嘉年華遊輪 (CCL) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Carnival Corporation's second quarter 2014 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 Tuesday, June 24, 2014.

I would now like to turn the conference over to Arnold Donald, President and CEO of Carnival Corporation LLC.

Please go ahead, sir.

Hello, everyone.

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

I'll start with a few comments, and then I'll hand it over to David to review in more depth the quarter results and some looks ahead.

So first of all, it feels like we've turned a bit of a corner.

We achieved not only better than expected results for the second quarter, but we also achieved year-over-year earnings growth; and we are working very hard to build on our current momentum.

Our progress is a credit to the outstanding efforts of our 120,000 shipboard and shore side team members who strive to create exceptional vacation experiences each and every day for our 10 million-plus guests around the globe.

We were pleased to see our European brands revenue yields turn positive in the second quarter and particularly encouraged by the favorable pricing trends emerging not only in Europe, but in North America, as well.

We are making every effort to maintain pricing integrity, despite aggressive price moves by other cruise lines, even if it means giving up a little more occupancy than we had planned, as was the case, for example, in our summer Caribbean deployment.

We believe this strategy can have positive implications next year and particularly as we have already rebalanced our deployment for 2015.

So next year, we expect flat capacity in Europe and Alaska for our brands and a slight reduction in Caribbean deployment, with a notable double-digit decline in the third quarter.

And we hope that will make for a better balance between supply and demand in our more established markets in both North America and Europe.

As we had anticipated, our capacity growth in both Asia and Australia is up mid-to high teens next year, albeit off a very small base, as we continue to expand our global footprint.

We were the first major cruise company to enter China.

In fact, we have home ported in China now for over eight years and we can feel the momentum building.

During the quarter, we announced deploying a fourth ship to serve the fast-growing China market next year; and in addition, we also announced the transfer of two smaller Holland America ships to support the growth of the P&O Australia brand.

And we also made significant progress on a number of strategic initiatives this quarter which we expect will improve our operating performance going forward, beginning with our recent decision to rationalize our brand portfolio by absorbing the smaller Ibero Cruises brand in Spain into the Costa brand by the end of the year.

Costa's had a leading presence in Spain for many years and is already well-established there.

We believe the Costa brand can serve our Spanish guests, exceeding their cruise vacations expectations while improving efficiency for our Company.

Now one of Ibero's two ships, the Grand Celebration, will be transferred to the Costa fleet and become the Costa Celebration.

The remaining Ibero ship will leave the fleet later this year.

This is in keeping with our ongoing strategy to optimize our fleet by selling or disposing of older, less profitable vessels.

This brings the total to five ships which we have sold or will leave the fleet in 2014 and 2015, including three smaller seaborne ships and one Costa ship.

Both brands have one larger, more efficient ship expected to be delivered by 2016, which will replace that capacity and generate higher returns.

Now while these new ships will result in a small net addition of capacity, their real advantage is a tremendous increase in efficiency, including offering higher-yielding balcony cabins, more than 20% lower unit costs, and greater than 40% fuel efficiency, while at the same time enhancing the guest experience.

As you know, optimizing our fleet is an ongoing process and we have a number of ships remaining in the fleet that we expect to replace with newer, larger, more fuel-efficient vessels over time, as we continue to advance our fleet.

We remain focused on elevating our customer experience through both new ships entering service, like the Regal Princess, which was introduced this quarter, as well as the new product initiatives being rolled out across the existing fleet.

For example, Carnival Cruise Lines launched the first of its Carnival Live concert series this past quarter with a number of sold-out performances.

In fact, just last week, Jennifer Hudson performed sold-out shows on board two of our ships in Cozumel.

We have received great feedback on the guest experience, which should result in even higher guest satisfaction scores; and we have sold thousands of tickets to date for this concert series.

Given the positive response, we have already begun working on the 2015 program.

In March, we also officially launched our Suess at Sea program on Carnival Splendor, and in May debuted a new marine-themed children's program, Carnival's Camp Ocean, onboard Carnival Freedom.

Both programs are extremely popular with our family segment and will be rolled out fleet-wide across the Carnival brand.

Now these are just a few examples of new product development that will better attract and serve our differing target customer psychographics across our portfolio of leading brands.

At the same time, increasing our fuel efficiency fleet-wide continues to be a cornerstone of our strategy to improve returns.

We remain on track in our effort to reduce fuel consumption by 25% in 2014 when compared to 2007.

Moreover, we have rolled out our leading edge scrubber technology on a dozen more vessels so far this year, in order to mitigate the higher cost of fuel under the pending eco requirements.

We have made progress on a number of other initiatives to leverage our scale, as well.

Those are still in early stages and we expect we'll be in a position to share more down the road.

These initiatives have been met with strong enthusiasm and a sense of renewed energy by our teams around the world; however, they will take some time and, of course, a lot of effort to fully implement.

On the revenue side, our brand segmentation study is well underway and we are conducting conversations with thousands of consumers, both cruisers and non-cruisers, and we've reviewed 30 million guest records to understand what our guests love about our brands and what we can do to increase loyalty across our portfolio.

We believe it to be the largest ever quantitative market research study of the cruise and leisure market.

At the same time, we are conducting a global review of our revenue management systems, processes and strategies.

We have commissioned a team of leading revenue management experts who have already begun visiting our major brands to identify best practices and new opportunities to improve our revenue management tools and stochastic modeling.

We believe these are opportunities that will allow us to capture higher yields.

On the cost side, our group travel sourcing initiative is well underway.

We recently issued a global RFP to the broad network of airlines we use around the world.

We are among the largest air travel buyers in the world and have historically taken a regional view for these relationships.

Now, we'll take a global view.

Although it's premature to quantify the impact, we expect to begin to see benefit as early as next year; and we will communicate to you as we achieve the major milestones.

We also in the process of issuing RFPs for global sourcing of our largest food products in regions of common deployment, and that is beyond the major regions where we are already leveraging our size.

We are now focused on capitalizing on our scale in Australia and parts of Europe.

As I indicated in the press release, I believe we are experiencing an inflection point for our Company.

I'm excited about the future and we are fully committed to moving forward at an aggressive pace, as we simultaneously execute a number of initiatives to improve return on invested capital over time.

I'd now like to turn to turn it over to David Bernstein for some comments, and after his, we'll take Q&A.

David?

Thank you, Arnold.

Before I begin, please note that if 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 strengths.

I will start today with a summary of our second quarter results and then get into more detail on first, our overall positive booking status; second, our yield expectations for the remainder of the year; and third, our booking patterns by program or deployment for each of our two major business segments; the North American brand and the European, Australia and Asian brands, known as our EAA brands.

I will then finish up with an update on our improved full-year 2014 June guidance.

Our non-GAAP net income for the second quarter was $80 million.

I'm pleased to report that our second quarter non-GAAP EPS was $0.10 above the midpoint of our March guidance.

And that was driven mainly by two things.

First, better than expected net revenue yields at most of our brands worth $0.04, which was split between net ticket and net onboard and other yields.

And second, lower than expected net cruise costs without fuel, which was also worth $0.04; and that was due to lower than expected occupancy, as well as the timing of certain expenses between the quarters.

Now let's turn to the second quarter operating results versus the prior year.

Our capacity increased 5%.

The North American brands were up 8%, while the EAA brands were flat.

Our total net revenue yields in the second quarter declined just over 2%.

So let's break apart the two components of net revenue yields.

Net ticket yields declined almost 4%, and that was driven by our North American brands, which were down over 7%, as anticipated in our March guidance.

This was due to the promotional pricing environment in the Caribbean resulting from the large increase in industry capacity.

However, our EAA brands were up over 2%, and that was driven by better-than-expected improvements in our Continental European brands.

Net onboard and other yields increased over 2%, despite the lower occupancy, with increases on both sides of the Atlantic.

Net cruise costs for available lower berth days, excluding fuels, was up just over 1%; and that was driven by higher advertising spend, as we invested to accelerate the recovery in ticket prices and higher dry dock costs.

As a result of our ongoing efforts to reduce fuel consumption, I am happy to report that our consumption per ALBD declined 6% this quarter and saved us $0.04 versus the prior year.

In summary, our second quarter non-GAAP EPS was $0.03 higher than the prior year.

It was driven by improved fuel consumption, lower fuel prices, and favorable exchange rates, all of which was partially offset by lower net revenue yields and slightly higher net cruise costs without fuel.

Now looking at the fine print for our recent booking trends and yield expectations for the remainder of 2014.

We are excited that during the second quarter our overall bookings curve continued to lengthen, a trend which began during the first quarter and was highlighted on our last conference call.

We are pleased with the overall new direction and anticipate that this trend will continue.

At this point, cumulative fleet-wide bookings for the remainder of the year are slightly ahead, at higher prices; however, the pattern is different for each of the two major business segments.

Our EAA brands are significantly ahead on occupancy with flat prices, which bodes well for pricing on the remaining inventory.

The North American brands are ahead on price, but are still behind on occupancy as a result of the large increase in industry capacity in the Caribbean.

Given these booking trends, we expect yields for the third quarter to be flat to down slightly compared to the prior year.

Our EAA brand yields, which turned positive in the second quarter compared to the prior year, are doing well and are forecasted to be positive for the remainder of the year; however, we don't expect our North American brand yields to turn positive compared to the prior year until fourth quarter.

As we discussed on the prior calls, for the better part of the last year, Carnival Cruise Lines has been following a new revenue management tactic, holding price and giving up a few percentage points of occupancy.

While we mentioned this before that it is has benefited us over the last few quarters, it's still a technique that we're analyzing.

In the interim, Carnival has continued with this approach; and as a result, we are forecasting slightly lower occupancies for the third quarter.

Remember that yield is a combination of price and occupancy.

It's the lower occupancy that's causing our yields to be lower for our North American brands and the Company in the third quarter; however, ticket prices are forecasted to be higher, which is an encouraging sign.

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

We exceeded our second quarter yield guidance and did roll the $0.04 benefit into the year; however, $0.04 is only a quarter of a percentage point for the full year.

Overall, the back half of the year, our forecast has not changed, with a slight improvement in the fourth quarter offsetting the lower occupancy in the third quarter.

While our net revenue yield guidance has a number of moving parts, I am pleased to say that the overall general direction is slightly positive towards higher yields.

Now looking at the booking patterns by program or deployment for each of the two major business segments for the remainder of the year.

First, for our North American brand.

I'll walk you through the Caribbean, Alaska, and their seasonal European program.

The Caribbean is behind on occupancy, but ahead on price and represents almost 44% of the remainder of the year for the North American brand.

Booking volumes during the last quarter have been good.

They've been higher than the prior year, albeit at promotional rates.

Alaska is nicely ahead on both price and occupancy, which bodes well for the remaining inventory.

The seasonal European program for our North American brands is strong, and we are well ahead on both price and occupancy.

For our EAA brands, the year-round European program, which represents almost 80% of the EAA brands' capacity for the remainder of the year, is significantly ahead on occupancy, with flat pricing.

Recent booking volumes are leading expectations at nicely higher prices.

Switching to costs.

Our full-year cost guidance has improved slightly from our March guidance, as we now expect net cruise costs, excluding fuel, for ALBD to be flat to up slightly.

The improvement comes from lower occupancy and greater collaboration amongst our brands.

We feel good about the small wins to date and the greater collaboration bears fruit, and we look forward to bigger wins.

Of course, the bigger wins generally take more time to realize.

Putting all these factors together, our 2014 non-GAAP EPS guidance is $1.60 to $1.75 per share, with a midpoint that is higher than our previous guidance.

Essentially, we've flowed through the better than expected second quarter revenue yields worth $0.04, the improved cost guidance worth $0.06, and improved fuel consumption and other items worth $0.04, all of which was partially offset by higher fuel prices and unfavorable currency movements worth $0.06.

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

Thank you, David.

And we'll open up, Melody, to Q&A, please?

Thank you.

Thank you.

(Operator Instructions)

Robin Farley, UBS.

I wanted to ask about Q3, because you had such a strong result in Q2 versus your expectations.

And I think the general expectation had been that your yields would start to be positive in Q3, even with the weak Caribbean, since Caribbean's only, I think, about 27% of your capacity in Q3.

And given the strength in Europe and Alaska, maybe it's surprising that the 73%, or the rest of the fleet, isn't enough to get Q3 into positive territory.

So, I wonder if you could give us a little bit more color on what the degree -- if Europe is up double digits, that is kind of implying very large double-digit declines in Q3 in the Caribbean, on top of what had already been a tough Caribbean season last year for you.

So, I wonder if you could give a little more color around that?

Sure.

Well, to start with, we had indicated that we thought our yields would be slightly positive in the third quarter, last time.

So, all we're talking about is a very small movement, from a tad positive to slightly negative, at this point.

And it was a more promotional environment in the Caribbean than we had anticipated.

And as a result, Carnival Cruise Lines decided to hold price and give up the occupancy.

And it's the lower occupancy that's driving the yield down.

As I indicated in my notes, the ticket prices are moving in a positive direction overall.

So, we were very pleased with that.

But it's the lower occupancy, and it's a couple of points of occupancy overall that we're expecting lower from this year -- from last year to this year, which is driving the price down -- or the yield down, sorry.

Is it fair to say that European yields are up double digit in Q3, and Alaska up at least high-single digit -- just to try to get a sense of the huge variance here versus the Caribbean.

Yes.

We didn't indicate that Europe was up double digits.

What we had indicated was that bookings and pricing are well ahead and very strong, and Europe was doing very well for our North American brand; Alaska, the same thing.

And that the EAA brands were moving in a positive direction, and we were expecting single-digit increases in all the categories.

And then, I guess just lastly, in Q4, which you're expecting to be positive now, but just thinking about some of the same issues continuing into Q4, and since there's a slightly higher concentration of Caribbean in Q4 versus Q3, I guess just trying to get a sense of your conviction level.

There's probably some late fall Caribbean that is still unbooked.

And how do you get comfortable that Q4 will absolutely bring the full year to your full-year guidance, really all being carried by Q4?

I think what we do is try to give our best guess of where we are today given the booking trends; given what we're seeing on the books.

One of the big differences between Q3 and Q4 is that the increase in the Caribbean as an industry is significantly less.

I think it's up 13% in Q4 versus like 22% in Q3.

So, we are expecting to see a better Caribbean overall environment in Q4 than we saw in Q3, on a comparative basis.

And, therefore, we are anticipating that yields will be up slightly in Q4, as part of our overall guidance.

So, we feel good.

It's looking at what we have on the books and what we have remaining to sell that gives us the confidence that the yields will turn positive in Q4.

And as a Company, our capacity growth in the fourth quarter is only 5%, 6% in the Caribbean, which is a much lower hurdle for us as an entity versus the 19% we absorbed in the third quarter.

Okay.

Great.

Thank you.

Steve Kent, Goldman Sachs.

Arnold, could you just talk a little bit about the air expense reduction?

How big of an opportunity is that?

At one point, I thought it was measured in the hundreds of millions of dollars.

And I'm just wondering: What's the delay, or what could accelerate that?

And then, just to Robin's question, because it doesn't really make a whole lot of sense, the guidance for Q3 -- is something happening on last-minute bookings?

Are last-minute bookings coming in a lot better than expected?

And is that Europe or North America that maybe is doing that?

First of all, on the air question, overall between the air and port combination team that we've put together, they're dealing with about $1.1 billion or $1.2 billion of annual costs.

The air component of that is split between crew and passengers, charters for passengers in Europe, et cetera.

But there is an opportunity there, for certain.

We've issued the RFP.

We are going to be in negotiations with a number of airlines.

And so, we're not throwing any numbers around, for obvious reasons.

But the reality is: There will be an opportunity there, for certain, to capture some value by leveraging our scale.

And we fully expect to begin to see the benefit of that next year.

With regard to your comment about hundreds of millions of dollars, I wouldn't anticipate being able to say it's 50% or 30% of the costs or anything like that, which would result in your hundreds of millions of dollars on other basis.

But we certainly have an opportunity to save substantial dollars that could contribute to the bottom line.

And of course, we have the initiatives across in all other areas, as well, with regards to provisions and technical stores, et cetera.

Your second question again?

Yes, go ahead, David.

Yes.

As far as the last-minute bookings and what's happening, in the first quarter what we had indicated was that the last-minute bookings on Carnival Cruise Lines in the Caribbean were better than anticipated.

And remember: The first-quarter Caribbean capacity was only up a couple of percentage points.

It was the second, third and fourth quarter that were up significantly on a year-over-year basis.

In the second quarter, as I indicated in my notes, as far as the ticket revenue was concerned, it was the EAA brands, particularly the Continental European brands, that performed a little bit better than we had expected.

Of course, the overall increase in yield year over year had to do with -- some of it was ticket, and some of it was onboard and other yield, as well.

Some of the programs on board, particularly our casino program and our casino partnerships, are bearing fruit.

And the on-board revenue did well in the second quarter.

And we didn't change the on-board revenue for the remainder of the year, despite the lower occupancy, because of some of the improvements that we're seeing.

What I can tell you, in regards to the guidance -- the question's come up a couple of times in different ways -- obviously, we have confidence in the guidance we provided.

We anticipated a number of the things that have occurred already this year.

We feel we have reasonable line of sight, barring unforeseen mega macro issues, that we have confidence in the guidance that we provided for the year.

Go ahead.

You had a second -- ?

Okay.

Thanks.

I was just going to say: Given what you're seeing so far, and given what you've seen in Q1, Q2, that better-than-expected results or better-than-expected bookings are coming in -- David, you said that it was Europe in Q2.

And given what Robin and I are both seeing, which is that you have a lot of capacity in Europe for Q3, it's surprising that that wouldn't carry over into Q3.

I understand what you're saying.

It's a mix of a number of different things and factors.

Just as an example, one of the things we talked about on the last conference call were the expectations for Japan, which had an impact on the third quarter, as well.

So, there are a lot of factors that are coming together, including the lower occupancy in the Caribbean, Japan, and other things, which is yielding our net guidance.

Okay.

Thank you.

Felicia Hendrix, Barclays.

David, the promotional environment in the Caribbean that's been persistent, and we've all known about it -- is it worse than what you thought it would be when you last reported your quarter?

I think it's fair to say the fact that -- the guidance for the third quarter, it's fair to say that, as I indicated before, a little bit worse than we had anticipated.

But there are other positives that are more than offsetting that, and that's why the net trend is positive.

We're never going to get everything perfectly correct.

There's always some pluses and minuses.

Right.

That's fair.

So, it's also fair to say: You reported the ticket prices in North American yields were down 7% in the second quarter.

It's fair to say that that will be worse in the third quarter, correct?

No.

No.

Not at all.

You have different comparisons, right?

So, first of all, the first half of last year was booked prior to the barge disruptions that caused a number of issues for us, and the industry in general.

So, you've got a different comparison, half to half.

So, we're not saying we're going to be down 7% in the third quarter, or anything like that.

David?

Okay.

So, you say you're going to see sequential improvement in yields generally.

You'll see sequential improvement in the Caribbean, as well?

I guess that's what I'm trying to get to.

And for the North American brands, had it not been for the change in capacity, as I said, the ticket prices were up and we would have gotten -- a change in occupancy -- we would have gotten higher yields.

So, it's the lower occupancy that's driving it.

(multiple speakers) I just want to say: We are seeing a recovery from the down over 2 in the second quarter, to the flat, to slightly down in the third quarter.

So, things are improving.

I'm just trying to separate out the Caribbean, but I get it; you were clear.

Let's move on to costs for a second.

Arnold, regarding your initiatives, you've been pretty consistent to say that a more detailed discussion of these is going to take some time, and you reiterated that again today.

Just wondering: You've been in your role for a year, and you've been examining these costs.

Just wondering if you could give us some sense of when you might be ready to discuss that.

And then also, will the cost initiatives be incremental to your cost base, or will they be used to reinvest in the Business and offset inflation?

How should we think about those?

First off, it hasn't been a year yet.

I have all the way to, I think, July 3 for that.

(laughter)

Okay.

I'm rounding, I'm sorry.

In any event, with regards to the cost, we have a number of initiatives, as I mentioned, underway.

In the end, we want to deliver the results.

And so, the best way to do that, at times -- we have a lot of things to manage, including the negotiations with outside parties.

And so, we're not too anxious to float numbers around, for obvious reasons, because they can obviously influence the discussion.

We could glob a bunch of numbers together across various initiatives or whatever, but I'd rather let the truth, as I mentioned to you before, bottom it up.

And as I mentioned before, they often come through much more aggressively than if we just mandated arbitrary targets.

So, it's going well.

We're beginning to experience every day, just through the ongoing behavior of collaboration and coordination and communication across the brands, we begin to see benefits in cost areas, as well as in revenue-generating areas and sharing of best practices.

And we're beginning to see results.

And we feel good about our quarter, and we feel good about the year.

We feel very good about looking ahead to the future and realizing those.

So, we will reveal along the way.

Once we've completed the RFPs and have done a good deal, we'll probably share the level of cost improvements that we've been able to achieve.

But that would be more likely the process in some of these areas.

With regard to -- what was your second question?

Well, just, as we anticipate this, should we think about these initiatives as being incremental to your cost base?

In other words, improving it, or are they basically going to be used to reinvest in the Business and offset inflation?

It's going to be a combination of it.

We have our annual strategy reviews in August and September.

The brands will all come in with their plans and requests for investments and what have you.

Where we see line of sight on an investment producing higher returns, we'll make that investment.

And where we don't, we probably won't.

And so, some of the savings, I'm sure, will go to smart investments that -- a more powerful bottom line.

And some of it will directly go to the bottom line.

Okay.

Great.

Thank you so much.

Harry Curtis, Nomura.

Let's just look ahead to global capacity shifts in 2015.

I think you made a brief comment about your expectations for Europe and the Caribbean.

Could you just review those again, with respect -- or maybe keeping in mind the 4% to 5% increase in fleet capacity overall -- what are your expectations, not only for what you expect, but also what you expect in capacity growth in the Caribbean and Europe next year?

I think everybody wants to answer that one.

Go ahead, David.

Overall, our capacity for the year is up a little over 2%.

And as Arnold said, we were looking at relatively flat capacity in Europe year over year; flat in Alaska.

On a full-year basis, we're looking at the Caribbean being down slightly.

But there's a couple of big things there.

Particularly in the third quarter, I think Arnold mentioned, double-digit decline in the Caribbean; so, that should bode well for pricing.

And the other thing is, as we've indicated before, within the Caribbean, the biggest promotional activity has been in the South Florida market.

And we are also making some changes in the overall deployment around the Caribbean.

So, while it's going down, it's also being redeployed and changing, as well.

And we had talked about the double-digit increases in both Asia and Australia and New Zealand.

So, that's where we're investing overall, and that's where the overall increase in capacity is going.

We see some capacity reduction in the industry, as well -- in the rest of the industry -- in the third quarter next year, in the Caribbean, for example.

And overall for the year, some reduction by the rest of the industry.

So, that should help things, with the added time and investment in marketing, and all those people that are sailing this year having great experiences on board and already thinking about booking next year.

So, all that should bode for a better environment in the Caribbean next year than we experienced (inaudible).

Okay.

So, as a follow-up, industry-wide there should be a lift of roughly 8 to 10 ships next year.

Where do you think they're going?

And how are you positioning yourselves in those markets against those other new ships coming?

For the industry growth for 2015, we do have the North American brands pretty flat.

Our European -- the industry has an increase in European brands of roughly 6%.

And the Asia-Pacific region is really carrying the most growth, at 16% for the industry.

That is off a very small base.

Okay.

Let me just quickly touch on one last question.

When we think about the Carnival brand, how has that been rebounding relative to your expectations, particularly in the Caribbean, over the last three to four, five months?

And can you give us an update on where the Carnival pricing has rebounded to versus where it was?

With regards to the brand image, it has rebounded very well.

And it continues to muster great brand image strength, driven -- in no small part, due to the fact that we have a lot of people sailing on Carnival, and they are thrilled with the experience.

So, both from a broader consumer perspective, but certainly amongst those that are cruising, the Carnival brand image recovery has been very strong.

And kudos and hats off to our employees and that brand -- the leadership of that brand -- for all the initiatives they undertook to help make that happen.

With regard to the second part of the question, David?

We don't give detail by brand and ticket yields and pricing for each of our individual brands.

But it's fair to say that overall, the rebound has not been what we had hoped, because of the promotional pricing environment in the Caribbean for Carnival, and occupancy as well.

We're holding price and giving up the occupancy.

And that's worked very well for us over the last year, and we'll keep analyzing that and see where we go.

But hopefully next year, with the redeployment in the Caribbean and the lower capacity, we do hope to be able to fill the ships and to bear those fruits and get the yields up.

That's great.

Thanks, guys.

Jaime Katz, Morningstar.

First, I'm curious if you guys are willing to comment on where your best opportunities on the cost side are?

Not necessarily putting a dollar amount with it, but obviously the costs have been pretty well controlled in recent years.

So, where are your best opportunities to continue on that path?

And second, how do we think about the Asia-Pacific market potential longer term and the cadence of moving ships into that territory without overpenetrating it too quickly?

Thank you, Jaime, for your questions.

With regards to the cost side, first of all, we do have opportunities everywhere.

We do.

If you try to force-rank them, you'd have to come up with categorizations.

So, if you take some broad categories, like air and port, and provisions, food, hotel services, different things, they're very large buckets, and the teams are resolving exactly what their targets are.

Right now, I'd say that there's considerable opportunity across all of them, and cumulatively, 1% improvement, non-fuel, non-payroll.

So, leaving payroll out of it, leaving fuel costs out of it, a 1% cost improvement yields $60 million to us, okay?

And so, we're mining every aspect, because just a few percentage points can give us significant positive impact.

And I'd like to leave it at that for now.

But I want you to know we have a focus on it.

And where it emanates from is just coordination and communication, and then single sourcing, in some instances, or limited sourcing, multi-sourcing across the brands and just leveraging the scale that we have.

The brands individually have done good jobs at managing their costs.

Some of the brands have done outstanding jobs.

And we want to mine those best practices -- deploy them across the fleet and across the brands, and then leverage the scale we have in negotiations, and take advantage of that.

And doing that, as I mentioned, a 1% improvement is worth $60 million to us.

So, that would be how I would answer that question.

And as far as Asia-Pacific region and the growth in the long term, the market has tremendous potential.

When you look, particularly at China, which is the largest market, and you look at the areas in Shanghai, Beijing, Guandong province, you're talking about over 130 million people, probably double the size of the UK.

So, there's a lot of opportunity there.

We've been growing the market slowly, taking it one ship at a time, making the decisions as we go along.

And China and Asia are doing very well for us, and we're looking forward as a great growth opportunity for us over the next few years.

There's always the risk of timing; if everybody floods the market at once, and so on and so forth.

But right now, with what we're able to see looking ahead, we continue to see China as very promising.

Australia is definitely a hot market and people want to send their ships there.

And if you're going to be in China, you're not going to be there all year long; you're probably going to spend some time in Australia with the ships and so on.

And so, all that adds some complexity.

But we feel very well positioned in those markets.

We feel that the growth that we've staged and what we see coming from the industry, on balance, nets positive in the short term and very positive in the long term.

Thank you.

Lena Thakkar, HSBC.

Couple of questions: Firstly, I know you don't discuss performance by brand, but I think you've made an exception for Costa in the past.

Can you help us understand how much of the 15% yield loss you're planning to recover this year, and, therefore, how the European pricing is weighted towards that Costa recovery?

And then secondly, more generally, on the occupancy and price dynamic, you've clearly changed the way you think about that.

And I'm just wondering if that's a more longer-term dynamic, whether you will continue to give up occupancy in various markets where it makes sense?

And just on that, does it mean we should think about a different EPS sensitivity to yield change, given the mix of occupancy and price?

Okay, so, on the latter part of your question, we have focused in a couple of markets on trying to ensure some price integrity.

We continue to pursue that, and we will as long as we see net benefit.

If ultimately we don't see net benefit, we would discontinue that.

And each market is its own market, its own source of guests, and how they buy and shop, and how they think.

And we really have to be careful, one-size-fits-all, even one-size-fits-all-times even.

And so, we're going to be very disciplined and very analytical in our approaches, so we do, in fact, optimize.

Because, as I mentioned many times to you all, the reality is: We fill 78 million-plus passenger cruise days a year.

And $1 more per day is worth $78 million to us.

So, the details matter.

And the discipline and the fine tuning matters.

So, I wouldn't want the team to be operating on a one broad swoop anything, because that's not going to optimize the return for us and accelerate our path to return on invested capital.

So, there is no grand single scheme plan.

So, I want to make that really clear.

The second thing, with regards to that is, if you look at Europe in particular, the booking patterns have improved.

So, people are booking further ahead than they did the prior year.

Occupancy is up.

Yields are up.

So, that's all very positive stuff.

We expect to see similar trends, in due course, on a consistent basis in North America, as well.

I don't know if David had any additional comments he wanted to make, or Beth, but go right ahead.

I guess, Costa was down 16% as a result of the incident.

And we had given out some information on the brand because of the circumstance.

Last year, in 2013, we had indicated they rebounded 4 points.

It was less than we had hoped, because they were facing economic headwinds.

This year, Costa does continue to improve.

It's a few points higher than the prior year.

So, it keeps going in the positive direction.

But as you had indicated, we're trying to stay away from giving brand-by-brand improvement, or brand-to-brand changes.

Okay.

And just as a quick follow-up, Arnold, you talked about the net benefit of the pricing and occupancy dynamic.

Are you thinking net benefit for just this year, i.e., the short term, or the future benefits of holding that price and how that may help to perhaps derive a bit more pricing power?

Absolutely, we're thinking over time, and monitoring carefully and tracking carefully to see if we're having the desired effect.

So, it's not just in the moment.

We are thinking longer term, no question about that.

Okay.

Thanks very much.

Tim Conder, Wells Fargo Securities.

Let's return to the Caribbean, and the Carnival brand in particular.

Again, in the third quarter, you said that you've given up a little bit more occupancy to hold price.

As we look to fourth and first quarter, going forward, and granted you've got more capacity in the Caribbean seasonally, but year over year the capacity growth is slowing for yourselves and the industry, have we reached the inflection point in the Caribbean to where potentially that occupancy can improve, along with price or hold price, and occupancy can improve in the fourth and first quarters, at this point?

Go ahead, David.

Given what we're seeing in the overall booking trend, and the pricing and everything else, I do believe that we can see yield improvement overall in the Caribbean.

And the Caribbean does vary by quarter significantly.

We see the third quarter -- as we said, we gave up price and occupancy for the CCL brand.

We gave -- I'm sorry -- we gave up occupancy and held price.

And in the fourth quarter, the brand still expects to hold price.

And overall, we do anticipate an improvement for the fourth quarter.

Okay.

So, maybe we're seeing this inflection here in the third, then moving to the fourth.

Is that fair to say then?

Yes.

That's fair to say.

Okay.

Okay.

And then, gentlemen, you had given some color regarding on-board yields -- how those that were improving nicely, both in the North American brands and in the EAA brands.

And please correct me if I'm wrong.

Did I hear that Europe -- if you just looked at it year over year in the second quarter -- had improved a little bit more than North America, or was that fairly balanced, and then the expectations for the remainder of the year?

What I said was: The EAA brands improved a little bit more than we had expected in the second quarter.

That was all -- what we had guided to.

And that's what drove the increase from our guidance.

I had indicated the North American brands were down in the second quarter.

The other comment -- in fact, I know you guys are focused pretty heavily on the Caribbean.

I can understand it.

But the bottom line is: In the fourth quarter, the capacity changes for the industry year to year in the fourth quarter are not anywhere near as dramatic as they were in the third quarter in the Caribbean.

And beyond that, we just believe a number of the things we've implemented, whether it's marketing initiatives, the pricing philosophy, whatever, we're seeing strength.

We have to play it all the way out to see where we end up.

But right now, we definitely see improvement in the fourth quarter, which gives us the confidence to give the guidance we have and increase the guidance from where we were.

Okay.

And just one last thing on the onboard.

David, is it being driven by the changes predominately on the casino, or are you seeing it in other areas of onboard, also?

We are seeing some positive things in a number of other areas.

I guess, I mentioned the casino, only because it was the largest positive of all of the variety of items.

And because David has responsibility for Casino now.

(laughter)

Okay.

That's great.

Thank you, gentlemen.

(multiple speakers)

Assia Georgieva, Infinity Research.

Beth was very helpful in providing the Caribbean capacity distribution, up 19% in Q3; up only 5% to 6% in Q4.

Could you give us capacity for the corporate entity?

Capacity, what, by quarter?

Meaning all destinations by quarter.

Assia, why don't you call back after the call.

There's a long list of details, and she'll be happy to go through it with you.

Okay.

Great.

Thank you for that.

And secondly, with Europe being so strong, I think none of us expected it to be that good this year, before wave season started.

Do you see indications for 2015, or is it still too early?

Oh, it's very early for 2015 overall.

I mean, we'll give you some indications in December, when we talk about our guidance for next year.

But overall, remember: We had been in the last (inaudible) facing some economic headwinds, particularly in Europe.

And so, it is a somewhat improving environment.

And so, hopefully, that does help us positively in 2015.

Okay.

Thank you, David.

And one last quick question: I should understand that you expect Q4 yields to be slightly up, correct?

That's correct.

That's correct.

Great.

Thank you so much.

(Operator Instructions)

Rick Lyall, John W. Bristol.

I have two questions.

First, have you commented on what the cost savings are from folding the Ibero brand into Costa?

And are there any other broader opportunities in the brand overhead structure?

First of all, let me answer the latter part of the question.

Thank you, Rick, for the question.

In terms of other opportunities, if the question is: Do we plan to roll any other brands up?

Absolutely not at this point in time.

So, we have really leading brands.

Even the Ibero decision took some time.

But Costa's so strong in Spain, and the opportunity was there to minimize marketing costs and other related costs to maintaining a separate brand.

So, given that -- and it was a small brand -- we thought it was the right thing to do.

But if you go beyond that brand, in terms of thinking about rolling up any other brands, that is not on the table right now at all.

I want to make that really clear.

Go ahead, David.

And, Rick, keep in mind that Ibero was a highly integrated brand within Costa, and it was only two ships.

It was a very tiny brand.

And so, as a result, there will be some cost savings, but you might be talking a penny or two.

We're not talking about big dollars here.

We'll take one or two more questions.

Melody?

I had a follow-up.

On your profitability in China, can you comment on where the relative profitability of China is versus other brands, or other geographies?

We have said before that, overall, the yields in China were slightly less than the corporate average.

And the thing that really drives that is somewhat on the onboard; while the gambling is great, the Chinese don't seem to drink very much.

So, there are differences, and that's what makes the yields slightly lower than the overall corporate average, at this point.

Okay.

Thank you.

We have no further questions at this time, so I'll turn it back over to you.

Thank you, everyone.

We appreciate your interest and your time.

Again, we feel good, looking forward, and we look forward to giving you guys updates along the way.

Thank you very much, everyone, and thank you, Melody.

Thank you, sir.

And ladies and gentlemen, that does conclude today's conference call.

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