嘉年華遊輪 (CCL) 2016 Q2 法說會逐字稿

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

I am 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; David Bernstein, our Chief Financial Officer; and Beth Roberts, Senior Vice President Investor Relations.

Before I begin, as always 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.

We delivered the strongest second quarter in the history of our Company with record adjusted earnings per share nearly double the prior year and well above the high end of our March guidance range.

The second-quarter result combined with our strong book position has enabled us to maintain and midpoint of our full-year guidance range despite a $0.17 drag from fuel and currency.

Essentially the strength and underlying demand for our products saw us with greater ticket prices in both the quarter and in the remainder of the year, offsetting the rise in fuel prices since the time of our last guidance as well as the very recent significant movement in currency exchange rates following the Brexit vote.

Our record results reflect our passionate 120,000-plus employees who in their efforts go above and beyond every day.

And who, together with our hundreds of thousand travel partners, are the foundation of our sustained earnings improvement.

This was among the most remarkable quarters in the history of the Company, not only because of our record-breaking financial results, but because of the significant number of milestones which will contribute meaningfully to our future success.

We introduced three new flagships including Carnival Vista, purposefully designed for our fun-loving Carnival Cruise Lines guests with an onboard brewery experience, entertaining IMAX theater and exhilarating sky ride experience.

Carnival Vista has already generated over 1 billion media impressions.

Holland America Line's Koningsdam, [Kristen] and Rotterdam by her Majesty, Queen Maxima of the Netherlands delivers a new premium experience where our guests can blend their own wine, enjoy high end flights of Scotch or dance the night away in our carefully engineered music walk.

And last but not least the AIDAprima made its debut with a spectacular light show, fireworks and memorable naming ceremony witnessed by over 1 million people gathered in Homburg.

These well publicized introductions are certain to continue to stimulate increased consideration for cruising within our portfolio of the world leading cruise lines.

Moreover, we welcomed our 10th brand, Fathom, in April with inaugural impact sailing to the Dominican Republic to do good, followed by historic first sailings to Cuba in May.

Bar none one of the most publicized events in the history of the cruise industry was our inaugural voyage to Cuba with over 20 billion media impressions bringing the cumulative total media impressions for Carnival and Cuba to nearly 55 billion to date.

We could not have been more proud than when our General Counsel, Arnie Perez, and his wife Carmen, both Cuban born were first to disembark when we made history as the first US cruise line in more than 40 years to sail to Cuba.

Having sailed there myself I can assure you there is no better way to experience Cuba today than on our Fathom brand.

We are working hard to enable more of our brands to bring guests to Cuba in the near future, a promising long-term driver of continued demand for our Caribbean itineraries.

Indeed we have had an eventful quarter.

Returning to the financials, China, which is destined to be the world's largest cruise market continues to deliver accretive returns on invested capital.

We again achieved significant earnings growth this quarter and continue to fully expect earnings growth for the full year directly proportionate with our over 60% capacity increase.

In China our occupancy levels remain comparable to the high levels we have consistently achieved as we introduce hundreds of thousands of new to cruise to our brands.

Yes, the penetration level for the sizable and rapidly expanding addressable market is well below 1%, just a fraction of the more developed cruise markets.

While these guests sail mostly within Asia today, over time we have an opportunity to take them to all the great destinations our ships sail and they have not yet been, like the unique beauty of Venice and the amazing glaciers in Glacier Bay Alaska.

We remain confident in the long-term development of the cruise industry in China with our capacity growth expected to be up over 30% in 2017.

Now that is following an over 60% increase observed in 2016.

These large year-over-year percentage increases are on a very small base, so these growth rates are equivalent to adding about one 4,000 berth vessel each year.

As a result China represents less than 5% of our global capacity this year and will grow to just 6% next year after the entry of Majestic Princess, the first purpose built ship for Chinese guests, and AIDAbella, the first ship in China for our AIDA brand.

Of course the capacity shift to China helps create relative scarcity in our other markets supporting global revenue yield growth.

We remain confident in the outlook for measured supply growth; in 2017 our global supply growth is just 2.7%.

Within that we are rebalancing our portfolio to optimize the current demand environment.

We expect a 5% capacity reduction in Europe stemming from a capacity reduction in the Mediterranean region which is down over 10%.

We expect a modest 5% and 3% growth in capacity in the more robust Caribbean and Alaska deployments respectively.

On the margin these deployment changes should contribute to yield next year.

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

On the revenue side work on our revenue yield optimizing system continues and, as previously noted, will be rolled out on 30% of our inventory across six of our brands this summer.

We are on track to begin prototype testing in July.

Even the early stage of implementation will foster yield uplift as we refine our modeling techniques to contribute to enhanced demand forecasting.

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

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

We remain on track for our stated $75 million of expected cost savings in 2016.

Most recently we announced a strategic coordination of our global media planning and buying for our seven brands in North America and the UK, generating a significant double-digit savings on our $100 million annual median spend.

Our record quarterly results and our strong book position are a testament to the success of our ongoing strategy to drive demand well in excess of our measured capacity growth.

All things considered, bookings for our ships sailing to Europe have held up well.

And bookings in the Caribbean and Alaska for the remainder of the year are very strong for our brands, enabling us to raise our revenue yield expectations and affirming our conviction to deliver over 20% earnings growth this year.

We are on track for the delivery of nearly [9%] return on invested capital this year and remain well on track in accelerating progress toward the double-digit threshold, again, given our ongoing effort to create demand in excess of supply coupled with our revenue management enhancements and opportunity to further leverage our scale.

Despite the geopolitical events in Europe, including the Brexit vote, we remain confident in our long-term outlook given the attractive value proposition our strong and diversified brand portfolio offers, particularly in the UK where our local brands, P&O Cruises and Cunard sold in British pounds, have an increasingly competitive advantage to land based vacation alternatives in Europe and abroad.

Our increasingly strong cash flow enables us to accelerate distributions to our shareholders.

Since resuming our stock repurchase program late last year we are nearing completion on our second $1 billion share repurchase authorization, bringing the cumulative total of repurchases to date to approximately $1.9 billion and 38 million shares.

In addition, recently we announced our second dividend increase inside of a year, bringing our annual dividend distribution to over $1 billion.

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

Our sustained earnings improvement coupled with our strong balance sheet has resulted in Moody's upgrading our credit rating from Baa1 to A3.

And just yesterday our Board of Directors authorizing our third $1 billion share repurchase program.

All of which demonstrates continued confidence and realization of sustained double-digit return on invested capital which our Company is inherently capable of delivering.

And now I would like to 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 second-quarter results.

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

Our record adjusted EPS for the second quarter was $0.49.

This was $0.13 above the midpoint of our March guidance.

The improvement was essentially driven by two things: $0.05 from net revenue yields which benefited from stronger pricing on close in bookings at our North American brands; and $0.06 from lower net cruise costs, excluding fuel, as a result of timing of certain expenses between the quarters.

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

Our capacity increased 2%.

The North American brands were flat while the European, Australia and Asian brands, also known as our EAA brands, were up over 5%.

Our total net revenue yields were up 3.6%.

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

Net ticket yields were up 3.5%.

The increase was driven by our North American brands deployment in the Caribbean and Alaska.

Net on board and other yields increased almost 4% with increases on both sides of the Atlantic mainly related to bar and casino.

Net cruise costs per ALBD excluding fuel were down almost 2%, which is about a 3 point improvement versus what was planned in our March guidance, but again this was due to the timing of expenses between the quarters.

In summary, our record second-quarter adjusted EPS was almost double the prior year, or $0.24 higher, driven by operational improvements worth $0.18, the favorable net impact of lower fuel prices and currency worth $0.04, and share buyback accretion worth $0.02.

Now let's turn to booking trends.

Since March bookings for the remainder of the year are at higher prices with less inventory remaining for sale than at the same time last year.

At this point in time for the remaining two quarters of 2016, cumulative 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, even with our capacity increase, bodes well for pricing over the next few months.

Now let's drill down into the cumulative 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.

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

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

Australia and Asia are consistent with our previous guidance.

As expected, we are behind on pricing given our 60% increase in China capacity and our 15% increase in Australia capacity.

For 2017 we continue to move out the booking curve.

At this point in time, for the first three quarters of 2017, cumulative fleet wide bookings are well ahead at prices that are in line with 2016 and recent trends have been very positive with robust booking activity at slightly higher prices.

These are early indications for 2017 and I do caution you not to read too much into these trends.

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

As Arnold indicated, our second-quarter results, combined with a strong book position, enabled us to maintain the midpoint of our previous guidance range.

This is actually a $0.17 improvement offset by a $0.17 drag from fuel prices and currency.

Our 2016 June guidance is $3.25 to $3.35.

The $0.17 improvement compared to our March guidance was essentially driven by three things: one, improved net revenue yields were $0.10, $0.05 of which was achieved in the second quarter and an additional $0.05 we expect to achieve in net ticket revenues during the remainder of the year.

Second, lower net cruise costs excluding fuel were $0.03.

And third, the accretive impact from the additional shares we purchased since our March guidance call were $0.03.

Net cruise costs, without fuel per ALBD, are now expected to be up approximately 1.5% for 2016, half a point better than our March guidance.

Remember that while the year is expected to be up approximately 1.5%, there are differences between the quarters.

The first quarter was up about 1.5 while the second quarter was down almost 2%.

However, as I mentioned during the last earnings call and taking into account the re-seasonalization of our planned second-quarter costs into the second half of the year, we expect third-quarter net cruise costs without fuel for ALBD to be up 6% to 7% driven by the timing of advertising expense and the re-mastering of Queen Mary 2 in dry dock.

The expectation for the fourth quarter is that costs will be flat.

At the midpoint of our June guidance net cash provided by operating activities is approaching $5 billion.

As Arnold indicated, with such strong cash flows since late last year we repurchased approximately 38 million of our shares and our Board of Directors authorized a third $1 billion stock buyback program yesterday.

In addition, we still have about $100 million remaining on our second $1 billion stock buyback authorization.

Our June guidance EPS calculations assume shares repurchased through last week.

For the full year the calculations assume approximately 750 million shares outstanding on a weighted average basis, while for the third quarter the calculations assume 743 million shares outstanding.

On a final note, given the volatility of FX rates since the Brexit vote, we want to share with you our current rules of thumb about the impact that currency and fuel prices can have on our 2016 results.

To start with ,a 10% change in all relevant currencies relative to the US dollar would impact our P&L by approximately $0.18 for the remainder of the year and $0.09 for the third quarter.

For fuel price changes, a 10% change in the current spot price represents a $0.07 impact for the remainder of the year and $0.04 for the third quarter.

Fuel expense in our guidance is about $920 million for the full year.

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

A 10% change in Brent would result in a $0.03 change in realized losses on fuel derivatives for the remainder of the year and $0.02 for the third quarter.

And now I will turn it back over to Arnold.

Thank you, David.

Operator, please open it up for questions.

(Operator Instructions).

Robin Farley, UBS.

I wonder if you could give a little color -- you are raising your full-year yield guidance for the year.

Is it China yields coming in line with expectations and Caribbean coming in better?

I wonder if you could give a little bit of color on how the different regions are coming in versus your previous expectations.

And also a little bit of Eastern Med since some investors have a concern that Eastern Med may be worse than expected.

But clearly overall things coming in better than expected.

So just wondering what areas are driving that more than others.

Thanks.

Good morning, Robin, thanks for your question.

Yes, generally speaking obviously, as we just said, that Alaska and the Caribbean are strong.

So those primarily North American sourced and the markets definitely are providing a lot of the higher yield expectations.

At the same time we are continuing to show strong improvement in Europe from our EAA brands.

The seasonal European business, so the North America brands going to Europe, have experienced more challenge as we previously communicated.

But most of the drive is coming from the strength of the North American markets.

And China is still in line with your previous expectations?

We are very pleased with China.

China continues to be accretive to us, as we have indicated before, a volume and return story more than a yield story., Yields are down in China this year, but overall our earnings are proportionate to our capacity growth.

We see continued demand and, again as we said just a few minutes ago, our capacity changes are -- they sound like big percentage increases, but in terms of the actual volume we are going to go from 5% of our capacity to 6% next year.

But China is doing well for us and we continue to have great confidence in the business and overall the business is accretive especially for the brands that are there.

Thanks.

Then just lastly, did the Brexit vote -- has that changed your outlook for the remainder of the year?

Is there any sort of different view factored in from that?

I mean obviously the FX impact that you have updated today, but --?

Right.

So at this point in time is the FX impact which obviously we have calculated in.

We have taken a strong look at our business obviously in the UK and in Europe and then everywhere else [in order to see] what possible ramifications would be.

But at this point we have no reason to adjust anything.

Okay, great.

Thank you.

[Assia Georgieva], Infiniti Research.

Good morning, congratulations on a great, great quarter.

And I had one question -- it seems that European pricing stabilized over the months of May and through the early part of June.

Is that what you are seeing and does that give you more confidence in terms of the Q3 and the fiscal year outlook?

Thank you for the acknowledgment on the quarter.

We see in Europe overall that again the booking curve is getting a little further out.

We end up with less inventory to sell which allows us obviously to improve closer in pricing, which contributes to the yield growth.

And David may have a comment.

Yes, keep in mind that in our situation 90% of the guests on our European itineraries are Europeans.

And so it is a very different picture than North Americans flying over.

And I think as we had said a number of times earlier this year, the North Americans, while the pricing was down, we are filling the ships.

And recently we have seen some very good demand for the European itineraries from the North Americans.

Okay, great.

Thank you so much, David and Arnold, that is what I was seeing and just wanted to confirm that.

Again, smooth sailing into Q3.

Thank you.

Thank you very much.

Felicia Hendrix, Barclays Capital.

David, thank you for the color on next year; it looks like things are starting to shape up well although it is early days.

Just wanted to talk for a moment about the yield optimization or the revenue management optimization program that you are undergoing now.

And recognizing that we will start to see the impact next year, just wondering if you could help us understand what kind of yield contribution you might be able to get from that -- from having those six brands more -- on that program?

Okay, this is Arnold first.

First of all on the new revenue management tools, we are very excited about it.

We feel the brands are collaborating exceptionally well on it.

It is going to allow as many, many more capabilities in terms of more time and inquiries, smaller movements and price movements to optimize pricing and therefore maximize on the yield results.

And as we said, we will be pretty much booked by the end of the summer.

So most of the impact of this initial phase we will see next year.

And then into next year we will add some additional features which will bring in the rest of the brands as well and we will be able to max out going into 2018 from the [tool itself] and the better management skills that our people will develop from being able to utilize this too and be able to see things on a more timely and be able to spawned in a more rapid fashion.

I will let David comment beyond that.

But go ahead, David.

Yes.

No, I agree with Arnold and it is really a multi-year process as we keep rolling out more of the inventory on the system and we learn from it.

It is a little early to try to give guidance for 2017 or the exact impact in 2017 from the system.

We will talk more about yields in December.

But keep in mind overall to achieve our double-digit ROIC goal, our expectation is that we will see solid yield improvement in 2017 and beyond to achieve those goals.

And we will give you more color come December.

Thank you for that.

And for my next question, I apologize if this sounds like a repeat of something that you have already said and answered.

But I keep getting investor questions about this, so I am going to ask for as a point of clarification.

As you look at your second half of the year, given where you viewed the second half of the year when you provided your guidance previously in the spring versus today, has anything changed?

I guess overall we took the ticket yield guidance, as I mentioned in my comments, up by $0.05.

And so, I think as Arnold alluded to before, we are seeing strength in the North American market.

And as a result of that we took our yield guidance up for the back half of the year.

Yes, what has changed is obviously we have more clarity on line of sight and we are ahead on booking.

We have got less volume to sell; we are at higher prices.

And so, we have affirmation for being positive.

Okay, so without putting words in your mouth, it sounds like you are more optimistic about the second half because you have better visibility than you were when you last -- when we last met in this forum?

Yes.

Great.

David, just housekeeping.

Is there -- just given the uncertainty, given Brexit, given the volatility in the markets, the fact that everybody is trying to figure out which companies are most exposed to which currencies.

I know in the past you haven't broken this out, but is there any way to give us any understanding or any kind of magnitude to how exposed you are to the British pound?

Yes, well, the British pound represents about 30% of our currency exposure.

So, we talk about of the full-year impact of $0.27 for a 10% change in all currencies relative to the US dollar.

So for the British pound you are talking about roughly $0.08 for the -- on a full-year basis.

To net income.

To net income.

Thank you very much.

That is very helpful.

I appreciate it.

Greg Badishkanian, Citi.

For just the first question, you mentioned that North American passengers going to Europe, that that trend recently strengthened.

And I am wondering just with the volatility in Europe, the currency changes, would you expect North American first business to become a bigger portion of passengers sailing on European itineraries over the next several quarters?

And I think it is like 10% sourced goes to -- or of the European itineraries I think 10% are sourced from North America.

Would you expect that to increase over the next three quarters?

Really hard to say.

You are talking a lot of itineraries, multiple brands.

Our brands do a great job looking at it itinerary by itinerary and sourcing based off of where they can get the maximum amount of yield.

And so, there is a lot of factors to consider and a call like that in the short term would be very difficult for us to opine on at this point.

All right, okay.

And then it just to even further clarify China, which I think we all know the answer, you give us different ways.

But from your vantage point you are not seeing any material drop off in the last, let's say since you reported in March.

You haven't seen a material drop off in pricing or booking trends either at the travel agent or the charter level?

Or in terms of renegotiating at significantly lower prices with the charter companies that you have deals with for 2016 pricing, is that the case or not?

No, for us, as I said, first of all our occupancy on our sailings is very comparable, which was very strong to prior year.

We see no major change in occupancy whatsoever.

In terms of yields, of course the yields are down.

But on the other hand, our earnings are up proportionately.

So we are pricing at what we need to price for it to make sense for our business in China.

We are achieving that pricing in our charters and our contracts and (inaudible) distributors.

And obviously they have to win as well.

And they won't to be in the business if they are not winning.

But they are in the business.

And so, I think overall things, again, in a market that is really so sizable and we are at such an early beginning, I mean we have such low penetration for a market of that scale, I think we are in good shape going forward.

Good, thank you.

Jaime Katz, Morningstar.

My first question is on the double-digit ROIC goals.

And I know in the past you guys have mentioned that the carnival brand I think was already yielding double digits.

So I am curious if most of the other brands are sort of catching up to speed or if the brands tend to be bifurcated some way and maybe it might take a little longer for some of the underperforming brands to catch up.

Well, as we have stated in the past, we expect to achieve double-digit returns on invested capital, earlier this year we said in the next two to three years, at the end of this year it will be the next one to two years.

We are going to approach 9% return on invested capital this year.

So that is a good sign for what you can expect going forward.

So, on balance we are going to get there.

You are right, we did share that the carnival brand itself was already at double-digit return on invested capital.

We have other brands that are.

And overall we will be there across the base of our business in time.

There are differences between the brands but we generally don't provide detail by brand.

Yes, okay.

And then do you guys want to offer any color on early reads on Fathom and how you guys are thinking about that brand going forward, whether maybe it can be a much more important part of the business down the road just by the early demand you have seen?

I know it is only one ship, but just curious if you have any commentary.

Thank you, yes.

It is only one ship, for the Dominican Republic part of the Fathom story, those that have gone have loved the experience and felt that they were personally transformed, etc.

It is a different targeted segment, it is a travel segment more than a [crew] segment.

And our ability to access that segment is challenging.

We remain very optimistic about the brand, but the reality is we have to see the bookings from that segment.

With regards to Cuba where we literally made history through the Fathom brand, our fall bookings are very strong for Cuba.

We got a late approval; the summer has not been full, although the experience has been phenomenal.

We do have opportunities remaining and some of the summer sailings into Cuba and we will just have to let it play out.

And the team has done a marvelous job with the on the ground product and the ship onboard product for DR. And obviously we are honored and privileged and somewhat humbled to be the first going to Cuba.

Thank you so much.

Nice quarter.

Harry Curtis, Nomura.

I wanted to drill a little bit further into your bookings for the third and the fourth quarter in Europe just to get a sense of the visibility but also the risk.

How booked are you for the European brands in the third and the fourth quarters?

Generally speaking we don't give all the details by brand.

But for the third quarter we generally 80% to 90% booked has been the historic range.

And for the quarter -- the fourth quarter which would be one quarter out it would be 50% to 70% booked.

Now I think on the last call I said we were sort of at the middle of those ranges -- or maybe that was the December call, I don't remember exactly.

And the booking curve has continued to move out.

So we are a little bit higher than the midpoint of those ranges.

Every brand has a slightly different booking curve and that has to do with the nationalities and the people.

And so, there are differences between the brands all around the world.

But it is more cultural than economic generally speaking.

So hopefully that gives you enough color to make some judgments.

And then recently have you seen any deviations from those trends?

Do you expect kind of the slope of the line to continue to trend in the same pattern that it has done recently?

No significant deviations.

I mean generally speaking the booking curve all around the globe has been moving out somewhat.

And we feel very good about that situation for all the brands.

And moving over to China for my second question, there seems to be a fair amount of debate over the relationships with the charter operators.

Do you have any -- you mentioned that your earnings have grown in line with your capacity growth.

Do you expect that to continue as you look into the capacity that you are introducing in 2017?

And the reason that I ask the question is that there seems to be some pushback on -- from some investors in China that with another year of such large supply growth that there is going to be a -- you are going to hit a demand wall.

Again, just to put things in perspective again.

While the percentages sound so large, it is the equivalent of moving one additional ship in to a market that in time is going to be far larger than the North American market and could be as large proportionately as the entire global cruise market is right now.

So, while there may be some bumps and temporary discontinuities as distributors ramp up with their own personnel to move the volume of cruise, because a lot of those (inaudible) sell other type of travel products obviously.

And there might be some bumps along those lines.

Overall China remains a robust opportunity.

And we are still at the very, very beginning of it.

So I don't see that.

You are going to have some negotiations going on, everybody wants a better price, it is a B2B business almost now.

And of course there will be negotiations trying to get lower prices if they can get better returns and what have you.

But overall things are very good, the cruise product that we offer is well received and [excellent].

We are going to have our first purpose built ship, the Majestic Princess, going in next year.

She is being met with a very, very positive response by the distributors already and we have our first ship, AIDA, as I mentioned going in next year.

And then we have our base for Costa and the rest of the Princess.

But on balance it's the equivalent of adding one ship.

And so, we will be going from 5% of our capacity to 6% of our capacity which is not very large at all.

Even with the industry moving in a few additional ships it's stuff that can be managed and may be a bump here in the road here or there.

But over time it is going to be great and we do expect to see continued earnings improvement directionally to capacity expansion.

And keep in mind we are also expanding the number of offices we have in China.

We are now up to 12 offices and there are more to be opened.

We are working with more and more travel agents and expanding that base plus we continue to educate the travel agents on more [bow] cruising and how to better sell cruises.

So we continue to expand the opportunity in marketplace as well as -- really as Arnold indicated, it is really just one additional -- the equivalent of one additional 4,000 passenger ship entering a huge market with tremendous opportunity.

Very interesting and helpful.

Thank you.

Tim Conder, Wells Fargo Securities.

Thank you and again congratulations on the quarter and thank you for the color so far.

A couple of just clarification follow-on items.

David, on the British pound, that 30% -- just to make sure that was on an annual net income exposure basis?

Correct.

Any additional color you could give?

I know you have got borrowings and everything in euro, but any -- where does the pound, I guess euro and maybe a couple other currencies rank annually on that net income exposure basis, maybe highest to lowest of the top three, four, five, whatever you want to feel comfortable in providing and if so the percentages?

The Aussie dollar is probably about 35%.

I think historically I have told everybody that the British pound and the Aussie dollar represented two-thirds of our currency exposure.

The remaining exposure is you have got the Canadian dollar, the euro and the Chinese renminbi and those three are probably about 10% apiece.

And this is of course all from a net income bottom line exposure.

We have a lot more than 10% of our business in euros, but we also have a lot of expenses in euros which net out the exposure when you get to the bottom line.

Okay, okay, great, helpful.

And then the other question -- and we get it -- we are getting it more frequently is given some Asian-based competitors adding, buying and therefore adding apparent capacity long term, it would appear that if we go out 2018, 2019 you could see some years of 6% capacity growth on a gross basis for the industry.

Arnold, any color on that, maybe how that would shake out net?

Or it appeared that the majority of that capacity also would be in China.

Just any additional thoughts or color on that looking out 2018 and beyond.

Yes, our commitment is definitely to measure capacity growth, not just supply growth.

And as we are delivering double-digit return and as the ships we have do that we will retain those ships in the fleet.

If they don't do that then obviously we would not.

But we are totally committed to measured capacity growth.

And given the large number of ships we have in the base we represent that influences overall the global capacity for the industry.

So, yes, a lot of the capacity growth you are going to see, as you have already identified, is targeted in China, which means the rest of the market, the rest of the world, the other 95% of today's capacity is not seeing very much growth.

And things change for whatever reasons, which we don't anticipate.

But if they were to change we can easily modify and adapt and change our replenishment strategy.

We will always want the new ships because they are more efficient, more cost effective.

And so you would always want the new ships you would look add the timing of moving out the ships that are less efficient and not generating any returns.

And would you anticipate that number for the industry to maybe come down?

Would you anticipate some higher scrappage rates going forward as the global (multiple speakers)?

Right now it depends on the demand in the market.

So, for us things are robust.

Keep in mind that the industry overall is under penetrated.

In our case with 10 brands we have a huge base of people who have experienced cruise and love it.

Cruise is still the best vacation value there is.

There is a tremendous vacation experience.

Onboard revenues have grown every year in the cruise industry except -- for us, our onboard revenues have grown every year except one year in the whole history of the time we have been in business.

And so that we can look back to and find.

And that is in all kinds of environments, recessionary environments, crises environments, everything.

So under penetrated, big base of people who already want to cruise, great dynamics.

It is hard to say, but I don't anticipate acceleration of retirements of ships.

But the point is we have mobile assets, we have a number of triggers we can pull and we can do what we need to do because we are committed to double-digit return on invested capital and sustaining that.

Great, thank you, gentlemen.

And congratulations again.

(Operator Instructions).

Jared Shojaian, Wolfe Research.

Arnold, you talked about a 5% reduction in European capacity and 5% increase in the Caribbean.

So my question is, what are you seeing from competitors on global redeployment?

And what gives you confidence that we won't have a repeat of 2014 when the Caribbean became oversupplied?

Well, in the near-term it is not going to happen because the deployments are mostly transparent at this point.

So, that is -- the best indication is that we kind of can see a lot of where the ships are going already.

So you won't see a 2014 explosion of Caribbean capacity like -- in 2017 you won't see that.

So having said that, there could still be additional capacity in the Caribbean because they are strong now for us and I am sure it is for others too.

And similarly, to the extent possible up in Alaska as well.

But we are anticipating that.

Every year there is over capacity somewhere and so on and so forth.

And again, we have lots of different ways to manage our business to ensure that we deliver the results we are committed to delivering which is a double-digit return on invested capital.

But we don't anticipate an explosion in the Caribbean like you saw in 2014.

Keep in mind that when we planned the 2014 deployments our brands were not coordinating their own -- the deployment within our own Company.

So a number of individual brands each made what they thought were really good decisions.

Now the deployment is well coordinated within our Company and there is more visibility across the whole Corporation, which is how we wound up with the 5%.

Right.

The 5% for us compares to a 20% growth we had in 2014.

So it is considerably different.

Okay, thank you.

And then, I just want to follow up on some of that capacity commentary, because it still -- I mean it feels like a lot of investors are still pretty concerned about the amount of industry growth over the next several years.

So, what levers do you have to pull if you need to?

I mean you talked about the retirements, but why wouldn't reducing utilization work?

I mean is that one opportunity?

Are there other areas that you see?

I would just love to hear about any flexibility you think you have there.

Again, you want that new ships because they are more efficient.

And inherently they can give you a better return.

So the new ships will come.

The question is what do you do with the other ships.

And as long as they are returning you will keep them.

If the demand is there, there is growth in China, Cuba opens up, there is renewed interest in the Caribbean and so on and growth prospects for the Caribbean, all those things are drivers that can help give you yields and returns on some of the existing fleet.

So, the lever is pretty straightforward.

You will be able to tell what ships are performing and which ones aren't.

And if you don't have a good redeployment plan then it would make sense to exit.

Okay, thank you.

Steven Kent, Goldman Sachs.

A couple questions.

One, you had some realized gains on fuel derivatives for 2016.

I think you said it was $330 million in March.

Can you tell us what it is running at now?

And then your marketing programs that you have (technical difficulty) shifted, what specifically was shifted and what was the rationale?

And then (inaudible) on the Queen Mary retrofit, are we going to see more Cunard and Queen ships follow up over the next couple of years?

Okay.

I will take the first question, Steve.

In terms of realized losses on fuel derivatives, it is $285 million that was built into our June guidance as a result of the change in Brent which moved up, the losses came down just a little bit.

In terms of advertising built into the guidance, I mean it was -- these are small movements that the brands planned well ahead and make decisions over time based off of what they see happening in booking trends and other things, and they will re-seasonalize.

Keep in mind every good plan has got to change as you see movement.

It is no different when we see strength in bookings we raise prices, we make changes over time.

So that is really -- essentially it is not a big deal and it's just some seasonalization between the quarters.

We manage to yield, we don't manage to a timeframe.

So, cost can move in and out of waters, but we are managing to yield and return.

The Queen Mary.

What was the question on Queen Mary 2?

The Cunard, the Queens and are we going to see more Cunard ships?

Are we going to see more ships in Cunard?

No, whether you are going to retrofit some more of them.

I'm sorry?

I asked whether you are going to retrofit more of the Queen.

Oh, retrofit.

Retrofit.

No, basically Queen Mary 2 went into a dry dock as the ships periodically do three to five years depending on the class of ship.

And the others are practically new, have gone through a dry dock recently.

So it is just part of dry dock.

On the other hand Queen Mary 2, there was a re-mastering.

I mean she is the only ocean liner out there and we are very, very proud of her.

And we -- wherever she goes she is still iconic, people gather by the thousands and tens of thousands to see her sail in and sail out.

And so, we take great pride in her.

And also we can generate the yields from the additional investment.

So we did do a re-mastering of the Queen Mary 2 versus just a traditional kind of dry dock where you refresh.

Okay, thank you.

Jamie Rollo, Morgan Stanley.

Just a few questions on China [Festival], please.

Could you give us a feeling for roughly how much your yields are down by year on year just sort of directionally and what the yield premium is to the rest of the group now please?

We have said all along the yields are down.

We had previously indicated that the ticket prices were higher than the fleet average.

And at this point in time the ticket prices are in line with the overall fleet average, but it is really an apples and oranges comparison.

Because in China you have got a much higher percentage of the fleet is in the contemporary brands.

And so you are comparing apples and oranges when you are taking the average China ticket yield to the overall fleet average ticket yield.

So keep that in mind as you evaluate the numbers.

Okay.

So it is fair to say it is not yield accretive to move ships to China if they match the existing brand type?

They are yield accretive to the brands within the brands.

Within the brand is definitely yield accretive.

Understood.

And you also mentioned some negotiations with charterers for next year.

Is that a bit more aggressive than usual because you have got several new brands entering the market -- Norwegian, MSC, Dream?

Or is that sort of in line with what you saw last year?

I would say the negotiations are in line, I mean there is always a negotiation.

And I don't want to overstate that.

I mean, they are our partners, they need to win too.

But of course they are going to try to get as great a return as they can possibly get.

There are sub agents involved with distributors and so on and so forth.

So, I don't see any greater intensity in the negotiations when you bake fundamental change in the tone or nature or anything like that.

But there is always ongoing negotiation as you look out into future years with the charters.

Okay, thanks.

And then the other question is just on your yield guidance for the rest of the year.

I think if my math is right you need something like 3.5% to 4% in Q4.

Is that sequential improvement just the mix of deployment, you've got obviously more Caribbean and more Europe?

Or is that a genuine underlying improvement (multiple speakers) for Q3?

You do also have to remember you have got a slightly easier comparison in the prior year to Q4 versus Q3.

That is part of it as well as mix of the ships and the deployments and a number of other things.

But fundamentally it is improvement.

Okay.

And each quarter is still roughly 100 basis points all accounting benefit to revenue yield still?

Correct.

Directionally, yes.

Directionally?

Yes.

Yes.

Thank you.

Stuart Gordon, Berenberg Bank.

Just a quick question just to break down a little bit on the $0.17 of headwind that you have now got.

My back of the envelope suggests that that would be about $0.07 or $0.08 of fuel and around about $0.10 of currency.

I was just hoping you could confirm that.

And on the currency I'm just interested in how you've dealt with sterling as we move into the third quarter, because obviously before the big move most people will have paid for their holiday.

So, have you already swept that into dollars so the third quarter is not going to be such a big hit?

Or was that sitting in sterling and therefore the repatriation cost still exists?

Thanks.

Okay.

As far as the split is concerned the fuel price was roughly including derivatives $0.10 and currency was $0.07 which made up the $0.17 compared to our March guidance.

In terms of the third quarter, the way it works from an accounting perspective is the exchange rate gets locked in for accounting when the people pay for their cruise.

From an actual exchange of physical currencies from one to another we do that, generally speaking, on a daily or a weekly basis depending on what currencies we need.

We do have bills in British pound, we retain those currencies and the extra we do exchange into US dollars or Euros or whatever currency we are short.

So just to be clear, people will have paid for their holiday before the drop in sterling.

So that will have been locked in at the better sterling rate for the third quarter.

That is correct.

And in the 10% impact, we take those locked in rates into account --.

Okay.

When we get a currency impact on our P&L.

So I said that 10% movement would be $0.09 for the third quarter.

I took into account that a big chunk of that revenue has been paid for and locked in.

Thank you very much.

Thanks.

Dan McKenzie, Buckingham Research Group.

I'm wondering if you can help us size the distribution opportunity in China in Carnival's today.

So when you say China is a volume story, how big a lever is the distribution lever there?

What do you mean when you say how big a lever is the (multiple speakers)?

So, when you think about the number of travel that -- you have 12 offices there, I appreciate the perspective.

But when you think about the volume of travel agencies, how many total travel agencies are licensed for outbound travel and how many relationships does Carnival have to date with those travel agencies and the growth trajectory of those agencies?

Got it.

Yes, so today we are beginning to expand the number of distributors historically.

We have worked with principally a group of 10.

We are starting to expand beyond that, we are starting of course in the -- near Shanghai, near Tianjin where the ships were.

And we are starting to expand into -- throughout the country, that is why we expanded the offices.

Some of those distributors obviously have sub agents, sub distributors that they have worked with in the past.

So our reach is a little bit more than what a lot of -- quite a bit more than the 10 we work with directly through that.

But we are expanding the -- as we expand capacity we are expanding the reach of distributors and going into not only further through the country but also more density where the ships are.

So it's a nascent market and we are building it as we go.

Keep in mind there is 26,000 travel agents in China, about 2,600 of them have outbound licenses.

And so, what we are seeing happening is while there is a small group that tends to charter let's say the full ship, we are probably dealing with 250 to 300 agents who are doing large groups and chartering part of a ship at this point in time.

But those 250 or 300 travel agents are also selling through the other 24,000 travel agents around the country, that is what Arnold called like sub agents.

And they are selling into these groups and charters.

So, it is a tremendous distribution system and it can be leveraged and it is part of the reason why we are so optimistic about the growth in China, tremendous opportunity.

That will do it for me.

Thanks so much, guys.

Thank you.

Operator, I guess at this point we are probably have time for one more question.

There are no other questions on the line.

(Laughter) okay.

Hey, everyone, thank you so much.

I really appreciate it and look forward to seeing you guys during the quarter and to sharing with you next quarter's results.

Thank you very much.

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

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