嘉年華遊輪 (CCL) 2015 Q2 法說會逐字稿

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

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

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

Our team has continued to make strong progress so far this year, as we march toward our goal of double-digit return invested capital in the next three to four years.

In the first half of 2015, albeit from a low base, our earnings are up fivefold year over year, and we are well on our way to our second consecutive year of 25% annual earnings improvement.

This was another strong quarter for our Company, more than doubling the earnings from the prior year, and significantly exceeding guidance by $0.12 per share, of which only $0.02 resulted from further improvements in a combination of fuel and currency.

All of our North American brands had a strong performance, led by the Carnival brand, which achieved a double-digit improvement in ticket revenue yield, a testament to the strength of the Carnival cruise line product, and the brand team's incredible execution in delivering a vacation experience that truly resonates with our guests.

The fund shift 2.0 features, including Guy's Burger Joint, the Punchliner comedy show, and Seuss at Sea, to name just a few examples, are continuing to elevate the guest experience.

The series of investments in product innovation, travel, agent engagement and marketing have delivered, and the brand continues to outperform.

The power of our diversified portfolio overcame the Continental European brand challenges from macroeconomic and geopolitical uncertainties.

During the quarter, we made progress on multiple initiatives, designed to further our journey toward consistent yield improvements by creating demand in excess of supply.

Our award-winning public relations effort is providing ongoing opportunity to attract new cruisers by creating more conversations around cruising.

A good example of our ongoing public relations effort was demonstrated by Cunard, creating nearly one billion media impressions around its 175th anniversary celebration, as the Three Queens took center stage in what may have been the largest attendance at a single-day maritime event anywhere in the world.

To witness, and to feel the deep sense of pride and awe emanating from its estimating 1.3 million people, packed on both banks of the Mersey, stretching the 22 miles from Liverpool to the mouth of the river, as the Three Queens, Elizabeth, Victoria and the iconic Queen Mary 2, did their own version of a Riverdance in a phenomenal display of engineering and maritime technical excellence and execution.

It was an incredibly uplifting and moving experience.

For several hours, the one million plus onlookers were totally captivated by our ships and Cunard.

And I'm always moved by the deep connection of our brands, our history, and what we do collectively with not just our guests, but the broader communities they represent around the world.

It was a job exceedingly well done by our Cunard and Carnival UK shipboard and shore-side team members, whose execution was a marvel unto itself.

The event drove a tremendous amount of public interest, as I have mentioned, and followed on the heels of the incredible launch of Britannia, christened by her Majesty Queen Elizabeth II, an event itself which drew significant international attention and showcased cruising on a global scale.

While creating demands through events such as these, we continue to manage capacity growth in our core source markets in North America and Europe, by redeploying capacity toward emerging markets, attracting increasing numbers of new to cruise.

With the additional capacity redeployed to China in 2016, we will offer an industry-leading approximately four million passenger cruise days dedicated to the burgeoning China cruise market.

That's substantially more than our closest competitor.

Moreover, in 2017, our Princess brand will introduce the first ship to be purpose-built for Chinese consumers.

That's an industry first.

While today, China represents just 5% of our global guest, its growth will continue to have significant ancillary benefit by constraining capacity in our core markets in both North America and Europe.

So growth prospects in China contribute to enhanced relative scarcity elsewhere, in which we market the remaining 95% of our capacity.

Over time, we are confident that China will become among the largest source markets for cruise, given the increasingly favorable demographic trends and high satisfaction scores we are commanding.

Chinese outbound travel is expected to double by 2020.

And we are certainly well positioned to capitalize on the explosive, pent-up demand for international travel, following the recent easing of travel restrictions, coupled with a booming upper middle class.

Beyond the growth opportunity in China, we are accessing a new segment of the global market through the launch of our tenth brand in the Carnival Corporation of families, Fathom.

The purpose is to do good.

And in doing so, we do expect the asset to perform financially, as well.

We believe US, UK, Australia and Northern Europe over-index with travelers in this segment.

Fathom will offer travelers authentic, meaningful experiences to targeted destinations, to work alongside locals for transformational community impact.

At the same time, Fathom creates a holistic sustaining impact through a market-driven business model.

Now, this is a new travel category for us.

And partly, from a pure business perspective, Fathom generates a totally different conversation around cruising, stimulating greater demand for cruising in general.

To date, Fathom has already garnered over 3.5 billion media impressions, and growing.

Beginning in April of 2016, Fathom will embark on seven-day voyages from the Port of Miami to its first impact destination, Puerto Plata, in the Dominican Republic.

This is also where our new $85 million Amber Cove port development is set to open this October, and ready to receive several of our other world-leading cruise line brands.

Fathom is headed by our new global impact leader, Tara Russell, a proven social entrepreneur with a track record of developing self-sustaining impact entities.

You can view the launch, and find out more about Tara and about Fathom, at fathom.org.

Including Tara, talent development continues to be an important focus.

And we have effected change by complementing the solid core with additional new talent, further strengthening our Management team.

In addition to seven new brand presidents, we have added talent in the areas of maritime, strategy, revenue management, communications, procurement and innovation.

Our team is totally engaged in communicating, collaborating and cooperating to capture the full benefit of the latent opportunity inherent in our industry-leading scale, both in driving revenues and in containing costs.

We continue to make progress on our road map to advance revenue science and systems, including investing in dynamic pricing expert brand teams, to improve our decision-making capability, establishing price boundaries for relative price position across our portfolio, and piloting regional price coordination in Alaska and Australia, for example, through increased booking visibility across the brands, and through joint decision-making.

Now, we've also made progress in our initiative to drive onboard revenue, as evidenced by the 6% onboard revenue growth, and that's in constant dollars, achieved this quarter, the fourth consecutive quarter of mid-single-digit growth in onboard revenue.

The outsized growth in casino, VaR and communication realized this quarter was again partly driven by best practice sharing.

The successful rollout of our casino engagement program, beverage packages, and additional bandwidth are just a handful of examples of initiatives that drove our onboard revenue strength in the past few quarters, and will continue to pay dividends over time.

Now, all of these initiatives are building blocks for capturing multi-year yield growth, needed to deliver double-digit return on invested capital in the next three to four years.

We remain focused on our initiatives to contain costs by leveraging our scale, and we remain on track for savings of $70 million to $80 million in 2015, and continuing over a multi-year period.

Now, we continue to look for opportunities to invest and generate a return, including our stepped-up marketing investment in the second half of this year, to build a strong base of business heading into 2016.

Progress continues on our fleet enhancement program, as we finalized the contract with Meyer to build four state-of-the-art ships, designed to provide an exceptional vacation experience tailored to our guest preferences.

This was part of our largest strategic partnership announced in March with Meyer, in both Germany and Finland, and with Fincantieri in Italy, to build nine ships over a four-year period, from 2019 to 2022, in keeping with our measured capacity growth strategy.

These next generation ships will be the most efficient ever built, with a total guest capacity of 6,600, through an innovative design pairing incredible cabins with even more innovative use of the ships' public spaces.

Adding price per berth, in line with our existing order book, these ships will significantly enhance the return profile of our fleet.

Moreover, these next generation ships will pioneer a new era in the use of sustainable fuels, through our green cruising design, representing the first cruise ships to be powered at sea by LNG.

This was yet another strong quarter, once again exceeding guidance.

Now, while we remain confident of delivering 25% earnings growth again this year, we caution you, given ongoing macroeconomic and geopolitical risks, not to get ahead of expectations for the year, simply based on our consistency and exceeding our quarterly guidance.

We do, however, remain on a clear path to achieving double-digit return on invested capital.

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

We are committed to driving relative scarcity by creating even more demand for our brands that outpaces 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 through our initiatives to leverage our scale.

And we look forward to enhancing total shareholder returns, including further opportunity to return capital to shareholders, as we drive toward double digit return on invested capital, and our already strong cash flow continues to build.

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

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.

I'll start today with a summary of our guidance-topping second-quarter results.

Then, I'll provide some insight into our current book position, and finish up with some color on our 2015 June guidance.

Our non-GAAP EPS for the second quarter was $0.25.

I'm excited to report that this was $0.12 above the midpoint of our March guidance.

The improvement was driven by three things.

First, $0.06 of net revenue yield, mainly due to better-than-guided onboard and other yield.

Second, $0.03, essentially from lower operating costs, due to the timing of expenses between the quarters.

And third, $0.02 from the impact of fuel pricing currency.

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

Our capacity increased 2%.

The North American brands were essentially flat, while the European, Australia and Asia brands, also known as our EAA brands, were up over 6%.

Our total net revenue yields in the second quarter were up over 4%.

Breaking apart the two components of net revenue yield, net ticket yields were up 3.5%.

Both sides of the Atlantic were up, but the improvement was driven by larger increases at our North American brands, particularly Carnival Cruise Line, as Arnold indicated.

If you remove the unfavorable transactional currency impacts, the net ticket yields were up almost 5% on what we refer to as constant currency.

The increase in net ticket yields was across the board, with improvements in Caribbean, Med and Northern European itineraries.

As Arnold indicated, onboard and other yields increased almost 6%.

Again, both sides of the Atlantic were up, but the improvement was also driven by the larger increases at our North American brands.

Net cruise costs per ALBD, excluding fuel, was up about 6%.

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

During the second quarter, we did benefit from the net impact of fuel and currency by $0.10.

In summary, second-quarter non-GAAP EPS was $0.16 higher than the prior year, driven by improved net revenue yields worth $0.20, and the favorable net impact of fuel and currency, worth $0.10.

Both of which were partially offset by higher net cruise cost, excluding fuel, costing $0.15.

During the second quarter, we had a $7 million restructuring expense in our US GAAP results, but excluded from our non-GAAP results, as you'll see in the reconciliation table in our earnings release.

For the full year 2015, we anticipate a total of $27 million of restructuring expenses, as we further leverage our scale, which will benefit us in 2016 and beyond.

Let's turn to booking trends.

Bookings for the next three quarters, taken during last 13 weeks, have been strong.

Volumes are well ahead, but at slightly lower prices, driven by unfavorable transactional currency impacts.

At this point in time, cumulative fleet-wide bookings for the next three quarters are well ahead, at slightly lower prices, but again driven by the unfavorable transactional currency impact.

Our increased base of bookings puts us in a strong position as we finish out 2015 and begin 2016.

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

Caribbean itineraries are significantly ahead on occupancy, at slightly lower prices, which bodes well for pricing on future bookings, and pricing in last six weeks has been higher.

Alaskan itineraries are nicely ahead on both price and occupancy.

All other North American brand deployments combined, which includes the seasonal European program, are nicely ahead on occupancy, but at lower prices, which are being unfavorably impacted by transactional currency.

For our EAA brands, all itineraries combined are nicely ahead on price, with occupancies that are in line with the prior year.

These solid booking trends are consistent with our guidance.

Now looking at our full year 2015 guidance.

We expect net revenue yields to be up 2% to 3% versus the prior year, which is slightly better than our March guidance.

Net revenue yields, on a constant currency basis, after removing the transactional currency impacts, are expected to be up 3% to 4% versus the prior year.

This is consistent with our March guidance.

The additional strength we have seen in Caribbean and Alaskan ticket yields, as well as onboard yield, has been offset by geopolitical risk in the Med and macroeconomic uncertainties in Continental Europe.

Now turning to costs.

For the full year 2015, net cruise costs without fuel, per ALBD, are now expected to be up 2.5% to 3.5%.

This is a slight increase from our March guidance, driven by decisions to increase spending on advertising, and certain strategic projects in the back half of 2015, both of which should benefit us in 2016 and beyond.

For 2015, we are forecasting to benefit from the net impact of fuel and currency by $0.16.

Taking all these factors into consideration, our non-GAAP EPS guidance for the full year 2015 is now $2.35 to $2.50, versus $1.93 for 2014.

On a final note, I wanted to share with you our current rules of thumb about the impact that currency and fuel prices can have on our results.

To start with, a 10% range in all of the relevant currencies, relative to the US dollar, would impact our P&L by approximately $0.25 for the full year, and $0.18 for the remainder of 2015.

This includes both translational and transactional currency impact.

For fuel price changes, a 10% change in the current price represents a $0.10 impact for the remainder of 2015.

The third rule of thumb relates to our fuel derivative portfolio.

A 10% change in Brent would result in a $0.04 change in the realized losses on fuel derivatives for the remainder of 2015.

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

(Operator Instructions)

Our first question comes from the line of Robin Farley, with UBS.

Two questions.

One is, I wonder if you could give a little bit of color around the Costa brand?

You mentioned Continental Europe, and the economic issues there.

So I -- maybe Costa won't be seeing positive yields this year.

I wonder if you could put color around that?

And then the other question I had is, you've talked about increasing advertising expense.

And I guess I was curious, if your volume sounds like it's up nicely.

And so if the issue is on the currency side, it seems like advertising is something that would -- you would use to drive volume.

But if your volumes are up already, why would advertising be the solution to those FX-related pricing?

Thanks.

Good morning Robin, and good to hear your voice.

First, I'll talk about the advertising.

We're always looking for opportunities to invest, to create additional demands.

Because ultimately, the key for us, of course, is relative scarcity, creating demand in all of the markets around the world -- excess of supply and excess of capacity.

And so when we recognize some opportunities to drive additional demand, if the brand teams, or if all brands, come up with innovative concepts that we think can generate more conversation around cruising, and attract new to cruise, then we're willing to invest in that.

And so that's the basis for it, is to an ongoing investment to continuously generate additional demand.

With regards to Costa, I'll let David make a few comments, and then I'll weigh in.

Sure.

As we had said before, in the notes, there is a lot of macroeconomic difficulties in Europe.

The economy seems to be bouncing along at the bottom.

Our Costa brand is doing very well.

But as a result of the geopolitical risk and other things, they have had some challenges on the yield side this year.

And so as a result, overall, our EAA brands, as I said in my notes, are up.

They are all doing very well.

But the Costa does face its challenges.

Okay, great, congratulations on a great quarter.

Thank you, Robin.

Our next question comes from the line of Felicia Hendrix with Barclays.

Hi, good morning.

I have two questions.

The first one is, we have been hearing from travel agents that all the cruise lines in the Caribbean are exercising discipline regarding near term discounting And as you know, one of your peers made a very clear splash about that.

Just wondering what your stance is on that?

And then also, I just wanted to confirm that the increase in advertising that you talked about is not inclusive of any promotional spending?

Okay.

So concerning the situation in pricing, obviously, we all independently make our pricing decisions.

We said, over two years ago almost, that we were looking at changing the psychology of pricing, concerning our brands in the Caribbean, in terms of guests waiting until the end and seeking discounts.

And so we trialed a number of things, and risked a little occupancy at times for that, and generated some success with that.

And we continue to try to put pricing integrity in, and discipline in, for our brands, independently of what anyone else does.

So for us, we have seen some positive trends there, and we'll continue on that course.

When you asked the question about advertising and promotion, I think obviously, we are looking at promotional activity, as well.

And when you say promotion, I don't know if you're referring specifically to travel agent promotion effort or if you -- so could you clarify your question for me?

Yes, I think the concern that we've heard from some investors this morning is, it gets to more of the discounting part of it.

So just your advertising is what you maybe talked about in the last question, and just that --

Yes, no, it's absolutely not discounting ticket pricing or anything.

Not that kind of investment.

This is to create demand and awareness and conversation around cruising.

Thank you.

Great.

David?

Can you help bridge something?

You beat the quarter by $0.12.

You're on a current dollar basis, which flows through to earnings.

Your net yields were improved by 1.5 points at the midpoint.

Your net cruise costs ex-fuel improved by a 1.5 points at the midpoint.

Your fuel price per metric ton improved since your last guidance.

You said your fuel hedges benefit by -- your FX and fuel benefit by $0.16 for the full year.

When I add that all up, that comes out to a lot more than, at the midpoint, $0.02 increase to your full-year earnings.

So how much is that advertising -- increased advertising spend?

And can you just help bridge your earnings guidance versus what looks like to be pass-through of a lot more than that?

Sure, no problem.

When you look at fuel and currency for the full year, it's actually pretty flat versus our March guidance.

So what's coming through is, we do have a little bit increase in the revenue yield, as well as the cost side.

And trying to understand what's going on versus the second quarter, yes, we did beat by $0.12.

But remember, $0.03 of that was simply timing of expenses between the quarters.

So on a full-year basis, it's really $0.09.

And we also had about a $0.05 increase in overall costs flowing through, which would be mainly advertising.

But as I indicated, some strategic projects that we decided to invest in.

And so net, there was about $0.04 or $0.05 of improvement, which gave us the confidence to increase the bottom end of the range by $0.05.

Okay.

(multiple speakers) Not really, because net revenues -- I can take this offline.

But if you go line by line, you get more than -- so you said it's net $0.04 to $0.05 improvement, but you're increasing, at the midpoint, your full year by $0.02?

Okay, I think one of the things that you're quoting the constant dollar numbers, and Beth can take it offline with you.

No, I'm actually quoting the current dollar numbers.

The current dollar, but that's all impacted by currency.

So if you go --

No, I know, but that would be in your earnings number, right?

Correct.

But if you go to constant currency, basically our guidance for revenue yield, in constant currency, did not change.

We also just increased the cost a little bit.

And so overall, what you're seeing happening, as I said, for the full year, currency and fuel basically netted out.

So we did see a bit of an improvement in the bottom end of our guidance range.

Hopefully -- does that clarify it for you?

Yes, it does, thank you.

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

Good morning.

A quick follow-up.

(technical difficulty)

Harry, you're breaking up.

Is this any better?

Harry, no, you're still garbled.

Is this any better?

Not really.

Hang on one second.

Let me try another line, all right?

Thank you, Harry.

We can take another question while Harry's trying to --

Is this any better?

No, Harry -- it's a little bit.

We'll try to hear your question.

Give it a shot.

If we can hear you, we'll try to answer it.

Go ahead.

Okay, so my question is really related to 2016.

When you think about your 2016 bookings, (technical difficulty) they're looking?

And might that explain the increased lift in your marketing spend for 2016?

The question is relative to 2016 bookings picture, is that how does that look?

And is that driving the advertising investment?

Is that correct, Harry?

That's correct.

Let me answer the second part first.

Again, we're focused, overall, on delivering double-digit return on invested capital in the next three to four years.

To do that, we know we have to have sustained revenue growth, in terms of ticket and onboard revenues.

And to do that, we know we have to continue to create relative scarcity with demand and excess of supply.

So our decisions are not strictly for any reaction or anything to a period.

They're an ongoing, considered investment to create, over time, what we need to create.

And so overall, we're looking at a 3.7% capacity increase for 2016.

And for the first quarter, we're ahead on occupancy, which bodes well for pricing on the remainder of the year.

And we're only in June, so we have very little visibility into next year, outside of the first quarter, but we're cautiously optimistic about 2016.

(technical difficulty) I'll try one other question.

Hopefully you can hear me.

And in relation to China (technical difficulty).

So with the incremental capacity going into China in the industry, I'm just curious about what's giving you confidence that if more capacity is introduced, that you're able to (technical difficulty)?

I didn't get it all.

But it sounds like you're asking about, with the capacity going into China, what gives us confidence that we can continue to show positive results there?

If that's the question, the reality in China is, we already have the relative scarcity I've been talking about, in terms of trying to create additional relative scarcity in the more developed markets.

It already is there.

It's the biggest outbound tourist industry in the world, and is growing at a rapid rate.

In fact, it's expected to double by 2020, in terms of outbound tourism.

And so given that, we actually have relative scarcity, and we've seen continued strong yield performance with the capacity additions we've put in, to date, and we expect to see it going forward.

Okay, we'll leave it at that.

(technical difficulty)

Thank you.

Our next question comes from the line of Steve Wieczynski from Stifel Nicolaus.

Hi, good morning guys.

David, I don't know if you said this or not.

But I know you said $0.06, in terms of the beat in the second quarter, was based off better revenue yields.

Did you break that down, in terms of how much was ticket versus onboard?

I didn't, but I did say that it was essentially driven by onboard and other yields.

Okay.

And then could you guys -- Arnold, could you maybe help us out, and give us an idea of where you guys are, at this point, in terms of your book to load position for the third quarter and the fourth quarter?

Versus historically, and maybe versus last year, as well?

Yes, the reality is we're ahead on bookings, and so we have less inventory to fill for the balance of the year.

And that gives us the added confidence that we will deliver on the guidance.

And so bookings are strong at this point.

And in terms of yields overall, we're tracking with the guidance of 3% to 4%.

But is it -- can I follow-up on that?

Is it significantly better than where you've historically been?

I would say, over the last couple of years, it is well ahead.

And we are feeling very good about our booking position.

Okay, and then one more quick question.

The new ships that you guys put on order, that will be powered by the LNG.

Can you give us an idea of how much more fuel efficient those ships will be, versus a ship that was built two, three, four years ago?

Yes.

First of all, those ships obviously will be both LNG powered, as well as conventional fuel powered.

So -- but we anticipate, over time, that LNG is going to be a fuel of choice.

And based on that, we're preparing for the future.

But having said that, overall, those ships, versus the [existing fleet], are going to be dramatically more efficient, in fact overall.

Not just fuel-based, but overall.

We're talking as much as North of 40% more efficient.

Okay, great.

Thanks, guys.

Thank you.

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

Good morning, thanks for taking my questions.

Can you guys comment -- I know you've talked in the past on air and travel transportation initiatives, and the savings that you've made in that space.

And it looks like you have had those expenses decline the last couple quarters.

So can you talk about maybe any strides you've made there, and what we should expect in that, going forward?

Yes, we continue, through all of the initiatives, to anticipate the ability to offset inflation, which we peg at about $70 million to $80 million a year.

We're definitely on track, through the initiatives, to achieve that this year.

We have clear line of sight for achieving that in a number of years to come.

We've added some skill set, in bringing Julia Brown in, who is our Chief Procurement Officer for the Corporation.

She's worked -- already worked closely with the brand.

I have lots of anecdotes that -- I can share a little one with you.

We put all of the mattresses -- we buy a lot of mattresses a year (laughter).

And we put all of the mattresses in one place, for all of the brands, and everybody saw everybody else's mattress, looked at the quality and whatnot.

And we're going to see, probably, a 20% to 25% improvement in cost improvement in that.

While increasing, overall, the quality standard for the mattresses.

And we have the scores of those examples.

And there's plenty of opportunities for us to do that.

And so we're on that path, and see a clear line of sight on that $70 million to $80 million for several years to come.

Okay, and then I'm -- go ahead.

No, go ahead.

I'm curious, on a separate topic, I think one of your peers had commented on onboard spend for European consumers.

And it sounds like onboard has been really strong for you guys.

But I'm curious if there's been a bifurcation across consumers geographically, that you've seen?

And if you have any color on that?

I'll make a comment first, and then go to David.

Overall, again, for us, a lot of it is best practice sharing, taking innovation in each of the brands, and then sharing that across the rest of the brands.

So we've seen very strong onboard revenue trends in our businesses, as evidenced by the results, and continue to expect to see that.

David?

Yes, as I said in my notes, the onboard and other yields, is the increase was driven much more so by the North American brands than our EAA brands.

So there is some -- we are seeing some better improvement in North America than over in Europe.

And I'm assuming that's macroeconomic overall.

Okay, thank you.

(Operator Instructions)

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

Thank you.

To circle back on China, again, Arnold, you described the penetration opportunity there, and the demand opportunity.

In the near term, though, we've heard a little bit from some industry sources that there's been a little bit of pricing activity going on.

And if you could just refresh, for us, the ships are largely sold on a contract basis.

And then the end reseller keeps the difference, whatever they're able to sell it for.

So any comment that you can talk about, any recourse that you would have, if that's ongoing, in any way, in the near term?

And if it is it, is it MERS-related predominantly?

So any color there.

And then David, a housekeeping item.

The restructurings, just -- if you could just refresh how much you talked about there, for the full year?

And is that included or excluded from your annual EPS guidance?

Thank you.

Okay, sure.

So first of all, I guess, MERS.

We're watching that situation very closely, but frankly, we have not seen a significant impact so far.

People, obviously, always should pay attention to health issues.

But the reality is that MERS is very hard to contract.

And hopefully, people will get educated on the very low probability of contracting MERS.

We have itineraries from China that touch Korea, and we have modified some [voice] itineraries, at the request of our shift charters.

But one of the strategic advantages that we have as an industry, versus land-based destination, is our ability to mitigate when appropriate, and adjust itineraries to maintain guest comfort and satisfaction, as opposed to being locked into the surroundings, no matter what the circumstances are.

Technically, we do have a measure of protection by having charters.

But we don't expect this situation to become a material issue for us or our distribution partners.

And overall, we continue to see strength in China in the yields.

And our charters, all the feedback we're getting is, they're pleased financially at this point.

And the restructuring charges, Tim, it was $27 million restructuring expenses that we expected for the full year.

And just as in the second quarter, we've excluded the restructuring expenses from our non-GAAP results.

And remember, we give guidance on a non-GAAP basis, so it's not included in the overall $2.35 to $2.50 guidance we gave.

Okay, that's what we thought, thank you.

Thank you.

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

Hi.

Good morning.

Just a couple questions for you.

Arnold, you mentioned, a couple times, you want to achieve double-digit return on invested capital.

I'm not sure that you gave a specific time frame when you wanted to achieve that by.

Also, can you just discuss -- you also mentioned, a couple times, that you want to have demand greater than supply.

And I certainly understand that.

But then, what's the basis for laying out so many ships for such an extended period, going out into the 2020 period or so?

I'm just trying to figure out what the drivers are that gives you the confidence that that would happen.

And then just one final thing, on China, I know people are talking a lot about it.

Could you give us an update on the two memoranda of understanding you had with your Chinese partners?

Any progress coming to agreements on port development or shipbuilding with the Chinese partners?

Thank you.

Very good.

I'll start from the bottom up, and then we can go from there.

On the memoranda of understanding, Steve, you know Alan Buckelew, our Chief Operations Officer for the Corporation, resides now in Shanghai, in China.

And we've made very meaningful progress with both CSFC and the China Merchant Group.

And hopefully, we'll have something more specific to say, concerning specific joint ventures, in the coming months here.

But we are very excited about the progress we're making in that particular arena, and the continued support, overall, from the Chinese government to the cruise industry.

So we're very, very positive on that front, and hopefully we'll have more to tell you.

Concerning the ship order, as we articulates at the time, the overall -- the large order, the nine ship order, between Fincantieri and Meyer, that was done for a number of reasons.

Number one is prototypes.

So we wanted to get plenty of lead time for those yards to engage the subcontractors that needed to be engaged.

And for those subcontractors to know that both entities, Meyer and Fincantieri, would be building ships, and it wasn't a single order that they were competing for.

And so hopefully, that will lead to efficiency, and ultimately, a lower cost of acquisition for us.

From a practical matter, we have to plan way ahead, to secure the slots, and to give the yards plenty of time to work with us to perfect and effect the designs.

And so that's the reason for that.

The reason to build the ships in the first place is that, by the time those ships come in, we should have achieved our double-digit return on invested capital.

That's certainly our plan and our focus, and what we have clear line of sight on right now.

Three to four years is what we're saying.

We said, a year ago, three to five years (laughter).

And so in the next three to four years, we should be delivering on double-digit return on invested capital.

And then those ships, individually, each return well above the baseline double-digit return on invested capital, at 10%, well above that.

And so they allow us to enhance and sustain the double-digit performance out into the future.

I hope I answered your questions.

Yes, thank you.

Thank you.

Our next question comes from the line of Kevin Milota with JPMorgan.

Hi, good morning.

Had a question on the advertising spend.

Was hoping you'd give some color on what you've seen from a first-time cruiser, based on what you've spent in the first half of the year, late last year.

And is that really the reason for taking up spend now?

I guess secondly, what are you seeing, from a competitive perspective, as it relates to marketing and advertising, as well?

Is that an additional reason to spend now?

Look, first of all, for us, our business is pretty straightforward.

And so we consider our competition to be land-based vacations.

We have very differentiated product offerings, versus the other cruise companies.

We do all compete for new to cruise.

Because often, the new to cruiser has no concept of what cruise would best fit with them.

And that's where we count on our travel professional partners, especially, as well as our own in -ouse people, to make certain we get the right people on the right ships.

But our real competition for new to cruise is land-based.

And so we focus on that.

And so what we need to do, as an industry, as well as as a Company, is create considerable interest in cruising, and just get in on the conversation, and have people think about cruising.

And we've done that a number of ways, whether it was the Super Bowl initiative we had, we did it most recently with the launch of Fathom.

We did it with our reference, in terms of celebration of Cunard's 175th, Princess' 50th anniversary.

And all those things are interesting stories, and create opportunities for us to really talk about cruising, and get it in the conversation.

And so that's how we look at it.

We don't look at it as advertising, to out-advertise the -- we want the competition to advertise and promote.

One out of every two people who cruise in the world cruise with us, and anything that generates interest in cruising automatically helps us.

And frankly, it helps the other companies, as well.

So that's the focus of it, and we think we've seen some success.

There's so many variables in any given year, and any given market, at any given time.

But clearly, our results have been strong, and we don't doubt for a second that is in part because we have had some success through the individual brands, and then collectively, in generating more interest in cruising.

Let's keep in mind that, as a Company, we spend, we've said before, over $600 million a year in advertising spend.

And all we're talking about is a few percent change here.

As the year progresses, we continue to tweak things, and make adjustments, to be as optimal as we can be throughout the year.

So it's just a really small change in a big number.

And frankly, we're much more interested in the specific idea and execution, and how is it going to generate additional interest, than we are in the dollars.

We don't have rules of thumb about, we need to spend this amount of dollars, or anything like that.

We look at individual initiatives and projects, and things that we say, show me how we're going to generate a number of impressions, generate a conversation, with a specific execution.

(multiple speakers) Okay, thank you.

You can ask a follow-up, go ahead.

I guess I was just wondering, from -- based on what you've spent, have you seen a meaningful increase in the percent of first-time cruisers, if you look at a ship-specific basis?

I would say, overall, first-time cruisers are up dramatically.

Now, there's a number of things that contribute to that.

Beyond this year, I guess last year, we were at 3.4 million first-time cruisers, whereas the year prior, we were at like something like 2.7 million or 2.8 million, or something.

But there are a number of things that drive that.

Number one, we've got a lot of first-time cruisers because we're in China, okay, so that's part of it.

Another part of it is in the Caribbean.

There was so much capacity last year in the Caribbean.

The only way to fill those ships was to get lots of new first-time cruisers.

And so that drove first-time cruising, not at yields that we were happy with, but it drove an additional base load of first-time cruisers.

And then of course, all of the initiatives we had to create demand, and others in the industry have.

We think all of that collectively contributes to what you saw, in terms of the increase in first-time cruisers last year versus previous years.

Okay, very good, thank you.

Our next question comes from the line of Sharon Zackfia with William Blair.

Hi, good morning.

Just a question on the ship orders that you announced recently.

The -- I guess the new ships are going to have the capacity of 6,600 guests.

I know you alluded to, in the press release, about how you'll have more efficient use of the ships' spaces, in order to accommodate those guests.

I was hoping you could maybe elaborate on that?

And also, within the design of the cabins, are you going to do any single cabins, or anything outside of the box of what you've done historically?

First of all, the current space per guest, in terms of space per guest, is similar to the ships we have on order now, for those new ships.

So it really was innovative design.

And Micky Arison, and then Michael Thamm, who runs our Costa group, were very ingenious in the original conceptualization for these ships.

And then the new build teams in house, and at the yards, were able to follow through on the execution of that.

So we actually have an incredible guest experience, great cabins -- absolutely great cabins -- and really phenomenal public space.

And are able, on that platform, to have, as I mentioned, space per guest comparable to the ships we currently have on order.

So it really is efficient interior design, and very creative design.

Just to be clear, the 6,600 is total passenger capacity.

Based on two passengers per cabin, it's just North of 5,000 per ship -- passengers per ship.

Okay.

And some of those exceptions, as the ships are being finished.

But in some of the conceptualizations, there are some single-cabin concepts.

Okay, great, thank you.

Our next question comes from the line of Edward Stanford with Lazarus.

Good morning, everybody.

I'm just intrigued by your new Fathom brand.

Could you take us through why you decided to do this?

How big is the potential market?

Do you see it as an interesting growth area?

Was it a requirement with the Dominican Republic, as part of your investment in that country?

Perhaps you could elaborate on that, please?

Yes.

So first of all, the reason behind Fathom.

Fathom, the purpose is to do good.

The unique aspect of it is a holistic, market-driven approach to doing good, so it has to be a win-win-win.

So we have to do financially well with it, and that gives us the freedom to do it, and makes it sustainable, so the shareholders win.

It has to resonate with the guests, and people want to travel on it.

And if they don't, they won't.

So when -- it makes it a win for them.

And then obviously, the ultimate reason, the starting point, is to do good.

And so we have to have real, genuine impact with it, otherwise what's the point?

So the concept of the win-win-win, while it does resonate and over-index with what we loosely call Millennials, it appeals to a broad spectrum of people, who basically want to grow themselves.

So it not just a matter of going someplace to do some good or help out; it's an enrichment and emergent experience for the traveller themselves.

And a very unique and different approach, and one that brings scale that previously just doesn't exist -- hasn't existed.

So it is new.

We picked the particular area in Puerto Plata, in the Dominican Republic.

We checked out a number of different countries to start.

And we landed there, primarily, because there are entities on the ground there that have a demonstrated long-term history of genuine impact, in the areas of economic impact, as well as environmental and educational impact.

So there are Dominican organizations on the ground that are currently delivering impact.

So the guests get to work alongside those proven Dominican impact providers, and scale up the impact they can have.

So we'll end up with thousands of volunteer days a week, spread across a region in a holistic fashion.

Not doing any one thing, but doing a combination of things that collectively can transform a community over time.

And the ideal goal would be, we would be there a few years, and no longer be needed, and move on to somewhere else.

How big it is, ultimately, what the appetite is, we've done a lot of research.

We paired our little [skunk works] team with the McKenzie Group, and did a ton of analysis over the last couple of years, leading us to where we are.

But obviously, it all has to be proven out.

We have every confidence we'll be successful with the initial foray.

And then if it is successful, it is scalable and replicable, and as long as there are on the ground entities that are already delivering real impact, that we can help scale up what they're doing, and accelerate the impact they're having.

So that's the concept.

We see a big appetite for it.

We -- it is a financial model for us, and it has to financially perform.

That gives us freedom to continue with it.

And we're very optimistic, but it has to be proved out.

Thanks very much.

Thank you.

Our next question comes from the line of Stuart Gordon with Berenberg.

Yes, good afternoon, gentlemen.

A couple of questions, please.

I think previous calls, you've said onboard spend assumptions, within guidance, is around about the 2% mark.

I was just wanting to check that was still the case, looking forward.

I'm assuming so, given the comments you've made already.

And the second one is just whether you have seen any impact in China, from the thinking that happened a couple of weeks ago.

I appreciate, obviously, it's river cruising, it was a local operator.

But clearly, it could impact first-time cruisers in that market.

And what you'll be doing to educate them on the differences between the river cruises and your ocean cruises?

Thanks very much.

Thank you.

I think we're at such an early stage of growth in China that there are a lot of things that happen, that if it was a more mature market, you might see some kind of impact or response from.

But again, the relative scarcity exists there today.

And so that buffers a lot of things.

And so frankly, no, we have not seen any impact from the incident that occurred.

And as more and more people cruise, obviously, we're continually educating our distribution partners there.

And then as well as the general public, about cruising and the differences.

But we have not seen any impact there.

And I'll let David answer the first part of your question.

Yes, Stuart, yes, we did assume 2% in the back half of this year.

Keep in mind, though, as you begin to analyze that, that the back half of last year, on onboard and other, was up mid single digits, and it was significantly better than the first half of 2014.

So we do have more challenging comps in the back half, so take that into account, as you analyze the numbers.

Absolutely.

And just on the onboard, it sounds, from the comments that you made, you're still seeing pretty good pickup from not just the consumer confidence coming back, but also from your own -- your self-help things that you're doing onboard.

Is that something that is now fleet wide?

Or is it still rolling out?

There are still a number of things that we're rolling out.

So we expect to continue to see benefits in the future from some of the initiatives, in communications, casino and beverage.

A great example, there was a press release AIDA put out yesterday, on their internet service, and how they had it on a couple of ships, and they were expanding it to the rest of their fleet.

So we do expect to see additional onboard revenue from those initiatives.

Okay, thank you very much.

Thank you.

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

Thank you.

First question is just on the yield growth guidance in the third quarter.

I'm just wondering, given the momentum you're seeing, and the very positive outlook statement, I'm wondering why that yield growth is weaker, year on year, in Q3 than Q2?

Are you just being conservative, or is there more of that European geopolitical issue in the mix in that quarter?

And then other question, just on costs.

As we look into next year, you talked before about quite a lot of this years dry dock reversing.

And it seems like marketing costs are somewhat elevated.

Would you expect cost growth to continue in the low single digits, even with your savings?

Or should we expect a full reversal of this year's cost step up?

Thank you.

I guess I'll just start with, on a constant dollar basis, the guidance for the third quarter is the same as the guidance we gave for the second quarter.

Yes but in terms of what you actually delivered in the second quarter?

So are you saying -- from what you're saying, it sounds like you're just being quite conservative there?

Keep in mind, I had already indicated that we included, in that guidance, was only a 2% increase in onboard and other.

And that is -- compares to the 6% in the second quarter.

And as far as the ticket side, as always, we give you our best guess as to what we believe the net ticket yield will be.

And we included that in the guidance, as well.

So overall, we've got some pretty good increases in the third quarter, on a constant currency basis.

We are expecting it to be like 3% to 4% included in the third quarter.

So we're very pleased with those yields, and hopefully we can do better.

And also, the base comparison for the third quarter is a little bit more challenging than the second.

And on the cost side, I think we had indicated, back in December, there was a big increase in dry dock days this year.

It was driving 2 of the 3 percentage point increase in costs.

We did expect to see dry dock days decline in 2016.

And so about half of that increase would go away.

So that will be a benefit for 2016.

It's a little early to give guidance on costs for 2016 overall.

We are hopeful, as Arnold indicated, with all of the leveraging our scale, to perhaps be able to offset inflation.

But we still have got to go through the whole planning process, and make some decisions on investments.

And we'll do that over the next couple of months.

The critical thing is to deliver the double-digit return on invested capital in the next three to four years.

And the way we're going to do that, ultimately, is through yield.

And so to the extent we invested to that, we will.

But we don't see that need to invest, or those opportunities to invest, to take us well out of range or anything, on costs, going forward.

Okay, thank you.

Thank you.

Our next question comes from the line of James Hardiman with Wedbush Securities.

Good morning.

Thanks for fitting me in here.

Just wanted to make sure I understand what's changed over the last three months -- or not changed, I guess, in terms of the guidance.

I guess most specifically, help me understand why the constant currency guidance is unchanged, despite the meaningful beat in the second quarter?

Is any of that timing-related?

I know costs are timing-related, but is any of the yield timing-related?

It sounds like there's a healthy dose of conservatism.

And I guess if the entirety of it is just weaker Europe and Med, can you maybe drill down and help us understand which itineraries in particular are trending what would almost need to be meaningfully beneath expectations for the back half of the year?

Yes, I'll start with a general comment.

The general comment is that, while results are tempered by Europe, for 2015, we are going to see growth and yield in Europe and -- both in the brands and in the region.

And also, we continue to see strong booking patterns there, where the booking curve is being pushed farther out.

And that bodes well, because it means you have less inventory to sell.

And then that's also, obviously, good for yield.

So despite a lot of the challenges, and Costa in particular, have been facing challenges since 2008, with macroeconomic malaise and other issue, and just a tough trading environment.

But despite that, not only Costa, but the entire European team, Carnival UK, AIDA as well, and -- have been doing a great job in managing the brand over this period.

So I'll let David comment on some of the specifics.

But overall, things are positive.

Yes, we're very positive on the year.

Some of these numbers, as I had talked, we said we beat the second quarter by $0.06.

So overall, when we put together our guidance for the year, keep in mind that to move our yield guidance takes $0.17.

1 percentage point is $130 million, or $0.17.

So as we look at all these numbers, the $0.06 movement causes a few decimal point movement in the guidance, but it doesn't necessarily change the whole overall range for the year.

So we're trying to just give you ranges and averages, but we are flowing through the benefits, as I had indicated before, of the second quarter.

And it was partially offset by costs, and we still increased the midpoint and the bottom end of the range.

Okay.

And then just maybe longer term -- and I understand it's always a difficult challenge to properly allocate capacity on a global basis.

But as we think about the out-performance of the Caribbean this year, versus Europe and the Med, it was the reverse last year.

It was also the reverse capacity situation.

So I guess the question is, how do we know that the under-performance of Europe is a function of macro, rather than just maybe getting too much capacity versus what we saw last year?

And I guess longer term, how do we think about the right amount of capacity growth in Europe, versus the Caribbean?

So first of all, I think capacity in Europe is going to be about 6%.

That's nowhere near what the capacity increase was in the Caribbean last year, which was up more than double-digit.

It was a dramatic increase in capacity in the Caribbean last year.

And so that's two very different scenarios.

And when you talk about Europe, you've got the Mediterranean and Northern Europe, whereas in the Caribbean, you've got the Caribbean.

There's Eastern and Western, but it's still just the Caribbean.

So there's two very different situations.

So the issues in Europe, we don't believe are capacity driven.

There are different issues.

The reality is that the macroeconomic situation there, and then the geopolitical issues that have popped up, have certainly tempered the results there.

It's still strong, but it's tempered and -- the results.

And coming into next year, while we're going to be down in capacity ourselves in the Caribbean a couple of points, overall, the industry will be up in the Caribbean, actually.

But nowhere near where it was last year, in terms of increase.

And obviously, we have a much stronger base of guests now, to fill those ships, than we did a year ago, when we had that huge capacity influx into the Caribbean.

And we'll see what happens in Europe, but there will probably be a little bit of easing of capacity.

I think the bigger issue there is just letting the time go by, and continuing to create demand in Europe, and manage through some of these geopolitical tensions, and get through them.

There are always going to be issues somewhere in the world.

That's the beauty of our business.

We can move our capacity, and we do have a broad portfolio, especially for us as a Company, to buffer a lot of these things.

But I don't want to understate the performance of Europe, given the dynamics.

But the dynamics are not comparable to what they were in the Caribbean last year.

And if you think about the longer term, I think we talked about this either on last call or December, I can't remember.

Our capacity growth, on a compounded annual basis, from 2014 to 2018, is only 2.9%.

And if you take into account all of the announcements we have made to date -- and there will be announcements of ships going to China -- the compounded annual growth rate for that four-year period, for North America, would be 1%, in Europe, would be 2%.

And so the growth rates, as I think Arnold had indicated before, are very measured, particularly in the established markets.

And so China is growing.

And for all of the reasons Arnold talked about before, we believe it's going to be a fabulous market for us over time, with measured capacity growth in the existing markets.

And that should bode well for (multiple speakers).

Thank you.

Got it.

Thanks, guys.

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

Perfect.

Our final question comes from the line of Edward Freeman with McLean & Partners.

Hello.

Thank you for taking my question.

You guys talked about the increasing capacity, in the next couple of years.

And I was wondering, you guys also talked about the relative scarcity.

And I was wondering, how does that jive together?

Like if you were increasing your ALBDs through the more ships, how does that create the scarcity that you talked about?

I think first of all, overall, the capacity growth for the industry is in the 4% to 5% range, and our capacity growth, along with vessels that we take out of service, is going to be less than that.

So we are totally focused on measured capacity growth.

And we feel that with China, in particular, but even without China, in the existing markets, that level of growth, as long as we are creating demand.

Because we are still relatively low penetrated, as an industry, as a cruise industry, in the overall vacation market.

That there is ample opportunity to create the relative scarcity, to get yields up over time.

And to have them be up and still be the greatest vacation value there is, while providing the greatest vacation experience there is.

So we are quite confident for ourselves, and for the industry, that we can create the relative scarcity that will bode well for the future.

Have you seen that the industry is also doing the same thing?

Overall, I would say yes.

It's being demonstrated today.

As you can see, the results we're achieving, we're up 25%, 2014 over 2013.

Our guidance will be up 25% again this year, and that's not from 25% added capacity, obviously.

And so we're in the process of demonstrating it.

We certainly have plans in place, and are making the investments to continue to do so.

You'd have to talk to the other companies, how they see it.

But our perception, we're one of every two people who cruise in the world.

So we're a relatively reasonable bellwether for the overall industry, and we see it as a strong industry, for years to come.

Thank you.

Thank you very much for your questions, everyone, and for being online.

We had a strong quarter, we are confident in our guidance going forward.

And we look forward to delivering results, and ultimately delivering the double-digit return on invested capital in the next three to four years.

Thank you.