嘉年華遊輪 (CCL) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Carnival Corporation's first-quarter 2014 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded Tuesday, March 25, 2014.

I now have the pleasure to turn the conference over to Arnold Donald.

Please go ahead.

Hi, good morning, everyone.

This is Arnold and with me today is Mickey Arison, our Chairman; David Bernstein, our CFO; and Beth Roberts, our Vice President of Investor Relations.

Thank you all for joining us.

I'll have a brief prepared statement to share and then David will follow me with some comments and then I will be back on to start the question-and-answer session.

So first of all, I'm very pleased to be able to share the better-than-expected performance in the first quarter and I find it affirming and consistent with the guidance that we have given for the year.

We've demonstrated progress in areas of challenge for our Carnival and our Costa brands and is very gratifying to see the initiatives that the Carnival brand has implemented begin to pay off.

In fact, brand perception is most of the way back.

Consideration among brand loyalists have previously recovered and now the new to cruise is back and we are working to complete perception recovery amongst switchers.

Interest is up dramatically in our Carnival brand as evidenced by strong Web activity and of course, by previously announced record booking volumes in the quarter at Carnival Cruise Lines.

Going forward, we are cautiously optimistic we will see pricing continue to firm and improve.

We are confident in our Carnival brand team and have been impressed with the measures taken in marketing and distribution and overall innovation.

Our product continues to get even better and what is truly the best vacation value at sea for that targeted guest segment is now even better.

Costa also continues on its role to financial improvement.

Costa achieved strong booking volumes during wave season and in fact, we were almost up 50% year-over-year.

We've seen a continued improvement in perception with an almost doubling of trust and confidence in the core Italian market.

We are very pleased with the recovery in yields achieved in Costa's core European deployment in the first quarter, as well as improved profitability through collaboration across the Continental European brands.

Across the corporation, attractive pricing for our guests during wave season has driven the desired result.

Our North American brands have caught up on occupancy compared to prior year while our European brands have pushed out the booking curve tracking ahead on occupancy.

These trends build confidence that we are tracking to turn the corner beginning in the second half of 2014.

We remain focused on increasing demand on all fronts, increasing advocacy by delivering an even better customer experience, stepping up our public relations effort by raising our profile and relationship-building with the media, taking advantage of social media where much of the conversation takes place today and cultivating guests into proactive advocates.

We have increased our investment in advertising and expect to spend over $600 million in 2014.

That is a 20% increase over 2012.

And we have launched new marketing campaigns in multiple regions.

For example, in North America, the Carnival brand was the national cruise line for the Sochi Winter Olympics with a new creative targeting of family segment while Princess lines launched its first television campaign in 10 years.

In addition, both Costa in Europe and P&O in the UK launched new advertising campaigns.

This increased investment in broad-based media buys supports our efforts to attract the new to cruise where we have the greatest opportunity to create additional demand.

We remain committed to leveraging our scale and we are making meaningful progress toward that end.

We held a leadership forum among our top 70 employees globally and in earnest are beginning to align around common objectives to accelerate us down the path of continuous financial improvement.

Our global team is truly energized to achieve that success.

We have identified opportunity areas to leverage our scale, both from a cost efficiency standpoint, as well as a revenue-generating standpoint.

Among our $6 billion of non-fuel, non-people costs, we are prioritizing areas where we believe we will find opportunity.

Crew travel and ports are two examples of large areas where we are conducting deeper dives.

We are still at early stage in sizing the opportunities in these and other categories and as we look across further brand collaboration, cross-brand collaboration on travel costs, for example, primarily for our 90,000 global crewmembers, as well as port costs for our more than 10 million guests and 100 plus ships.

We are encouraged with the progress we are making, but we obviously still have a lot of work to do.

We are very excited about the road ahead.

We are a ways away from realizing our full true potential, but I am very confident that we will get there over time.

And now, I would like to turn it over to David Bernstein for a few comments.

David?

Thank you, Arnold.

Before I begin, please note that as some of our remarks on this conference call will be forward-looking, I must 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 currency as this is a much more meaningful measure of our business trends.

I will start today with a summary of our first-quarter results and then get into some more detail on the overall positive booking trends during the current wave season, as well as the booking patterns by deployment for each of our two segments, the North American brands and the European, Australia and Asia brands known as our EAA brand.

I will finish up with an update on our full-year 2014 March guidance.

Our non-GAAP net income for the first quarter was $2 million.

I am pleased to report that our first-quarter non-GAAP EPS was $0.09 above the midpoint of our December guidance and this was driven by better-than-expected net revenue yields at Carnival Cruise Lines and our Continental European brands worth $0.05, as well as lower-than-expected net cruise costs without fuel worth $0.04.

Now turning to our first-quarter operating results versus the prior year, our capacity increased 1.7%.

Our total net revenue yields declined just over 2%.

Let's look at the two components of total net revenue yields, net ticket yields and net onboard and other.

First, net ticket yields, which declined 3%, with decreases on both sides of the Atlantic.

Our North American brands were down 3.5% and that was driven by promotional pricing at Carnival Cruise Lines, although I am very glad to say that the pricing environment for last-minute first-quarter bookings was clearly better than we had expected.

Our EAA brands were down 2.5% with increases at Costa resulting from the continuing brand recovery, which were more than offset by declines in our other major European brands.

Net onboard and other yields increased 1%.

Our EAA brands performed very well and were up over 4%, but this was tempered by slightly down yields at our North American brands driven in part by lower occupancy at Carnival Cruise Lines.

Net cruise costs per available lower berth day, excluding fuel, was up 3.5% and that was driven by higher advertising spend as we invested to accelerate the recovery in ticket yields.

The increase was less than we had expected in our December guidance and that was due to the timing of advertising and certain other expenses between the quarters.

In summary, the first-quarter non-GAAP EPS was $0.08 lower than the prior year and that was driven by lower net revenue yields, higher net cruise costs without fuel, which was partially offset by improved fuel consumption and slightly lower fuel prices.

Turning to our recent booking trends and yield expectations for the remainder of 2014, as we indicated in the press release, fleetwide booking volumes during this year's wave season have been running almost 20% ahead of the prior year, significantly outpacing capacity, albeit at lower prices.

This pattern is the same for both our North American and EAA brands in all three quarters.

It is nice to see that some of the largest booking volume increases were at Carnival Cruise Lines and Costa as these brands continue their recovery.

As Arnold indicated, cumulative fleetwide bookings are ahead and they are at lower prices.

This is the first time in a number of years we have indicated that cumulative bookings for the next three quarters were ahead of the prior year as our overall booking curve has started to lengthen.

While we are pleased with the new direction and we expect it to continue, we are currently still toward the lower end of our historical booking curve.

Despite these booking trends, we continue to expect yields for the second quarter of 2014 to be down 3% to 4% while our EAA brands are forecasted to turn positive, our North America brands are impacted by the more challenging comps in the second quarter of 2013 as the majority of those bookings were taken prior to the voyage disruptions that occurred in February of last year.

For the second half of 2014, with better cumulative booking status and ramped up marketing efforts in the first half of the year, which should benefit us in the second half, we are expecting positive yields for both our North American brands and our EAA brands.

For the full year, we are expecting net revenue yields to be down slightly, which is the same as our December guidance.

While we exceeded our first-quarter yield guidance mainly due to better-than-expected last-minute Caribbean bookings at Carnival Cruise Lines, our expectations for the Caribbean for the balance of the year remains unchanged.

We are being prudent with our full-year expectation given the large cruise industry capacity increase in the Caribbean, as well as the slower-than-expected demand growth in Japan.

As you know, Princess successfully entered the Japan home porting market in 2013 with one ship for three months.

For 2014, Princess increased its capacity in Japan to two ships for about six months each.

While demand in Japan has grown considerably, it has been somewhat less than anticipated.

While we are experiencing some growing pains in Japan, we are still very bullish on the long-term prospects for this market.

Today, Princess' Japan home porting represents only about 1% of our annual capacity.

Looking at booking patterns by deployment for each of our two segments, first, for our North American brand, I will walk you through the Caribbean, Alaska and their seasonal European program.

The Caribbean is behind in both price and occupancy and represents almost 50% of the remainder of the year for the North American brands.

Recent booking volumes have been excellent and we are catching up on occupancy, albeit at promotional rates.

Alaska is behind on price, but well ahead on occupancy, which bodes very well for pricing on the remaining inventory.

The seasonal European program for our North American brands is strong.

We are well ahead on both price and occupancy.

For our EAA brands, the year-round European program, which represents 70% of the EAA brands' capacity for the remainder of the year, is behind on price, but well ahead on occupancy.

Recent booking volumes have been substantially ahead of last year, which again bodes well for pricing on the remaining inventory.

Switching to costs, our full-year cost guidance also remains unchanged from December as we continue to expect net cruise costs, excluding fuel, to be up only slightly.

Putting all these factors together, our 2014 non-GAAP EPS guidance is $1.50 to $1.70 per share with a midpoint that is the same as our December guidance.

Given our higher confidence level, we have simply narrowed the range reflecting our solid booking patterns with softness in Japan offsetting our better-than-expected first-quarter performance.

At this point, I'll turn the call back over to Arnold.

Thank you, David.

Kim, I think we are now ready to open it for questions.

(Operator Instructions).

Robin Farley, UBS.

Thanks.

I was going to ask about your guidance coming $0.10 off the top and the bottom and given the better close in Q1, I guess it sounds like Japan is the reason why that and maybe a little bit of fuel off of the top.

So I guess I will ask, when you look at your bookings for the remainder of the year being at higher volume at lower prices, is that mostly due to Q2 because, in theory, if the comparisons get easier in Q3 as we get closer, we would see higher prices and so you'd hold back on some booking at lower prices year over year.

I guess if you could give us a sense of that sort of higher volume, lower price, how that changes from Q2 into the second half?

Yes, David, go ahead.

Essentially, for all three quarters, we are essentially at higher volumes and slightly lower prices.

Albeit there is different levels of increases and different amounts of lower prices between the quarters, but that is the overall trend at the moment.

Keep in mind that while the booking volumes have been very good, we did expect to see booking volumes, good booking volumes in the first quarter.

In December, on the conference call, we talked about being behind and we knew we had to catch up.

And in order to catch up, you need a good booking volume.

So this is pretty much in line with our expectations.

Okay.

And then just the other question is can you quantify a little bit the lower occupancy in the Carnival brand, just the degree?

Yes, as we have been saying all along, on a number of voyages, they are willing to give up a couple of points of occupancy to hold price.

So we are seeing some -- a couple of points down in the first quarter on Carnival Cruise Lines.

Okay, great.

Thank you.

Steven Kent, Goldman Sachs.

Hi, good morning.

Arnold, could you just discuss your cost saves and just talk about them more broadly and will you set a target either in dollars or percentage?

And if you don't do that, why wouldn't you do that?

And then, David, I think you mentioned that the booking curves have extended and you mentioned something about but they were still at the lower end of where you'd like them to be.

What is the lower end and what is the higher end on the booking curves?

Okay, I'll start with your cost question first.

Obviously, our greatest opportunity is on the revenue side, but the reality is we do spend, as I mentioned, over $6 billion not counting fuel and not counting personnel, not counting payroll.

And largely that spend today is uncoordinated.

There are portions of it that are to some degree across a few brands, one or two areas that are more broadly, but the majority of it is not coordinated and that just is a natural result of having run the brands very independently and very successfully very independently.

So any corporation can always be more efficient.

And when you have that level of spend that historically has not been aggressively coordinated, by definition, there is opportunity there.

And so I just mentioned the one area of airline and hotel for crew where we spend, between that and port, over $1.3 billion a year.

We haven't set an arbitrary target.

We are doing it from the ground up and we're doing the work to see what opportunities lie, but from a reasonableness test, would you say 1% is reasonable savings?

Almost certainly, right?

5% of $6 billion would be $300 million, 10% would be $600 million.

Exactly what the number turns out to be across that $6 billion base, we'll see as we go through these individual areas of opportunity and quantify them more rigorously and look at where the opportunities are.

So that work has begun.

Once we've done that, we'll prioritize which ones we attach first and over time, we'll realize the latent opportunity that is there through collaboration, coordination and communication across our 10 brands.

I hope that answered your question, Steve.

Go ahead, David.

Yes, Steve, historically, we had given some ranges out.

For instance, we said in the current quarter we might be like 80% to 90% booked, one quarter out 50% to 70%, two quarters out 30% to 50% and so I think previously in the last --- latter part of last year, I said we were at the lower end or slightly below the historical booking ranges.

So now we are a little bit better than we had previously been, but still toward the lower end of the booking ranges.

Okay, thanks.

Felicia Hendrix, Barclays.

Hi, good morning.

I am wondering if you could just give us some color on the Carnival brand yields, what they were in the first quarter and when you think they get positive and then similarly, Costa's net yields in the quarter.

Go ahead, David.

Sure.

Overall, we had indicated that we expected to see Carnival down in the back half of last year and the first half of this year in the mid to high single digits and then we had talked about them turning positive in the back half of 2014 after we lapped the ship incident, the voyage disruptions.

So in the first quarter, Carnival turned out to be a little bit better than we expected, which helped exceed the guidance but we are still --- I guess our forecast and our guidance for the remaining quarters remains unchanged.

And on Costa?

Oh, for Costa, yes, Costa was up a couple of points in the first quarter and part of that was due to occupancy, but they did get some pricing, as Arnold indicated, particularly in their core European markets.

Keep in mind that one of the things for the first quarter Costa has less ships in South America which, while it is a very high-yielding market, it is not nearly as profitable.

So we gave up something on the yield for Costa to improve the profitability overall because of the high cost of doing business in South America.

That makes sense.

And then just on Carnival, I totally understand this strategy that you have, trying to get the bookings levels up given the hole that you were in, but I am just wondering, as you kind of look forward, do you [wonder] if the consumer gets used to certain pricing or promotions on the brand and specifically when you look past this year, do you envision the Carnival brand having more pricing power?

I think as we look now through the year, obviously, the comparison is going to get easier right off the bat because the second half of last year was post the voyage disruptions that occurred.

And in terms of just the building momentum, the Caribbean has had a lot of capacity expansion, 10% for Carnival and even more than that, over 19%, for the industry.

So there will probably be some continued pressure from that.

But overall we do see a significant strengthening in Carnival.

I don't worry about the consumer getting used to the lower prices.

I mean this has happened before.

We saw lower prices in 2009 and the prices came back up in 2010 and 2011.

So as the economy improves and as demand is there, we should be able to get the pricing back without any problem.

This has happened a number of times in our history.

Okay, thank you.

James Hardiman, Longbow Research.

Hi, good morning.

Thanks for taking my call.

Maybe just a little piggyback on Felicia's question.

You talked about you saw a price dip in 2009 and that came back in 2011.

Maybe you could talk a little bit about relative pricing compared to the competitive set, Caribbean line I am talking about specifically here.

It seems like last year there was a bigger gap versus a lot of your competition.

I am assuming that has worked its way back now, but how should I think about that going forward and have we gotten back to the historical gap versus the ships that Carnival would ultimately compete with?

Are you talking specifically about Carnival Cruise Lines?

Yes, Carnival Cruise Lines.

Yes, exactly.

Yes, it's very hard for us.

There is no direct competitor, it is very hard for us to compare because many of our competitors, like Royal Caribbean, it's multiple brands in multiple markets whereas Carnival Cruise Lines focuses primarily on the Caribbean.

So very hard to do a direct comparison the way you are describing.

It really is difficult.

The brands are different; they cater to different psychographic segments.

They have a different [sense] for what ships were where the previous year, etc.

and so you are often comparing apples and oranges.

So we tend not to look at it that way, but we do look at how we are doing relative to how we have done in the past and how we anticipated we should be doing given our deployments and what equipment we have where.

I can give you a little color on us in total versus our competition that might be helpful because if you go back, we lost about 10% of yield in 2009 and we got back in 2010 and 2011 about half of that and we had hoped to regain the second half in the following years, 2012 and 2013, but unfortunately with the ship incidents today, we are about 11% behind 2008 yields.

In comparison, our competition, with their 2014 guidance, should be close to their 2008 yields and hopefully as our brands recover, both Carnival Cruise Lines and Costa, we can recoup getting back to the 2008 yields as well.

Hotel RevPARs are also back to those levels, so we have every reason to believe we can get back there as well.

That's really helpful actually and maybe -- Arnold, you talked about at the beginning of the call sort of those three major segments of cruisers -- the loyalists, the new to cruise, the switchers.

Maybe expand on that a little bit.

Is that brand consideration independent of the cheaper prices that those people are receiving and ultimately is that sustainable as prices inevitably come up?

Maybe talk a little bit more about that.

Well, I think, first of all, understanding the guest psychographics increasingly is clearly the immediate task that we have across the 10 brands.

So we continue to do deep dives and that is an area where we are collaborating across the brands.

As opposed to doing 10 different segmentation studies, we will be able to do a much more rigorous market research effort at probably less cost frankly than doing 10 independent ones and get much better insights.

But generally speaking, sure, each segment has its own price elasticity curve.

A loyalist, now they might take an extra cruise or two if pricing is lower.

The switchers might be more compelled to switch to a brand with a better price offering and so on.

And the new to cruise, that is where all the heavy-duty action has been across all the brands, ours and other cruise company brands, as to get the new to cruise on board and that has always been more of a price-sensitive market for the majority of the psychographic targets, not so much the ultraluxury, but short of that has been somewhat price-sensitive.

So measuring that and then that changes with time.

Geopolitical influences it, economy influences it, just general mood influences it.

So these are all conceptual things, but we are going from concept to rigor in modeling in our price models and our psychology of pricing through the work we have underway.

But basically it sounds like it's the switchers that are the last of the three to sort of get back to where we were pre last year's --?

Yes, in the comments I made, it was around brand perceptions.

And so a switcher by definition is probably going to be last because they have a brand they are with and you are trying to get them to switch.

And so you need to have perhaps more cause, more rationale for them to switch from a brand they are on to go to another brand and so any kind of negative noise makes that more difficult obviously.

Very helpful.

But it is a small (inaudible).

And it is the smallest segment of the population Beth is pointing out.

Most cruisers are either new to cruise or they would fall into the category of loyalists.

Good stuff.

Thanks, guys.

Thank you.

Tim Conder, Wells Fargo.

Thank you and good morning.

Two things, if you can just maybe give us a little bit of an update.

On the last call, you mentioned that Carnival was a little bit ahead of your period of recovery for the brand and it sounds like the brand perception has continued along that vein.

But if you frame that from the perspective of pricing, has much changed from your statement on the prior call that the Carnival brand is tracking a little quicker than what you expected and Costa still lagging?

Just an update there.

And then the second question would be related.

Looking out over the next couple of years here, Arnold, you continue to outline there is a lot of cost-savings opportunities, but you also, in your preamble, talked about elevated spending on advertising and marketing.

How do you see those two netting out over the next several years for net cruise costs ex-fuel?

Yes, first of all, let's go to your pricing question.

We feel, and brand recovery, we are very enthused by what we see in the Carnival brand in terms of the pace of recovery and in terms of how it is showing up.

Obviously, we had a better-than-expected first quarter with Carnival and that is extremely encouraging and affirming to us and as I mentioned in my opening comments, I am very proud of the Carnival brand team through the innovations and hard work they've put in place to accelerate that brand recovery.

So we are very encouraged on the Carnival brand.

That would be the first comment.

In terms of more broadly looking down the road, we will continue to invest to build demand because that is what the industry needs and it is what we need.

Our ships sail pretty much full, if not full, so do the competitors and the issue is not about that, the issue is at what price.

And so the greater demand -- obviously, the more we are able to capture the great value that we offer to guests and we do believe this is the greatest vacation value there is and so, obviously, we want to drive demand.

And we will do that through promotion periods, so that is advertising through social media or whatever and we will continue to invest in that.

Having said that, do I think that investment in the future will offset any potential savings that we have across the large base of spend we have?

No, I don't expect that.

Will we reallocate some of those savings to additional promotion investment?

If we see a return on those investments, absolutely yes.

But the reality here is I think there is more opportunity collectively over time to show improved overall cost performance even given continued investment in promotional spend.

Okay, so just to clarify, you are saying that the Carnival brand continues to track ahead of that expected recovery and the Costa brand, is it still -- has it picked up a little bit of that pace?

I just wanted to make sure I'm clear on the Costa side of the equation.

Yes, Costa has picked up as well.

Costa had the double whammy of the disruption and then, obviously, the European economy.

And the European economy is still choppy, but it has obviously strengthened and we do see accelerated progress in the Costa brand and I've given huge plaudits to our Carnival brand team, but our Costa team deserves huge plaudits as well.

And they have done a great job in managing the brand and all the dynamics around the brand recovery.

So they obviously had a very different level incident than the Carnival brand did, so they had a much more serious incident.

They were in a much tougher economic environment and so both of those things weigh in heavily to affect the pace of recovery, but they are doing well.

Now we are very confident and excited looking ahead for Costa as well.

And again, I apologize, on the cost side, just to clarify, are you saying that costs should be flat, down or slightly up over the long term netting the savings in the incremental spending?

We haven't quantified the cost-savings opportunities yet precisely and I want to hold on that until I have given the team the opportunity to really drill down.

We like giving you guys numbers that we have a high degree of confidence in and so we are going to do that the right way.

Some of that will be revealed by the time we get to talk to you again.

Some of it may be somewhat obvious and as appropriate, we will lay out targets if we feel that it is of any real value to you all.

But the bottom line is we are still working all that.

Directionally, I certainly see overall opportunities for efficiencies on the cost side.

But, again, I want to point out our opportunity is scale.

We have 78 million passenger cruise days a year.

We have 10 million guests a year and on the revenue side, small moves on the revenue side produce substantial cash flow and operating earnings opportunity for us.

And so we are going to do both.

We are going to walk and chew gum, but the big opportunity is clearly on the revenue side.

Okay, great.

Thank you.

Ian Rennardson, Jefferies.

Yes, thank you.

Good morning.

A couple of questions.

I'm slightly -- if you could help us a little bit with your yield guidance for Q2 because if I look at last year's yield, it was down 1.9% in constant dollars in Q2 followed by minus 3.8% in Q3.

Now you are looking for minus 3% to 4% in Q2, but then a relatively big positive in Q3.

How big can that be in Q3 please?

And then the second question would be yields in Q1 ex-Costa, so if we strip Costa, big improvement in Costa out, what was the yield for the rest of the Company?

Thank you.

David?

Yes, well, first of all, the guidance for the second quarter, part of that is impacted by the 19% capacity increase in the Caribbean that we are expecting and the promotional rates that are out in the market as a result of that.

Each quarter has its unique set of circumstances.

The third quarter we had indicated or I should say the back half I had indicated that yields would be positive in the back half and of course, the third quarter will be impacted to some degree by Japan and so that's taken into account.

But all we said was positive in the third quarter and slightly down for the full year.

Okay, thank you.

And then the other one was --.

And as far as Costa is concerned, I had indicated earlier in the call Costa was up a couple of points in the first quarter.

So Costa, remember, is 15% of our overall capacity and the yields in the first quarter were down 2.1%.

So it probably would have been down slightly more than that without Costa, but you can do the math.

Yes, yes, yes.

Okay, thank you.

(Operator Instructions).

Jamie Rollo, Morgan Stanley.

Yes, hi thanks.

The balance sheet customer deposits at the end of the quarter were not much changed year on year despite, as you say, a very significant booking volume increase in the wave period and I am wondering it could suggest your pricing on those volumes is very weak, but it may also suggest you are selling more through agents.

I am just wondering if there's been a mix in your direct/indirect or if we should be perhaps more worried on pricing given that year-on-year change.

Thank you.

Well, there were so many factors, Jamie, that go into customer deposits on a year-over-year basis.

I mean there is prorated voyages, there's shore excursions, there's charter deposits and a whole bunch of other things, including currency movements on a year-over-year basis.

So it is very difficult for you to read in.

The other thing to keep in mind is that ticket prices are down on a year-over-year basis, so that does also affect the customer deposits and Carnival Cruise Lines I think also had a program with a lower deposit for a number of voyages, which generated a lot of volume.

Now typically we don't see any difference in the overall cancellation experience with those lower deposits, so that was something that stimulated a lot of bookings as well.

So there's a lot of factors that make it difficult for you to read into the trends in bookings versus customer deposits.

Okay, and then -- thanks.

The other question was on the cost guidance.

So for the second quarter, the guidance looks quite high given Q2 last year, NCCs were up 8% given all the [trans] costs.

And I think even if we strip out the (inaudible) proceeds from the quarter the year before, they are still up about 6% Q2 last year and only a small bit of that seems to be the timing you mentioned from the first quarter.

Given your sort of full-year guidance for costs, you are expecting the second half looks to be roughly flat.

I am just wondering what is causing that significant improvement and whether any of the savings you mentioned are being built into your guidance.

Thank you.

I think the most significant thing that you have to think about is the fourth quarter we do expect costs to be down and the reason is, if you remember, last year in the fourth quarter, we had talked about Carnival Cruise Lines' new advertising campaign and how we had increased advertising.

So there is a different seasonalization of the advertising this year and therefore, we would expect costs to be down in the fourth quarter and that is probably the missing piece that puts it together for you.

So that shifted into Q1, Q2 this year?

You are not actually cutting your advertising, are you?

Well, we increased the whole overall advertising, but the big increase in Q1 and Q2 was on the advertising side, yes.

There were other increases in insurance and crew travel and a few other things, but the thing that drove the majority of the increase was advertising.

Okay, thank you very much.

Patrick Scholes, SunTrust.

Hi, good morning.

I have two questions for you.

You briefly talked about expectations for third-quarter revenue yields and sort of indicated just back half will be up.

What would you expect to be a stronger quarter, the third or the fourth, as far as that revenue yield growth?

Yes, we will give you that guidance when we get to next quarter.

I mean, at this point, it is built into our full year.

There's a lot of bookings left to go for the third quarter.

We are probably about halfway there and the fourth quarter is probably a third of the way there.

So there is a lot left to go.

Typically, of course, the third quarter is the strongest summer season for us.

So that bodes well for the yield in that particular timeframe, but it is a little early for us to give detailed guidance.

Okay.

We will catch up on that in the future.

And then, gentlemen, second question here.

You have talked today a bit about getting back to prior pricing levels and mentioned that hotels have gotten their -- certainly one difference between the cruise industry and the hotel industry is the different supply characteristics.

That being said, for next year, what would you -- what do you see capacity in the Caribbean shaping up and that is really maybe very important because, this year, it has been high and impacted prices.

What are your expectations for next year for the Caribbean both for yourselves and the industry?

Well, we don't have all the detailed itineraries for our competitors and everybody, but I took a look at the first quarter and for our North American brands for the first quarter, we are expecting a small decrease in the capacity in the Caribbean primarily driven by the fact that the Carnival Legend was announced as moving down to Australia, which will reduce her capacity in the Caribbean.

So that should be helpful.

I have seen other announcements, but we will be putting all that data together on a consolidated basis and hope to have that before the next call.

Historically, when there has been a big change in capacity in a destination market, and then there has been some pricing impact from that, ships tend to move out.

So I guess I won't say ships are moving out, but it is highly unlikely we'll see the level of capacity increase next year that we've seen this year.

Okay, got it.

I appreciate the color.

Thank you.

Thank you.

Brian Dobson, Nomura.

Hey, guys, two quick questions for you.

So you talked a lot about a strong post in bookings.

I suppose how much of the 2Q and 3Q are left to sell at this point?

You mentioned that you were just shy of a normalized forward booking curve, but I guess where are you more particularly?

What I had said on the previous -- in answering the previous question is that, for the current quarter, we are in 80% to 90% and then the next quarter out, 50% to 70% and I said we were towards the lower end of those ranges.

So that gives you a good indication of where we are for Q2 and Q3.

And then I guess thinking about your recent ship renovations, can you give any color on the type of premium pricing that you are seeing or the returns on those Fun Ship 2.0 renovations?

Yes, I think on Fun Ship 2.0, it's certainly one of the reasons why we've seen the accelerated recovery in the brand.

I don't think there is any doubt about that.

And so even though we have got tough comparisons given all the moving parts and all the various variables, there is no question in our minds that Fun Ship 2.0 has lifted our yields relative to where they would have been and have probably lifted our occupancy as well.

So we are absolutely declaring success on that one.

And we continue to innovate.

As you know, we have the 60 concerts that are planned for the Carnival brand this year.

We are seeing some lift across a number of those as well both in terms of booking trends and pricing.

On the Carnival Sunshine, which was a major refurbishment, we had planned that out with extra revenue on the additional cabins that we had put in, extra onboard revenue relating, as Arnold indicated, to all the Fun Ship 2.0 improvements.

The one thing that turned out to be very favorable that we hadn't anticipated or didn't put into our forecasts, I should say, was the extra ticket pricing and the premium we were getting there as a result of the refurbishment.

So we were very pleased with that.

It's virtually like a newbuild, we renamed the ship and added a lot of great features with the waterpark and the ropes course and all.

So we are pleased with that.

We are seeing that the refurbishments have a positive halo effect across the fleet.

We bring out the new features on the new ships and then we try to retrofit them across the fleet to maintain a consistent brand standard.

And that is very powerful and very helpful.

And we have been doing that for a while and we will continue to do that as we move forward.

Okay, thanks.

Wyn Ellis, Numis.

Yes, hi, good morning.

I have just got three questions, if I can, please.

First of all, on Japan, you said it is only 1% of your capacity for this year.

Could you clarify for us what it will cost you, you think, in EPS terms?

And then secondly on the Ukraine, have you seen any impact of the unrest there and the political maneuvers and have you built that into your guidance for this year, any additional caution?

And then finally just a question on advertising.

I think, Arnold, in your opening remarks, you said it would be up about 14% this year.

Is that something you would expect to continue in following years?

Okay, so, first of all, with regards to the Ukraine, the geopolitical issues happen periodically almost every year somewhere and clearly, the Ukraine has impacted some itineraries in terms of demand and attitude and orientation for guests to seek a particular itinerary.

And it has had a bit of a halo effect for a period of time on the European bookings period.

On the other hand, European bookings continue to be strong and we are seeing good yield and good occupancy trends there.

So yes, it has had an impact, but there's a lot of variables and it all comes out in the wash so to say.

And it only represents about 0.7% of our capacity, so there is some halo effect going across.

Go ahead, David.

You wanted to make --.

Yes, I think as far as the overall forecast is concerned, what we did is we assumed that things remained the same, that things didn't deteriorate and we built the forecast on that premise.

Costa has announced some changes in their itinerary because they had some -- a ship going to the Ukraine in May.

They are replacing the Ukraine with Bulgaria and an overnight in Istanbul that has been announced.

There are some other -- Costa and AIDA and if I remember correctly Seabourn go there in the third quarter and we are monitoring that carefully and I would expect that those itineraries would change as well.

As far as Japan is concerned, I guess it is safe to say that, like many new markets when you enter, you do have to invest a little bit.

I have used that term before; it is a nice way of saying we are losing some money in the market, but we are very bullish on the overall prospect for Japan and we believe it is worth the investment as we continue to develop the market.

As far as advertising --.

Yes, the advertising, the increases I referenced was over 2012.

We went back a couple of years because of the increases that we did put in place in the 2013 year at the end.

But, directionally, we will make an ongoing judgment.

I am always looking to see impact for dollars invested.

We had not advertised, for example, in the Princess line for almost 10 years for an ad campaign and so we will examine it.

I am a personal believer in pulsing, that you advertise for a period of time, then you take a little break and you advertise -- we have 10 brands we can manage that over, but we will see how it works out and I don't have any preconceived notions.

I want to hear from the brands in terms of what they think is having the greatest impact and the evidence they can provide of that.

Fundamentally, we are going to promote our brands and from an overall direction, I don't have a big prediction for you, but I don't see us doing anything dramatically in terms of dramatic increases absent a clear return prospect.

Yes, of the 20% that Arnold mentioned versus 2012, a little bit more than half of that was last year and the rest of it was in 2014.

I had indicated in December part of the increase was due to higher advertising.

Okay, thank you very much.

Edward Stanford, Lazarus Partnership.

Good morning.

Just one question if I may.

Could you give us an update on where you are with fitting the scrubber technology to your vessels and the extent to which, as a percentage of the fleet, will be embodied by the end of the year please?

Sure.

Go ahead, David, on the percentage.

Today, we had put it previously on the Queen Victoria.

I think we had said that on previous calls that we were testing it and it was working well and we were pleased with the results.

We put it on six additional ships, probably have 20 plus ships with scrubbers before the end of the year.

Between that and the exemptions that we got for 2015, we had indicated in the 10-K that we didn't expect to see the ECA have a significant impact on our cost structure for 2015.

The numbers previously in prior 10-Ks were a few hundred million dollar impact as a result of the low sulfur fuel.

We are progressing.

We are pleased with the progress we are making, and we will continue to roll the scrubbers out over time, both in 2015 and 2016.

Thank you.

Steven Kent, Goldman Sachs.

Just a quick question on the impact of the Galveston oil spill.

Should we be thinking about that as having any EPS impact in the next quarter, and what is your current thoughts on that and where those ships stand?

Okay.

Well, there are three ships that are currently in port, two Carnival ships and one Princess ship.

Unfortunately, we don't know exactly when the channel will open up.

Where, I guess, at the moment if the channel opened up this week and the future cruises were to occur as normal, it might cost us a penny in the second quarter.

But this is a fluid situation and I do hope they can get it cleaned up and the channel open this week.

We do -- by the way, under current law we do expect recovery of the lost revenue in the incremental costs under the OPA regulations and insurance.

So we would expect to see a recovery at some point later this year, the additional costs.

Yes, for the full year unless something really prolongs this, we don't see a material impact on our guidance.

Great, thank you.

Robin Farley, UBS.

Thanks.

I wonder if you could give a little bit of color on, you mentioned the other European brands excluding Costa being down in Q1.

Just sort of a little bit of color on those factors.

Sure.

You know -- and AIDA, unfortunately, because of the loss of the Red Sea program and the very popular Egypt itineraries, we had to make some changes.

Those didn't occur this year.

And as a result, the yields were down just a little bit in the first quarter.

In the UK, you know, the UK has done some changes to their pricing programs and their commission structure.

So while their first quarter was impacted, we do expect an improving trend in the UK overall.

So hopefully, that gives you a little bit more color on what is going on.

And I would say in general in Europe, we do -- as I mentioned early on the call -- with the booking curves being moved out, we see strength in Europe.

And again, it is reflected in our guidance, but we actually see a strong performance collectively in Europe this year.

Okay, great.

Thank you.

Tim Conder, Wells Fargo.

That's fine.

My previous question was just answered.

Thank you.

Thank you very much.

And there's no further questions at this time.

I'll now turn the call back over to you, Mr. Donald.

Okay, thank you all very much.

We look forward to visiting with you next quarter and in between, and thank you for your time.

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.

Have a great day, everyone.