fully booked, just at weaker prices than expected.

That said, management cautioned investors not to expect a change in Carnival's wider capital plans. "We will not be afraid to spend money to invest, especially if we have an opportunity to drive demand," Donald explained. For example, Carnival is preparing to boost advertising over the next two quarters to help secure full bookings for 2020.

Long-term bets

Newbuilds are a very important part of the path to double-digit return on invested capital and given the inherent cost efficiencies gained by the greater scale and fuel efficiencies of our new ships. Now we've not taken delivery of a new ship in Europe for Costa in over five years, and that ship is still among the highest-returning ships in our entire fleet.
-- Donald

Executives say Smerelda, its first new Costa-brand ship launch in five years, is attracting strong early bookings ahead of its maiden voyage in November. It's a good example of how Carnival can continue to boost capacity, increase fuel efficiency, and generate excitement for sailings just as it has through rough demand patches over the last several years.

Short-term challenges have knocked the company from its intended earnings gains in 2019, management said, but that doesn't change the overall positive dynamics impacting Carnival's business. "We operate in an industry that is capacity constrained," Donald said, "[and] the ships are full, so are the shipyards, and the mobility of the assets allows us to optimize the demand environment over time."

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Demitrios Kalogeropoulos owns shares of Carnival. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.