嘉年華遊輪 (CCL) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to our first-quarter 2016 earnings conference call.

This is Arnold Donald, President and CEO of Carnival Corporation & plc.

Thank you all for joining us this morning.

Today I am joined by our Chairman, Micky Arison, via phone from Italy, as well as David Bernstein, our Chief Financial Officer, and Beth Roberts, who heads up our Investor Relations, here with me in Miami.

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

Our Company is off to a strong start this year with first-quarter adjusted earnings nearly double the prior year and well above the high end of our December guidance range.

The first-quarter results combined with our strong book position has enabled us to increase the midpoint of our previous guidance range by $0.05 and raise the floor on our full-year earnings expectations.

I am proud to acknowledge all of our employees globally for the industry leading guest experience efforts that are essential to our sustained earnings improvement.

I especially thank our travel agent partners for the critical role they play in connecting guests with our great brand experiences.

It was reinforcing to see revenue yield growth of 5.7% in constant currency, marking the fourth consecutive quarter of mid-single-digit yield improvement.

We enjoyed ticket price improvements for both our North American and our EAA brands with particularly robust ticket price improvements in our core Caribbean itinerary, which represents 47% of our first-quarter deployment.

We drove revenue yield growth at Costa by creating relative scarcity through our brand team success and increasing demand via our ongoing guest experience efforts coupled with new impactful creative featuring Shakira.

While at the same time we reduced supply in the more challenging trading environment in Southern Europe by transferring Costa capacity to China.

As you recall, our Costa brand was the first global cruise line to home port in China back in 2006.

Today we are the largest in China and the first global cruise Company with six ships based there across two of our brands, Costa and Princess, representing nearly half of the Chinese cruise industry.

While it represents less than 5% of our global capacity, for us China continues to be a promising unit growth opportunity.

China has quickly become the world's largest outbound travel market at an estimated 135 million strong, yet just over 1 million cruise today.

We expect to continue to grow over time and have further plans for AIDA and Carnival Cruise Lines to enter China in the near future.

China contributed to our strong quarterly results.

We absorbed over 60% more capacity there and enjoyed strong profit improvement and return on invested capital accretion.

At the same time the capacity shipped to China helped create relative scarcity in our other market supporting global revenue yield growth.

Beyond China during the quarter we made further progress globally in creating demand for all our brands in excess of measured capacity growth.

Part of that demand creation is the excitement around the much anticipated delivery of AIDAprima.

And I can tell you she is well worth the wait.

The ship is absolutely fantastic; the first of a next-generation platform for AIDA that combines leading edge environmental attributes and well-designed features that foster an exceptional guest experience.

All of her features, whether racing waterslides, a lazy river, multiple climbing walls an expansive German spa, an ice rink for skating, for hockey, for curling and even a traditional Christmas market, together create an experience that truly resonates with AIDA's nearly exclusively German guests.

And we have additional opportunity for demand creation in just a few short days with the delivery of Holland America's new flagship, Koningsdam.

Koningsdam was designed with our Holland America guest in mind and to reintroduce Holland America to those who have yet to experience our award-winning service, our five-star dining, our extensive enrichment program and compelling worldwide itineraries.

Our new flagship will offer fine dining in several alternative restaurants including a new French seafood brasserie and a new immersive [on the table] dinner experience in the culinary arts center.

Part of enhancing an already great Holland America guest experience includes taking onboarding entertainment to a whole new level.

We have carefully engineered a music walk area which showcases different genres while offering chamber music in Lincoln Center Stage, Rocking the [Crowd] with chart topping hits and Billboard Onboard and bringing the best of Memphis music to sea in our popular BB Kings Blues Club.

Responding to our guests, our new flagship will feature Holland America Line's first ever purpose built state rooms for families as well as single state rooms.

Newbuilds will also provide additional demand creation opportunities later this year as well with the delivery of Carnival Vista followed by Seabourn Encore.

When it comes to ships, newbuilds are not the only way to stimulate demand creation.

We continue to invest in our existing fleet to further enhance guest experiences, including the recent recreation of Holland America's Eurodam, incorporating many of the same experiences onboard as Koningsdam.

In addition, we are undergoing an extensive remastering of Cunard's Queen Mary 2 later this year.

Destinations are often a powerful tool for demand creation as well, especially when combined with effective public relations.

Last week we made history when we became the first US cruise operator in over 50 years to receive Cuban approval to bring US cruise guests directly from the US to Cuba.

We made worldwide news showcasing cruise in a very positive light with nearly 5 billion media impressions and still counting.

We very much look forward to launching our historic Cuba inaugural season in May with Fathom, initially with itineraries including Havana, Cienfuegos and Santiago de Cuba.

We believe there is no better way to experience so much of Cuba in seven days than with the enriching guest experience on our premium Fathom brand.

As the Adonia carries just 700 guests per sailing, if you have an interest in seeing Cuba during an extraordinary Fathom experience, I sincerely recommend you book now.

Concerning the future of cruises in Cuba, we have already begun the process for approval for other brands that sail to Cuba in the months and years ahead.

Now beyond ships and destinations, our ongoing marketing and promotional efforts are also part of demand creation.

As part of our efforts to keep cruise in the forefront of vacationers' minds, Princess is airing a new reality-based show on prime time UK television entitled, [The Cruise].

The documentary follows the lives of our amazing crew and guests on board Regal Princess through a six-week series.

In fact, we have already seen a 40% increase in Web traffic for Princess in the UK since the show began airing.

Also airing in the UK P&O cruise's Battlechefs, a new cookery concept set at sea on board Britannia featuring five celebrities testing their culinary skills and judged by celebrity chef Marco Pierre White.

In Italy Costa Fortuna was the set of a major motion picture, Vacanze ai Caribe, Holidays in the Caribbean, launched early in the quarter partially cast with Costa crewmembers.

More recently an episode on Italian reality TV, I Colori Dell'Amore, the Colors of Love, was based on the love story between two young Costa crewmembers who met on board.

In North America just last week Carnival Cruise Line was featured nightly on the ever popular television show, Wheel of Fortune.

While early in the quarter Carnival announced an exceptional partnership with Grammy award-winning country music superstar, Carrie Underwood, and Operation Homefront supporting our US military personnel.

Media coverage from that announcement alone generated more than 1 billion media impressions and our Carnival brand continues to outperform.

Also in North America we partnered with AT&T and Samsung to create a virtual reality experience that showcased in nearly 1,200 AT&T stores promoting consideration for cruise by allowing new-to-cruise to virtually experience a cruise vacation.

We estimate nearly 400,000 people have already had the virtual reality experience showcasing our portfolio of leading brands.

All of these efforts heighten global awareness and consideration for our (inaudible) cruise line as we continue to capture a greater share of the vacation suitcase.

During the quarter we continued to make progress on cross brand efforts to leverage our scale.

On the revenue side, work on our revenue yield optimizing system continues and in summer of 2016 will be rolled out on 30% of our inventory.

The prototype will foster yield uplift as well as inspire improvements for final system development.

Since most of this year's bookings will be behind us by the summer, we look forward to a greater contribution from this effort in 2017.

And on the cost side, work on our procurement area continues.

We have negotiations underway on 16 separate purchasing categories with 22 more RFPs outstanding.

All of which will contribute to our stated $75 million of expected cost savings in 2016.

Our ongoing operational improvement is a testament to the success of our combined efforts to create demand in excess of measured capacity growth and to leverage our scale.

The strong first-quarter we have enjoyed affirms our conviction to deliver this year's earnings forecast and accelerates progress to our double-digit return on invested capital.

We remain well on track for the delivery of over 8.5% return on invested capital this year and crossing the double-digit threshold in the next two to three years.

At the same time we have accelerated our return of capital to shareholders.

Since resuming our stock repurchase program late last year we have completed our first $1 billion share repurchase authorization and are well into our second billion, bringing the cumulative total of purchase to date to $1.3 billion and approximately 27 million shares.

We plan to continue to return free cash flow to shareholders with our strong balance sheet and leverage ratios now comfortably at the better end of our targeted range.

And now I will turn the call over to David.

Thank you, Arnold.

Before I begin please note all of my references to revenue ticket prices and cost metrics will be in constant currency unless otherwise stated.

I will start today with a summary of our 2016 first-quarter results.

Then I will provide some insights on booking trends and finish up with an update on our full-year 2016 guidance.

Our adjusted EPS for the first quarter was $0.39; this was $0.09 above the midpoint of our December guidance despite a $0.01 drag from fuel and currency.

The improvement was essentially driven by two things: $0.07 from net ticket revenue yields which benefited from stronger pricing on close in bookings on both sides of the Atlantic; and $0.03 from lower net cruise costs excluding fuel as a result of timing of certain expenses between the quarters.

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

Our capacity increased almost 4%, our total net revenue yields were up 5.7%.

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

Net ticket yields were up almost 7%.

As Arnold indicated, we enjoyed ticket price improvements on both sides of the Atlantic.

The increase was driven by the strength of pricing in the Caribbean, which represented 47% of our capacity in the quarter.

In addition, our European, Australian and Asian brands, also known as our EAA brands, saw solid price improvements on their year round European program.

Onboard and other yields increased almost 3%, in line with December guidance.

The increase was mainly related to bar, casino and communications as our efforts in these areas continue to pay dividends.

Net cruise cost per ALBD excluding fuel were up about 1.5%, which was less than planned in our December guidance, again due to the timing of expenses between the quarters.

In summary, first-quarter adjusted EPS was $0.19 higher than the prior year driven by operational improvements were $0.15 and favorable net impact of lower fuel prices and currency were $0.03.

Now let's turn to booking trends for 2016.

Bookings during this year's wave season were strong; volumes are ahead of last year's historically high levels at higher prices.

At this point in time, for the remaining three quarters of 2016, cumulative fleet wide bookings are well ahead at slightly higher prices.

The fact that we are well ahead on the book position with less inventory left to sell for the remainder of the year compared to last year bodes well for pricing over the next few months.

Now let's drill down into the cumulative fleet wide book position.

First, for our North American brands, Caribbean occupancy is well ahead of the prior year at nicely higher prices.

For Alaska occupancy is in line with the prior year also at nicely higher prices.

2015 was a great Alaskan season and I'm happy to say 2016 is shaping up to be even better.

For the seasonal European program, occupancy is nicely ahead of the prior year at lower prices driven by the geopolitical risk impacting the Mediterranean trade as anticipated in our guidance.

Secondly, for our EAA brand, for Europe occupancy is ahead of the prior year at slightly higher prices.

Australia and Asia are consistent with our prior guidance.

While we are behind on pricing, and not surprisingly behind on percentage occupancy given our over 60% increase in China capacity and our significant increase in Australia capacity.

Remember Asia and particularly China is a unit growth opportunity and we are achieving strong unit profits and returns that exceed our corporate average.

Finally, I want to provide you with an update on our full-year 2016 guidance.

As Arnold indicated, our first-quarter results combined with strong book position enabled us to increase the midpoint of our previous guidance range by $0.05 and raise the floor on our earnings expectations for the year.

Our 2016 March guidance is now $3.20 to $3.40.

The $0.05 improvement was driven by improved net revenue yields worth $0.04 and the accretive impact from the additional shares we repurchased since our December call worth $0.05.

These improvements were partially offset by a $0.04 drag from fuel and currency.

Net cruise costs without fuel per ALBD are still expected to be up approximately 2%, no change from our December guidance.

While we were favorable to the guidance for the first quarter, as I previously indicated, the favorability was due to the timing of expenses between the quarters.

Remember that while the year is expected to be up approximately 2%, there are differences between the quarters.

The first quarter was up about 1.5% while the guidance for the second quarter is expected to be up only 0.5% to 1.5%.

However, for the third quarter we expect net cruise cost without fuel per ALBD to be up 5% to 6% driven by the remastering of Queen Mary 2 in dry dock and higher advertising expense.

Offsetting that, however, is the expectation that [costs] will be down slightly in the fourth quarter.

So far this fiscal year we have repurchased over 21 million of our shares and we still have almost 700 million left under the second $1 billion share repurchase authorization that was approved by the Board of Directors just two months ago.

Our March guidance EPS calculations assume approximately 760 million shares outstanding on a weighted average basis.

On a final note for your planning purposes, I wanted to let you know that we expect our June conference call to be a little later in June than usual to allow some extra time for quarter end reconciliation and analysis given that we are currently in the process of implementing a significant upgrade to our Oracle enterprise reporting platform, which includes moving to a single instance of the general ledger as we further leverage our scale.

And now I will turn the call back over to Arnold.

Thank you, David.

Operator, please open it up for questions.

(Operator Instructions).

Steven Kent, Goldman Sachs.

A couple questions.

One, first can you just -- I think it was David, you just made some comments on China and I want to understand them.

Are you saying that pricing is still higher in China than the rest of the world?

You are adding capacity in China and that this is a unit growth story?

I wanted to understand those two things.

So to me it sounds like, almost like you're simply adding more capacity at a higher price relative to the rest of the fleet, but that the pricing maybe is not as high as it was maybe last year.

Is that what you are saying?

And then one other thing on this China opportunity, which I think it is outsize attention because it really is a huge opportunity and is a big pricing opportunity too is how are the travel agents doing in that market?

Is there anything we can read from them and their reaction to the capacity that is coming in?

I will answer, this is Arnold.

First of all, good morning and thanks for your questions.

I will answer the travel agent or what we call the distributors in China question first.

We don't have direct line of sight into their profitability, but what I can tell you is that our relationships are strong, they continue to book with us.

Our actual occupancies on sailings are the same and we are seeing great results.

And we see no easing of interest or demand on anything from the distributors and the best line of sight we have says that the relationship is working for us and -- for them and it is definitely working for us.

You had a question -- I will let David answer directly the question you asked of him.

Yes, Steve, the yields are higher than the group average on the ticket prices.

But that is not really our key metric.

I mean operating income per ALBD is really the key metric and there too the yields are higher.

So that is what we are looking at as a metric in terms of overall for China.

But the one other thing I will add, keep in mind is since mid last year the Renminbi has also devalued by 7%.

So when you are looking at an apples-to-apples comparison on a current dollar basis that does affect the overall ticket yields and the overall yields for our China business.

I think, Steve, the main point is China is a very positive story for us.

It is strong, it is a contributor, it only represents 5% of our capacity today.

So we are well positioned from that regard as well.

But it is definitely a nice add and we certainly have benefited from it and see continued strength.

And let's not forget the benefit that we see and the rest of the world as a result of the growth in China and the more measured capacity growth in the established markets, which is 95% of our business.

Okay, thank you.

Thanks for the color.

Robin Farley, UBS.

Two questions.

One is I am just curious, there is no change in your full-year yield guidance, but Q1 obviously came in quite a bit stronger.

That sort of implies that your next three quarter's guidance are lower from where you thought it was, which I think is not the case and you are probably just being conservative.

So, I wonder if you could -- if anything I would think the strength of the close in bookings in Q1 would lead you to feel better about the next three quarters.

So I wonder if you can just sort of address that.

Sure.

Well, Robin, as I indicated in my comments, the first-quarter revenue yield was worth $0.07, it beat on the guidance.

So $0.07, keep in mind, is [0.4] for us in total in terms of the full-year yield.

And when you take a look at it our yield guidance for the year was approximately 3%.

So, depending on where you are, if you are 2/10 of a percent below that then now you are 2/10 a percent above that.

So essentially it is still approximately 3% and the rest of the year didn't change.

Okay.

And to the strength of the close in is not changing your view on the next three quarters?

Well, obviously we are going to strive to do better.

But what we've experienced so far gives us conviction to maintain our guidance and actually we have increased guidance by a nickel.

And we feel very positive about our booking situation.

So obviously we are going to strive to do even better.

But at this point, with all the dynamics around the rest of the world and the fact that the Caribbean, which has been very strong for us, becomes a smaller percent of the total in the subsequent quarters, we think it's prudent to stick with the guidance we have given.

Okay, that is great.

Thank you.

And then my other question was just on China, and you talked about the tremendous potential for unit growth there.

Can you just put a little color around -- the Carnival brand originally was going to send a ship there for the first time in 2017; it sounds like that is now going to be 2018.

Is that just sort of taking time to market a new brand that you wanted to give a little more lead time to?

Or just given the -- obviously the volume growth in China?

Thanks.

No problem, Robin.

Yes, the CCL decision, the Carnival brand decision in China, when we originally -- when they originally gave their estimate it was a preliminary thing.

As they got into the detailed deployment planning we have a number of home ports here in the US serviced by the brand.

And as they looked at moving ships -- ships fit in certain ports, not in others, so on and so forth.

It just became prudent for them to look at launching in 2018 rather than in 2017.

But it is strictly around deployment planning, it had nothing to do with the environment in China.

Okay, great, thank you.

Harry Curtis, Nomura.

A follow up question on the booking and yield strength.

Just turning to Europe for a second, can you give us a sense of the recent incident in Brussels and whether or not that has had any impact?

And, David, I think that I didn't catch your -- fully your outlook for Europe based on your current booking strength.

I think you said it was slightly higher but I didn't catch the occupancy.

First of all, obviously our thoughts and prayers go out to the victims and their families in the Brussels situation.

It is really too early for us to know the exact impact of that.

Historically there has been some temporary impact from events like this and the level of impact depends on a lot of different factors.

But historically eventually people adapt, we don't know exactly where we are in the process at this point, but right now we see no reason to change guidance.

And as you know, our philosophy is things happen every year and we anticipate that without knowing exactly where or what things will happen and we factor that in to an extent.

So, it is too early to see the full fallout of that, but at this point in time we are comfortable with the guidance that we have given and see no reason to change it.

Yes.

And as far as the booking position, for our EAA brands, which really is the majority of our European program, we said that for Europe occupancy is ahead of the prior year at slightly higher prices.

And for the seasonal programs for our North American brand, which is really just like 5% of our overall capacity for the Company, we said that occupancy was nicely ahead, but that pricing was a little bit lower because of the geopolitical risk and the things that Arnold had indicated.

Very good.

And then my follow-up question speaks to the share count assumption.

David, you mentioned, but I am not sure I caught this right, that the guidance for the balance of the year assumed a fully diluted share count of 760 million shares, is that correct?

That was for the whole year.

And as I think I had indicated in the December call, the way we do our guidance is we include the shares that we purchase to date because, as we have always said, our share repurchase program is opportunistic.

So built into our guidance does not include any future share repurchases.

And as I mentioned, we do have almost $700 million left on that second $1 billion.

So we do have the opportunity to continue to repurchase.

Okay, you anticipated my last question, thanks very much, guys.

James Hardiman, Wedbush Securities.

So just a real quick clarification on some of what has been going on in Southern Mediterranean based on some of the terrorist attacks.

Have you had to move any itineraries around at all?

And if so, does not have any impact on your numbers?

First of all good morning.

There is always in every year some itinerary adjustments.

And we go where people want to go.

So if we see there is a heavy reaction from guests about going to a particular itinerary we have previously planned, obviously we will choose to alter that.

So, yes, there have been some changes in some of the ports in Turkey for example this year.

We still have a number of brands going to Turkey and we are in constant contact with every intelligence agency in the world and all the various security and enforcement agencies as well.

Safety to our guests is number one.

But frankly right now we see more just what is driving our decision-making is the desire of guests to go to locations.

And that is where we are right now.

Very helpful.

And then just maybe walk us through the changes in fuel and currency since the last time you guys reported.

The constant currency numbers for both yields and costs look to be unchanged, but the current currency numbers look to be slightly better for both.

Now this might just be a rounding thing and these are all approximate estimates or maybe it is a function of the repositioning of ships.

But normally sort of things get better for yields and worse for cost or vice versa.

It seems like they got a little bit better with respect to FX.

And then with the fuel, certainly the crude oil prices that we look at have gotten a little bit worse, although your guidance for the year seems to have gotten a tad better.

Just walk us through some of the puts and takes there.

Well, I will start with fuel.

You probably noticed that overall we -- for the year we were $2.00 -- our guidance is $2.00 per metric ton better.

At the moment in time that we did the December call versus our March guidance, I mean Brent was within $1.00.

The crack spread was virtually the same.

So the numbers moved very little on the fuel side.

Of course we have a little benefit there.

We had offsetting that with some additional derivative losses.

So the overall fuel number was negligible in terms of a change from our December guidance.

Currency did move against us.

And remember we have a basket of currencies, so it depends on the movement.

The one currency from December through March that moved the most was the British pound.

And if you look back we were using $1.51 as the rate for the British pound back in December.

The rate now I think in our press release in the second quarter was like $1.43, so there was like a 5% movement.

So, depending on what you are looking at because of the different basket of currencies and the movements, the British pound is the biggest impact.

And that was a negative impact on our bottom line.

And that is what drove the majority of the currency drag.

Got it.

Thanks, guys.

Felicia Hendrix, Barclays.

David, just I wanted to clarify something -- some commentary that was in the release in the outlook section, please.

When you were talking about the cumulative advance bookings for the first three quarters of 2016, in the release it said that they are well ahead of the prior year at slightly higher constant currency prices.

And then in the December release you talked about 2016 in the context of slightly higher prices.

So, I was just wondering is there any difference in the two outlooks?

No, they are both constant currency.

Okay, that is helpful, thank you.

And then also Arnold, on the last call you had talked about the high end of the guidance range, the net yield guidance range for the year being 4%.

I know you reiterated the 3%, but just wondering if you are looking at the high end [similarly].

Yes, I think, Robin, the reason we had said --.

Felicia.

Felicia, sorry, I apologize.

The reason why we had said the high end of the range was 4%, it related to the $3.40.

And when you start looking at the midpoint of our guidance and it was a $0.30 range and a point of yield is $0.15.

So we had said the $3.40 related to a 1% higher yield or 4%.

So, obviously time has gone on and we have narrowed the range down to a $0.20 range.

But we still -- we are giving you the best estimate that we can.

It is still relatively close to approximately 4% at the high end.

Okay, that is helpful.

And then can you just refresh us in terms of how much of that is ticket and onboard?

Has that changed?

It really hasn't changed significantly from the December guidance, the ticket and onboard.

The December guidance we used about 2% for onboard and it was a little over 3% for ticket -- and it rounds into approximately 3%.

Okay, thank you.

Jaime Katz, Morningstar.

My first question is on this revenue management yield system that you guys are using across your brands.

And I think the commentary you guys indicated that about 30% of the inventory would be up over the course of the year.

And I am curious first when that might be completed if all of the brands will eventually be on it.

And there was a comment that there would be some yield uplift.

So I guess I am curious what your expectations for benefit there are?

Yes, good morning, Jaime.

So on the revenue management tool that we are implementing, we have six brands, six of our brands that initially will be on the new tool.

When it is implemented this summer we will only have about 30% of their collective inventory going through the tool.

Obviously that will ramp up over time and we will have more inventory that goes through it.

By the time it is up and running, 2016 will be pretty much booked.

And so, the real impact we won't see until 2017.

But I have to tell you we are enjoying some benefits now just from the brands collaborating and working on the two together, sharing lots of information.

There is improve decision-making going on on revenue management all along the way and it is definitely contributing to some of the yield improvement that we have enjoyed the past few quarters and including this past quarter.

So, over time when we go to the next phase of the tool, which will be implemented next year, pretty much all the brands will be using the tool.

We have some brands that have already more sophisticated tools than others.

This to the base flow that will be at one level of sophistication, we put the next layer on top, it will be at a whole other level of sophistication.

So we will have a build of impact over the next few years from having the two.

And then it will make a difference.

Okay.

And then I have sort of an esoteric question for you guys.

How do you think about differentiating the brands that are going into the China market versus the competitors?

Obviously Costa has been there for some time, there is a lot more brand awareness than maybe some of the other brands.

But I think the messaging going through the travel agents -- the way that the distribution network there works might be a little skewed.

So I am curious if there is an easy way to articulate how Carnival's brands in the region are different and may be a better value to those consumers.

Yes, the easiest way to do it is to actually have the distributors experience the brands because once they go on the ships and experience the brands the difference is dramatic and you very much get a very different feel from one brand to the next in terms of what type of cruise experience it is.

And because those brands resonate around the world across different what we call [psychographic] segments, with 1.3 billion people China is very capable of absorbing lots of different brands.

And so, we see it at this stage as we just have a toe in the water.

There is 135 million estimated outbound Chinese tourists today already.

And less than 1 million of them -- or maybe roughly 1 million of them are cruising today.

So we haven't even touched -- begun to touch the surface hardly, but it is plenty of room and capacity.

Our belief is at the consuming level, at the guest level that in the price ranges we are in the guests today are relatively price inelastic, whether I am in Australia, I was in Cuba last week, mainland Chinese filled the [palador] that I was in -- the private restaurant in Havana I was in.

And so they have money, they are able to travel, they are not exactly shopping for price.

They fill up the retail outlets in spend several levels higher than the typical tourist would from other places in the world.

So we don't see any major barriers at this point except, as you just referred, good communication, execution, training the distribution system, giving them the exposure they need so they can represent the various brands well.

We think there is plenty of room for everybody for several of our brands and we are going to bring AIDA in in 2017 and the Carnival brand right now is scheduled to go in in 2018.

Okay, and then lastly just a housekeeping question.

With so much capacity coming on can you guys offer your outlook for D&A in the current year?

$1.760 billion to $1.780 billion is the range for the year.

Thank you.

Greg Badishkanian, Citigroup.

Just to put the Brussels impact in perspective, kind of comparing it to the Paris attacks.

Any change in behavior that you have seen that were different than the initial 10 days or so with North American sourced passengers versus European sourced as well as cancellation rates?

Again, it is early.

In Paris there was some impact on bookings, which faded pretty quickly, may have had some net minor impact on results.

But again, it is one of many things affecting us in Europe and we factor that into our guidance.

But it is still early for Brussels, we don't see -- haven't seen anything dramatic yet.

The question is how things build and so on.

But frankly, again, we kind of have it in our guidance -- barring some major dramatic shift in reactions.

Okay, so nothing dramatic, that is (multiple speakers).

Nothing dramatic, no.

Good.

And then moving just to Cuba and kind of thinking about the opportunity.

And congratulations, by the way, in getting your ship there.

How quickly before you think that you will be able to ramp up capacity in Cuba?

And I know there is a regulatory perspective and then there is just a logistical perspective.

Yes, you nailed it both.

First of all regulatory first, so we already are talking to Cuba obviously about the other brands and when might they come and which ports and so on and so forth.

We are looking forward to working with Cuba to help develop the cruise industry there.

We think, again, it is a different story than China, but it is similar in that there is room for everybody.

And we are looking at it as a refresher for the Caribbean.

We think it is going to help us, it is going to help the industry, it is going to help the Caribbean and it is certainly going to help Cuba.

So we are excited.

We are very honored and privileged to have been given the honor of being first for approval by Cuba.

And we are really enjoying the working relationship and looking forward to working with them.

In terms of timing of all this, the logistics do matter too because our ships -- we just talked about the brands being booked by the summer for 2016 pretty much.

And so itineraries have been established, guests are planning on going places.

As we get additional brands approved by Cuba those will have to adapt to their current itinerary planning schedule.

So practically speaking, while we may have some additional itineraries in 2016, you are probably looking at 2017 for any kind of significant impact.

Thank you.

Tim Conder, Wells Fargo Securities.

Just a couple clarification questions.

One, on your yield guidance, the basically 1% difference due to the change in accounting that you called out in December, is that built into the guidance now or not?

I just want to clarify that?

And then secondly, David, I think you -- or Arnold one, you were commenting on China relative to one of the earlier questions.

Did you -- just to clarify, did you say at this point yields were up, down as they are looking for the year?

First of all on China, again, it is a unit growth story; we want to keep emphasizing that.

But to answer your question, yes, ticket yields are higher than the average for the fleet and they are forecasted to be that for the year.

So, that's the truth.

But we don't want you guys over focusing on yield because the real story is the great accretion and earnings that we are getting from China.

And it is going to be a volume growth story for a while because we are at the very beginning; we are nascent in that market and there is just so much potential in that market.

In terms of (multiple speakers).

Then on a year-over-year (multiple speakers).

The other question was about the accounting reclassification which, yes, we built into the guidance in December and we built that into the guidance in March.

There is no change in the methodology there.

And it is about 1%.

Okay.

And, Arnold, I apologize, it was just my question and clarification on China was just more -- I totally understand it's a unit growth story and (inaudible) the highest in the world and it is a positive mix as things continue to grow.

But just more on a year-over-year comparison -- flat, slightly down?

We have never given a range on yields in China, but yields are down on just a year-to-year basis.

But we have never given a range and wouldn't do so now.

Okay.

And then to stay kind of on that versus the rest of the world, any color for the industry that you could comment on as to how maybe the tiny yields combined are different relative to say North America or Europe?

No, I don't have any color for you on that, no.

Okay.

And then two other things on yield and that will be it.

The implied net yields in your guidance for the year just by major geographic region, Europe, Asia, North America?

And then specifically related to the Brits and onboard spending, anything that you are seeing given the pound depreciation that you have seen here since the beginning of the year or over the last six months in onboard spending trends by Brits in particular?

Just onboard in general -- onboard revenues for us has increased every year over the last, I don't know, 10, 12 years except one.

And so, onboard revenues tend to increase every year and the question is how much.

Last year we had a large percentage increase in onboard revenues overall.

And this year we are seeing again an increase on top of that, not necessarily at the same level as last year, but a nice increase.

And so, the correlation to economies and all that tend not to -- we have difficulty tracking that and correlating in any specific way.

Even the degree of increase in onboard revenue isn't always correlated to particular economic conditions in a given destination market or a given source market.

And so, there is just so many variables that come into that, not the least of which is us constantly giving guests more of what they want.

And if you do that the guests onboard will spend more.

And that is really the issue for us is always tweaking that and figuring out exactly what do guests want.

So we give it to them in the way they want it, what they want in the way they want it and we continue to grow.

So, to be honest with you, we haven't seen -- we have tried it every which way and we just haven't seen tight correlations to general economic trends.

And also keep in mind that the overwhelming majority of our British guests sail on P&O Cruises which is the British pound onboard.

So as far as they are concerned there really is no change.

Of course it does affect on a translation basis those onboard revenues into US dollars, but it doesn't change their spending patterns onboard.

And as far as the overall cruise revenue yields are concerned, we had talked in December, between our North America brands and our EAA brands we were expecting increases in both segments of our business.

The increases were slightly better in the North American brands than the EAA brands once you net out the accounting reclassification which I had mentioned affected the EAA brands in December.

Okay, and it's very nice to see everything really starting to come together and bear fruit.

Thank you, gentlemen.

Thank you very much.

Much appreciated.

Kevin Milota, JPMorgan.

Just have two quick ones here.

First, obviously China fairly small right now in terms of total capacity at 5%.

With your capacity introductions in 2017 and 2018, could you give us a sense for where your total -- where those capacity stats will go in those years?

And then secondly, I guess for David on fuel.

At current fuel levels could you give us a sense for what is baked into the $3.20 to $3.40 guidance as it relates to the unrealized losses from your derivatives?

Thank you.

Okay, thank you for your questions.

First of all on China, as you know, the industry, believe it or not, is capacity constrained because of the limited number of shipyards to build ships.

And obviously we have partnerships with both Fincantieri and with Meyer in Germany in terms of securing slots to enhance our fleet.

Having said that, in China we can't grow too fast because just the limited availability of ships.

So we will probably be by 2020 somewhere in the 8% to 9% range of our fleet, which means most of the growth in capacity we have will actually be going to China.

And that means that we will be growing at a much slower rate in the rest of the world markets, 1% to 2% there while -- big percentage increases in China, but in terms of absolute number of ships still relatively small compared to the latent demand that exists in the country.

So to answer your question, by 2020, depending how things go -- and that is the beauty of this, we have flexibility.

Depending on how things go we could be 8%-9% of our capacity in China.

And that means therefore that we didn't grow a lot in the rest of the world, but that fits with our measured capacity growth overall plan to help create relative scarcity.

We continue to drive demand to create excess demand relative to that measured capacity, which obviously allows us to capture more of the value gap that currently exists between land-based vacations and cruise.

We are still a much better value than land-based vacations and we have lots of room to move.

David?

And as far as the derivatives, you said unrealized, but I think what you meant is how much was in our guidance in terms of realized losses on the fuel derivatives for the year.

And the number is 300 -- about $330 million of realized losses.

Okay, very good.

Ian Rennardson, Jefferies.

Just a couple of questions for you.

How much more are you sold than this time last year?

Is it 5%, is it 10%, is it 20%?

Could you give us a sort of numerical answer, please?

And moving on to yield expectations, Q2, 1.5% to 2.5% growth at constant currency after a very strong end to Q1.

You mentioned close in pricing, why this sort of slight disconnect, please?

Thank you.

So, as far as how -- we are ahead on bookings, but we don't give the details for competitive reasons about exactly what percentage points we are ahead.

So we would just rather leave it more general.

And as far as the comparisons on the quarterly basis, the second quarter is lower than the first quarter.

But you have got to remember you have got to look back against the prior year, the second quarter last year was much stronger than the first quarter.

We were up about 2% more the second quarter so it has a tougher comparison in the prior year.

As well as the fact that in the first quarter this year we had indicated we were 47% in the Caribbean versus 30% in the second quarter.

The Caribbean was a very strong market for us.

And so, you are seeing some differences between the first and second quarter in terms of yield increases.

But that yield improvement in the second quarter obviously is consistent with the overall guidance and is going to lead us to 20% or better at the midpoint of our current guidance earnings improvement year-over-year.

Okay, thank you.

(Operator Instructions).

Stuart Gordon, Berenberg.

Just a quick question on the close in bookings have obviously been very strong and held beat on the yield.

Could you give an indication as to whether this has been helped by less sort of onboard concessions that has helped drive up that ticket price rather than driving up onboard spend?

Thank you.

Yes.

When we package -- what you are talking about is some value added packages.

And when we provide those value added packages we do segregate a portion of the revenue and record it in onboard.

So you wouldn't see an artificial drive up in ticket prices from a value added package.

Okay, but did you have to give away less value added packages in the close in of this quarter, which than perhaps has been the case in previous quarters?

Well, certainly compared to the prior quarter the yields are up significantly.

So overall pricing at total was stronger, whichever way you want to look at it.

So that means, I don't know whether they gave more packages out or not, but again, that would have been reflected on onboard versus ticket.

But the practical reality across the fleet -- we have so many different brands, but across the fleet overall close in was much stronger this year than last, period.

So that means that they reduced pricing less.

Okay, thank you.

Jared Shojaian, Wolfe Research.

Have you guys stopped hedging fuel?

It looks like you haven't put on anything new for a while.

Can you just give us an update on your current policy here?

Yes, well, we had collars that went out a number of years and right now we continue to live with those, as you can see from the derivative losses.

So at this point in time we evaluate it constantly to see what we should do.

In the past we did it to avoid a significant spike in fuel pricing that could have created any kind of short-term cash issues.

And we don't see at this point in time a need to do anything.

We are collared all the way into 2018 at various levels.

I think next year is -- David?

Next year we have got 8.1 million barrels collared.

Which is what percent?

A little over 50%.

And 5.4 million barrels in 2018, which is less than 50%.

But as Arnold said, we are collared out almost three years.

So we are comfortable with our current position.

We constantly talk about it and analyze it and think about it.

But as you said, we haven't done any fuel derivatives since -- it was October of 2014 and we will give it more consideration as we go forward.

Okay, great, thanks.

And then should we expect the pace of your buybacks year-to-date to continue throughout the balance of the year?

And if so, are you comfortable financing CapEx in order to do that?

And if not can you just help us understand why you wouldn't take on some incremental debt right now while still being able to maintain the investment-grade credit rating?

Thank you.

So first of all -- yes, you bet.

First of all we do have an authorization, we will do as we have done in the past which is opportunistically use that authorization; beyond that that is a Board decision.

The Board is constantly looking at it.

In terms of our debt position we are, as you can tell by our balance sheet, in pretty good shape.

I will let David add any additional color you would like.

Go ahead, David.

Yes, we have said many times that we would return all our excess free cash flow to the shareholders, we have done that.

We did get the second $1 billion authorization from the Board of Directors.

We will be opportunistic as we purchase throughout the rest of this year.

And we get completed with that we will take a look and we will talk to the Board about what is next.

But you have to keep in mind this is a Board decision.

So we don't want to preempt the Board, but when we get done with the 700 million, we will look at potentially what is next in the program.

Okay, great.

Thanks for the time.

One last question, please, operator.

Dan McKenzie, Buckingham Research.

With respect to the revenue beat, I am just wondering how much of it was tied to investments and advertising spend over the past year?

And then with respect to the uptick in advertising in the third quarter, I am wondering why then and how you have been measuring the link between the campaigns and the revenue production?

Well, as you know, we have 10 brands.

They all have segments that they are catering to.

And they all have their independent marketing plans.

We do look at it collectively.

We are leveraging our scale in terms of looking at common media buy and those types of things to be even more efficient as paying dividends for us.

But the reality is, we are expecting a return on any investment we make and that includes advertising and whether it is mass media advertising, product placement advertising, digital, all the various forms of it.

And PR, public relations efforts.

So our belief is that we have to keep cruise out in the public space in a positive way on a constant basis, so that when people are considering vacation there's been enough noise about cruise that they say, well, I have an idea, let's look at a cruise.

And so, the idea is to just keep it out there and that is utilizing all the various forms.

There is no question we have created incremental demand.

We also know there is no question that incremental demand has been in part created by the fantastic work of our team members across our 10 brands who literally exceed guest expectations every day when they come on board.

And that word of mouth and that personal experience of having your expectations exceeded is the most powerful marketing tool we have by far.

And that is by the work of our people in engineering, the experiences on board and then delivering against it.

So to your question, yes, we have increased advertising overall.

We will continue to look at it.

We don't do it willy-nilly, we do a lot of measuring and tracking to see what kind of impact we get both in attitude and in bookings and so on.

And we are constantly monitoring that and tweaking it.

But the third-quarter rationale is a peak communication time to prepare for the coming year.

And that is why you often see an increase in that period.

Very good.

The next question gets at the competition for the upper scale traveler and specifically your key competitors have products within their core brand to chip away at that market share in that segment.

And so you have got the Norwegian Haven, the Royal suite products, looking ahead Virgin seems poised to also chip away at the upper scale traveler.

So, I am wondering if you can help us put some brackets around the revenue that this market segment represents, how you are thinking about these moves by key competitors and how Carnival is responding.

And thanks for the questions.

You bet.

Our primary competitor is land-based vacations.

One of every two people who cruise in the world cruise with us.

And we have tremendous respect for the other companies that operate.

And we want them to be successful.

That helps us a lot.

The stronger they are the better it is for us.

So having said that we have 10 brands, we have ultra luxury in Seabourn, we have luxury in Cunard both our Queens Grill and Princess Grill, we have Holland America on Neptune.

We have premium brands in Fathom, our newest premium brand, but obviously our long-established premium brands of Princess and Holland America and AIDA.

And we have mass contemporary brands like Costa and Carnival.

So we look at that, but again, the really important thing about cruise is this -- we have had Steve Wozniak, who we pay to lecture on Seabourn, but he pays to go on Carnival, okay, because it is not a demographic choice per se, we have taxi drivers who will save for five years to go on a Seabourn Cruise and we have billionaires who want to sail on Carnival.

And the reality is the experience that you are looking for.

And each brand is a different experience, caters to a different psychographic market.

So we have ultra luxury brands, luxury brands, premium brands, etc., each with their own experience and that is what drives it for us.

But for us, we are definitely looking at penetrating more land-based vacations because all the cabins in the world added up together represent less than -- in the industry represent less than 2% of the hotel rooms in the world.

So that means there is 98% of the market to chase as opposed to 1% because of that 2% 1% is ours already.

So that is kind of our approach.

Thanks much.

Thank you very much.

I really appreciate the questions.

Thanks for your support.

We look forward to talking to you guys next quarter and in between.

And as always, feel free to call Beth with any additional questions or insights you might want to offer us.

Thank you.

Thank you.

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

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