嘉年華遊輪 (CCL) 2014 Q3 法說會逐字稿

Good morning.

This is Arnold Donald, CEO of Carnival Corporation & plc, I'd like to thank you all for joining us for our third-quarter 2014 earnings conference call.

Today I am joined by David Bernstein, our Chief Financial Officer; and Beth Roberts, our Vice President of Investor Relations.

Although our Chairman, Mickey Arison, is traveling today, he is on the phone with us.

Before I begin, please note that because some of our remarks on this call will be forward-looking, I must refer you to the obligatory cautionary statement in today's press release.

This is an exciting time for our Corporation.

Last quarter we indicated that we felt like we were turning the corner, and our third quarter confirmed that we have.

The 15% earnings improvement achieved in the third quarter and the increased guidance expected and an even stronger improvement in full-year earnings is truly a credit to our global team.

I'm especially pleased to see yields inflect positively in the third quarter and we are well positioned to continue that trend.

There was a notable lengthening in the booking curve particularly across our European brands, and bookings taken during the last quarter are running ahead at higher prices in both North America and Europe for the first half of next year.

As it relates to effectively leveraging our scale to drive revenue and contain costs, our efforts in communicating, collaborating and coordinating across our brands are beginning to take hold, producing a few small early wins and showing progress in areas that will deliver in 2015 and beyond.

We should have more to say in that arena next quarter.

We're wrapping up our planning process which has me very excited about our business going forward.

Fuel and environmental related investments will temporarily impact our cost progress primarily in 2015.

Frankly I'm personally impatient to realize even stronger results more quickly but it is clearly in all of our best interest to make the investments in environmental stewardship and energy-saving technology that we are planning for next year.

Not only do we view sustainability as a core guiding principle, these one-off expenses next year will yield financial benefits to us for many years to come.

As you know, higher fuel prices had a meaningful impact on our business model accounting for a 5 point reduction in return on invested capital to date.

Without mitigation, the impending eco requirements were originally expected to have a further $0.35 reduction on earnings when effective in 2015.

We plan to aggressively roll out our new technology developed over the last three years, limiting the cost impact of eco to approximately $0.10 in 2015 and virtually eliminating any impact whatsoever by 2017 while protecting the environment.

At the same time, we have a series of technology initiatives in progress related to energy efficiency in areas like propulsion, lighting and air-conditioning to name a few that we will continue to rollout during the resulting accelerated dry-dock schedule.

These initiatives have a quick payback period as we continue to steadily reduce fuel consumption in the years to come.

It is gratifying to say we have reduced our fuel consumption by another 5% this year and 25% since 2007, meeting our stated goal of delivering a 20% reduction in carbon emissions ahead of schedule.

While saving more than 1 billion gallons of fuel and $2.5 billion in fuel costs during that period.

This efficiency improvement is a testament to the breadth of efforts undertaken to reduce consumption on board the existing fleet and the energy efficient advances that have been designed into the new ships delivered during this time period.

During the third quarter, we're also pleased with the steady progress that both our Carnival and Costa brands have made.

Carnival Cruise Lines was recognized a YouGov 2014 midyear Buzz rankings report as the most-improved in consumer perception among all brands in the US.

A nice affirmation of the success of the combination of recent marketing and product initiatives as well as effective public relations.

Our teams put a lot of effort into achieving the sharp turnaround and it's gratifying to see their effort recognized.

We've had great success with Suess at Sea and Camp Ocean for the kids, and for the adults with our concert series Carnival Live.

Carnival Live has presented 24 concerts over 18,000 of our guests and will present 25 more concerts by year end with over 12,000 tickets already sold.

In addition, we recently renewed the Great Vacation Guarantee, a hassle free program that provides 110% refund if you are dissatisfied.

As you might expect, we've had very few who have requested that refund.

In fact, our guest satisfaction has increased substantially since we launched Fun Ship 2.0 in the fall of 2011.

We have now added 300 Fun ship 2.0 experiences across the Carnival Cruise Lines feet.

For the Costa brand, we have seen a steady improvement in both yield and profitability as well as a doubling of trust and confidence in brand perception in the core markets.

We are well-positioned for continued success in 2015 as we welcome the Costa Diadema to the fleet, to be celebrated November 7 during a special christening event in Genoa, Italy with the ship's godmother selected from participants in a worldwide travel agent competition.

Two days earlier on November 5 in Fort Lauderdale, Princess will also celebrate its newest cruise ship, which enters service in May, the Regal Princess, with a naming ceremony featuring the original cast members of the TV series The Love Boat as godparents.

2015 marks the 50th anniversary of Princess cruises and there are a plethora of special activities planned for our guests throughout the year.

In July, Princess announced plans to build another new ship which will enter service in 2017.

The vessel will carry 3600 passengers and feature the successful design platform introduced by sister ships Royal Princess and the aforementioned Regal Princess.

In keeping with our Company's strategy of measured capacity growth, this will be our only new build in 2017.

And we also have plans underway to sell the smaller ocean Princess.

And speaking of celebrations, the Queen Mary 2 10-year anniversary celebrations last quarter included James Taylor entertaining Cunard guests on a transatlantic crossing.

In July, Cunard, which remains the aspirational cruise experience for many around the world, was recognized as number one among the top mega ship cruise liners in Travel + Leisure's annual reader survey for the World's Best Awards 2014.

During the quarter we furthered our efforts to stimulate demand across the globe.

I'm particularly pleased with our public relations efforts, I really want to recognize the efforts of all our public relations teams across the Company.

We enjoyed a significant increase in our share of voice globally.

In fact, in the most recent quarter, our positive mentions doubled based on the many operational and guest improvements being implemented by all our brands.

While we've made great strides in getting our message out, there are many additional opportunities ahead for us.

Also with respect to stimulating demand, China continues to be a focus for emerging market development where we expect double-digit growth over the next few years.

We expect China to someday be the largest cruise market in the world.

We are already the largest cruise operator in mainland China having been the first to enter the market through our Costa brand in 2006.

Our China operations have been profitable and continue to improve as we increase yield and add more capacity.

Next year, we will again lead the industry with four ships home porting in mainland China and 12 marketing offices in the region.

At all levels, the Chinese government and government affiliate organizations including the Ministry of transport, the National Tourism Administration, the Municipal and Port Authorities, and for example Shanghai and Tianjin and the China Cruise and Yacht Industry Association have demonstrated impressive vision and have worked hard to pave the way for the development of the cruise industry in China.

Reflecting the high importance we place on future growth with China, to support our brands with strategic initiatives and coordinate our growth strategy in China, our Chief Operations Officer, Alan Buckelew, will relocate to Shanghai and manage his full corporate responsibilities from there.

Again, the third quarter was strong.

Our guidance for the year is up significantly.

We are making real progress across many fronts and we are excited about our prospects of returning to double-digit return on invested capital in the next three to five years.

And with that I'd like to turn it over to David to take you through our financial results and updated guidance.

David?

Thank you, Arnold.

Before I begin, please note 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 strength.

I'll start today with a summary of our excellent third-quarter results and then get you more detail on our improved 2014 full-year guidance.

And while it is early, I'll finish up with some preliminary insight into what we're seeing for 2015.

Our non-GAAP EPS for the third quarter was $1.58.

I'm excited to report that this was $0.17 above the midpoint of our June guidance driven essentially by three things.

First, better than expected net revenue yields worth $0.11 which was evenly split between ticket and onboard and other yields.

Second, lower than expected net cruise costs without fuel were $0.03.

And third, lower fuel prices were $0.02.

We were pleased to see that net revenue yields and net ticket yields both turned positive in the third quarter which we believe is the beginning of the positive trend we've been expecting.

On the cost side, the slightly lower than expected net cruise costs without fuel was simply due to the timing of certain expenses between third and fourth quarter.

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

Our capacity increased 2%.

The North American brands were up almost 4% while our European, Australia and Asia brands also known as our EAA brands were essentially flat.

Our total net revenue yields in the third quarter were up almost 2% despite lower occupancy.

Although I'm happy to say that occupancy was almost a point higher than we had anticipated in our June guidance.

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

Net ticket yields were up almost 1% and this was driven by our EAA brands being up 4% resulting from improvements at our Continental European brands and double-digit increases in China.

Our North American brands were down just over 1% due to the continued promotional pricing environment in the Caribbean.

However, the yields were better than we had anticipated in our June guidance both in terms of price and occupancy.

Net onboard and other yields increased over 5% despite lower occupancy with increases on both sides of the Atlantic and across the board in almost all categories.

This increase was considerably more positive than we anticipated in our June guidance.

It was a great quarter for onboard revenue.

Net cruise costs per available lower berth day excluding fuel was up half a point and that was less than our June guidance due again to the timing of certain expenses.

In summary, third quarter non-GAAP EPS was $0.20 higher than the prior year driven by improved net revenue yields worth $0.09, the 2% capacity increase, favorable exchange rates, improved fuel consumption and lower fuel prices.

Now looking forward at our fourth-quarter yield expectations.

With the overwhelming majority of the quarter booked at this point at higher prices, we are well positioned to achieve our fourth quarter total net revenue yield guidance of up 1.5% to 2.5%.

This is due in part to our expectation that the North American brands and the ticket yields will turn positive, consistent with what we discussed on the June conference call.

Remember, the EAA brands turned positive in the second quarter.

Given the overall positive yield trend in the back half of 2014, we now expect full-year 2014 net revenue yields to be flat with the prior year.

Turning to the cost side, with the majority of the year now complete, we have narrowed the range on our full-year cost guidance.

We now expect net cruise costs excluding fuel per ALBD to be up slightly.

Putting these factors together, our 2014 non-GAAP EPS guidance is $1.84 to $1.88 per share with a midpoint that is $0.19 higher than our June guidance.

Essentially we flow through the better-than-expected third-quarter yields worth $0.11 and increased our fourth-quarter revenue yield forecast slightly.

We also benefited by $0.04 from the net impact of fuel prices and currency.

While it's still early, I'm going to provide you with some color on what we're seeing for 2015.

At this point, cumulative fleet wide bookings for the first half of 2015 are ahead at higher prices.

Now let's look at the booking patterns for each of our two major business segments for the first half of 2015.

First, for our North American brands.

The Caribbean is ahead on both price and occupancy and represents 56% of the first half of 2015 capacity.

While other North American brand deployments combined, which includes the early part of the seasonal European program, are also ahead on both price and occupancy.

Booking volumes during the last quarter have been good, ahead of the prior year at nicely higher prices.

Secondly, our EAA brands are also ahead on occupancy but at prices that are just about in line with the prior year.

Booking volumes during the last quarter are higher than the prior year at slightly higher prices.

With increased net ticket yields expected for both our business segments for the fourth quarter of 2014, and positive early booking patterns for the first half of 2015, we're confident that we'll see solid yield improvements for 2015.

As we usually do, we'll provide detailed yield guidance for 2015 during our December conference call.

Having completed our planning meetings with all our brands for 2015, the cost picture is taking shape.

As we indicated in the press release, we expect net cruise costs per available lower berth day to be up around 3% for 2015.

The majority of the increase is due to significantly higher dry-dock days in 2015 as we're working hard to accomplish a number of things.

First, installing exhaust gas cleaning systems, or EGCs more commonly known as scrubbers, which will it reduce the impact of the new 2015 eco requirements.

Second, installing new fuel efficiency technology to reduce fuel consumption.

And third, completing the vessel enhancements we announced last year.

As we look further out to 2016, we expect that the majority of the higher dry-dock costs in 2015 will be reversed since we currently anticipate a lower level of dry-dock days in 2016.

I'm pleased to report that the various cost initiatives that we're working on for 2015 and beyond are beginning to take shape and are expected to completely offset inflation in 2015.

However, we won't rest there.

Over the years we've developed an excellent track record of cost control and we'll continue to focus on leveraging our scale and reduce costs further in 2015 and beyond.

As Arnold indicated, we are aggressively rolling out the EGCs on our ships.

The current schedule calls for EGCs to be installed on 16 ships before the beginning of FY15 and 42 ships are expected to have commissioned EGCs by the end of FY15.

We expect these efforts to mitigate the vast majority of the impact from the new eco requirements.

As we indicated in the press release we currently estimate that the new requirements will cost us about $0.10 in 2015.

Going forward, we expect about half of this to disappear in 2016 and the remainder should just about disappear in 2017 as the result of the installation of EGCs on additional ships.

And now, Operator, we're ready to open up the call for questions.

(Operator Instructions)

Felicia Hendrix, Barclays.

David, since you ended on costs, I'll start my question there.

Thank you for all the color regarding the increase, regarding related to the higher dry-dock days and what's driving that.

You mentioned this a little bit in your prepared remarks but I'm wondering if you could give us some color about what is going on with your underlying cost structure, ex this dry-dock cost driver, what's going on with your current ongoing cost savings initiatives?

And is there any way that those might further offset this cost guidance that you provided us with today?

Felicia, about two-thirds of the cost increase as I said was relating to dry-docks.

At the other third was really an investment in various areas of the business in terms of things like deployment and occupancy and other things which are driving the remainder of the increase.

And on the flip side, I think as Arnold indicated, a lot of the leveraging our scale and the efficiencies are taking hold and we're expecting to see that completely offset inflation.

We're still working very hard.

Vets our direction at this point and as we make greater strides, we'll update all our projections and forecasts accordingly.

Felicia, as we offset the inflation with some of the initiatives that we have, we're looking aggressively -- we're not afraid to invest if we see a line of sight return from that investment.

So we aren't afraid to reinvest in the business to drive yields and to drive revenues.

So you've got a mix going on there, some of the cost increases investments.

Okay, thanks, that's helpful.

And Arnold, there was a comment in the release that you made, you recorded as saying that you're gaining momentum towards your goal of achieving double-digit returns in ROIC over time.

I was wondering if you could talk more about that comment?

Over what time?

Obviously we're not looking for specific date and I know you're not going to give one, but are you thinking about over the next two to three years or are you looking at longer than that?

We're looking at three to five years to get to double-digit returns.

We have a large business here.

We took some hits with fuel increases and other things.

But we definitely see the path in the next three to five years get to double-digit return on invested capital.

Okay super helpful, thank you.

And then David one last housekeeping, your occupancy rate in the quarter actually came in lower than we were expecting.

And we were estimating this strategy that you're using in the near term to navigate through the tough promotional environment in the Caribbean.

Wondering how should we think about occupancy rates in the fourth quarter?

And in 2015 do you think this strategy will continue?

It sounds like things are getting better in the Caribbean for you.

Thank you.

Sure.

Well I'm not sure, our occupancy rate came in 1.7 points below the prior year, which as I think I indicated in my notes was a bit better than we had anticipated.

So we were able to do much better.

That was part of the yield improvement that we saw in the third quarter.

And as we move forward, I think I talked about this on the last conference call, that holding price and giving up some occupancy is purely a tactic.

We will continue to work through that.

If the tactic makes sense, we'll utilize it.

But I think as I indicated just a moment ago, as part of our cost increase, one of the things was higher occupancy relating to the variable costs of food and port charges, et cetera.

So we're hopeful that as we move forward, part of that yield improvement is higher occupancy for 2015.

Great.

Thank you very much.

Joel Simkins, Credit Suisse.

Obviously you guys are very positive on the Chinese market and that's certainly been developing over a number of years here.

Can you juxtapose what you're seeing perhaps in Macau and does that give you any pause as it relates to continuing to add capacity in and around China?

I think Macau is a destination for those who like gaming.

And we are actually in a true cruise product.

And so to date, those sailing on our cruises actually our casinos opportunities to date have not been strong on our ships because they're really going for a cruise.

They have families, et cetera.

So I'm not exactly sure what you're referencing in Macau.

But in terms of the cruise opportunity, the Chinese government has shown a lot of vision.

They've made developing the cruise industry a priority.

And with their support, companies like ourselves have a tremendous opportunity to tap into what is a huge market possibility.

And we've enjoyed early success and plan to build on it.

And one quick follow up if I may, Arnold.

If you were to peg a percentage of your yield improvement and the improvement in booking activity for 2015 directly to some of the revitalization that you've done over the last year or so particularly on the Carnival brand, what percentage do you think is contributing towards that improvement?

That would be very difficult to say to isolate variables like that.

What I can tell you is that we have definitely gained momentum across the brands in terms of best practices.

We haven't finished our revenue management project, but already we've had lift on isolated itineraries across brands as they collaborate appropriately.

Also on onboard revenue, some of the onboard revenue lift we've experienced has come from again great collaboration across the brands identifying best practices.

We see that continuing to build in even more dramatic fashion than we've experienced to date because we've only touched the tip of the iceberg today.

Thank you.

Steven Kent, Goldman Sachs.

On Joel's question, on the China opportunity, what has changed there do you think that you're willing, more willing to commit ships and human capital to the market especially putting CLO and I'm assuming some other Management people there?

Because in the past, China has been a little bit more difficult and hasn't been a home run.

And then separately, Arnold because you just mentioned this, the cross collaboration which has been a big focus of yours, on that onboard spend, could there be more to go as you start to integrate some of those great ideas?

Maybe you could share some of the specific best practices that you've seen.

And then one final thing, and I'm sorry I ask this fairly frequently, why not set a more specific cost cut target for the next couple of years?

You've now set an ROIC target of three to five years, why not set something more on the expense front?

Thank you.

Okay, thank you, Steven.

So your first question concerning China, we began investing in China in 2006.

The Costa brand as I mentioned in the introduction here was the first brand to do so in China.

And things have -- take time to develop.

And we have been successful in developing our business there and others have come in now as well.

What's changed in addition to that first of all it just takes time to develop a market, but what's changed in addition to that is that the government has it as a priority now.

The Chinese government has a plan for development of a cruise industry in China.

And that means you're getting tremendous support and opportunity to participate led by the various governments whether it's the central government, or the provincial or the municipal governments like in Shanghai and Tianjin.

And so all that bodes well.

We're beginning to gain momentum.

Distribution system is learning how to market a product such as a cruise product.

You're beginning to see players in China look at building a domestic brand which we think would be a real powerful add to developing that market.

So that's basically what's going on in China.

And then getting enough scale that it does take costs obviously to build brands and to build a presence and now obviously with the number of ships we have there now and the ones we're going to add, we're beginning to get scale so the opportunity for greater profitability is there.

So that's the quick answer on China.

Let me add one other point on that.

Steve, we've talked about this before.

Historically as Arnold said we started in 2006 and we were investing in China which was a nice way of saying we were losing money.

We broke even in 2012.

We made money in 2013, and 2014 we saw double-digit yield increases in China.

And the performance of our ships in China has been excellent.

And so we're very excited about the opportunity as we move forward.

To your second --

No.

Concerning onboard revenue, your second question, in terms of is there additional opportunity, absolutely.

We had a 5% lift in onboard revenues in this quarter.

To suggest that we'll have a 5% lift every quarter from here on out, we'll probably not be anywhere near the right thing to say but clearly we see opportunities.

Specific areas, we had an area in casinos, we've had areas in beverage upgrades and restaurants upgrade opportunities.

There are a host of others, but we are just at the tip of that in terms of really harvesting what's possible there.

And then your last question --

Was relating to the specific cost targets heading back for --

Yes, in terms of giving you a specific number on costs, as we mentioned, directionally we see it as offsetting inflation.

That's a $75 million to $80 million number unto itself.

We haven't finished all of the projects yet.

We're in the middle with the airlines in terms of our airline RFPs.

Obviously we're not going to give a number on that because we're in negotiation with them as we speak, that will be wrapping up soon, and I think we'll have more to say in the fourth quarter.

But in terms of setting a specific target, the reality is we are going to reinvest in the business too.

So I think we'll give you one-offs as we determine them and we'll share with you what we're reinvesting in at the appropriate time and whether or not we think it paid off.

Thank you, Steve.

Okay, thank you.

Thanks.

Steve Wieczynski, Stifel.

David, going back to your cost guidance for 2015 and 2016 I guess.

Is it fair to say if we simplify this that basically in 2015 and 2016 if you stripped out your dry-dock costs you're basically looking at flat over that two-year period?

Roughly speaking that's a good estimate.

But I will say one of the things that we have to decide on for 2016 is whether we have additional product enhancements or investments.

As Arnold said before, he's not afraid to make some good ROI investments to improve yield, to improve the operating income because that's what we're most focused on.

So absent that, yes, the math is similar to what you're describing but yet there are a lot of decisions yet to be made.

Okay, got you.

And then Arnold seems like the Carnival brand itself has started to get a little bit of momentum here, can you maybe help us think about the recovery in that brand and how you -- is it moving quicker than you guys would have thought?

Is it lagging?

And maybe also I don't know if you give us this but where is the booking window for just the Carnival brand and maybe pricing relative to all the triumphs -- the Triumph incident?

Well real quickly in terms of the overall feeling about the brand, I would say that the recovery is probably a little faster than we had a right to believe it would be.

But at the same time, it's not nearly fast enough for all of us.

And our brand people certainly deserve a tremendous amount of credit for their product innovations and both in terms of hardware product and soft product on board.

And just an excellent, excellent delivery on restoring the confidence in the brand and having people appreciate the great experience that the Carnival brand is.

So we're pleased with it, but at the same time we're not satisfied.

And we're going to continue to pursue aggressively building the Carnival brand and getting back to the historical levels.

In terms of the specifics, as you know we don't give a lot of yield by yield -- or brand-by-brand detail.

So in general, I would say that the yields are showing some strength.

The Caribbean as we all know was very tough environment this year.

We anticipated that in our original guidance for the year.

So it was a difficult year overall in the Caribbean from a pricing environment.

But the brand has navigated that well and has offset some of that with strong onboard revenue lift.

And we're feeling really good about it.

But as you know, we don't give a lot of brand-by-brand detail.

Okay, great.

Thanks a lot.

Harry Curtis, Nomura.

Wanted to touch on CapEx for a minute and make sure that we have an accurate estimate of your CapEx in 2015 and 2016 now that you're going to be probably increasing your dry-dock days.

David, can you give us a sense of what your full CapEx is likely to look like in both 2015 and 2016?

Yes.

CapEx roughly speaking for 2014 is $3 billion.

It's probably going to be similar to that level in 2015 and 2016.

We're obviously still going through a lot of the detail for those years and we can give you better guidance as we make some more decisions down the road.

So it sounds like there's going to be some incremental investment in these systems.

And based on our estimates, does that -- it looks to me to be an incremental maybe $600 million to $700 million a year.

Is that in the right ballpark?

I'm not sure what numbers you're comparing to, but these are the numbers that I just quoted are very close to the numbers that we have been talking about for the last six to nine months as far as my memory is concerned.

Yes, but it does reflect the higher level of enhancement cost as well as scrubbers for the intervening period, not just the scrubbers.

Right, that's what I was after.

And then the last question is you mentioned that by the end of 2015 probably in the low 40s, the number of ships will be compliant with ECA.

Ultimately, how many will have to be touched within the system?

Is it 70 ships, is it 75 ships?

What is that number likely to be?

Directionally, the 70 number's are a magnitude number.

That ultimately depends on future deployment plans and what have you, but

Through 2016,,

Yes through 2016.

And current requirements.

Okay.

So roughly 25 of your ships are newer and really don't have to be -- have to have much --

No, no, we don't need scrubber -- we don't need the EGCs on every vessel.

Depends on where they're deployed.

ECA is not a universal -- so it depends where the ships are going.

And so some of the fleet doesn't hit ECA impacted destinations.

All right.

So the bottom line is that --

Having said that, from a flexibility standpoint most new builds will be equipped to handle the regulations from a long-term planning standpoint.

And when you get into future regulation --

Yes, go ahead.

I guess what I was after is in 2016, you'll probably be doing another 20 to 25 ships and then you'll pretty much be done?

I think if you're trying to get a feel for it, 2015, over two-thirds of that increase I think as David mentioned on the cost side, the directional increase we're sharing with you all right now, is related to increased dry-dock days partly EGC related, partly other fuel saving technology related.

And when you go to 2016, that will fall off.

And there will still be additional work to be done, so we won't recapture all of that.

But say, two-thirds of the cost of those increased at peak and dry-dock days for next year.

Two-thirds of the costs related to that will probably disappear in 2016.

But we will continue the implementation, aggressive implementation of both the EGCs and the fuel saving technologies because they have sharp payback periods.

Thanks, guys.

Did that help you?

Yes.

Thanks very much.

Jaime Katz, MorningStar.

I have one quick question on China.

I'm curious about what headwinds you guys have on expanding the infrastructure with just the people selling the cruises there?

And then maybe persuading some of the consumers that your product is different than some of the other products that have been out there in the past from other vendors like Star.

I think fundamentally, there's several issues in your question.

First of all in the consuming public, the guests, helping them understand what a cruise is is still a challenge.

Now, early on there's so few ships and such latent demand that it's not a huge challenge because there are enough people there that have some familiarity that we can certainly fill the ships.

The challenge is as we -- as it grows, to communicate what a cruise is.

And that is it's not just in our case, a gambling destination or a gaming destination.

So there is a challenge there but we're in the work of doing that along with our distributors there that work with us.

And we are beginning to have good success with that.

On the other side of the coin in terms of the challenges in developing a market, it's a host of things.

And in cruise port development, there needs to be extensive ports people have to have a place to go and things to do when they get there.

The has to be availability of international ports where the Chinese citizens are free to go and have the opportunity to experience and enjoy.

And then there has to be supply chain development locally there to provision and provide the infrastructure and what have you, so there's a ton of work to be done.

It's at an early-stage but it's very, very exciting and you can just see the potential and the possibility.

And like I said we're already experiencing good results and are excited.

It will take time.

It's not going to happen overnight.

And that's why we're sending Alan over there now because there have to be a number of areas sorted out and we'd like to have one of our top people full time there working it every day to position it for what should be in the not-too-distant future a tremendous opportunity for the entire cruise industry and especially for Carnival Corporation.

Are you guys finding that cruisers are acquiring or purchasing the product more on their own or still through the travel agent channel there?

And if it is through the travel agent channel, how sizable is that at this point?

Yes, it is definitely through distributors.

Technically in most cases the ships are chartered.

And so the distributors charter the ship and then market it to the Chinese populous.

That's the structure today.

It's working just fine.

It's a good model.

That model has existed in other places and eventually of course there will end up being probably direct selling but that's the a ways off.

So right now it is through a distribution network.

The distribution network is well organized, there are some very large entities involved in that in China domestic companies of great scale and significant market capitalization, et cetera.

So these are professional organizations that do a good job.

Thank you so much.

Assia Georgieva, Infinity Research.

Congratulations on the great Q3 results.

And I had another follow-up question to China.

Do you see any improvement in terms of the relationship between China and Japan so that you can offer a more varied destinational experience for the Chinese passenger?

Obviously, we are very respectful of relationships wherever we operate.

And that's outside of our scope.

We do expect over time that there will be opportunities for easy exchange between those countries.

Obviously we have ships home ported in Japan as well.

And so we are optimistic about all that, but that's beyond our scope as a Company to be involved in, in those types of relationship matters.

And Arnold, now in Q1 that we'll be anniversarying the Caribbean capacity increase do you think that in 2015 we can get back to the historical yield increases of about 1.9% that we've seen in the past or is it still too early to say?

I think we're not really giving obviously any yield guidance at this point for 2015.

But I think directionally I would say things should look better in the Caribbean.

Beginning in the later second quarter into the third quarter, should be very good because there will be capacity reduction in the Caribbean next year versus this year.

So I think directionally, it looks more positive but at this point, I'd have to stop there because it'd be a little early to go beyond that.

Okay, understand.

Thank you so much.

Tim Conder, Wells Fargo Securities.

Let me wrap up one other one on China, if I may.

It appears that the functional currency is still the euro at this point given that everything's under Costa.

Do you see that functional currency changing in the near future as China grows significantly?

And then secondly, back to the cost comments, clearly the scrubbers and that are somewhat of a unique item and something that you just have to do.

And sounds like if, and correct me if I'm wrong, you term that more as a one-off which we would agree with.

Future investments though, do you see those as more the ongoing part of the business and redeploying some of those cost savings?

Thank you.

First of all on the China comment on the currency, obviously we do we have Costa, but we also have Princess in China as well.

And I really can't comment on the currency so --

If you're talking about Tim the accounting functional currency for these entities, at the moment because it is part of the Costa brand, we look at it collectively together.

And you're right, it is a euro-functional currency.

But as that grows, we'll reevaluate it.

Today, it's only two ships.

We're adding a third ship next year to the Costa Asia group.

And so as that grows, that might be something we reevaluate.

But at the moment, we're happy with the accounting part.

Got it.

And Princess?

And Princess, the same thing.

It was a half a ship last year and as that grows, its US dollar functional currency and as that grows if there's a good reason, we will reevaluate it.

Got it, okay.

And then your question on the cost, could you repeat it please?

Yes.

I guess it boils down to it sounded like the scrubbers would be -- you're doing that more as a one-off cost given the unique changes that you're seeing in the regulation.

But the rest of the investments, will you view those as one-off or will that just be folded in your cost savings?

You said as it stands now half the rate -- or basically flat with inflation would be fair.

But then would those investments then be netted against that or would you view those more as one-offs?

Got it.

So first of all, the increase in dry-dock days that we're planning for 2015 involves both the EGCs as well as some fuel technologies, fuel saving technologies.

Hopefully we'll find additional fuel saving technologies but I think this particular group that we're looking at is more one-off, and that's why we'll have a reduction in 2016 in the costs equivalent of the dry-dock days, a significant reduction in costs from the peak you'll see in 2015.

So in that sense it is one-off.

In terms of other cost savings or other investments, we are making investments in multiple areas, whether it's a guest experience enhancement or whether it's related to creating demand directly through advertiser promotions, specialty events those kinds of things.

So those we'll look at on a case-by-case basis and as we see an opportunity for return, we'll implement them.

And some are technology-based enhance the guest experience or create leverage in (inaudible) demand, so it's a host of things.

So there will be some ongoing, are we at a peak with that right now.

It's hard to say.

But what we will tell you is that we still have a focus on cost containment.

And so we're constantly harvesting opportunities to reduce our costs and then we decide whether those dials can go to the bottom line or whether they'll be reinvested to drive revenue.

Because if it gets to the double-digit return on invested capital in the timeframe we're talking, we will have to obviously drive revenue and then that is our focus.

Great.

Thank you both.

Robin Farley, UBS.

Two questions.

First on China, have you looked at partnering maybe doing some kind of a venture with local travel companies there?

Is that something you've thought about and decided not to do or something that you're considering?

And then my other question is on your expense guidance and I hate to focus so much on expense when obviously the yields are -- the yield growth here is above expectations and that's what's going to drive so much of the return recovery, it's really a yield story.

But just one small expense question.

And your full-year guidance, I know there was some timing shift between Q3 and Q4, but your full-year guidance non fuel expense up slightly instead of being flat to up slightly just up slightly.

Is that the reinvesting in the product that you talked about, is there anything in particular there?

Or is that general reinvesting you talked about?

Okay, let's do the China question first.

In terms of partnerships, obviously, anything we do we'll announce at that time.

Clearly, it would be safe for you to presume that we're exploring all types of possibilities to see what makes the most sense.

And that's one of the reasons for having Alan relocate to Shanghai and be there full time.

So we're exploring a number of possibilities.

We'll see what makes sense.

We'll work with the Chinese authorities and the various private and partially standalone enterprises that are there and we'll sort it all out and we're in the process of doing that.

But if we have anything specific to announce, we'll do it at the time.

And on the expense side, go ahead, David.

Yes, on the expense side, Robin, really you're right, we did narrow the range.

With every forecast, there are always some unexpected things, some things positive some things negative.

I guess overall with our forecast that we gave last quarter, the trend has all generally been positive and we were very pleased with that as we raised the guidance.

But there were a couple of unexpected things on the cost side.

We did have a pension expense that we had to take and put into the guidance in 2014.

So there was a couple of minor additional expenses.

And that's what narrowed the range up slightly.

Okay.

Great, thanks.

And maybe one last question.

You talked about in Q3 the strength in close in demand.

Would you say that was more close in demand for Europe and China or was actually Caribbean close in showing some improvement too?

I would say the close in demand definitely included the Caribbean, there's no question about that.

But it also was global not so much China on close in demand because as I mentioned, that's a charter type business.

But in terms of Europe and the Caribbean in particular, they were stronger close in demand.

Okay, great.

Thank you.

Nick Thomas, Merrill Lynch.

Can you talk a little bit more on these dry-dock costs and their reversal?

Do I take from what you've said so far that your initial thinking on unit costs in 2016 is that they would actually then be down year on year, i.e., strategic initiatives offsetting any inflation again.

But then some of these, perhaps not quite all, but some of the 2% to dry-dock costs reversing to bring unit costs down?

Those dry-dock costs can you talk a little bit about how they interact with CapEx?

My understanding was they were already CapEx for this equipment within the guidance.

Outline what things are capitalized and what things go through as OpEx?

And then finally on the revenue side of things looking into next year, it sounds from what you've said on early bookings as though the environment is actually switching around to being stronger for your North American brands rather than your EAA brands for next year.

Could you clarify whether my read of that is accurate and provide any further color as to what best predominately down to Carnival brand recovery or whether it's more general than that?

Thank you very much.

Okay.

So I'll take some because I heard some of them and I'll have to have David take some.

So first of all, in terms of costs being down in 2016 it'd be premature at this point to give full clarity for 2016 because we don't know we're going to learn from what we've done this year.

We'll learn from what we do in 2015 and we'll make determinations on expenses going into 2016 later in 2015 in terms of what we might choose to invest in from a driving revenue and driving the business in a sustainable fashion standpoint.

So I have no prediction on the absolute.

What I can tell you though, is that these costs that are occurring in 2015 were related to the dry-dock that two-thirds of that increase at least will disappear in 2016 will not be there because it won't be necessary, would have made the enhancements and they just won't be necessary to spend that money.

So that's what I can tell you on that part.

And as far as the dry-dock costs themselves, during the dry-dock period, we do both expense type work as well as capital type work.

So if you're installing an EGC on the ship or implementing some capital relating to fuel efficiency technology, that might be some capital work.

But you also have the actual cost of the dry-dock services.

The dry-dock itself, the power, the water for the ship.

You've got the crew that generally stays with the ship that gets expensed and isn't capitalized because you're not sending 1000 crew home for two weeks.

So there's a number of capital as well as expense type items that occur during the dry-dock period.

And from a cost perspective, the increase was relating to the P&L costs I'm referring to.

And then with regards to your question about North America versus Europe, in terms of is there more strength in North America than Europe, or flip-flopping the strength of the markets.

I would just say that we have seen a lengthening of the booking curve and higher prices in the first half of the year so far.

So far in North America.

And while we've seen somewhat lengthening of the booking curve for the first half, of next year in Europe, the prices are at comparable pricing.

So that's probably what you're reacting to.

Having said that, I wouldn't describe that broadly as North America being stronger than Europe or vice versa.

Some of it has to do with the comparisons year to year and the mix.

So we'll see how it goes.

But we are optimistic about both markets going into 2015.

On that point, my comment in relation to brands within North America presumably given that the comps you would be more optimistic [whilst] your able to break down brand individually, but you'd be more optimistic specifically about the Carnival brand than the rest of the North American brands?

I think the North American brands broadly if you lob it all together, clearly the comps will be somewhat easier weighted average because of the Caribbean situation.

And the Carnival situation coming off of the last couple years, so the comps will be covered.

But on the other hand you have the Costa situation where Costa is still continuing to rebound and has additional upside.

So that's having looked at it quite that way, that would be a tough call to make off-the-cuff.

Sure.

Thank you very much.

Stuart Gordon, Berenberg.

Couple of questions, please.

Could you give us some feel for the fuel efficiency programs that will be in place for next year?

And to what extent they may offset the $0.10 increase in fuel that you're expecting off the back of the change in regulation?

And secondly what fuel price you've assumed in assessing that?

And also in the fourth quarter guidance clearly, the onboard spend has been very good and you did point out not to assume that every quarter, but in putting together your guidance, were you more prudent in terms of thinking more along how you were looking at the third quarter when you put out your view in the third quarter or with what you actually delivered this quarter?

Thank you.

Thank you.

Concerning the 10% eco impact on the higher fuel costs next year and whether some of the fuel saving technologies already in place or that we would deploy next year during early season dry-dock will help offset that.

The reality is 10% obviously, or $0.10 excuse me, will be pretty much eliminated going into 2016 and will be gone by 2017 because of the EGC installations that we're doing.

So it will go away in that context.

But obviously we will continue to aggressively pursue not only through the deployment of the technologies but also managing deployments and managing the ships on itineraries from a fuel consumption standpoint as well as all the practices on board.

And so we'll continue to pursue fuel savings as we have in the past.

Is there some upside in that for next year?

We'll have to see as we manage through, but right now we were just trying to give you guys a little color of something you might not have anticipated which was this increase in dry-dock so we could aggressively deploy the technologies.

So we could have the benefits sooner rather than later for many years to come.

To give you some color on the math, given the amount of fuel, the 2014 prices, a 1% change in our fuel consumption or the price of fuel would be like $0.026.

So it would take a 4% consumption reduction to offset the $0.10 of ECA that we talked about in 2015.

And we've been talking about getting a 2% to 3% fuel consumption improvement as we move forward.

And as far as the fuel price is concerned, we always use basically the current fuel prices.

We locked off late last week when fuel was close to $100 a barrel in terms of Brent and fuel moves around daily and the numbers do change accordingly.

As far as onboard for the fourth quarter is concerned, we did raise our onboard revenue guidance for the fourth quarter.

In fact, we raised both the ticket and the onboard as I had mentioned in my notes.

So we were conservative.

I'm not assuming a repeat of 5.5 percentage point yield increase in onboard in the fourth quarter.

I'd love to see it repeat itself, but that's not the guidance.

Something considerably lower in a more normalized level is baked in.

Okay.

Thanks very much.

Jamie Rollo, Morgan Stanley.

First question is on your 3% unit cost guidance for next year, is that inclusive or exclusive of the cost savings that you referred to and that you'll talk about in December?

I'm just aware that this time last year you were guiding to cost up 4% this year and you're ending up just slightly up.

And then the other question is how worried are you about the industry order book?

Clearly we're back to if not above prior peak for 2007 levels, a lot of new ships coming on your competitors, should we be worried about that?

Thank you.

So your second question was a little fuzzy.

If you can repeat that, Jamie, appreciate it.

Sorry.

Couldn't quite hear you, Jamie, on your second question, we couldn't hear you.

Okay, sorry about that.

How worried are you about the industry order book, the amount of new ships and order particularly by your competitors?

It seems to be back to if not above prior 2007 peak levels and mostly it's not from Carnival.

Thank you.

Thank you.

I'll take the second one first.

In terms of worried, we're not worried.

We know the ships are coming as in the forecast we can see them.

I think in general, that still there's not a huge capacity expansion in the industry.

Obviously, we're helping that by being very measured in the net capacity addition that we bring on.

But we -- deployment makes a difference, depends whether ships all get deployed in a cluster in a given destination market.

But generally speaking, it's a big planet and we think that for the ships that we see coming, that the market will be able to absorb and it will continue to be able to deliver results we need to deliver.

Go ahead, David.

Sure, one additional comment on the -- Arnold was answering, keep in mind that we're expecting quite a bit of growth in the emerging markets particularly Asia and China.

So that should be able to profitably absorb a lot of that capacity.

And the other more established markets, we'll see a more measured capacity increase.

As far as the costs are concerned, the 3% increase, two-thirds of it was dry-dock.

Another third was some product initiatives and enhancements and reinvesting in the product.

And I indicated that a line of sight at this time we see all the leveraging our scale completely offsetting inflation.

So that's our best guess at this point in time.

But as I indicated in my notes, we're not going to rest there.

We'll keep working.

If we're able to accomplish more, that would be great.

We'll let you know.

But this is our best guess at this point.

And one last comment.

Measured capacity growth overall, would clearly be a very good thing.

We're not counting on what other people do, we can only control ourselves.

But obviously, that would be a good thing.

And I guess --

Thank you very much.

We're running over.

Operator, we'll take one more question at this point.

Ian Rennardson, Jefferies.

Two questions for you.

Number one, were you much -- did you have much more to fill when you gave guidance back in June than normal because the bait on yield seems very surprising in terms of its magnitude given how far into Q3 you were when you gave that guidance?

And secondly if you could give us an idea of how much inventory you sold already for 2015 both for the US and Europe?

Thank you.

Sure.

Well as far as the third quarter is concerned, you really have to break it apart into a number of different pieces because about half of the increase was relating to onboard, which we don't have a lot of visibility into it in advance.

And we're very grateful, everything worked well.

All the things we're doing seemed to pan out in the third quarter.

And we hope that continues and we see a positive trend.

On the ticket side of things, half of the increase in ticket was relating to occupancy and the higher occupancy than we had expected.

And the other half was higher prices than we expected.

So it was very nice to see a forecast and everything go in one particular direction.

But it was a lot of pieces that came together to create that overall increase and total was $0.11 per share.

In terms of the visibility?

And in terms of the visibility for 2015, I think we've said many times, for the next quarter out, we are roughly generally 85% to 95% booked.

When you get into the first quarter 2015, the second quarter out we're roughly half book.

And then as you go out to the second quarter, quarter booked.

So that's our historical numbers and that's where we're roughly speaking today.

Okay, that's great.

Thank you.

Thank you, all.

We really appreciate your interest and I'm sure we'll be talking to some of you in the weeks to come.

But thank you very much.

Thank you, ladies and gentlemen, that does conclude the conference call for today.

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

Thank you and have a good day.