Carnival PLC (CUK) 2016 Q4 法說會逐字稿

Good morning, everyone, and welcome to our fourth-quarter 2016 earnings conference call. I am Arnold Donald, president and CEO of Carnival Corporation & plc. Thank you all for joining us this morning and a heartfelt happy holidays, everyone.

Today I am joined by our chairman, Micky 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.

We finished the year with another record quarter of adjusted earnings, which were $0.17 per share or 34% higher than the prior year. Exceeding the midpoint of guidance by $0.10 per share and leading to the highest full-year earnings in our Company's history. We achieved full-year 2016 adjusted earnings of $2.6 billion or $3.45 per share. That is $500 million or [28% per share]( sic) higher than last year and more than double 2013 earnings of $1.55.

More importantly, we achieved return on invested capital of 9% and doubled our 2013 return on invested capital of 4.5%. We are pleased to have delivered for our shareholders doubled earnings and doubled return on invested capital in just three short years.

Strong operational improvement contributed $0.55 per share to the bottom line year over year, which when combined with $0.14 of accretion from our share repurchase program enabled us to exceed the high end of our original December guidance range of $3.10 to $3.40 per share. And that is despite an $0.18 drag from fuel and currency both moving against us.

These strong results are a credit to the commitment and to the passion of our 120,000 team members, which when coupled with the support from our valued travel agent partners enabled us to overcome the significant obstacles encountered this past year, including the rare occurrence of a simultaneous negative from fuel and currency; a series of global geopolitical events in Turkey, Paris, and Brussels; as well as concerns around Zika and Brexit.

It is through their collective efforts that we delivered record earnings in 2016 and are gaining momentum as we embark on 2017 with booking volumes and pricing both well ahead of the prior year.

It was reinforcing to see constant currency revenue yield growth this year of roughly 4% inclusive of the previously disclosed 1% accounting change on top of the over 4% improvement achieved last year. We enjoyed ticket price improvements for both our North American and our EAA brands, with particularly robust ticket price improvements again in our core Caribbean deployment.

We drove revenue yield growth by creating relative scarcity through our brand team success in increasing demand in excess of our measured capacity growth via our ongoing guest experience efforts coupled with our continuing public relations efforts. In fact, we recently created three original TV programs that are airing on major US networks, having already reached more than 40 million viewers during the large family-oriented programming blocks.

They are designed to entertain, to educate, and to engage viewers by showcasing exciting adventures, exotic cultures, beautiful ships, and popular global destinations. With almost 80 original episodes, the new experiential series use compelling and authentic storytelling to share the powerful way travel by sea connects people, places, and cultures around the world while prominently featuring each of our brands.

Not only are we experiencing very high appeal ratings at number one or number two in their respective time slots, but we also achieving even more favorable consumer perception of our brands. This successful programming comes on the heels of many impactful shows aired earlier this year: in the UK a reality-based TV series on board Regal Princess, The Cruise, and P&O Cruises Battlechefs onboard Britannia; in Italy Bravo Chef on board our Costa ships and on Costa Fortuna a major motion picture, [Holidays in the Caribbean]; in North America, Carnival Cruise Lines was featured on Wheel of Fortune for a full week and featured on the Ellen Degeneres Show.

We have many more opportunities already in the pipeline for next year to keep cruising in the forefront of vacationers' minds, including the new Celebrity Apprentice airing on NBC in February during wave season, our peak booking period. All of these efforts promote consideration around the globe by prominently featuring amazing cruise experiences on our world-leading cruise lines.

In fact, our brands accounted for over 70% of the industry's positive media coverage. This includes our historic voyage to Cuba when we became the first US cruise operator in over 40 years to bring US cruise guests directly from the US to Cuba, with over 55 billion very positive media impressions and paving the way for others in our industry to follow. At this time, we are proud to have more sailings scheduled to Cuba than any other major US operator.

Moreover, our phenomenal guest experience it just gets better and better each year as we continue to deliver on consumer expectations, achieving further improvement in our net promoter scores.

We also introduced three new flagships in 2016 including Carnival Vista, which celebrated its US arrival in November with an onboard concert by country music superstar Carrie Underwood supporting Operation Homefront and with Miss USA, herself military, as the godmother and including 700 military families invited as guest of honor. Carnival Vista was designed specifically for our fun-loving Carnival Cruise Line guests with an onboard brewery experience, entertaining IMAX theater, and exhilarating sky ride experience.

Holland America's Koningsdam christened in Rotterdam by her Majesty Queen Maxima of the Netherlands delivers a new premium experience where our guests can blend their own wine or dance the night away in our carefully engineered Music Walk showcasing Lincoln Center Stage, Billboard Onboard and B.B. King's Blues Club.

AIDAprima, the first of the next generation platform, resonates with AIDA's nearly exclusively German guests, combining leading edge of our (inaudible) attributes with exceptional gift experiences including racing waterslides, a lazy river, climbing walls and expensive German spa, and an ice rink for skating, for hockey for curling, and even a traditional Christmas market.

Newbuilds will provide additional demand creation opportunities in 2017 as well, beginning with the recent delivery of Encore for our ultraluxury brand Seabourn. Designed by Adam Tihany in keeping with the feel of a luxury yacht, Seabourn Encore sets a new standard in ultraluxury cruising featuring 300 elegant suites, The Grill, a new restaurant by three-star Michelin chef Thomas Keller, and the debut of a new mindful living program with Dr. Andrew Weil.

Later next year we will welcome AIDAperla in Germany and of course Majestic Princess, the first ship purpose built for Chinese cruisers, demonstrating our commitment to grow the cruise industry in China, which remains an embryonic market with vast untapped potential. We expect to continue to profitably grow our presence in China and throughout Asia for many years to come.

When it comes to ships, newbuilds are not the only way to stimulate demand creation though. We continue to invest in our existing fleet to further enhance guest experiences, including the recent remastering of Cunard's Queen Mary 2 and the continued rollout of Carnival Cruise Lines Fun Ship 2.0 to now over 60% of the Carnival Cruise Lines fleet.

On January 5 we will kick off the year by unveiling our latest guest experience innovations at the Consumer Electronics Show in Las Vegas. We are privileged to be the first travel company ever to be invited to provide the opening keynote address at CES, where we will showcase using our leading-edge technology, offering a new option for our guests for a true breakthrough in unobtrusive high-touch and personalized travel at scale.

Furthermore we launched our new state-of-the-art revenue management system this past year, positioning us well to drive incremental revenue yield growth over time. The rollout of the system across six of our brands is expected to be completed by early 2018. We have already benefited from the sharing of best practices and we expect this new yield management tool to begin to facilitate yield uplift in 2017 and even more so in 2018.

We continue to accelerate progress on our cost-containment efforts, delivering $95 million in cost savings in 2016. That is $20 million more than the $75 million included in our original 2016 guidance, and bringing the cumulative savings to date to over $190 million. Work continues on our cost-containment efforts that we believe present a multiyear opportunity to further leverage our scale, including another over $75 million of savings planned in 2017.

In addition, we continue to make meaningful progress on our 2020 sustainability goals, focusing on our environmental, safety, labor and social performance. Having already reduced our unit fuel consumption by 28% since initiating the effort, we remain committed to ongoing reduction in air emissions. Just this year, AIDAprima became the first cruise ship in the world to be powered by environmentally friendly liquefied natural gas.

We are committed to continuous improvement in health, environmental, safety, and security, which is not only so critical to our freedom to operate but also to our future success. This year we introduced industry-leading shoreside technology to monitor real-time navigational performance and energy use across our fleet. We opened our significantly expanded Arison Maritime Center in the Netherlands delivering state-of-the-art maritime training through cutting edge bridge and engine room simulators and curriculum.

In 2016 we delivered over $5 billion in cash from operations and returned more than half to shareholders, having distributed $1 billion through our annual dividend and investing over $2 billion in our ongoing share repurchase program. As a testament to the strength of our operating performance, we were able to accomplish this while also getting back our A- and A3 credit ratings from S&P and Moody's. We plan to continue to return excess cash and more to shareholders in 2017 with our credit metrics at the better end of our targeted range.

Now looking forward, there are large addressable markets with low penetration all over the world including North America and new markets in Asia were economic growth has raised discretionary income levels, fueling increased demand for vacations. We are focused on growing our top line and have numerous innovations underweight to foster cruise demand in the years ahead.

Our booking trends are strong heading into 2017, positioning us well for continued growth in revenues. In 2017 we are projecting revenue yields up another 2.5% on top of the tougher comparisons with our prior-year success, based on our proven demand-creation and yield-management efforts. At the same time, we will continue to contain costs.

In 2017 at the midpoint of our guidance, we expect to deliver an improvement in earnings of $0.43 per share. However, at current rates that is offset by $0.43 per share impact from fuel and currency. We remain committed to achieving increased consideration for cruise vacations and continued investment in the guest experience to create additional consumer demand in excess of measured capacity growth.

We remain committed to responsibly containing costs. We remain committed to returning value to shareholders and despite the unusual occurrence of both fuel and currency working against us at the same time, we remain committed to achieving sustained double-digit return on invested capital within two years.

With that, I will turn the call over to David.

Thank you, Arnold. Before I begin, please note all of my references to revenue, ticket prices, and cost metrics will be in constant currency unless otherwise stated. I will start today with a summary of our 2016 fourth-quarter results. Then I will provide some insights on current booking trends and finish up with some color on our 2017 December guidance.

Our adjusted EPS for the fourth quarter was $0.67. This was $0.10 above the midpoint of our September guidance. The improvement was almost all operational, driven by a number of factors. $0.04 came from net ticket revenue yields, which benefited from stronger pricing on close-in bookings on both sides of the Atlantic, while the remaining $0.06 was an accumulation of a variety of items such as improved fuel consumption and lower depreciation expense.

Now let's turn to the fourth-quarter operating results versus the prior year. Our capacity increased over 4%. The North American brands were up almost 3%, while the European, Australia, and Asian brands -- also known as our EAA brands -- were up over 6%. Our total net revenue yields were up 4.1%.

Now let's break apart the two components of the net revenue yield. Net ticket yields were up 5.2%. This increase was driven by our North American brands' deployment in the Caribbean and Alaska as well as our EAA brands' deployment in Europe. Net onboard and other yields increased 1.3%, in line with our guidance, as our current initiatives continue to pay dividends while our brands develop new initiatives for 2017 and beyond.

Net cruise cost for ALBD excluding fuel were up 1%, which was in line with our September guidance. In summary, our fourth-quarter adjusted EPS was $0.17 higher than the prior year driven by higher net revenue yields worth $0.17 and the accretive impact of the stock repurchase program worth $0.04, both of which were partially offset by the unfavorable net impact of lower fuel prices and currency worth $0.04.

Now let's turn to 2017 booking trends. Since September, both booking volumes and prices for the first three quarters of 2017 have been running well ahead of the prior year. At this point in time, for the first three quarters of 2017 cumulative advanced bookings are well ahead at considerably higher prices.

Now let's drill down into the cumulative book position. First, for our North America brand, Caribbean occupancy is ahead of the prior year at nicely higher prices. For Alaska, both occupancy and prices are well ahead of the prior year. If you want to go to Alaska next summer, I suggest you book early as the remaining inventory is going fast.

For the seasonal European program, occupancy is in line with the prior year at nicely higher prices.

Secondly, for our EAA brands, for European deployment occupancy is well ahead of the prior year at nicely higher prices. For the Caribbean deployment for our EAA brands occupancy is lower than the prior year at prices that are in line. However, prices on bookings over the last quarter are well ahead of the prior year, clearly an improving trend.

Finally I went to provide you with some color on 2017. We are forecasting a capacity increase of 2.6%. As Arnold indicated, our booking trends are strong heading into 2017, positioning us well for continued growth in revenue yields. For 2017 we are projecting net revenue yields up approximately 2.5% on top of the tougher comparisons from our prior-year success. For the full year, we are expecting to see yield improvement in almost all itineraries.

Now turning to cost, net cruise cost without fuel per ALBD are expected to be up approximately 1% for 2017. Broadly speaking, there are three major drivers of the cost change. First our forecast is for 1.5 points of inflation across all of our categories globally.

Second, we are planning for an increase in drydock days from 366 days in 2016 to nearly 450 in 2017, impacting our cost metrics by a half a point. As we have indicated on previous conference calls, the drydock days will vary each year but probably average around 450 to 475 days given the current size of our fleet.

Partially offsetting these two items, we are forecasting about a point of cost-saving benefit as we further leverage our scale. Given the volatility of fuel prices and FX rates over the past year, the 2017 year-over-year impact is an unfavorable $0.43 with both fuel and currency moving against us. $0.27 for fuel prices including the impact of fuel derivatives and $0.16 for currency.

Putting all of these factors together, our adjusted EPS guidance for 2017 is $3.30 to $3.60 versus the $3.45 we did in 2016. I will finish up by sharing with you our current rules of thumb about the impact that currency and fuel prices can have on our 2017 results. To start with, a 10% change in all relevant currencies relative to the US dollar would impact our P&L by approximately $0.34 for the full year and $0.04 for the first quarter.

For fuel price changes, a 10% change and the current spot price represents a $0.17 impact for the full year and $0.04 for the first quarter. Fuel expense in our guidance is $1.2 billion for the full year. The third rule of thumb relates to our fuel derivatives portfolio. A 10% change in Brent would result in a $0.06 in replace losses on fuel derivatives for the full year and $0.01 for the first quarter.

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

Thank you, David. And now, operator, let's open it up for questions.

(Operator Instructions) Steve Wieczynski, Stifel.

So could you --? If you look at your yield guidance for next year of basically 2.5%, could you give a little more color and break that down in terms of what you guys are looking for both on the price and then the onboard side as well?

Directionally onboard would be comparable in terms of the percent change year-to-year and comparable to prior year.

Okay. And then second question around your book position. You said you are in a better position at this point for 2017 than you were for this point for 2016. Can you give a little more color on that and maybe give a little bit more color into some of your geographies as well? Next year specifically talk about what you are seeing with China even though it is a pretty short booking window?

Yes, I would say with China things are looking great, but as you know it is a B2B business. But we feel very comfortable in China. We obviously ended up with good returns this year. We are expecting good returns again next year. But things are very positive. But it is B2B. So we still have traditional charters and subcharters to complete and then we have to see the year figure through. Dave, do you want to add some comment on the --?

Yes. Overall, Steve, I went through in my notes all of the different areas of the globe both for the North American brands as well as the EAA brands. Arnold touched on China. Remember, China is a late booking market and as a result of that it is early.

Australia, which I didn't mention, we are in good shape in Australia as well. It is a small piece of our business not nearly as large as the other pieces I mentioned. So overall booking trends are good and we are very encouraged.

And that is across the board, Steve.

Okay. So if you looked at your book position for the full Company right now versus where it was last year it is -- would you use the word significantly ahead?

Well, we said the overall book position is well ahead at considerably higher prices.

Okay, got you. Thanks a lot, guys.

Felicia Hendrix, Barclays.

Thanks for taking my questions. So just to kind of stay on how you are thinking about the globe and your -- and how you could perform next year, obviously the outlook on the Caribbean is positive but we -- despite you and some of your competitors and travel agents also all talking about the Caribbean looking positive for next year, there still seems to be concerned about some of the supply increases particularly in the second and third quarter. So I was just wondering if you could address the demand that you are seeing and the Caribbean despite the increased supply and why you are so confident that you will see growth there next year.

Sure. Good morning, Felicia. Yes, I guess the industry capacity overall is going to be up 6% next year in the Caribbean and we are going to be up 5% roughly. But again, we have actually had less inventory to book now than we did at this point in time last year.

So we feel very strong at this point. We still have to get through wave season. It is still early. But things are looking very positive. And all of our indicators are we -- our brands have done a great job of creating demand, especially our Carnival brand has continued to outperform in the Caribbean and did again this year.

For us, we have added some new capacity primarily in the form of the Carnival Vista. The ship is spectacular. She is going to command premium yields and premium booking position and have demonstrated that already. So we have every confidence. The other good news for us is we have such a large base especially in the Carnival brand of previous cruisegoers that when we introduce a new ship because we don't tend to do it every year, we have a large base of previous cruisers set to book with us.

So our dependence on new-to-cruise, while we still need new-to-cruise, is not overweighted. So we feel very confident at this point based on what we see in the Caribbean.

Thanks. And, Arnold, while I have you, I thought your comment that you are committed to returning double digit ROIC within the next two years despite the current FX and fuel headwinds was impressive. So just wondering if you could help us understand maybe some things that you would be doing beyond your already identified cost savings to ensure that goal.

No, absolutely. I think first of all it is a headwind to have obviously currency and fuel both move against you at the same time, which has rarely ever happened before. And it is happening with a pretty significant impact, obviously. Having said that, we also have a lot of momentum on a number of fronts not just on cost containment but in driving yield and with some small capacity addition that helps us as well.

But we had multiple paths all along. When we declared double digit, fuel prices were much higher than they were the last few years. And we are now looking at next year at basically being on balance net of fuel and currency where we were when we declared double-digit return on invested capital. So we have no reason to back off from that goal. We have multiple pathways including obviously increased yields but also in terms of managing more efficiently.

Then all of the tools we have in place. We have a new revenue -- new management tool in place that will begin to kick in and we will see the full effect on about half of our brands by 2018. We have done a lot of work and the brands have in creating additional demand. We have a lot more cruise scores in our base of previous cruise scores.

We have much more collaboration and coordination and communication across our brands to not only contain cost to help us manage costs, as you see reflected in the cost guidance, but also frankly to share best practices and drive yield further. So we have a number of things in place we have a lot of momentum and we are committed and we will deliver.

Thanks. And then just finally housekeeping, Beth. Can you give us the D&A and interest expense guidance for the first quarter of 2017 and the full year of 2017 and the quarterly capacity increases?

That interest is running about $50 million a quarter, $200 million for the year. That is net of capitalized net of income. Depreciation is running $450 million in the first quarter, $1.850 billion for the year and quarterly derivative are running $47 million in the first quarter, $185 million for the year. That is the realized derivatives.

The quarterly capacity projections are 4% for the first quarter, 3.6% for the second, 1.2% for the third, and 2% even for the fourth quarter for 2.5% on the year.

Thank you so much.

Tim Conder, Wells Fargo Securities.

A couple here, gentlemen, Beth. First of all, a little more color, Beth. It has been hit on the first two questions here the geographic color. David, you talked about the European occupancy for the EAA brands as well ahead at nicely higher prices. Can you break that down a little bit between Med and ex-Med? And then just again sort of recap in you thought process on the EAA brands looking into the Caribbean?

Yes. You talk about -- hang on one second. Let me get the details for the EAA brands.

While he is looking, the overall position next year and the Med for the industry is going to be pretty good because basically there will be probably capacity production in the Med next year. Go ahead, David.

Overall the comment if you break it down it is very similar for both markets as I mentioned for the year. Occupancy is well ahead and the prices are nicely higher for both the Med as well as northern Europe for the EAA brands.

Okay, okay. And it sounded fairly similar to North --

The EAA in the Caribbean, I had indicated occupancy was lower than the prior year with prices that are in line.

Okay. And it sounded similar also a similar breakdown color for the North American brands both Med and outside of the Med?

At this point in time for the North American brands, the Med -- with the reduced occupancy in the Med, the pricing in the Med seems to be doing much better than in northern Europe in terms of being up more than northern Europe.

Okay, okay. And then, gentlemen, just given your overall commentary about the higher booked occupancy and pricing. Should we anticipate, we'll grant that wave is important but should we anticipate that you obviously won't need as much bookings during wave on a year-over-year basis all else equal in the same trajectory at this point?

Well, we have less to sell, as Arnold indicated, than we did at this time last year despite the capacity increase. So clearly it is a zero-sum game and we can only book so much, we only have so much capacity. So we do need less during wave and the remainder of the year for 2017 and we will be looking to push pricing up and try to continue to do better than our guidance.

Okay. And then lastly I know it is less than 24 hours, but it has been kind of quite thankfully on the terrorist incidents front. But the incident yesterday in Germany less than 24 hours, just any very early feedback indications from that? I know it kind of absent flows for a week after an event but any thoughts there?

Just general comments. We had a couple of incidents, I guess, the German situation and the situation in Turkey. But the reality is that we had weathered those storms for the past several years. And as long as the world continues in the general state it is, people have chosen to continue to travel.

As long as people travel, we are going to be in good shape. If things were ever to obviously get exacerbated and people are afraid to travel, then we will have a challenge. But that has not happened in recent times with all of the various incidents that have occurred and so we have no reason at this point in time to have a higher level of concern than normal.

Thank you all. Happy holidays and congratulations again on a great 2016.

Thank you. Happy holidays to you too.

Harry Curtis, Nomura Instinet.

I wanted to focus on next year's free cash flow. The first question is is there any repurchase of shares baked into your 2017 earnings guidance? And is there any or to what degree have you built in any uplift from your new revenue management system into the 2017 guidance?

Okay, concerning stock repurchase, right now we have about $400 million remaining on the current amount designated for that. We will continue to buy back on an opportunistic basis and we will see if we get through that amount over the next period of time.

The Board will revisit to see what would be the next step because it is clearly a Board decision. So that is the basic story on that. We do it opportunistically so we don't have a plan per se in terms of factoring into that. What was the second part of your question?

Well I wanted to see if the new revenue management system was also baked into your yield guidance for next year.

It is. We only have about 30% of the inventory for the six brands that have been new tools, currently being managed because obviously we are way ahead on booking so it is can only impact so much of 2017. But by 2018 we will have the full impact for the inventory in those six brands.

But we already benefited somewhat from the sharing of best practices across the brands and the development of the two and the sharing of what they do. So the answer is, yes, it is factored in as one of many factors that contribute to yield.

And, Harry, you had asked (multiple speakers). Go ahead.

Yes, go ahead. Sorry, David.

You asked about cash flow for 2017. At the midpoint of our guidance, the cash flow from operations should be close to the $5 billion mark. We do have about $3 billion in CapEx for 2017 and so we do have roughly $2 billion of free cash flow.

Our existing dividend is close to $1 billion, so we do have some extra money over and above the dividend to return to shareholders as well as we have some room in our credit metrics to continue to potentially increase debt and return free cash flow and more to shareholders.

You know, the revenue management (multiple speakers). Go ahead, Harry.

Just where I was going with this is I am just trying to get a sense of if your share repurchase appetite in 2017 could be as strong as it was in 2016.

That is going to be a Board decision, as I mentioned. We have about $400 million left and we will continue to buy as we have in the past.

We did repurchase (multiple speakers).

Okay, well I will keep trying. (laughter)

What I can tell you, Harry, is a little color on your other question on the revenue management system is obviously we just the two -- we just put it in place and there will be continuous learnings. So we think over time there is real upside contribution from that and I know the teams absolutely love working with the two.

Very good, thanks.

James Hardiman, Wedbush Securities.

I was hoping you could give us a little bit more color on Cuba? You had made the announcement that Fathom is transitioning back to P&O. I guess what does that mean for the impact travel experiment? Then I guess what happens next? I don't think we have gotten an official announcement in terms of the other brands and when and how many are going to be going to Cuba but was hoping we could get an update there.

Yes, good morning, James, happy holidays to you. So first of all regarding Cuba, again we are really privileged that we were the first and in doing so have paved the way for the rest of the industry. We still, as I mentioned in my opening remarks, will have more calls to Cuba than any other major US cruise company.

So we feel very good about our position in Cuba. Along with everyone else, we submitted our request for additional sailings through the beginning of the June period and thereafter is just the planning cycle in Cuba. And we are in a process of receiving the authorizations from Cuba as we speak here now about that.

But we have every intention of cruising to Cuba. We have every expectation one or more of our brands will be approved from the June time period on. And through May as I mentioned we have more sailings than anyone else. In terms of the Fathom, Adonia was basically a sort of an internal charter, the brand chartered it to establish the concept and also obviously to position us to introduce into Cuba. We are going to probably -- not probably, we are going to go with larger ships and multiple brands to Cuba.

With regard to the DR, we are also going with multiple brands for Fathom. So Fathom is being expanded across a number of brands in the DR. The on-the-ground experiences have resonated greatly with the guests. We both take some of the onboard stuff from Adonia and Fathom to the other brands, but the emphasis of course is the on-ground experiences in DR and then continue to have the opportunity for travelers to have that deep travel experience and for the DR to reap the benefits of the impact of having those travelers work alongside. Impact clear is already in the DR they are doing great work.

Great. And then along those same lines, remind us why the first-quarter trend looks to be short of the fiscal full-year trend, fiscal 2017 trend, I think it is 1.5% to 2.5% for the first quarter versus 2.5% for the year. I don't know if that has anything to do with Cuba or even if Cuba is factored into your yield guidance in any way.

It has nothing to do with Cuba. But go ahead, David.

Yes. It is just the midpoint of the first quarter is 2% versus the 2.5% approximately for the year. And the first quarter had tougher comparisons in the prior year. But keep in mind we are only talking about a half a point here. And so we could view our best guess for each and every number.

Great. And then I guess just lastly. I just wanted to circle back to China. Obviously you have made it pretty clear that China is more about generating positive returns than yields, but I know it is early but maybe just directionally do you think yields are going to be down again for 2017? Is there even the chance that they could grow?

I guess what are the contributing factors there? Obviously capacity in China is going to be much more manageable in 2017 versus 2016. It seems like you guys are pretty bullish about the improvement in your distribution, but how should I think about that?

Yes, well first of all you touched on a couple of good points there. We have expanded distribution, that improves the B2B aspect of what we are doing there. But we are going to have tougher comparisons in the first half of the year in China with yields. So based on what happened in the last half of the year, where you might expect yields to be down in the first half of the year on a comparison basis. But then expectations are that it will be up in the second half of the year.

So on balance we will see where it lands. But China for us is a volume growth story. It is a return story. The yields that we have experienced this past year are certainly still generating good returns. We see possibility for increasing yields but our focus again is on continuing the high level of occupancy that we have, continuing delivering great experience to Chinese guests, and being positioned to expand the market.

Great, thanks, guys, and happy holidays.

Jaime Katz, Morningstar.

So it seems like you guys are about to want some sort of new technology initiatives at CES. I am curious given that CapEx is a little bit higher than we are richly anticipated next year, is there any sort of level of CapEx associated with whatever new initiatives you guys are going to launch and is there any sort of multi-year cost that we should be thinking about going forward?

Yes, thanks, Jaime, for the question. First of all, the capital that is being employed in that initiative is kind of part of a low-level 3% to 5% of our total capital spend annually that we look at for basically research and development and innovation. So we had invested along the way all of this time we delivered the earnings we have delivered in that manner to position us to have the opportunity to introduce this particular -- truly it is a guest experience.

It is driven by technology, but the technology obviously to the guest will be invisible. And we are excited about the potential. The guest ultimately will decide and we are prepared. But fundamentally for your planning purposes we look at a 3% to 5% level of innovation in research and development kind of investment in capital. And we feel that it is appropriate for a copy of our scale and it gives us plenty of dollars to try to create breakthroughs, which we think obviously this current introduction that will be revealed on January 5 has potential to be.

Okay. And then I think yesterday you guys put out a press release saying that new ship in 2019 would be going to Carnival, it was originally planned to go to maybe P&O Cruises Australia if I am recalling correctly. So I am curious if there are any new conclusions surrounding the Australian market given that you are moving the new hardware back to the Caribbean, which has clearly been performing very well.

No, Australia has remained a big growth market for our cruises and growing 20% for I don't know how many years now, 10 years plus. So it is a very strong cruise market. When we make decisions like that, you just have to keep in mind it is very holistic. There are a gazillion variables that go into play.

One obviously, the Carnival brand is doing very, very, very well here in the states. But also we have multiple home ports in the US. We distribute the fleet around the US for Carnival and certain places can take certain ships, certain places can only take certain size ships and so on. Balancing all of that out makes a difference.

Similarly to -- in Australia, certain size ships can fit when you look at the destinations. But we have had so much success with Vista, Carnival Vista, we are looking at expanding the opportunity for Carnival brand while at the same time still giving really guest-ready and guest-preferred Hartwell and Australia market.

So there's only so many shipyards. We can only build so many ships a year and we have to allocate things and we are always trying to optimize. But it is holistic decision involving a lot of variables, deployment, itinerary, relative yield contribution, a number of things.

The second part of the announcement was the Carnival Splendor moving to P&O Australia. So we are continuing to grow that brand within Australia.

Thank you, guys. Happy holidays.

Greg Badishkanian, Citigroup.

Just to follow on to James's question on China. It kind of sounded like net yields for full-year 2017 would maybe be around flattish year over year at least not too far off from flat year-over-year either way. Is that correct? And then also how much of the China business is locked in at this point for 2017?

So just remember that China represents even with the increase next year and introduction of the Majestic Princess, the first purpose-built ship for China in our Princess line we will introduce will represent less than 6% of our capacity. So just keep that in mind.

We will see where yields end up. Again, it is a B2B business. In terms of guidance, of course we put it in. We don't give brand-by-brand and total geography-by-geography yields, so I won't do it for China either. But we have given you a good description I think of what you can expect.

The message we like you guys to hear clearly is that it is a return-driven business. With all of the concerns people have expressed this year on China as well as concerns expressed in lots of other areas and whatnot, you can see what we are able to deliver and ultimate results. We are very, very bullish on China long-term.

We have great partners in CSSC. Our relationship there is growing stronger and stronger. We are moving forward together to help build a long-standing, sustainable cruise industry in China, which has been declared the five-year plan by the Chinese government. So we are bullish but it is a slow walk. We can only send so many ships and so on so we feel really confident overall.

The second part of the question, you had asked about where we stand in China. Given the historical averages of where we are booked and give or take generally speaking we start the year roughly about half booked but I did indicate before that China is a much later booking market. Every country is different. So they are a closer-in booking market and less than that overall.

Right, right. That all makes sense, thank you. And then the North American passengers going to Europe, I know that is still a small part of your overall mix in Europe. For itineraries in Europe it is only about 10% that you source from North America. But with the broad strength that we have seen, could that have a significant impact and benefit for you if that continues? I understand the attack in Germany may have a negative impact, but it does seem like that -- the trend has been pretty strong recently.

Yes, the trends have been, have been positive overall. But we have had to redo a number of our itineraries along the way that have cost us in terms of opportunity in 2016. But that is all part of our business.

So again on balance, we give guidance, the numbers we feel are reasonable. We know the world is a volatile place and so we factor that into everything we do. But, sure, anything that is positive in the end obviously helps us. The North American brands have a number of itineraries planned in Europe and our guests are looking forward to them and we are looking forward capturing the value for them.

Yes, great. Thank you.

Robin Farley, UBS.

Most of my questions have been asked, just kind of one or two follow-ups. I just wanted to clarify on Cuba, what is in your yield guidance, your EPS guidance for the year in terms of the Cuba? Is it just an expectation that one ship not yet specified will continue to operate there from May until the end of the year or does that include perhaps more than that?

Yes. So, Robin, first of all good morning to you. I am a little surprised. You are usually much earlier on the calls on your questions.

I don't know what happened. Yes (multiple speakers)(laughter).

But concerning Cuba, look, today we have Adonia. It is a 700-passenger ship. So the reality is you can barely find the numbers, even though the ship is getting a premium price and is selling out and so on. So as we look at it again, Cuba will be a slow expansion. So we will have additional itineraries going there. Hopefully we will have more than one brand once we get the final approvals from the Cuban authorities. But they have constraints in the number of berths and the size of the berths and what size ships you can get in and so on.

So financially to be candid with you, it is important and the margin is certainly important to the brands. But the most important thing is positioning for the longer haul and positioning to lift overall demand and interest in the Caribbean and ultimately because of that create additional opportunity for capturing more of the value through increased yields. So Cuba is a longer-term play but you have to build it today and that is what we are doing. But in terms of the financial impact on the corporation, you couldn't find it probably.

Okay. No, great, that is helpful. Then on China and I know that obviously it is early and you don't want to give specific yield guidance for the market, but just on your comment that returns will continue to be positive or I don't know whether you indicated whether returns would grow or just that they would be positive or more relative to other brands.

Well, because my question is with the Majestic going there, I think that is your first newbuild for that market and so it would be a higher investment per berth than the other tonnage that you have there. So it's fair to assume, right, that that ship is getting price premium to your other capacity in China? So I guess that is why I am surprised that you wouldn't feel comfortable saying positive yields for the year just given that if returns would continue to be what they are given that newer ship.

Well, again you have got to look at the holistic. There's a lot going on there. You have got first of all different ports in different seasons. We are one of the few companies that committed year-round. So the Tianjin market is different than the Shanghai market, so on and so forth. So there's lots of things that move in that.

But here is the real answer, fundamentally I know how to answer your question is, yes, we expect returns overall to be better in 2017 than they were in 2016. Returns have grown reasonably consistently in China. The most important thing for us is the way we do deployment, we know that the returns are better than what the alternative deployments would have generated for us. That is the key for us in operating.

So overall we are lifting our overall performance. But it does represent 5% of our capacity. So it did in 2016 and a little bit less than 6% in 2017. So as we move forward, we are looking at building that market but we are doing it in a way where as we grow it we are seeing higher returns than we would have seen otherwise.

There is a natural constraint on the pace of growth because we have large addressable markets everywhere in the world that are underpenetrated everywhere in the world, including in North America. So we can't send all of the ships to China. And we need new additional capacity in the other places in the world to optimize the ultimate yield and bottom-line return.

And remember, Robin, Majestic gets to China in July. So that is consistent with the comments made -- Arnold made about the first half versus the second half.

Okay, great. No, that is helpful. Thanks. Our channel checks show a really nice strong premium for Majestic, so I understand that you don't want to commit to anything but thank you.

Jared Shojaian, Wolfe Research.

David, you indicated that about half of your 2017 capacity is booked at this point. So my question is what kind of pricing do you need to see on the other half that is not yet booked in order to hit your 2.5% yield guidance? Is it possible that pricing could be down to get to 2.5%? Is that your expectation?

First of all I didn't say that exactly half was booked. I said generally speaking that the historical average give or take we enter the year approximately half booked. I wasn't trying to give you an exact number. I was just trying to do that relative to China being less than that. That's all. So our pricing is up at this point and we do continue to expect to see pricing continue to be up in the rest of the year and finish the year on an overall basis as we say approximately 2.5%.

Okay. And then I guess just to ask that a little bit differently, you have indicated that you are in a better book position today than you were at this time last year. Then you also get the mix benefit on yield from Seabourn Encore and maybe even get some benefit on from the yield management system.

So I guess why is your yield guidance 2.5% when you did 3% this year if you take out the accounting re-class? Are there any headwinds that maybe I am not appreciating or are you just looking at this from more of a conservative approach given some of the issues that we felt throughout 2016 for the industry?

You know, if you were to take the accounting re-class out, as you referenced, and looked at the guidance we gave this time last year, you will see our guidance is actually stronger this year at this time than it was last year. Keep in mind we haven't gotten to wave season yet.

We know the world is a volatile place. We just talked about a number of things that have happened, even things that happened yesterday. So we give you over best guidance, realizing that the world is full of things. It is full of typhoons and cyclones and hurricanes and it is filled with unexpected things like a Brexit or a Zika or whatever.

So we give you the guidance as we did last year with that. If you look at it, you would say, okay, they are giving stronger guidance this year at this point in time than they did last year, which reflects the difference. The difference is last year we were ahead on booking at slightly lower prices at this point in time. Now we are ahead of bookings with higher prices at this time.

So you will see us give a little strong yield guidance. Now, keep in mind also you are coming off a higher base. The comparisons are getting tougher and tougher as we grow yields. In the end, people take money to the bank, not percentages, right? So the absolute dollar increase to the guest, if so you have to look at all of that too.

But bottom line is we are confident at this point in time with the qualifiers that we haven't gotten to wave and the world is a strange and mysterious place and is volatile. But factoring that in -- and it has been volatile the last many years and we have been delivering -- and that is our intention for 2017 as well.

Great, thank you. If I could just squeeze one more quick one in, would you characterize the demand environment today as being better than what it was two, three months ago?

The demand environment? You mean from consumers in general or from potential guests? I would say that to three months ago, that is a good question. I would say this. Our brands continue to do an outstanding job of exceeding guest expectations when the guests are on board and they continue to an outstanding job of creating more demand for their particular targeted segments.

Our public relations more broadly has done a good job of providing an umbrella effect of getting people to increasingly consider cruise when they are thinking about vacation holidays. The last two to three months -- we are a global business. Every year there is a recession somewhere or this or that or whatever. If you are talking globally for our business, I could not say that the last two or three months I see a change in global consumer attitudes or anything like that consistently. What I can say is we definitely see strength and we have seen strength for a while and we are building on that and taking advantage of it.

Great, thank you very much.

Operator, we have time for one more question.

Assia Georgieva, Infiniti Research.

Congratulations on yet another great quarter. I have kind of lost track of all of the sequential beats quarter versus guidance. I had one quick question. Given that comparisons get a little bit tougher in Q2 of next year and now for Q4 2017 given the great result that you just reported, could you qualitatively discuss the cadence of yield that you expect?

You discussed China but again that is a small piece of the overall puzzle. So, Arnold or David, if you could just give us some sort of a direction as to the curve?

I would say it is very hard. There are so many moving parts and so many moving pieces particularly when you get out to the fourth quarter, where we have a very small -- relatively a very small percentage booked. So we give you our best guess for the year. We give you our best guess for the next quarter.

It is fair to say that given the two numbers the remaining three quarters of the year is about the 2.5% because we have 2% for the first quarter. And at this point in time that is about as much information as we can give.

Well, it is just difficult for the rest of us and we had even less information than you guys. So I was thinking that maybe it is a bell curve that is all I was hoping for. Arnold, since you are laughing, can you say yes?

I can't say is to a bell curve. I wish things were that orderly, but they are not. But thank you for your question. (laughter)

Okay, I appreciate that. Thank you again for taking my call.

Be safe. Thank you.

Hey, everyone, a sincere happy holidays, thanks for your continued interest. We will -- obviously as always our people will work very hard to exceed the expectations we put in place. We hope everyone has a safe and wonderful holiday. I hope some of you are taking a cruise.

Happy holidays.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.