嘉年華遊輪 (CCL) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the first-quarter 2012 earnings call.

During the presentation all participants will be in a listen-only mode.

(Operator Instructions) As a reminder, this conference is being recorded Friday, March 9, 2012.

I would now like to turn the conference over to Mr.

Howard Frank, Vice Chairman and Chief Operating Officer.

Please, go ahead.

Good morning, everyone.

This is Howard Frank.

With me this morning is Micky Arison, our Chairman and Chief Executive Officer; David Bernstein, our Senior Vice President of Finance and our Chief Financial Officer; and Beth Roberts, our Vice President -- what are you, what do you do again?

(laughter) Investor Relations office.

Before David's comments, which we typically start the call with, Micky would like to make a few comments first.

Good morning, everybody, and thank you for joining us today.

As you can imagine, this has been a most difficult and challenging time for our Corporation.

We've all been deeply saddened by the Costa Concordia accident.

Our thoughts and prayers are with the passengers, crew and family of those who were lost in this tragic accident.

We are grateful to the Italian authorities and rescue workers who acted heroically following the accident and will continue to assist in the recovery process.

We would also like to express our deepest appreciation to the local population of the island of Giglio, and thank them for their generosity to those in need.

As to the Costa Concordia crew, I would like to thank and recognize them for their tireless efforts to evacuate more than 4,000 passengers and crew from the ship that night.

Not enough can be said about the work that the crew did to help our guests in the most challenging of conditions.

Before we walk through the financial impact of two Costa cruises and Carnival Corporation, I would like to offer a couple of observations based on my experience.

First, that the cruise industry remains incredibly safe and maintains one of the best safety records of any form of recreational travel in the world.

The safety and security of our guests are job one.

We learn from everything we can from this incident and apply all lessons learned.

Thank you.

And David will take you through the numbers.

David?

Thank you, Micky.

Before I begin, please note that some of our remarks on this call will be forward-looking.

I will refer you to the cautionary statement in today's press release.

Also, all of my references to revenue and cost metrics will be in local currencies unless otherwise noted, as this is a more useful measure of business strength.

Our non-GAAP EPS for the first quarter was $0.02.

The first quarter came in $0.06 below the midpoint of our December guidance.

The $0.06 shortfall from our December guidance was driven by $0.04 from the Costa Concordia incident expenses not covered by insurance, and $0.04 from the impairment charge related to the Costa Allegra.

All the other items netted out to a favorable $0.02 per share as higher-than-expected revenue yields and cost savings, including lower advertising expenses, more than offset $0.06 of higher fuel prices.

Now let's look at our first-quarter operating results versus the prior year.

Our capacity increased almost 4%.

Our North American brands grew over 4%.

While our Europe, Australia, and Asia brands, or as we call them our EAA brands, grew almost 3%.

Our total net revenue yields increased to 2.9% in the first quarter, with net ticket revenue yields up to 2.6%.

Net onboard and other revenue yields up 3.7%.

With respect to our net ticket yields, the North American brands were up almost 5% as yields rebounded in the Caribbean, benefiting from the continuing recovery in the US economy after absorbing a significant capacity increase last year.

During the first quarter, the Caribbean represented two-thirds of the North American brands capacity.

Our EAA brands net ticket yields were in line with the prior year, with their ships cruising in numerous regions throughout the world during the first quarter.

For net onboard and other yields, the 3.7% increase was also driven by our North American brands.

While consistent with our expectations, our EAA brands were down, principally due to the challenging economic environment in Europe.

On the cost side, net cruise costs excluding fuel for available lower berth day were up over 6% versus the prior year.

More than half the increase was driven by the Costa Concordia incident expenses not covered by insurance and the impairment charge related to the Costa Allegra.

The remaining increase was due to the higher number of dry dock days and related costs in the first quarter, which we discussed in the December call.

As a result of our ongoing efforts to reduce fuel usage, our consumption for ALBD declined 2.5% this quarter, continuing a multiple year savings trend.

Fuel prices in the quarter were up 30% which cost us an additional $0.18 per share.

In summary, the first quarter non-GAAP EPS was $0.17 lower than 2011 earnings of $0.19 per share as increased yields were more than offset by higher dry dock costs, higher fuel prices, the Costa Concordia incident expenses, and the Costa Allegra impairment charge.

Excluded from our non-GAAP EPS, but included in our GAAP loss per share, were impairment charges of $173 million or $0.22 per share, relating to all of Ibero's about goodwill and 60% of their trademarks.

We believe it is more meaningful to exclude these non-cash charges from our non-GAAP EPS given their nonrecurring nature and the fact that we believe that they are not an indication of our future earnings performance.

As we disclosed since 2010, we have been closely monitoring Ibero's intangibles given the small amount of headroom in excess of its carrying value.

At this time, given the state of Spain's economy, we slowed down the projected pace of Ibero's capacity growth in our discounted cash flow projections that are used to estimate Ibero's fair value.

Which primarily resulted in the impairment charge.

Now turning to our 2012 outlook.

I will skip the net revenue yield outlook, as Howard will discuss that shortly.

On the cost side, for the full year net cruise costs, excluding fuel for ALBD, are forecasted to be flat versus the prior year.

This is consistent with our December guidance despite the $45 million of Costa Concordia incident expenses and the $34 million of Costa Allegra impairment charge.

Which increased the year-over-year cost metrics by 1.1 percentage point.

Our operating companies identified opportunities in a number of areas to reduce costs, offsetting these items.

At this point, I will turn the call over to Howard.

Thank you, David.

Good morning, again, to everyone.

A comment, to make some comments on the outlook for 2012, and talk a little bit more about the Costa situation.

While the Costa Concordia event has had a profound effect on our business, and indeed the business of the entire cruise industry, as time passes, we are confident that our business will improve.

Indeed, as I will comment on later, our North American brand booking patterns have improved during the last seven weeks since the event in mid January.

In continental Europe, the impact of the event on the European market and our European businesses has been greater.

It seems it will take more time for those markets to return to normal booking levels.

We have, however, seen some positive trends in our European business so we are hopeful that booking patterns will return to normal levels sooner than we might have originally expected.

As I comment on the business outlook for the remainder of 2012, for purposes of having more meaningful comparisons of booking trends fleet-wide and for the EAA markets, I will be excluding the Costa metrics.

As we indicated in the press release, after the Concordia incident, Costa curtailed its marketing.

In most markets Costa still has not reestablished its marketing, although plans are underway to start these efforts over the next several weeks.

I will comment separately on the Costa business later on in my talk, as a separate matter.

On a fleet-wide basis, excluding Costa, constant dollar revenue yield guidance is being lowered from December guidance by approximately 1.5% for 2012.

As a result, revenue yields in 2012, excluding Costa, are now expected to be in line with 2011 yields.

As to the current status of bookings, on a fleet-wide basis, again keep in mind I'm excluding Costa, occupancies for the remaining three quarters are lower than a year ago, with slightly higher prices.

All my comments on pricing will be on a constant dollar basis as I go through my presentation this morning.

For North American brands occupancies are slightly lower at slightly higher prices, and for EAA brands, occupancies are lower at higher prices again.

Which respect to recent booking trends, beginning in January, for the first two weeks of wave season, bookings were quite strong on a fleet-wide basis.

Driven by our North American brands which experienced higher booking volumes and higher pricing year over year.

EAA bookings were also higher year-over-year during the first two weeks of January at lower pricing.

So even before the Costa incident, we continued to experience softer European pricing.

Which we attributed to the slowing European economies, together with the government austerity programs being implemented, or are expected to be implemented in many of the countries in Europe in which we market.

Since the Costa grounding incident in mid January, the booking patterns for North America and for EAA brands have slowed significantly.

On a fleet-wide basis, bookings for the last seven weeks -- and of course this excludes Costa -- through March 4 are running lower year-over-year in the mid to high single-digits, at slightly lower pricing.

The week-to-week patterns have been uneven, with some weeks being stronger than others, partly resulting from the timing of marketing efforts by the brands.

For North American brands, booking volumes during the seven-week period have been lower, in the mid single-digits range on a year-over-year basis at slightly lower prices.

The weakest itineraries for the North American brands have been their European programs.

Which is a trend we began to see beginning last year, starting with the European sovereign debt and banking crises and the problems in Greece.

Higher airfares between North America and Europe have also been a challenge.

North American brands also source a significant portion of their European cruise programs from the Europe market.

So, the economic slowdown in Europe has also affected the North American brand of European cruises.

For EAA brands, excluding Costa, booking volumes during the seven-week period on a year-over-year basis have been running lower in the mid teens range and at lower prices.

Our AIDA brand in Germany and our Ibero brand in Spain have felt the greatest impact during this period.

Our UK brands are holding up relatively well as compared to our continental European brands.

We have recently seen improving trends in Germany, so we are hopeful that we have finally turned the corner there, as well.

Now let me turn to Costa.

As most of you know, Costa has a world-wide sales and marketing network, with its primary source markets in continental Europe, South America, North America and Asia.

In recent years it has also developed new markets in Eastern Europe.

Since the grounding on January 13, Costa has not been marketing its cruises.

Indeed Costa offered the opportunity for passage booked on any Costa ship to cancel their cruise through February 7.

There were, in fact, relatively few cancellations, which we consider to be a very positive sign.

Where possible, passengers booked on future Concordia cruises were rebooked on other Costa cruises.

As a result, there was a considerable number of cancellations and rebookings in the Costa booking pattern.

So it was difficult to get a clear picture of booking trends post the grounding.

Without any marketing, Costa's bookings during the first four weeks, after the grounding, ran approximately 80% to 90% lower on a year-over-year basis.

More recently, during the last three weeks to March 4, bookings ran 40% to 50% year-over-year.

So with virtually no marketing, the booking picture is improving.

As Costa begins to implement its marketing programs, which is already starting in certain markets, we expect their booking trends to gradually improve.

While certain of Costa's markets may take longer to come back, because of its broad marketing reach, Costa has the ability to source passengers from its other markets.

However, estimates are it will take up to one year before the booking trends start to normalize in some of its markets.

During this period, Costa has adopted a strategy in its primary markets to hold its pricing, even at the expense of lower occupancies in order to maintain an orderly market.

For 2012, Costa's forecasting a loss for the year of approximately $100 million.

Or a swing of $500 million from its previous earnings forecast.

Most of this swing relates to reduced revenues including the lost capacity from the Costa Concordia.

It also includes approximately $27 million of one-time Concordia-related costs and $34 million relating to the Allegra incident, including the write-down of the value of the ship, which David mentioned before.

Having said all this, Costa is beginning to see light at the end of the tunnel, but it will take some time to get there.

So there should be no doubt, we view Costa as a great Company and a great brand with a terrific Management team and with a great future.

Micky and I take this opportunity to thank Pierre Foschi and the entire Costa management team for their most extraordinary efforts during this most difficult period.

Now let me turn to revised guidance.

The midpoint of our revised non-GAAP guidance for the year of $1.55 per share, is a reduction of $1.15 from our December guidance of $2.70.

That was the mid point of earnings.

Included in the $1.15 of guidance reduction, the $0.65 which represents the decline in Costa's earnings, of which I mentioned before, of which $0.08 is one-time costs.

The reduction of our other North American and Europe EAA brand revenue yield forecast amounts to $0.19.

Higher fuel prices for all these other brands, net of currency from that used in the December guidance, is forecasted to reduce earnings by $0.40.

There is a net benefit from other items, mostly reduced costs, of approximately $0.09 a share.

Which gets us to the $1.15.

So, apart from the increase in fuel prices, our other brands earnings are lower by approximately $0.10 per share from the December guidance.

Now I will move on to give you some color by each of the quarters.

Turning to the second quarter, and when I give you this data it is now ex Costa.

Fleet-wide capacity for the second quarter is up 2.7%, 2.9% for North America brand, and 2.2% for EAA brands.

At the present time, on a fleet-wide basis, pricing is slightly higher than a year ago at slightly lower occupancy versus last year.

North American brand fleet-wide pricing is higher than a year ago at flat occupancies.

North American brands are 56% in the Caribbean, approximately the same as last year, with the balance in various other itineraries.

Caribbean pricing is nicely higher than a year ago at approximately the same occupancy levels as last year.

Pricing for all other itineraries taken together is higher than a year ago at slightly lower occupancies.

EAA brand fleet-wide pricing, excluding Costa, is slightly lower than a year ago on lower occupancies.

EAA brands are 50% in Europe, slightly up from 47% last year with the balance in various other itineraries.

EAA brand European pricing is up slightly versus a year ago on lower occupancies.

EAA pricing on all other itineraries taken together is lower than last year, also at lower occupancies.

On an overall basis, we are currently forecasting that constant dollar revenue yields will be flat to down slightly for the second quarter.

Slightly higher in North America, slightly lower for EAA.

For the second quarter guidance, we are guiding earnings in the range of $0.05 to $0.09, or a mid point of $0.07.

This is versus $0.26 in the second quarter of 2011.

Swing and earnings for the second quarter of 2011 is primarily due to the Costa impact of about $0.12 per share, and higher fuel costs of about $0.10 a share.

Now turning to the third quarter, capacity is expected to be up in the 2.9% range; 3.4% in North America; 2.2% in EAA.

On a fleet-wide basis, third-quarter pricing is higher than a year ago on lower occupancies.

North American brand pricing is slightly higher than a year ago at lower occupancies.

North American brand capacity in the third quarter is 38% in the Caribbean, slightly higher than a year ago, 24% in Alaska -- the same, slightly higher, and 25% in Europe which is about the same as last year.

Pricing for Caribbean itineraries is higher than a year ago, with pricing for Alaska and Europe cruises flat with last year.

Occupancies for the Caribbean and Alaska cruises are slightly lower versus last year.

Occupancies for Europe cruises are lower than last year.

For EAA brands pricing, is nicely higher than a year ago at lower occupancies.

EAA brand capacity is 85% in Europe itineraries, which is slightly up from 82% the prior year.

EAA brand constant dollar pricing for European and all other itineraries is higher than a year ago on lower occupancies.

Now turning to the fourth quarter, fleet-wide capacity in the fourth quarter is expected to be 2.9% higher than last year.

3.7% for North America brands, 1.7% for EAA brands.

This of course excludes Costa.

Fleet-wide pricing is slightly higher than a year ago at lower occupancies.

Much business remains to be booked for the fourth quarter, so I caution not to be too much into this information.

North American brand pricing in the fourth quarter is flat versus last year at lower occupancies.

North American brands are 43% in the Caribbean, slightly higher than a year ago; 13% in Europe, which is about the same as the past year; with the balance in various other itineraries.

Caribbean pricing is higher than a year ago at higher occupancies.

Europe pricing is also higher versus last year at lower occupancies.

Pricing for all other itineraries taken together is higher than a year ago on lower occupancies.

Turning to EAA.

EAA pricing, which is the EAA brands, at 61% in Europe itineraries, is nicely higher versus a year ago at lower occupancies.

That wraps up the current status of the booking picture for 2012.

I think with that, Kayla, I think we can open it up for questions.

(Operator Instructions) Felicia Hendrix with Barclays Capital.

Thank you for all those very detailed comments.

In the release, and this should be directed to Micky, but also Howard.

Your comment on price discounting was interesting, especially since occupancies are lagging in almost every quarter.

I'm just wondering, are you actually seeing improvement fast enough to make you comfortable that customers won't need a little nudge, especially in Europe given how that's also lagging?

I don't know what you mean by a little nudge.

What I mean is a little stimulation.

I'm kidding, Felicia.

I guess what we're saying is that our brands, and we are obviously comfortable with what we are saying here.

The reality is, all we are saying is that marketing efforts discounting, et cetera, to achieve our yields forecast, will not be greater than last year, or should not be greater than last year.

But that is not to say there wasn't incentives for booking last year, as well.

So it's not that marketing activities won't continue.

But we are very comfortable with this forecast based on the information we have to date.

And we believe they are very achievable and we will do what marketing efforts we need to do to get it done.

Clearly the pattern has been positive as we get further away from the incident.

I think as we've emerged from this period, and based on a lot of the surveys we've done in different markets -- not in all markets, certainly not in certain European markets -- the issue of the Concordia incident has really fallen away as a major obstacle for selling cruises.

It's come back to great value, great vacations.

And our guys, really, apart from the Costa situation, feel that things are getting better.

The closing patterns are good.

Which is not necessarily always good for us.

We like to see further out booking patterns.

And I think that is going to start to happen as business gets stronger closer in, then bookings get pushed out and pricing becomes more sustainable.

I think they're feeling pretty good about the situation.

We are not totally out of the woods, I don't want to suggest that, but certainly the trending seems to be quite positive right now.

I think Howard's point is a good point.

We have done consumer surveys now in all our major markets, and all our brands are doing them.

And by far the number one reason why people are holding out is not safety.

Safety is way down the list.

There is a clear recognition that this is a very, very safe industry.

The number one consistently across the board is that expectation that prices are getting lower.

At this point, there's no reason to believe that's going to be the case versus last year.

And hopefully as people realize it, they will come off the fence and book their vacations.

That is actually very helpful color.

I appreciate that.

Just on Europe and in line with your answer there, obviously there's weakness coming from North American source consumer.

You mentioned airfare, among some other things.

But what can you do to offset that airfare issue as a gating factor for the North American consumer who might want to cruise in Europe, but who's getting some sticker shock?

They can take Queen Mary II.

(laughter)

Look, our guys are pretty creative when it comes to the marketing side.

They are taking actions to strength the booking pattern for European cruises.

And they are doing it in various ways.

Each brand does it uniquely different than the other.

They don't copy each other necessarily.

So we are seeing bookings in Europe.

It has been slow and it's probably not going to be our best year in Europe.

But I think they will be creative.

We haven't added a huge amount of capacity of North American brands to the European programs this year.

It is up some, but not a whole lot.

By the way, I was only partially kidding because as airfares across the Atlantic get higher, Queen Mary II gets to be greater and greater value.

And it's the best way to go to Europe or back.

Then you would have to take two cruises.

Absolutely, Nothing wrong with that.

But the food is so much better.

(laughter)

Okay.

Thank you very much.

Robin Farley with UBS.

Thanks for that level of disclosure this morning.

I wonder, given that it's a departure to have occupancy down, and obviously it's to protect the brand, does it make sense at some point to take some Costa ships out of service to eliminate the operating expense while the occupancy is down?

I want to a least have the opportunity to clarify that comment about occupancy with Costa.

It's clearly a short-term tactic based on present information and the fact that Costa in many of its major markets still is not doing any advertising.

So it's the reality of the situation, is the tactic.

As soon as that changes, as soon as they are comfortable from a PR point of view to start marketing, they will do that and hopefully bring these occupancy up.

But our forecasts are built on the concept that the majority of their yield deterioration will be occupancies.

And just let me comment further.

A lot of the occupancy loss is occurring now.

On a shorter timeframe, we will see a greater proportion of the occupancy loss.

Longer term, further out, we should not have much occupancy loss on any of the brands.

And then just one more point on the issue of looking at other possibilities.

Clearly the Company, because it has a unique ability to source in so many different markets, it is looking further out and into 2013 at their itineraries currently, and will make some adjustments.

Indeed, I think in for this coming winter they are moving another ship to the South American market to Brazil and Argentina.

We did, by the way, think about and look at laying up ships.

But because of the disruptive nature and the short-term nature of the occupancy declines, we don't believe that that would make sense for the long-term strength in the brand.

Okay.

Great.

And then I wonder if you could give a little bit of color.

You talked about some of the sequential year over year changes for the Costa brand and seeing how that had improved from the initial weeks.

Can you give a little bit of color on the change for North American brands, or Company-wide ex Costa?

You mentioned down mid to high single digits, and that sounded like a cumulative change over the seven weeks.

But just to get a sense on how that's trended from week one through week seven.

I think for North America what we are seeing is actually a little bit of a surprise.

The contemporary brand Carnival seems to be performing stronger than their premium brands.

But I think part of the premium brand issue is, we read through it, also European cruises in the spring, summer and fall.

But Carnival, we thought there would be more of a first timer issue.

They seem to have come through this quite nicely right now.

First-timers appear to be, from everything they can see, because their bookings have been up recently, that first timers, we don't have the data specifically on first-timers, it's too early, but it looks like Carnival Cruise Lines will not have any kind of a problem.

For Holland America, Princess and even Seabourn, they are doing fine except for these European cruises and they are doing all they can to try to shore that up right now.

But, Alaska seems to be okay, their European programs are fine.

All their other long-term programs are fine.

That is the North America situation.

And it has gotten stronger each week.

As I say, it's a little bit uneven depending on how much marketing they are doing.

But each week the pattern is getting stronger and stronger.

It's interesting because the perception out there was that Carnival Cruise Lines, because they have more first-timers and more North America, and because of the name recognition, vis-a-vis Costa, would be most impacted.

But in reality they've been the least impacted.

And in fact their business is up year over year.

And they're our best-performing brand right now on a year over year basis.

Looking at the North American brands specifically, surely after the incident, they started down in the double digits and they improved considerably.

As Howard mentioned in his notes, it varies week by week depending on the marketing activities of each brand.

But it is overall a general positive trend into the low single digits.

In other words, that is what I was trying to clarify.

If the down mid to high single digits is cumulative, and it was initially down double digits, are the last two weeks or so down?

It sounds like you're saying they're down less than 5% year over year?

I would rather give you overall -- really look on a rolling basis because the weeks can be very uneven.

But they are getting positive, yes.

Okay.

Great thank you.

Steven Kent with Goldman Sachs.

Can we just talk a little bit about the $173 million charge related to Ibero goodwill and trademark?

I don't completely understand it because by taking the charge, and you're saying slower than anticipated capacity growth due to the current state of the Spanish economy, does that essentially assume that you think the Spanish economy will be weak forever?

That's the way I read that write-off and how you were able to do it.

And then --

Can I answer that question?

The reality, the way this is done, and maybe David can explain it better than I can, it's a long-term model.

And in that long-term model, we had projections of moving ships into the brand and growing the brand over time.

In reality, over the last 12 months, we have reduced capacity by moving the Grand Voyager out of the brand.

And our competitors, Pullman Tours, have also pulled capacity out of the marketplace.

Was it realistic to continue to assume that we are just going to add capacity when we are actually reducing capacity.

So when we pulled that capacity out of the model, it required this write-off.

David?

Correct.

Yes, we just basically slowed down the future growth of capacity.

We still believe in the Spanish market longer term.

But at the moment, I think we've said a number of times that Ibero was struggling as a result of the economy.

I think the unemployment rate is still like 20% in Spain.

And as a result of that, we felt this was the right thing to do.

I think, Steve, it's going to take longer.

I think we felt it was going to take longer for the Spanish economy to return to reasonable levels of strength.

So it was hard to justify today that three or five years, whenever we're adding a ship, what happened.

It was a marginal call on the goodwill for a while.

We were covered with this additional capacity three to five years out.

But once we took that capacity out of the model, and it was difficult for us to support it internally, we just felt uncomfortable with it.

That, let's just take it out and take the charge so we don't have to deal with it later on.

It doesn't mean we wouldn't add that capacity later on if the market supported it.

And clearly we think the Spanish market will come back, but it may take a few more years than we originally thought.

That clearly seems to be what people are saying.

If you did add capacity back on, then what's the accounting for it?

If you decided to do that in two years?

There's no change.

You cannot write back up goodwill.

That's what I thought.

So then the second issue is, just on Costa, I think it was, Howard, who said you thought it would come back in one year.

That was your number, or your timeframe.

What's giving you the confidence that it is one year and not six months or three years?

When I said come back, I said for most markets the patterns should start to -- they expect the patterns should start to normalize in about a year.

What all the work and research, there's a huge amount of research done over in Europe by Costa on the process by which this is going to happen.

Using benchmarks from other companies having crisis situations.

I think that, while there's nothing that says this pattern will follow those patterns, there is a feeling on many of the major -- and by the way, we're starting to see it.

Many of Costa's markets are coming back already and starting to show some normalization.

But they are not the major markets.

The major markets for Costa will be Germany, Italy, of course, France, and Spain.

We are seeing evidence in France and Spain, actually, of their business coming back already.

Less so in Italy and Germany.

But we need Italy and Germany.

Italy for sure.

Actually, Germany had a good week last week.

But one week is not --

Yes.

Italy for sure is going to be the major challenge.

But I think the feeling is, a year from now, based on these very smart people who seem to have been through this before, and the sense of the positive trending we're starting to see now without any marketing out there, that we should get back to more normal booking levels.

The pricing, I'm not sure pricing will come back to the same levels, but we'll see.

But I think we will gradually come out of this in '13.

I think '13 obviously will show an improvement over '12.

But it may take a year or two to get back to the kind of profitability that we expected to have in 2012.

Obviously -- it is slightly obvious-- but from a year ago, Costa's capacity now will be down three ships.

They sold the Costa Marina, the Concordia and now the Allegra.

So their capacity is three ships less than we would have expected in '13.

Okay, thanks for that for the help.

Harry Curtis with Nomura.

Just a clarification and then a bigger picture question.

In your comments, you mentioned that Costa has swung about $500 million in profitability to a loss of $100 million.

About how much is that on an earnings basis?

And is that embedded in your 2012 guidance?

Yes.

That's all in.

That's the major.

What I was trying to do is explain the major reduction in guidance.

And that represented $0.65 of $1.15 in lower guidance, Harry.

Okay.

And then just a 30,000-foot question.

In the hotel industry, there's an adage that the industry doesn't really know if it is over-built until it builds one room too many.

And that's a topic that probably applies to the cruise industry, as well.

And my question is, is it over-built?

Should the industry really be adding any capacity here?

You can go back to the normal stuff.

We are still a very small piece of the vacation market.

And the reality is the growth potential in many of our markets is still very big.

And we've said that we are growing at a much slower pace, two to three ships a year.

And we've also said that the two or three ships a year will not be all incremental capacity because some of the older ships will be sold and taken out of the fleet.

And in fact, the Allegra was for sale and we had anticipated taking her out of the fleet as soon as we had a buyer.

So the growth rate will be coming down, but I still think there's plenty of growth potential in this industry.

Remember, unlike the hotel industry, we operate at full occupancy.

Hotel industry operates at 70% or 75% occupancy.

With two to three ships a year, if you net out some sales, as Micky mentioned, you're really probably only talking about a 3% or 4% capacity growth.

Which is really in line with the population growth in many of the markets where we operate.

And actually is less than the growth of, let's say, the 45-plus age population growth in many of the markets we are operating.

So we feel that we have slowed down the capacity growth in line with our overall marketplace.

But as a practical matter, the industry through the cycle has really only averaged maybe just over 1% yield growth.

And that's not going to drive your return on invested capital.

I think you've got to get your pricing higher to do that.

And so has there been any consideration that the two to three ships a year should really be a lower number?

But keep in mind, Harry, the 1% you are talking about is in a period of time where you're talking about high single digit, and in many cases, double digit capacity growth.

So now we are talking about low single-digit capacity growth.

The reason we changed the strategy was for the very point you mentioned, in the hopes that we wouldn't necessarily have to discount the cruises as much compared to other vacation alternatives.

We could begin to close the gap, get a little bit more pricing power, and improve our return on investment.

There's no question we agree with you, that the product deserves much higher yield growth.

And hopefully in the future we will see it.

But we have gone through a financial crisis.

I won't go through the whole litany of stuff.

But the reality is, we believe with the lower capacity growth in a normalized period of time we can get significantly higher yield growth.

And historically we haven't had cost growth so that the returns could return.

Okay.

Thanks, guys.

Greg Badishkanian with Citigroup.

As you look out to the 2013, I am assuming if you even exclude the Costa line, that things will be normalized by then.

If that's the case, would you actually expect maybe even a greater bump up in terms of the growth rate, in terms of whether it's bookings or net yields, just because you'll face really easy comparisons from 2012?

Greg, the one thing I will agree with you on is the comparisons will be easier.

(laughter) I get I hate to get into talking about 2013 just yet.

I think it's still early.

But clearly the comparisons will be easier.

I think we've got a great business.

We've got our strong brand positionings in each of the major markets.

When we started the year this year, the first two weeks of January, where I mention our business was quite strong.

Our bookings were up, our pricing was up, especially in North America.

We were feeling that this could be a very, very strong year.

And then this event came along.

Yes, I think 2013, absent exogenous events and the European economy going into a real tailspin, we are doing okay.

Even the UK market, North America looked fine to us, actually.

The UK market, even with all this noise out there, is coming through it very nicely right now.

With very little sign that the incident is affecting their business at all right now.

So we feel good about that.

And we know Germany's going to come back.

The AIDA brand is an amazing brand with an amazing management team.

Very talented people running it.

And strongest position in the German market.

And Costa we think is going to go through a little bit of pain this year, and a little bit less pain in 2013.

But clearly it will be better.

So I think the future is bright for us.

I really feel good about the business right now.

Just keeping on the theme.

When you look at your price versus occupancy, how do you look at that?

Because next year it is a lot harder to recover if you start discounting now.

So are you thinking maybe even give up a little bit of occupancy because then it's easier to work off the pricing base that you'll have in 2012?

Our long-term strategy on occupancy and price has not changed.

Our discussion about giving occupancy in Costa is a short-term tactical situation based on present events.

But you should expect that our long-term strategy, which we believe is the way to maximize profitability, has not changed.

Great.

Thank you.

Tim Conder with Wells Fargo.

First of all, just a clarification.

The $30 million, roughly, deductible, or right about that amount, for the ship, where is that included in relation to the whole comments regarding Costa?

So it's just a clarification from that standpoint.

And the other one, also, if you would have the capacity by quarters inclusive of Costa.

And then more of a real question here, two of them.

Given that Costa, the Carnival brand and AIDA appear to be your most profitable brands, and the Carnival brand you've already commented on what it's doing.

And then AIDA.

As AIDA starts to come back, how much of a recovery have you built into your expectations for this year for the AIDA brand in 2012 from the present levels?

Let me start with the $30 million deductible relating to the Costa Concordia.

At the time we put that into the 10-K, it wasn't clear what the end result of the ship would be.

Now that it has been declared a constructive total loss, the deductible no longer applies.

It's just a part of the overall policy and therefore that $30 million disappeared from the financial analysis.

As far as the capacity by quarter, the total capacity were up 3.7% in the first quarter, 2.7% second, 2.9% third, 2.9% fourth, and 3% for the full year.

And that includes Costa.

And that includes Costa.

Great.

Thank you.

On the AIDA question, Tim, they've taken down their revenue yields as a result of this hit, this interim hit.

But they see the business coming back.

For purposes of our forecast, they have taken down their revenue yields as a result of the incident.

But I think they're starting to see business come back.

But there will be some level of hit because they have taken -- in order to fill close in, they've had to take pricing down a little bit.

I think last week they were up year over year for the first time, so that was very encouraging.

On the bookings, Micky?

Yes.

Okay.

And then my other question is, back to more, let's call it, normal state of affairs, on the prior question related to the slower capacity and so forth.

Yes, you've had some good cost leverage and a good history of doing that.

Do you still feel comfortable of maintaining that -- you had said before roughly 50% the rate of inflation or so, with the lower capacity growth, as you look out into '13, '14, and '15 at this point?

We've consistently said flat to 50% of inflation.

The reason we're comfortable with that is because we are working on quite a number of things.

We have a corporate group.

They've got a profit of improvement program.

They've got lots of different things going on.

The gold mine of opportunity for us is the continuation of the brands working together, the leverage, our size, to work through collectively in order to save money.

And we have been working on that extensively over the last couple of years.

And that gold mine of opportunity is far from completely harvested at this point.

The short answer is yes.

Okay.

One last clarification.

Is the Allegra at this point scrap?

Or can it be recovered and then eventually sold as you were originally planning?

We have written her down because it was our intent -- it is not our intent to put her back into service.

And we believe that the repair cost will be more than we want to spend to put her back in service.

Whether we sell her or scrap her, that decision has not been made yet.

We have to get a full cost of what it will take to repair her.

She's on the market for sale, she has been.

But we're going to have to, obviously, reduce the price of the ship for sale and see what happens.

In the last year or so there have been a couple of different groups expressing an interest in that ship.

We have written her down to a level that we feel comfortable that we'll be able to get at least that.

Thank you, gentlemen.

Steve Wieczynski, Stifel.

Most of my questions have been answered.

But just going back to the expense question, David.

When we look at your expense forecast now, I'm pretty surprised it's essentially still flat from where it was back in December.

You talked about that you guys identified some expenses that you can cut out.

Can you just walk us through just where those are coming from or maybe what buckets those are coming out of?

And then, does your expense forecast include anything in terms of higher cost, for whether it's safety standards or insurance deductibles, or anything like that?

Yes, we looked at every single line item.

To start with, on the advertising front, we had talked about the fact that advertising was down in the first quarter because all the brands essentially stopped advertising for some period of time after the event.

We do expect to spend most of that money in the remainder of the year, but probably not all of it.

Some of it came in the form of advertising.

We looked through the G&A expenses, travel, training, cutting back in all areas that were not essential.

All of the operating company CEOs talked to their people and identified numerous items relating to ship operating expenses that could be saved without impacting the product.

And one other item is, we built our forecasts early in the year on inflation assumptions.

And what we noticed was in the first three months of the year, our inflation assumptions were a little high.

So we brought them down for the back half of the year.

And as a result of the lower expectations we were able to reduce costs in the remaining three quarters to cover some of those one-time expenses we talked about.

Just a clarification just probably because I'm more sensitive to it than some other people.

But when David talks about saving on training, the focus is on hotel training, not safety training, not emergency training.

Just hotel and that sort of thing.

Mostly shore-side training.

Great.

Thanks guys, thanks for the color.

Just to finish up on the issue of potential regulations.

Clearly this is something that, with the safety group that we have, both internally and with CLIA, those recommendations, when found, would go to the IMO.

And if they're things that we institute immediately we would obviously do that, like we did with the mustard drill change that we did with CLIA.

But anything that was more structural, or anything like that, that would be costly, would have to go through the IMO process that would take quite some time.

So it's not something that would be in our '12 expectations.

Assia Georgieva with Infinity Research.

Howard, I wanted to ask for a clarification.

When you gave Q3 and Q4 outlooks, those were without Costa, is that correct?

Actually it wasn't the outlook, it was really the current status of bookings and it was without Costa.

Ex Costa.

Would you be able to give us that type of color on Costa only?

I think the issue with Costa is that, everything related to what that Company is going to do this year is going to be such a one-off situation.

And even speculating on the situation, or giving you data points, I don't think is worthwhile information.

Let's just look at it for this year as a very challenging year, a rebuilding process, a retooling process, a re-marketing process.

When you don't have marketing out there, your websites aren't doing any marketing, even your basic website it's difficult to market on today.

Giving you information like that, I think, would not enable you to get a sense as to what the real business is doing.

That is why I chose to say, this is what the profit we expected it to be, this is what the profit loss is going to be, this is the swing, and let's look forward to 2013.

Okay.

Fair enough.

Going back to the state affairs for Q3, and against excluding Costa at this point, have you built any upside on the year-on-year basis, given that in April and May we are entering much easier comparisons when we had the Arab Spring and the Japan earthquake events impacting bookings in the year-ago period?

Is that built into your Q3 forecast or are you waiting to anniversary it and then see how it goes?

Our forecast is built on what our brands booking patterns are now and what they perceive they will wind up with it at the end of the year.

And then we look at it for reasonability.

And I think based on everything that's happened, everybody is a bit conservative.

But obviously it's our best shot at where we are going to wind up.

Historically we have done a pretty good job of that.

Obviously this is a unique set of circumstance and that is why the ranges are a little broader.

But I don't think it has anything to do with last year.

I think it's based on what we are seeing right now and what the perception is going forward and where we are going to wind up.

Remember, the MENA effect last year was mostly within Costa.

A large portion of the Costa MENA was actually in the Costa brand.

Most of the other brands, I think, are marginally affected by MENA, but not to a great degree.

The 300 itinerary changes that were made last year because of MENA were virtually all Costa.

And maybe that is why you were interested in Costa, Assia.

I don't know.

Partly because of that, then, just to get more of a sense as to how you expect their booking patterns to recover over time since you gave us the breakdown the first four weeks, the most recent three weeks.

I thought that would be interesting.

And again, one last question.

Any update on the timeframe for the removal of the Concordia hull at this point?

Or are you still waiting on bids to actually finalize plans?

One of the challenges, I think, is going to be the salvage of that ship.

Salvage bids just came in earlier this month.

That's being evaluated right now.

Realistically, though, and that's one of the challenges that Costa is going to have, it's going to be a unique salvage.

It's never been done on this order of magnitude.

So there's a lot of planning and engineering that needs to go into it, and probably building some unique tools to do it with.

It's realistic to think that the process, what they're saying right now is we should not expect the salvage process to begin until after the summer.

So it could be there for quite some time, the hull of the ship.

Costa did indicate in a press release this morning that because of the complexity, they do expect the duration to be 10 to 12 months overall.

Okay.

Thank you so much.

Jamie Katz with Morningstar.

Could you guys talk a little bit about how the incentives have changed, the level of them year over year?

And maybe how that might impact onboard spending in the next quarter or two.

And then also if you have any more color on Alaska, that would be really helpful.

I'm not sure if I recall correctly, but I think it sounded a little bit more positive on the last quarter's call.

Jamie, when you said the level of incentives, you're talking about the pricing?

Yes, the pricing, and what you guys are using to get people onboard, whether that's onboard credits or some program like that to incentivize them.

Overall, all the brands, depending on the marketplace and the itinerary, in some cases it's pricing, in some cases it's an upgrade, in some cases it's an onboard credit.

Our brands are very creative.

And they do what works in each situation.

So there's a little bit of everything thrown in across all of the brands around the world.

As far as the onboard spend is concerned, Howard did indicate that, excluding Costa, he expected the prices overall for the year to be in line with the prior year.

So taking a look at that, we were not necessarily expecting a significant change.

And we built into our onboard revenue forecast an increase.

We actually had, excluding Costa, we probably about 1.5 points of yield increase on the onboard side in the December guidance.

The first quarter came in much more than we had anticipated.

And so we did build in a little bit of an increase in those numbers for the remainder of the year.

So we are seeing some good onboard spend increases.

Although the categories are up.

All the major categories.

Including casino in the first quarter.

I was quite pleased by that.

On the Alaska question, Jamie, I don't remember what we actually said on Alaska.

I think Alaska's been pretty consistent and solid.

Not spectacular.

But I think, if anything, the picture maybe looks a little bit better.

Maybe at the expense of Europe, for all I know.

People doing more Alaska cruises than Europe cruises because of the cost of the Europe cruises going up.

But Alaska seems to be doing okay.

Thank you.

Jamie Rollo with Morgan Stanley.

I've got a couple of questions on yield.

First of all on Costa, you're saying it has a 2 to 4 percentage point impact on group yield.

Which applies Costa yields down 15% to 25% or so.

But then you also said bookings are down, I think you said 40% to 50% in the last four weeks.

That seems to imply quite a sharp recovery over the next few months.

And then the other question was, I am just interested in trying to strip out the noise post Concordia and what trajectory you are on in waves.

You said it started well, your onboards were better, Royal was guiding originally to 2% to 4% on the line.

I was wondering whether you would have increased your regional yield guidance of 1% to 2%.

Thanks.

As far as Costa is concerned, Jamie, you're right, the way the math works, since its 15% of our capacity, that 15% to 25% range makes sense.

One thing to keep in mind that we talked about is the majority of that is going to come in the form of occupancy, when you're talking about yield decline.

At the moment, Costa is behind in terms of bookings in the high single digits.

So they can continue to be behind on a year over year basis considerably, to wind up with a 15% to 25% occupancy yield decline, most of it coming from occupancy.

This isn't a situation where Costa has to catch up.

It is not a zero sum game.

They don't have to exceed last year's booking patterns in order to make this guidance.

So it is a little bit different from that perspective.

As far as the full-year guidance is concerned, we did exceed the guidance in the first quarter.

It was 1.5% to 2.5%.

We came in at 2.9%.

So the year was starting off strong, we were very pleased.

I think Micky indicated that before.

So I would like to believe we might have increased it.

But it's very hard to say at this point what would have happened.

Just to clarify.

I'm not sure if I said this, particularly as the press has asked me this question, but North America brands for that first two weeks of January were up in the mid teens level in terms of bookings.

So we were off to a very, very positive start.

Even the booking period over the holidays, which is normally extremely quiet, was very strong this year.

So we were very encouraged up until January 13.

Okay.

And I'd like to following up on Costa.

Are you absolutely confident in the future of the brand?

Is there any risk it does need a rebranding or anything like that?

And also what is the goodwill for Costa, please?

We are totally confident in the brand.

It is a global brand.

All the surveys we have done so far, whether they're in continental Europe or other markets, indicate that the issue, certainly in other markets is becoming less and less of an issue, the incident itself.

Business has picked up in these other markets.

And we are forecasting that it will take time in the Central European market, the primary European markets, to get back to normal.

But there's no reason.

I think people, even in Italy, are seeing this as a one-time freak event.

And don't see it as a fundamental issue with the Company or the brand or the management or the safety of the ship.

It's just a very unfortunate incident and most of the polls seem to support that notion.

And are getting better and better on the issue.

So we think it's going to come back.

It'll take a year or two to come back, but it's going to come back.

Jamie, we don't have the goodwill for Costa with us.

You can call Beth after the call.

I'm sure she can fill you in on some of the details.

I will say, when we last did the Costa goodwill test, which we do every July, there was a considerable amount of headroom.

And our expectation is that the brand will be rebuilt and it will perform.

And so we are not concerned about a goodwill impairment in relation to Costa.

One of the encouraging things obviously Italy's the biggest issue.

And our surveys, we have done extensive surveys in Italy.

The encouraging thing is that the Italian consumer continues to view Costa as a great vacation option and a terrific vacation value.

When the majority of the population feels that way, you feel very strongly that once we get past this, they are going to want to experience the product because that's the way they feel right now.

There's no question that Costa is going to come back, and come back stronger than ever over the long-term.

On the comment about the $3.3 billion of free cash flow, which includes $0.5 billion of insurance proceeds, that just about covers the capital investment and the quarterly dividend as it currently is.

Are you signaling you're unlikely to return additional cash to shareholders this year, please?

We are not trying to signal anything.

We are just trying to give the facts as they are.

We were not trying to signal anything.

We wanted to suggest that there would be no need to go to the markets to borrow any money, or the banks.

That our cash flows will cover our dividend as well as our capital costs for the year.

Thanks, guys.

[Edward Sanborn] with [Orb Securities].

Just one question, if I may.

Picking up on your comments just now on the dividend.

Should we read anything into your declaration of the dividend post the Concordia incident?

And how does that fit relative to guidance in your 30% to 40% payout ratio plans?

Please.

I think overall we said in the long-term the 30% to 40% was our target.

But the reason we chose the 30% to 40% was because we believed that that was sustainable through all cycles.

This is a cycle and therefore we believe the dividend is sustainable until the earnings comes back.

That's what we had pointed out in the press release, that the cash flow is sufficient to cover all our CapEx and the dividend.

Ian Rennardson with Jefferies & Company.

Just have one final questions.

Are you comfortable that your insurance will cover all the eventualities?

Thank you.

Yes.

We're comfortable.

Yes.

Thank you.

David Leibowitz with Horizon Kinetics.

First, when will the Italian Naval Board issue their report?

We have no idea.

Italy is Italy, and they are going through their process.

We are cooperating in every way we can.

Do you mean Coast Guard or Naval?

Whatever the board of inquiry is.

Are we talking then something, let's say, by June or October?

No, I suspect -- look, I don't know which particular -- there are a number of different organizations, regulatory-wise, looking at the incident.

And probably will do their own evaluations.

There's also a prosecution ongoing question of prosecution against certain people.

Or potentially the company, but we don't think that's going to happen, relative to the event.

That could go on for quite some time in Italy, as Micky indicated.

Second, how are we doing with our, if not hedging, whatever contractual arrangements we are making for fuel for the balance of this year?

I think we went over that.

Yes, It's in the press release.

We've got the table for the back half of 2012, as well as '13, '14 and '15.

We are 20% of our consumption is collared.

So nothing for the second quarter, but 20% for the third and fourth.

Given the collars, et cetera, how low would the price of fuel have to go for you to foreshorten the Q1, 2 crossings so you could get an extra sailing or two?

We will never do that.

The fuel consumption is just too large.

The likelihood is we'd lengthen it rather than shorten it.

When we lengthened it from six to seven days, the fuel savings was high enough that we did not need any additional revenue to make the profitability increase.

And in fact, we did get some additional revenue.

So it was the correct decision.

And we are actually studying lengthening it again to reduce the speed again.

We have a huge focus on reducing consumption.

Passenger response on the ship has been terrific.

They don't have a problem taking the additional day at sea.

And lastly, the amount or quantity of bookings you are receiving from onboard passengers, has that been continuing to go up as it was the last few years?

Or is there some sort of fueling that may have hit?

I'm sorry I don't know the answer.

We really don't know the answer.

That will vary, by the way, by brand, David, in terms of how much marketing.

Certain brands do a lot more marketing onboard than others for future cruises.

So it really varies by brand.

But we don't have any across-the-board answer for you.

Sorry.

Thank you very much.

[Manus Medorills], Exane.

I just have two quick questions, please.

Did I hear you correctly when you say that you would expect one to two years to come back to the expected profits for the group?

So would I have understood well?

And the second point, on the operating cash flow of $3.3 billion, given the CapEx you've guided for, and your dividend expectations, would that mean that you would operate on a broadly stable net debt in FY12 versus 2011?

The first part of your question, I would say, we said one to two years for the Costa brand.

I think we believe the other brands will recover much more quickly.

As I think we've said, Carnival Cruise Lines is actually booking up year over year.

So we think the recovery will be much more quick for the non-Costa business.

It's hard to tell on Costa.

There is feeling that it is going to be a year or two.

Actually, I have to say that although the consensus is that, I believe it will come back faster than that.

So we'll see.

The second part of your question?

The net debt, essentially that does imply it will be flat.

We do have some maturities this year, but we also have a couple of export credits associated with the ship deliveries.

So it should be essentially flat for the year.

Okay.

And can I just have a follow-up on CapEx.

After the Allegra, do you have any expectations for boosting your CapEx or revisiting some of your ship engines, or safety or whatever, that you should book this year?

We have a very extensive refit program going on in a number of our brands.

That is already in our CapEx expectation prior to this quarter.

We also, based on lessons learned from a prior, but similar event, we have had extensive refits to a number of our ships to improve the safety of the fire prevention systems in the engine rooms.

And we have spent many millions of dollars over the last 12 months refitting the ships with additional safety equipment in those areas.

The CapEx requirement for this year is expected to be $2.6 billion, dropping down to $1.9 billion for 2013.

Included in those numbers is an investment of $700 million to $750 million for other CapEx for the existing fleet.

Okay.

Thank you.

Thank you.

We have no further questions at this time.

Thank you all for calling in.

And if you have any further questions for details, Beth will be available for the rest of the day.

Thanks so much.

Have a good day, everyone.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.