嘉年華遊輪 (CCL) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Carnival Corporation third-quarter 2013 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 a reminder, this conference is being recorded us Tuesday, September 24, 2013.

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

Please go ahead, sir.

Thank you, Lynn, and good morning everyone.

This is Howard Frank and with me today is Arnold Donald, our President and Chief Executive Officer; Micky Arison, our Chairman; David Bernstein, our Chief Financial Officer; and Beth Roberts, our Vice President of Investor Relations.

We are all gathered in London, actually, for the -- today we announced the naming of the new P&O ship, the Britannia, and there was a tremendous amount of press there, and we got some great coverage, so that was quite a nice morning for us.

Later on this week, we start our business reviews, starting with the P&O brand and Cunard in the UK.

So we'll follow the usual procedures, and David Bernstein will give you some color on the third quarter.

David?

Thank you, Howard.

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 statements 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 the more useful measure of business trends.

Our non-GAAP EPS for the third quarter was $1.38.

The third quarter came in $0.09 above the midpoint of our June guidance, driven by lower net cruise costs, excluding fuel.

I will speak to the full-year costs later, but in summary, we expect $0.05 of the $0.09 to flow through favorably, as cost savings for the year.

The remaining $0.04 from the timing of expenses between the third and fourth quarter, primarily for advertising, as a number of brands decided to delay some of their advertising spend from the summer months to the fall season.

Our GAAP EPS for the third quarter was $1.20, which is $0.18 below our non-GAAP EPS.

The GAAP EPS included $203 million, or $0.26 per share of impairment charges, partially offset by $64 million or $0.08 per share of unrealized gains for our fuel derivatives program, as the price of Brent increased this quarter.

The impairment charges included $176 million related to two smaller Costa ships, one of which will be serviced this November, as well as $27 million for Ibero's remaining trademarks and other small items.

In the earnings release, you will notice we have further refined our definition of non-GAAP earnings.

Non-GAAP earnings now excludes gains and losses on ship sales and related impairments, which are classified in other ship operating expenses on our P&L.

In connection with this change, net cruise costs, which is also a non-GAAP measure, will exclude these cruise-related items as well.

The excluded items are clearly identified in the non-GAAP financial measure reconciliations of net cruise costs, net income, and EPS, located towards the back of the earnings release.

It should be noted that all of the excluded items are non-cash.

In addition, you will see that prior period actuals and previous guidance for non-GAAP measures have been changed to be consistent with the new definition.

For example, 2012 non-GAAP EPS for the nine months ended August 31 increased to $1.80 from $1.75.

We believe it's more meaningful for these items to be excluded from our non-GAAP measures, since gains and losses on ship sales, as well as any impairment charges, are not part of our core operating business, and therefore, are not an indication of our future performance.

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

Our capacity increased 3.4%.

The North American brands were up 4%, the European, Australia and Asian brands, known as our EAA brands, were up 2.5%.

Our total net revenue yields in the third quarter declined almost 4%, in line with our June guidance.

Now let's look at the two components of net revenue yield.

Net ticket yields declined 4.6%.

The North American brands were down 5.4%, primarily driven by promotional discounting at Carnival Cruise Lines.

Our EAA brands were down 3%, driven by declines in our Northern European brands, partially offset by increases at Costa and P&O Cruises Australia, a pattern similar to last quarter.

Net on-board and other yields decreased slightly, just under 1%, a trend we had anticipated in our previous guidance.

Our EAA brands experienced a slight increase, which was more than offset by declines in the North American brands across most on-board categories.

Net cruise costs for the quarter per ALBD, excluding fuel and now excluding the impairments under our new definition, were up 4.6% versus the prior year.

This increase was better than we expected in our June guidance, as I previously mentioned.

As a result of our ongoing efforts to reduce fuel usage, our consumption per ALBD declined 5% this quarter, and saved us $0.04 per share versus the prior year.

In summary, the third quarter non-GAAP EPS was $0.15 lower than the prior year, driven by lower net revenue yields and higher cruise costs without fuel, partially offset by capacity increases, improved fuel consumptions and currency.

Now turning to our 2013 outlook.

I will skip net revenue yields, as Howard will discuss that shortly.

For the full year, net cruise costs excluding fuel per ALBD are forecasted to be up 4% versus the prior year.

This is at the lower end of our previous guidance range, as a result of the cost savings experienced in the third quarter, that I expect to flow through to the full year.

On a final note, I wanted to share with you preliminary cost guidance for next year, as there are several areas of the business we plan to invest in to improve our return on invested capital.

For 2014, we expect net cruise costs excluding fuel per ALBD to be up in a range similar to 2013.

This increase is driven by more marketing activity, investments in on-board products such as food and entertainment, higher dry dock costs including vessel enhancements, and various other costs and inflation, partially offset by our ongoing efforts to reduce costs.

Please keep in mind that this is very preliminary.

Over the next few weeks, we'll be visiting each of the operating companies to review their 2014 annual plans, and we'll have a much clearer picture on 2014 costs after those meetings, and we will provide detailed guidance on the December call.

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

Thank you, David.

As in our last call, I will comment separately about the continuing progress we've made at Carnival Cruise Lines, and Costa Cruises.

First, let me bring you up-to-date on the last 12 weeks of bookings since the end of March.

For this discussion, I've taken Carnival Cruise Line booking information out of the mix, which I will comment on separately.

As a reminder, all of the pricing information I will be discussing is using constant currency.

Fleet-wide booking volumes during the last 12 weeks from the end of June, covering sailings over the next three quarters are at the same levels, at the same levels as last year.

These bookings had been at higher prices versus last year, and as I said, this excludes Carnival.

For North American brands, booking volumes during this 12 week period are higher year over year at lower prices.

And for EAA brands, booking volumes are lower at nicely higher prices.

We see the EAA booking pattern as an encouraging sign, especially given the continued softness in European economies.

The last six weeks of the 12-week period, we've seen a nice uptick in booking volumes in North America and EAA, which is also an encouraging sign.

For Carnival Cruise Lines booking volumes and pricing over the last 12 weeks are both lower year over year, in the low single-digits and mid double-digits range respectively.

Carnival's booking volumes have also shown recent improvement and during the last six weeks, are running higher year over year.

As Carnival booking volumes steadily increase, we are expecting their cruise pricing to gradually improve over the longer term.

Now, I'll move to the cumulative booking status for each of the fourth quarter of 2013, and the first and second quarters of 2014.

For the fourth quarter of 2013, on a fleet-wide basis, and this excludes Carnival, cumulative occupancies are lower at same pricing levels as last year.

For North American brands excluding Carnival, again, occupancies are slightly lower, at slightly lower prices.

Carnival Cruise Lines occupancies for the fourth quarter are lower at lower prices.

For EAA brands, occupancies are lower year over year at slightly higher prices, reflecting the positive patterns we have experienced during the last 12 weeks.

Costa brand occupancies and pricing for the fourth quarter are nicely higher.

As we indicated in the press release, on a fleet-wide basis including Carnival Cruise Lines, we are expecting fleet-wide revenue yields in the fourth quarter to be 3% or 4% lower year over year.

North American brand revenue yields in the fourth quarter, excluding Carnival, are expected to be down slightly.

Carnival Cruise Lines yields in the fourth quarter are expected to be lower, in the double digits range, and fourth-quarter EAA pricing revenue yields are expected to be higher year over year.

Turning now to the first quarter of 2014.

On a fleet-wide basis, pricing on bookings taken to date is higher year over year, with lower occupancies.

For North American brands excluding Carnival pricing is higher on lower occupancies.

Carnival Cruise Line pricing is lower on lower occupancies.

For EAA brands, pricing on bookings taken to date is flat year over year at lower occupancies.

Second quarter of 2014 bookings taken to date, which is still in the early stages of development, on a fleet-wide basis excluding Carnival, pricing is slightly higher year over year at lower occupancies.

For North American brands, pricing is slightly higher at lower occupancies.

At this stage, Carnival's pricing is also higher at lower occupancies.

For EAA brands, pricing is slightly higher at lower occupancies.

As to the yield outlook for the first half of 2014, although pricing on bookings taken to date for the first half of 2014 is higher, because we are running behind on occupancies, we are expecting revenue yields will follow the usual pattern of coming down, as we close out the first and second quarters.

As a result, on a fleet-wide basis, for the first half of the year, we are estimating a low single digits decrease in revenue yields, in a similar range to the lower yields we experienced in the third and fourth quarters of 2013.

This expectation includes the Carnival Cruise Lines yields.

North American brand yields in the first half of 2014 are expected to be lower year over year, and EAA brand yields are expected to be higher.

We are ramping up efforts in both North America and Europe this fall and winter, and are expecting that revenue yields will turn positive in the second half of the year.

Now let me just turn to the Carnival Cruise Lines.

Carnival Cruise Lines brand continues to demonstrate its resilience in the market, maintaining high occupancies, albeit at lower prices.

The perception and consideration surveys at the Carnival brand continue to show improving trends at a faster pace than originally projected, so we are greatly encouraged by these positive signs.

Yesterday, Carnival began its fall marketing, with a new national consumer advertising campaign on the back of the announcement of its new Carnival Great Vacation Guarantee program.

This is one of the largest fourth-quarter national marketing spends for Carnival in recent years, and is designed to further accelerate the improvements we are seeing in brand perception and consideration.

The increase in Carnival's consumer advertising is also expected to drive more consumers to our travel agent partners.

Also as a result of recent travel agent surveys, and its travel agent outreach program, Carnival Conversations, Carnival has made a number of changes and improvements to its travel agent programs.

This includes adding more in-house call center agents, new bonus commission plans providing complementary cabins, and a variety of other changes to make it easier for travel agents to book Carnival.

Also, a new and simplified cabin pricing plan, also to make it easier to book Carnival, is expected to be announced shortly.

The response to these changes by travel agents has been very positive, and we have seen a significant improvement in travel agent bookings with the introduction of these programs.

So we again thank the travel agent community for their continuing support of Carnival Cruise Lines during this past year.

Carnival will continue to reach out to travel agents to ensure that we maintain a strong partnership with this critically important distribution channel.

Although Carnival Cruise Lines pricing is lower than we would like, with the new national advertising campaign and the increase in marketing spend this fall and winter, we do expect to see a recovery of pricing as we cycle into the second half of 2014.

Recently, Carnival adopted a strategy of holding firm on pricing, even if ships sail with slightly lower occupancies.

We believe this will make Carnival's pricing recovery more achievable, as we move through 2014.

Now turning to Costa Cruises.

As most of you know, the critical phase of the Costa Concordia removal was completed last week, and the present plan is to take the ship to the scrap yard next spring.

We believe this is the start of a new chapter for Costa, and we expect the Company's performance to continue to strengthen over the remainder of this year and throughout 2014.

Brand perception surveys for Costa continue to show improvement, particularly in Italy and France, its two most important markets.

Costa revenue yields show a nice improvement in 2013, and we are forecasting continued revenue yield increases in 2014 for Costa, despite what is still a very challenging European economic environment, especially now.

Congratulations to Michael Thamm and the Costa management team for managing through a very, very difficult period.

Let me make some concluding comments, by saying while 2013 has been a challenging year for Carnival Corporation, there were many positive developments in the Company that bode well for our future.

We continue to be encouraged by the growth of our business in Asia.

Beginning in 2014 we will have two fully dedicated Costa ships in the China and Southeast Asia markets, and Princess will have one fully dedicated ship in these markets.

Princess will also have two ships in the Japanese market during the 2014 spring and summer season in Japan.

We believe these emerging new markets for Costa and Princess offer significant growth opportunities for our business in the future.

In Australia, our P&O Australia, Princess and Carnival brands are the major year-round operators in Australia.

P&O Australia is the market leader, and our combined brands are by far the leading cruise line companies in Australia.

We are also pleased to see the turnaround for Costa in Europe, and we expect to see solid revenue growth and improved profitability for Costa in 2014.

Our well-established European cruise brands, Costa and AIDA in Continental Europe, P&O Cruises and Cunard in the UK, are great franchises and we expect the performance of our European companies to improve, as the European economies begin to emerge from several years of slow or negative growth.

Our European cruise companies are the market leaders in their respective countries, and have maintained their presence in these markets during the difficult economic period.

We believe this will position them to grow their profits more quickly as these markets emerge from recession.

Coming back to the US, we do expect the Carnival Cruise Lines brand to begin to see a recovery in the second half of 2014, as we cycle through the events of 2013.

Our two premium brands, Holland America and Princess, are all expected to have a solid performance in 2014.

Our Seabourn brand, although small, is performing extremely well.

To sum it all up, we have great cruise brands all over the world, and we are excited about our future.

With that, I'm going to turn it over to Arnold.

Arnold?

Thank you, Howard, and hello everyone.

I have I guess three months under my belt with the on-boarding process, so that process is well under way.

We just completed in-depth reviews with each of our leadership teams to look back over the past five years on each of our businesses, and key corporate departments.

I've also visited with our leadership teams in each of their home markets, including Australia, UK, Continental Europe, as well as our US-based operations both on the West Coast, and of course in Miami.

As well, I visited China to see our emerging market opportunity there firsthand, and I can say I am very impressed with the commitment, the dedication and hard work that has been accomplished, and can affirm that we have solid leadership talent in place.

This process of on-boarding has also included spending some time with our travel agent partners, to better understand how they see us relative to our peers, and how we can support them in their very important role.

Engaging with the media to provide proper context, and we're confident that when armed with more information and more personal experiences with cruising, that we can gain more balance in the press over time.

I've been spending time with our shore side and shipboard employees, gaining an understanding of the challenges our team members face in delivering that great guest experience, and importantly our valued guests, spend time with, which has allowed me a practical feel for the guest experience, to complement the quantitative data and market research, and to gain deeper insight.

Having gained these perspectives, I believe we have an opportunity to stimulate demand and drive yield improvements.

Starting with gaining a better understanding of the consumer, by further investing in research to better identify vacation purchase decisions, sharpening the focus on product attributes consumers are willing to pay for, differentiating our brands to better attract our targeted guests.

And once on board, taking the exceptional vacation that we deliver to our guests today, to the next level.

And in doing so, we can generate the word of mouth that is the most significant driver of attracting first time cruisers.

On the cost side, I believe we have tremendous opportunities to use our scale more effectively through collaboration across our brands, these add synergies, some of which we already have achieved but there's plenty more opportunities ahead.

I cruise, myself.

I have for years, even before I joined the Board.

I love the product, and have no doubt we will be able to generate better returns than we do today.

I feel much better positioned now to be effective in our upcoming plan meetings beginning later this week and expect to be fully up-to-speed by December, and begin to make some meaningful contributions toward any shareholder value.

Thank you all, and with that, we're ready to take questions.

(Operator Instructions)

The first question comes from the line of Felicia Hendrix from Barclays.

Please go ahead.

Howard, starting with you, just if we could just talk about the outlook for next year.

You gave us good color for the first half, appreciate that and also appreciate your comments on the second half.

What I'm wondering, where you said that the yields would turn positive, I'm just wondering if overall do you think you could report a 2014 yield increase that's better than flat year over year?

I know it's early, but I'm asking.

It's early.

I feel at some risk we gave first half yield outlook, because it was going to be down.

We do expect to see a turn in the third and fourth quarters to a positive yield, but I would hesitate to put any numbers on it right now.

I think we need to go through the next couple months, go through the business plants and we'll have a much better feel for it.

This is based on -- as David said at the start of his comments, it's based on very, very early information from the brands so we need to refine it and get it better, but we wanted to get the guidance on the first half out at least from a yield standpoint, because we were concerned that people didn't understand what was happening in the business.

And the first half lower yield, first half yields that are going to be lower year over year, similar to the second half of 2013, is that mainly just driven by still Carnival, or is there anything else that's driving that?

Well, it certainly is driven largely by Carnival, yes.

We expect positive yields on the EAA side.

So the other two brands are solid, so we expect most of it to be a Carnival challenge, maybe a little bit -- I can't recall exactly, but I think there may be a little bit from some of the other brands but not much.

I think one of the things when you look at the first half of 2014 versus the back half of 2013, when we say they're similar declines, they are made up a little bit different.

Both Carnival and Costa are improving, but what you'll see happening is Costa is not improving as much as it did in the back half of 2013, and therefore, you're coming out at a similar amount.

Although both Costa and Carnival are improving, Carnival's not down as much, and Costa's not up as much as it was in the back half.

Actually, Carnival compared to the first half of this year of 2013, it's a tough comparison because the events happened.

We'll be comparing first half next year of Carnival to first half this year, and that's a tough comparison, given the fact Carnival would not have fully recovered.

Improving from the prior quarter.

From the prior quarters.

Yes.

It's also consistent with what we said last quarter.

Didn't seem like anybody was -- took it to heart, but it is consistent with what we said last quarter.

Okay.

David, just a quick cost question.

Thank you for the color you gave us, on why it's going to increase next year, probably more than we expected.

If we back out all of the initiatives and the dry docks and the things you talked about, does the underlying cost profile look similar to how you have typically run the business?

I think next year is little bit unique.

The things that we were talking about, there were some one-time costs this year that -- relating to the Carnival Triumph that don't repeat themselves next year, but we do have quite a few dry docks next year.

They're longer in length, because of the vessel enhancements.

That is costing us something.

And we talked about the increased advertising expense, which is an investment that we hope will wind up with better yields in the back half of next year.

There are other investments that we're making in the food and entertainment, and the product.

There are a few other things, insurance premiums, crew air costs, investments in sales forces and other things, that we think are worthwhile, that we're looking at.

But again, these are all very preliminary, and we've got a lot of discussions to do with the operating companies before we can give you a final number.

But these are some of the things that they're proposing.

Okay.

Okay.

Thank you.

Thank you.

The next question comes from the line of Robin Farley with UBS.

Please go ahead.

A couple clarifications.

I'm just thinking about rate of recovery and things for more than just the Costa brand.

But I'm curious for Costa in the third quarter, was the yield increase just in occupancy recovery, or was there also ticket price improvement for the Costa brand in Q3?

That's one question.

And then the commentary you gave about first half, you said North American yields would be down in the first half, and I just wanted to clarify.

Was that including or excluding the Carnival brand for first-half yields?

Thanks.

I think the --

The Costa brand in the third quarter was mostly occupancy-led.

We are projecting that the fourth quarter will be a combination of occupancy and pricing.

And the North American yield outlook that I provided includes Carnival.

And if you excluded the Carnival brand in -- would North American yields in the first half be up, excluding Carnival?

I didn't give that information.

And it's not something I guess -- I guess you don't want to.

Too early.

Too early, Robin.

We're trying to give -- based on preliminary information, both on a yield and cost side, we're trying to give some directional information.

We'll go through the numbers in the next couple months with the business guys, and get a better sense.

They'll have a better sense of it as well.

It will all change somewhat.

I appreciate that you're trying to give guidance and want to give as much, but not give more than you have visibility for.

I guess the reason I was asking for the clarification is trying to think about whether it's mostly the Carnival brand issues that are hurting North American yields.

So I guess, would you say if it's still a question mark for the North American brands excluding Carnival?

Is it still primarily related to like the Carnival brand's issues affecting the others?

I'm just trying to get a sense if there's some other factor that we're not thinking of, that may be impacting those other brands?

Or would you say even if it's not the Carnival brand itself, it's still the impact of those issues affecting the other brands.

What I said is that both Princess and Holland America are going to have solid performances in 2014.

What we don't know -- when we all focus on yields, you may get the wrong piece of information, because there's so much mix elements in terms of moving itineraries around, making investments in new markets and so on, that can be effective.

We can give you much better guidance on this in the December call.

But we don't really have that information right now.

Okay.

Great.

Thank you.

Thank you.

The next question comes from the line of Steven Kent with Goldman Sachs.

Please proceed.

So just a couple of questions for Arnold.

One is, when do you expect to finalize your contract, what metrics might you be looking for in your own contract and when can we look for some sense of where that's all going?

And then secondly, you mentioned that there might be some opportunities for expense reduction.

While well aware that with almost 100 ships, that can take some time.

Do you think about that as a multi-year process or are there immediate expense reductions that you might be able to talk about in December?

Okay, Steve.

Concerning the contract, I suspect that will be finalized at the upcoming Board meeting in October, and at that time we can comment on that, we can talk about metrics for next year.

This year, the metrics are well-established in the compensation plans, and I own those, along with the rest of the leadership team for this year.

I think those have been publicly discussed before.

Concerning -- what was your second question?

Expense reduction.

Oh, the expense reduction, yes.

I think certainly there are opportunities immediately, that under Howard's direction and Micky's, people are already working on.

So we have been realizing cost savings for some time, and we'll continue to do so in terms of immediate opportunities.

And then as we look at it and look at our total spend and the opportunity to leverage across the brands, I think there will be opportunities, additional opportunities for cost savings.

But that's what we're going to review in these plans coming up, and then subsequent to me hearing all of those, meeting with the rest of the leadership team to identify some targets, we'll be in a better position to talk about that in the coming months.

Thank you.

The next question comes from the line of Harry Curtis with Nomura.

Please go ahead.

So, was interested in your effort to sell or pay off a couple of Costa ships.

Is there a broader plan here to at least begin reducing capacity?

Yes, I think that we said for some time that part of the plan, that the new building capacity that we had contracted for, part of it was replacement capacity, and that it was our intention to sell off older, smaller ships, less efficient ships.

In this particular case, though, it got to the point where because the secondhand market is so weak, that we now considered laying ships up or selling them at very low price or even scrap, and so because of that, we took the decision.

In fact, one of the Costa ships that we've written down is being laid up this fall, and the other one, final decision hasn't been taken, but she's clearly on the market for sale.

So we're trying to move more aggressively to move out this older tonnage.

Can you give us a sense of what percentage of your fleet could be considered for moving it out?

Well, one of the problems we have is except for these two ships, all the rest contribute.

But obviously, we're taking a hard look at everything.

Okay.

No, I can't.

But one of the problems is of course because it's smaller capacity, the overall scheme of things, one new building is three or four or five times the size of one ship that we scrap or sell.

Harry, keep in mind, these two ships were ships we never -- we didn't build.

These are ships that came through the acquisition of Costa or another brand that we probably wouldn't have built, which we would not have built, because of their sizes.

So they were smaller ships and during lower-yielding periods like we're in right now for Costa, they're not generating positive cash flows, so we decided to either write them down or sell them, scrap them.

And my second question is -- goes back to Steve's question.

But it's perhaps a little bit broader, for Arnold.

I'm just wondering what are some of the broader initiatives that you're considering?

There's been some discussion about the centralization of resources, which could be an interesting source of cost savings.

And then the second question is, and this is really for Micky, is it -- what is your perspective on giving Arnold enough of a rein to actually execute some of these changes?

Why don't I take the second one first?

Go ahead.

Arnold has full authority from me and the Board to do and to recommend to the Board whatever he feels is the right way to go, and while I'm happy to assist him and give him whatever advice he needs, my focus is only to do whatever I can to make him hugely successful.

So if he feels strongly that he wants to go in any particular direction, I will support him 100%.

To him it's a clean slate.

I'm sure he's looking at it that way, and I'm as interested as you are to see where we go from here.

Yes, first of all, Micky has given me total freedom and flexibility, and has been extremely supportive.

I'd be foolish not to take advantage of all of his experience and time in the business, and certainly will continue to do that.

But I feel no constraints whatsoever at an operating level.

He's an outstanding delegator, and he definitely stands behind his people, and so I'm very, very comfortable in doing what we need to do.

But it is still premature, and so we have upcoming plan meetings and that's the rest of the process here for me, and then I'll meet with the leadership team, and we'll align around the best way forward.

I don't imagine any big, dramatic changes, but obviously there will be some changes, but we'll discover those together as we finish up through the plan process, and then meet with the leadership team right after that.

In terms of the overall opportunity, though, it's not so much centralization or decentralization, and all of that.

The reality is, obviously we have scale.

Today, if you rolled up the other publicly-traded cruise companies and perhaps if you rolled them all up, their net income would not equal what ours is, even in this period.

And so we have a tremendous advantage of scale, with 10 very powerful brands, and leveraging that in all ways, both from a revenue-generating way as well as a cost management way, bodes well for our future and we have the opportunity to do that, and we will find the most effective ways to do that.

Very good.

Thank you very much.

Thank you.

The next question comes from the line of Tim Conder with Wells Fargo.

Please go ahead.

Thank you.

Just a couple of clarifications.

You said that you're seeing trends improve in both the Costa and the Carnival brands.

So just again, to clarify, the Carnival brand pricing has stabilized, you're saying, but obviously at lower year over year levels.

That would be question one.

And then I think you made a statement that you've made a decision with the Carnival brand to hold price with the willingness to sacrifice some occupancy.

Can you comment, the decision to do that?

Because I think post the Costa Concordia accident, you wanted to do that, and then you said, wait, that's not the right -- what we need to be doing, and you reversed course, and dropped price to gain occupancy.

So just maybe compare and contrast those two decisions with those brands.

Okay, Tim.

On the Carnival, comments about Carnival brand and Costa, they're very -- their improvements are very different, because Costa's well on its way, 18 months later from their incident, to start to show year over year improvements in yield, which we experienced in 2013, and will continue to experience further yield improvements in 2014.

Carnival is much more in the formative stages of recovery, so early stages of recovery.

So what we're seeing in the Carnival brand is continuing increases in volumes.

They fell considerably behind on occupancy.

As you know, in order to stimulate demand, we put lower prices out there to get the booking volumes up and we've seen a good response to that, especially in the last 12 weeks, in the last six weeks and so on.

But there's still considerable catch-up to do.

So while you catch up, you're not quite sure, is pricing stable, it's hard to exactly say, because pricing is so dynamic day-to-day.

But I don't know that I have an answer to that but clearly we're seeing significant improvement in demand recently, and I think with the new marketing going out right now plus the outreach program to the travel agents, we've seen some nice upticks on our various distribution channels.

And the number of hits we're getting on our websites and so on.

So it's a very -- we're seeing very positive trending right now.

That will take time for that to translate into improved pricing, and hopefully we'll start to see that in the second half of the year of 2014.

I'll let Arnold comment on the pricing occupancy on Carnival.

In terms of the holding the price, we're open-minded about different pricing approaches and the world constantly changes and evolves, and so we are doing some testing in Carnival now to see if holding the price on certain itineraries can break a cycle of some of our repeat guests waiting to the last minute to book, thinking they're going to get a better price.

When these issues happen like a Triumph, or whatever, the real pressure is on the new to cruise.

Most of those people who have cruised extensively, they continue to cruise.

They're not taken aback by these events.

And certainly, there are a lot of brand loyalists, because there's actually not as much overlap between the brands and repeat guests as some people might think.

The real issue is the new to cruise, and there's pressure there.

So we're going to experiment a bit, and see if there's ways we can accelerate the full pricing recovery, and that's one of the things the Carnival brand opted for in the fourth quarter, was on certain itineraries to test that.

Can I just add, because I believe the question was inaccurate.

The decision at Costa was to hold price, and not try to fill the ships for a couple of quarters, and we did that for a few quarters.

And then as the perception of the brand started to improve, the strategy started to change.

So it's not that we changed it all of a sudden.

We did go a couple of quarters with significant below full occupancy at Costa, and the fact is, right now, Carnival's talking about going a quarter or two or whatever, and leaving some cabins, if necessary.

The good thing, by the way, is part of the Carnival conversations program they've been able to use these cabins for travel agents which is fantastic, because the agents get to see the upgraded Fun Ship 2.0 product and hopefully encourages them to sell more in the future.

So that could be a win-win as well.

Okay.

Gentlemen, thank you for the color on that.

One last question related to the Caribbean.

Granted, there are different dynamics between what the Carnival brand and what your competitors are doing, but collectively Caribbean capacity from the whole industry is increasing.

How do you see -- I guess a better way to ask the question is, you how do you see the Caribbean pricing with what your competitors are doing, relative to the non-Carnival brands in your fleet?

Increase in Caribbean is the second half, isn't it?

Second quarter.

We don't have much visibility for the Caribbean at this point.

It's just too early.

Too early to say, Tim.

Okay.

Okay.

That's fair.

Thank you.

Thank you again.

Thank you.

Our next question comes from the line of Assia Georgieva from Infinity Research.

Please go ahead.

Congratulations on the parbuckling project.

That was quite fantastic to watch and I'm happy that it turned out well.

One quick question on Caribbean pricing.

I'm going to follow Tim's line of questioning.

It seems that during Q3, the Carnival brand had recovered somewhat.

Do you expect to see any last-minute improvement in pricing, or do you expect to actually lower pricing?

When you say the Carnival brand recovered, you mean in terms of volumes, higher demand?

In terms of pricing, because I can't crack your database, so I can't know volume.

I don't know the exact answer but I would say generally there's quite a bit of catch-up to do on getting back to historically higher occupancies for Carnival, before they could start to move the pricing.

So I think that's going to take a while.

Exactly the difference between Q3 and Q4 and Q1 of 2014 is hard to say right now, other than on an absolute basis.

Clearly, if they continue to run these large volumes, and we're very encouraged about it with everything else that's going on in the marketplace for them right now, it's a very positive sign, but I likely -- we don't expect to see positive year over year improvement until the third and fourth quarter of 2014.

We do have a natural third quarter phenomenon that families, pre-school families, that haven't made vacation plans, have postponed it because of the economy or whatever, come into the market very often late, and so there tends to be in the third quarter this natural push for vacations, and particularly family vacations.

And so, Carnival being a very, very big family brand, we see a natural push.

But that disappears once school's back in and in the fall, and the demographic changes in the fall.

You could see something in the third quarter that may not translate to the fourth.

And Micky, that is very helpful and basically I was asking the question whether that can translate into Q4 or Q1, given how important the Caribbean is in those two quarters?

In Q1 you have a different phenomenon.

In Q1 it starts getting cold in November, December and you start getting the snow birds.

So you do have certain demand criteria in Q1 that might help you last minute.

It doesn't tend to be there in Q4.

Q4 is always the most -- historically for 40 years, been the toughest quarter of the year.

Right.

Good times and bad times.

Even in good times Q4 tends to be tough.

But Q1, the challenge of course is all the capacity that comes from Alaska and from Europe to the Med, sorry, to the Caribbean.

There's a massive increase in capacity every year.

But there is a massive increase in demand from the cold weather, and hopefully we get a nice cold snap early this year, and it helps our Caribbean first quarter.

That's why we're lucky that we live in Florida.

Thank you so much for your answers.

Thank you.

The next question comes from the line of Jaime Katz with Morningstar.

Please go ahead.

Can you remind us what percentage of capacity is booked at this point for the first and second quarter, just so we could think about what improvement you might get from your advertising exposure in the rest of the year?

And then, can you also talk about what sort of advertising channels you might be thinking of using, if you're targeting more travel agents or consumers, and how that's split up?

As far as the percentage that are booked, the numbers -- the ranges that we generally talk about are for the next quarter, which would be the fourth quarter, would be 85% to 95% booked.

The second quarter out, which is the first quarter, 50% to 70%, and then the second quarter which is three quarters out, 30% to 50% booked.

We have indicated recently that we're at the lower end of those ranges as far as booking patterns are concerned.

Okay.

Advertising channels, I mean, we use all -- right now we're using all advertising channels.

We're on national TV with the new Carnival campaign but we're also going to do more consumer print.

We're now back into trade magazines.

We're doing radio as well.

We're doing local TV.

We're doing local radio.

We're all over.

Princess recently started a new program, where we're advertising on the mall directories as well.

They think that's a good spot for them, so as Howard said, we're all over.

Okay.

So it's pretty much as it has been in the past.

I thought maybe there was just a change in getting in front of people, maybe?

We haven't been on national TV in a long time.

I don't know how many years, but many, many years we haven't been on national TV, and never have been in this levels in the fall.

We have been out of trade advertising for a while, and we're back in trades.

And I don't recall that we did that much radio.

Our focus the last few years has really been Internet, search, direct mail, e-mail, that kind of advertising.

Now we're back in virtually all media.

Thank you.

We have also upped the amount of investment in advertising as well for the fourth quarter, so the total spend and the total level of activity has increased.

Thank you.

(Operator Instructions)

The next question comes from the line of Jamie Rollo with Morgan Stanley.

Please go ahead.

I was just wondering how temporary some of these cost increases are for next year?

You talked about a step-up in marketing and advertising, more agent support, dry docks.

Could any of those actually reverse in 2015, so we could sort of thing of next year as a transition year in terms of costs?

It's very early to say.

I mean, there are some possibilities, the dry docks are significantly longer, because of the vessel enhancements.

But as I mentioned, and the advertising is a function of the effectiveness of the ads, and the yield increases that we get from it.

There are some things like insurance premiums which hopefully over time, we can work our way back down, but the investments in the product and a few of the other things are very possible that they're more permanent.

It's a mixed bag but it's very early to say at this point how much of the total increase would be permanent.

Okay.

And then the other question, just in terms of the shape of the yields in the first half, just to give us a feeling for the trajectory.

I think Arnold you said, given the tougher comps for Carnival, it sounds like Q1's going to be worse than Q2.

Is that sort of fair?

And can you give us a rough flavor of the difference, please?

I think he said the --

Talking about yields?

Yes.

Directionally, that's correct, yes.

For Q2 would still be negative as well as Q1?

That is correct.

More than likely, yes.

Keep in mind that the Triumph occurred last February and then we had the Carnival dream in March and so it's really most of the second quarter was booked, and as a result, it's more difficult comparisons in the first -- the second quarter than the back half of next year.

Thank you very much.

Comparisons get easier.

Thank you.

Thank you.

Mr. Frank, it appears that there are no further questions at this time.

Okay.

Thank you all very much for listening in.

Beth will be available for follow-on calls after we hang up.

We wish everybody a good day.

Thank you.

Thank you, 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.

Thank you, and have a good day.