嘉年華遊輪 (CCL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by and welcome to the Carnival Corporation second-quarter 2012 earnings conference call.

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

Afterwards we will conduct a question-and-answer session.

(Operator Instructions).

As reminder, this conference is being recorded on Friday, June 22, 2012.

I would now like to turn the conference over to Howard Frank, Vice Chairman and Chief Operating Officer.

Please go ahead.

Good morning, everyone.

We are all here in Miami.

David Bernstein, our Chief Financial Officer, Beth Roberts, VP of Investor Relations, and Micky Arison, our Chairman and CEO of Carnival Corporation.

Before we proceed with the formal comments this morning, I am going to turn it over to Micky.

Hi, everybody.

I just want to warn you that many of you know we had quite an exciting evening last night and a very long evening last night, so if during the presentation you hear any snoring in the background, that's me.

And I apologize if I am not totally coherent this morning, but I'm going to do the best I can.

David?

Thank you, Micky.

Before I begin, please note that some of our remarks on this conference 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 trends.

Our non-GAAP EPS for the second quarter was $0.20.

The second quarter came in $0.13 above the midpoint of our March guidance.

The improvement was driven by better than expected pricing on close-in bookings and higher on board and other revenue worth $0.05.

Lower net cruise costs excluding fuel were $0.03.

Lower fuel prices were worth $0.01 and two nonrecurring items each worth $0.02.

The first nonrecurring item relates to insurance proceeds received for the total loss of Costa Concordia in excess of its net book value and was forecasted to be received in the third quarter in our March guidance, while the second nonrecurring item is a litigation settlement we received relating to Queen Mary 2's propulsion pot pod.

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

Our capacity increased over 2%, roughly the same for both the North American brands and the Europe, Australia, and Asian brands, or as we call them our EAA brands.

Our total net revenue yields decreased 1.4% in the second quarter.

However excluding Costa, total net revenue yields increased 1.1% with net ticket revenue yields flat and net on board and other revenue yields up 4%.

With respect to net ticket yields, the North American brands were up 1.5% driven by improved yields in the Caribbean and Alaska, partially offset by lower yields in European and other itineraries.

During the second quarter, slightly more than half of the North American brands capacity was positioned in the Caribbean.

Excluding Costa, our EAA brands' net ticket yields were down 2.7%.

For net on board and other yields again excluding Costa, the increase was 4%.

This was driven by our North American brands while our EAA brands excluding Costa were flat despite lower occupancy.

We were pleased with the results as we saw improvement in all categories of onboard revenue.

On the cost side, net cruise costs per available lower berth day excluding both fuel and the two favorable nonrecurring items I previously mentioned, were down 2.2% versus the prior year.

The decline in net cruise costs per ALBD was greater than what we expected in our March guidance.

As a result of our ongoing efforts to reduce fuel usage, our consumption per ALBD declined 3.2% this quarter, thus continuing a multiple year savings trend.

Fuel prices this quarter were 12% higher than last year, costing us $0.09 per share.

Currency rates this quarter versus the prior year cost us an additional $0.02 as a result of the stronger US dollar.

In summary, the second-quarter non-GAAP EPS was $0.06 lower than 2011 earnings of $0.26 per share driven by higher fuel prices as reduced revenue yields were more than offset by lower net cruise costs.

Excluded from our non-GAAP EPS but included in our GAAP EPS were unrealized losses on fuel derivatives of $145 million or $0.18 per share resulting from marking to market our portfolio of fuel derivatives.

As we first discussed on the December call, we believe it is more meaningful to evaluate our earnings performance by excluding the impact of unrealized gains and losses on fuel derivatives until the gains or losses are realized.

This appropriately lines up the economic or the cash impact of the fuel derivative with the underlying fuel price risk which is intended to mitigate.

In March, we entered into the zero cost collars for an additional 19% of our estimated fuel consumption for the second half of fiscal 2012 and fiscal 2013, bringing the total to approximately 38% for this period.

We feel comfortable with this level of protection for the next 18 months.

In addition, we also have zero cost collars in place that cover approximately 19% of our estimated fuel consumption for fiscal 2014 and 2015.

We will look to opportunistically increase these percentages over time.

While the unrealized losses on fuel derivatives are excluded from our non-GAAP EPS, realized losses are not.

Through the end of the second quarter there were no realized losses; however, our non-GAAP diluted EPS guidance for 2012 includes $0.07 per share of forecasted realized losses on fuel derivatives by applying the current Brent prices to the derivatives that settle in the second half of 2012.

Now turning to our 2012 outlook, I will skip net revenue yields as Howard will discuss that shortly.

On the cost side, for the full year, net cruise costs excluding fuel per ALBD are forecasted to be down 0.5% to 1.5% versus the prior year.

This is 1 percentage point better than our March guidance.

Our operating companies identified opportunities in a number of areas to further reduce costs.

Certain expenses relating to the Costa Concordia incident were less than we had forecasted and the litigation settlement I previously mentioned also contributed to this improvement.

On a final note, I wanted to share with you our current rules of thumb about the impact that fuel prices and currency can have on our results.

To start with, the 10% change in the current fuel price excluding the impact of fuel derivatives represents $0.26 per share for the full year.

For the remaining half of 2012, it represents $0.13 per share.

As we all know, the price of a barrel of oil has moved substantially in recent days.

Just to be clear, the price of Brent was $93 a barrel the other day when we locked off our forecast.

The second rule of thumb relates to our current fuel derivative portfolio where a 10% reduction in the price of Brent for the remaining half of 2012 would result in an additional $0.04 of realized losses on fuel derivatives that would offset the $0.13 per share favorable impact from the reduced price of fuel.

With respect to FX movement, the 10% change in all relevant currencies relating to the US dollar for the remaining half of 2012 would impact our P&L by $0.11 per share.

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

Thank you, David.

Before my formal comments, let me just mention that the Miami Heat winning an NBA championship last night is a defining moment.

It is broader than just basketball.

It really is a defining moment for the community.

It brings the community together, so there is quite a bit of excitement down here.

Most of us have lost sleep, Micky more than anybody else.

But we like everybody to offer congratulations to the Heat organization, to Micky Arison, and of course to Lebron James, who was absolutely spectacular.

We were all involved and we all either watched it on TV or at the arena and so it was a great evening and a great week for us.

Now to my formal commentary.

As we indicated in the press release, during the second quarter we experienced a significant improvement in booking volumes for all of our brands in North America and EAA over the last seven weeks booking volumes, and this excludes Costa, have run 8% ahead on a year-over-year basis.

The booking momentum percentages are approximately the same for both North America and EAA brands -- the percentage improvements that I'm talking about.

For Costa, the booking momentum for the seven-week period has even been more encouraging, running approximately 25% ahead year on year.

Loss of booking momentum beginning this past January and continuing through the end of March resulted in our falling further behind in our year-over-year occupancies across all of North America and the EAA brands.

Towards the end of March, marketing programs were restarted which included significant price initiatives to stimulate consumer demand and we began to see a strong rebound in bookings beginning in early April.

I think it is fair to say that the revenue yield impact from the pricing initiatives taken during this period was slightly greater than we had originally anticipated.

Perhaps to some degree this may have been attributable to the further softening in consumer demand, which was experienced this spring particularly in the North American market.

Also as we mentioned in our prior earnings call, the significantly higher air costs for North American passengers traveling to Europe caused bookings for these activities to slow and resulted in our having to take further price reductions for these programs.

During this past spring, North American brands experienced slightly lower pricing than we originally forecasted.

North American brands European itineraries experienced the largest declines in pricing not just because of the slowing North American market but also because of the challenges in locally sourcing business from the softer European markets for these sailings.

As a consequence for the remainder of 2012, we have modestly reduced our revenue yield outlook for North American brands for the second half.

For the full year, North American brand revenue yields are now forecasted to be flat on a year-over-year basis.

Revenue yields for our European brands excluding Costa are also forecasted to be slightly lower than previously anticipated, primarily due to the significant softening in the Spanish market.

Ibero, our Spanish cruise line, has suffered a significant decline in revenue yields.

Fortunately there were just three ships operating in the brand so the impact of the struggling Spanish economy on our financial results has not been significant.

The good news in Europe is that bookings and pricing for the UK and German brands have held up reasonably well during this past spring.

Please keep in mind that all of my comments on revenue yields are in constant dollars.

Now turning to Costa itself for the Costa brand, the picture has improved.

Costa's booking volume stimulated by significant pricing initiatives as part of their remarketing campaigns introduced in April have shown considerable strength.

This has been in all of their major markets, Italy, France, and Germany.

For the last 15 weeks, volumes were 13% higher for Costa, and in the last seven weeks, as previously mentioned, Costa's booking volumes are running 25% higher year-over-year.

Costa suffered a significant loss in booking volumes beginning in mid-January which created a huge gap in their occupancies for the remainder of 2012.

Costa's revised marketing strategy has been focused on catching up on bookings lost during this earlier part of the year.

So it's not surprising that pricing has been deeply discounted.

We do expect that when year-over-year occupancy levels begin to normalize, Costa's cruise prices for 2013 should start to firm up.

Costa's revenue yields for 2012 are forecasted to be down in the mid teens levels on a year-over-year basis and we expect Costa's operating loss to be in the range of $100 million.

While I am on the subject of Costa, let me just make -- take a minute to comment on some recent management changes at Costa.

As we indicated in a press release earlier this spring, we have made some new senior management appointments in our Costa Cruise Group, which is comprised of Costa, AIDA, and Ibero Cruises.

For some time now there was a plan in place for Pier Foschi, the CEO of the Costa Group, to step back from the day-to-day running of the Costa Group after he reached the age of 65.

He reached 65 in late 2011 and there was a succession plan in place for Michael Thamm, CEO of AIDA Cruises, to replace Pier.

So beginning this July, Pier will step back from day-to-day responsibilities but will continue to serve as Chairman of the Costa Board and a Managing Director of the Costa Group with responsibilities for government relations and strategic business initiatives.

Pier will also stay on the Board of Carnival Corporation.

Michael Thamm will become Chief Executive of the Costa Group and a member of the Costa Board and relocate to Genoa, Italy, which he is in the process of doing right now.

Gianni Onorato, will continue as the President of Costa.

Michael Ungerer, who was Michael Thamm's number two executive at AIDA, will take over as President of AIDA Cruises.

Alfredo Serrano will continue as President of Ibero Cruises in Spain.

Gianni, Michael, and Alfredo will report to Michael Thamm.

We are very pleased with the seamless management transition in our Europe cruise business and wish these executives continued success in the future.

Turning to full-year guidance for 2012, we have increased our non-GAAP earnings mid-point range guidance to $1.85 per share for the year, a $0.30 increase over our previous guidance.

In broad terms, $0.30 is comprised of a $0.40 improvement lower fuel prices offset by $0.07 of fuel derivatives costs and $0.03 from currency.

The approximate $0.08 of forecasted lower revenue yields from previous guidance is offset by about $0.08 of lower unit costs.

Based on our 2012 earnings guidance forecasted, operating cash flow is expected to be in the range of $3.2 billion.

Net CapEx for the year is estimated at $1.9 billion so after the dividend, that will leave us with approximately $500 million of free cash flow.

2013, our CapEx is currently estimated at $1.8 billion so with operating cash flow expected to improve in 2013, there should be further increases in free cash flow come 2013.

Now turning to some of the color on the next three quarters.

For the third quarter, capacity is expected to increase 2.9%, 3.4% in North American markets and 1.6% in EAA.

At the current time on a fleetwide basis, third-quarter pricing and occupancy is lower than a year ago.

Keep in mind my comments on the third and fourth quarter exclude Costa unless I indicate otherwise.

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

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

Pricing for Caribbean itineraries is in line with a year ago with pricing for both Alaska and European cruises lower versus last year.

Occupancies for Caribbean and Alaska cruises are slightly lower versus year and occupancies for Euro cruises are lower than a year ago.

EAA brand capacity in the third quarter is 85% and European itinerary is up from 82% prior year.

EAA brand pricing, this excludes Costa again for European and all other itineraries is slightly lower than a year ago on slightly lower occupancies.

UK brands pricing is higher than a year ago and German pricing is slightly lower.

For Ibero, our Spanish brand, pricing is significantly lower than a year ago due to the significant softening of the Spanish economy, which I mentioned earlier.

Also as expected, Costa pricing in the third quarter was significantly lower than a year ago.

Third-quarter guidance as we indicated in the press release is expected to be in the range of $1.42 to $1.46 per share versus $1.69 last year.

Revenue yields are expected to be 3% to 4% lower versus last year and that excludes Costa and net cruise costs excluding fuel are expected to be slightly lower than last year.

Changes in currency net of lower fuel prices and derivatives are expected to have a $0.03 negative effect on Q3's earnings.

Now turning to the fourth quarter, fleetwide capacity is expected to be 3% to 4% higher than last year; 3.9% of that is for North American brands, 2.1% for EBITDA.

Fleetwide pricing excluding Costa is slightly lower than a year ago on lower occupancies.

North American brands are 43% in the Caribbean, slightly higher than a year ago, 13% in Europe, about the same as last year.

The balance is in various other itineraries.

North American brand pricing is slightly lower than last year at lower occupancies.

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

Europe pricing is lower versus last year at lower occupancies and pricing for all other itineraries taken together is slightly higher than a year ago on lower occupancies.

EAA pricing in the fourth quarter and this excludes Costa, is higher versus a year ago at lower occupancies.

Pricing for Europe cruises would represent 61% of EAA itineraries or slightly higher on lower occupancies.

For all other itineraries taken together, pricing is also higher on lower occupancies.

Costa's pricing and occupancies are lower over to the year ago.

Although pricing for Europe brands excluding Costa is higher at the present time because there are more cabins to fill versus last year, we expect pricing for EAA brands to decline as the quarter closes.

On a fleetwide basis similar to the third quarter, we are forecasting EAA revenue yields excluding Costa to be lower in the fourth quarter.

Now turning to the first quarter of 2013, my comments now include Costa's data for both years.

Fleetwide capacity for the first quarter of 2013 is expected to be higher by 4%, 3.4% in North America, 4.9% in EAA.

Fleetwide occupancies at the present time are lower than a year ago with pricing at the present time slightly lower versus last year.

Booking data for the first quarter of 2013 is in its early stages of development so I wouldn't read too much into the data at this time.

Our North American brands taken together occupancies are flat year-over-year with overall pricing currently lower.

However, pricing is higher for most of the North American brands but lower in total, partly due to itinerary changes and the mix of the four brands' pricing.

I should mention that revenue yield comparisons for the first quarter of 2013 versus first quarter 2012 will be more challenging given our stronger first-quarter North American yield performance this past quarter -- for the past first quarter of 2012.

On a fleetwide basis, EAA brand occupancies are behind last year with higher pricing although still early.

Pricing and Costa's bookings for Q1 is also higher on a year-over-year basis at lower occupancies.

But as I mentioned earlier, you should not read too much into the information for the first quarter of 2013 as there is still a long way to go before the first-quarter closes.

I should mention that certainly a positive development for 2013 is our expectations at least currently that lower fuel prices should provide a boost to earnings.

Using our current fuel price of $620 per metric ton, we are currently estimating that lower fuel prices should benefit first half 2013 earnings per share by approximately $0.23.

So that's a little bit of hopefully a silver lining for going into 2013.

Having said all that, Jennifer, I'm going to turn it back to you and we'll open it up for questions.

(Operator Instructions).

Steven Kent, Goldman Sachs.

Good morning.

Could you just talk about when I am looking at the way you are describing the balance of 2012, it sounds like the third quarter is going to be very weak, probably a little bit weaker than I would've expected or our team would've expected.

But then the fourth quarter using again your guidance would suggest a very, very strong rebound in the fourth quarter to get to your full-year numbers.

Maybe I'm calculating that wrong, David, but I just want to make sure we are going that way and if that's the case, what gives you the confidence on the fourth quarter that things are going to improve that dramatically from the second and third quarter?

Steve, this is Howard.

Actually based on our current forecasting, we are estimating that Q3 and Q4 yields will be down in the same relative range of 3% to 4%.

I said 3% to 4% down in Q3.

My guess is it will be in that range in Q4 as well.

So I am not quite sure how you did your calculation but that's the way our numbers work.

That's excluding Costa in both quarters what Howard just mentioned.

Yes but if for the third quarter you are negative 6% to negative 7% for the whole Company right -- for constant dollar and then for the full year your negative 3% to negative 4%, so something has to happen pretty dramatically.

The first quarter was up.

First quarter yields were up close to 3% I think on a constant dollar basis.

What I suggests is go back -- I think Beth can take you through it but I think that's just the way the numbers work right now.

But Q3 and Q4 basically look like they are going to be in line.

There's always more -- the further out you go right now it's always more difficult to predict but I think Q3 -- where we are behind is still not that much inventory left to sell so --

But it sounds like the assumption is wrong so maybe after the call you can follow through with Beth and see where this --

The four quarters, I mean 2.9% percent up on constant dollars in the first quarter, 1.4% down in the second --

(multiple speakers) It is about the same range that we guided to in the third.

And we are still in the same range that we were at March 5.

By the way, these are only modest changes in yield from North America and Europe from previous.

I think it's important to put in context that when the incident occurred, it was the second week of January, which is really the peak of the beginning of wave season and when we reported, it was March 5, only a few weeks into that.

So we estimated how deep a hole was and how much we would have to incentivize to get that hole filled and we missed by what appears to be a rounding error at this stage.

On the close-in bookings, it sounds like you had to incentivize more as you got through Q2.

Can you just talk about how you are thinking about that?

Q2 held up pretty well.

I'm sorry, Q2 was better but you're incentivizing more going into Q3 so can you just talk about what kind of programs you are doing --?

I think it is pretty well understood that Europe has been challenging this year.

I think everybody understood that particularly for the North American brands and that continues to be the case although we are well into it now and it's pretty much full, so we pretty much know where we are.

Okay, thanks.

Felicia Hendrix, Barclays.

Good morning and congratulations, Micky.

Just to -- I was actually going to yell that you should wake up, but it sounds like you are pretty awake even though you gave us a disclaimer.

The only thing is that I've got Queen running in through my brain.

Do you want me to start singing?

So I think just to touch upon how you just answered the last question, if I remember correctly, normally you are about 85% to 95% booked in the quarter that you are in and then the next quarter out you are about 55% to 75%.

So just in terms of trying to think about your confidence in the guidance that you've provided, are you within those ranges?

We are.

We are towards the lower end of the ranges which I think is consistent with the comments that we are behind the prior year but still (multiple speakers)

But within the ranges.

Okay, so within the ranges but the lower end for both the third quarter and the fourth quarter?

Correct.

There is not that much left to sell.

Even though we are behind maybe by about a point or two, there's not that much left to sell in Q3.

Okay, so obviously the fourth quarter's range is wider and that kind of gets to my next question because what we have been hearing is from all cruise lines, not just you, your competitors, you have been holding price for as long as you can and then discounting kind of lower -- the closer you get to the cruise.

So when we think about that, when we think about the fourth quarter kind of being usually historically a more difficult quarter and in light of the guidance that you gave, how confident are you in that?

I'm confident in the guidance we give right now.

To be honest with you, I think the numbers are not going to change dramatically I think for the second half of the year.

We always know.

Obviously we only give guidance that we are confident in but we never know.

We never know -- we never know about hurricanes.

We never know about the election season.

There's a lot of things that can happen between now and then but based on everything we know today, we are very (inaudible)

Okay, is it fair to assume that in your guidance you kind of take into consideration these programs that you might be implementing to stimulate demand?

Well, they've already been implemented.

They have been implemented and our volumes are up substantially, as we said in the press release.

So they have been implemented and they are working and they are working very significantly, obviously at Costa and well in the other brands as well.

Okay, great.

Thank you.

Robin Farley, UBS.

Thanks.

Actually I don't have a question about the yield guidance.

It basically sounds like it's kind of just narrowed I guess in the same range, narrowed within it.

But I did have a question on your free cash flow.

You talked about next year having more free cash flow and less CapEx.

Can you give us some color on your thoughts about share repurchase?

Because I think you have $350 million authorization still outstanding and just some thoughts on that?

We did resume the share repurchase during the last quarter but we only wound up purchasing about 150,000 shares.

Our share repurchase program is designed to be opportunistic and we are being patient given the market volatility.

And at the moment, it's actually $330 million that remains on the program.

Okay, so any sort of thoughts about just strategically whether you feel like looking ahead free cash flow will be greater next year versus this year?

But are you not comfortable sort of spending that in advance of getting it?

Or I guess just trying to think about what your expectations are over the next 12 months, understanding that day-to-day is opportunistic.

I don't think we are comfortable preempting the Board.

That's a Board decision and I think our position is basically what has historically been.

We are going to return free cash flow to shareholders in a combination of ways -- dividends and stock buyback, depending on what the Board decides.

And our free cash flow this year, given our new guidance, we would expect it to be in the range of $300 million to $400 million using the midpoint of guidance.

I think we explained -- I'm not sure if it was on the prior call but we suspended the repurchasing for a while for -- but the reasons -- how to be (multiple speakers) sensitive to the issues regarding the incident, but as David said, we are now back and prepared to continue.

Okay, great.

Thank you.

Rick Lyall, John W. Bristol.

Congratulations, Micky and the Heat organization on a terrific season, obviously.

I'm sure you are very pleased.

Promotional activity in North America and Europe, it is not reflected in the ticket yield.

Can you talk about both the depth and the impact of those promotions?

And I've got a follow-up.

The impact is what it is.

It's what we anticipated back in March.

It's just like I said a rounding error because it's just a little bit more expensive than we thought but overall, it's pretty much what we have thought after missing such a significant part of wave season.

So I'm not sure I understand what you mean by the depth in your question.

If you have had to offer more free flights, more onboard credits, etc.

than you thought back then?

Yes, correct.

(multiple speakers) What I said is we had to do more promotions especially for the European programs or where there was other programs where there was a major air component.

The range we had was 2 to 4 and now it's 3 to 4, so again, it's a fraction of a point that we are talking about.

So yes, we gave -- we did do a little bit more than we had anticipated in March but again in March, we were only a few weeks into the situation.

So I think we did a pretty good job of guess-timating what would need to be done to fill that hole.

So -- but we didn't get it 100% right but we've still got it within the range, so --

Right, okay.

I've got a question about the fuel hedging.

So when I look at the schedule and the release and out through '14 and '15, you're kind of holding in the 70 to 80 floor range and you are keeping the upper range 125, 130.

How do you think about migrating the ban?

Are you going to march the ban down or are you going to kind of consistently stay in the 80 to 125, 130 range?

I think it depends what the ban is at the time that we meet.

We meet on a regular basis and discuss this.

Again, we look at this or I look at this anyway as insurance.

It was at the time cheap insurance.

It's not become a little bit more expensive insurance but that's what it is.

It's insurance and we keep looking at -- we meet on this on a regular basis and if opportunistically we can get lower bans, we obviously would take advantage of that at the time.

Steve Wieczynski, Stifle Nicolaus.

Yes, good morning, guys.

Micky, congratulations, even though I had a small wager on Oklahoma City, so I will give that for fair disclosure.

The first question --

You didn't cover your bet?

You know, I should have hedged it out.

It was stupid.

But anyway, one of the brands you guys haven't talked about is AIDA and I know that was a brand that had been -- seen some pressure from the Costa event.

So could you just update us on what you're seeing there?

Yes, AIDA, there was that period I think subsequent to mid-January where business was quite soft but their business has come back quite nicely, and as I mentioned, their yields are slightly down.

But I think -- I don't think they are dramatically different than how we originally budgeted the year for AIDA so they are holding quite nicely and they picked up a lot of booking momentum.

It took a while to come back but it's a very, very powerful brand in the German-speaking markets and it's doing quite well.

It just seems to be -- have normalized quite nicely.

They had a naming ceremony in Hamburg for their new ship and to give you a sense of the power, the viewership on the river was 1.4 million people, actually more people showed up to see the naming ceremony of that ship than the Diamond Jubilee.

(multiple speakers) It's a pretty powerful brand.

Then the second question I guess would be a little bit more for David on the expense side.

The expense control seems to be -- you guys seem to be doing a phenomenal job there.

I guess in the other expense category, that was down significantly even if you exclude I guess the $34 million there from the litigation and the insurance proceeds.

So what was being pushed out of that line item?

Even -- you also have some costs related to the Costa Concordia incident.

Are you talking about the second quarter -- the second quarter, the 494 versus the 556?

Right.

I will have to get -- I don't have the detail with me here.

I will have to -- we will get back to you on that.

(multiple speakers) the schedule.

No problem.

Thanks a lot, guys.

Assia Georgieva, Infinity Research.

I had a couple of quick questions.

First of all, Costa's second-quarter occupancy was probably up significantly after the end of March pricing program.

How did it compare relative to your expectations?

Could you give us let's say if it was a 10% change in occupancy or higher?

Relative to which expectation?

(multiple speakers) Expectation changes every week.

Well, the one that we know of (multiple speakers)

In March we really were unsure whether we could move occupancy at all and we discussed that a lot that we were going to do continuous surveys to see whether if we put stimulus in the market it would work.

We didn't want to put pricing stimulus just to put it in there without having a response and what we found is relatively quickly that with pricing stimulus, we could generate significant demand because of the strength of the debate brand and its key markets.

And so the occupancy levels versus where we thought we were in March are significantly higher but the pricing offset virtually all of that.

But we are far more pleased with this kind of result than what we were talking about in March because it is accelerating in my mind and I think the mind of management, the comeback of the brand.

Full ships or relatively close to full ships with happy passengers coming back, enjoying the brand, and saying what a wonderful time they had generates a whole different ambience on board, creates onboard revenue -- there is lots and lots of positive elements of having higher occupancies than we had anticipated.

So compared to March, the occupancies are significantly better.

The response is significantly better to the incentive that we've put in place than we thought in March.

And still you expect the loss to be in the $100 million range, which was the original expectation, so it's pretty much a trade-off between price and occupancy at this point?

Correct.

Okay, okay.

My second question, in the past it seems that onboard spend has been almost a leading indicator to higher ticket pricing.

Do you think we may be seeing some of that especially on the onboard part?

We are seeing some increases in onboard.

We were very pleased.

In fact, we took the guidance up almost a point on onboard for March to the June guidance so the trend is very favorable and I hope it is a leading indicator.

It's too early to say but I don't know that we have ever necessarily seen it that way.

It certainly indicates that consumer spend is up but there are a lot of elements to that 1% improvement.

I do think that all of our brands have put a lot greater emphasis on being creative on ways, whether it's Fun Ship 2.0 or other programs out there that will generate more onboard revenue.

So it's really hard to say whether how much of it is -- if you talk to the marketing, the onboard marketing guys, they will tell you it's all them.

So it's hard to tell how much is that and how much is just the consumer is willing to spend more.

Okay, great.

Thank you so much for your answers, and Micky, keep celebrating.

We will.

Tim Conder, Wells Fargo Securities.

Thank you.

If we could just stay on the onboard topic here, it sounded like again from your preamble comments that that was -- remained skewed to the North American brands.

But also, Micky, you alluded to in part of your answer there that you are seeing that nice recovery in Costa.

Just a little bit more color I would guess on the rest of the European brands as it relates to onboard.

The onboard is actually -- I said it was flat on the European brand despite the lower occupancy, so you are actually seeing some additional spending on a per diem basis, so the onboard spend per person is going up.

It was just we had a couple of points less occupancy on the brands.

So flat on a yield basis.

Okay, and then just any color commentary and we've touched on North America.

We've touched on Europe, but given a little bit of weakening in the Australian economy, a little bit and then just overall related to Asia, what are you seeing out of Asia Australia collectively?

I think they've really got very different markets.

I think in Australia we are seeing -- we are being challenged.

There is a lot more capacity coming into the Australia market including our own capacity, so yields are on a year-over-year basis, pricing has been down but it's still a very, very profitable market for us and our pricing is -- seems to be we're able to get a whole lot of bed pricing with our brands in Australia than what we see our competitors getting right now.

So we are very pleased with Australia and it's likely that we may be through the worst part of it in terms of the additional capacity.

Next year Carnival brings a ship down to Australia and it's performing quite nicely right now, so we are very pleased with Australia.

In Asia, it's a pretty positive situation.

We moved the larger ship into the China market, the Costa Victoria, and it's doing quite well and we expected that we would be breakeven this year in Asia or maybe make a little bit of positive cash flow and that looks like it's going to be the case so far.

So bookings -- pricing in Asia, in Southeast Asia and China is quite good right now.

And we are adding another 2000 passenger ship in Costa Atlantica.

As a result of that, Micky is right on.

Beginning next spring, we are bringing a second Costa ship to Asia, the Costa Atlantica because the situation is really developing nicely.

And we are entering the Japanese market with Princess, so we are aggressively starting to size up in Asia and we are very, very, very optimistic that we are starting to see that opportunity come to fruition.

Gentlemen, if I may, if you could just round out that whole discussion then with a little color on South America and Micky, I will offer my congratulations too.

Thank you.

South America business for us is mostly begins this coming winter but is shaping up nicely.

As mentioned, Costa's pricing at this point for Q1 is up year-over-year, a good part of their itinerary is -- they have four ships in South America this winter and so those ships are doing nicely.

The Ibero, to be honest with you, I'll get back to you -- I don't know the Ibero pricing in South America for this winter yet.

It's still early because the South America season is basically mid-December to mid-March, so it's a very short season and it is booked quite early.

Early indications are positive.

Great.

Thank you, gentlemen.

Sharon Zackfia, William Blair.

Good morning.

I just wanted to go through the yield guidance for the rest of the year.

I guess different than Steve, I was a little surprised that there wasn't going to be an improvement perhaps in the fourth quarter sequentially on yields.

I know it's a less predictable quarter but I would've thought with the timing of the Concordia incident, kind of the booking curve there, impacting the summer as well as the preponderance of ships in the Mediterranean in the summer that maybe you'd get some relief as you move more towards the Caribbean and (inaudible) as we moved into the fall.

If you could help us think about if you are seeing just general signs of more economic weakness that may be exacerbating some of the other ancillary effects on the business.

Sharon, the way the demand profiles work is your Q3, your summer quarter is your quarter of your strongest demand in your business and so when you get into Q4, it's a little bit more of a struggle in terms of demand.

Ships are coming back from Europe or going back from Alaska so it's always -- fourth quarter is always more of a challenge in terms of demand stimulation and all we are saying right now is that Q4 will be like Q3 in terms of yield.

In terms of the capacity mix, it's not as different as you would think.

The Caribbean is about 24% of our exposure in the third quarter as opposed to 28% in the fourth and the net is actually 25% in the third quarter, going up to 29% in the fourth.

So we have a heavy Med exposure in the fourth quarter.

Europe, the northern part of Europe is a little less, 25% coming down to 7%.

That includes Costa's -- (multiple speakers) what you have to remember is our fourth quarter includes September.

September through mid-October is still very heavy Med period but you've lost the Baltic, which is your highest yielding European business because it's the end of the season and those ships move back into the Mediterranean.

So your capacity in the Mediterranean for half the fourth quarter is actually higher, as Beth pointed out.

Okay, that's helpful.

Thank you.

Getting back to Steve's questions on other ship operating expenses, the two reasons for the decline year-over-year in the second quarter, one was drydock.

We had significantly less drydock days in the second quarter this year than the prior year.

One of the things we mentioned was in the first-quarter call, we had significantly more drydock days in the first quarter of 2012 than 2011, so that was just a seasonality on drydock.

The other thing was currency.

The euro was 1.43 last year in the second quarter on average.

And this year it was 1.31, so currency has driven the number down as well.

Greg Badishkanian, Citigroup.

Thanks.

First question is just on European source business and maybe getting a little bit of color by geography.

I know you mentioned Spain was soft.

UK, Germany held up.

So I'm just wondering, did the UK and Germany actually get incrementally better over the last seven weeks?

And did any other major market stand out as maybe bucking the trend one way or the other?

The UK wasn't really impacted as much as anywhere else.

The UK held up pretty well throughout the year and throughout the process.

Germany had to have bounced back.

(multiple speakers) It had to have bounced back.

We are hesitant on Italy and France only because Costa is our primary brand in those markets.

Obviously the volumes now are very, very strong at significant lower prices.

So the one area -- the areas that we are very clear on is that Spain is terrible.

UK has been fine and Germany has bounced back and I think it's fine.

Second question just on the new versus seasoned cruiser, any change in trend there over the last month or two?

I think -- we said at the time of the incident that it's likely that first-time cruisers would be more impacted than experienced cruisers as experienced cruisers understand both the value and the safety of the product while first-timers may not.

At the time of our March call, we said that while it's kind of intuitive that that may happen, we have no empirical evidence that it did happen.

I can say now that we have empirical evidence that it did happen.

And that first-time cruisers did decline and were impacted.

Our surveys clearly show that they were impacted by the events and hopefully the further we get away from those events, the more likely they will bounce back.

We also saw after the global financial crisis and we reduced prices, we also saw an uptick in repeat passengers as well at that time.

As Micky said, the people saw the value much quicker and jumped on the bandwagon and started booking.

Right.

But we now see it in actual bookings and we now see it in actual surveys that demand from first time cruisers has declined since the incident.

We are hopeful as we get further along that that will start to rebound.

Right, so maybe next year a little bit easier comparisons from the Concordia when you lap that, right?

Hopefully.

Okay, thank you.

Jaime Katz, MorningStar.

Thanks for taking my call.

I have a question actually on the booking curve and could you guys talk a little bit about how many people are booking closer in versus further out?

Has that shortened even more this summer than you guys had anticipated?

And then the second question is while Costa has done obviously very well over the last few weeks, can you elaborate a little bit more on the pricing that you have sacrificed to get there?

As we've said, we basically gave up pricing for occupancy and it was a wash, so on the booking curve, it's a function -- it's purely a function of the hole that was created during wave and the need to fill that hole, which meant that there was a requirement by the brands for closer in business.

So I don't know if that is a booking curve issue or an issue that you had this hole that was created starting in the second week in January.

So it's a very unique set of circumstances that we really haven't experienced before anything quite like it and I don't see any reason why over time -- and I mean relatively short time as we catch up on occupancy and we are getting there, that the booking curve won't go back to where it was traditionally.

But we needed to be more close in because we have some space to sell.

I think we are encouraged by the fact that we are still within historical ranges despite all the events and the incidences that occurred.

And as to the Costa, what they gave up on pricing, they are selling it 20% to 30% below the prior year in order to get the volumes and the occupancy.

I think we indicated for the full year, we would be down in the mid teens, right?

On a yield basis?

Correct.

Thanks so much.

Lena Thakkar, HSBC.

A couple of quick questions.

Firstly on Costa, hypothetically speaking if you were to get back yields in occupancy rates in line with pre the incident, where would that negative $100 million profit go to in 2013 do you think bearing in mind all the capacity changes?

Then the second -- go ahead.

Let me pull you after the second question.

I think there's an underlying assumption that we get it all back in one year, which I don't think is to be honest with you is realistic.

What I would say is this, that we forecasted the swing in Costa's earnings for this year is at about $500 million.

And about $100 of that was the loss of the ship itself, which is not coming back.

So I wouldn't want to get into a hypothetical about if you get back here all your revenue yield loss in 2013, what it would look like.

I think that that could be -- I don't want to mislead anybody because I don't think that's going to happen.

It's going to take a couple years for this to come back.

Remember also, we have taken both the Concordia and the Allegra out of Costa and they sold the marina, so compared to where we were a year ago, looking forward, they are down three ships so really their earnings can't be what it would've been had they had those three ships.

No, that's sort of what I was getting at.

Even if it did take two or three years, where is the new base I guess?

Okay.

Then just on the second question slightly -- on a slightly different topic in terms of direct bookings, I was just wondering where you are in terms of direct bookings versus third party across the fleet and where aspirations are in that department?

Direct bookings last year were 19% of our total business.

That has moved up year-over-year.

We don't have any specific aspirations.

I do expect the number will continue to creep up over time.

As people become more and more comfortable booking directly, it's easier for them to do the bookings.

It's just a natural occurrence almost.

With the passing of generations and the improvement of technology, we would expect it to creep up.

Do you have any plans at all to reduce commission rates like you did in the UK elsewhere?

First of all, the answer to that is no.

But I think it's important to understand that we don't believe we have effectively reduced commission rates from the standpoint of the travel agency community because there was so significant discounting and rebating going on that their in-pocket commission was far less than what they have now.

And so I think the clear indication based on what we have said about the UK market and how it has held up through this whole period is that our team in the UK made a very, very good decision.

Travel agents in effect are getting overall better compensated because they are not rebating and pricing stability has been brought to the marketplace.

So I think it was an overall strong decision for the UK but it was a unique issue in the UK that doesn't really exist quite the same anywhere else.

So no, there's no plans to reduce compensation.

It's still the North American and I should say Italy, France, Germany.

The travel agency distribution is still a very, very critical part of our overall distribution strategy.

They have been supportive of us and we continue to be supportive of them.

Okay, that's very helpful.

Thank you.

David Leibowitz, Horizon Kinetics.

Thank you very much.

Two quick questions.

One, with the drop in the price of fuel, do you still have surcharges in Europe?

Yes, there are currently surcharges on a couple of the European brands in Germany and the UK, yes.

Fuel supplements.

Secondly, when the dividend was reinstituted, the comment was we had a lot of catching up to do.

Obviously this year we couldn't do any catching up.

On a priority list and at least two members of the Board are on the call right now, the Board would rather do catch up or buyback?

I'm not quite sure what you mean by catch up.

I don't think we used the term catch-up.

I apologize for the wrong term.

We generally use that on hamburgers.

Not in Brooklyn you don't.

In Brooklyn we put the mustard on the hot dog.

You know, all I can say is that we said that the free cash flow will be distributed to shareholders that clearly we have Board members who prefer dividends.

Remember we have a mixture of Board members who are more UK-centric and we have Board numbers who are more US-centric so we have both views.

We have views that are aggressive toward buyback and we have views that are aggressive toward dividend and we try to find a happy balance and we will continue to try to do that.

Thank you very much.

Kevin Milota, JPMorgan.

Good morning, everyone.

I was hoping you could give us a sense for the revitalized marketing efforts and how big of a driver that was behind what you have seen over the last seven weeks in terms of the increased bookings that you've seen.

Also secondly on the Costa brand strategy, from the first quarter it sounded like you were trying to hold price at the mercy of occupancy levels.

Just wondering how shortly thereafter the March 5 call you effectively flipped that strategy to take occupancy at the mercy of price?

Thank you.

Kevin, in terms of the marketing efforts, I indicated that how we were booking over the last seven weeks and so volumes are up significantly during this period so clearly the marketing -- and I'm talking broadly now, I'm not talking about one particular brand but -- so the marketing efforts have worked to recapture some of the lost business albeit it has been at lower prices than we would have liked.

But let me add, we haven't increased the marketing budgets of any of our brands beyond Costa.

Costa right now is pumping a lot of marketing dollars again not just to create volume but to rebuild the brand and so on.

So other than Costa, all the others are working within what we would have anticipated as their normal marketing budgets at beginning of the year.

And on the Costa brand strategy I think you're right.

I think initially, I think it was based on advice they were getting from marketing consultants in Europe was that to -- and it was very early in the process that the strategy would be just to maintain price in regards to how you price the product would be difficult to start to generate a lot of bookings.

I think that changed over time as they got further and further away from the incident and the marketing people came back and said no, no, no let's -- after they did a lot of market tests and decided that -- let's go ahead and start to used price and see if we can stimulate the market and regenerate the bookings.

And I think that happened.

And I think we said that on the March 5 call.

We said that right now it appears from surveys we have done, from the marketing consultant information we are getting that price stimulus would not work because of the extent of the event, but that we would continue to do weekly surveys to judge if that was moving in a different direction and at the point that we were comfortable based on those surveys that we can stimulate demand and we can get Costa back into the kind of occupancies we traditionally had that we would make that move.

A few weeks later -- I mean they stayed out of the market completely for eight weeks.

Last week in March versus -- (multiple speakers)

From the second week of January to the last week in March, they totally stayed out of the marketplace.

And the beginning of April when we felt comfortable that the market perceptions were clearly that Costa brand is a great vacation value, one that is highly thought of in their key markets and now those numbers stabilized to pre-incident level.

We went heavy and it worked.

And the advertising they were doing was price driven.

They had a very simple message.

I think if I remember correctly it was like EUR75 per person per day for May, EUR85 for June, EUR95 for July and that drove bookings.

Jamie Rollo, Morgan Stanley.

Thanks, everyone.

One question, please.

It's really a question on the comps, on the yield comps in 2013.

You sort of referred to this but just thinking about H1 this year, your yields were up around 1%.

In the second half, you are guiding to down about 7% including Costa.

And as you say, Q4 showing no improvements over Q3.

So I'm just wondering whether your comment is really asking us to think about H1 yields next year to maybe re-base sort of drop mid-single digits or are things recovering fast enough to sort of hold them flat next year?

I think it's too early to say.

I think in Q1, I think our yields were up close to 3% on an overall basis for the first quarter of 2012.

So what I said is the comps would be -- would have been more challenging and also as you roll out of these -- eventually as you roll out of these price incentives, you are still booking business in Q1.

It will probably have some impact of some of this lower pricing in Q1.

So far if you look at the overall pricing picture although I think we are still behind on occupancies in Europe, the pricing picture so far is positive in Europe including Costa.

So I think a lot depends on how quickly the bookings will come back and how quickly you get the volumes back to backfill the space that we lost.

You also have to keep in mind that despite where we are deployment wise in Q3 and Q4, Q1 deployment is totally different and so that has a huge impact on this as well.

Like we said, we are very heavy in the Med in Q4 and Q3 and Q4 but we are clearly not in Q1.

Our Med is what percentage?

5% in Q1.

Yes, it goes from 28% in Q4 to 5% in Q1, so that has a major impact too, Jamie.

We have 50% in the Caribbean and then there's a big component in Brazil and Latin America.

So you're not guiding to any yields decline in Q1 at this stage then?

We're not guiding anything.

We are not doing any guidance.

I think it's too early for 2013 to do anything quite yet.

Okay, thank you.

We are running a little bit over normally, but we will take one more question if it's out there.

Edward Stanford, Oriel Securities.

Good morning, everybody.

You will be pleased to know this is a quick question.

You've again demonstrated some good progress in adjusting your fuel consumption.

Is there much more that you can do?

That's been growing for a number of years now.

How you see that going forward?

We continue to work extremely hard on it.

We have a lot of R&D going on, a lot of investment going on and we would anticipate this type of continued reduction in fuel consumption for the foreseeable future.

Thank you.

Thank you.

I am showing that there are no further questions at this time.

All right.

That works out just fine, Jennifer.

Thank you all for listening in and if you have any follow-up questions, Beth will be around to take care of that.

She enjoys that.

Thanks, everybody.

All the best to everybody.

Have a good weekend.

Thank you.

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

We thank you all for your participation and we ask that you please disconnect your line.

Thank you and have a good day.