嘉年華遊輪 (CCL) 2015 Q1 法說會逐字稿

This is Arnold Donald, the CEO of Carnival Corporation and PLC.

Thank you all for joining us for our first quarter 2015 earnings conference call.

Today I'm joined by our Chairman, Micky Arison; David Bernstein, our Chief Financial Officer; and Beth Roberts, our Vice President of Investor Relations.

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

We are off to a strong start, with a significantly improved first quarter earnings, exceeding both prior year and December guidance.

It is extremely gratifying to see the hard work of our team members pay off.

It is the power of their efforts which have allowed us to overcome much of the impact of the dramatic currency movements that have faced all global companies.

Consistent with the strengthening of our business, our travel partners are helping to drive and are benefiting from our improved performance, and we especially thank them for their support.

Now, despite the nearly $0.30 drag from currency movements, we continue to expect roughly 25% earnings growth over 2014, based on our improved operating performance.

Looking ahead, we are working hard to accelerate that growth as we continue to execute a longer path towards double-digit return on invested capital through our two-pronged strategy, to drive demand in excess of measured capacity growth, and to capture the inherent value of our industry-leading scale.

The 8% onboard revenue growth achieved this quarter is an affirmation of the inherent power of harnessing our collective efforts, as we embrace the fundamental behavioral change of communicating, collaborating, and coordinating across our nine world-leading brands.

The outside growth in casino, bar, and communication realized this quarter, in part, resulted from best practice sharing.

This also marks the second consecutive quarter that Carnival brand outperformed.

Despite a competitive Caribbean environment in the first quarter, Carnival Cruise Lines enjoyed a mid single-digit yield improvement.

The brand remains on track for a strong year and beyond, the latter posted by a tremendous response by media, travel professionals and future guests to the unique unveiling of the Carnival Vista.

During a three-day event in New York City, Carnival Cruise Lines brought to life the enhanced guest experiences of that brand's most innovative shift ever.

Making its debut in 2016, the ship will feature a host of groundbreaking innovations, including the first IMAX Center at Sea, and onboard brewery, and SkyRides, the first pedal powered aerial attraction, featuring some of the best views ever offered at sea.

The Carnival brand continues to benefit from the rollout of Fun Ship 2.0 and its immeasurable lift in guest satisfaction, further driving greater guest retention.

Additionally, the experience has created stronger customer advocacy, which is far and away, the most powerful marketing tool for attracting first-time cruise guests.

Concerning demand creation, overall, we are pleased with the constructive conversation around cruising, ignited by our multifaceted campaign, Whale time during our part of Wave Season and built around the Super Bowl.

That effort generated over 10 billion media impressions, nearly all of which were positive.

Our ongoing public relations effort was furthered by the delivery of Britannia, the largest ship ever built specifically for British guests.

The ship design was informed by extensive research among previous and potential guests and is iconic for many things trending positive in modern Britain.

We were honored that the flagship of the P&O fleet was named by her Majesty Queen Elizabeth II, drawing a worldwide audience, and providing a ringing endorsement of cruising.

The event generated a record for P&O of 1 million web visits that week, including over 100,000 people viewing the naming online.

In addition, the delivery and naming ship garnered over 1,000 broadcast on radio and television, reaching even beyond the UK and anchoring us for future growth in, what is today, the second-largest cruise market in Europe.

Additional public relations impact was created earlier in the year, when Princess Cruises sponsored a stunning award-winning float in the Rose Bowl Parade, which served to launch the brand's 50th anniversary celebration.

The original cast of the Love Boat TV series, featured on the float, help to generate over 400 million media impressions in the days prior and that followed.

Those and other initiatives that drive demand have resulted in ongoing improvements in our underlying fundamentals.

We are enjoying a strong Wave Season and we are particularly pleased with the demand for the Caribbean for the remainder of the year.

Overall, our booking trends feel confident in our increased yield guidance, as much of the year is already booked at higher prices.

Moreover, we have less inventory remaining for sale, leaving us well-positioned to strengthen pricing on the remaining inventory.

Excluding the impact of currency, we expect a 3% to 4% underlying year-over-year improvement in revenue yields and we are working aggressively to continue that momentum.

We have completed segmentation studies in three of our major markets, including the US, the UK, and Australia with significant learnings.

The work allowed us to size the addressable markets and validated significant growth potential remaining in these markets.

For instance, in North America, half of the addressable markets have not cruised yet and roughly 75% of the addressable markets will plan to cruise in the next five years.

We also identified the unique vacation preferences, reflected in the cruise support segments, and we are using the output to further focus onboard offerings and acquisition marketing to what guests most want in a vacation.

Each brand is refining its core offerings based on potential that captures more demand and preference and the ability to command higher yield.

All of the brands have collaborated to improve, and align on how we measure guest satisfaction and we've adopted a Net Promoter Score metric as a tool to help drive greater value.

Enhanced Internet conductivity is another area of focus with a goal to further improve the guest and crew experiencing difficulty.

In 2014, we introduced a hybrid model Wi-Fi at Sea as a means to offload traffic via land-based towers to enhance the guest experience with faster connectivity.

Now we [piloted] this model in the Caribbeans and now we are introducing this technology to the Alaska market for the coming season.

Our pilot program achieved a 40% lift in guest satisfaction as well as a 30% increase in revenue.

This concept is now being piloted more broadly by an incremental bandwidth as well as adjusting price and plans.

We've also made great strides in our global market planning and deployment.

For the first time, brands shared unpublished itineraries to identify conflicts and maximize long-term profits.

We are opening new destinations and we are really excited about Amber Cove and the Puerto Plata region of Dominican Republic this year.

Now following the review of our revenue management process by a team of dynamic pricing experts, we have created a roadmap to implement recommendations.

We have already enjoyed some benefit, as reflected in our positive yield results.

There is much opportunity ahead to continue to share best practices in the science and psychology of pricing as well as price management systems.

We continue to make strides on initiatives to leverage our scale and remain on track to achieve our previously announced $70 million to $80 million in cost savings this fiscal year.

These savings are attributable to our recently completed air travel initiative, which captures the benefit of consolidating our global air travel purchases as well as procurement savings in other major spend areas, including technical, food, beverage, and shore excursions.

Going forward, we have additional opportunities to leverage our scale, allowing us to continue to offset inflation in future years.

To further this step, we've recently hired a Chief Procurement Officer Julia Brown.

She brings 25 years of large cap strategic sourcing and supply chain management.

Of course, China presents the next great frontier for cruising and we are making great progress on this front.

Our current four ships, across two brands, diversify our product offerings by targeting two different guest experiences, contemporary and premium.

We are enjoying continued growth and strong operating performance from both our Costa and Princess brands.

Along with two MOUs recently signed with the CSSC and The China Merchants Group, to explore joint venture opportunities, we are well-positioned for future growth.

China expects to surpass 1 million cruise passengers in 2015 and nearly 50% of those will travel in a Carnival Corporation Ship.

It's just a matter of time before China becomes the largest cruise market in the world.

Importantly, we made continued progress toward enhancing our fleet while maintaining our commitment to measured capacity growth.

This week, we entered into a strategic partnership for nine ships, expected to enter service in 2019 through 2022.

That averages out to be roughly two to three ships per year, which, combined with likely ships exits, reflects our commitment to measured capacity growth.

Included in this commitment is the new class of ships, expected to be the most efficient ships we have ever built, and which will add excitement to our industry and even further inspire first-time cruisers.

We believe we are continuing to execute along a clear path towards double-digit returns on invested capital.

Now, as you know, we improved returns on invested capital by nearly 1 point in 2014 and we still expect another point of improvement in 2015, despite the negative impact of currency.

We are committed to driving relative scarcity by creating even more demand for brands that outpaces capacity.

We are focused on measured capacity growth by delivering innovative and significantly more efficient ships, while at the same time, removing from service less efficient capacity.

We remain focused on driving yield growth in the low to mid single-digit range through higher ticket and onboard revenues while containing cost increases throughout our initiatives to leverage scale.

There are and will be challenges in our business every year, whether it's currency, fuel, or geopolitical issues.

Regardless, our path is to harness the inherent capabilities we have to deliver double-digit return on invested capital.

We feel we are demonstrating and we've begun to harness that capability and are firmly on a path to achieving double-digit return on invested capital in the next three to four years.

Thank you.

Now I'd like to turn it over to David.

Thank you, Arnold.

Before I begin, please note all of my references to revenue and cost metrics will be in constant dollars, unless otherwise stated, as this is a much more meaningful measure of our business trends.

I'll start today with a summary of our guidance to operating first quarter results.

Then I'll provide some insight into our current bookings and finish up with some color on our 2015 March guidance.

Our non-GAAP EPS for the first quarter was $0.20; I'm excited to report that this was $0.11 above the midpoint of our December guidance.

The improvement was essentially driven by two things: $0.06 from net revenue and yields, the majority of which was due to better-than-expected onboard and other yield, and the improvement we saw in the back half of 2014 was repeated again in the first quarter, and $0.05 essentially from lower operating costs due to the timing of expenses between the quarters.

Now, let's look at our first quarter operating results versus the prior year.

Our capacity increased almost 2%, the North American brands were up 3%, while the European, Australia, and Asia brands, also known as our EAA brands, were flat.

Our total net revenue yields in the first quarter were up 2%.

Turning to the two components of net revenue yield, net ticket yields were flat in total and on both sides of the Atlantic, on a constant dollar basis.

However, I am pleased to say that when you remove the transactional currency impact, net ticket yields, on a constant currency basis, was up 1%.

The increase in net ticket yields was driven by improvements in European itineraries and Asia itineraries, this was partially offset by lower yields in the Caribbean, which we expected.

However, I would like to point out that we do expect Caribbean yields to be up for the remaining three quarters of the year.

Net onboard and other yields increased almost 8%, with similar increases on both sides of the Atlantic.

This increase was considerably more positive than our December guidance.

It was the third great quarter in a row for onboard revenue.

Net cruise cost per ALBD, excluding fuel, was up 2% which was less than we expected in our December guidance, driven by the timing of expenses between the quarters.

Fuel prices this quarter were down 38% versus the prior year, which saved us $0.17 per share, net of realized losses on fuel derivatives.

The year-over-year impact from the strengthening dollar cost us $0.06, including both translational and transactional currency impacts.

In summary, the first quarter non-GAAP EPS was $0.20 higher than the prior year, driven by improved net revenue yields worth $0.11 and lower fuel prices worth $0.17, both of which were partially offset by currency and higher net cruise costs excluding fuel.

Now, let's turn to bookings.

Bookings during this year's Wave Season were strong; prices were up nicely and volumes were consistent with the historically high levels achieved last year.

At this point in time, for the remaining three quarters of 2015, cumulative fleetwide bookings are nicely ahead at slightly higher prices despite the unfavorable transactional currency impact at our North American brands.

Drilling down into the booking patterns, first, for our North American brands.

The Caribbean and Alaska are nicely ahead on both price and occupancy, which bodes well for pricing on future bookings.

Booking volumes during wave season has been strong.

They were on pace with last year's historical levels, even though we started the wave period nicely ahead on occupancy.

Prices on these bookings are also nicely higher.

All other North American brands deployments combined, which includes the seasonal European program, are ahead on occupancy, but at lower prices due to the transactional impact of currency.

Booking volumes during the wave season, again, have been strong, on pace with last year's historical results but have lower prices, driven by transactional currency impacts.

Secondly, for our EAA brands.

European itineraries are nicely ahead on price and occupancy.

Booking volumes of for these itineraries during wave season were in line with forecasts, but down from prior year because we started ahead and did not need as much volume to fill.

I'm happy to report that the prices on these bookings were higher than the prior year.

Looking forward to 2015, based on the strength of bookings during Wave Season, we have increased our yield guidance for the full year.

We now expect revenue yields to be up 3% to 4% versus the prior year on a constant currency basis, which excludes both the translational and transactional impacts of currency.

The midpoints of the range is 1 full percentage point better than on December guidance.

On a constant dollar basis, which does not exclude the unfavorable transactional currency impact, we still expect yields to be up approximately 2% versus the prior year, which is the same as our December guidance.

In the constant dollar case, the underlining improvement in the business that we are forecasting from higher prices is offset by the unfavorable transactional currency impact.

Now, turning to costs, for the full year 2015, net cruise costs without fuel per ALBD are now expected to be up approximately 2% to 3%.

This is a slight improvement from our December guidance because of the favorable impact of transactional currency.

On a constant currency basis, we are in line with our December guidance.

For 2015, we are forecasting to benefit from the lower price of fuel, net of realized losses on fuel derivatives by $0.63.

Partially offsetting this benefit is the impact from both translational and transactional currency which cost us $0.61.

Putting all these factors together, our non-GAAP EPS guidance for the full year 2015 is $2.30 to $2.50 versus $1.93 for 2014.

Currency, clearly, remains a headwind.

Since our December guidance, currency, net of fuel price and fuel derivatives, has impacted the full year by $0.26.

However, we are encouraged by the underlying strength of the business, which improved by $0.21 and largely offset the currency headwind and the midpoint of our guidance fully moved by $0.05.

I did want to make one comment on our second quarter guidance to ensure that everyone fully understands the 6.5% to 7.5% increase in net cruise costs excluding fuel for the quarter.

This is driven by the previously discussed increase in dry-dock days for the year, which was disproportionately impacting the second quarter.

On a final note, if you read the footnote in the press release, at the bottom of the income statement, you will see that we revised the accounting for the marine and technical spare parts for one of our brands.

Without the revision, we could have had a material impact on our future financial statement.

The impact of the revision is $0.11 per share, but that's primarily spread out over the five-year period from 2010 to 2014.

The revision for the full year 2014 resulted in a $0.03 lower EPS, of which $0.01 was in the first quarter.

We expect to file an 8K next month, with all the prior periods revised to reference purposes.

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

Thank you.

(Operator Instructions)

Robin Farley, UBS.

Thank you.

Hi.

And this is (inaudible) in for Robin.

Could you perhaps talk a little bit about what drove upside in Q1?

Primarily if you could breakdown perhaps some of the upside you saw in the Carnival brand, as well as some commentary if you could on the Caribbean environment post-Q1 would be helpful.

Thank you.

Hi.

Good morning, Robin.

I'll let David comment first.

Go ahead, David.

Yes.

Talking about what drove the yields up from Q1, essentially, as I had indicated, the onboard and other yields were up 8%, and in constant currency, the net ticket yields were up 1%.

So collectively, together, the onboard had a disproportional impact overall.

You know, the Caribbean environment in the first quarter, as I indicated in my notes, the pricing was lower but we are looking at the Caribbean environment being a positive for the rest of the year.

It's been very strong in terms of bookings and Carnival is doing very well.

Thank you.

Steve Wieczynski, Stifel.

Hey.

Good morning, guys.

So Arnold, you talked about this a little bit, just briefly in your opening commentary but can you talk about a little bit about your book to load position today relative to maybe where it's been in the past in terms of historical levels?

Both in the North America and in Europe, we are ahead on bookings.

The bookings are definitely stronger.

And they are at high yields.

So we've definitely seen an improvement, both from the hard work of our people within all the brands and with the additional PR and other demand creation activities, we've seen an improvement in the booking pace.

And relative to historical levels, I mean, Steve, we had -- I think a year ago I indicated we were at the lower end of historical levels and we continued to make progress and move up but we're still towards the lower end and but we've made progress and it's very positive trends.

Okay.

Thanks.

And then, I guess with the announcement yesterday in terms of your -- the ship order, the pretty large ship order, I guess, can you go into a little bit more detail about maybe what went into that in terms of why putting in such a big order at this point?

Was it something to do with currency?

Was it trying to lock up the yards where the yards give you some pretty good prices?

Can you just give us a little bit more detail there?

Yes.

Definitely nothing to do with currency.

Times just require more forward planning.

To our advantage, to communicate with the yards and have a longer-term plan because they have to work with a lot of subcontractors and it gives them the opportunity to plan further out and to be more effective in lining up those subcontractors.

We also included in the nine ship orders, a new ship design.

And that requires additional forward planning; it was a prototype and so that's why we did it.

We don't have all the details yet.

We have not signed contracts with each of the yards for each of the ships.

We'll be happy to share those details once we do that.

But it was important for us to get out in front from a planning standpoint to empower the yards and to get in front of our new design.

Okay.

Got you.

And can I ask one real quick question to David.

For David, for this accounting change that you just called out, I guess the question is what -- are different brands using different accounting practices?

I'm just trying to understand what the difference is here.

Yes.

It's very simple.

I mean, we had one brand who was using -- we had two acceptable accounting methods which are bordered as agreed with but there was one brand that was using a different method.

And so what we decided to do was make the brands consistent, just in case, as we go forward in the future the difference became material.

So we decided to revise the accounting, as I indicated in my notes.

Overall, it was just $0.11 over a five-plus year period so it's a couple of pennies a year.

Thanks a lot, guys.

Appreciate it.

Thank you.

Felicia Hendrix, Barclays.

Hi.

Good morning.

Thanks for taking my question.

David, this is for you.

This commentary about transaction and translation has left a lot investors very -- and us, very confused this morning.

So I'm hoping that you can walk us through a few things.

First is, can you just walk us through where this transactional impact is coming from?

You haven't really broken it out before like this.

And then, the second point is, if your new net yield guidance is up 3.4% as ex-translation and transaction, I'm just trying to figure out what the apples-to-apples comparison was for your prior guidance for net yields for the year which was up 2% at the midpoint.

If you ex out translation and transaction, what would that number have been?

Okay.

I think that's about three or four questions in there but I'll try to answer them one at a time.

The way to think of the constant currency that we're talking about is to think of it in terms of the prices that the consumer pays.

And so we're talking -- in the local currency so we were talking about a 3% to 4% increase in yields in constant currency then that's a 3% to 4% increase in price in the local currency that the consumer pays.

And that's probably the most important underlying metric for us to look at in terms of the strength of the business.

When you compare that 3% to 4% that we gave back to December, if you remember back in my notes in December, I did say that in constant currency, the yields were up 0.5% more so the two -- the comparison is back to 2.5% and so was approximately 2% in constant dollars and 2.5% in constant currency.

And that's why I've indicated in my notes that we went from that approximately 2.5%, up a 1 percentage point to a midpoint of 3.5%.

The difference between the two, I think everybody understands the translational impact when you have a brand like Costa in Euros and you translate it back into US dollars; that's the translational impact as a result of the change in FX rates that we capture in the constant dollar measure.

But the transactional impact, the best example of that is, like Princess.

Princess has a couple of ships sailing in Australia, and they sell in the local currency in Australia and when the Australian dollar moves compared to the US dollar, the transacting that back into US dollars is at a different rate.

And that is what we call the transactional currency impact.

Probably 80%-plus of the currency impact that we have within the company is translational.

And so, when currency would move by small amounts on a regular basis, the constant dollar substantially accounted for all of the movements.

But with the big moves and currency recently, if you look at our press release, you'll notice that the difference between the current dollar yields and the current currency yields are 7.5%.

Of that, 1.5% is the transactional impact so because currency has moved so much, the transactional impact has become more meaningful and therefore, we wanted to disclose it to everybody and make sure people were aware of what was going on.

Okay.

So that's very helpful.

So if I -- so your -- as you said in your release, based on the current booking strength, you're going to 3.4% and that's 1 point higher than your December guidance, and it looks like you beat the quarter by, at the midpoint about 1 point on yield.

So what I'm trying to figure out is, are you just passing through that upside or is your 3% to 4% inclusive of strength that you're seeing -- now new strength that you're seeing in the rest of the year versus what you were seeing before?

It's considerably more new strength that we're seeing and we did raise the rest of the year.

I guess the best way to kind of couch that is, I indicated that the net revenue yields was worth about $0.06 in the first quarter and we raised the whole year by 1%.

So that's worth a -- as we've always told you about $0.17 so you can see, not only did we flow through the first quarter, but we raised the rest of the year as well.

Okay.

All right.

Thank you.

James Hardiman, Wedbush Securities.

Great.

Thanks for taking my call and just to sort of follow-up on that last response to the last question.

So you raised or you flowed through the $0.06 yield beat to the rest of the year.

How should I think that, that remaining $0.11?

Is it more weighted towards 2Q or are we thinking evenly weighted to the rest of the year in terms of the yield increase on the guide for the remaining three quarters?

Also from a guidance perspective, I mean, we took up the remaining three quarters but I would like to point out that what we took up was this -- in the remaining three quarters, was the tick-up in net ticket yield.

We left from our December guidance for the remaining three quarters; we left the onboard and other yields the same.

And the reason they are being, obviously, you have a lot more visibility about ticket yields going forward than you do about onboard spend which, obviously, doesn't happen until it happens.

Yes.

It's more visibility, James, and the other reason is we also will have tougher comparisons going forward because we've several quarters beginning this late last year with increased rates of improvement in onboard spend so the comparisons will be a little tougher going forward, too.

Got it.

And then, just a question on currency from a demand perspective, are you seeing any impact in terms of bookings that you think represent the big appreciation of the American dollar, whether it's more Americans interested in traveling overseas given the strength of that dollar on cruises, or the relative value of a land-based hotel and some overseas destination?

Do think there's anything that's changed excluding the translational and transactional impact of currency just on the demand side?

On the margin, there could be a little bit of activity but we haven't really measured any significant impact of people responding to the currencies and a lot of it is just how we price things, too.

Local currencies for the European brands, dollar for us and so we haven't seen any big lifts in anything.

Alaska super strong.

But again, not sure that's a currency-driven thing.

Great.

Thanks, guys, and congrats.

Thank you.

Thank you, James.

Thanks.

Steven Kent, Goldman Sachs.

We'll take the next question.

Greg Badishkanian, Citigroup.

Great.

Thanks.

I'm here.

So, hey, the -- my question is, obviously you raised the yield guidance which is good to hear.

And if your -- if you kind of think about the different regions, where do you feel stronger about for the current year?

Where you have more confidence and just kind of breaking out, the 3% to 4%, is it going to be a little bit stronger in Europe than the Caribbean?

How would you kind of characterize -- how would you characterize that?

Well, I think, clearly, we are expecting a relative uptick in the Caribbean.

The Caribbean was really crowded last year.

Ingoing forward, we see strength in the Caribbean and there's going to be a different capacity level in the Caribbean so that will bode well as well and is easier comparison for the Caribbean relative so the Caribbean's going to be relatively stronger.

We've seen strength in Alaska, but overall, we are seeing yield opportunities everywhere in the world but on a relative basis, if you are looking for it, I would have to say on a relative basis, the Caribbean will look even stronger than some of the others.

Yes.

Good.

And from what we can see, it looks like the Caribbean, especially Carnival brand seems to be picking up throughout the year.

So is that -- would you expect the Caribbean net yields that you're receiving to maybe accelerate throughout the year?

Or is it a one-time step-up function in the second quarter and it will be consistent?

Yes.

It's early to tell but it -- we are seeing a continual improvement in the overall environment, particularly in the third quarter where the industry capacity is down double digits.

So we are expecting to see a continual improvement, at least through the third quarter, and it's very early for the fourth but we are forecasting good, strong yields for that there as well.

Good.

Makes sense and good to hear.

Thank you.

Thank you.

Harry Curtis, Nomura.

Good morning.

Going back to your CapEx, as you layer in the progress payments for your new ship orders, to what degree will it impact your ability and desire to return cash to shareholders over the coming three years?

Well, you know, first of all, we are clearly focused on delivering double-digit return on invested capital.

As we move towards that and are successful in that, obviously, we're going to generate a lot of cash.

And the excess cash that's not being reinvested back into the business, as in the past, will be distributed to shareholders, either through dividends and our share buyback.

So we do see an opportunity to deliver more to shareholders in those -- in that timeframe going forward, based on our expected continued progress on the path of double-digit returns on invested capital, while at the same time, having the capital required to invest in the business to be able to maintain that performance and build on it.

Is it more likely that you take the (multiple speakers) -- go ahead.

No.

(multiple speakers) But I'm just wondering.

Go ahead, Harry.

Bobbing and weaving.

Okay.

So I'm just wondering if it's more likely to see, first, a lift in the base dividend versus more aggressive share repurchases.

That's a Board decision and we'll make the decision at the time.

Historically, we have a certain pattern but we'll make that decision along the way.

Okay.

And then --

(multiple speakers) It is nine ships and all that, but the reality is it's still just two or three ships a year and that's not dramatically different than what we've done in the recent past here.

Still measured capacity growth, still managing capital, and we have to -- the only way we're going to get to double-digit returns on invested capital is through yield and revenue.

But we have to be disciplined and cost containment and we have to be wise in our choice of capital deployment and ensure that any capital we deploy does give us double-digit return on invested capital so we have clear line of sight on managing and expect to be able to return to shareholders.

Yes.

That leads to my other question, which is, how much net growth do you see in the fleet over the next several years?

And even beyond, as you layer in these -- the new ship orders, and particularly, do you see much net growth in the key markets being Europe and North America?

On the contracted ships that we have through 2018, the compounded annual growth rate in capacity from 2014 to 2018, there's only 3% and that's with a calculation that was done with the currently announced ship exit.

So the numbers may actually be slightly lower than that as we continue to remove ships from our fleet.

I mean, we're removing four from the fleet in 2015 and we do expect that we will remove more in 2016, 2017, and 2018.

When you start balancing that between the markets and you just look at what is announced relative to the North America, European and Asian markets, within that 3%, you're seeing a 1% to 2% increase in North America and Europe, the more established market and like a 20% increase in Asia.

So overall, as we make more announcements, I think those numbers will continue to move probably lower in North America and Europe, and higher in Asia.

Very good.

Thanks for the help.

Jaime Katz, Morningstar.

Thank you.

I guess my question is more surrounding this new Chief Procurement Officer role and where you guys see the best opportunity to leverage or maybe use the entire business to reduce expenses and any insight you have to that.

And then, if you have any added commentary on what brands you might prefer to add the new ships, too, that you announced yesterday where those best opportunities are.

Thanks.

You bet.

I'll start with the new ship comments.

The only color that I'll give that -- I can't remember whether it was in the press release or not is that some of those ships will be purpose built for China, and so China is definitely a market that will be receiving some of those new ships.

But in terms of the specifics on the brands, we're still working that through with the brands and the yards and once we've completed that, we will be happy to share it with you.

And then, the first part of your question concerning the Procurement Officer, Julia Brown is well-known in the procurement field.

She has had a highly successful track record at Kraft and now Mondelez and just a real star in procurement and given the scale of what we have, we already have a line of sight of offsetting inflation as we've mentioned $70 million, $80 million this year and we see that going on for several years.

But it's in our best interest to have a top level procurement person overseeing that effort and collaboration with the brands to ensure that we not only deliver on it but have the opportunity to beat it.

Thank you.

Thank you.

Ian Rennardson, Jefferies.

Yes.

Thank you for taking the question.

I have two questions for you.

The first one is it looks to me as if you've excluded the negative transactional effects in your yield guidance but left in the positive effect in the cost guidance.

If that's so, what is the effect?

What would be the like-for-like comparison on costs?

And secondly, not being a currency expert, can you give me another example of what a transactional negative effect on yield would be, because it sounds to me like moving Aussie dollars into US dollars sounds like a translational effect.

I might be missing something there, though.

Thanks.

Okay.

On the revenue and cost, basically because of the movement in currencies, we did get a transactional positive impact in costs and we lowered our cost guidance in constant dollars.

So we did not increase our spending to offset that.

We just allowed the transactional cost benefit to flow through.

However, on the revenue side, we had a negative transactional impact of revenue, but we increased our expectations for pricing, which offset the transactional impact on revenue.

So in the end, the revenue guidance in constant dollars stayed the same but on the costs, it went down.

So hopefully, that, that explanation is clear.

Now, you asked about the Aussie dollar and you said that it was a transactional -- a translational impact.

It depends on the circumstance so the situation that I gave was Princess Cruises, which is a US dollar functional currency and when it's spelled in Aussie dollars and it brings it back to US, that's transactional.

Now, that is different than P&O Cruises Australia, which has an Aussie dollar functional currency and when you translate that back into US dollars, that is translational, so they have different basis and as a result, it's two different types of transactions.

Yes.

Very clear.

Thank you.

Steve Kent, Goldman Sachs.

Hi, we'll try again.

Can you hear me?

Yes.

We can.

With the little echo, Steve, but it's good.

Okay.

So can you just talk about the way you're handling costs?

The timing keeps on getting pushed back.

It seems like your guidance is consistently -- it's a little too conservative but then you say in your press release that the costs moved or you didn't use as much or what the issues are.

It seems to me like that cost variable seems to be moving around and keeps on being pushed forward.

And then, the other thing is near-term demand has been pretty strong the last few quarters, leading to some of the earnings beat.

Is that a change in the way the consumer is acting?

I just wanted to understand that whether it's just -- there's been such change and we're just seeing closer in bookings versus let's say five years ago or three years ago or 10 years ago.

Yes.

I'll answer the second part first.

In terms of near end bookings, that has been a trend in the business in recent years that bookings were occurring closer and closer to time of sale.

So that has been a trend.

We have -- are enjoying some better -- improved booking curves now in terms of bookings occurring further out, both in Europe and in the US.

So that's encouraging.

It's not back to where it was, as David mentioned, earlier on the call, to -- in the past, but we are seeing a strengthening of the booking curves and that's really encouraging.

So, yes, the consumers have changed behaviors to an extent but we also see through the recent results that we can further improve our booking curves and ultimately, our pricing.

Go ahead, David.

Yes.

And as far as costs are concerned, Steve, I mean, this has been -- we've talked about this a lot over the years.

We basically indicated that you should try to judge us on our costs for the full year as opposed to the quarters.

I mean, our cost base is almost $8 billion in total, so that's $2 billion a quarter and we have to try to lay out exactly when we're going to spend every single dollar and it's very hard within a three-month period to get it perfect.

I mean, things vary, whether it's advertising expense or crew travel or some other hotel costs; it's very hard to pin down every single dollar in $2 billion for each quarter but we do have plans for the year.

People know what they are.

They are flexible.

They do change but for the year, we have a pretty solid guidance and we stick to those plans but we don't force people to spend it specifically in a particular month or a particular quarter.

We allow people to make decisions and change timing to optimize the business and that's what you would want us to do over time.

So hopefully, that's helpful.

And it's just a little bit of a seasonal as they should be between the quarters.

Okay.

Just one other quick one on this is, you say that currency was a headwind but better operational metrics closed the impact to only a $0.05 headwind.

How much did the lower fuel price help us, though, because your fuel price per metric ton guidance for the full year now has decreased by $30 so I'm trying to get a balance of those two issues?

Okay.

I'll give you a couple of numbers so that you fully understand.

On a full-year basis versus the December guidance, the currency impact was $0.28 and the net fuel positive was only $0.02 so that is net a $0.26 headwinds that we were facing.

We improved our overall guidance by $0.21 and therefore, the decline in the midpoint of $0.05.

And most of that $0.21, as I indicated before, was the 1% increase in the revenue yield which is worth approximately $0.17.

So that's how the math works.

The -- your point about the fuel, yes, the fuel price did move, but one of the things the fuel collars or their fuel derivatives offset the big chunk of the fuel price movement, and the reason that, that happened was, while the Brent fell, our fuel price did not fall by as much as Brent because when we did our December guidance, the crack spread was 75% roughly speaking.

And at this point in time, it's 81% so Brent fell by far more, 6% or so more than the price of the fuel that we purchased.

And so that's why it wasn't a perfect 50% offset there.

Okay.

Thank you.

Assia Georgieva, Infinity Research.

Good morning.

Congratulations on the excellent numbers.

I had one quick question on the transactional issue.

If we assume that the Princess Ship sales in Europe for a week-long itinerary and prices at EUR1,000 per person and we have a cost of ship sailing that those same dates for EUR1,000, wouldn't translate both of those at the same exchange rate?

And David, are you just breaking down the Princess piece into transactional and the cost of piece into translational?

Okay.

All we're doing, basically in terms of the exchange rates, the rate at which we would actually be go back into US dollars is the rate on the day that it was paid, so it's theoretically both cruises were paid for on the same day, you use the rate that the cruise was -- the booking was paid on.

And all we are doing is separating it between translational and transactional because the Costa would be translational and that (multiple speakers) because it's Euro-based and the Princess would be transactional because it's US dollar functional currency.

So it's the same magnitude if it was paid the same day but it's two different points of impacts.

And the reason why the transactional -- the reason why I said the transactional wasn't as important in the past is because it represents a much smaller percent of our business.

And --

In terms of sourcing?

Yes.

In terms of sourcing.

So the movements and currency didn't affect the transactional to any great extent is whereas we always had translational and that's why we -- in the past constant dollars were fine but now with the big movement in currency, we have to look at local constant currency.

As well as --

Great.

This was very helpful.

I appreciate it.

And my second question relates more to the European-sourced passengers.

They seem to be booking much closer for European sailings because they're closer to the actual port of departure and there seems to be a mentality of, I guess, closer bookings in general.

After the events -- the unfortunate events, have you seen any change or is it still too early?

Are people holding off?

Two comments.

One is, in Europe, we are actually are seeing versus prior year in the previous few years, that the booking curves are further out.

So we are seeing that both in Continental Europe and in the UK.

The events that you referenced in Tunisia, that was just tragic incident and obviously, we offer our sympathies to those directly affected and to the people of Tunisia so that was a terrible tragedy.

At the same time, it represents 2% of our port alls, so from that standpoint, not overly significant.

But beyond that, the impact in terms of psychology of travel, whenever there are incidents like this, it affects the psychology of traveling, in a different source markets around the world, it affects it more or less.

For example, in North America, some people are just nervous about going to all of Europe.

They don't think about specific locations.

But at the same time, we'll just have to monitor and see what the long-term effects are but there has been a history of the market response to these things and historically it dissipates.

And we feel confident in the guidance that we put forward to you based on what we can read at this time.

Okay.

Arnold, thank you so much for that color and David, thank you for running me through the example.

Thank you.

Sharon Zackfia, William Blair.

Hi.

Good morning.

So most of my questions were answered.

I won't ask about translation versus transaction again.

(laughter) I wanted to talk about the ad campaign.

So I mean, obviously, with the Super Bowl, you got so many impressions and you did kind of more of a consolidated multi-brand campaign, I think for the first time.

I mean, how are you measuring the effectiveness of that?

Is the change kind of your media strategy going forward?

Just any thoughts on that would be helpful.

Yes.

We have an internal joke here that almost anything good happens, we blame it on the Super Bowl ads.

So if the food is especially good in the cafeteria, it was hey, the Super Bowl ad did it.

But the reality is that following the advertising and direct impact is always a difficult challenge.

What we can measure is the level of communication, website hits, impressions, conversations around the brand, that we can measure and so we know we have a lot more conversations generated about cruising.

There's no question about that.

We would hope that, over time, that translates to greater demand and ultimately, bookings and higher yield so we have confidence that, that, combined with all the work the brands already do, combined with a public relations effort that we have in general, things like the naming of the Britannia, things like the Rose Parade, as I mentioned, with Princess and the opening comments.

All of those things create positive noise and consideration for cruising.

And we do try to measure, of course, and we do track and we tried to measure uptick in bookings or -- and so on, to make certain that we're getting the best results from the dollar and getting a return on the investment.

It's a difficult thing to do because we're also doing product enhancements onboard and we know those.

We can track that directly in terms of onboard revenue responses and in terms of guest satisfaction scores and what have you.

So we feel it accomplished what we set out to do.

We'll be evaluating it through the course of the year to figure out what to do next.

But we have four ships, three ships and a baby ship, that we're going to introduce to the market and next year in 2016, that's going to provide us with tremendous opportunity for PR events to build awareness and conversation and we're going to factor that into our planning as well.

Okay.

Great.

Thank you.

Thank you.

Stuart Gordon, Berenberg.

Yes.

Good morning, guys, just a quick question on the onboard spend, I was just wondering whether there's any way you could give us some color on disaggregating what I think you've commonly referred to as some changes in consumer behavior onboard ships and their spending and what would be consumer recovery to get a flavor for where that boost and onboard spend is coming from, please?

Well, we always feel that the better economy, the better off we are but the reality is our onboard spend increases is across the board.

So it's clearly not only tied to consumer response from economic improvements because it's everywhere.

So we know that it has been, in part, due to the stimulation of the brands working together, sharing ideas, building on each other's idea, sharing best practices.

For example, the one example I gave, the Wi-Fi at Sea is a comprehensive conversation about how do we enhance conductivity onboard the ships for both our guests and our crew.

And coming out of that, a number of things we've done collectively and some individually by brands based on the collective sharing and discussion.

And ultimately, it's led to a nice uptick in both guest satisfaction scores with conductivity and actually and also in terms of onboard revenue.

So we would see far more of the benefit coming from focused actions and efforts on the part of our outstanding employees that have revenue management responsibilities, onboard revenue responsibilities and their working together and sharing best practices.

Okay.

And just a follow up, then, I mean obviously that's alluding to the fact it's partly what you're doing to encourage changing consumer behavior.

I mean, although the comps will get harder, does it give you some confidence that the acceleration in onboard spends and not forsaken to suggest it stays at 7.7% going forward, but it will stay better than perhaps GTP-based thinking?

Well, obviously, we want to drive it as much as we can.

And it's not so much change in consumer behavior as much as us listening to our guests and giving them more of what they want.

And if you give them what they want, they'll buy it.

So yes, we feel that we are going to work it and continue to work it.

We think there's additional growth prospects but at this point in time, we think the prudent thing to do is the guidance that we gave.

Yes.

Thank you very much.

One more question.

Perfect, our last question.

Dan McKenzie, Buckingham Research.

Hey.

Good morning.

Thanks, guys, for squeezing me in here.

My question is on -- Good morning, Dan.

Good morning.

My question is on the revenue management practices.

I guess, first, I'm just wondering how material that benefit is and then separately, just timing, is the benefit really limited to 2015 or is there an annualization of fact that is going to continue to be a tailwind in next year as well as 2017?

Well, in terms of revenue management and dynamic pricing and all of that, that is an ongoing effort.

It should yield results for some years to come.

We want to accelerate the learnings we have and accelerate the adoption of those across the brands.

It's very significant for us and we are at roughly $80 million passenger cruise days a year so $1 a day across our fleet is $80 million and so $10 a day is $800 million.

So revenue management is absolutely a prime area of focus; it's the biggest driver we have and small tweaks add up to real dollars.

So there, whether it's the actual tools that we use, the management systems that allow us to do more inquiry and change prices, at smaller increments faster and so on and so forth, or whether it's the actual presentation and psychology and packaging of pricing, all of that, all of those are areas that we continue to mind.

We've got a clear line of sight from the study on about 21 different areas to explore.

We're doing that, luckily, with nine brands.

We can do a lot of that simultaneously as opposed -- two in this brand, two in that brand, get the learning and share it more rapidly.

We have a guru in place, a coach that's there to monitor process and encourage the brands and to make certain that the communication takes place across the brands.

And it's going very well.

So we have an expectation that, no pun intended, it will yield results for several years to come.

Very good.

Thanks so much, guys.

Thanks, Dan.

Thank you.

Thank you all very much.

I really appreciate your interest and we are happy to deliver a good quarter and we're looking forward to building on that momentum.

Thank you very much.

Thank you.

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

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

Thank you, everyone, and have a good day.