Carnival PLC (CUK) 2019 Q2 法說會逐字稿

Greetings, and welcome to the second quarter 2019 earnings conference call.

(Operator Instructions) And as a reminder, this conference is being recorded, Thursday, June 20, 2019.

I'd now like to turn it over to Mr. Arnold Donald, President and CEO of Carnival Corporation.

Please go ahead.

Thank you, Keith.

Good morning, everyone, and welcome to our second quarter 2019 earnings conference call.

As Keith said, I'm Arnold Donald, President and CEO of Carnival Corporation & plc, and today I am joined by our Chairman, Micky Arison as well as David Bernstein, our Chief Financial Officer; and Beth Roberts, Senior Vice President, Investor Relations.

I want to thank you all for joining us this morning.

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.

Now given the vessel disruption that unfolded this week with Carnival Vista, we decided to move the call to today because we wanted to provide the information that the impact was limited to $0.08 to $0.10, and we wanted to provide the information as quickly as possible.

Obviously, we're disappointed with this morning's announcement as well as in our change in guidance from our initial guidance for 2019.

We acknowledge that we would not deliver for this year the growth rates in earnings and returns that our business is capable of and that we are committed to deliver over time, and we are disappointed in the reduction to that guidance.

However, we have the foundation, and we remain steadfast in our commitment to consistently deliver double-digit earnings growth and growth in return on invested capital over time.

We delivered second quarter adjusted earnings per share of $0.66, that's higher than the midpoint of March guidance by $0.08 per share and only $0.02 per share lower than last year despite a $0.09 drag from fuel and currency.

For the full year, voyage disruptions related to Carnival Vista are expected, as I have mentioned, to have a financial impact of approximately $0.08 to $0.10 per share, and that's from a combination of modified itineraries, canceled sailings and the unusual nature of the repair, given the unavailable damaged dry dock in Grand Bahama Shipyard, where repairs otherwise would have occurred.

Now we're updating our adjusted earnings guidance range, previously $4.35 to $4.55, now $4.25 to $4.35 due to the voyage disruptions; the U.S. government's policy change on travel to Cuba, which impacted earnings by $0.04 to $0.06 per share; lower revenue yields in the second half of the year resulting primarily from ongoing headwinds for our Continental European-sourced brands estimated at $0.10 to $0.12 per share, and that represents 0.5 points off our prior full year yield guidance.

That's partially offset by $0.02 per share reduction in cost due to lower fuel consumption and a favorable $0.08 per share from changes in fuel and currency since the time of our March guidance.

The U.S. government's policy change for travel to Cuba has the financial impact of approximately $0.04 to $0.06, as I just mentioned, per share, as we have to make deployment changes very close in.

While the regulatory change was disappointing as these sailings had experienced strong demand and were well booked at significant yield premiums, we were able to adjust our itineraries to provide our guests with attractive alternative vacation experiences utilizing the 6 destination ports that we own and operate in the Caribbean, which are among our highest-rated destinations based on guest feedback.

However, the suddenness of the regulatory change is disruptive and has led to a concentration of industry-wide capacity and to a select number of lower-yield deployment options.

As always, we remain focused on pricing discipline.

Now our Continental European brands have been facing heightened geopolitical and macroeconomic headwinds, which has impacted operating performance this year.

Our growth in these markets has continued to outpace general travel, but growing into a contracting travel market has put pressure on ticket prices this year.

In Germany, land-based tour operator booking trends have been running significantly behind this year, while our German cruise brand has grown double digits but not been able to hold price in that environment.

Now despite these headwinds, our German brand, AIDA, has among the highest returns in our portfolio.

In Southern Europe, while the environment had been challenging for multiple years now, we have encountered a further deterioration in the economic environment in Italy with Italy experiencing a recession, a heightened geopolitical environment in France given the ongoing yellow vest disruptions, further compounded by increased land-based competition at significantly low rates, resulting from the reopening of resort destinations in Turkey and North Africa.

Prior to this year, despite what had already been a challenging economic environment, particularly in Southern Europe, Costa was executing along the path toward double-digit return on invested capital.

In fact, in the last 5 years, Costa more than doubled return on invested capital, albeit starting from a lower base.

Now newbuilds are a very important part of the path to double-digit return on invested capital and given the inherent cost efficiencies gained by the greater scale and fuel efficiencies of our new ships.

Now we've not taken delivery of a new ship in Europe for Costa in over 5 years, and that ship is still among the highest-returning ships in our entire fleet.

We have also entered into an agreement to sell 2 ships from Costa to our China joint venture next year.

We're evaluating further opportunities to optimize our future performance, including accelerating demand and rightsizing capacity.

Clearly, in 2019, exacerbated by recent events, we are not performing, as I mentioned, at the double-digit earnings growth rate or growth in return on invested capital that we target.

Now we have been aggressively working to enhance our action plan to drive results in 2020 and beyond as some of these action items are in the process of being rolled out and some are still being evaluated.

Now I'll highlight a few that we expect to benefit 2020 and beyond.

While we remain focused on cost containment, and aside from the impact of voyage disruptions, we are maintaining the cost guidance we gave for the year.

Included in our guidance is a planned increase in our investment in demand creation in the back half of the year to further position us for 2020.

However, that increase in advertising is offset by cost savings in other areas.

Now we continue to roll out applications across multiple brands, designed to enhance the guest experience and to promote onboard sales, including Ocean Medallion for Princess, and we expect to have 11 Princess ships rolled out by the end of 2020.

Of course, our ongoing newbuild program is integral to the growth in earnings and return on invested capital over time.

And as we mentioned before, not only are our newbuilds on average roughly 15% to 25% more cost efficient and approximately 25% to 35% more fuel efficient, they also help to create further demand for cruising.

And of course, we continue to reinvest in the existing fleet to drive demand and have more major refurbishment projects planned next year.

For our Carnival brand, we've garnered double-digit yield premiums and double-digit return on investment for the renamed Carnival Sunshine.

And we're off to a strong start for the recently reintroduced Carnival Sunrise with both booking volumes and pricing up double digits.

On the cost side, we are now positioning, beginning in 2020, to take advantage of the natural cost containment that comes from leveraging the increased capacity from newbuilds.

And we've also initiated a zero-based planning pilot for our 2020 planning process.

Now this is in addition to our efforts to leverage our industry-leading scale, estimated at $75 million or more annually, and the greater economies of scale afforded by our higher capacity growth.

That said, we will not be afraid to spend money to invest, especially if we have an opportunity to drive demand and earn a return on investment.

We remain very confident in our portfolio of cruise brands.

Over the past 5 years, we have had even stronger cumulative yield growth from our EA segment than our NAA segment on similar capacity growth, and believe our brands continue to outperform the broader travel market in Continental Europe.

We remain confident we can continue to grow demand for cruise at good prices because we operate in an underpenetrated industry with an overall growing global travel industry.

We're well positioned to take advantage of the acceleration in retirees globally and the millennial generation, which overindexes to cruise.

And at the same time, cruising generates higher satisfaction levels than land-based alternatives and prices at a value to comparable land-based alternatives.

So we operate in an industry that is capacity constrained, the ships are full, so are the shipyards, and the mobility of the assets allows us to optimize the demand environment over time.

There are headwinds every year.

And over the past 5 years, we've demonstrated our ability to overcome multiple headwinds and deliver strong operational improvement.

Now this year, our growth has been hampered by a confluence of events, which our people have worked hard to mitigate.

We remain confident with actions we're taking that over time, we will continue to deliver double-digit earnings growth and significant growth in return on invested capital.

And now I'd like to turn the call over to David.

Thank you, Arnold.

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

I'll start today with a summary of our 2019 second quarter results, then I'll provide an update on current booking trends for the back half of 2019 and finish up with some additional color on our 2019 June guidance.

As Arnold indicated, our adjusted EPS for the second quarter was $0.66.

This was $0.08 above the midpoint of our March guidance.

The improvement was driven by 2 things: $0.02 of favorability in net cruise revenue and $0.07 of favorability in net cruise costs without fuel, substantially due to the timing of expenses between the quarters.

Both favorable items were partially offset by a $0.01 unfavorable net impact from fuel price and currency.

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

Our capacity increased 4.6%.

Our North America and Australia segment, more commonly known as our NAA brands, was up 0.5%, while our Europe and Asia segment, more commonly known as our EA brands, was up almost 12%.

Our total net revenue yields were up 0.6%.

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

Net ticket yields were essentially flat.

Our NAA brands were up 3%, driven by yield improvements in the Caribbean, while our EA brands were down 3.5%.

Net onboard and other yields increased almost 2% with increases on both sides of the Atlantic.

In summary, our second quarter adjusted EPS was $0.02 lower than the prior year, with the benefits from slightly higher net revenue yields and lower dry dock costs, driven by less dry dock days during the quarter, being more than offset by higher depreciation expense costing $0.03 and the $0.09 unfavorable net impact of fuel price and currency.

Turning to 2019 booking trends.

At this point in time, cumulative advance bookings for the back half of 2019 are slightly ahead of the prior year on occupancy at prices that are in line with last year.

Now let's drill down into the cumulative booked position for 2019.

Cumulative advance bookings for our NAA brands are higher than the prior year on occupancy and slightly ahead on price, driven by nicely higher prices in the Caribbean and the seasonal European program, while pricing in Alaska is well lower than last year's record pricing.

Cumulative advance bookings for our EA brands are slightly behind the prior year on occupancy at lower prices, again driven by our EA brand sourcing in Continental Europe.

Given our strong booked position at the end of the second quarter, with less inventory remaining for sale than the same time the prior year, we had anticipated better pricing on booking volumes during the second quarter, which was included in our March guidance for the back half of the year.

In light of these booking trends, primarily driven by our EA brands, we have lowered our price expectations on the remaining inventory.

Therefore, we are forecasting full year net revenue yields to be approximately flat versus March guidance of up approximately 1%.

Yield guidance for third quarter is now forecasted to be flat or down slightly versus the prior year, while our fourth quarter, we are now forecasting yields to be lower.

We do expect yield improvement in both quarters in our NAA brands, which is being offset by yield declines in our EA brands.

For the full year, we now expect yield increases in our NAA brands to be up more than 1%, which were impacted by the recent restrictions on travel to Cuba.

While for the full year, we now expect yield declines in our EA brands to be more than 1%, driven by our EA brand sourcing in Continental Europe.

So now let me provide you with some additional color on our 2019 June guidance.

The $0.08 favorable net impact of fuel price and currency is driven by lower fuel prices, which will benefit us $0.15, while currency movements will cost us $0.07.

Our full year net cruise costs without fuel per ALBD guidance increased slightly as a result of the voyage disruptions and is now expected to be up approximately 0.7% versus March guidance of 0.5%.

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

Okay.

Keith, we're ready for the questions.

(Operator Instructions) And the first question is from the line of Robin Farley from UBS.

Couple of issues I would love to ask about.

First is, in your opening comments, you talked about the German market and Costa's market, and you didn't say too much about the U.K. And just given what's going on with Brexit, I wonder if you could give us a little bit of insight into demand in that market?

First of all, good morning, Robin.

The U.K. has been a better market despite Brexit.

There would be a number of reasons for that, but overall it has been better.

I don't know if David would like to add any additional color.

No.

I think you summed it up.

It has certainly had an overall impact.

It would have been better had it not been for Brexit, but we are doing okay in the U.K.

Okay.

Great.

That's helpful.

And then the comment about 2020 bookings in the release, well ahead, that price is in line, but I wonder if you could talk about how -- has that also -- it sounds like the last 3 months that there was this kind of an increasing pressure in Costa's markets and in Germany.

Is that also impacting 2020?

In other words, the commentary on 2020 was really about what's on the books, but in terms of what's coming in incrementally on 2020, if you could give some insight?

Yes.

I'll start and then I'll let David fill in with some details.

I think going into 2020, it will still be a challenging environment in Europe, but there is a couple of changes for us.

First of all, we had significant increase in the German market this year, not just us but the industry, and that will not be the case in 2020.

So significant double-digit capacity increase this year, next year that will not be the case.

And then in Costa, we have the new ship.

This is the first new ship in over 5 years, Smeralda, and she is booking very well so far.

It will introduce a number of efficiencies and stuff, so that also is a positive going into 2020 for Continental Europe.

David, have you got any comments?

Yes.

So we made some comments on the booking trends in the second quarter for 2019, and clearly there are similarities with the booking trends into 2020.

They were clearly stronger in our NAA brands during the quarter, and so we are seeing the overall economic headwinds extend beyond just the back half of 2019 for our EA brands.

But it is very early in the overall process, and so there is a lot of time left as we go through the year.

And while the environment seems similar, as I mentioned, the conditions we're operating in within our own brands is different going into 2020 and that gives us a basis to build on.

Your next question is from the line of Steve Wieczynski from Stifel.

I guess when we look at your revised guidance, I think you said most of that yield reduction was -- is related to Continental Europe, but I wanted to ask about other markets, I guess, specifically, maybe around Alaska.

And I guess the question here is, you guys called out some Alaska pressure back in March, and I guess what I'm getting at here is, has that stayed pretty much neutral or has that intensified as well?

I would say, I'll -- again a general comment, so overall, our North America brands are doing well with regards to guidance and what we had included in guidance.

And I'll let David give you the details on them.

Yes.

I had indicated in my prepared remarks that the current pricing on the books in Alaska was well lower than its record levels last year, which is pretty much consistent with what we had said previously, that -- we have 18 ships in Alaska.

We have more Lloyd ships in Alaska than the rest of the industry in -- over double the number of ships.

So Alaska is a very high-yielding market for us.

It's performing very well, but we are seeing -- with the capacity growth in Alaska this year, as we had indicated before, we are seeing lower pricing, but it's still yielding very well for us, and we're very pleased with the results and we'll continue to work hard to improve upon that.

And just to refresh your memory, we do have the tour complication in Alaska, where we have a tour business that has a certain amount of capacity, and even though you can increase the number of guests going to Alaska, we don't necessarily have additional rooms in the resorts and other things to -- for total yield once you get to onboard revenue, et cetera, excursions.

So that's another level of complication, but Alaska is strong, it's profitable, it's growing.

And I guess to add on to that, does -- David, I guess, this is probably for you, but does your updated guidance that you put out today assume that European-sourced customer weakens from current levels or basically stays kind of status quo from what you're seeing today?

It's really hard to say because you're now getting into voyage-by-voyage and country-by-country detail.

We try to generally understand the overall economic environment and did our best to go voyage-by-voyage sourcing and come up with a reasonable plan that we believe is our best guess.

Okay.

And last question, I guess, for me is -- I'm not sure if I am allowed to do this or not, but I think you said Micky is there today.

So I was wondering if I could ask him a question around Cuba, given it sounds like he might have had some direct dealings with Washington officials.

And I guess, Micky, if you are there, can you maybe help us understand what those meetings were like?

And if you were somewhat surprised at the eventual outcome of the situation?

I was definitely surprised at the outcome, but I don't think it's appropriate for me to comment on meetings.

The next question is from Jared Shojaian from Wolfe Research.

Arnold, you touched on the supply environment in Europe.

I think you said double-digit growth this year for Germany.

Can you tell us what the industry supply growth is in all of Europe, not just Germany, versus what you guys are seeing next year in 2020?

And along those lines, do you think you need to reduce capacity?

I will answer the latter part of your question first, as David looks up the details on these percentage growth and stuff.

But it was double digits in Continental Europe this year, uniformly.

And I think overall for -- you said for the industry, so it would be much higher than ours individually, probably.

But in any event, we are always looking at rightsizing every market, every source market, every destination market.

And obviously, we'll be looking at that going into next year and beyond in Europe, especially in Southern Europe.

So I can answer your question, but the hard part of answering your question, first of all, I only know the numbers for us.

I don't have all the numbers for the industry for 2020.

And for us in total, we are seeing -- we have 7.3% capacity growth and we do expect to see 11% capacity increase in 2020 in Europe, 26% in China and 8% in Alaska.

And that is our capacity increase overall for the whole corporation.

But when you go in brand-by-brand, in 2020, it's very different.

And if you look at the total capacity increase this year?

For us, it was 4.5% in Europe.

Continental Europe.

I think what Jared -- the point of Jared's question was really the industry supply growth for the European source market, not the deployment.

From a source market perspective, we are looking at 9% supply growth in the EA segment this year, and it compares to a comparable rate next year.

If you look at Continental Europe, it is down from 13% to 10%.

That is mostly a reflection of -- sorry, it includes Asia.

AIDA is up mid-single digits, Costa is up low double digits, again, with the new ship this year.

Costa is -- Asia is up with the new ship and Cunard is down slightly and P&O is up high single digits.

So that would be all of Europe.

If you just want to focus -- sorry, we didn't have the answer succinctly for you, but the bottom line is this, if you look at AIDA, AIDA was up double-digit capacity growth this year.

20%.

Almost 20%.

And there won't be -- they will be up 5% or 6% or something next year.

Costa was up almost 14% this year, but that was with existing hardware with -- not with the new ship.

It was not with the newbuild.

Next year, we'll be up in Costa, but it will be the newbuild, with Smeralda, which is -- brings in efficiencies and so on and so forth.

So the brands will be experiencing a different dynamic as well.

There was capacity increase from others in Germany this year and they will not have capacity increase next year.

So when you look at those markets that primarily we're focused on, or all those brands that primarily we've been focused on in this conversation with the yield adjustment, they will be going into a better situation even if the overall environment hasn't changed much in Europe.

And in addition to that, of course, we're going to do a number of things ourselves from creating demand and other things to try to improve the performance there.

Having said all that, AIDA is still growing earnings in Europe and so on and so forth.

So we have an opportunity still to focus on what we want to focus on, which is earnings growth and return on invested capital, and we have a good base in AIDA to do that going forward and have the opportunity with Costa as well.

Okay.

I'll go back and check the transcript on -- there's a lot of information to unpack there.

But I mean, if I am understanding everything you said, it seems like there's still a decent amount of capacity growth in 2020, maybe not to the same degree as what you saw in 2019.

And so obviously, environment is a little bit challenged.

If you do have more supply coming on in 2020, I mean, what can you do to mitigate this besides, I guess, more marketing or whatnot?

I mean why not just come out and, as the largest player in the industry, take out some capacity right now?

I mean, maybe you can help me understand that better.

I would say, first of all, AIDA is one of the highest-return brands that we have.

And so while it may not be a yield story, it's an earnings and it is an accretive story, and it is helping us overall deliver.

Costa this year, as I mentioned, had existing hardware, did not have new hardware in the capacity increase there.

With the new hardware they're getting, it's going to provide us with a new vessel, give us an opportunity, again, for financial performance and return generation.

We will be looking at overall capacity, though.

It's July now, but we will be looking overall at capacity to see if we feel with all of that, we still need to make some other adjustments.

Okay.

And just one last quick one for me.

Arnold, you talked about leveraging scale and benefits of cost beginning in 2020.

2020 is really the first year of, I guess, a little bit more supply growth for you for the next few years.

Is it reasonable to conclude that your unit costs, and I am talking constant currency, NCC ex fuel, should be down in each of these next few years?

Is that kind of how you guys are thinking about it?

I think the opportunity is definitely to have unit cost reductions.

The question is, is it worthwhile to reinvest that to create demand?

And so that's the trade-off we'll be evaluating and assessing.

But absolutely, it gives us the opportunity for unit cost reduction with the capacity increase, and either that goes to the bottom line or should be invested to drive yield.

The next question is from the line of James Hardiman from Wedbush.

So just to clarify on Europe, I'm just trying to understand, do you think Europe is getting worse since the last time you reported or did your previous guidance just assume that it would get better?

I think, again, when we give guidance, we factor in a whole lot of things.

And even now with this guidance, we have half a year to go and things happen.

And so even within this guidance, we are assuming some things are going to go wrong in the second half of the year.

I think what happened in this -- and I know you're asking just about Europe, but we look at things holistically because there's so many moving parts.

And what's happening right now is just a confluence of events.

We've had them in the past, but we were able to overcome them.

This year, the confluence kind of overwhelmed us.

But we've had issues in other markets over the years, where you had a yield challenge where -- you guys worry about China one year, and another time it's the Caribbean and the stuff moves around.

So yes, Europe definitely is weaker than it appeared at that time.

But again, things -- some things get stronger, some things get weaker every year.

And so in this case, it happens to be Europe, and we have to look at it and look ahead and see if we need to make other changes, look at the changes we're already making and whether that will accommodate us to help us drive towards what we're chasing, which is double-digit earnings growth and elevated return on invested capital.

So to add to that, I think I tried to explain in my prepared remarks that we were sort of surprised at the levels of bookings and the prices that we needed during the second quarter.

So the demand we're seeing and the environment we're seeing is really -- you could say it's something similar to what the ECB is seeing as they are talking about creating more stimulus to help the economic environment in Europe.

So it was a bit of a surprise and that's why we took -- we reflected that in our guidance this quarter.

Okay.

And then my second question was on Cuba.

So the $0.04 to $0.06, just trying to figure out, I mean, it's not a big number to begin with, but I'm trying to figure out how much of that flows into next year?

In other words, how much of it was the fact that you have -- you get premium pricing on Cuba versus all of the disruption and rebooking?

And then secondarily, are there any secondary consequences of the Cuba travel ban, maybe a ripple effect as the Cuba stops get replaced with other stops?

I'm just trying to figure out if that has an impact on ships that weren't even initially going to Cuba?

Yes, thank you.

Again, complex question.

The reality is Cuba is gone for the foreseeable future, and so we didn't add in the plans for next year.

And therefore, that higher-yielding itinerary is off the table.

And companies like us and others will have to adapt and see what they can generate.

Having said that, it was already the Caribbean.

The ships are already stopping at another of the Caribbean islands.

And so while the overall itinerary yields will potentially be less if we can't come up with creative ways to generate more onboard revenue or whatever, that -- the effect is the effect.

It's a certain percent of capacity.

And next year, who knows what percent it will be because some of those ships may move out of the Caribbean entirely.

So yes, it could put some additional pressure, but the Caribbean has been a very strong market this year.

Yields are up, occupancy is up.

I mean, it has been a very strong market and even with the impact of Cuba.

So keep in mind that a lot of the $0.04 to $0.06 was disruption from the cancellations in the short-term.

Next year, we have a lot less bookings on the books so that -- but keep in mind there's also a full year impact versus this year was a half year impact.

To add to what Arnold had said, one potential dynamic that we can't anticipate is that our competitors did increase their short cruise capacity when they started sailing to Cuba, and without the Cuba demand, it may be hard to fill the short capacity.

So we really can't predict what others will do and if they'll keep the capacity in the short market versus going back to long cruises.

And so this is one of the things we'll be watching very closely.

But having said that, that's a [deep build] to manage the Caribbean right now.

I mean looking into early -- it's early, but looking into 2020, bookings are very strong and it looks good.

Did we answer your question?

I just want to make we addressed it.

Yes.

That was a perfect answer.

I really appreciate it.

The next question is from the line of Felicia Hendrix from Barclays.

So Arnold, bigger-picture question.

So with Costa and AIDA and your other kind of, what I call, country-specific brands, your competitors have been successful with moving to global sourcing over time.

And I understand that the structure of their company and their strategy is different than what you all have with your many, many brands.

And it probably would be a challenge to kind of change the strategy, just given how entrenched you are there.

But I am wondering, is there any sense to, at least, examining a strategy shift in the brands so that you could remove the vulnerability you have?

I mean I know like today it's an issue, and tomorrow you might not have an issue, but you are really like entrenched and kind of subject to what is going on in each specific economy, so I was just wondering if you thought about that.

We've looked at the model all the time because it's just part of managing the business.

But the reality is, our model, over the last 5 years, you look at things like return on invested capital, common financial metrics, it has performed comparably: in some cases, better; in some cases, slightly not.

But in any given year, a model could benefit more or less.

For example, this year, we actually had less dependence on Cuba because of our portfolio than others, so the impact on our total business of Cuba, while it is an impact, is less than what was from other players.

We have more activity in Europe than they do.

So the impact in Europe for us is more dramatic than it is for them.

And so those things move around, but overall, the model has delivered over the last 5 years.

This year, we had modest growth plans in the first place as we're prepping for the capacity build coming over the next several years, and we feel strongly the model was going to deliver and the proof will be in the pudding.

But in any given year, one can look slightly better than the other.

But it's a portfolio, it's a portfolio approach and portfolio of brands and overall, it delivers.

Yes.

And I do want to point out, we do have global brands as well within the portfolio.

And I also do want to point out that some of our competitors do have national and regional brands.

They're just not consolidated into their results because they're treated from an equity perspective.

But as Arnold indicated, we get very strong results over time in the long run from the variety of types of brands that we have in our portfolio.

It does make our yield story more complicated.

But in the end, as you guys know, we're chasing earnings and the return on invested capital, but it absolutely makes the yield story more complicated.

Yes.

I think some of it, too, is that those other country-specific brands, just from what we have all understood, are actually not seeing some of the challenges that you are seeing, like, say, in AIDA, so -- but anyway, it just points to something...

I would like to point out to you guys on AIDA though -- I would like to point out on AIDA, just to make it clear.

While that's a yield challenge this year and we revised some yield stuff, overall, AIDA is growing earnings.

And as I said, it's one of the higher-performing brands that we have.

And so we're very confident about it going forward, and I think the dynamics in the future, along with the actions that the brand team are taking and we're taking overall, is going to just enhance that performance.

Go ahead, I am sorry, you had another comment.

That's helpful, thank you.

That's helpful.

No, yes, so just to clarify, on your comments on Alaska, is there a -- is it status quo in Alaska for you or is it -- because I think people might have interpreted what you said as Alaska is getting worse.

Is that [your] interpretation?

No.

I wouldn't -- Alaska is not getting worse or anything.

Go ahead, David?

Yes.

No.

I mean -- okay, I mean, there are a little puts and takes in the NAA brands.

But the only 2 things I'd really call out in the NAA brands versus our prior guidance was the voyage disruption and the travel restriction to Cuba.

Other than that, it was a bunch of small puts and takes.

Okay.

Perfect.

And then just on your onboard, so I think you said that, that was up 2%.

So that's a nice positive.

Can you just talk about what you're seeing there and to the extent that that's a surprise, and how you might expect that to trend throughout the year even though it's hard to predict?

Yes.

So the -- we did see -- as I indicated in my prepared remarks, we did see increases on both sides of the Atlantic.

And we are -- we do expect to see those type or better yield increases in the balance of the year in onboard and other revenue, which is what we included in the guidance.

We got a lot of things in the works, which should hopefully continue to improve those numbers as we move forward.

The next question is from the line of Tim Conder with Wells Fargo.

Thank you for the color on Alaska.

One thing I did want to follow up there though is, we do understand -- and it's been going on and even happened to a degree last year -- how you're limited on your tour side and then as the capacity grows, you're not able to grow the tour onboard as -- at the same rate you are, the lower ticket price, so that's a little negative mix on the yield.

But all that being said, your 2 competitors did add a significant amount of capacity, yet they didn't -- have not really seen the pressure that you're seeing in Alaska.

So were there some executional issues in Alaska that if you had to do it again, you would maybe do a little bit differently, if we rewound things 12 to 18 months?

I guess, it's one question there.

Yes.

I don't know about the competitors in Alaska.

I won't make any comment on that, but I can tell you about us.

I mean, we [feel very] -- we have 18 ships in Alaska.

We're doing our very, very well on Alaska.

Alaska is a growth segment for us, a growth destination market for us.

And so we don't feel there is a problem in Alaska.

Now when you look at yields and you're just trying to track yield changes, yes, all those things come into play that -- we're growing and we're still making incremental money on the additional guests, but they come in at a lower total yield if they're not getting the hotel rooms and some of the other things that are associated with the land tours, so that can be a mix drag.

But beyond that, overall, we're doing well on Alaska.

Any other comments, David?

Yes.

The only thing I'll add is since we have more Lloyd ships in Alaska than the rest of the industry combined, so it is difficult for us to move the needle dramatically year-over-year just by adding 1 or 2 new high-yielding ships to the mix compared to our competitors.

Right.

Okay, okay.

Fair.

Maybe shift to China, granted it's only 5%, 6% your total capacity, but you called out basically Europe and China in the press release, but then in your preamble, you seemed to focus mostly on Europe.

China, are you seeing any fallout here short term, given all the -- let's just call them "festivities" over the last 6 months geopolitically there?

Or what are you seeing?

I guess, how have things transpired, especially over the last 90 days, from your business in China and then the outlook?

Overall, China is doing better and we've had yield increases and the business is better.

So go ahead, David.

Yes.

I think what you're referring to is because we break the world into 2 segments, our NAA and EA, somebody may have interpreted the booking comments to be both the E and the A and it really was just the E.

And it's actually just the Continental Europe part of the E.

Europe.

Exactly.

Okay.

So the little island to the west, the U.K., as you said before, really, that's been fairly stable in your view over the last 90 days.

Yes.

Correct.

The next question is from the line of Stephen Grambling from Goldman Sachs.

As a follow-up to Jared's question earlier on capacity, you had slowed portfolio-wide capacity growth somewhat in tandem with the ROIC targets being announced over the past few years, and your opening remarks cited newbuild as a key part of the path to double-digit ROIC.

So can you just walk us through your thought process on new ship growth versus deletions on a portfolio-wide basis?

Perhaps comment on how locked in your orders are as we look out over the next couple of years.

Okay.

In terms of newbuilds, you're always going to build new ships because they are more cost efficient, you get economies of scale, they're more fuel efficient, they are just more efficient.

So the question when it comes to capacity is how quickly are you going to divest lower-performing vessels?

And that depends on how the market goes.

So if we see persistence in market challenges and creating a demand to fill the ships, then we would accelerate capacity reduction on lower-yielding ships.

But the new ships are the wrong place to go because those new ships are giving you your double-digit return on invested capital.

So maybe as a follow-up on what happened with Vista, that's a relatively new ship, how should we be thinking about what happened there relative to other new ships and the broader fleet?

First of all, Vista is a very high-performing ship, which is why we have a significant impact from a few weeks of cancellation and some modified itineraries where we had to kind of take care of our guests in the right way, given the fact it was a little bit disruptive to their vacation plans.

So this is a very high-performing ship.

It's a mechanical issue that reduced the speed of the ship.

It wasn't a safety issue, just reducing the speed of the ship.

But reducing the speed forces a change in itineraries and you got to get it repaired.

And so it's not unique to Vista.

The particular equipment is on other ships, not just ours, but other companies.

There have been other issues with other ships with the particular equipment involved.

And obviously, we're addressing that with the manufacturer and being in front of it on other ships that have that same piece of equipment.

We did have an issue on the AIDAprima last year, but it had a dry dock that was very close by and we were able to quickly take it into dry dock and return it to service.

Unfortunately, with the dry dock unavailable at the Grand Bahama Shipyard, we had to find some other alternatives to fix the ship and so it's taking a little longer than it might otherwise have taken, which magnified the impact.

So just to be clear, so the impact that you're citing is specific to Vista, or is there the potential that as you're looking at the part in other ships, there could be another potential impact?

No.

It's specific to Vista.

The next question is from the line of Harry Curtis with Instinet.

Arnold, you mentioned the refurbishment plan.

Can you give us a sense of how your number of dry dock days in 2019 is different from '18?

And then what is the outlook for 2020?

I am just trying to get a sense of, is there any meaningful difference, given the impact on the likely sailings?

So leaving the unplanned, just the dry dock out of it, go ahead.

Yes.

So for '18, we had 500 days.

The number is the same essentially in '19.

And for 2020, it's going to be a little higher, 520 days.

Okay.

So not particularly meaningful then?

Right.

Okay.

And then, Arnold, you mentioned your objective of, over time, achieving double-digit earnings growth.

Given the capacity increases that we're likely to see globally, and particularly in the markets that have had an impact on your pricing in 2019, is it -- does your intuition give you the sense that you're going to be able to achieve that double-digit growth in 2020?

Again, it's early.

We're not giving guidance yet for 2020.

But clearly, we will be working towards that objective.

So in order to achieve that objective, if you have 7% capacity growth, how much pricing power would you need to get to 20 -- to double-digit earnings growth next year, just in kind of broad strokes do you think?

Depending what we do with the cost savings [that, that would drive].

So can you get there with as little as 1% yield improvement?

The answer is yes, you could.

Obviously, we'll be striving for yield above and beyond that.

And so just the matrices we've shown you in the past, we've shown investors in the past, there is the capability to deliver double-digit earnings growth and increase return on invested capital.

Obviously, we're going to be working to drive beyond all that and that can affect the combination of cost versus yield.

And just to give you the math behind that, a 1% yield growth will drive a 5% earnings growth, and a 1% cost reduction will drive a 3% earnings growth on top of the 7% capacity growth.

Capacity.

But as a practical matter, with 7% capacity growth next year, the industry typically dials up marketing costs pretty significantly in anticipation of that capacity growth.

So it would seem to me that your -- the opportunity for a decline in net cruise costs next year is pretty remote, given the amount of capacity that you're going to have to get ahead of with higher marketing spend.

Is that fair?

We'll have to see.

We're not giving guidance yet.

But the reality is with that kind of capacity growth, you definitely have a lot of cost improvement that you have available to you to either put to the bottom line or to reinvest.

We already invest heavily in promotion, given the scale we have and whatnot.

And we will continue to invest.

But the practical reality, again, is, in the end, you're chasing a certain amount of reach and frequency and messaging, et cetera.

You don't always have to ramp up proportionally to the increase in demand you need.

How you message, sources of messaging the people, how you reach them, whether you're using PR versus paid media versus direct mail versus digital, on and on and on.

And then leveraging our scale, affecting -- more effective media buys because of our scale, et cetera.

So there's a lot of dynamics there and we're focused on being cost effective.

We're not afraid to invest.

But at the same time, we expect to harvest some of the cost improvements from the capacity increase.

And with that level of capacity increase, you have more opportunity.

The next question is from the line of Assia Georgieva with Infinity Research.

In my 22 years of following this industry, this has got to be one of the most informative calls, so thank you so much for spending the time.

Couple of questions.

In Alaska -- in terms of Alaska, competitive pressure probably played a role.

Is it fair to say that we have some of that, capacity additions?

I think the fact that there are other companies having more ships going to Alaska and getting more new to cruise to try to go to Alaska will absolutely play a role.

I don't think there's been anything that's -- just from the tone of questions, it makes it sound like Alaska is weak or something, and that's just not the case.

Again, you've got yield dynamics.

But in the end, we're chasing earnings and return on invested capital.

And so while Alaska, we would love to have higher yields in Alaska, even higher and we're going to work to do that, Alaska is a very strong market.

And as a follow-up and kind of switching gears to Europe, Southern Europe seems to be the issue as opposed to Brexit, as opposed to really Germany.

Is there any specific macroeconomic problem that you're seeing?

I mean we had Spain going through a major recession years ago, Italy, Greece, et cetera.

So we shouldn't really be in such poor shape.

And isn't there the opportunity, given that it's a kind of closer-in booking market from -- in terms of passenger sourcing, that there could be upside to Europe for Q3 and early part of Q4?

We're certainly going to work to try to beat what we have in guidance in Southern Europe.

But we've given you our best projection at this point, is what's included in our guidance.

It has been a challenging environment for some time and at periods of time, it gets even more challenging.

And that's what we're facing now.

All right.

I hope it works out better than it has so far.

Me too.

Thank you.

We're going to work hard to work out better, thank you.

The next question is from the line of Brandt Montour from JPMorgan.

Just quickly from me, so Dominican Republic, we haven't really talked about that.

Just curious, what is the [annual] exposure to that market for you guys in terms of capacity?

Have you seen any type of cautiousness from the consumers due to the recent headlines there?

So we haven't noticed any impact on any of our bookings going to the DR as a result of what's happened in a couple of hotels there, which have all been isolated incidents, from what I've read.

And so overall, in fact, my son was in the DR last week, spent a week there and had a wonderful vacation.

That's great to hear.

And then quick, I know we talked about Alaska a ton.

For next year, for the industry and for you guys, capacity growth, what's kind of the early read there?

Is there any relief that you think you will get there?

Sorry, your question was a little...

The question is capacity in Alaska next year, is it going to be up, down or flat?

Is there any relief?

It was up 16% this year, and for us, it's up 8%.

We don't have the industry yet, but we are more than half of the industry.

The next question is from the line of Sharon Zackfia with William Blair.

I wanted to follow-up on Robin's question on onboard yields.

I mean clearly, it's a brighter spot, but it is kind of growing at a lower pace than it has over the last few years.

I guess I'm wondering if that's -- that you've pulled so many arrows out of the quiver and so it's just settling in at a lower pace or if you're seeing some sort of impact from the discounting in Europe, bringing in a passenger that's spending less, but any context you could give us around that would be helpful.

Yes.

So if you went back to the guidance we gave in December, we actually included in that guidance yields in the second quarter that were up approximately 2%, similar to the results.

We had some itinerary changes and seasonality that affected the second quarter.

So we anticipated the second quarter being, call it, the lowest increase of the year.

And as I said before, we do expect slightly higher increases in the third and fourth quarter.

And just to follow-up on that, so are you seeing any impact from the discounting in Europe flowing through to onboard yields there?

So our onboard revenue in Europe, as I said, in both cases, we're seeing increases on both sides of the Atlantic, and we are not seeing any significant impact on onboard revenue in Continental Europe.

The next question is from the line of Robin Farley from UBS.

Just circling back, I have a follow-up question.

Welcome back, Robin.

Yes, thanks.

See, but I got in line again.

Just on Cuba, I know you said no plans for Cuba next year.

I guess just thinking about the fact that maybe some of the challenges in Cuba, just given the size of the port, there -- some of the ships there are smaller or older ships and may not be as easily repositioned.

And so I guess I just wanted to get your view on -- do you kind of wait for a year, put them in something to get through the next year and kind of wait to see if there is a change in administration a year out that would maybe have a different view of relations with Cuba?

Is that the kind of...

No.

I think, look, we welcome whenever Cuba is open for cruise travel again.

That obvious, that's first thing.

But the second thing is, our ships that we have are our ships that we have.

We didn't change or concentrate a certain type of hardware to Cuba versus other.

So it's the core of our Carnival fleet, core of our Holland America fleet, the core of our Seabourn fleet, and so it's our normal ships.

Having said that, clearly, as I said, especially in the case of Carnival, the ships are ready in the Caribbean and they would stop at other ports in the Caribbean along with Cuba.

Cuba was a draw.

You were getting definitely guests who wanted to go to Cuba and that was a draw and it lifted yields and so on.

But we don't see it as an overwhelming capacity shift or anything.

But clearly, it introduces a factor that causes us to have to work harder to fill the ships at good pricing.

Only other comment I will make, Robin, is that the Caribbean has been very, very strong overall.

So you don't want that to happen, but it happened in a strong destination market.

We'll take a couple of more questions.

We're little over time.

But I know we started 1 minute or 2 late, so couple of more questions, Keith.

Okay.

The next one is a follow-up from Jared Shojaian from Wolfe Research.

Just one housekeeping, real quick, too.

Just on capacity, D&A and CapEx.

I didn't see any guidance in the release, I think you normally give it in your 10-Qs.

But can you tell us how you're thinking about capacity growth and CapEx over the next few years, and then how to think about D&A for this year?

Capacity growth is -- for this year was 4.5%; for next year, it's 7.3%; for '21, it is 6.1%; and for '22, it's 5.3%.

Those are [gross] numbers.

They can't go up, but they will come down.

CapEx is $6.7 billion in '19, $5.7 billion in '20 and $5.9 billion in '21 and $5.4 billion in '22.

Interest is $195 million roughly for the year, and depreciation is $2.22 billion for the year.

Great, that's very helpful.

And then just on your booked position for 2020, if you removed new hardware you have coming on and then old hardware that's leaving the fleet, I think you're selling a couple of Costa ships, if you just neutralize for hardware, are you in the same booked position for 2020 that you called out in your release or is it not as strong?

So it's very difficult.

I mean, I haven't actually taken -- done that analysis.

But I will tell you that every time we do an overall mix analysis for a new ship, given our size, the mix is very tiny.

And so I am assuming it's a very tiny impact on the bookings as well.

Great.

And then just one last one.

I know you just talked about the Caribbean and the strength that you're seeing, but I apologize if I missed this, but have you seen any promotional activity from any of your competitors?

I mean, can you just talk about that a little bit?

Well, we see promotional activity all the time from other cruise lines, and I guess some of ours will occasionally do promotion as well.

Have we seen a ramp-up in promotional activity related to the Cuba ships?

And I guess the answer to that would be, yes, we have.

But we've been holding price and doing well with that.

One more question, Keith.

The next one is a follow-up from Assia Georgieva from Infinity Research.

I managed to sneak in again.

Thank you, Keith, and thank you, the entire team at Carnival.

So in terms of what we're looking at in Cuba, if you had a choice, let's say, tomorrow, hypothetical, the administration says, "Well, you can go back in." Would you be willing to jump at the opportunity?

Or would you take a wait-and-see stance?

No.

Absolutely.

Whenever we can go back to Cuba, we absolutely will go back to Cuba.

It's a great experience for guests.

Obviously, there's lots of Cuban-Americans who want to connect with family, but more broadly for Americans.

And then for the Cuban locals in terms of the impact for them, it is a big driver for the micro economy there, for the individual citizens of Cuba.

So we would absolutely go back.

We had great experiences for our guests and we welcome that opportunity.

Yes.

I would imagine based on the rough calculations that for the second half of this year, it's about $250 million direct impact to the 3 major cruise companies and probably over 1.5 years, it's probably $1 billion worth of lost economic impact, correct, roughly?

It's a significant lost economic impact for Cuba, there's no question about it.

All right, thank you very much everyone.

I know we kept you a little long.

Just know that, again, while we're disappointed having to revise guidance, very disappointed with the situation with Vista, our teams are working hard to mitigate all that.

We are still working hard to beat last year's record earnings.

We're still obviously generating great cash and so on.

But more importantly, we feel we have a strong foundation, and with the actions we're taking and the actions that we are considering to take, and we'll eventually take some subset of those, we're confident we'll be well positioned for our objective of double-digit earnings growth and double-digit return -- growing our double-digit return on invested capital over time.

Thank you very much.

That does conclude the conference call for today.

We thank you for your participation, and you can now disconnect your lines.