嘉年華遊輪 (CCL) 2016 Q3 法說會逐字稿

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

I'm Arnold Donald, President and CEO of Carnival Corporation and plc.

Thank you all for joining us this morning.

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

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.

Despite a series of geopolitical events that unfolded as the year progressed, including Turkey, Paris, and Brussels; despite heightened concerns around zika, around Brexit and around China; despite fuel and currency both working against us, resulting in an $0.18 drag from our initial 2016 guidance, we have exceeded the high end of our quarterly guidance and we are raising our expectations for the year.

This quarter we delivered the highest quarterly earnings in Carnival Corporation's history, with record net income of over $1.4 billion, $0.17 per share higher than the prior year, exceeding the high end of our guidance, and $0.07 above the midpoint.

Despite the numerous headwinds, we are well on track to achieve our new guidance midpoint for full-year adjusted earnings per share of $3.35, more than doubling our 2013 earnings of $1.55 per share.

More importantly, our return on invested capital will also nearly double from 4.6% to 8.8% over that same time period.

These strong results could not happen without the hard work of our 120,000 passionate employees and without the strong support of our travel agent partners.

Looking forward, our booking trends are strong heading into 2017, with higher occupancy levels at higher prices, building momentum for continued earnings growth.

Our record results and favorable booking trends reflect our ongoing efforts to create demand in excess of measured capacity growth, together with the benefits of leveraging our scale.

Our world-leading cruise lines continue to outperform, particularly in the Caribbean with continued strength in close-in pricing.

Moreover, all of our major brands in North America and Europe experienced net revenue yield improvement despite the geopolitical environment in Europe.

Europe is our single largest deployment in the third quarter at 45% of our total capacity.

Now, there certainly has been a lot of noise around China, so I'm going to spend a little extra time on China in my comments now.

First, China is a profitable market for us.

Our ships operating in China optimize our overall brand performances.

As we have previously indicated, China is a unit growth opportunity and we expect the yield to be down as the distribution system improves its ability to service the growing market there.

To demonstrate our commitment to grow the industry in China, we have factored into our results and into our guidance potential adjustments to our contracted prices in support of our distribution partners.

The distributors are gaining experience translating pent-up consumer demand for cruising into sustainable market pricing and we certainly want to help them as they adapt to a rapidly growing market.

Again, even with those adjustments, we are raising our guidance for the year, affirming that we could manage ups and downs in this embryonic market.

As we previously pointed out, China represents just 5% of our capacity.

And even with capacity growth well above our global average, it will remain a relatively small percentage of our total business.

We continue to expect China to be a growth market, especially since the growth in the cruise industry is backed by the Chinese government, as is evidenced by its inclusion in the current five-year plan.

We will participate in this growth.

We had 16 marketing offices in China in 2016.

That's up from just eight in 2015.

We plan to open four more offices and to significantly expand our distribution network in 2017.

Also in 2017, the brand-new Majestic Princess will enter as the first purpose-built ship for the Chinese market.

Our capacity growth in China is expected to be 26% next year, compared to 66% this year.

Industry-wide growth in China is expected to be 31% in 2017 compared to 100% this year.

Those numbers sound big, but keep in mind that these large year-over-year percentage increases are over a very small base.

So, these growth rates are directionally equivalent to adding less than one 3,000-berth vessel to our China fleet and roughly two 4,000-berth vessels to the industry fleet overall in 2017 in China.

Regardless of the rate of growth in China, we are firmly committed to overall measured capacity growth, and fully capable of managing to sustainable double-digit return on invested capital.

Concerning newbuilds, our recent announcement included three new ship orders for 2021 and 2022, our first orders for those years.

Before 2020 there has been no change in capacity from previous announcements.

To optimize deployment, however, we have reallocated the newbuilds among our brands.

Over the next four years, three ships are planned to be purpose-built for Asia, our fastest growing region which is still in its earliest stage of development.

And an average of roughly three ships per year will be spread across all our established markets.

In fact, we have a very measured capacity environment during this time at the brand level, with two ships each for our North American brand Carnival Cruise Lines, our global brand, Princess, our luxury brand, Seabourn, and our German brand, AIDA -- effectively one ship every other year for those brands.

In addition, over the same four-year period which will deliver just one ship each to Holland America line, Costa in Southern Europe, P&O in the UK, and P&O in Australia.

And during this time we will continue removing ships from our fleet.

In fact, the number of berths that are eligible for removal will more than double by 2020 and more than double again by 2024.

Given this potential replacement cycle increase, we expect that a greater portion of our newbuild capacity will actually replace older, less efficient ships.

As in the past, we will sell ships into secondary markets that do not compete directly with our brands.

Within those secondary markets, there are older ships operating today that will soon reach retirement age and need to be replaced.

We expect our net capacity growth through 2020 to be 3% to 4% compounded annually, consisting of double-digit growth in Asia, and obviously 3% or less growth in our established markets in North America, Europe, and Australia.

Meanwhile, we continue our efforts to create demand in excess of measured capacity growth.

We have stepped up our aggressive public relations efforts with three innovative 30-minute programs airing weekly on ABC, NBC, and CW, every Saturday morning beginning in October.

These programs showcase our brands creating amazing vacation experiences that are designed to expand the audience for cruising by providing increased consideration, and at the same time changing perceptions by dispelling the myths of cruising with compelling original content.

We're excited by the prospect of connecting people, places and cultures across the world to create unforgettable experiences.

Collectively these programs provide an hour and a half of content per week, with over 150 scheduled airings and an annual expected viewership well in excess of 150 million people.

And we have further innovations on the horizon that will be unveiled in January of 2017 designed to further enhance our already great guest experiences.

Additionally, we launched the initial phase of our yield management system this quarter, helping us drive incremental revenue yield over time.

We are currently market testing across six brands for a portion of the inventory to refine algorithms.

The full rollout will be completed by late next year.

Although we have already benefited from the sharing of best practices, we expect this new yield management technology to contribute in 2017 and even more so in 2018.

We also continue to make progress on our cost containment efforts and remain on track for more than $75 million of cost savings this year.

In summary, we are committed to measured capacity growth, currently planned at less than 3% in the established markets.

Our brands are differentiating themselves in the market and delivering fantastic vacations for our guests, as evidenced by our strong yield performance.

We continue to build demand for cruise and continue to aggressively contain costs while still investing in enhanced guest experience and demand creation.

We are improving our capability to extract yield in any environment through enhanced revenue management tools.

Moreover, we remain committed to returning value to shareholders.

During the quarter we repurchased another $700 million of Carnival stock through our ongoing buyback program.

In the last year we have invested nearly $2.5 billion to buy back over 50 million shares of our Company's stock, demonstrating conviction in our ability to execute and achieve sustainable double-digit returns on invested capital.

With that I'd 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'll start today with a summary of our 2016 third-quarter results.

Then I'll provide an update on our full-year 2016 guidance.

And then I'll finish up with some insights on 2017 booking trends and a few other items to note for 2017.

Our record adjusted EPS for the third quarter was $1.92.

This was $0.07 above the midpoint of our June guidance.

The improvement was driven by a number of factors.

First, $0.02 from net revenue yields which benefited from stronger pricing on close-in bookings at our North American brands.

Second, $0.02 from lower net cruise costs excluding fuel as a result of timing of certain expenses between the quarters.

Third, a penny from the favorable net impact of fuel prices and currency versus our June guidance rates.

And fourth, a penny from the accretive impact of the shares we repurchased since the last earnings call.

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

Our capacity increased almost 4%.

The North American brands were up over 2%, while our European, Australia and Asian brands, also known as our EAA brands, were up over 6%.

Our total net revenue yields were up 2.7%.

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

Net ticket yields were up 3.1%.

This increase was driven by our North American brands deployment in the Caribbean, Alaska and Europe, as well as our EAA brands deployment in Europe.

These net ticket yield increases were partially offset by yield reductions in Australia, driven by large industry capacity increases in a highly penetrated market, as well as yield reductions in Asia, where distributors are gaining experience growing the market.

The majority of these yield reductions were anticipated in our initial 2016 yield guidance provided during our December earnings call.

After eight straight quarters of mid to high single-digit yield increases, our net on-board and other yields increased 1.3% over much tougher comparables from the third-quarter 2015, as our current initiatives continue to pay dividends while our brands develop new initiatives for 2017 and beyond.

Net cruise cost per ALBD excluding fuel were up over 5% driven by the timing of advertising expenses and the remastering of Queen Mary 2 in dry dock, as discussed on our last earnings call.

This was about a point improvement versus what was planned in our June guidance, but again, this was due to the timing of expenses between the quarters.

In summary, our third-quarter adjusted EPS was $0.17 higher than the prior year, driven by three things.

One, operational improvements were $0.05, despite the high net cruise cost seasonalization in the third quarter.

Two, the favorable net impact of fuel prices in currency were $0.02.

And, three, share buyback accretion were $0.10.

As Arnold indicated, since the beginning of the third quarter we repurchased over $700 million of our shares for a total since late last year of over 50 million shares and nearly $2.5 billion of buybacks.

At this point in time, we have approximately $500 million remaining on the third $1 billion stock buyback authorization.

Our September guidance EPS calculations assumes shares repurchased through last week.

For the full year, the calculations assume 748 million shares outstanding on a weighted average basis, while the fourth-quarter calculations assume 730 million shares outstanding.

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

As Arnold indicated, we are well on track for achieving adjusted EPS of $3.35, which is the midpoint of our 2016 September guidance range of $3.33 to $3.37.

The $0.05 improvement compared to the midpoint of our June guidance was essentially driven by two things.

Improved net revenue yields were $0.03, $0.02 of which we achieved in the third quarter, and an additional penny we expect to achieve in net ticket revenues during the fourth quarter; and $0.02 from the accretive impact of additional shares repurchased since our June conference call.

Now let's turn to 2017 booking trends.

Since June bookings for the first half of 2017 have been at significantly higher prices, with booking volumes lower than the prior year as there is less inventory remaining for sale.

At this point in time, for the first half of 2017, cumulative advanced bookings are ahead at considerably higher prices.

Drilling down into the cumulative book position, first, for our North American brand, Caribbean occupancy is well ahead of the prior year at nicely higher prices.

For all other deployments, occupancy is ahead of the prior year at higher prices.

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

For the Caribbean deployments for our EAA brands, occupancy is in line with the prior year at slightly lower prices.

However, prices on these bookings over the last quarter are well ahead of the prior year, clearly an improving trend.

For Asia, occupancy is in line with the prior year at nicely higher prices.

And for Australia, occupancy is also well ahead of the prior year at prices that are in line.

However, prices on the bookings over the last quarter are well ahead of the prior year, also clearly an improving trend.

And, finally, a few other items to note for 2017.

We are forecasting a capacity increase of 2.5%.

We are planning for an increase in dry dock days from approximately 380 days in 2016 to 470 days in 2017.

Remember, we did benefit in 2016 from lower dry dock days compared to the 563 days we had in 2015.

As we have indicated on previous conference calls, the dry dock days will vary each year but probably average around 450 to 475 days, given the current size of our fleet.

As we indicated last year, given the amount of CapEx reinvestment in the existing vessels and other areas of our business to drive yield improvement, we do expect depreciation expense to increase percentage-wise more than capacity, and currently expect depreciation expense to be around $1.9 billion for 2017.

Given volatility of fuel prices and FX rates over the last year, we wanted to share with you the year-over-year impact that these items would have on our 2017 results if we use current fuel prices and FX rates.

The 2017 year-over-year impact would be an unfavorable $0.28; $0.24 for fuel prices including the impact of fuel derivatives and $0.04 for currency.

Although it's early, 2017 appears to be shaping up to be another good year.

We are well positioned for continued earnings growth, given the current strength of our bookings and pricing trends for next year.

And now, operator, let's open up the call for questions.

(Operator Instructions)

And our first question comes from the line of Robin Farley with UBS.

Please go ahead.

Great.

Thank you.

I know your first-half commentary, you're looking very strong.

I wonder if you could clarify though maybe two areas where investors may be most concerned, and it's really given concerns about North American demand into Europe.

That would really be more of a Q3 issue.

I wonder -- I know it's still early but can you give us any early read on that?

And then he other area, China, of course, and I realize China's in your first-half guidance, as well, but I wonder if you could just give any color on how much you're chartered for next year at this point already.

Thanks.

Good morning, Robin.

First of all, let's take the second one first, China charters.

We're just in the process now and that was part of our consideration for making the adjustments we made that we've included in the guidance going forward on this year's activity.

So no real guidance yet for 2017 on that except what Dave has shared in his comment about what the bookings were for Asia overall.

In terms of the North America brands in Europe, again, our booking curves look strong and look good, as do our pricing.

But you're asking about third-quarter 2017.

Obviously that's a ways off.

Okay.

Maybe just one clarifying comment.

David had mentioned occupancy for Asia overall in line so far in the first half.

And that commentary would include China.

In other words, any charters for the first half for China suggesting in line with last year at this time.

Right now our charter activity is strong in China.

Our occupancies this year were very good.

We anticipate, as we said in opening comments, that we would see yield declines.

But China's profitable.

Occupancy levels are high, which means the increased capacity was absorbed in terms of having guests on the ships.

The ships are sailing full.

And chartering for next year at this point is in process but solid, very strong.

We don't see any consternation around occupancy for next year.

Okay.

Great.

Thank you.

And Robin, just one last comment.

I'm sorry.

Real quickly, the guest satisfaction levels are very high, as well.

So, China is a great market.

Still a small part of our overall base, but it's a very strong market.

Great.

Thank you very much.

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

Please go ahead.

Hi.

Thanks for the time and good morning.

Just sticking on your outlook for 2017, David, it appears that the commentary that you had for the first half this quarter has improved since the color you gave last quarter.

You guys did give us some nice color on the call but I was just wondering specifically what is driving that improvement.

It's a variety of things.

We've talked all along essentially about the strength of our booking.

Our booking position is well ahead.

We talked that pricing at this point is considerably higher.

We've been working all year long on our yield management system.

Best practices across the brands have been very helpful.

As Arnold mentioned, we just rolled out for the six brands the prototype for the new revenue management system, and that will be helping in addition for 2017 and beyond.

So, there's a lot of good positives.

Deployment optimization across the brands have contributed.

So, there's a lot of very good things going in our favor and we feel very good about the overall book position for 2017.

That's helpful.

Thank you.

Your fourth quarter outlook is basically in line with what was implied when you reported last and also in line with consensus.

There have been some travel agent reports about pockets of inventory in the Caribbean for the remainder of the year.

I'm assuming that's being contemplated in your guidance.

But is there anything that you can see today that might cause some risk or concern about the guidance for the rest of the year?

No, we don't see anything in terms of guidance for the rest of the year.

Our bookings are very strong in the Caribbean.

We're well ahead with higher pricing.

We don't see softness.

Our brands continue to outperform in the Caribbean.

Thank you for that.

And then just finally, Arnold, you touched upon this earlier in your prepared remarks, could you just talk a little bit more about the decision to move AIDA?

One of your AIDA ships was originally anticipated to be in China next year, now it's going to be in the Med.

And then earlier in the year you moved the decision for Carnival brand to be in China, you took that out.

So, I was just wondering if you could talk about those decisions.

And would we perhaps see those brands in China in 2018?

Again, deployments are a holistic decision so a lot of things go into consideration.

Obviously the market you're considering deploying it in.

But also, in the case of AIDA, the AIDAperla, our new ship, we've gotten confirmation of when she's going to come in.

So, we now know the capacity situation we'll have.

So, that was the relative strength of the market in Germany for AIDA.

So, all of those things factor in as well as the dynamics in China itself.

Similarly, with the Carnival, as I mentioned on a previous call on that one, it was a combination of things, how well Carnival is doing in the Caribbean, the timing of capacity coming in with the Vista coming in and other things, and the fact that we have distributed ports, home ports here in the US and getting the right ship in the right home port.

All of those things factor in ultimately for an optimized deployment decision.

And that's the beauty of our inventory is that it's mobile.

We can adjust and adapt and we're constantly seeking to optimize.

Great.

Very helpful.

Thank you.

And our next question comes from the line of Steve Wieczynski with Stifel.

Please go ahead.

Good morning, guys.

Arnold, can I follow up on China?

Let me ask another question.

I'll know you'll probably get sick of them.

I know you were just over there last week at a pretty major cruise conference.

Can you give us maybe the two or three main take-aways you came back with?

The take-aways are the ones I went over with, frankly, which is, number one, cruise is in the five year plan for China.

So, that means the government is committed to developing the cruise industry.

The reason for that is pretty self-evident.

We'll employ overall, with port development and infrastructure and supply chain and training, as well as shipbuilding, it will employ millions and millions and millions of Chinese.

So the government's very interested and they see cruise as an economic engine going forward.

So, you've got the support of the central government in the various provincial and municipal governments, so that's very important.

The second thing it's a growth market.

The third thing is that growth is constrained.

I know the percentage is not large and everything, but as I've tried to point out in my opening comments, we're talking onesie, twosies in ships.

And the reason the growth is constrained is because we have large addressable markets that are under-penetrated everywhere in the world.

So, we have lots of places to put ships these days, so we're not going to just take all the ships in existing markets and move them to China.

And then there's constraint on the number of ships that can be built for the China market in the near term here.

So all of those things put additional constraints.

Beyond that, clearly, as we anticipated, as you guys have identified through your assessments and stuff that yields declined, we see China as a unit volume, a unit growth story, as ultimately accretive to earnings, which it has been for us and overall helping us optimize yields across the global fleet.

And it's working really well.

Having said that, there is a gap with distribution.

It's an embryonic market.

Distributors are finding their way for the first time in cruise.

It is a charter market, a B2B market.

So, that introduces possibilities of discontinuities that you might not see if you had a direct to consumer a market.

So all of those things are things we already knew going over.

Those were affirmed.

But the other thing that was affirmed was the enthusiasm for the government for the cruise industry, the fact that the guest satisfaction levels are high, that our ships are definitely occupied comparable to prior years, despite the significant percentage increases in capacity.

And we see it as a future market.

Now, having said all of that, with all the increases we're talking about, it's 5% of our capacity next year with the additional increases, including the Majestic Princess -- will be the first purpose-built ship for China entering late next year -- even with that, it's going to be 6% of our capacity.

We can only grow so fast.

And because of the relatively small percentage of our total fleet it is, it's very manageable for us with any fits and stops or bumps in the road we might encounter.

But we're committed to working with our distributor partners and building a sustainable business in China.

If I could follow up on that real quick, is the biggest hurdle you guys see still the distribution network or is it the infrastructure is still not really in place at this point?

The short-term opportunity, of course, is for the distribution system to benefit fully from the pent-up demand there is for cruising by connecting it to the capacity there.

So, that's the immediate opportunity.

The near-term opportunity, of course, is to further develop the market from a port and destination standpoint.

That's a near-term opportunity and there's lots of work going on with that.

So, that's the next opportunity and the near term opportunity, and we're working on it of course, the Chinese government's working on it.

We're working on it in other places, the places the Chinese want to go to.

There's additional itinerary planning that needs to evolve in force capable of taking the large number of Chinese guests that would be frequenting it.

Okay.

Great.

Last question, very simple, your Caribbean bookings in terms of your commentary are probably much better, I think, than folks would expect at this point.

So, is it fair to say the Zika impact is basically zero at this point?

We've seen no material impact from Zika.

We didn't get any cancellations or not enough to mention.

We didn't see any impact on booking volume or timing or anything.

So, we have not seen impact from Zika.

Having said that, could there be a little bit of noise that is just overwhelmed by the great demand that there is for the Caribbean, and it would have been even greater?

Hypothetically you could say that but we have seen nothing that would suggest there was impact from Zika.

Okay, great.

Thanks, Arnold.

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

Go ahead.

Good morning.

Thanks for taking my questions.

I'm curious on the new ship builds that you guys are doing with CSSC, if there's any infrastructure spend that maybe needs to happen to facilitate that, or whether that goes under the China government spend plan and won't require very much investment on your part.

No, there will be no investment on our part.

First of all, just to explain the construct, CSSC and Fincantieri have a shipbuilding joint venture.

Ourselves, CSSC and CIC have a ship-owning joint venture that's still being finalized, as well as a ship operating joint venture that's being operationalized, is being finalized.

So we aren't investing in the shipbuilding infrastructure.

That's on the part of CSSC.

I'm not sure if Fincantieri is contributing to that or not.

You'd have to ask them.

But that's that part.

And then with CSSC and ourselves we would be, at this point, a minority participant in the joint venture, helping to manage the marketing, manage the fleet.

But CSSC and CIC would be the majority owners of the joint venture for the domestic Chinese effort.

Okay.

And then your selling and administrative expenses came in quite a bit lower than we had modeled.

Can you talk about maybe where you guys have made the most gains there and where you still see the best opportunity to gain on some of the expense structure you currently have in place?

We've had success across a number of fronts.

We'll highlight more.

We definitely will achieve our $75 million target this year.

We'll have more detail on that in the next earnings call.

But we continue to see opportunities across the board.

Some highlights this year were freight and marketing, as well as food provisioning.

Going forward, we see additional opportunities in all those areas, plus we're beginning to get to stores, our technical stores, which is a big area of expense for us, inventories on the ships, et cetera.

That takes a little more time to get things coded properly so you can monitor and measure but we're starting to make progress there.

David?

I think David had a comment.

On the SG&A expenses, of course I don't know exactly what you modeled.

We did give guidance for the whole year for net cruise costs without fuel being up 1.5%.

We did beat our third-quarter cost guidance because of the timing of certain expenses.

And I mentioned that one of them was advertising.

So, we may have spent a little bit less in the third quarter in advertising than we previously anticipated, which could have affected your comparison.

Okay.

Thank you so much.

And our next question comes from the line of Greg Badishkanian with Citigroup.

Please go ahead.

Great.

Thanks.

Just a follow-up from Steve's question before on Zika that you're not seeing a noticeable impact, why do you think that you're performing better than some of your competitors in the Caribbean in the fourth quarter?

We've been hearing about some aggressive discounts and promotions coming from some of those competitors lately.

I would not make any comments, obviously, on the competitors, but just for ourselves it runs the gamut from, first and foremost, our people and our brands have done a great job developing the guest experience.

And the guests are having just tremendous experiences and we are exceeding their expectations across the brands as they go into the Caribbean, and especially with the Carnival brand.

That's number one.

Number two, in the case of the Carnival brand, in particular, again, we have a very large base of previous cruise-goers that are loyal to the brand.

And that obviously helps us because those people have experienced the brand and love it and want to do it again and again.

And then, thirdly, we're better in our revenue management skills.

We have shared best practices across the brands on revenue management and our people are getting increasingly sophisticated and doing very well.

Also, we've anticipated a bit of an election slowdown.

Historically there's always been a little falloff in booking volumes around election time.

So, there could be some of that.

But in our case, again, right now we're doing so well, and we're so far ahead and the pricing is strong, we've got great close-in pricing right now, so it's been very good.

But relative to what the other companies, other cruise lines, I wouldn't have a comment, other than to say I'm sure it's a combination of the relative moves they made and deployments and stuff.

But I have no idea.

The only other thing I wanted to add is that in the Caribbean, keep in mind that our capacity is distributed across multiple home ports, which I think we benefit from, as well.

Okay.

That's helpful.

Moving to China, if you think about 2017 and how your negotiated pricing ultimately will end up, I know you're not going to give us a specific number right now but maybe just some thoughts of how you think that will proceed.

And, also, is the right way to think about it, if you're growing the capacity there by 26%, would you expect the profitability of your China business to grow equal or greater to that in 2017, so that's what you're managing to, that profitability growth?

Real quickly, I think the important thing for us in China is to ensure that we are developing sustainable business there, sustainable for our distributor partners, sustainable in terms of the government's desire to have the cruise industry be established there, and obviously sustainable for us from a profit standpoint.

It has to be a win-win-win.

So that begins the constraint around how much we will negotiate because we're not going to negotiate to a point where it's not economical for us.

That just won't happen.

Having said that, the other comment is if you take the impact this quarter, given even the additional consideration we've reflected in the guidance going forward, the impact for the full year on yields for us across our fleet is a rounding error.

We believe that we can effect a sustainable business in China over time.

We're going to make practical economic decisions.

Our assets are mobile.

And because of such a small percentage, even in the future when we start looking at adding additional ships to our overall capacity, we can move a few ships around and manage things effectively through smart deployment.

Having said that, for next year right now we see good relationships with our distributor partners and an ability to extract value.

Hopefully it will be proportionate to the capacity increase or greater, but at this point we haven't finalized those conversations.

It's too early to give real guidance.

Also, the capacity increase is driven to a great extent by the introduction of Majestic Princess.

That's the first purpose-built ship for the China market and we really do believe will generate a lot of great excitement and further stimulate demand in the market, which should be very helpful on the pricing side.

Good.

All right.

That's helpful.

Thank you.

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

Please go ahead.

Hi, good morning.

Thanks for taking my call.

A couple questions here.

Obviously since the last time you guys reported, there were a number of geopolitical events.

Could you maybe walk us through what happened during and following that time?

It doesn't seem to have really hurt your numbers for the quarter or in terms of the outlook.

Was it that you didn't see any impact on demand?

Was it that you're maybe a little more insulated because you don't have a whole lot of exposure to US customers going to Europe?

Or did it impact your business and your yields would have been all the better for the third quarter and in terms of the outlook if it hadn't been for those two geopolitical events?

Real quickly, in terms of that many US going to Europe, we do have -- in our Holland America brands, the Princess brand, and even in our Cunard, we have a number of Americans who go to Europe across our brands -- Seabourn, et cetera.

So, it is important to us.

The impact was this.

In the cases when things got a little dicey in Istanbul, in Turkey, we obviously had to make deployment itinerary changes.

Again, generally speaking, we go where guests want to go, and we go obviously where all the information we have says it's okay to go, it's safe to go, because safety is number one, obviously.

So, how it affects us is we make itinerary deployment changes, either because guests don't want to go or because we've gotten intelligence in the world community that it's wiser not to go.

It affects us that way.

Initially we can see booking impacts right after an incident.

Those tend to fade away.

As you know, if you go back over years, this is not a year where this is the only time this has happened.

It happens to some extent almost, in recent times, almost every year for the last several years, as does a Zika or a MRS or Asian flu or whatever, Ebola even.

Every year there's geopolitical tensions, there's some kind of disease consternation, there's macroeconomic malaise, there's isolated or concentrated over-capacity in the cruise industry.

Every year in some markets around the world those things happen and it's part of our business.

So we manage that, we anticipate it, we change deployments, we do good revenue management practices, manage around it.

And that's basically it.

To us it's normal business.

I wish it wasn't that way.

Every now and then hopefully we'll get lucky and there won't be those incidents because we think we would do better.

Some of those itineraries we had to redirect are high-yielding shore excursion items which could have added additional revenue and earnings to the bottom line.

We used to be in the Black Sea.

We haven't been there in quite a while.

The Black Sea was one of the highest-yielding, both from a ticket standpoint and onboard revenue standpoint, itineraries we could have had.

Hopefully sometimes those things will work in our favor and we'll do even better.

But right now we expect that stuff to happen every year and we have to manage it and we have to deliver double-digit return on invested capital in those environments.

One of the things that we've said previously is that, as Arnold indicated, there's always something going on out there and people, to some extent, have gotten used to that and they go on with their lives, and they continue to travel and continue to book cruises.

So, we did very well in the third quarter and, as we had indicated, we raised our guidance for the year.

That's very helpful.

My second question may or may not be related to the first but can you talk a little about the slowdown in onboard?

I know you mentioned that the comps are just fundamentally tougher.

A, was maybe some of that the result of some of the itinerary changes that you just spoke to or maybe sourcing changes as you try to bring in more Europeans to those European destinations versus North Americans which typically spend more while onboard?

And then just going forward, should we expect onboard to be a drag on overall yields going forward or does that revert back to where it's been the last year and a half?

First of all, we've had almost eight quarters of very strong onboard revenue growth, so the comparisons obviously are getting more difficult.

On the other hand, we're still growing onboard revenue and it's still a growth story.

So we would not characterize it as a drag, we would definitely characterize it as still accretive to the bottom line because it is still growing, and we think there's opportunity to grow beyond where we are today, obviously.

Some of it, if you look at the details relative to the categories of onboard and what drove some of the change in the increase, we did see some really nice increases in both beverage and casino, which make up about half of the onboard revenue.

And the areas where we saw some lower onboard revenue relating to shore excursions, which we talked about, relating to itinerary changes and itinerary optimization across the brands, as well as shops where last year benefited from some strong guarantee arrangements in 2015 and prior periods.

Got it.

Very helpful.

Thanks, guys.

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

Please go ahead.

Good morning, everybody.

There seems to be some skepticism today about the outlook or your comments about next year that's still too early to tell much.

Maybe you can give us a sense of how well booked you are overall fleet-wide this year versus the same time last year.

And do you really think that it is too early, with this data, to make any initial conclusion that you're off to a good start?

I think the conclusion is we're definitely off to a good start, but we're not prepared to give guidance yet for 2017.

We'll give guidance on the revenue side in December when we get closer, because it is far out at this point.

Harry, we had said that we are ahead of the prior year and we're ahead at considerably higher prices.

So, we're feeling very good about that overall position.

We had talked about how we were moving the booking curve further and further out and we have continued to move it out for the early half of 2017.

All the markets, I went through the details, both for the North American market and our EAA brands, and everybody was pretty much ahead on pricing except EA for the Caribbean and Australia which was in line.

And I even said in those areas the booking activity for the last quarter was well ahead of the prior year.

So, those areas, even though they were in line or slightly lower, they were improving.

So, we feel very good about the overall trend for the first half of 2017.

Following up then on your comments about the yield management rollout, to what degree do you think the yield management, the new system is or may be having or playing a factor in these higher prices?

And perhaps you could just educate us on what's changing.

First of all, in terms of the impact of the new system, you're not seeing much direct impact from the new system right now.

You'll see on maybe 30% of the inventory going into 2017 some impact and then the full impact for the current state of the system, and it will take it to a higher level next year.

But the full impact of the current state of the system will probably be more in 2018.

What you are seeing, though, is, just the fact by working on it, we're sharing best practices across our 10 world-leading cruise line brands.

That sharing and them working together on the two and so on, clearly, has been advantageous and has boosted our yields.

Beyond that, is again, as I mentioned, a combination of creating demand, of clever deployment and of exceeding guest expectations once onboard so that when they leave they help us create demand themselves, not only for them to come back but for others that they share with.

The brands are differentiated.

That helps, as well.

And we've done some smart things in terms of, within the brands, about various home porting decisions and distributing the home ports to access various destination markets.

So, it's a combination of things.

We have good momentum.

That has to be maintained.

Of course, what will help us in the end is if the other cruise companies also fill and fill at high prices.

That ultimately is helpful to us.

If they don't, that's a drag for us because it sets a psychological tone in the marketplace.

But right now we are doing very well and the first half of next year looks very strong.

The only thing I want to add to that, the one other thing that's been very helpful is the brands have been working collectively together, comparing pricing, making decisions.

And as a result of that, given the fact that the size of our Company, I think that has benefited us tremendously over the last couple of years, as well.

Thank you.

And just a quick shifting of gears here.

Carnival is rapidly becoming an impressive free cash flow generator.

And it seems the market is valuing higher dividends today more than it has in the last decade.

Have you given consideration to even getting more aggressive with dividend payout versus share repurchases?

How do you prioritize at this point one versus another?

First of all, clearly that's a Board decision, right off the bat.

But having said that, historically you've seen what we've done where we've done a combination of dividend increases and share buyback.

I'm sure that trend will continue in the future.

But we evaluate it constantly and we'll see where the Board wants to go.

Our current dividend yield is strong.

But we'll be evaluating that each quarter.

One of the things we've said in the past is that we are targeting a 40% to 50% dividend payout ratio.

So one of the things you do want to be careful of, we want to make sure that our dividend is sustainable through all cycles.

So, we feel staying within that range it would be sustainable.

You can take that as guidance.

That's what we discussed with the Board and we continue to target that.

Thanks very much, guys.

And our next question comes from the line of David Beckel with Bernstein Research.

Please go ahead.

Hi, thanks a lot for the question.

And thanks particularly for all your Chinese commentary.

I really appreciate that.

But I'll lob another one in there, just for good measure.

You talk a lot about net revenue yields in the region.

I was wondering, what I haven't heard as much is any color on the trajectory of net cruise costs specifically as it relates to China, inclusive of things like office expansion, incremental marketing and the like.

Could you potentially provide us any color or context around how to think about that for that region?

I'll make a comment but I think it's very important that David comment since his last name is the namesake for your firm.

(laughter)

But, in any event, it's an embryonic market.

We think there are opportunities over time to actually improve our net cruise cost position on an ALBD basis as we expand and get greater scale and so on.

We think there's opportunity to actually improve that part of the equation, as well.

Right now it's not the driver for anything.

But as we get more capacity there and we begin to expand our supply chains, training centers and so on and so forth, we think we'll be able to actually over time improve net cruise cost.

As Arnold indicated, in 2015 we had eight offices in China.

We went to 16 offices in 2016 and we're going to open up 4 more in 2017.

So, clearly we are making an investment.

But we believe the investment's for the long term.

Keep in mind we've got an $8 billion cost base.

So, a 1 point change in net cruise cost without fuel is $80 million.

So, an investment in China is really just fractions of a percent, and a very small change in the overall picture for a Company our size.

That's really helpful.

Thanks.

As a follow-up, I just wanted to ask a question about the distribution system in China.

We've heard some color about various selling practices on the ground in China.

I was curious what level of control you have with respect to pricing discipline from the travel agent community.

Thanks.

You bet.

First of all, basically for us right now it's a B2B business.

We charter with some Asia distributors.

They then sell through their network.

But they often, in turn, expand their network through subagents or subdistributors, and that's a negotiation between them and those subdistributors on pricing and so on.

How we control the pricing -- which we don't really per se control -- we control what price we're getting.

And then it's up to them to manage to see how much profit they're going to take and so on and so forth.

But all the control we have is in the end if they come back and say -- hey, I didn't do as well as I thought, why don't you help me out, et cetera -- that's a negotiation that's afoot.

It happens every year.

But that's the level of control we have by our degree of willingness to negotiate.

In some cases they may have had legitimate challenges.

In some cases they're just negotiating to get a better deal.

And you got to do your best to sort all that out when you don't have total transparency to the ultimate price that the Chinese guest that was on the ship paid.

We try to get at that various ways but of course others try to make certain we can't get to that information.

That's just a business, normal in business.

You can think of other constructs in other places where a manufacturer sells to a distributor and may not know exactly what the distributor priced at and so on in any other market, any other industry.

That's the nature of the business today.

Over time that will probably evolve to a different model but that's what it is today.

Great.

Thanks a lot.

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

Please go ahead.

Yes.

Thank you.

First of all, on the supply growth in the industry, you said that Carnival's only growing at 3% to 4% out to 2020, but obviously the industry order book is much bigger than that.

So, I'm just wondering what your thoughts are on the size of that order book.

It's clearly much bigger than it was at the last peak.

Particularly if China's been able to absorb those new ships, are you worried about the capacity in the developed markets a few years hence?

I think that obviously if China's growing rapidly and is able to absorb a lot of capacity, that makes everything easier.

But on the other hand, as I tried to point out earlier on the call in some of the questions, China's going to be limited in how many ships are going to be available for it to take because people are building ships for other markets, as well.

I think what you have to think about is net capacity growth.

We're always going to build new ships and so will others.

And the reason is because the ships are more efficient and they give you the opportunity for enhanced revenue opportunity, versus the existing ships.

So, new ships are always going to be coming.

The question is how many ships leave, how many ships go to secondary markets, and so on.

And in the opening comments I referenced the fact that the number of berths that are getting to retirement, the amount of capacity that's getting to retirement age is going to double in 2020 and is going to double again in 2024.

So, there will be a need for some of that capacity just to replace.

Then the rest will get regulated by the marketplace.

If there's scarce supply relative to demand, some of the less efficient ships will continue to fill.

If there's not that relative scarcity, then some of those ships will exit.

They'll either go into secondary markets or they'll leave the fleet and be scrapped.

So, that's the real dynamic.

We know what we're going to do.

We are committed to measured capacity growth.

We know how to manage within our brands and across the various destinations.

And so, based on that, we have great confidence that we'll be able to manage to the sustained double-digit return on invested capital that we have promised within the next two years.

Thanks.

And a couple of housekeeping ones, please.

You mentioned fuel and FX $0.28 headwind for next year.

Depreciation I get to $0.12 from the $1.9 billion.

Did you give us figures for dry dock?

For dry dock I didn't give a figure, but the dry dock days increased.

It's probably worth a little bit less than a 0.5 point on a year-over-year basis for net cruise costs excluding fuel.

0.5% headwind to net cruise cost ex fuel?

Less than 0.5 point.

A little bit less.

Okay.

The 100 basis point yield benefit from the accounting change, was that evenly spread through this year?

Did that help every quarter, including Q3?

Yes, the accounting replay was pretty much evenly spread through the year.

Okay.

And final one, the weakness in onboards, that's nothing to do with onboard credits?

Or, given the way you account for those, do those come through the ticket line or the onboard line?

If somebody gets an onboard credit associated with a value package where they are purchasing it ahead of time, then that is a reduction in the ticket price and we get the full benefit in the onboard.

So, it didn't have anything to do with that, the items I had mentioned.

But onboards not -- I may have misheard what you said in the beginning -- but we're not weakening in onboard.

We're still growing onboard, it's just not at the rapid rate that we had in some of the previous quarters.

Then I just wanted to add one comment, too, concerning the newbuilds.

And that is, for us, because we have 10 brands, 3% to 4% is not the same as 3% to 4% for a single brand type of cruise company.

We're spreading out these newbuilds across a number of brands, which gives that brand base an opportunity to absorb the capacity while they're creating the excess demand required to get the relative scarcity that we're chasing.

So, we are overall managing to measured capacity growth in total but we're also doing it by brand.

And that allows us to more effectively manage against a committed base of loyal cruisers to that brand and reduce the number of new to cruise at any point in time we have to generate for any given brand.

Great.

Thank you very much.

The next question comes from the line of Jared Shojaian with Wolfe Research.

Please go ahead.

Hi.

Good morning.

Thanks for taking my question.

I know you don't want to give formal guidance for 2017 so I'm going to try to ask this a bit differently.

But if I look at your booking commentary for 2017 now, it seems better than your commentary for 2016 at this time last year.

And now you're doing 2.5% yield growth ex the accounting reclassification in a year where you've had unexpected headwinds.

So, the question is, just directionally, is there any reason why the yield growth in 2016 can't be replicated again in 2017?

Thanks.

That's a clever way of asking for guidance for next year.

But I will say this, that you're absolutely accurate that this time last year, while we were ahead on bookings, we were not ahead on pricing.

And this year we're ahead on bookings and pricing.

So that's obviously strong momentum going forward.

It's still early though and I think we have to just continue to work hard and let things play out.

But I'd rather be disciplined and give you guys guidance at the appropriate time.

And you said we had headwinds this year.

As Arnold indicated, we're going to have some sort of headwinds every year.

There's always some political event or something that goes on around the world.

So, just keep that in mind, as well.

Okay.

Thanks.

I figured I'd try.

And then just a follow-up question, haven't heard anything on Cuba on the call today.

I know earlier this year you said you expected to have more deployments by year end.

Is that still your expectation?

Curious in anything you can share on that.

Thanks.

At the risk of you playing a tape back, I think we said we were hopeful we'd have additional by year end.

I'd say at this point in time, while that's a possibility, we might know something before this year is out about additional brands going next year into Cuba.

Again, we are hopeful.

I wouldn't say we expect it, but we are working on it and hopeful.

As you know, to date we are the only ones that have received approval by Cuba to sail to and from Cuba from the US.

We're the only ones so far.

I'm sure that will change.

Exactly when it will change and how many other brands we can get in there beyond our Fathom brand that we have now remains to be seen.

But we're in constant conversation with the various authorities in Cuba.

It's been an exciting year in that regard for us.

It's helped us across our fleet in a number of ways with the positive media, and so on and so forth.

But beyond all that, a single ship of 700 guests, obviously financially it's not hugely material.

But it has been important in establishing the relationships and the dialogue and the partnerships to prepare the foundation for what will be a destination that will help refresh the Caribbean and ultimately contribute to that relative scarcity that I like to talk about -- excess demand relative to supply -- and be a source of strength for yields and returns in the years to come.

Okay.

Thank you very much.

Of course.

Thank you very much.

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

Please go ahead.

Thank you for squeezing me in here.

Just a couple of maybe housekeeping.

Arnold, you talked about that I think maybe the investment community's focused excessively on the gross capacity growth and ignored the net capacity growth.

So, a couple related to that.

One, could you maybe give us industry expected net capacity growth by major regions for 2017?

And then, two, just maybe a range of top line here looking out through that 2020 on that industry net capacity growth as you see it at this time.

And maybe another way to ask that latter part is what type of range of retirements each year on a go-forward basis to go from gross to net, is another way to ask that.

I understand you guys have models that you need to populate with data and some of the variables.

But the practical reality is beyond 2017 as we go out into the future, that's a flex thing.

In our case, we're going to manage it and we read the markets in terms of what relative scarcity exists, what's the demand that's been created relative to supply, and what we see.

Basically we can do that relatively easily financially because we look at the ships and see what kind of returns we're getting on them and what the probability is we'll see increased performance or better performance in the coming year.

So, for us, that will be a flex thing.

Historically, I think we've averaged a little more than a ship.

It's one or two ships a year.

We've sold 18 ships since 2006.

And so we've said a number of times that we could expect to see something along that pace or, as Arnold indicated, it could be more or less.

It's very hard to tell.

I wouldn't try to make an assumption for the industry, again, in terms of net.

But, again, what we're looking at is how do we manage in various environments and how do we ensure that we're going to deliver sustained double-digit return on invested capital and improve earnings growth in various environments.

We're confident we've got multiple pathways to do that and some of those, if it proves to be necessary, includes accelerating retirements.

Okay.

And then the capacity by region for 2017 for the industry as you see it at this point, say, Europe?

And whether you want to break that in Med, ex-Med, North America and just Asia in general.

The way we see it right now is that for the year the Caribbean -- and, again, this is the industry -- is up 6%, Europe is down approximately 4%.

Actually the Med is down 11% but the Northern Europe is expected to be up about 9%.

We're looking at Alaska up close to 7% and overall the industry, all other programs, overall the industry is going to be up about 4% from a capacity perspective.

For the global industry, up 4% on a net basis.

Correct.

Okay.

And then is China still mix accretive to your global capacity, mix accretive on an EBITDA basis?

Yes, relative to overall.

As Arnold indicated, by having the ships in China each of our brands, both Costa and Princess, they're optimizing their operating income and their profit.

Okay.

And then very last, China, is that the reason you said some contracts rolled off on onboard?

Was it China or was it elsewhere.

No, this had nothing to do with China.

I said there was some guarantee arrangements for onboard on the shop side, with certain of our brands which we benefited from in 2015 and in prior years that didn't repeat itself in 2016.

Hey, guys, thank you for your interest.

We really appreciate the questions and the attention.

We're committed to, as we've always said, exceed our guests' expectations, leverage our scale and to deliver sustainable double-digit return on invested capital.

We're enjoying a great quarter, a very strong year, happy to raise the guidance, and looking forward to delivering in the years to come, as well.

Thank you very much.