Carnival Corporation & plc (CUK) Q4 2018 Earnings Report, Transcript and Summary

Good morning, everyone and welcome to our Fourth Quarter 2018 Earnings Conference Call. I'm Arnold Donald, President and CEO of Carnival Corporation & Plc. Thank you all for joining us this morning and a sincere happy holidays to everybody. Today, I'm 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. Collectively, our people, our fellow team members have achieved a very important milestone, and I'd like to take my prepared remarks on this call as an opportunity to share it with all of you. Five years ago, we established a target to deliver by the end of 2018 double-digit return on invested capital. I am very pleased to share that we have achieved double-digit return on invested capital while finishing the year with another record quarter of adjusted earnings, leading to the highest full-year earnings in our company's history, our fifth consecutive year of adjusted earnings growth, and third consecutive record year. I sincerely thank our 120,000 team members who went above and beyond to deliver for our shareholders a more than doubling a return on invested capital and near tripling of adjusted earnings per share in just five years through executing on our strategy to create demand in excess of measured capacity growth, while leveraging our industry-leading scale. It was their efforts that drove a $12 billion increase in market capitalization, and the return of $11 billion to shareholders through strong dividend growth and opportunistic share repurchases, all of which was accomplished while also achieving A Minus and A3 credit ratings from S&P and Moody's respectively. It was also their effort that enabled us to execute despite of plethora of headwinds like rising geopolitical tensions all over the world, including the attacks in France and Germany impacting people's willingness to travel, actual geopolitical conflicts, affecting our ability to retain some of our high-yielding destinations like Turkey and Egypt for a period of time. There were disease scares, and there were natural disasters like hurricane Maria and Typhoon Talim, disruptions in China like with the trade and stoppage of travel to Korea, economic malaise in some key countries in Europe including uncertainty around Brexit, and temporary over-concentration of industry supply at times in regions like the Caribbean. These headwinds caused consternation and in some cases even doubt amongst the investment community that we would in fact deliver. Again, I'd like to thank our team globally, it was their passion and their commitment that overcame all of that and still performed, and when combined with the strong support of our value travel agent partners, enabled our record-breaking results. While the journey into sustained double-digit return on invested capital is built on the foundation of exceeding guest expectations every single day, we’ve had contributions from many areas that helped pave the way to double-digit return on invested capital and have left those better positioned to sustain and grow return on invested capital over time. While the list of areas that will continue to pay dividends going forward is very long, I'd like to highlight just a few. Central to our core strategy is creating demand in excess of measured capacity growth by increasing consideration for cruise globally and continuing to enhance our already high guest experience. Five years ago, if you had not yet cruised, there was little press coverage that would make you want to take your first cruise. Our proactive public relations effort has clearly had a positive impact. While we believe those efforts have been [indiscernible] at the entire cruise industry, today our brands consistently capture over 75% of all positive media in our industry, and the absolute number of positive media mentions are multiples of what they were just five years ago. Our brands marketing efforts have shared the spotlight with many well-known personalities, who brought with them a greater audience of potential new to cruise to our respective brands, like Oprah Winfrey for Holland America, Shack [ph] for Carnival Cruise Line, Shakira for Costa, and Her Majesty The Queen for P&O Cruises just to name a few. Our brands were featured on television programs all around the world including the new celebrity apprentice, The Ellen DeGeneres Show, ITV reality show, The Cruise and its six seasons in the U.K., and Ant and Dec also in the U.K. But we didn't stop there, we created our own original content TV program which have already reached more than 400 million views and counting. Airing on major U.S. networks, including [indiscernible] units, proprietary shows The Voyager with Josh Garcia, Ocean Treks with Jeff Corwin, Vacation Creation, and for the Spanish speaking market, La Gran Sorpresa are among the most popular travel series on TV using our authentic story-telling to share the powerful way travel by sea connects people, places, and cultures around the world. All of these programs and more can also be found on our own television network OceanView or our mobile app OceanView Mobile. Through our history-making voice to Cuba, we captured over 55 billion very positive media impressions and became the first U.S. cruise operator over 40 years to bring U.S. cruise guests directly from the U.S. to Cuba. At the same time, opening up an exciting new destination option for our guests through now three of our brands Carnival Cruise Line, Holland America Line, and Seabourn with more planned in the future. We made global news through the historic sign of our joint venture agreement with CSSC, China State Shipbuilding Corporation forming a local cruise operating company. More importantly, we look forward to significant long-term relationship to help build the cruise industry in China, which over time has the potential to become the largest source market for cruise in the world, and we made history with the debut of Ocean Medallion, our patented guest experience innovation which enabled us to become the first travel company ever to be as the keynote at CES, the largest technology trade show in the world. So far, Ocean Medallion has received 36 billion favorable media impressions for our company and has won recognition globally for our innovation efforts including being recognized by Fast Company as one of the Top 10 Most Innovative Companies in the travel category. While so far our ocean efforts have increased awareness for cruise globally, particularly in new forums like technology forums, the opportunity going forward has the potential to be even greater. We believe the Medallion Class experience can elevate the guest experience by enabling the delivery of more personalized guest services, including features like expedited boarding, keyless state room entry, on-demand food and beverage delivery just about anywhere, anytime, crystal clear and easy to follow way finding, and the absolute best Wi-Fi. In the first quarter of full ship operational onboard Caribbean Princess, our Medallion Class experience is clearly resonating with guests and with crew. And we now have Medallion Class activated for all guests on our second ship, Regal Princess, but ocean is just one of many technology enabled milestones. Across our other brands, we're in the process of rolling out new technology, both on-board and shore side including enhanced targeted marketing, improved CRM capabilities, new Mobile App, and redesigned websites which collectively contributes to enhance guest experience, add an empowerment to our travel agent partners, increase revenues, and reduce cost of sales. Our State-Of-The-Art revenue management to Yoda has been deployed across half the company to facilitate further yield growth, particularly in the second half of 2019 and beyond. Our cruise brands continue to make great strides and further the guest experience whether through new destinations like Cuba and the cold new terminals like Barcelona or Dubai or multibillion-dollar fleet wide reinvestment efforts like Fun Ship 2.0 for Carnival our signature of excellence for whole of America. Of course our ongoing fleet replenishment efforts are essential to our strategy to create demand in excess of measurers capacity growth. Over the last five years we welcome 12 State-Of-The-Art larger more efficient vessels at the same time exiting nine less efficient ships from our fleet building a more return resilient fleet. And we leverage our scale to reduce cost, achieving cumulative savings of over $350 million in just five years. And we believe we have more runway ahead to continue the momentum. We also had many notable achievements in our sustainability efforts, including the opening of 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 and we opened three, State-Of-The-Art pleat operations centers around the globe to provide real time support Ship to Shore, 24 hours a day. On the environmental front, we exceeded our target unit fuel consumption reduction of 25% three years ahead of schedule and we made history just this week with get sailing on our first ever cruise ship able to be solely powered by even more environmentally friendly liquefied natural gas. We are fully committed to continuous improvement in health, environment, safety and security. The last five years have been transformative achieving breakthrough results against considerable odds. It's a great foundation to build on. In fact today our business model is more sound than ever having built into the fleet even greater returns on investment resilience on top of an even stronger balance sheet. As our journey continues we will stay on the same path. To create demand in excess of measured capacity growth while leveraging our industry leading scale to deliver a sustained and growing double digit return on invested capital. That said, the relative contribution from the components of our earnings model may change a bit going forward. In the past five years we grew capacity on average 2.5%. We achieved average annual growth greater than 3%, while attaining cost increases to less than 2% compounded annually. Going forward, our fleet replenishment efforts are purposefully designed to achieve greater… [Technical Difficulty]

Okay. Because ultimately what I'm just -- I'm trying to do is kind of understand, your two peers have provided -- they haven't given guidance yet, but they've provided very bullish outlooks for next year. And I'm just trying to call through what the differences might be between what they're seeing and what you're seeing, and it seems like again it's coming from some of this uncertainty in your EA brands which are specific Continental brands which are increasing capacity and perhaps more specific to what's going on at your company than what's going on in the industry or I mean in the kind of in the marketplace is that fair?

That's a fair representation. I’d just say when you repeated that, I would have the uncertain economic environment in Continental Europe as well.

Okay. And are you seeing -- have you -- yes, and we all know that and we've heard some things retail and stuff through the quarter, but I'm just wondering if you're seeing a significant change there from when you last reported?

No, I wouldn't say a significant change or anything. Again, I think the other difference, Felicia, is we're really focused on earnings and return on invested capital. And so, as we have the higher capacity increases, so even the European brands are going to grow in earnings, okay, and that's what we're driving towards. And so with greater capacity, you're less reliant obviously on yield increases. But obviously, we're going to strive to get the yield increases. But at this point in time, for our guidance, given we're in front of wave and uncertainties and some of the challenges that were referenced in terms of economies in Europe, we think that's the prudent guidance at this point. But that guidance takes us to where we want to be in terms of earnings and increase in return on invested capital.

Okay. Thank you. And Beth just whenever you have that interest number, that's fine.

Its $55 million.

55, okay. Thank you.

Thank you very much. We'll go to our next question on the line from David Beckel with Bernstein Research. Please go right ahead with your question.

Hey, thanks a lot for a question. Just sort of following on with guidance and potential changes and expectation. Last quarter, you indicated that the expected yields in the first half to be -- I'm paraphrasing, but a little bit less robust than what Q4 2018 guidance was, which was interpreted by most to be , sort of, a little bit less than two, and so now you're obviously indicating probably a little bit lower than that with maybe a step up in Q2. So, I'm just wondering what exactly changed between then and now that informs a more conservative view?

Nothing really changed. I mean, we don't have a more conservative view to be -- I mean, we feel confident about the year. Again we're focused on earnings and return on invested capital. We're giving the best guidance we have at this point. But I would say it was changes that were well ahead on occupancy, we have -- even with the capacity increases we have, we have less to fill next year than we had at this point in time last year. And so, we're actually seeing strength. And so we're not – we don't – nothing's changed, we aren’t more conservative than we were before, whatever.

We do have more visibility because we've had three months of bookings, but we had indicated that our guidance for the first half that would be less than what the guidance we gave for the fourth quarter. But we never quantified the exact number because we had less visibility. And secondly, we give guidance in December, which we are now doing. So nothing – as Arnold said nothing's changed.

Understood.

Except we are in a better booking position than we even thought at that point in time.

So following on that point, specifically your better book position, is it fair to assume that Yoda has, sort of, informed or suggested that you increase volumes in bookings or business on the books at the expense of price at this point of the year, is that an active trade-off that you made heading into the year?

I think, Yoda is a tool [ph] and it allows us more frequent inquiry and more frequent adjustments as a powerful tool. It will show up more in the second half of 2019 in terms of impacting real results. But fundamentally, it builds up from the bottom. So the key in yield management versus by ship, by itinerary, et cetera and you're looking at – it's not just nine brands as you know thousands of itineraries of specifics, and it builds up to what it is. So for certain, on some of those itineraries, I'm sure along with the tool and experience with revenue management, scientists that with capacity increase they want to be at a certain point in the booking curve, et cetera, and may have driven decisions. But there are a lot of other variables. How much you bundle, how much of the bundling is allocated to on board versus ticket, affinity groups, charters, there's a lot of moving dynamics there from a bookings standpoint, but overall for the guidance in terms of where we'll end up, that's what we have given our best shot at, at this point in time.

Got it. And just the last quick question if I could, I want to – there’s a lot of concern about the impact of Brexit and you have a U.K. dedicated line. Just to confirm, have you seen any weakening in demand or purchase intent from that specific market?

We don't get brand by brand, but the reality is at this point time, no.

Okay. Thank you.

Thank you.

And we'll get to our next question on the line from the line of Harry Curtis with Nomura Instinet. Please go right ahead.

Hey, good morning. First question is what percentage of your business is European sourced, and how does that look through the year?

So, it's probably in total about 30% of our guests come from Europe, not sure exactly what that is by quarter but that that's in total for the year.

Okay.

That's pretty confirmed that the European brands versus some European year around.

Okay. And looking at the performance of the stock, it seems to me that after you back out the $0.14 fuel benefit fuel FX net benefit in your guidance your earnings growth is really only up 5% for next year despite the 4.6% lift in new capacity. And I'm a little bit – I'm somewhat disappointed that we're not getting more of – or a higher lift both on yield and earnings contribution from bigger growth in your base?

You again, as the timing of capacity when it comes on et cetera all those things factor in. But what we can assure you is that, we have the foundation for double-digit earnings growth over time, over the near-term ahead of the medium term. And I don't know exactly the 5% might be a little higher than that. But the bottom line is that's our best guidance at this time. And of course, we're going to be working to beat that.

And one of the things that we did Harry is over time we have made a number of investments in capital and we have mentioned this on previous calls. So that the depreciation went-up a bit more than capacity, which impacted the numbers you're referring to and these are investments, which we believe over time will pay dividends. So I think we're in very good shape as Arnold indicated in his prepared comments looking forward in the future.

And just a real quick question on your cash flow. How much capacity do you really have to buyback stock next year given the bulge that you see in CapEx because with the dividend already at 1.4 billion you're pretty much using most of the operating cash flow after CapEx? So to what degree do you feel like you want to turn to your balance sheet to buy back stock?

Well, we ended the year with a debt to EBITDA ratio of 1.96. So we do have some room on the balance sheet side. And so if you take a look at our guidance for 2019, we would end the year assuming no buybacks which as you know is the way we put together the guidance, it's slightly above two times. We have almost 700 million remaining on the authorization. So clearly, we have the flexibility to complete the authorization. And beyond that, the buyback is a Board decision and we'll be discussing that with the Board. But one thing I did want to mention, because you brought up capital expenditures and cash flows is the capital expenditure forecast going forward. And let me just give you the years – the numbers by year and then explain the changes. So for 2019, our CapEx number is 6.8 billion, for 2020 it's 5.7, for 2021 it's 5.9 and for 2022 it's 5.3. The 2019 numbers probably higher than you've seen before, but keep in mind as we mentioned in the press release we had the delayed delivery of the AIDAnova and it was just simply delayed from November to December. So the CapEx that we anticipated in 2018 just fell into the first month of the new fiscal year. The other numbers have also gone up. We got some feedback because typically our cap -- the CapEx that we were giving out was new ships that were contracted for, as well as non newbuild CapEx the capital improvements. And so every time we ordered a new ship, our annual CapEx numbers went up. So what we've done is, we've tried to anticipate the new ships we plan to order and we've included that in the total CapEx projections. So hopefully we get that you'll see the numbers will be much closer in the future as we go forward.

Thanks David and thanks everyone.

Thank you.

Thank you. We'll get to our next question on the line from the line of Steve Wieczynski with Stifel. Please go ahead.

Hey guys good morning and happy holidays to all of you. So I got to ask another European question if I didn’t get sick of the stuff. But I think that's where we're getting most of our questions here this morning. And you know I think there's panic out there at this point because you have seen some whether it's tour groups or retail provider start to call up some weakness in certain parts of Europe. So yeah, I want to ask this little bit differently, but you know I guess in some of your key European brands whether it's P&O, Costa, AIDA whatever you want to look at. Have you seen any material changes there in terms of onboard trends that you might want to call out in the last couple of weeks, the last month or whatever time frame you want to look at?

No, not at all. I would say that, obviously there are some challenges in Europe broadly, Continental Europe from turbulent economies or what have you. But the bottom line is, with everything we just told you our European -- EA brands are going to grow in earnings and they're absorbing the capacity. They're going to be better than they've ever been and so for us, it's still very strong. On a relative basis, average to the fleet all those kinds of things, all that impacts, our average numbers that we share with you guys, but in the end we are focused on growing earning and growing return on invested capital. Our makeup is different than some of the others in the industry. But Europe is going to grow earnings. Europe is doing well. They're absorbing their capacity and they're absorbing it and we'll see, they're working to grow yields in the end and we'll see where we end up.

Okay, great. Thanks. And second question would be just in terms of your yield guidance in general and maybe what's embedded in there for onboard, and obviously you're coming off a couple of years of very strong on-board trends. And I guess I'm wondering if you're taking a little bit more conservative view around that metrics, given not only that the tougher comparisons, but you know maybe also some global economic uncertainty as well. Is that is that a fair way to kind of characterize that?

Yes. What we haven't generally historically seen on-board is impacted by economic environments the way they have in tickets. The way we put this together is the onboard and other increase is slightly above the 1% overall and the net passenger or the net ticket is slightly below, getting you to that 1% for the whole year. So, and typically I think I've said this in the past. We do typically use sort of 2%-ish on-board another guidance number as we go forward and we work very hard to do better than that.

Yes, there's a blurring between ticket and on-board and brands try different combinations as they move along their booking curve and whatnot. So, -- but clearly pre-wave, we have a little bit better visibility on yield -- on ticket yield. Obviously, on on-board, we just have to factor in whatever we can and come up with a forecast, but we work hard to beat it and that's what our team this is about. But we -- the guidance we've given you, we see the foundation for what we promised which is overtime double-digit earnings growth and continued growth in return on invested capital.

Okay, great. Thanks. And David one quick housekeeping question. I guess can you help us think about maybe when you put together your fuel guidance and I guess what I'm getting at there is I mean, if you can obviously look at fuel prices over the last week or two weeks, it's obviously, collapsed a little bit more, so just trying to figure out maybe at what point in time you were -- you essentially put that together?

Yes, we -- it was a couple of days ago. Brent at that moment was $59. I know fuel has moved considerably. Keep in mind, Brent is just one factor, there's also the crack spread as well in determining our fuel price. So, look at both of those before you do your calculations.

Understood. Thanks. Happy holidays guys.

Happy holidays.

Thank you. We'll get to our next question on the line from the line of Robin Farley with UBS. Go right ahead.

Great. Thank you. I'm struggling a little bit--

Hi Robin. You're deep in the call this time. Normally someone would have heard you by now.

I know I'm not sure what happened. I think it was a little bit -- how much you exceeded closing guidance by 170 basis points at the midpoint, is there something about the close in activity that you think will recur? Something that has obviously been driving your results to come in, like 150 plus basis points for the last several quarters that is not recurring or that's sort of -- that you think that trend is going to change?

I'll make a comment and I'll let David comment as well. Frankly as you know Robin by now working with us, there are so many unknown things that happen every year. And so we find it prudent to anticipate, so you can't anticipate unknown things, but anticipate that things are going to happen. And that's always been in our guidance at this point in the year. If more things happen, that guidance seems super prudent. If fewer things happened, that guidance seems conservative. And we never know what the future's going to hold and whether it's going to be more or less or the same. And that will be my general statement, I'll let David make a comment.

Yes, if you break apart the pieces, the on-board and other probably accounted for 60%-ish or 65% of the improvement and we have very little visibility on the on-board and other going into the quarter. So, that's just a factor of our business and fortunately we've worked hard and we did better on the on-board and other which drove it.

Great. That's helpful. Thank you. And maybe just as a follow-up, you were calling out some other continental sourcing brands, the softer the uncertainty there. Did they exceed your expectations on a constant basis in Q4? Or did they come in as high as you anticipated? Or did they also come in a little better than your expectation?

So I did say in my prepared remarks that the close in bookings was stronger on both sides at Atlantic.

And it includes – so that includes the Continental, not just in U.K.?

Yeah, yeah…

Okay, yeah.

…both, North America as well as Europe.

Okay. But I also, I meant the Continental brand and not just the U.K…

Yeah.

Okay. No. Great, that's helpful. And then this is just a very minor, last question. The force under the EPS impact from the AIDAnova delay, do the shipyard usually pay a penalty where in other words it would not be an earnings impact for you. I was just surprised to see an earnings impact when usually the yard would cover that?

Yeah, they do. There are liquidated damages, but the accounting rules say that we have to reduce the net book value of the ship by the liquidated damage payment. So unfortunately it doesn't go through the P&L and – but we made whole by those losses.

Okay. Great, thank you very much. Thanks.

Thank you, Robin. Happy holiday.

Thank you. We'll get to our next question on the line from Jared Shojaian from Wolfe Research. Please go right ahead with your question.

Hey good morning, everyone. Thanks for taking my question.

Good morning.

You made some comments about how the higher capacity growth leaves you less reliant on yield growth and I appreciate that there are yield mix differences between each of your brands, but I would still think that every ship you're taking delivery of should still be yield accretive to your system yields. Just given that your system yields are already more weighted to the contemporary segment. So, I guess the question is shouldn't this incremental step-up and capacity growth in 2019 and beyond give you a tailwind on the yield side relative to the prior years, or do you disagree with that thought?

Within a brand in general, true. Not necessarily purely on you, but definitely on earnings for that brand or you know, but across the brands it depends where the capacity is, you have to mix. So we have some brands that are below our fleet average and in yield and some that are above, greater capacity increases and those that are below, it’s still accretive, it grows our earnings. But it doesn't necessarily allow you to grow as much in yield because this is holding back as you got more capacity in a below average fleet. You can understand the math. So that's about the campaign. There's a bunch of other variables too, because again what is included in ticket versus in booking time doesn’t include in ticket versus on board. And then if we have shifted to more on board, we have to actually realize that an on board. And again we're giving you guidance right now, we're not reporting actual 2019 we're giving you guidance. And so all those factors come into play, but it's not automatic that everything would just plus up because there’s not all eat, certain brands have capacity one year, other brands the next year increase capacity et cetera.

You have given our side…

I don’t want to leave you with this and I understand why you guys focus so much on yield, but there’s one lever to grow our earnings. For us, again, we're totally focused on growing the earnings and the returns on invested capital. And we're managing everything to affect that and there's timing issues of when capacity comes in, when capital is recorded on and on and on, although – all that mix of stuff confluence of things can create at any point in time a particular number. But what happens over time is what we're focused on and clearly we're going to grow earnings on top of a record year that we just experience with our growth return on invested capital, we've gotten the double-digit return on invested capital. We're going to do that in the year and then we're going to be double-digit on average over the near-term in earnings and continue to grow return on invested capital. We had a very strong business with very strong demand.

Okay. Thank you. And then just switching gears here. Last quarter, you announced the four shipped sales for 2019. Can you just talk about the strength of the transaction market and whether you think the new IMO 2020 rules maybe driving more of a robust secondary market right now as – really the private companies look to become more compliant? And then, I guess on that, how are you thinking about additional ships sales beyond the four that you've already announced? And is it possible that you could do more in 2019 in the near-term here?

The practical reality for us is, if ship is relevant to our guests and is delivering double-digit return on invested capital and will as we have to invest more in that ship over time. We'll continue with the ship in the fleet if it's relevant to the guests and his earning is key, if it's not then the ship will be gone. And so in terms of there being a robust secondary market, there's no question, the secondary market has opportunity not only because the IKEA [ph] regulations but simply because the aging of ships that are in the secondary market. Those ships are now – many of them were getting to 40, 45 years old. And they're just going to need to rotate out. So there should be a market for a number of the ships. But at the same time, to drive earnings and return on invested capital, if we had a need to scrap for ships in nutshell we would do that. We don't see that at this point in time. But if it came to that, we have no problems doing that.

So we've also over time we sold 28 ships since 2006. So it's been roughly two ships a year and it's hard to predict. It depends on the demand in the market. But we've said consistently, we'd likely sell one to two ships a year over time as the ships get older which isn't a big surprise.

But we're not going to hold onto an underperforming asset, because we're not able to sell it. I mean, if – we would scrap it if we had to. I don't anticipate that, but if we had to do it, we do it.

All right. Thank you very much.

Thank you.

We'll get to our next question on the line from the line of Greg Badishkanian from Citigroup. Please go ahead.

Hey, guys. Good morning. It's actually Fred Wightman on for Greg. If we look at the full year guide for net cruise costs just compared to the first quarter outlook. Can you remind us what's driving some more of that favorable outlook beyond Q1?

So overall, our guidance as we put it together in that – as you mentioned in the prepared remarks, we do have the capacity increase we get economies of scale from that. We have our global sourcing efforts, where we're leveraging our scale. So those are two major items that I had indicated are more than offset any inflation for the full year. When you look at the quarters, I know, the first quarter was up like 2% in the full year. We're talking about being up, just a 0.5%. So what that implies is that the rest of the year is relatively flat. I always say judge us on overall the cost for the year because there are timings between the quarter whether it be things like dry dock or advertising that does vary year-to-year, quarter-to-quarter.

That makes a lot of sense. And then I think you would mention that China ticket prices were up in 4Q, wondering if you could just talk a bit about the broader yield environment in the market today? Are things stabilizing? How are you thinking about industry capacity in that market and competition overall?

You know things are definitely better than they were say, a year plus ago in China. Some of that is you know there's been -- capacity has moved out, but a lot of it is frankly the distribution system just becoming more familiar with cruise. So we see China again as small, a very small part of the overall mix today that we see the real opportunity of course being a joint venture with the CSSC and building a domestic cruise running there. But there's ones and two ships in and out. So it is a market that is more important for the development, for the future than it is right now, but just in terms of yield environment, the yield environment is certainly better.

Great. Thank you.

Thank you.

Thank you very much. We'll get your next question on the line from Jaime Katz with Morningstar. Go ahead.

Hi. Good morning. I just have one quick question. I think you guys mentioned the roll out of the Ocean Medallion on the Caribbean Princess. I'm curious if you guys have any learned lessons from that yet, whether that has stimulated incremental onboard spend? And if so, is there a timeline to roll it out to the rest of the brand? Thanks.

Thank you. And happy holidays to you. Yeah. We're very excited about the Ocean, but it's the early stages. And so to answer your question directly, yes we've seen blips here and there, but we want to see consistent delivery and performance all the time before we make any hard assessment on revenue and take a yield. And keep in mind, if new technology, so maybe you have an Apple phone. I don't know if you ever use your air drop feature on it if you happen to have one. You know a lot of people don't know they airdrop feature even exist. If they do, they don't know how to use it and so on. But as you know it's a great feature, if you want to just share photos at an event or something. And once people use it they love it. So similarly for us with Ocean, there are so many features our crew has to get used to it. And then of course we have to activate with guest and guest have to become familiar with it. We have every indication from guest satisfaction scores from crew satisfaction scores. That is definitely elevating the guest experience and a crew experience. And now we see potential. But it is new. And so we have to you know let it play out. We have the full ship now active on Regal Princess. We have six, seven other Princess ships you know ready to go when the time comes. And we're learning and educating and practicing and experiencing, meanwhile the guests having a great experience with it. But we see potential, but it's a little too early to count the chickens.

Thanks.

Thank you very much. We'll get to our next question on the line from Tim Conder with Wells Fargo Securities. Go ahead.

Thank you. I wanted to circle back on the topic of the day, Europe continental sourcing. Any comments that you can give us by color, Italy, Germany and U.K. obviously are three main source markets; and U.K. is not on the continent. So, are Italy and Germany, lot of budgetary uncertainty over the last couple of months in Italy, how is that impacted? And is that -- are you seeing any similar type of impact with changes in government in Germany and maybe one being impacted more than the other?

Okay, I'll start and I'll let David fill-in with the details. First of all I just want to emphasize again that Europe is strong and we're talking double-digit capacity increase in a number of brands there. They're ahead on bookings with less to book even with that capacity increase than they've had even last year. So, first comment is strong, that's number one. Number two is that, yes, in general, the average ticket yield there is less than the average for our fleet and so even with a strong performance, it can pull down when we give you an average number, especially our booking time across nine brands, it can pull down the yield picture. But it is strong and so I'll let David color in on, but Germany strong and U.K. is strong and go ahead David.

So, overall, we're well ahead of the prior year and on an increased level of capacity. So, as Arnold said, we are -- things are very strong and we see an improving trend. I mean, overall, we said on a cumulative position, our pricing is in line. And when you look forward, you see that the second half of the book position for the rest of the year is obviously expected to be up considerably from where we are today to get to the 1% yield guidance. So, we're seeing positive trends, we're seeing very strong volume and we are seeing a lot of economic uncertainty within those countries that you mentioned, which is impacting the overall booking situation, which we've said before that economic uncertainty does affect the consumer which affects our business.

Okay. So, it sounds like though that maybe Italy is the lead of the problem then followed by Germany and U.K. is the [Indiscernible]?

Okay, let me -- first of all, I can't emphasize enough. There is no problem. We're talking double-digit capacity increase; our bookings are ahead of where they were last year. We have less to book even with double-digit capacity increases in number of those brands than we had last year. So, there is absolutely no problem. Those brands are going to grow their earnings this year over last year. So, we got growth in earnings. So, there really isn't a problem. You're just talking weighting of averages and numbers and -- but there's not a problem in the market, there's not soft demand, there's not -- none of that's happening. Okay?

Okay. So, mix, mix as you said, some brands yield lower, but still have higher profitability there, was that the key?

Well, even though they may be below the fleet average, they earned money and even if they improve year-to-year, they may not get to the average of the fleet. So, you're still not seeing an overall increase in yield. And as they have more capacity, it can pull it down. Now, in the end -- by the end of the year, by the time we get there with on-boards and everything, mix may not even have any impact. Historically, it doesn't, okay, but we've got an unusual capacity increases in some of the brands and so we'll see what happens. But it's not -- there's not a problem. The only reason why you guys feel, I think, some of you might, is because you're so focused on the yield number which is definitely a lever in growing earnings and return on invested capital, but it's not the only lever when you have a portfolio of nine brands with lots of moving parts. It's not as simple a picture, as a simple yield number. And when you try to compare it to other companies, you're comparing apples and oranges. And so as a comparison you'd have to get the huge amount of detail, which we don't do. We won't provide you details by every brand because that's not how we run the business for obvious reasons. We run the business by brand but we wouldn’t share that.

Okay, okay. No, no. Thank you. Thanks for the color. Lastly back to the fleet and maybe looking a little bit longer term here. David, you talked about in your earlier comments about the DNA being up given the reinvestments. How should we think about that looking out over the next three to five years? Obviously, you have ship retirement, obviously, you've got ships on order but just given the scale of the fleet, should we anticipate that existing fleet reinvestment rate to further accelerate, and then therefore DNA maybe to grow at a higher clip from that reinvestment alone and that is excluding that new ship orders?

It's really hard to say because there's a lot of decisions yet to be made over time but we've been saying for a couple of years now that the expectation is that DNA would grow a few percentage points higher than capacity and exactly how many, we've got a lot of decisions left to make to determine that. But that should help in your modeling.

Okay. Merry Christmas and Happy holidays to everyone. Thank you.

Merry Christmas. Thank you.

Thank you very much. We'll get to our next question on the line from Assia Georgieva with Infinity Research. Go right ahead.

Good morning, guys. Congratulations on a great Q4. I had one quick question. If we look at the cadence of yields for fiscal 2019, and again I understand that we still don't have a European source passenger bookings quite firmed up occupancies but we probably still need a couple more months. Would it be fair to say that Q1 might be the weakest link in the year? And as we go through Q2, 3 and 4, we might see actually higher yields, higher earnings?

So we – I did indicate in my comments that the first half was a tougher comparison. And so we do see the back half being stronger than the first half. And we do see an improving trend in the second half, which was a little bit of what I was getting at before. So you are correct in your paraphrasing of the year.

Well, and David I was trying to paraphrase and tried to actually dig a little bit deeper. So Q2 is going to be better than Q1. Is that a fair statement?

That is what we expect that this time it built into our overall guidance.

And in Q4, because you're getting new builds that should be a good quarter as well?

We're getting new builds in late October, so the impact is very minimal in the year; it's like just a month. So careful about that, and keep in mind that every month in a quarter is not the same. Now you're going to get into the mix impact as well in a quarter.

That is totally fair. Thank you so much.

Thank you.

So operator, we will take one more call.

Certainly. Our final question for today is from the line of Sharon Zackfia with William Blair. Go right ahead.

Hi. Good morning. Thank you for letting me sneak-in.

Good morning.

Good morning. There's been a lot of commentary about mix and all of that and perhaps just to clarify because it sounds as if Europe growing so quickly is part of the dynamic with the yield outlook for next year. Within that construct of looking at Europe versus Europe, are you expecting yields to be positive in NAA, but it's the mix that's bringing down the consolidated I just want to make sure I understand that correctly?

Generally speaking, we don't – well I do make commentary historically on the actuals we don't give guidance by brand or by segment to the business. But as Arnold said before, we see the volumes being strong on both sides of the Atlantic in Europe as well as in North America and we are well positioned to achieve our guidance and we're working hard to do better than that.

Okay. Thank you.

Thank you.

Okay. Thank you all very much. First of all, I just want to reiterate that we're marching down a path to double-digit earnings growth and continue growth on return invested capital. Clearly, on the bookings that we share with you given the environment, some of our brands have chosen to put more business on the book earlier to optimize – in an uncertain environment. But even with the uncertain environment, we're going to grow our earnings. We're going to grow return on invested capital. And we're marching down a path. I want to thank you all very much, like to acknowledge 120,000 colleagues here at Carnival Corporation again for delivering on the promise of double-digit return on invested capital this year. And I really want to wish everyone a joyful, safe and happy holidays. Thank you all very much.

Thank you everyone. And ladies and gentlemen, these conclude the conference call for today. We thank you for participation, and ask to disconnect your lines. And have a great day everyone.