Carnival (CCL) Q1 2011 Earnings Call March 22, 2011 10:00 AM ET

Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Carnival Corporation First
Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the
conference over to Howard Frank, Vice Chairman and Chief Operating Officer. Please go
ahead, sir.
Howard Frank
Good morning, everyone. This is Howard Frank. With me this morning is Micky Arison, our
Chairman and CEO; Beth Roberts, our Vice President of Investor Relations; and David
Bernstein, our Senior Vice President and Chief Financial Officer. We're going to continue our
normal presentation this morning, and I'm going to have David take you through the first
quarter color and some details.
David Bernstein
Thank you, Howard. Before I begin, please note that some of the remarks on this conference
call will be forward-looking. I will refer you to the cautionary statements in today's press
release. Also all of my references to revenue and cost will be in local currency unless
otherwise noted, as this is a much better indicator of business trend.
For the first quarter, our earnings per share were $0.19. The first quarter came in at the high
end of our December guidance, which was $0.15 to $0.19 per share. The $0.02 per share
improvement versus the midpoint of our December guidance was driven primarily by $0.04
of favorability in a variety of cost areas, partially offset by higher-than-expected fuel prices
which cost an additional $0.02.
Now let's look at our first quarter operating results versus the prior year. Our capacity
increased 5% for the first quarter, with substantially all of the increase coming from our
European, Australian and Asian brands, or as we call them, our EAA brands. Our EAA brands
grew 11% while our North American brands grew 2%.
Our net revenue yields increased 2% in the first quarter, driven by a net ticket yield increase
of 3%. Our EAA brands were up 9% as a result of yield improvements in South America. The
South American market has rebounded nicely from last year's challenging season, which was
impacted by significant increases in industry capacity.
Our North American brands were down 1%, driven by lower yields in the Caribbean due to
higher industry capacity, which we discussed on the last conference call, and is limited to

winter deployment. In net onboard and other yields, we experienced a 1% decline. The
decrease resulted from favorable items we recognized in the first quarter of last year related
to minimum guarantee payments for calendar year 2009 and a litigation settlement. We
mentioned these items during the first quarter conference call last year. If we normalize the
prior year for these items, net onboard and other yields for the first quarter would have been
up 3%.
On the cost side, net cruise costs, excluding fuel, per available lower berth day were up 3%
versus the prior year. However, if you exclude the gain on the sale of P&O Cruises' Artemis,
which reduced net cruise costs last year by $44 million, the net cruise costs, excluding fuel,
per ALBD would have been in line with the prior year. Fuel prices this quarter were up 9%,
and that cost us about $0.05 per share.
In summary, we were pleased with the first quarter EPS of $0.19, which is up from last year's
adjusted EPS of $0.12 before the favorable impact of $0.10 of unusual items.
Now turning to our 2011 outlook. I will skip -- the full year outlook. I'll skip the net revenue
yields, as Howard will discuss that shortly. On the cost side, for the full year, net cruise costs,
excluding fuel, per ALBD are forecasted to be flat to up 1%. This guidance is about 0.5
percentage point higher than we forecasted in December. We're seeing some more
inflationary pressures than we thought in crew travel, food cost, freight and other areas.
Most of these items are simply a function of rising fuel and commodity prices. However, our
current guidance for interest expense, taxes and depreciation is lower, which balances out
the additional inflationary pressures.
One final note. I wanted to share with you our current rules of thumb about the impact that
current fuel prices and currency can have on our results. To start with, a 10% change in the
price of fuel for the remaining three quarters of 2011 represents a $0.22 per share impact.
With respect to FX movement, a 10% change in all currencies relative to the U.S. dollar, also
for the remaining three quarters of 2011, would also impact our P&L by $0.22 per share.
At this point, I will turn the call back to Howard.
Howard Frank
Thank you, David. Taking a look at the overall booking picture for the remainder of 2011. On
a fleet-wide basis, occupancies are slightly lower than a year ago on a 5% increase in cruise
capacity for the next three quarters. Ticket pricing for these bookings are nicely higher than
last year.
Looking at this picture by major markets, North American occupancy is slightly behind last
year, with nicely higher pricing. Bookings for Europe, Asia or Australia, or EAA, are also

slightly behind last year at higher prices. So that is the snapshot of the fleet-wide bookings
status for 2011 as it stands today.
Turning to booking patterns since the start of the year. On a fleet-wide basis, bookings have
been running higher year-over-year at higher prices. In North America, wave bookings have
paced the increased North America capacity with solid increases in year-over-year pricing.
In EAA, bookings have also been higher during this wave period at approximately the same
year-over-year prices, but the booking pace has lagged the 8.6% capacity increase for the
period. EAA bookings and pricing during this period have been affected by the recent
disruptions in the European brands, the Middle East and North African itineraries for the
remainder of the year. As a result of political unrest in that area of the world, there was
significant slowdown in demand for these itineraries with the related effect on booking
volumes and pricing. Over 280 cruises had to be reset, and we estimate the cost of this
disruption to our business will be approximately $44 million of lost revenue or about $0.05 a
share for the year.
So summarizing the booking pattern during the wave season so far, demand for our cruises
continues to be strong. At this time, stronger in North America than in the EAA markets. The
EAA brands, in particular Costa and Ibero Cruises, have felt the effects of the political unrest
in the Middle East and North Africa and the related disruptions to their itineraries which visit
these countries.
In terms of our revised guidance for 2011, the effect of the increase in fuel prices has cost us
$355 million or $0.45 per share. Currency exchange rates have benefited us by $0.09 per
share, and the cost of disruption in the itineraries which call on the Middle East and North
Africa is approximately $0.05 a share. These factors have caused us to take our earnings
guidance down for 2011 to a range of $2.55 to $2.65 a share or a midpoint of $2.60.
Now some color on each of the quarters. Fleet-wide capacity in the second quarter of 2011
will be 5% higher, 2.9% in North America, France and 8.6% for EAA brands. On a fleet-wide
basis, occupancies are at approximately the same levels as last year, and local currency
pricing is higher than a year ago. At this juncture, we have only a small amount of
inventories left to sell in the second quarter.
North American brands are 55% in the Caribbean, with the balance in various other
itineraries. Currently, pricing for North American brands in the second quarter is higher than
a year ago, with occupancies at the same levels. Caribbean pricing has shown improvement
from the first quarter and is down only slightly from last year's second quarter Caribbean
prices. Pricing for the various other North American brand itineraries, including shoulder
Alaska and Europe seasons and most other itineraries, is higher than a year ago.

For EAA brands, they are 54% in European itineraries, up slightly from a year ago, with the
balance in various other itineraries. Local currency ticket pricing for EAA-brand cruises in
Europe is slightly higher than a year ago. Pricing for EAA brands vary. Its other itineraries
taken together is also slightly higher than last year.
From an overall standpoint, to summarize the second quarter, we are forecasting that fleetwide local currency revenue yields will be higher for both North America and EAA brands.
Booking momentum and pricing, particularly for EAA brands, slowed somewhat during the
wave season as a result of the political unrest that I previously discussed, notwithstanding
the voyage disruptions resulting from the political unrest. We are forecasting European
brand yields to be higher than a year ago, but not as high as we originally expected.
Second quarter guidance is affected, as following. Fleet-wide revenue yields on a local
currency basis for the second quarter are now expected to be 1.5% to 2.5% higher than a
year ago. This is slightly lower than our early expectations, largely as a result of the itinerary
disruptions I previously referred to. Fuel price increases are expected to result in $140
million, or $0.18 per share, of higher fuel cost compared to the second quarter of 2010.
Costs other than fuel are forecasted to be higher in the 2% to 3% range for the quarter due
to a variety of factors, some of which David previously discussed and described in the first
quarter.
Taking all of these factors together, second quarter 2011 earnings guidance will be in the
range of $0.20 to $0.24, down from $0.32 per share in the second quarter of 2010.
Now turning to the third quarter. Capacity in the third quarter is expected to increase by
4.8%, 3.4% in North America and 7.2% for EAA brands. Third quarter booking patterns are
progressing quite well, with fleet-wide pricing well ahead of last year at lower occupancies.
The North American brand capacity for the third quarter was 36% in the Caribbean, down
slightly from 41% last year. 25% in Europe, an increase from 17% last year, which is almost
a 50% increase, or about a 50% increase. And 23% in Alaska, which is about the same as
last year.
Pricing for all North American brand itineraries in the third quarter is well ahead of last year,
with particularly higher occupancy than pricing in this year's Alaska season. Pricing for North
American brands in Europe is also ahead of last year at lower occupancy, which was not
surprising, given the approximate 50% increase in European capacity for our North American
brands in the summer.
Caribbean pricing for the third quarter is higher than a year ago, also on lower occupancies.
This is a refreshing change for our Caribbean programs, given the challenges we've had
during the first and second quarter.

For EAA, brand capacity is 88% in European itineraries. The EAA pricing is nicely ahead of
last year at slightly lower occupancies, notwithstanding the challenges resulting from the
political unrest in the Middle East and North Africa. As mentioned earlier, the EAA bookings
in the last five to six weeks have been challenging, with some booking momentum lost as a
result of the itinerary issues in this region of the world. Now that itineraries for these cruises
have been reestablished and are in the marketplace, we believe the booking momentum will
start to pick up again.
On overall basis, we are forecasting fleet-wide pricing for the third quarter to be up nicely for
both North America and EAA business segments.
For the fourth quarter, on a fleet-wide basis, capacity is up 5.9%, 3.3% for North America
brands and 10.1% for EAA brands. Pricing on a fleet-wide basis is nicely higher year-overyear, with a similar pattern to the third quarter. Occupancies are lower than last year, which
is also consistent with the pattern that we are experiencing in the third quarter.
Fourth quarter booking picture is encouraging, but it's early in the booking cycle, so I caution
not to read too much into the fourth quarter booking picture at this time. North American
brands are 42%, and the Caribbean, down from 50% last year; 14% in Europe, up from 9%
last year; and 10% in Orient and Pacific cruises, which is about the same as last year.
Pricing across North American brand itineraries is running higher than last year at slightly
lower occupancies across the fleet. EAA brands at 72% in Europe, up from 65% last year,
with the balance in various other itineraries. Pricing for European cruises is nicely higher
year-over-year, with pricing for the various other itineraries taken together also higher on a
year-over-year basis.
Occupancies are lower for European itineraries, which is not surprising, given the 20%
increase in European brand deployment for the fourth quarter. While it's still early to have a
more precise picture for fleet-wide fourth quarter pricing, on a fleet-wide basis, we are
currently forecasting that local currency revenue yields will be nicely higher in the fourth
quarter.
And so that kind of summarizes what the yield outlook for the remainder of the year looks
like at the current time. And with that, I'll turn it back to -- Kyle, I'll turn it back to you for
questions from the people that have called in.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from the line of Janet Brashear with
Sanford Bernstein.

Janet Brashear - Sanford C. Bernstein & Co., Inc.

I wonder if you could talk a little bit about the commission structure that you're debuting in
the U.K. And to the extent that the purpose is to get a little bit of control back over pricing
and discounting and things like that, can you talk about why that wouldn't work in the U.S.
as well?
Micky Arison
The U.K. policy has been put together by the U.K. brands to compensate for the heavy
rebating that had become institutionalized in the U.K., and the belief was with lower pricing
by the brands and the lower commission level, they could turn the tide of the rebating. It's
something that, I think, is not an issue in the U.S. the way it used to be and has been dealt
with in the U.S. in different ways. So I think you have to look at the U.K. as a unique market
where the brands felt that they had to get control of their pricing and took this kind of
action. I think in the long run, they believe, and I think the major retail travel agents that
they've negotiated and talked to believe, that this will be in the best interest of everybody.
But you shouldn't look beyond the U.K. It's not a model that we'll be looking at anywhere
else
Janet Brashear - Sanford C. Bernstein & Co., Inc.
Could you also talk just a little bit more about the charges in the Middle East and North
Africa relative to what markets you had to pull itineraries out of and maybe where you're
putting those ships in new itineraries?
Howard Frank
I mean, we pulled out of just all North African stops, in Tunisia and Morocco and Egypt, and
we've pulled out of -- actually, in some cases, we've had to pull out of Israel because we got
a lot of resistance. We haven't done it in all cases. But people are just concerned about
going to that part of the world, and we've kind of -- I don't know all the details, over 280
different cruises that were redone, but a lot of the calls are now calls going into that part of
the Eastern Mediterranean, but they're going to ports in Turkey and perhaps Cyprus and the
Greek islands and things along those lines.
Micky Arison
What Howard just said was primarily the European brands, primarily Costa and
Iberocruceros. The reaction of the North American brands has been more muted, and they
have a lot less calls in those countries as well. Canceling Tunisia was a relatively small
change in the itineraries, but canceling -- obviously, canceling Egypt and some other areas

near Egypt created total itinerary changes, again, primarily for Costa and Iberocruceros. This
really didn't affect North America anywhere near as much as it affected Europe.
Operator
And our next question comes from the line of Steve Kent with Goldman Sachs.
Steven Kent - Goldman Sachs Group Inc.
Could you just talk a little bit about the customer reaction to these itinerary changes? It
seems like that they're just holding back because they didn't know what your itinerary was
going to be, but now that the itineraries have been set, you should be able to more
effectively sell them. Is that the impression that you are getting too? And then, secondly, the
pricing seems to be very good, seems to continue to be very good, although you mentioned
a couple times that your occupancy might be a little light. Is this just a strategic move, given
the pent-up demand for travel amongst consumers that you're better off holding these
prices here and then filling them in as you get closer to booking?
Micky Arison
I think on the changes for the Middle East itineraries, I think there's too much noise right
now for us to tell. Obviously, as itineraries change, passengers decide whether they want to
go on the new itinerary or not or want to change their mind and go on a different itinerary.
And so there's a lot of booking canceling going on, so it's very hard to really judge exactly
the total impact. But we're hopeful that once -- now that all the itineraries are out there and
people understand it, that, that will settle down and we'll go back to a normal booking
pattern. As far as pricing for the summer, yes. I think because we've been able to achieve
higher prices, we have been holding out for those higher prices, and that's why you're
seeing a little bit lower occupancies to compensate for those higher prices. But that's versus
last year. We obviously filled last year, and the feeling is that we can hold out for the prices
and still fill this year.
Steven Kent - Goldman Sachs Group Inc.
And then just one final quick question, which is dividend, share buyback, cash flows are
going to be very significant over the next couple of years. Could you just give us your latest
thoughts, acknowledging that you just did raise your dividend a few months ago?
David Bernstein
Yes, well, you're right. We do anticipate good cash flows over the next couple of years. For
2011, we expect to have free cash flow of about $1 billion. And given that we raised the
dividend in January, the dividend in this year would be $700 million. So there isn't that much

significant extra cash flow this year. Only $300 million. And going forward in '12 and beyond,
as we said before, it is a board decision. And as we move forward, we will discuss that with
the board, whether it be share buybacks, more dividends or anything else.
Operator
And our next question comes from the line of Felicia Hendrix with Barclays Capital.
Felicia Hendrix - Barclays Capital
Micky, I'll direct this one to you. In this fuel environment, have you been rethinking the fuel
hedging philosophy at all for the company?
Micky Arison
I'll defer that one to Howard.
Howard Frank
Well, obviously, we've had a good deal of discussions internally about it, and what we
decided to do is take another fresh look at hedging strategies and whether we really think it
makes sense for the business on a long-term basis. With the significant hit we're taking for
2011, we thought it incumbent upon us to take another look at it. As you know, in the past,
we've stated that we don't think it has any real long-term benefit to the business. There's a
cost associated with doing an accounting hedge type of program of some consequence. The
cost, we'd like to avoid. Nonetheless, we've kind of huddled and just said, okay, let's take
another look at it again, just to see how things -- whether our views have changed and
whether there are other factors which would suggest that we should change our view.
Felicia Hendrix - Barclays Capital
So you're in the process of doing that now?
Howard Frank
Yes, we're starting that now. Right after this earnings call. No, we've had the discussion.
We're doing -- it takes quite a bit of work, so we've asked our treasury department to go
ahead and start to gather data and look at empirical evidence and forward-looking fuel
curves and see whether anything makes sense for us.
Micky Arison

I will add that this is not the first review. We've done this many times, and you know the
conclusions that we came to. So I wouldn't prejudge what conclusions we will come to again.
But you shouldn't take for granted that we haven't done this many times.
Felicia Hendrix - Barclays Capital
Well, that's good. And then Howard, so you gave us a lot of color about how the political
unrest in the Middle East is affecting the momentum in the EAA business. Wondering if -- is
there any of the EAA itineraries that aren't in that region? Maybe you could just give it -because I thought you said that 54% of the capacity was actually in Europe. I don't know if
you were including that as the itinerary. I was just wondering if you are seeing a slowing in
momentum in the EAA brands for the non-Middle Eastern-type of itineraries? And then
similarly, I'm just wondering what the momentum has been on the North America demand
for Europe? And then have you seen any change in demand trends for the North American
consumer in general?
Howard Frank
Yes. On the EAA cruises, a lot of those itineraries get -- are either one, in some cases, maybe
two calls, in Mediterranean ports and then they go further south to North African ports. We
haven't been able to -- there's so much noise in the booking patterns for these brands right
now for their Mediterranean and Eastern Mediterranean cruises. And we haven't dissected
the information in a way that -- what didn't call there, what did call there, and how are the
bookings for those particular itineraries that didn't call there? We really haven't done that
work, but our view is that a large part of what we're seeing is relating to that kind of noise. I
also think, and I can't speak for the European consumer, but places like Libya and Egypt and
Tunisia are a lot closer to Southern Europe, and I think, perhaps in the minds of Europeans,
that there may be some caution in what they're doing. But I don't think there's very much of
that, but I think there may be something entering. But we haven't really done the work to
know, to be honest with you.
Felicia Hendrix - Barclays Capital
And what about the momentum for the North American consumer? Have you seen that
change at all?
Howard Frank
No, not really. Demand in North America has been pretty solid since wave season, both for
European cruises, Alaska cruises and other kinds of itineraries. So demand seems to be
pretty solid. I would say, if you look at it from premium brands versus contemporary brands,
we're seeing, I think, pretty good strength in those premium brands, where, for longer
cruises, European programs, Alaska programs and for Caribbean programs, it's good. But I

think that we'll see a lot of the yield improvement that we're expecting to come from those
areas where we received good historical demand for those types of cruises from the North
American market.
Felicia Hendrix - Barclays Capital
Okay. Because there's some concern that higher fuel costs are affecting the North American
consumer to -- airline ticket prices to be affecting the demand, and you're not seeing that?
Howard Frank
Well, we do hear about the high ticket prices, but -- and it could be that the strong Alaska
season is really quite strong. Maybe people saying, well, instead of going to Europe this
summer, I'll go to Alaska because the air cost is lower. But really, we don't know that. All we
know is European business is good. Now we'll be running behind in occupancies, but we've
had this huge increase in capacity in Europe, and our competitors have had huge capacity
increases. Our North American competitors have had huge increases in capacity in Europe.
But the absolute numbers of bookings are quite good for Europe.
Micky Arison
And decline to occupancy is modest compared to increase in capacity, so we're still very
bullish on this summer in both Europe and Alaska.
Operator
Our next question comes from the line of Rick Lyall with John W. Bristol.
Richard Lyall
So I believe David said that you've got offsets in lower D&A taxes and interest expense for
the year? Could you walk through why that is?
David Bernstein
Sure. So this is, again, versus our December guidance and -- for instance, in D&A, some of
the brands were a little bit aggressive about when they would put some of those
maintenance CapEx items into service. And so we saw some favorability in the first quarter,
and we reevaluated that, and we flowed that through for the year. It's just the timing of
when things go into service. As far as the interest expense is concerned, again, we saw
favorability in the first quarter, and we flowed that and some more through the year. For
things like -- we went back to a few banks. We asked them to lower the interest rate on
some of our loans because, quite honestly, margins have come in over the last year or so.
We're using the CP market more aggressively, which is cheaper than our revolver. And so we

took that in. And we also reevaluated our income taxes. We had a pretty substantial increase
in our income tax expense from 2010 to 2011 in our December guidance. And now that
we've got a little bit more experience during the first quarter and have a better picture of
the year, we just evaluated that. We took it down, but we still are up versus the prior year in
terms of income taxes. So all of that, as I said before, kind of offset some of the inflationary
pressures in cruise costs.
Richard Lyall
Okay, that's helpful. A couple of, I guess, itinerary questions. Are you seeing stronger
demand in Alaska and maybe Northern Europe as a result of the dislocations in Northern
Africa? And then kind of a related question. Caribbean improving for the first time in really
quite some time. Do you think you really turned a corner there in terms of supply and
demand?
Micky Arison
First, your comments on Alaska. Alaska has been strong already for a while for this year,
prior. I think I could say bookings were strong well before the issues in the Middle East came
up. So while the situation -- uncertainty in the Middle East could, in effect, help Alaska, I
think the trend was in place well before, so I don't -- it's not one created the issue for the
other. I think Alaska, based on the agreements we reached with the governor last year, lower
head taxes and much higher marketing spend by the state of Alaska has really helped. Plus,
obviously, capacity's down versus the peak. So the combination of those things, I think,
really helped Alaska. So Northern Europe, I don't know. I think we're doing well, but I don't
think it's any different than the rest of Europe.
Howard Frank
Well, I think we're doing well in Northern Europe. I don't know that we know -- it's hard to
know why. We don't do any polling on it and know what our customers are thinking. But we
know they're booking -- it is booking well.
Micky Arison
But we know that trend was in effect before the Middle East situation.
Howard Frank
Yes, it's been going on for a while. On the Caribbean side, I mean, typically, there is a lot less
Caribbean capacity in the summer. And we have a little bit less, so -- I mean, I think that the
Caribbean pricing is holding up a lot better.

Operator
And our next question comes from the line of Robin Farley with UBS.
Robin Farley - UBS Investment Bank
Most of my questions have been answered. I guess just to sort of parse one answer a little
more finely. When you talked about the slowdown that you've seen in recent weeks, would
you say, particularly the EAA brands, would you say that, that is sort of continuing to
deteriorate, or has that fairly stabilized now, in other words, versus what it might have been
kind of two weeks ago?
Micky Arison
The problem with answering the question is that what happens when you change 200
itineraries is you have a lot of people changing that. I'm referring to primarily Costa and
Ibero, so you don't think this is a global issue. You get a lot of churn. So you get a lot more
bookings, but they're coming off people who'll change their mind and cancel one itinerary to
get on another itinerary. So it creates a difficult -- until it settles down, it's difficult to gauge
what's going on. I can say this much is, historically, weve found that Europeans believe their
vacations are very important to them. And if they have chosen to take a cruise to the Holy
Land and have now canceled because of these issues, we believe that eventually, theyll get
rebooked on Costa and Iberocruceros if they're from places like Italy, France and Spain
because these people will take their vacation. So right now, there's a lot of churn going on.
It's difficult to tell exactly what the bottom line effect -- we tried to estimate it. We estimated
it at $44 million, we'll see. But for the next few weeks -- because these itineraries changes
only were announced...
Beth Roberts
Monday.
Robin Farley - UBS Investment Bank
If you look at maybe just your U.K. brands and AIDA as maybe more representative of
demand outside of just...
Micky Arison
Both brands are booking quite well. Very little issue. Almost no issue at all.
Robin Farley - UBS Investment Bank

And so even in the last few weeks, that hasn't -- the slowdown was really specific to the
Costa and Ibero?
Micky Arison
That's why I tried to -- Ibero and Costa, with heavy emphasis on Northern Africa and Middle
East itineraries. Even AIDA and U.K. and North America that had those in the itineraries don't
seem to be anywhere near its impact.
Operator
And our next question comes from the line of Harry Curtis with Nomura.
Harry Curtis - Nomura Securities Co. Ltd.
A couple of quick questions. I wanted to dig a little bit deeper into the sequential increase
from the first quarter to the second quarter in your cost. And I'm trying to get a sense of
whether or not the rebooking costs are really driving most of that increase. Because it would
appear that for the balance of the year, the cost increases aren't quite as severe.
David Bernstein
Yes. When you take a look overall at the cost structure, we talked about costs being flat to
up 1% for the year. But keep in mind that it does vary by quarter. There are seasonality
differences. Advertising is a great example of seasonality differences. And one of the
reasons why the second quarter is a bit higher is because they're projecting perhaps some
more advertising expense over and above last year. And there are other things in repair and
maintenance and drydock and crew travel which do have an impact by quarter. So we were
flat for the first quarter on a normalized basis. As Howard indicated, we're up 2% to 3% for
the second quarter. We were expecting the third quarter to be up and the fourth quarter to
be down, and that's how we got flat to up 1% for the year. Again, there's lots of seasonalized
differences between the quarters.
Howard Frank
This information that we pulled together here in Miami results from 10 different companies
giving us their estimates of what their costs are going to be and, invariably, sometimes
there are variances in terms of how it actually turns out in the past, and sometimes it's
conservative. They tend to be, if anything, more on the conservative side and making sure
they've covered their costs, so we'll see what happens.
Micky Arison

And I think -- and David has said this many times, is costs really can't be judged on a
quarter-to-quarter basis. It really, because of timing differences and other things, you really
have to look at it in a longer term, and annual basis is clearly better than quarter-to-quarter.
Howard Frank
But it has nothing to do with -- we don't think it has anything to do with rebooking of cruises.
Micky Arison
No.
Harry Curtis - Nomura Securities Co. Ltd.
Okay. Then let me move on to my second question, which is related to the topic of fuel
surcharges. I'm trying to get a sense of what level you believe surcharges warranted and
could be acceptable to passengers?
Micky Arison
I don't think we can give you that. I think our position right now in North America is basically
the same as the statements we've put out in the past. It's something that we always are
looking at. But as of right now, we don't feel it appropriate.
Operator
And our next question comes from the line of Rachael Rothman from Susquehanna.
Rachael Rothman-Ould - Susquehanna Financial Group, LLLP
Sorry, you gave out so many numbers so quickly, I may get this slightly wrong. But I guess if
you could talk sequentially about the trends in net yield growth from the first quarter to the
second quarter, I guess I would've expected a greater pick-up in the net yield growth, given
the capacity growth in the Caribbean in the first quarter as the kind of motivation behind the
2% constant currency forecast. And then it sounded to me like in the second quarter, maybe
you were saying it's because of supply growth in Europe and the North American brands. Am
I understanding that correctly? Is it a supply shop...
Howard Frank
Rachael, Im talk even more slower the next time.
Rachael Rothman-Ould - Susquehanna Financial Group, LLLP

Sorry. It's like so much data at once. I really apologize.

Howard Frank
I fully understand. It can get a little bit confusing. Now what's happened -- what I did say
about the second quarter is that we had expectations that yields would be higher for our
EAA brands, and that has been impacted by these disruptions in itineraries in the second
quarter. We had to actually move some ships out of Egypt that were two ships actually home
[ph] doing turnarounds in Egypt, and we had to move them out to different itineraries. And
that disruption caused some deterioration in yield for the second quarter. Maybe one point
of yield for the company. One point of yield, so we're arranging -- we probably would've
forecasted, without these disruptions, about a point higher than the 2% midpoint that you're
seeing.
David Bernstein
It's also a little bit of an apples-and-oranges comparison, because the one benefit that we
had in the first quarter that was substantial, that I talked about, was the South American
market for our EAA brands, which was up quite a bit. So it's hard to compare. We went from
-- it looks flat, but as Howard said, we would have been up in the second quarter.
Howard Frank
But that explains it.
Rachael Rothman-Ould - Susquehanna Financial Group, LLLP
So I guess if you guys are saying that the second quarter would've been roughly about one
percentage point higher, and you're taking the full year net yield guidance down by about
half a percentage point, it seems like it becomes more dependent on the third quarter
actually executing in order for you to hit even the revised net yield guidance? And when I
combine that with your commentary surrounding higher prices yet lower occupancy, can you
kind of clarify for us what gives you comfort that, that will actually come through, given that
it's a market with, I guess, right now, pretty substantial geopolitical risk and a choppy
booking window?
Micky Arison
First of all, you have to realize that a substantial amount of the business is already on the
books at higher prices. So that gives us a great deal of comfort.
David Bernstein

The thing is you mentioned the one point in the second quarter. The Middle East and North
Africa also was probably about a half a point in the third quarter. When you really average it
out, I know it turns out to be a half a point for the year, because when Beth puts together
the press release, she rounds everything to the nearest half a point, but it's really more of a
third of a point for the full year. And so it just rounds to...
Howard Frank
Rachael, let me just say this. We do the best job we can in trying to forecast. But it is not an
exact science, and it is subject to the vagaries of the marketplace and what can happen
around the world. So when we give you guidance, it is really our best estimate based on
what our brands tell us and how we see it, as we look at the numbers here in Miami, to make
sure that we give guidance that we think is reasonable and what we normally are able to
achieve. But it could be -- yes, can it be wrong? Sure.
Rachael Rothman-Ould - Susquehanna Financial Group, LLLP
You guys do an actual excellent job with the guidance for sure. I guess maybe -- has your
third quarter implied guidance changed at all? Maybe that's a better question to ask.
Micky Arison
Came down half a point primarily because of the Middle East -- entirely because of the
Middle East. I should say also there's been some itinerary changes relating to Japan that
we've tried to include in our numbers as well, but they were really small.
Operator
And our next question comes from the line of Greg Badishkanian from Citigroup.
Gregory Badishkanian - Citigroup Inc
Just wondering if you're still comfortable with kind of that two to three new ships a year, and
if you're hearing anything as you talk to other shipyards, just of maybe other cruise lines
potentially accelerating capacity growth or kind of maintaining from here?
Micky Arison
Yes, we're comfortable with the two to three. That hasn't changed. Are we hearing stuff from
other cruise lines?
Howard Frank
You hear a lot of noise, but you're never quite sure.

Micky Arison
Yes, we're hearing some noise.
Gregory Badishkanian - Citigroup Inc
Good. That's good to hear. And just in terms of some of your other brands and just kind of
looking at sort of the higher-end versus the lower-end consumer, are you seeing some
maybe trading up or vice versa right now as you kind of look across your fleet?
Howard Frank
Yes. I think I mentioned that in North America, I think the strength in the pricing seems to be
more for the premium brands, less so, although improved pricing, for the contemporary
brands and the contemporary products. So it looks like the higher-end consumer appears to
be driving a lot of the strength from a pricing standpoint today.
Gregory Badishkanian - Citigroup Inc
You don't think it's trading up, it's just the higher-end consumer -- more of them coming to
book cruises, right?
Howard Frank
It's probably both, but I don't think we really know the answer to that question.
Operator
And our next question comes from the line of Kevin Milota with JPMorgan.
Kevin Milota - JP Morgan Chase & Co
Just had a quick one. Not to beat a dead horse here on demand, but as you look at the North
American passenger base, I was just wondering if you could give us a sense of if you know
how the booking window is looking for the second and third quarter. And then, also, I know
you spoke of pricing, but is it more solid pricing on the premium stuff and less solid on the
contemporary? Just go into a little more detail there.
Micky Arison
I think we've responded to that. Booking pattern is as we anticipated it a quarter ago. I
mean, basically, the only adjustment we've made in yield is for the Middle East situation. So
I would say it was more predictable than almost ever. We're basically exactly where we were
three months ago as far as booking pattern. The expectation was for a good wave, and

that's what we got. And so we continue to be very bullish about the third quarter and
beyond.
Operator
And our next question comes from the line of Assia Georgieva from Infinity Capital.
Assia Georgieva - Infinity Research
Just a follow-up, Micky. You just said Q3 and beyond. It looks that you have good visibility. Do
you expect the same type of yield improvement in Q4 as you do in Q3? And I know it's still
early on.
Howard Frank
This is Howard. We expect a strong yield improvement in -- based on everything we see right
now, and what I commented on is that we still have a way to go in the booking pattern. It's
still early in the booking pattern, but the pricing is strong for both North America and Europe
right now for the fourth quarter. And probably we're hopeful of seeing similar yield
improvement in the fourth quarter. That's really it. Even with these early patterns, I mean,
even if you look out beyond 2011, and we have really early booking data and not all cruises
are being sold and it's more long cruises and so on, if you look at Q1 2012, the booking data
is encouraging as well from a pricing standpoint.
Assia Georgieva - Infinity Research
And for Q4, Caribbean pricing continues to be doing as nicely as it is in Q3 at this point?
Micky Arison
I will get -- Beth is scrambling right now, so we'll get back to you on that one.
Operator
Our next question comes from the line of Jamie Rollo with Morgan Stanley.
Jamie Rollo - Morgan Stanley
I was just wondering if you could talk a bit about your pricing model, maybe in relation to
fuel. It's just an observation that fuel historically wasn't much of an issue for you or the
industry. It's clearly a much more material component now of the cost base, and you didn't
seem to be recovering this spike in price increases. So part [ph] of the question is, as
industry leader, have you considered adopting maybe a more aggressive pricing strategy to

immediately parse [ph] on the fuel prices, like maybe the airlines do, or maybe not pricing to
fill as you have done historically?
Micky Arison
We price to maximize revenue and maximize profitability and not based on the price of fuel
on any given day. So while obviously fuel is an issue, we have to price based on demand.
And that's what we do, and we try to maximize yields. To go back to the prior question,
Caribbean pricing is strong in the fourth quarter.
Beth Roberts
As much as the third.
Micky Arison
As much as the third, yes.
Operator
And your next question comes from the line of Tim Conder with Wells Fargo.
Timothy Conder - Wells Fargo Securities, LLC
Two things, and this maybe -- I don't know if you have the data, given its so tight here to
answer it or not, but given the military action that started with the UN here over the
weekend, have you seen any data in the bookings from the brands, especially the EAA
brands that would indicate that there is maybe some additional caution or shift with Costa or
Ibero in particular?
Micky Arison
We definitely don't have any bookings to Libya.
Howard Frank
Tim, we have no information on that, honestly. It's just we get it weekly at the end of the
weekend.
Timothy Conder - Wells Fargo Securities, LLC
Okay. That's what I thought you mean. There maybe two from that in the current set [ph] to
have it. And then on the fuel supplement question, you do have some fuel supplements as
you said before in the U.K. and in Germany. Are you looking at evaluating those and any of

the other international itineraries, potentially South America, the Australia area, or do you
have those already on in those markets?
Micky Arison
The laws and regulation in every country is different. Our brands individually make decisions
based on geographical locations and based on the laws that are in those locations. As we've
said, we have some brands in some countries doing fuel supplements. If we're not doing
them, it's because the brand has decided either not to do them or they can't do them
because of those laws or regulations. And rather than try to go country by country, just
leave it at that. It's a very complicated set of issues. There's some countries where it's
absolutely illegal. Some countries, it depends on the price at a given time versus the typed
price that's printed on the brochure, et cetera, et cetera. So I'll just leave it that we're doing
whatever we can to maximize revenue wherever we can.
Timothy Conder - Wells Fargo Securities, LLC
Okay. And that's the underlying driver, maximize revenue and profitability first and
foremost?
Micky Arison
Absolutely.
Operator
And our next question comes from the line of Nick Thomas with Nomura.
Nick Thomas - ABM Amro
You've made it very clear that, I think, by far the biggest part of the Middle East/North Africa
situation is relating to your European brands, such as Costa. Are you at all surprised that
there maybe hasn't been more impact on the booking behavior from your U.S. clientele,
given the proximity of those geographies to the Mediterranean?
Micky Arison
Actually, our North American brands have very few calls in that area. They don't have the
kind -- you have to remember, Costa had four ships based in the Middle East, two in Dubai
and two in the Red Sea. So it was clear that they had a -- plus weekly commitment to
itineraries to the Eastern Med, including the Holy Land and Egypt. So it was a far greater
problem for them. These North American brands only have occasional calls in the area, and
so the impact was relatively small and the itinerary changes relatively easy to accomplish.

Nick Thomas - ABM Amro

But you're not seeing any impact on the sort of -- the propensity for American customers to
cruise in the sort of wider Mediterranean area given its proximity?
Micky Arison
No, we haven't seen that all.
Operator
And our next question is a follow-up question from the line of Janet Brashear with Sanford
Bernstein.
Janet Brashear - Sanford C. Bernstein & Co., Inc.
Starting with one quick one, you talked in the last call about breaking results out in four
different categories, and I don't see that in this report. Is that coming later in the year?
David Bernstein
That comes in the Qs and Ks. So next week when we file our 10-Q, you'll see the segment
information in the footnotes.
Janet Brashear - Sanford C. Bernstein & Co., Inc.
Terrific. And then a quick question about the differences you're seeing in customers from the
luxury lines to the more mid-priced lines. Are you seeing differences in spending patterns in
luxury versus mid-price? And are you seeing differences in spending patterns between North
American and European brands to the extent you can separate the European brands from
the confusion going on?
Micky Arison
I think we've said that the pricing on our premium brand is stronger than our contemporary
brand.
David Bernstein
You're talking about spending onboard or ticket pricing?
Janet Brashear - Sanford C. Bernstein & Co., Inc.
I was talking about onboard spend.

David Bernstein
Yes. I mean, in general, onboard spend is up across the board in all the brands. There really
hasn't been significant changes in the different marketplaces. By category, most of the
categories are up. We're still struggling a little bit in the casino and art, which is something
we talked about over the last couple of years. But all the brands are up, and I don't -- there
aren't any discernible differences by brand or by region.
Micky Arison
There are, but not year-over-year. Because, as we've said before, certain brands, certain
geographies have far less onboard spend than others. But that's -- what David's saying is
we're up across the board, but they are different by brand and demographic and...
Howard Frank
And the product itself.
Micky Arison
Yes.
Operator
And Mr. Frank, we have no further questions at this time. I'll now turn the conference back to
you.
Howard Frank
Okay, great, Todd. Thank you all for calling in. And Beth is around, and she's looking forward
to getting calls from those who have an interest in talking to her and getting more
information than what we may have imparted to you on this call. Have a great day,
everybody. Goodbye.
Operator
And ladies and gentlemen, that does conclude the conference call for today. We thank you
for your participation and ask that you please disconnect your lines. Have a great rest of the
day, everyone.

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