嘉年華遊輪 (CCL) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to our second quarter 2018 earnings conference call.

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

Today, I'm joined by our Chairman, Micky Arison, who is in Europe right now; as well as David Bernstein, our Chief Financial Officer; and Beth Roberts, Senior Vice President, Investor Relations, both here in Miami.

Thank you all for joining us this morning, and thank you for joining us in what is known internationally as the Day of the Seafarer.

Thanks to all those seafarers out there for the positive impact they have on our everyday quality of life the world over.

Now 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.

We delivered the strongest second quarter adjusted earnings in the history of our company, and that's on top of last year's record results.

Adjusted earnings of $0.68 per share were more than $100 million higher.

That's more than 30% higher than prior year as well as $0.10 above the midpoint of March guidance and $0.08 above the high end of our March guidance range.

These record results reflect the efforts of our passionate 120,000-plus employees who go above and beyond every day as well as that of hundreds of thousands of travel professionals who support our brands.

Collectively, those efforts helped to mitigate a $0.19 drag for the year from fuel and currency, both moving against us since the time of our March guidance.

While our full year guidance is now below March guidance, in the range of $4.15 to $4.25, we continue to have strong operating performance.

Despite the impact of fuel and currency, the midpoint of our original December guidance of $4.15 has become the floor for our current full year guidance, reflecting continued strength in the business.

Essentially, strength in underlying demand for our cruise offerings fosters greater ticket prices year-to-date and more than offset the unfavorable impact of fuel and currency for the full year compared to our December guidance.

It was reinforcing to see constant currency revenue yield growth this quarter of roughly 4.8%.

Now that's on top of the 5.1% improvement achieved in the second quarter last year.

We continue to drive revenue yield growth by increasing demand in excess of our measured capacity growth through our ongoing guest experience, marketing and public relations efforts.

By all accounts, this was a significant quarter for our company, not only because of our record-breaking financial results, but because of a number of milestones, which will contribute meaningfully to our future success.

We introduced 2 spectacular new ships, an important part of our measured capacity growth strategy.

In March, we delivered Carnival Horizon, offering Carnival Cruise Line guests even more ways to choose fun, from a new Dr. Seuss-themed WaterWorks aqua park; to Guy's Pig & Anchor Smokehouse | Brewhouse, serving up real-deal barbecue favorites by Guy Fieri as well as 4 new craft beers brewed onboard, a nice complement to Guy's hugely popular burger bar serving arguably the best burgers at sea.

The ship also features the SkyRide aerial experience, an IMAX theater and Family Harbor, featuring extra roomy accommodations.

Carnival garnered nearly 250 million media impressions around its creative naming ceremony in New York City, which included showcasing the talented young artists from St.

Jude Children's Research Hospital, reaffirming Carnival's long-standing strong support of St.

Jude's.

Festivities included an entertaining lip sync battle between Horizon's godmother, Grammy-award winning artist and actress, Queen Latifah; and Philadelphia Eagles Super Bowl Champion kicker, Jake Elliott.

Also during the quarter, our ultra-luxury brand, Seabourn, debuted the fifth all-suite ship in its fleet.

Seabourn Ovation provides guests with a private veranda in every luxurious suite, sophisticated decor fashioned by Adam Tihany and a new alfresco dining venue, Earth & Ocean at The Patio, as well as a number of innovative programs, including An Evening with Tim Rice, Spa and Wellness with Dr. Andrew Weil and The Grill by Thomas Keller.

Select sailings will also include Ventures by Seabourn programs, which are expedition-style excursions featuring a team of world-class expedition experts with a focus on allowing guests to experience nature up close.

Seabourn Ovation launched on May 11 at a distinguished naming ceremony in Valletta, Malta, with highly acclaimed actress and singer Elaine Paige serving as godmother during a ceremony that lit up the UNESCO World Heritage site.

Our measured capacity growth strategy also takes into consideration the replacement cycle of less-efficient ships.

Over the last 12 years, we have sold 22 vessels into the secondary market, including the 2 ships that left the fleet this past quarter.

We plan to continue removing ships from our fleet and remain on track to sell, on average, 1 to 2 ships annually with more announcements expected later this year.

Moreover, we achieved a number of milestones in our strategic core development efforts around the globe.

In Alaska, Holland America Group recently announced a minority position in a joint venture to further strengthen our ties in Skagway, Alaska, the gateway to the legendary Gold Rush region and destination for 80% of our Alaskan cruises.

In Spain, we recently opened a second new state-of-the-art terminal in Barcelona.

We bring over 1 million cruise guests a year to Barcelona.

In Australia, where 7 of our 9 brands operate, we entered into an important long-term agreement with the Port of Brisbane.

We have priority berthing rights at a new terminal to be completed by 2020, enabling our brands to add even more calls and take even larger ships to Brisbane.

At the same time, we are expanding and diversifying the home ports we sail from in China while engaging in strategic port development throughout Asia, providing additional attractive ports of call for our Chinese guests.

For example, we recently signed an agreement for preferential berthing for our brands in Sasebo, in Japan.

We also announced a long-term preferential berthing agreement in Dubai and brought a strategic alliance for development of cruising in the region.

Dubai will not only serve as an attractive port of call but will facilitate the development of source markets in the Arabian Gulf.

During the quarter, we also received meaningful recognition for our brands.

Now while each year, we receive well over 500 awards, there are a few I would like to highlight, including Carnival Cruise Lines being named Most Trusted Cruise Line by Reader's Digest for the fourth year in a row; and Princess Cruises and the cast of The Love Boat being inducted into the Hollywood Walk of Fame.

Our Ocean Originals TV program, Ocean Treks with Jeff Corwin, The Voyager with Josh Garcia and Vacation Creation, have been honored in their second year with 14 Telly Awards.

That's even more than last year.

And in the U.K., reality based series The Cruise, filmed onboard Princess, has ranked among the most-watched factual programs on prime-time television in Britain with 4 million viewers per episode.

Our CSMART, Center for Simulator Maritime Training, was recognized as the world's first Center for Safety Excellence by DNV GL, one of the leading maritime classification societies, citing CSMART's commitment to safety and ongoing training to our 7,000 bridge and engineering officers across our 9 world-leading cruise lines with the industry's most advanced simulating equipment technology and curriculum.

Also worth noting, our corporation earned a perfect score in Human Rights Campaign Corporate Equality Index; was acknowledged by Forbes as one of the top 500 Best Large Employers; and by Corporate Responsibility Magazine as 1 of the 100 Best Corporate Citizens and ranking highest in the travel sector.

Progress continues on our new revenue management system, which is expected to be rolled out to approximately 90% of the inventory for 6 of our brands by the fall.

We also remain on track to deliver nearly $80 million of cost savings in 2018 as we continue efforts to contain costs by leveraging our industry-leading scale.

With strong and growing cash from operations, we remain committed to distributing cash to shareholders.

During the quarter, we accelerated returns to shareholders by increasing our dividend to $0.50 per quarter, generating annual dividend distributions now exceeding $1.4 billion.

At the same time, we reauthorized our $1 billion share-repurchase program.

Since March, we invested more than $375 million in Carnival stock, bringing the cumulative total shares repurchased to over $3.7 billion since late 2015.

In addition to all our efforts to drive operating performance, there are several structural advantages to our industry.

We have a significant long-term opportunity to increase penetration levels in all of our existing markets.

All told, the cruise industry represents less than 2% of all hotel rooms in the world, and we will continue to be underpenetrated as we operate in an industry that is capacity constrained.

We also enjoy significantly higher satisfaction levels than land-based alternatives, yet we offer a greater value for money, with a value gap that can range anywhere from 15% to 45% for a comparable land-based resort vacation.

Of course, demographics are supporting the growth in cruising, benefiting from the millennial generation and the aging of the baby boomers.

In North America alone, the number of people reaching retirement age goes from 48 million in 2015 to 56 million in 2020 and 74 million by 2030.

Now that's a target-rich environment for us, as this segment has the time and the resources, given our value proposition, to sail multiple times per year.

Factographic trends also support the growth in cruise as consumers invest more in collecting experiences rather than buying things.

And at the same time, increasing wealth in emerging markets is yet another powerful driver.

To capitalize on these many structural advantages, we continue to proactively generate demand by increasing consideration for cruise globally through our marketing and public relations efforts, while at the same time, stepping up our already high guest experience levels to increase retention, frequency and propensity to recommend to others.

Our ongoing efforts to generate demand builds confidence in our continued ability to increase capacity and prices.

All told, the strong execution in the quarter, the fundamental strength in demand, combined with many achievements realized already this year to sustain the momentum all bolster our conviction in delivering double-digit return on invested capital in 2018 and beyond.

With that, I'll turn the call 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 2018 second quarter results.

Then I'll provide an update on current booking trends and finish up with some additional color on our 2018 June guidance.

As Arnold indicated, our adjusted EPS for the second quarter was $0.68.

This was $0.10 above the midpoint of our March guidance.

The improvement was driven by 3 things: $0.05 was from increased net ticket yield, which benefited from stronger pricing on closing bookings on both sides of the Atlantic for all our brands; $0.02 was from improved onboard and other yields, which continue to benefit from a variety of ongoing efforts; and $0.03 was from lower net cruise costs, excluding fuel, due to the seasonalization of costs between the quarters.

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

Our capacity increased 1.4%.

Our North America and Australia segment, more commonly known as our NAA brands, were up 2.1%; while our Europe and Asia segment, more commonly known as our EA brands, were flat.

Our total net revenue yields were up 4.8%.

Now let's break apart the 2 components of net revenue yield.

Net ticket yields were also up a strong 4.8%.

Overall, the net ticket yield increase was comprised of first, a decrease in our NAA brands' itineraries in the Caribbean, which was included in our previous guidance as a result of last fall's hurricane impact; second, increases in our NAA brands' itineraries in Europe and Alaska; and third, increases in our EA brands' itineraries in Europe and China as well as various other programs, including World Cruises.

I will add that we do expect to see an improving trend in the Caribbean over time.

Net onboard and other yields likewise increased 4.8%, with similar increases on both sides of the Atlantic, with all the major categories showing solid growth.

In summary, our second quarter adjusted EPS was $0.16 higher than last year with a strong 4.8% revenue yield improvement worth $0.22 being partially offset by 3.6% higher net cruise costs, excluding fuel, costing $0.10, which was driven by more dry-dock days during the quarter, which we previously highlighted.

Now turning to 2018 booking trends.

Booking volumes for the remaining 2 quarters of 2018 have been running ahead of last year at prices that are in line with the prior year.

At this point in time, cumulative bookings for the remaining 2 quarters of 2018 are slightly ahead of the prior year at higher prices.

Now let's drill down into the cumulative booked position.

First, for our NAA brand.

The Caribbean is behind the prior year on occupancy at lower prices.

Given the negative news flow from Puerto Rico, the hurricane impact continues to affect the Southern Caribbean itinerary.

As a result, the lower prices are driven principally by San Juan itineraries.

This is consistent with the comments we made on our previous earnings call and the expectations we built into our guidance.

The seasonal European program is ahead of the prior year on occupancy at significantly higher prices.

Alaska is in line with the prior year on occupancy at lower prices.

However, as I indicated on the last 2 conference calls, Alaska yields are impacted by mix.

In the end, we expect that like-for-like itineraries in Alaska will have higher yields than last year's record levels.

Second, for our EA brands.

For their European itineraries, occupancy is slightly ahead at higher prices.

While it is early, and I caution you not to read too much into the numbers, I will provide our 2019 booked position.

At this point in time, cumulative bookings are slightly ahead of the prior year at higher prices.

Finally, I want to provide you with some color on our 2018 June guidance.

As Arnold said, while our full year guidance is now in the range of $4.15 to $4.25, we continue to have strong operational performance.

The change in our guidance was driven by 3 things compared to our March guidance: First, we flowed through the $0.07 of operational benefit from higher revenues in the second quarter.

Second, we benefit from $0.02 of accretion relating to the shares repurchased in the second quarter that Arnold mentioned.

And third, higher fuel prices, net of fuel derivatives and the stronger dollar, is expected to unfavorably impact the year by $0.19.

Higher fuel prices, net of fuel derivative, cost $0.11, while currency was an unfavorable $0.08.

While I'm on the topic of fuel and currency impact, for those of you who are modeling 2019 using June guidance fuel price and FX rates, the impacts of higher fuel prices and the stronger dollar would unfavorably impact 2019 by $0.14.

Remember, we have no fuel derivative for 2019, so this calculation includes the year-over-year benefit from realized fuel derivative losses in 2018.

And now I'll turn the call back over to Arnold.

Thank you, David.

Operator, please open the lines for questions.

(Operator Instructions) Our first question comes from the line of Steve Wieczynski with Stifel.

So I guess, the -- I guess the question's when we look at your yield outlook now for 3% for the year, and given the stronger yield -- the yield beat that you had in the second quarter, I guess, your stock's up, you're selling out there, and I guess, the implied expectations for your yields in the back half of the year are probably a little bit lower, I think, than kind of where the typical investor's thoughts were.

So can you maybe help us think about the back half of the year in terms of are there any markets out there where you guys are taking a little bit more of a conservative view at this point?

Well, let me open.

I'll let Dave add some color to it.

First of all, we're very confident about the business going into the second half of the year.

We're coming off a really fantastic last year.

The back-half comparisons obviously are tougher, but we have confidence.

The adjustment in our guidance, as we said on the call, as David pointed out, was strictly related to fuel and currency.

And because we always factor in -- we've got a hurricane season coming, things can go wrong.

We think it's prudent to give the guidance we have for the back half, but we didn't modify our perception of the back half of the year.

David, you want to make some comments?

Sure, yes.

As Arnold said, I mean, the back-half yield expectation is the same as it was last quarter.

I think what we saw was, if you're looking at the first half versus the back half, is keep in mind that there was some particularly strong markets, particularly in the second quarter, that more than offset what we had indicated was a down yield in the Caribbean.

So it's really the extraordinary strength in the first half of the year in some of the other markets that drove it.

But we are seeing, as Arnold said, great booking volumes and excellent business trends.

And so overall, we feel very comfortable.

So if I heard you guys right, I guess when we look at the way you're kind of viewing the Caribbean here in probably late 3Q and 4Q, it sounds like you are taking a pretty conservative view there.

Is that the right way to think about it?

I mean, are you guys expecting that -- your typical consumer to maybe book a little bit closer in this year just because of the fear around potential hurricanes?

First of all, yes, booking curves are strong.

Again, we had a great year last year, and we're doing even better in terms of occupancy and with significant capacity increases, so on and so forth.

So booking's strong.

Having said that, there's no question that we got impacted originally by missing a booking period during the hurricane season.

And now for portions of the Caribbean, and we keep referencing Puerto Rico and San Juan because it was so obvious there, there is a hurricane malaise.

But having said all that, the Caribbean is strong.

We're talking about performing well against a very strong year last year and with significant additional growth.

So, building on what Arnold said, we are seeing, if you break the Caribbean into the 3 different segments, as we indicated, the down -- the pricing being behind the prior year was driven by the San Juan itineraries of the Southern Caribbean.

And I think last quarter, we had indicated that the Eastern Caribbean was also -- the cumulative booked position was down, and we have seen an improvement there, and now we're in line with the prior year.

And the west continues to be up.

So we do expect to see an improving trend in the Caribbean.

We -- the second quarter was probably the biggest impact from the hurricane last year, and we expect to see an improving trend over time.

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

I think that you really hit on a lot of the concerns in that last dialogue.

Just wondering, can we just -- the first 2 sentences of your 2018 outlook, where you talk about, at this time, cumulative advanced bookings for the next 3 quarters are in line with the year -- prior year's higher prices.

And then you say since March, booking volumes for the next 3 quarters have been running slightly ahead of the prior year prices, that are in line with the prior year.

David, I know you went through this.

But maybe perhaps for the people on the call who are aren't as familiar with your business and with the industry in general, can you just talk about that sentence, "since March," and explain to us what that -- what you're saying there?

That since -- that the booking volumes are at -- slightly ahead, and prices are in line?

Yes.

So there -- yes.

So this is what was booked during the second quarter for cruises where we'll recognize revenue in the third, fourth and first quarter.

So we're not including -- when we say for the third and fourth and first quarter, we're not including the bookings that were made in the second quarter for the second quarter.

We're only looking at the future periods because what's in the quarter for the second quarter is history, and that's in our actual results.

So we're trying to give you a dynamic of what the future looks like.

Now if you break that apart, what you'll -- the Caribbean impacted that booking volume.

Because as I said, we are seeing overall, we -- as I said, in the second quarter.

And it is an improving trend in the Caribbean, but all the major markets were up.

But the Caribbean is -- was impacted, and that's why prices were in line.

Okay.

So -- and again, I don't want to beat a dead horse.

But like you said, the Caribbean is improving.

And you kind of went through all the other itineraries, and there's no change in your kind of operational or yield outlook since you reported the last quarter.

Correct.

Okay.

And when you talk about...

Other than fuel and currency, so I wouldn't say...

Yes, other than fuel and currency, which I always consider to be kind of exogenous.

And when you talk about -- just you gave us some color for 2019 fuel and FX.

What fuel price are you using?

So we use $75 for fuel.

It has bounced around, but at some point late last week, we cut off at that price.

Okay.

And then -- and just getting back to that "March" sentence as well, I think that some of the language that you used to have in your press release was like for all future periods.

And now you're talking about the next 3 quarters.

Is there any reason behind that?

No.

Generally, we actually have for the next 3 quarters in the press release.

That has traditionally been what we've done.

In the first quarter of this year, we saw our wave season -- because there was a lot of bookings for 2019 during wave season, we just chose to give you a broader picture.

But if you look back, you'll see it's traditionally been 3 quarters.

Okay.

And final for me, throughout this conference call, even throughout your answers to the last -- my question and for Steve's, which I thought were pretty clear, your stock keeps going down.

So, Arnold or David, is there anything you'd like to say?

I think, look, the reality of our business, I kind of said on the call, is we have large addressable markets around the world.

They're all underpenetrated.

We have highly differentiated product offerings.

I know people are concerned about capacity and so on.

But overall, the industry is actually capacity constrained.

So when we build a ship for AIDA, and one for P&O in the U.K., and one for Carnival and one for Seabourn, they don't even compete with each other, okay?

What happens with the German source market versus the British source market, et cetera, versus the ultra-luxury market, those things don't even overlap.

There are positive trends in population growth and in travel in general.

And whether it's millennials or -- who over-index in cruise, or whether it's retirees, the retirees are going increase dramatically here in North America, but elsewhere as well.

That's people with time on their hands and with some assets.

And we're very affordable, from mass contemporary brands to those who have more assets, to ultra-luxury brands.

And people have time, and we're a better vacation value than land-based vacation.

So we have a lot of fundamental things going.

We don't have a problem right now in terms of looking ahead with booking curves or yields or any of that.

So we know there's concern about capacity.

There's actually not even any empirical evidence to show a correlation between capacity and yield.

That doesn't exist.

And more importantly, we're here to grow earnings and further improve our return on invested capital.

And that's exactly what we've been doing, and it's what we're going to do.

There've always been pocketed markets in any given year, where appears there's a capacity problem.

Usually, that's complicated by something else like hurricane malaise or other things.

But that exists, has always existed every year in the business.

But our assets are mobile, and so we can move.

And for us, we intend to create the demand for our capacity.

And if we don't, we'll moderate our supply.

So that's all I have to say.

I think the business is super strong.

We just had a record quarter.

We look ahead.

Things look very good.

There's little dynamics in one market or another.

Last year, people were very concerned about China and so on.

We had a bit of a mess in China and a bad hurricane season, and we still performed well.

This year, our guidance is to grow earnings double digit and to achieve the longstanding promise we made about return on invested capital getting to double digit.

That's going to happen.

And we have multiple pathways to keep that going in the future.

So that's what I have to say.

Okay, next question.

Oh, Beth?

I would just add something on the hurricane -- on the booking patterns.

When you look at the booking patterns, please keep in mind the context that booking patterns today are post-hurricane.

And we're comparing to very strong pre-hurricane booking patterns.

And also keep in mind that a lot of the beginning part of this year was booked -- well-booked at the time the hurricanes occurred.

So really seeing that impact more later in this year, as David said, starting with the second quarter.

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

I have 2 questions, and I just want to make sure I understand the kind of subtlety of what you're saying.

David, you mentioned the -- a sort of a difference in bookings that came in during the second quarter for the second half versus kind of everything booked for the second half, including prior to the second quarter.

And I think what you said was the second -- during Q2, bookings are ahead of last year at prices in line.

But cumulatively, they're slightly -- you're slightly ahead at higher prices.

So does that mean that prices in the second half of the year have decelerated during Q2?

And I -- and perhaps, the premise of my question is wrong.

I might have misheard.

But that's what I wanted to clarify.

Yes.

No, you repeated what I said, which is essentially correct.

But you have to keep in mind that when you're looking at the very -- you have to look at -- if you break it apart market by market, so the fact that prices were in line, the booking volume was in line during the second quarter.

As I indicated, throughout the other major markets, except the Caribbean, the prices were up, and the in-line was impacted by the Caribbean.

So as Arnold was indicating before, and as Beth said, we have not lapped the Caribbean, the hurricane last year.

The booking situation won't lap the Caribbean from a booking perspective until we get to September and October, which is during our fourth quarter.

So we're just seeing the impact of the hurricane affecting our bookings.

But we're in great shape as far as booking volumes are concerned.

We're being patient on the Caribbean and managing to the highest yield.

Does that answer your question?

I think so.

I think some of the -- I guess, clearly, the biggest point is the idea that you're comparing pre-hurricane to post-hurricane, so that the year-over-year is not.

But then, I guess, maybe also if I could ask about your guidance commentary versus a quarter ago.

Because there is -- the outlook a quarter ago, we had that same sort of post- and pre-hurricane issue.

You said price is in line for the next 3 quarters.

And in March, the commentary was price is ahead for all future periods.

And I know you mentioned sort of the subtlety, but you thought you'd just give a wider view on the -- because there were some 2019 in waves.

But is there anything else with the comparability that would make the pricing today -- or the pricing guidance that you're saying now be in line, and a quarter ago, it was ahead if we were comparing the same periods like next 3 quarters versus next 3 quarters or all future periods versus all future periods to 3 months ago?

I'm just trying to think about apples-to-apples, what's happened to price on a year-over-year basis.

Yes.

The comment on the 3 quarters would be similar if we included all future years.

There isn't a significant difference overall because the majority of the bookings coming in -- that the majority of the bookings coming in are for the next 3 quarters.

And the -- remember that the second quarter rolled off.

And we did have, as you saw, the 4.8% ticket yield in the second quarter.

So that was a very strong period that we saw bookings in the first quarter for the second quarter.

And that was in our March commentary.

Okay, then that makes sense.

The Q2, where obviously the strong upsides from Q2 rolling off.

That makes sense.

And then maybe just last sort of clarification.

It seems like your close-in bookings are very strong in Q2.

Or possibly, that you were just very conservative going into Q2.

But either way, the close-in seemed to be very strong.

Is there -- should we -- is there anything we should be thinking about with mix of itineraries or things that would not -- where the close-in would not be maybe as good in the second half?

I mean, Caribbean's actually sort of lower weighting in Q3, I guess, a little more in Q4.

But just thinking about second half cumulatively, that it was you've beaten your close-in guidance very nicely the last few quarters.

And so obviously, being conservative is all good as well.

But just is there anything we should be keeping -- is there anything -- any reason why close-in wouldn't continue to maybe have more upside than what you see further in advance?

Yes.

We try to give you our best guess each quarter in terms of the guidance, and we include an expectation for close-in bookings.

As Arnold indicated, we also -- we got a hurricane season coming, and so we build in an expectation.

It's very difficult.

There's always something, and so we build that into our guidance as well.

Depending on how things go, the one thing I will say about our forecast is we're always wrong.

We just never know by how much and in which direction.

We give you our best guess.

Okay.

And again, it's -- I think that that's appreciated that you're conservative with the guidance.

And I guess I just wanted to stress test it to see if there's anything else other than your conservative approach.

That's very helpful.

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

So in our model, it looks like expenses in the fourth quarter trail off a little bit.

And I'm curious if there are any timing things that we should be thinking of that are maybe being pushed into 2019.

And then on the heels of that, how do we think about long-term cost growth in this business?

I know historically, you guys have said maybe flattish to half of inflation.

But has that changed at all?

Sure.

So we did talk about the quarterly season -- seasonalization cost on previous calls.

The seasonalization this year has to do with the timing of dry docks.

And I mentioned that costs were up in the second quarter, and that had to do with the large number of dry-dock days.

Well, the fourth quarter is the exact opposite.

So with the lower dry-dock days, you will see a reduction in net cruise cost per ALBD, excluding fuel, in the fourth quarter, and we mentioned that on previous calls.

So it's not a -- some sort of delay of expenses.

Our cost guidance for the year has not changed since December.

We're still estimating up approximately 1%.

As far as the future is concerned, we have been leveraging our scale on the sourcing side, and we -- Arnold mentioned that we're on track for $80 million of cost savings.

This year, we see opportunity to do similar things in the next couple of years, so there's a lot of opportunity there.

And also in 2019, on a -- right now, our capacity increase is 5.6%.

So we will have the opportunity to leverage our scale there as well, both with larger ships that we're bringing in, on the ship's expenses as well as shore side.

So there are good opportunities for us to keep costs under control.

But it is premature for us to give some specific guidance as to costs for 2019.

Understood.

And then on a housekeeping note, you had touched on the Alaska tourist business in the prepared commentary.

And I'm curious what the scale of that business is, if it's meaningful.

Obviously, some part of that's going to be consolidated in the income statement.

So I just -- I don't have a good sense for what the size of that business is.

If you could help us think about that, that would be great.

Okay.

So the -- I mean, the business that we purchased, it's a -- it isn't going to be consolidated because we're taking a minority interest, 45%, and our partner will have 55%.

The deal will close, hopefully, sometime this summer, and so it will have a positive impact in the long run on our net income.

However, for 2018, the impact will be very minor because we'll be well through most of the season before we take ownership.

So I don't expect it to have much of an impact on our 2018 numbers.

Okay.

And that'll flow through other income as a solid number, right?

Yes.

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

Going back to David's comment about building in an expectation for hurricanes, David, could you comment on to what degree your guidance factors that in for the third quarter?

Harry, it's -- we take an educated guess based off all the things we've seen over time.

I hate to try to give a specific number at this point because it's -- we know things are going to happen, and we try to factor it in for both third and fourth quarter.

We don't necessarily do hurricane-specific.

There are things that happen every year around the world.

And markets get taken away from us, high-yielding itineraries for geopolitical reasons.

There's disease scares.

I mean, all these different things happen.

And so we put -- look at historical stuff that's happened and level of impact, and we come up with a general rule of thumb, and then we put judgment on it based on the climate at the time -- so the global climate.

And that's how we do it.

But it's just a matter of trying to be practical because realistically, every year, something happens and usually more than one thing.

And then as a follow-up to the projections for 2019, given that 2018 is being impacted by the Caribbean negatively, can you give us a sense of whether or not your -- the pricing so far that you're seeing in the Caribbean for next year is encouraging?

Can I say one thing?

When you say negatively, I just want to emphasize to everyone, we're growing in the Caribbean, okay?

We're generating more earnings in the Caribbean, and we're growing generally more earnings everywhere else in the world, too.

So on a relative growth basis, yes, the Caribbean might be weaker on yields than some other markets.

But overall, we're growing earnings, and there's no weakness in the business.

But go ahead, David.

Yes.

So if you look at the first quarter, which is probably the most meaningful because after that, it's -- not that much are on the books, the occupancy is in line in the Caribbean, and pricing is slightly ahead.

So again, just like I said before, we are continuing to see an improving trend in the Caribbean.

We may be a victim of our own conservatism.

But the reality is that it's not conservatism.

It's -- for us, it's just trying to be practical.

But just to reinforce, all that's happened with our guidance is we offset a lot of the fuel and currency.

But we aren't -- we haven't put in the guidings completely offsetting all of what the current fuel and currency is.

And that, of course, can change.

Very good.

And then just a quick -- one quick one.

Can you talk about your performance recently and looking into the second half by brand?

Are you seeing any brands generating more pricing versus less pricing?

And if so, does that give you any indication as to customer health, the health of their wallet by segment?

I would say always, certain brands in any given year, one brand may have significant increase relative to others.

And so that's just the common practice when you have a portfolio of brands.

Is there some systemic, long-term, underlying trend in terms of appetite by source market for the brands?

No, we don't see any intrinsic patterns that would suggest certain brands are going to be much stronger for the next 5 to 7 years versus some others.

But sure, in any given year, one brand has a big increase relative to other brands.

And as a portfolio, that happens.

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

So I wanted to ask about the 2019 booked position.

I think you said slightly ahead at higher prices.

And I think last quarter, you said ahead at higher prices.

So can you just elaborate on that?

Has the 2019 booked position changed at all since last quarter?

So last quarter, I hadn't gone through the detail of 2019 at all.

It was -- so I'm not sure what you previously are referring to.

But remember, I also have mentioned, sometimes, when you're talking about the difference between "ahead" and "slightly ahead," you're talking about decimal points here.

There is a point where we have to -- where we change our adjectives.

So try not -- I mean, I wouldn't read too much into that.

Okay, got it.

And then I'll ask another question about your stock.

I'll ask this a little differently.

If I look at your leverage today, you're at a low point historically at 1.7x net debt-to-EBITDA.

So if you guys really aren't concerned about the supply growth that's coming online, and you think the market has it wrong on your stock, what prevents you from getting more aggressive on the buyback right now?

And is there a leverage level that you'd be willing to go to in order to get more aggressive on the buyback in the near term?

Two quick comments.

One is, we obviously have a strong credit rating.

We don't feel a need to have it be even stronger.

We can go up to 2.5 pretty comfortably, we feel, from a leverage standpoint.

As you say, we have 1.8, 1.9 now.

So from that vantage point, and of course, in a situation like this, I'm not going to make any comments other than to say our strategy on stock buyback is optimistically return cash to shareholders through stock buyback.

And then, actually, we did buy more stock in the second quarter than we did buy in the first quarter, again, being opportunistic.

And so as you point out, we actually, just so you understand, we look at the leverage going forward and do look at where we expect to be at the end of the year.

We're not 1.7 at the end of the year.

We're more like 1.9.

And so, as Arnold indicated, we do have an opportunity there to continue to borrow and to use those funds to buy back shares throughout the remainder of the year.

And as I'll mention, we don't include those share buybacks in our guidance.

Traditionally, we've just done share buybacks to date.

Okay, that's helpful.

And just to confirm, you'd be willing to go up to as high as 2.5x, I guess, by the end of the year the way you look at it?

No, I wouldn't say that.

That's the range within we can operate and maintain a strong credit rating.

But we don't have a plan or anything.

I don't want to -- you to misinterpret we'll go to 2.5x.

Yes.

We've talked.

In many cases, what we said previously is that we're looking broadly at a range of 2 to 2.5.

And in good times, we would be at the better end of the range.

And we'd allow the leverage to increase at other times.

So that's obviously something that we'll have conversations on and will take a look at as a management team going forward.

Our next question comes from the line of Stephen Grambling with Goldman Sachs.

I guess, changing gears a little bit to fuel.

Can -- I guess, when we look at the relationship between Brent and your fuel prices, there's been a bit of a shift and certainly more volatility.

I guess, what are you expecting in that relationship between Brent as you talked about that $75, given the forward curve, as in backwardation, there's even a wider gap in Brent and fuel oil as we look further out?

And maybe as part of that, just remind us of your thought process on hedging.

I'll do the hedging.

We never hedge.

We've done the collars.

We did them before to protect against spikes in fuel prices that could compromise us in the capital markets when we have commitments for capital.

We didn't want to have to go into the capital markets not knowing what the capital markets would be at the time.

And so we did collars to protect ourselves in that regard.

Since then, things are a lot different obviously.

Our ratio's much better.

We have a lot more cash than we have been.

So we're in a much better position to weather any type of fuel spike or whatever.

And so fundamentally, we've never believed in hedges.

The board hasn't.

The management hasn't.

And so we continually look at that situation, because, number one, we want to maintain our freedom to operate and make sure we're doing it in an advantageous way for the shareholders.

But we never try to play the fuel game, because even oil companies don't know where fuel prices are going.

So that's not the business we're in.

So, Steve, when we do our guidance, I think we've said this many times before, we basically take the spot price of fuel today as we see it, and we use that price going forward through the balance of the year and in any forecast.

We're not trying to make a projection for the fuel price, as Arnold said.

We don't know where it's going, but we try to just use the current, existing fuel price.

And I guess, just 2 related follow-ups.

One, given some of the airlines have started to implement changes to their fuel surcharges, what are your thoughts on potentially implementing something like that?

And then I guess, just to be clear, as we look out to 2020, there's a pretty wide gap in the Brent versus heavy fuel curves.

So is there any reason why you wouldn't be able to purchase the lower-cost fuel amidst the IMO implementation?

Got it.

First of all, in terms of forward purchasing of Brent, we -- again, we try not to play the fuel game for obvious reasons.

And the variability there is crazy.

You just never know where you're going to be.

So we tend not to do that.

And then first part of your question, what's it again?

The fuel surcharge.

Oh, the fuel surcharge, yes.

So, yes, in the past, we've implemented fuel surcharge when there was a rapid spike in fuel prices, et cetera.

That's always something that we could take a look at.

So far, we have not done that and considered doing that.

And at this point right now, I don't think we would.

But if prices were to continue to spike, obviously, that's something we'd have to look at.

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

A couple of questions here.

One, related to Alaska, and David or Arnold, whoever wants to take this.

You've commented a couple of times in the last couple of calls regarding the mix in Alaska.

And just to clarify that, the mix that's somewhat restraining your yield growth there this year is, one, a limited capacity on the shore excursion side, correct?

You still have very strong demand, but your...

Correct.

Okay, okay.

And the recent transaction...

Purely the tour business.

Tour business.

Yes.

(inaudible) hotel capacity.

Okay.

And do you see -- how do you see addressing that here?

Will the recent transaction make -- help address that going forward?

Or is there other things you need to do?

No, the recent transaction would not, because it really is a hotel base because we have properties there.

And so it's just -- it's purely just a mix issue.

So Alaska's doing great.

Earnings are growing.

The capacity's there.

We're making really good money.

It's a very popular destination.

It's just that we don't have more hotel rooms.

And so some of the bookings have that with them and then others don't.

And the ones that don't are at a lower price.

And as that volume increases, it makes it look like a yield impact.

But it's not a yield on cruise or anything.

Yes.

And, Tim, as you can imagine, we plan our itineraries to optimize revenue for the company.

So while within the context of just Alaska, it's a mix issue that we commented on.

But we believe that the way we plan the itineraries, with the incremental Inside Passage to Alaska, will have a positive impact on the overall company's yields.

So it's not flowing through negatively to the company.

It's just a mix within Alaska.

Okay.

And then again, it's been talked about a lot here on this call, but within the Caribbean, you cited Puerto Rico last call; this call, also the San Juan in particular.

Is there something in your Eastern Caribbean itinerary mix relative to the industry that's maybe giving you a little bit more difficulty than the broader industry in the Eastern Caribbean?

We homeport in San Juan, and so that's one thing that's different.

I'm not sure that we're that different than the industry.

I think you'd have to talk to the others, I guess.

Norwegian changed their itineraries or something and went to a different part of Caribbean for the year.

But frankly, we don't see it as anything particularly unique, but we do homeport.

But, Tim, we talked -- as I mentioned before, I said the Eastern Caribbean, we had been behind on price and now we were in line on price.

So we are seeing an improving trend on the Eastern Caribbean from what we saw last quarter.

And it's the San Juan itineraries, mostly the Southern Caribbean, that were impacted to a great degree, as Arnold said, because we homeport there.

And San Juan was a source market for us in those itineraries as well.

Okay.

And then lastly, China.

Just any specific color there, what you've seen over the last 90 days there?

The year appeared to be -- Q1 was pretty good for you guys even though you really did not have the easy comparisons yet.

And then Q2 onward appeared to have easier comparisons.

So just any update there.

And for the industry as a whole, including yourselves, obviously, it would appear that there's really a pretty low risk on anything related to sanction going on with the tariffs and so forth also.

Yes.

My usual contextualization of China: a small part of our capacity, embryonic market, basically still a B2B market, et cetera.

So, all those qualifiers.

And the bottom line is things are stronger for sure than they were last year at this time.

And so it looks positive for the year on a relative basis so far.

But China's China, and we have to see how things play out for the full year.

But right now, conditionally, things definitely look stronger.

In terms of sanctions, we haven't heard of any sanctions on either side that would directly impact the cruise industry.

Obviously, there's still -- the Chinese are still not going to Korea at this point in time.

If that changes, that could open up the possibility on some itinerary planning and maybe help the situation there even more.

But in terms of additional sanctions or new sanctions, given what's going on, we've heard nothing.

I just happened to be in China last week and had the opportunity to participate in some high government-level stuff, and nothing was talked about in those.

Our next question comes from the line of Assia Georgieva with Infinity.

This is Assia.

If I am to summarize, basically, the Caribbean outlook for the next -- for Q4 and Q1 specifically, at this time last year, we had very strong close-in demand.

And because of the hurricanes in September, we're not seeing quite as much of that.

So is it because we are in a deferred comp mode as opposed to, specifically, a slowdown in terms of bookings for Q4 and Q1?

It seems to me that things are starting to normalize quite a bit.

And we saw pretty much most of the impact during Q1 and Q2 of this year, and we're starting to get normal.

Is that a fair read?

I think I would rather say that we saw most of the impact from the hurricane in Q2 and Q3 as opposed to Q1 and Q2, because by the time the hurricane came last September, we were very well booked for Q4 and Q1.

So it was really Q2 where you started seeing it.

And then it gets better over time.

And as we enter Q4, basically, early September when we saw the hurricanes last year, isn't it fair to assume that bookings, barring another active hurricane season, that the comparisons will ease significantly?

So at this point, we're looking at timing year-on-year as opposed to necessarily poor trends for the Q4, Q1 period.

There's no doubt we'll have easier comparisons, as I mentioned before, in the fourth quarter when we lap the hurricane.

And we just haven't gotten there yet?

We need to wait 3 months before we get there?

Correct, which is why I was indicating that's baked into the current booking volumes.

All the other markets were higher.

So our next question comes from the line of Greg Badishkanian with Citi.

And just in terms of Europe, I know that's been strong for you.

The -- 2 of the differences that you're seeing in the consumer of the North American going to Europe versus the European sourced and just how sustainable you think that the strength in that market will be.

So overall, keep in mind, Greg, that 90% of the guests on our ships in Europe are Europeans.

And that has to do with the fact that we have all of our European brands.

And so overall, I mean, Europe for us has been a very strong market.

I did comment in the second quarter, both for our NAA and our EA brands, that we saw really good yield increases that drove the yield.

And when I talked about the booking commentary, I talked about, for the seasonal European program, we were ahead at significantly higher prices for the NAA brands.

And for Europe, I had said that occupancy was slightly ahead at higher prices.

So we are seeing it's a great market for us and things continue to move forward.

And I won't repeat all the comments that Arnold made about the overall market for the sake of time, but we believe this will continue to be an excellent market for us.

Our next question comes from the line of Patrick Scholes with SunTrust.

Real quick question here.

You noted that the booking curve continued to be strong.

Would you say that has gotten, since you last reported earnings, would you say that booking curve has gotten stronger, stayed the same at strong or gotten slightly less stronger?

I'd just like some -- since last time.

It was very strong, and it remains very strong.

Okay.

So all right.

I'll leave it at that.

Our next question is from Vince Ciepiel with Cleveland Research Company.

I wanted to come back to China.

You recently introduced the Princess Majestic (sic) [Majestic Princess].

You have the Costa Venezia arriving in that market next year.

Curious your thinking on sending kind of new, premium purpose-built hardware to that market, the returns you're seeing there, and if it makes sense to continue to send new capacity into that market.

And then secondarily, can you just give us an update on how the distribution system with the charters has been evolving?

And do you think it's making progress?

And is there maybe a time line for the progress you'd like to see it make?

Excellent.

Okay.

Yes, so first of all, again, we believe eventually, China is going to be our largest cruise market in the world.

So right now, we're teeny tiny, and it's embryonic.

So absolutely it makes sense putting hardware there and new hardware.

So Shèngshì Gongzhu Hào, which is Majestic Princess there, is ideally suited for Chinese.

It's home port some of the year in China.

The rest of the time, it's sailing elsewhere in Asia, but filled with lots of Chinese cruise goers.

The Costa Venezia, as you mentioned, will be introduced in 2019 in China.

The Costa brand currently has several ships homeported there.

It will be a great addition to their fleet.

It's purpose-built, again, for the Chinese cruise goer.

The market there is very large in terms of overall travel, both from cities in China and, of course, as a huge potential source market for fly/cruise all over the world.

And so we will continue to have a presence.

And as I mentioned, I was just over there recently.

We definitely are excited about our joint venture with CSSC and moving that forward and establishing a brand in China that's in partnership with [Stanley Enterprises] there to drive cruise, as they've mandated in their 5-year plan.

So all of that stuff's very positive.

In terms of the distribution system itself, yes, we've moved from full-ship charters primarily now to group sales and partial ship charters, et cetera.

We've added a large number of additional distributors.

All of that kind of derisks things a bit from being overly concentrated in what, in effect, today is still pretty much a B2B market.

The direct sales component is slowly growing a bit there.

There's opportunity to grow that over time.

But a time line in China, we'll see.

It's a small market.

I don't see today, for us and for the industry, I don't see a dramatic increase in percent of total capacity in the short term there.

And the reason is not so much because of China, but because of the demand everywhere else in the world.

And then, as I mentioned, there's large addressable markets everywhere in the world that are underpenetrated, including the United States.

And so the ships are needed to continue to grow and serve the market demand that we've been creating over the past several years.

But China, long term, is going to have a cruise market.

But it's China.

There'll be starts and stops and fits and turns and so on.

And it's the nature of the animal, but our assets are mobile.

And as long as it's accretive, we'll participate.

And when it's not, we'll move the ships elsewhere.

Thank you for your question.

Thank you, everyone.

We really appreciate your participation on the call.

We always do our best to give you the best guidance that we can.

And I just want to leave you with the thought that our business is strong.

The guidance we've given is reflecting some changes in fuel and currency.

But beyond that, the business is strong.

Thank you very much.

Ladies and gentlemen, that concludes today's call.

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