REG - Carnival PLC - 3rd Quarter Results <Origin Href="QuoteRef">CCL.L</Origin> - Part 2
29/09/2017 17:41
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applied.
Our unrealized and realized gains (losses), net on fuel derivatives were as follows (in millions):
Three Months Ended Nine Months Ended
August 31, August 31,
2017 2016 2017 2016
Unrealized gains on fuel derivatives, net $ 65 $ 25 $ 134 $ 121
Realized losses on fuel derivatives, net (57 ) (61 ) (153 ) (223 )
Gains (losses) on fuel derivatives, net $ 7 $ (36 ) $ (19 ) $ (102 )
At August 31, 2017, our outstanding fuel derivatives consisted of zero cost collars on Brent as follows:
Maturities (a) Transaction Barrels Weighted-Average Weighted-Average
Dates (in thousands) Floor Prices Ceiling Prices
Fiscal 2017 (4Q)
February 2013 819 $ 80 $ 115
April 2013 507 $ 75 $ 110
January 2014 450 $ 75 $ 114
October 2014 255 $ 80 $ 113
2,031
Fiscal 2018
January 2014 2,700 $ 75 $ 110
October 2014 3,000 $ 80 $ 114
5,700
(a) Fuel derivatives mature evenly over each month within the above fiscal periods.
Foreign Currency Exchange Rate Risks
Overall Strategy
We manage our exposure to fluctuations in foreign currency exchange rates through our normal operating and financing
activities, including netting certain exposures to take advantage of any natural offsets and, when considered appropriate,
through the use of derivative and non-derivative financial instruments. Our primary focus is to monitor our exposure to,
and manage, the economic foreign currency exchange risks faced by our operations and realized if we exchange one currency
for another. We currently only hedge certain of our ship commitments and net investments in foreign operations. The
financial impacts of the hedging instruments we do employ generally offset the changes in the underlying exposures being
hedged.
Operational Currency Risks
Our EAA segment operations generate significant revenues and incur significant expenses in their functional currencies,
which subjects us to "foreign currency translational" risk related to these currencies. Accordingly, exchange rate
fluctuations in their functional currencies against the U.S. dollar will affect our reported financial results since the
reporting currency for our consolidated financial statements is the U.S. dollar. Any strengthening of the U.S. dollar
against these foreign currencies has the financial statement effect of decreasing the U.S. dollar values reported for this
segment's revenues and expenses. Any weakening of the U.S. dollar has the opposite effect.
Substantially all of our operations also have non-functional currency risk related to their international sales. In
addition, we have a portion of our operating expenses denominated in non-functional currencies. Accordingly, we also have
"foreign currency transactional" risks related to changes in the exchange rates for our revenues and expenses that are in a
currency other than the functional currency. The revenues and expenses which occur in the same non-functional currencies
create some degree of natural offset.
Investment Currency Risks
We consider our investments in foreign operations to be denominated in stable currencies. Our investments in foreign
operations are of a long-term nature. We have $5.6 billion and $402 million of euro- and sterling-denominated debt,
respectively, including the effect of foreign currency swaps, which provides an economic offset for our operations with
euro and sterling functional currency. We also partially mitigate our net investment currency exposures by denominating a
portion of our foreign currency intercompany payables in our foreign operations' functional currencies.
Newbuild Currency Risks
Our shipbuilding contracts are typically denominated in euros. Our decision to hedge a non-functional currency ship
commitment for our cruise brands is made on a case-by-case basis, considering the amount and duration of the exposure,
market volatility, economic trends, our overall expected net cash flows by currency and other offsetting risks. We use
foreign currency derivative contracts to manage foreign currency exchange rate risk for some of our ship construction
payments.
At August 31, 2017, we had foreign currency zero cost collars that are designated as cash flow hedges for a portion of
euro-denominated shipyard payments for the following newbuilds:
Entered Into Matures in Weighted-Average Floor Rate Weighted- Average Ceiling Rate
Carnival Horizon 2016 March 2018 $ 1.02 $ 1.25
Seabourn Ovation 2016 April 2018 $ 1.02 $ 1.25
Holland America Nieuw Statendam 2016 November 2018 $ 1.05 $ 1.25
If the spot rate is between the weighted-average ceiling and floor rates on the date of maturity, then we would not owe or
receive any payments under these collars.
At August 31, 2017, our remaining newbuild currency exchange rate risk primarily relates to euro-denominated newbuild
contract payments (including newbuild contracts entered into through September 26, 2017), which represent a total unhedged
commitment of $7.0 billion and substantially relates to newbuilds to be delivered during 2019 through 2022 to non-euro
functional currency brands.
The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise
brands' will be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations
may affect our decision to order new cruise ships.
Interest Rate Risks
We manage our exposure to fluctuations in interest rates through our debt portfolio management and investment strategies.
We evaluate our debt portfolio to determine whether to make periodic adjustments to the mix of fixed and floating rate debt
through the use of interest rate swaps and the issuance of new debt or the early retirement of existing debt.
Concentrations of Credit Risk
As part of our ongoing control procedures, we monitor concentrations of credit risk associated with financial and other
institutions with which we conduct significant business. We seek to minimize these credit risk exposures, including
counterparty nonperformance primarily associated with our cash equivalents, investments, committed financing facilities,
contingent obligations, derivative instruments, insurance contracts and new ship progress payment guarantees, by:
• Conducting business with large, well-established financial institutions, insurance companies and export credit
agencies
• Diversifying our counterparties
• Having guidelines regarding credit ratings and investment maturities that we follow to help safeguard liquidity and
minimize risk
• Generally requiring collateral and/or guarantees to support notes receivable on significant asset sales, long-term
ship charters and new ship progress payments to shipyards
We currently believe the risk of nonperformance by any of our significant counterparties is remote. At August 31, 2017, our
exposures under foreign currency and fuel derivative contracts and interest rate swap agreements were not material.
We also monitor the creditworthiness of travel agencies and tour operators in Asia, Australia and Europe, which includes
charter-hire agreements in Asia, and credit and debit card providers to which we extend credit in the normal course of our
business prior to sailing. Our credit exposure also includes contingent obligations related to cash payments received
directly by travel agents and tour operators for cash collected by them on cruise sales in Australia and most of Europe
where we are obligated to honor our guests' cruise payments made by them to their travel agents and tour operators
regardless of whether we have received these payments. Concentrations of credit risk associated with these trade
receivables, charter-hire agreements and contingent obligations are not considered to be material, principally due to the
large number of unrelated accounts, the nature of these contingent obligations and their short maturities. We have not
experienced significant credit losses on our trade receivables, charter-hire agreements and contingent obligations. We do
not normally require collateral or other security to support normal credit sales.
NOTE 5 - Segment Information
We have four reportable segments that are comprised of (1) North America, (2) EAA, (3) Cruise Support and (4) Tour and
Other. Our segments are reported on the same basis as the internally reported information that is provided to our chief
operating decision maker ("CODM"), who is the President and Chief Executive Officer of Carnival Corporation and Carnival
plc. The CODM assesses performance and makes decisions to allocate resources for Carnival Corporation & plc based upon
review of the results across all of our segments.
Our North America segment includes Carnival Cruise Line, Holland America Line, Princess Cruises and Seabourn. Our EAA
segment includes AIDA Cruises, Costa Cruises, Cunard, P&O Cruises (Australia) and P&O Cruises (UK). The operations of these
reporting units have been aggregated into two reportable segments based on the similarity of their economic and other
characteristics, including types of customers, regulatory environment, maintenance requirements, supporting systems and
processes and products and services they provide. Our Cruise Support segment represents certain of our port and related
facilities and other services that are provided for the benefit of our cruise brands. Our Tour and Other segment represents
the hotel and transportation operations of Holland America Princess Alaska Tours and other operations.
Selected information for our segments and the reconciliation to the consolidated financial statement amounts was as follows
(in millions):
Three Months Ended August 31,
Revenues Operating costs and Selling Depreciation Operating
expenses and and income (loss)
administrative amortization
2017
North America $ 3,561 $ 1,773 $ 306 $ 287 $ 1,195
EAA 1,879 1,262 172 163 193 (a)
Cruise Support 28 - 65 13 (50 )
Tour and Other 155 86 4 10 55
Intersegment elimination (108 ) (108 ) - - -
$ 5,515 $ 3,013 $ 547 $ 473 $ 1,393
2016
North America $ 3,284 $ 1,668 $ 293 $ 272 $ 1,051
EAA 1,738 903 161 152 522
Cruise Support 31 12 73 9 (63 )
Tour and Other 148 84 2 10 52
Intersegment elimination (104 ) (104 ) - - -
$ 5,097 $ 2,563 $ 529 $ 443 $ 1,562
Nine Months Ended August 31,
Revenues Operating costs and Selling Depreciation Operating
expenses and and income (loss)
administrative amortization
2017
North America $ 8,547 $ 4,776 $ 945 $ 845 $ 1,981
EAA 4,527 3,082 512 459 385 (a)
Cruise Support 101 18 180 36 (133 )
Tour and Other 200 132 12 28 28
Intersegment elimination (124 ) (124 ) - - -
$ 13,251 $ 7,884 $ 1,649 $ 1,368 $ 2,261
2016
North America $ 7,823 $ 4,368 $ 897 $ 791 $ 1,767
EAA 4,466 2,666 513 450 837
Cruise Support 93 23 196 32 (158 )
Tour and Other 190 125 7 30 28
Intersegment elimination (118 ) (118 ) - - -
$ 12,454 $ 7,064 $ 1,613 $ 1,303 $ 2,474
(a) Includes $89 million of impairment charges related to EAA's goodwill and trademarks.
A portion of the North America segment's revenues includes revenues for the tour portion of a cruise when a cruise and land
tour package are sold together by Holland America Line and Princess Cruises. These intersegment tour revenues, which are
also included in our Tour and Other segment, are eliminated by the North America segment's revenues and operating expenses
in the line "Intersegment elimination."
NOTE 6 - Earnings Per Share
Our basic and diluted earnings per share were computed as follows (in millions, except per share data):
Three Months Ended Nine Months Ended
August 31, August 31,
2017 2016 2017 2016
Net income for basic and diluted earnings per share $ 1,329 $ 1,424 $ 2,060 $ 2,171
Weighted-average shares outstanding 723 737 724 751
Dilutive effect of equity plans 3 2 3 3
Diluted weighted-average shares outstanding 726 739 727 754
Basic earnings per share $ 1.84 $ 1.93 $ 2.85 $ 2.89
Diluted earnings per share $ 1.83 $ 1.93 $ 2.84 $ 2.88
NOTE 7 - Shareholders' Equity
On April 6, 2017, the Boards of Directors approved a modification of the general authorization to repurchase Carnival
Corporation common stock and/or Carnival plc ordinary shares (the "Repurchase Program"), which replenished the remaining
authorized repurchases at the time of the approval to $1.0 billion. During the nine months ended August 31, 2017, we
repurchased 2.8 million shares of Carnival plc ordinary shares and 2.4 million shares of Carnival Corporation common stock
for $156 million and $158 million, respectively, under the Repurchase Program. At August 31, 2017, the remaining
availability under the Repurchase Program was $830 million.
During the three months ended August 31, 2017, our Boards of Directors declared a dividend to holders of Carnival
Corporation common stock and Carnival plc ordinary shares of $0.40 per share.
NOTE 8 - Property and Equipment
In April 2017, we transferred an EAA segment 1,550-passenger capacity ship under a bareboat charter agreement which was
accounted for as a sale.
In July 2017, we entered into a bareboat charter agreement under which an EAA segment 1,300-passenger capacity ship will be
chartered from April 2018 through April 2025. This transaction will be accounted for as a sales-type lease with the
recognition of sale and derecognition of asset upon asset delivery.
In September 2017, we entered into an agreement to sell an EAA segment 700-passenger capacity ship. The ownership of the
ship will be transferred to the buyer in March 2018.
SCHEDULE B
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Concerning Factors That May Affect Future Results
Some of the statements, estimates or projections contained in this document are "forward-looking statements" that involve
risks, uncertainties and assumptions with respect to us, including some statements concerning future results, outlooks,
plans, goals and other events which have not yet occurred. These statements are intended to qualify for the safe harbors
from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements other than statements of historical facts are statements that could be deemed forward-looking. These
statements are based on current expectations, estimates, forecasts and projections about our business and the industry in
which we operate and the beliefs and assumptions of our management. We have tried, whenever possible, to identify these
statements by using words like "will," "may," "could," "should," "would," "believe," "depends," "expect," "goal,"
"anticipate," "forecast," "project," "future," "intend," "plan," "estimate," "target," "indicate," "outlook" and similar
expressions of future intent or the negative of such terms.
Forward-looking statements include those statements that relate to our outlook and financial position including, but not
limited to, statements regarding:
• Net revenue yields • Net cruise costs, excluding fuel per available lower berth day
• Booking levels • Estimates of ship depreciable lives and residual values
• Pricing and occupancy • Goodwill, ship and trademark fair values
• Interest, tax and fuel expenses • Liquidity
• Currency exchange rates • Adjusted earnings per share
Because forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual
results, performance or achievements to differ materially from those expressed or implied by our forward-looking
statements. This note contains important cautionary statements of the known factors that we consider could materially
affect the accuracy of our forward-looking statements and adversely affect our business, results of operations and
financial position. It is not possible to predict or identify all such risks. There may be additional risks that we
consider immaterial or which are unknown. These factors include, but are not limited to, the following:
• Incidents, such as ship incidents, security incidents, the spread of contagious diseases and threats thereof,
adverse weather conditions or other natural disasters and the related adverse publicity affecting our reputation and the
health, safety, security and satisfaction of guests and crew
• Economic conditions and adverse world events affecting the safety and security of travel, such as civil unrest,
armed conflicts and terrorist attacks
• Changes in and compliance with laws and regulations relating to the environment, health, safety, security, tax and
anti-corruption under which we operate
• Disruptions and other damages to our information technology and other networks and operations, and breaches in data
security
• Ability to recruit, develop and retain qualified personnel
• Increases in fuel prices
• Fluctuations in foreign currency exchange rates
• Misallocation of capital among our ship, joint venture and other strategic investments
• Future operating cash flow may not be sufficient to fund future obligations and we may be unable to obtain
financing
• Overcapacity in the cruise ship and land-based vacation industry
• Deterioration of our cruise brands' strengths and our inability to implement our strategies
• Continuing financial viability of our travel agent distribution system, air service providers and other key vendors
in our supply chain and reductions in the availability of, and increases in the prices for, the services and products
provided by these vendors
• Inability to implement our shipbuilding programs and ship repairs, maintenance and refurbishments on terms that are
favorable or consistent with our expectations and increases to our repairs and maintenance expenses and refurbishment costs
as our fleet ages
• Failure to keep pace with developments in technology
• Geographic regions in which we try to expand our business may be slow to develop and ultimately not develop how we
expect and our international operations are subject to additional risks not generally applicable to our U.S. operations
• Competition from the cruise ship and land-based vacation industry
• Economic, market and political factors that are beyond our control
• Litigation, enforcement actions, fines or penalties
• Lack of continuing availability of attractive, convenient and safe port destinations on terms that are favorable or
consistent with our expectations
• Union disputes and other employee relationship issues
• Decisions to self-insure against various risks or the inability to obtain insurance for certain risks at reasonable
rates
• Reliance on third-party providers of various services integral to the operations of our business
• Business activities that involve our co-investment with third parties
• Disruptions in the global financial markets or other events that may negatively affect the ability of our
counterparties and others to perform their obligations to us
• Our shareholders may be subject to the uncertainties of a foreign legal system since Carnival Corporation and
Carnival plc are not U.S. corporations
• Small group of shareholders may be able to effectively control the outcome of shareholder voting
• Provisions in Carnival Corporation's and Carnival plc's constitutional documents may prevent or discourage
takeovers and business combinations that our shareholders might consider to be in their best interests
• The dual listed company arrangement involves risks not associated with the more common ways of combining the
operations of two companies
The ordering of the risk factors set forth above is not intended to reflect our indication of priority or likelihood.
Forward-looking statements should not be relied upon as a prediction of actual results. Subject to any continuing
obligations under applicable law or any relevant stock exchange rules, we expressly disclaim any obligation to disseminate,
after the date of this document, any updates or revisions to any such forward-looking statements to reflect any change in
expectations or events, conditions or circumstances on which any such statements are based.
Outlook
On September 26, 2017, we disclosed in our earnings release that we expected our adjusted earnings per share for the 2017
fourth quarter to be in the range of $0.44 to $0.50 and 2017 full year to be in the range of $3.64 to $3.70 (see "Key
Performance Non-GAAP Financial Indicators"). Our guidance was based on the following assumptions:
2017 Fourth Quarter 2017 Full Year
Fuel price per metric ton $397 $378
Currencies
U.S. dollar to euro $1.19 to E1 $1.13 to E1
U.S. dollar to sterling $1.35 to £1 $1.28 to £1
U.S. dollar to Australian dollar $0.80 to A$1 $0.77 to A$1
The fuel and currency assumptions used in our guidance change daily and, accordingly, our forecasts change daily based on
the changes in these assumptions. We have not provided a reconciliation of forecasted U.S. GAAP earnings per share to
forecasted adjusted earnings per share because preparation of meaningful U.S. GAAP forecasts of earnings per share would
require unreasonable effort. We are unable to predict, without unreasonable effort, the future movement of foreign exchange
rates and fuel prices. While we forecast realized gains and losses on fuel derivatives by applying current Brent prices to
the derivatives that settle in the forecast period, we do not forecast the impact of unrealized gains and losses on fuel
derivatives because we do not believe they are an indication of our future earnings performance. We are unable to determine
the future impact of gains or losses on ships sales, restructuring expenses and other non-core gains and charges.
The above forward-looking statements involve risks, uncertainties and assumptions with respect to us. There are many
factors that could cause our actual results to differ materially from those expressed above. You should read the above
forward-looking statements together with the discussion of the risks under "Cautionary Note Concerning Factors That May
Affect Future Results."
Critical Accounting Estimates
For a discussion of our critical accounting estimates, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" that is included in the Form 10-K. A discussion of our impairment charges recognized during the 2017
third quarter for the impairment of ships as well as the results of our annual goodwill and trademark impairment reviews as
of July 31, 2017 is included in the accompanying consolidated financial statements.
The determination of our cruise brand, cruise ship and trademark fair values includes numerous assumptions that are subject
to various risks and uncertainties. We believe that we have made reasonable estimates and judgments. Changes in the
conditions or circumstances influencing fair values may result in a need to recognize additional impairment charges.
New Accounting Pronouncements
Refer to our consolidated financial statements for further information on Recent Accounting Pronouncements.
Seasonality
Our revenues from the sale of passenger tickets are seasonal. Historically, demand for cruises has been greatest during our
third quarter, which includes the Northern Hemisphere summer months. This higher demand during the third quarter results in
higher ticket prices and occupancy levels and, accordingly, the largest share of our operating income is earned during this
period. The seasonality of our results also increases due to ships being taken out-of-service for maintenance, which we
schedule during non-peak demand periods. In addition, substantially all of Holland America Princess Alaska Tours' revenue
and net income is generated from May through September in conjunction with the Alaska cruise season.
Statistical Information
Three Months Ended Nine Months Ended
August 31, August 31,
2017 2016 2017 2016
Available Lower Berth Days ("ALBDs") (in thousands) (a) (b) 21,120 20,572 61,541 59,555
Occupancy percentage (c) 111.3 % 111.4 % 106.7 % 106.6 %
Passengers carried (in thousands) 3,441 3,265 9,116 8,606
Fuel consumption in metric tons (in thousands) 814 793 2,463 2,417
Fuel consumption in metric tons per thousand ALBDs 38.5 38.6 40.0 40.6
Fuel cost per metric ton consumed $ 378 $ 335 $ 371 $ 268
Currencies
U.S. dollar to euro $ 1.15 $ 1.12 $ 1.11 $ 1.11
U.S. dollar to sterling $ 1.29 $ 1.34 $ 1.27 $ 1.41
U.S. dollar to Australian dollar $ 0.78 $ 0.75 $ 0.76 $ 0.74
(a) ALBD is a standard measure of passenger capacity for the period that we use to approximate rate and capacity
variances, based on consistently applied formulas that we use to perform analyses to determine the main non-capacity driven
factors that cause our cruise revenues and expenses to vary. ALBDs assume that each cabin we offer for sale accommodates
two passengers and is computed by multiplying passenger capacity by revenue-producing ship operating days in the period.
(b) For the three months ended August 31, 2017 compared to the three months ended August 31, 2016, we had a 2.7%
capacity increase in ALBDs comprised of a 2.1% capacity increase in our North America segment and a 3.5% capacity increase
in our EAA segment.
Our North America segment's capacity increase was caused by the full quarter impact from one Princess Cruises
3,560-passenger capacity ship that entered into service in April 2017, which was offset by the full quarter impact from the
transfer of one Princess Cruises 2,000-passenger capacity ship to P&O Cruises (Australia) in May 2017.
Our EAA segment's capacity increase was caused by:
• Full quarter impact from one AIDA Cruises 3,290-passenger capacity ship that entered into service in June 2017
• Partial quarter impact from the transfer of one Princess Cruises 2,000-passenger capacity ship to P&O Cruises
(Australia) that entered into service in July 2017.
These increases were partially offset by the full quarter impact from one P&O Cruises (Australia) 1,550-passenger capacity
ship removed from service in April 2017.
For the nine months ended August 31, 2017 compared to the nine months ended August 31, 2016, we had a 3.3% capacity
increase in ALBDs comprised of a 4.2% capacity increase in our North America segment and a 2.0% capacity increase in our
EAA segment.
Our North America segment's capacity increase was caused by:
• Partial period impact from one Holland America Line 2,650-passenger capacity ship that entered into service in
April 2016
• Partial period impact from one Carnival Cruise Line 3,930-passenger capacity ship that entered into service in May
2016
• Partial period impact from one Princess Cruises 3,560-passenger capacity ship that entered into service in April
2017
These increases were offset by the partial period impact from the transfer of one Princess Cruises 2,000-passenger capacity
ship to P&O Cruises (Australia) in May 2017.
Our EAA segment's capacity increase was caused by:
• Partial period impact from one AIDA Cruises 3,290-passenger capacity ship that entered into service in April 2016
• Partial period impact from one AIDA Cruises 3,290-passenger capacity ship that entered into service in June 2017
• Partial period impact from the transfer of one Princess Cruises 2,000-passenger capacity ship to P&O Cruises
(Australia) that entered into service in July 2017
These increases were partially offset by the partial period impact from one P&O Cruises (Australia) 1,550-passenger
capacity ship removed from service in April 2017.
(c) In accordance with cruise industry practice, occupancy is calculated using a denominator of ALBDs, which
assumes two passengers per cabin even though some cabins can accommodate three or more passengers. Percentages in excess of
100% indicate that on average more than two passengers occupied some cabins.
Three Months Ended August 31, 2017 ("2017") Compared to Three Months Ended August 31, 2016 ("2016")
Revenues
Consolidated
Cruise passenger ticket revenues made up 75% of our 2017 total revenues. Cruise passenger ticket revenues increased by $335
million, or 8.8%, to $4.1 billion in 2017 from $3.8 billion in 2016.
This increase was driven by:
• $191 million - increase in cruise ticket revenues, driven primarily by price improvements in our Caribbean,
European and Alaska programs for our North America segment and European and Caribbean programs for our EAA segment,
partially offset by decreases in our China programs
• $101 million - 2.7% capacity increase in ALBDs
• $21 million - foreign currency translational impact from a weaker U.S. dollar against the functional currencies of
our foreign operations ("foreign currency translational impact")
The remaining 25% of 2017 total revenues were substantially all comprised of onboard and other cruise revenues, which
increased by $77 million, or 6.7%, to $1.2 billion in 2017 from $1.1 billion in 2016.
This increase was driven by:
• $33 million - higher onboard spending by our guests
• $31 million - 2.7% capacity increase in ALBDs
Concession revenues, which are included in onboard and other revenues, increased by $9 million, or 2.9%, to $331 million in
2017 from $321 million in 2016.
North America Segment
Cruise passenger ticket revenues made up 75% of our North America segment's 2017 total revenues. Cruise passenger ticket
revenues increased by $221 million, or 9.3%, to $2.6 billion in 2017 compared to $2.4 billion in 2016.
This increase was driven by:
• $152 million - increase in cruise ticket revenues, driven primarily by price improvements in the Caribbean,
European and Alaska programs
• $50 million - 2.1% capacity increase in ALBDs
The remaining 25% of our North America segment's 2017 total revenues were comprised of onboard and other cruise revenues,
which increased by $51 million, or 6.3%, to $859 million in 2017 from $808 million in 2016.
This increase was driven by:
• $24 million - higher onboard spending by our guests
• $17 million - 2.1% capacity increase in ALBDs
Concession revenues, which are included in onboard and other revenues, increased by $3 million, or 1.5%, to $226 million in
2017 from $223 million in 2016.
EAA Segment
Cruise passenger ticket revenues made up 82% of our EAA segment's 2017 total revenues. Cruise passenger ticket revenues
increased by $110 million, or 7.6%, and was $1.5 billion in 2017 compared to $1.4 billion in 2016.
This increase was caused by:
• $51 million - 3.5% capacity increase in ALBDs
• $45 million - increase in cruise ticket revenues driven primarily by price improvements in the Caribbean and
European programs, partially offset by decreases in the China programs.
• $21 million - foreign currency translational impact
The remaining 18% of our EAA segment's 2017 total revenues were comprised of onboard and other cruise revenues, which
increased by $30 million, or 10%, and was $330 million in 2017 and $300 million in 2016.
This increase was driven by:
• $15 million - higher onboard spending by our guests
• $11 million - 3.5% capacity increase in ALBDs
Concession revenues, which are included in onboard and other revenues, increased by $6 million, or 6.5%, to $104 million in
2017 from $98 million in 2016.
Costs and Expenses
Consolidated
Operating costs and expenses increased by $450 million, or 18%, to $3.0 billion in 2017 from $2.6 billion in 2016.
This increase was caused by:
• $304 million - impairment of ships, resulting primarily from our decision to strategically realign our business in
Australia
• $66 million - 2.7% capacity increase in ALBDs
• $35 million - higher fuel prices
• $32 million - higher commissions, transportation and other
• $20 million - foreign currency translational impact
• $15 million - higher port expenses
These increases were partially offset by lower dry-dock expenses and repair and maintenance expenses, which accounted for
$19 million.
Selling and administrative expenses increased by $18 million, or 3.4%, to $547 million in 2017 from $529 million in 2016.
Depreciation and amortization expenses increased by $30 million, or 6.8%, to $473 million in 2017 from $443 million in
2016.
Goodwill and trademark impairment charges of $89 million include a goodwill impairment charge of $38 million and a
trademark impairment charge of $50 million during the third quarter of 2017, resulting from our decision to strategically
realign our business in Australia.
North America Segment
Operating costs and expenses increased by $101 million, or 6.5%, to $1.7 billion in 2017 from $1.6 billion in 2016.
This increase was driven by:
• $33 million - 2.1% capacity increase in ALBDs
• $30 million - higher commissions, transportation and other
• $20 million - higher fuel prices
Selling and administrative expenses increased by $13 million, or 4.4%, to $306 million in 2017 from $293 million in 2016.
Depreciation and amortization expenses increased by $15 million, or 5.5%, to $287 million in 2017 from $272 million in
2016.
EAA Segment
Operating costs and expenses increased by $359 million, or 40%, to $1,262 million in 2017 from $903 million in 2016.
This increase was caused by:
• $304 million - impairment of ships, resulting primarily from our decision to strategically realign our business in
Australia
• $32 million - 3.5% capacity increase in ALBDs
• $20 million - foreign currency translational impact
• $15 million - higher fuel prices
These increases were partially offset by lower dry-dock expenses and repair and maintenance expenses, which accounted for
$11 million.
Selling and administrative expenses increased by $11 million, or 6.8%, to $172 million in 2017 from $161 million in 2016.
Depreciation and amortization expenses increased by $11 million, or 7.2%, to $163 million in 2017 from $152 million in
2016.
Goodwill and trademark impairment charges of $89 million include a goodwill impairment charge of $38 million and a
trademark impairment charge of $50 million during the third quarter of 2017, resulting from our decision to strategically
realign our business in Australia.
Operating Income
Our consolidated operating income decreased by $169 million, or 11%, to $1.4 billion in 2017 from $1.6 billion in 2016. Our
North America segment's operating income increased by $144 million, or 14%, to $1.2 billion in 2017 from $1.1 billion in
2016, and our EAA segment's operating income decreased by $329 million, or 63%, to $193 million in 2017 from $522 million
in 2016. These changes were primarily due to the reasons discussed above.
Nonoperating Income (Expense)
Gains (losses) on fuel derivatives, net were comprised of the following (in millions):
Three Months Ended August 31,
2017 2016
Unrealized gains on fuel derivatives, net $ 65 $ 25
Realized losses on fuel derivatives, net (57 ) (61 )
Gains (losses) on fuel derivatives, net $ 7 $ (36 )
Key Performance Non-GAAP Financial Indicators
Non-GAAP Financial Measures
We use net cruise revenues per ALBD ("net revenue yields"), net cruise costs excluding fuel per ALBD, adjusted net income
and adjusted earnings per share as non-GAAP financial measures of our cruise segments' and the company's financial
performance. These non-GAAP financial measures are provided along with U.S. GAAP gross cruise revenues per ALBD ("gross
revenue yields"), gross cruise costs per ALBD and U.S. GAAP net income and U.S. GAAP earnings per share.
We believe that gains and losses on ship sales, impairment charges and restructuring and certain other expenses are not
part of our core operating business and, therefore, are not an indication of our future earnings performance. As such, we
exclude these items from non-GAAP measures. Net revenue yields and net cruise costs excluding fuel per ALBD enable us to
separate the impact of predictable capacity or ALBD changes from price and other changes that affect our business. We
believe these non-GAAP measures provide useful information to investors and expanded insight to measure our revenue and
cost performance as a supplement to our U.S. GAAP consolidated financial statements.
The presentation of our non-GAAP financial information is not intended to be considered in isolation from, as a substitute
for, or superior to the financial information prepared in accordance with U.S. GAAP. It is possible that our non-GAAP
financial measures may not be exactly comparable to the like-kind information presented by other companies, which is a
potential risk associated with using these measures to compare us to other companies.
Net revenue yields are commonly used in the cruise industry to measure a company's cruise segment revenue performance and
for revenue management purposes. We use "net cruise revenues" rather than "gross cruise revenues" to calculate net revenue
yields. We believe that net cruise revenues is a more meaningful measure in determining revenue yield than gross cruise
revenues because it reflects the cruise revenues earned net of our most significant variable costs, which are travel agent
commissions, cost of air and other transportation, certain other costs that are directly associated with onboard and other
revenues and credit and debit card fees.
Net passenger ticket revenues reflect gross passenger ticket revenues, net of commissions, transportation and other costs.
Net onboard and other revenues reflect gross onboard and other revenues, net of onboard and other cruise costs.
Net cruise costs excluding fuel per ALBD is the measure we use to monitor our ability to control our cruise segments' costs
rather than gross cruise costs per ALBD. We exclude the same variable costs that are included in the calculation of net
cruise revenues as well as fuel expense to calculate net cruise costs without fuel to avoid duplicating these variable
costs in our non-GAAP financial measures. Substantially all of our net cruise costs excluding fuel are largely fixed,
except for the impact of changing prices, once the number of ALBDs has been determined.
We have not provided a reconciliation of forecasted gross cruise revenues to forecasted net cruise revenues or forecasted
gross cruise costs to forecasted net cruise costs without fuel or forecasted U.S. GAAP net income to forecasted adjusted
net income or forecasted U.S. GAAP earnings per share to forecasted adjusted earnings per share because preparation of
meaningful U.S. GAAP forecasts of gross cruise revenues, gross cruise costs, net income and earnings per share would
require unreasonable effort. We are unable to predict, without unreasonable effort, the future movement of foreign exchange
rates and fuel prices. While we forecast realized gains and losses on fuel derivatives by applying current Brent prices to
the derivatives that settle in the forecast period, we do not forecast the impact of unrealized gains and losses on fuel
derivatives because we do not believe they are an indication of our future earnings performance. We are unable to determine
the future impact of gains or losses on ships sales, restructuring expenses and other non-core gains and charges.
Constant Dollar and Constant Currency
Our EAA segment and Cruise Support segment operations utilize the euro, sterling and Australian dollar as their functional
currencies to measure their results and financial condition. This subjects us to foreign currency translational risk. Our
North America, EAA and Cruise Support segment operations also have revenues and expenses that are in a currency other than
their functional currency. This subjects us to foreign currency transactional risk.
We report net revenue yields, net passenger revenue yields, net onboard and other revenue yields and net cruise costs
excluding fuel per ALBD on a "constant dollar" and "constant currency" basis assuming the 2017 periods' currency exchange
rates have remained constant with the 2016 periods' rates. These metrics facilitate a comparative view for the changes in
our business in an environment with fluctuating exchange rates.
Constant dollar reporting is a non-GAAP financial measure that removes only the impact of changes in exchange rates on the
translation of our EAA segment and Cruise Support segment operations.
Constant currency reporting is a non-GAAP financial measure that removes the impact of changes in exchange rates on the
translation of our EAA segment and Cruise Support segment operations (as in constant dollar) plus the transactional impact
of changes in exchange rates from revenues and expenses that are denominated in a currency other than the functional
currency for our North America, EAA and Cruise Support segments.
Examples:
• The translation of our EAA segment operations to our U.S. dollar reporting currency results in decreases in
reported U.S. dollar revenues and expenses if the U.S. dollar strengthens against these foreign currencies and increases in
reported U.S. dollar revenues and expenses if the U.S. dollar weakens against these foreign currencies.
• Our North American segment operations have a U.S. dollar functional currency but also have revenue and expense
transactions in currencies other than the U.S. dollar. If the U.S. dollar strengthens against these other currencies, it
reduces the U.S. dollar revenues and expenses. If the U.S. dollar weakens against these other currencies, it increases the
U.S. dollar revenues and expenses.
• Our EAA segment operations have euro, sterling and Australian dollar functional currencies but also have revenue
and expense transactions in currencies other than their functional currency. If their functional currency strengthens
against these other currencies, it reduces the functional currency revenues and expenses. If the functional currency
weakens against these other currencies, it increases the functional currency revenues and expenses.
Under U.S. GAAP, the realized and unrealized gains and losses on fuel derivatives not qualifying as fuel hedges are
recognized currently in earnings. We believe that unrealized gains and losses on fuel derivatives are not an indication of
our earnings performance since they relate to future periods and may not ultimately be realized in our future earnings.
Therefore, we believe it is more meaningful for the unrealized gains and losses on fuel derivatives to be excluded from our
net income and earnings per share and, accordingly, we present adjusted net income and adjusted earnings per share
excluding these unrealized gains and losses.
We believe that gains and losses on ship sales, impairment charges, restructuring and other expenses are not part of our
core operating business and are not an indication of our future earnings performance. Therefore, we believe it is more
meaningful for gains and losses on ship sales, impairment charges, and restructuring and other non-core gains and charges
to be excluded from our net income and earnings per share and, accordingly, we present adjusted net income and adjusted
earnings per share excluding these items.
Consolidated gross and net revenue yields were computed by dividing the gross and net cruise revenues by ALBDs as follows
(dollars in millions, except yields):
Three Months Ended August 31,
2017 2017 2016
Constant
Dollar
Passenger ticket revenues $ 4,138 $ 4,117 $ 3,803
Onboard and other revenues 1,223 1,218 1,146
Gross cruise revenues 5,361 5,335 4,949
Less cruise costs
Commissions, transportation and other (699 ) (695 ) (646 )
Onboard and other (184 ) (184 ) (171 )
(883 ) (879 ) (817 )
Net passenger ticket revenues 3,439 3,422 3,157
Net onboard and other revenues 1,039 1,034 975
Net cruise revenues $ 4,478 $ 4,456 $ 4,132
ALBDs 21,120,155 21,120,155 20,572,112
Gross revenue yields $ 253.82 $ 252.63 $ 240.60
% increase vs. 2016 5.5 % 5.0 %
Net revenue yields $ 211.99 $ 211.02 $ 200.87
% increase vs. 2016 5.5 % 5.1 %
Net passenger ticket revenue yields $ 162.82 $ 162.05 $ 153.47
% increase vs. 2016 6.1 % 5.6 %
Net onboard and other revenue yields $ 49.17 $ 48.97 $ 47.39
% increase vs. 2016 3.8 % 3.3 %
Three Months Ended August 31,
2017 2017 2016
Constant
Currency
Net passenger ticket revenues $ 3,439 $ 3,424 $ 3,157
Net onboard and other revenues 1,039 1,033 975
Net cruise revenues $ 4,478 $ 4,457 $ 4,132
ALBDs 21,120,155 21,120,155 20,572,112
Net revenue yields $ 211.99 $ 211.05 $ 200.87
% increase vs. 2016 5.5 % 5.1 %
Net passenger ticket revenue yields $ 162.82 $ 162.13 $ 153.47
% increase vs. 2016 6.1 % 5.6 %
Net onboard and other revenue yields $ 49.17 $ 48.92 $ 47.39
% increase vs. 2016 3.8 % 3.2 %
Consolidated gross and net cruise costs and net cruise costs excluding fuel per ALBD were computed by dividing the gross
and net cruise costs and net cruise costs excluding fuel by ALBDs as follows (dollars in millions, except costs per ALBD):
Three Months Ended August 31,
2017 2017 2016
Constant
Dollar
Cruise operating expenses $ 2,927 $ 2,908 $ 2,479
Cruise selling and administrative expenses 543
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