Carnival's CEO Discusses Q1 2012

Results - Earnings Call Transcript

Executives
Howard S. Frank - Vice Chairman, Chief Operating Officer and Member of Executive
Committee
Micky M. Arison - Chairman, Chief Executive Officer, Chairman of Executive Committee,
Chairman of Carnival Plc. and Chief Executive Officer of Carnival Plc.
David Bernstein - Chief Financial Officer and Senior Vice President
Beth Roberts - Vice President of Investor Relations
Analysts
Felicia R. Hendrix - Barclays Capital, Research Division
Robin M. Farley - UBS Investment Bank, Research Division
Steven E. Kent - Goldman Sachs Group Inc., Research Division
Harry Curtis - Nomura Securities Co. Ltd., Research Division
Gregory R. Badishkanian - Citigroup Inc, Research Division
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division
Assia Georgieva
Jaime M. Katz - Morningstar Inc., Research Division
Jamie Rollo - Morgan Stanley, Research Division
Edward Stanford - Oriel Securities Ltd., Research Division
Ian Rennardson - Jefferies & Company, Inc., Research Division

David Liebowitz - Horizon Kinetics LLC

Unknown Analyst
Carnival (CCL) Q1 2012 Earnings Call March 9, 2012 10:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2012
Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded
Friday, March 9, 2012. I would now like to turn the conference over to Mr. Howard Frank,
Vice Chairman and Chief Operating Officer. Please go ahead.
Howard S. Frank
Good morning, everyone. This is Howard Frank. With me this morning is Micky Arison, our
Chairman and Chief Executive Officer; David Bernstein, our Senior Vice President of Finance
and our Chief Financial Officer; and Beth Roberts, our Senior -- our Vice President and -what are you -- what do you do again? Investor Relations Officer.
Before David's comments, which we typically start the call with, Micky would like to make a
few comments first. Micky?
Micky M. Arison
Good morning, everybody, and thank you for joining us today. As you can imagine, this has
been a most difficult and challenging time for our corporation. We've all been deeply
saddened by the Costa Concordia accident, and our thoughts and prayers are with the
passengers, crew and family of those who were lost in this tragic accident. We are grateful
to the Italian authorities and rescue workers who acted heroically following the accident and
who continue to assist in the recovery process. We would also like to express our deepest
appreciation to the local population of the island of Giglio and thank them for their
generosity to those in need.
As to the Costa Concordia crew, I'd like to thank and recognize them for their tireless efforts
to evacuate more than 4,000 passengers and crew from the ship that night. Not enough can
be said about the work that the crew did to help our guests in the most challenging of
conditions.
Before we walk through the financial impact to Costa Cruises and Carnival Corporation, I'd
like to offer a couple of observations based on my experience. First, that the cruise industry
remains incredibly safe and maintains one of the best safety records of any form of

recreational travel in the world. The safety and security of our guests are job one, and we
learn from everything we can from this incident and apply all lessons learned.
Thank you. And David will take you through the numbers. David?
David Bernstein
Thank you, Micky. Before I begin, please note that some of our remarks on this call will be
forward-looking. I will refer you to the cautionary statement in today's press release. Also,
all of my references to revenue and cost metrics will be in local currencies, unless otherwise
noted, as this is a more useful measure of business trends.
Our non-GAAP EPS for the first quarter was $0.02. The first quarter came in $0.06 below
the midpoint of our December guidance. The $0.06 shortfall from our December guidance
was driven by $0.04 from the Costa Concordia incident expenses not covered by insurance
and $0.04 from the impairment charge related to the Costa Allegra. All the other items
netted out to a favorable $0.02 per share as higher-than-expected revenue yields and cost
savings, including lower advertising expenses, more than offset $0.06 of higher fuel prices.
Now let's look at our first quarter operating results versus the prior year. Our capacity
increased almost 4%. Our North American brands grew over 4%, while our Europe,
Australia and Asia brands or, as we call them, our EAA brands, grew almost 3%. Our total
net revenue yields increased 2.9% in the first quarter, with net ticket revenue yields up
2.6% and net on board and other revenue yields up 3.7%.
With respect to our net ticket yields, the North American brands were up almost 5% as
yields rebounded in the Caribbean, benefiting from the continuing recovery in the U.S.
economy after absorbing a significant capacity increase last year. During the first quarter,
the Caribbean represented 2/3 of the North American brands' capacity.
Our EAA brands' net ticket yields were in line with the prior year, with their ships cruising in
numerous regions throughout the world during the first quarter. For net on board and other
yields, the 3.7% increase was also driven by our North American brands. While consistent
with our expectations, our EAA brands were down, principally due to the challenging
economic environment in Europe.
On the cost side, net cruise costs excluding fuel per available lower berth day were up over
6% versus the prior year. More than 1/2 the increase was driven by the Costa Concordia
incident expenses not covered by insurance and the impairment charge related to the Costa
Allegra. The remaining increase was due to the higher number of dry-dock days and related
costs in the first quarter, which we discussed on the December call.

As a result of our ongoing efforts to reduce fuel usage, our consumption per ALBD declined
2.5% this quarter, continuing our multiple-year savings trend. Fuel prices in the quarter
were up 30%, which cost us an additional $0.18 per share.
In summary, the first quarter non-GAAP EPS was $0.17 lower than 2011 earnings of $0.19
per share as increased yields were more than offset by higher dry-dock costs, higher fuel
prices, the Costa Concordia incident expenses and the Costa Allegra impairment charge.
Excluded from our non-GAAP EPS but included in our GAAP loss per share were impairment
charges of $173 million or $0.22 per share, relating to all of Ibero's goodwill and 60% of
their trademarks. We believe it's more meaningful to exclude these non-cash charges from
our non-GAAP EPS, given their non-recurring nature and the fact that we believe they are
not an indication of our future earnings performance.
As we disclosed since 2010, we have been closely monitoring Ibero's intangibles, given the
small amount of headroom in excess of its carrying value. At this time, given the state of
Spain's economy, we slowed down the projected pace of Ibero's capacity growth in our
discounted cash flow projections that are used to estimate Ibero's fair value, which primarily
resulted in the impairment charge.
Now turning to our 2012 outlook. I will skip the net revenue yield outlook 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 versus the prior year. This is consistent with our December
guidance, despite the $45 million of Costa Concordia incident expenses and the $34 million
of Costa Allegra impairment charge, which increased the year-over-year cost metrics by 1.1
percentage points. Our operating companies identified opportunities in a number of areas to
reduce costs, offsetting these items.
At this point, I will turn the call over to Howard.
Howard S. Frank
Thank you, David, and good morning again to everyone. I'm going to comment -- to make
some comments on the outlook for 2012, talk a little bit more about the Costa situation.
While the Costa Concordia event has had a profound effect on our business and, indeed, the
business of the entire cruise industry, as time passes, we are confident that our business
will improve. Indeed, as I will comment on later, our North American brand booking patterns
have improved during the last 7 weeks since the event in mid-January.
In Continental Europe, the impact of the event on the European market and our European
businesses has been greater, and it seems that it will take more time for those markets to
return to normal booking levels. We have, however, recently seen some positive trends in

our European business, so we are hopeful that booking patterns will return to normal levels
sooner than we might have originally expected.
As I comment on the business outlook for the remainder of 2012, for purposes of having
more meaningful comparisons of booking trends fleet-wide and for the EAA markets, I will
be excluding the Costa metrics. As we indicated in the press release, after the Concordia
incident, Costa curtailed its marketing. In most markets, Costa has still not reestablished its
marketing, although plans are underway to start these efforts over the next several weeks.
I will comment separately on the Costa business later on in my talk as a separate matter.
On a fleet-wide basis excluding Costa, constant dollar revenue yield guidance is being
lowered from December guidance by approximately 1.5% for 2012. As a result, revenue
yields in 2012, excluding Costa, are now expected to be in line with 2011 yields.
As to the current status of bookings, on a fleet-wide basis, again, keep in mind I'm
excluding Costa, occupancies for the remaining 3 quarters are lower than a year ago due to
slightly higher prices. All my comments on pricing will be on a constant dollar basis as I go
through my presentation this morning.
For North American brands, occupancies are slightly lower at slightly higher prices. And for
EAA brands, occupancies are lower at higher prices again.
With respect to recent booking trends beginning in January, for the first 2 weeks of wave
season, bookings were quite strong on a fleet-wide basis, driven by our North American
brands, which experienced higher booking volumes and higher pricing year-over-year. EAA
bookings were also higher year-over-year during the first 2 weeks of January at lower
pricing. So even before the Costa incident, we continued to experience softer European
pricing, which we attributed to the slowing Europe economies, together with the
government austerity programs being implemented or expected to be implemented in many
of the countries in Europe in which we market.
Since the Costa grounding incident in mid-January, the booking patterns for North America
and for EAA brands have slowed significantly. On a fleet-wide basis, bookings for the last 7
weeks -- and, of course, this excludes Costa -- through March 4 are running lower yearover-year in the mid- to high-single digits at slightly lower pricing.
The week-to-week patterns have been uneven, with some weeks being stronger than
others, partly resulting from the timing of marketing efforts by the brands.
For North American brands, booking volumes during the 7-week period have been lower in
the mid-single digits range on a year-over-year basis at slightly lower prices. The weakest
itineraries for the North American brands have been their European programs, which is a
trend we began to see beginning last year, starting with the European sovereign debt and

banking crisis and the problems in Greece. Higher airfares between North America and
Europe have also been a challenge. North American brands also source a significant portion
of their European cruise programs from the Europe market, so the economic slowdown in
Europe has also affected the North American-brand European cruises.
For EAA brands, excluding Costa, booking volumes during the 7-week period on a year-overyear basis have been running lower in the mid-teens range and at lower prices. Our AIDA
brand in Germany and our Ibero brand in Spain have felt the greatest impact during this
period. Our U.K. brands are holding up relatively well as compared to our Continental
European brands. We have recently seen trends in Germany so we are -- we have recently
seen improving trends in Germany, so we are hopeful that we have finally turned the corner
there as well.
Now let me turn to Costa. As most of you know, Costa has a worldwide sales and marketing
network, with its primary source markets in Continental Europe, South America, North
America and Asia. In recent years, it has also developed new markets in Eastern Europe.
Since the grounding on January 13, Costa has not been marketing its cruises. Indeed, Costa
offered the opportunity for passes booked on any Costa ship to cancel their cruise through
February 7. There were, in fact, relatively few cancellations, which we consider to be a very
positive sign. Where possible, passengers booked on future Concordia cruises were
rebooked on other Costa Cruises. As a result, there was a considerable number of
cancellations and rebookings in the Costa booking pattern, so it was difficult to get a clear
picture of booking trends post the grounding.
Without any marketing, Costa's bookings during the first 4 weeks after the grounding ran
approximately 80% to 90% lower on a year-over-year basis. More recently during the last 3
weeks to March 4, bookings ran 40% to 50% lower year-over-year. So with virtually no
marketing, the booking picture is improving. As Costa begins to implement its marketing
programs, which is already starting in certain markets, we expect their booking trends to
gradually improve.
While certain of Costa's markets may take longer to come back, because of its broad
marketing reach, Costa has the ability to source passengers from its other markets.
However, estimates are that it will take up to a year before the booking trends start to
normalize in some of its markets.
During this period, Costa has adopted a strategy in its primary markets to hold its pricing,
even at the expense of lower occupancies in order to maintain an orderly market. For 2012,
Costa is forecasting a loss for the year of approximately $100 million or a swing of $500
million from its previous earnings forecast. Most of this swing relates to reduced revenues,
including the lost capacity from the Costa Concordia. It also includes approximately $27
million of one-time Concordia-related costs and $34 million relating to the Allegra incident,
including the write-down of the value of the ship, which David mentioned before.

Having said all this, Costa is beginning to see light at the end of the tunnel, but it will take
some time to get there. So there should be no doubt, we view Costa as a great company
and a great brand, with a terrific management team and with a great future. Micky and I
take this opportunity to thank Pier Foschi and the entire Costa management team for their
most extraordinary efforts during this most difficult period.
Now let me turn to revised guidance. The midpoint of our revised non-GAAP guidance for
the year of $1.55 per share is a reduction of $1.15 from our December guidance of $2.70.
That was the midpoint of our guidance. Included in the $1.15 of guidance reduction is
$0.65, which represents the decline in Costa's earnings, of which I mentioned before, of
which $0.08 is one-time cost.
The reduction of our other North American and Europe EAA brand revenue yield forecast
amounts to $0.19. Higher fuel prices for all these other brands net of currency from that
used in the December guidance is forecasted to reduce earnings by $0.40. And there is a
net benefit from other items, mostly reduced cost of approximately $0.09 a share, which
gets us to the $1.15. So apart from the increase in fuel prices, our other brands' earnings
are lower by approximately $0.10 per share from the December guidance.
Now I'll move on to give you some colors by each of the quarters. Turning to the second
quarter -- and when I give you this data, it is now x Costa -- fleet-wide capacity for the
second quarter is up 2.7%, 2.9% for North America brands and 2.2% for EAA brands. At the
present time, on a fleet-wide basis, pricing is slightly higher than a year ago at slightly
lower occupancies versus last year.
North American brand fleet-wide pricing is higher than a year ago at flat occupancies. North
American brands are 56% in the Caribbean, approximately the same as last year, with the
balance in various other itineraries. Caribbean pricing is nicely higher than a year ago at
approximately the same occupancy levels as last year. Pricing for all other itineraries taken
together is higher than a year ago at slightly lower occupancies.
EAA brand fleet-wide pricing, excluding Costa, is slightly lower than a year ago on lower
occupancies. EAA brands are 50% in Europe, slightly up from 47% last year, with the
balance in various other itineraries. EAA brand European pricing is up slightly versus a year
ago on lower occupancies. EAA pricing on all other itineraries taken together is lower than
last year, also at lower occupancies.
On an overall basis, we are currently forecasting that constant dollar revenue yields will be
flat to down slightly for the second quarter, slightly higher in North America, slightly lower
for EAA.
For the second quarter guidance, we are guiding earnings in the range of $0.05 to $0.09, or
a midpoint of $0.07. This is versus $0.26 in the second quarter of 2011. Swing in earnings

for the second quarter of -- from the second quarter of 2011 is primarily due to the Costa
impact of about $0.12 a share and higher fuel costs of about $0.10 a share.
Now turning to the third quarter. Capacity is expected to be up in the 2.9% range, 3.4% in
North America, 2.2% in EAA. On a fleet-wide basis, third quarter pricing is higher than a
year ago on lower occupancies. North American brand pricing is slightly higher than a year
ago at lower occupancies. North American brand capacity in the third quarter is 38% in the
Caribbean, slightly higher than a year ago; 24% in Alaska, the same, slightly higher; and
25% in Europe, which was about the same as last year.
Pricing for Caribbean itineraries is higher than a year ago, with pricing for Alaska and
Europe cruises flat with last year. Occupancies for the Caribbean and Alaska cruises are
slightly lower versus last year, and occupancies for Europe cruises are lower than last year.
For EAA brands, pricing is nicely higher than a year ago at lower occupancies. EAA brand
capacity is 85% in Europe itineraries, which is slightly up from 82% the prior year. EAA
brand constant dollar pricing for European and all other itineraries is higher than a year ago
on lower occupancies.
Now turning to the fourth quarter. Fleet-wide capacity in the fourth quarter is expected to be
2.9% higher than last year, 3.7% for North America brands, 1.7% for EAA brands. This, of
course, excludes Costa. Fleet-wide pricing is slightly higher than a year ago at lower
occupancies. Much business remains to be booked for the fourth quarter, so I caution not to
read too much into this information.
North American brand pricing in the fourth quarter is flat versus last year at lower
occupancies. North American brands are 43% in the Caribbean, slightly higher than a year
ago, 13% in Europe, which is about the same as the past year, with the balance in various
other itineraries. Caribbean pricing is higher than a year ago at higher occupancies. Europe
pricing is also higher versus last year at lower occupancies, and pricing for all other
itineraries taken together is higher than a year ago on lower occupancies.
Turning to EAA. EAA pricing, which is the EAA brands of 61% in Europe itineraries, is nicely
higher versus the year ago at lower occupancies. So that kind of wraps up the current
status of the booking picture for 2012. And I think, with that, Kayla, I think we can open it
up to questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Felicia Hendrix with
Barclays Capital.

Felicia R. Hendrix - Barclays Capital, Research Division

In the release -- and I guess this should be directed to Micky but also, Howard -- your
comment on price discounting was interesting, especially since occupancies are lagging in
almost every quarter. I'm just wondering, are you actually seeing improvement fast enough
to make you comfortable that customers won't need a little nudge, especially in Europe,
given how that's also lagging?
Micky M. Arison
I don't know what you mean by a little nudge. But I think...
Felicia R. Hendrix - Barclays Capital, Research Division
Well, I guess what I mean is a little stimulation.
Micky M. Arison
I'm kidding, Felicia. I guess what we're saying is that our brands -- and we're obviously
comfortable with what we're saying here. And the reality is, all we're saying is that
marketing efforts, discounting, et cetera, to achieve our yields forecast will not be greater
than last year or shouldn't be greater than last year. But that's not to say there wasn't
incentive for booking last year as well. So it's not that marketing activities won't continue.
It's not that -- but we're very comfortable with this forecast based on the information we
have to date, and we believe that they're very achievable. And we'll do what marketing
efforts we need to do to get it done. Clearly, the pattern is -- has been positive as we get
further away from the incident.
Howard S. Frank
I think as we've emerged from this period, and based on a lot of the surveys we've done in
different markets, not in all markets, certainly not in certain European markets, the issue of
the Concordia incident has really fallen away as a major obstacle for selling cruises. So it's
come back to great value, great vacations. And our guys, really apart from the Costa
situation, feel that things are getting better. So that -- the close-in patterns are good, which
is not necessarily always good for us. We like to see further out booking patterns, and I
think that's going to start to happen as business gets stronger closer in, then bookings get
pushed out and pricing gets -- becomes more sustainable. So I think they're feeling pretty
good about the situation, and we're not totally out of the woods. I don't want to suggest
that. But certainly, the trending seems to be quite positive right now.
Micky M. Arison

I think Howard's point is a good point. We've done consumer surveys now in all our major
markets, and all our brands are doing them. And by far, the #1 reason why people are
holding out is not safety. Safety is way down the list. There is a clear recognition that this is
a very, very safe industry. The #1, consistently across-the-board, is that expectation that
prices are getting lower. And at this point, there's no reason to believe that's going to be the
case versus last year. And hopefully, as people realize it, they'll come off the fence and book
their vacations.
Felicia R. Hendrix - Barclays Capital, Research Division
That's actually very, very helpful color. I appreciate that. And then just on Europe and kind
of in line with your answer there, obviously, there's weakness coming from North Americansourced consumer. You mentioned airfare among some other things, but what can you do to
offset that airfare issue as a gating factor for the North American consumer who might want
a cruise in Europe but who's kind of getting some sticker shock?
Micky M. Arison
Well, they can take Queen Mary 2.
Howard S. Frank
No. I mean, they're -- look, our guys are pretty creative when it comes to the marketing
side, and they are taking actions to strengthen the booking pattern for European cruises,
and they're doing it in various ways. Each brand does it uniquely different than the other.
They don't like -- they don't copy each other necessarily. So we're seeing bookings in
Europe. It's just -- it has been slow, and it's going to be -- it's probably not going to be our
best year in Europe and -- but I think that they will be creative. We haven't added a huge
amount of capacity, North American brands to the European programs this year. It is up
some, but not a whole lot.
Beth Roberts
5%.
Howard S. Frank
5%.
Micky M. Arison
By the way, I was only partially kidding. Because as airfares across the Atlantic get higher,
Queen Mary 2 gets to be a greater and greater value. And it's the best way to go to Europe
or back.

Felicia R. Hendrix - Barclays Capital, Research Division

Then you'd have to take 2 cruises.
Howard S. Frank
Absolutely.
Micky M. Arison
And you need...
Howard S. Frank
Nothing wrong with that, but the food is so much better.
Operator
Our next question comes on the line of Robin Farley with UBS.
Robin M. Farley - UBS Investment Bank, Research Division
I wonder, given that it's kind of a departure to have occupancy down, and obviously, it's to
protect the brand, does it make sense at some point to take some Costa ships out of service
to eliminate the operating expense while the occupancy is down?
Micky M. Arison
Yes. I want to at least have the opportunity to clarify that comment about occupancy with
Costa. It's clearly a short-term tactic based on present information and the fact that Costa,
in many of its markets, still is not doing any advertising. So it's the reality of the situation.
It's a tactic. As soon as that changes, as soon as they are comfortable from a PR point of
view to start marketing, they will do that and hopefully bring this occupancy up. But our
forecasts are built on the concept that the majority of their yield deterioration will be
occupancy.
Howard S. Frank
Right. And just let me comment further that a lot of the occupancy loss is occurring now. So
on a shorter time frame, we'll see a greater proportion of the occupancy loss. Longer term,
further out, we shouldn't have much occupancy loss on any of the brands. And then just one
more point on the issue of looking at other possibilities, I mean, clearly, the company -because it has a unique ability to source in so many different markets, it is looking further
out and into 2013 at their itineraries, currently, and will make some adjustments indeed, I

think, for this winter. This coming winter, they're moving another ship to the South
American market, to the Brazil and Argentina zones.
Micky M. Arison
Brazil.
David Bernstein
We did, by the way, think about and look at laying up ships. But because of the disruptive
nature and the short-term nature of the occupancy decline, we don't believe that, that
would make sense for the long-term strength of the brand.
Robin M. Farley - UBS Investment Bank, Research Division
Okay, great. And then I wonder if you can give a little bit of color. You talked about some of
the sequential year-over-year changes for the Costa brand, seeing how that had improved
from the initial weeks. Can you give a little bit of color on the change for North American
brands or company-wide x Costa? You mentioned down mid- to high-single digits, and that
sounded like a cumulative change over the 7 weeks, but just to get some sense of how that
trended from week 1 through week 7.
Howard S. Frank
Yes. I think for North America, what we're seeing is actually a little bit of surprise. The
contemporary brand Carnival seems to be performing stronger than their premium brands
and -- but I think part of the premium brand issue as we read through it is also these
European cruises this spring, summer and fall. But Carnival, we thought there would be
more of a first-timer issue. They seem to have come through this quite nicely right now.
And first timers appear to be, from everything they can see because their bookings have
been up recently, that first timers -- we don't have the data specifically on first timers. It's
too early, but it looks like Carnival Cruise Lines will not have any kind of a problem. For
Holland America, Princess and even Seabourn, they're doing fine, except for these European
cruises, and they're doing all they can to try to shore that up right now. But Alaska seems
to be okay. Their Caribbean programs are fine. All their other long-term programs are fine.
So I think that's sort of the North America situation. And it has gotten stronger each week.
As I say, it's a little bit uneven, depending on how much marketing they're doing. But each
week, the pattern is getting stronger and stronger.
Micky M. Arison
It's interesting because the perception out there was that Carnival Cruise Lines, because
they have more first timers and more North America and because of the name recognition,

vis--vis Costa, would be most impacted. But in reality, they've been the least impacted.
And in fact, their business is up year-over-year. And they're our best performing brand right
now on a year-over-year basis.
David Bernstein
Looking at the North American brand specifically, I mean, shortly after the incident, they
started down in the double-digits, and they improved considerably. As Howard mentioned in
his notes, it varies week by week, depending on the marketing activities of each brand. But
it is, overall, a general positive trend into the low-single digits.
Robin M. Farley - UBS Investment Bank, Research Division
So in other words -- thats what I was trying to clarify. If the down mid- to high-single digits
is cumulative, and it was initially down double-digits, are the last sort of 2 weeks or so down
-- it sounds like you're saying its down less than 5% year-over-year?
Howard S. Frank
It's really -- I'd rather give you overall -- youre really looking at it on a rolling basis
because the weeks can be very uneven. But they are getting positive, yes.
Operator
Our next question comes from the line of Steven Kent with Goldman Sachs.
Steven E. Kent - Goldman Sachs Group Inc., Research Division
Can we just talk a little bit about the $173 million charge related to Ibero goodwill and
trademark? I guess I don't completely understand it because by taking the charge, and
you're saying slower-than-anticipated capacity growth due to the current state of the
Spanish economy, does that essentially assume that you think the Spanish economy will be
weak forever? That's the way I read that write-off and how you're able to do it. And then...
Micky M. Arison
Can I answer that question first?
Steven E. Kent - Goldman Sachs Group Inc., Research Division
Sure guys. Sure.
Micky M. Arison

The reality is the way this is done -- and maybe David can explain it better than I can. It's a
long-term model, and in that long-term model, we had projections of moving ships into the
brand and growing the brand over time. In reality, over the last 12 months, we have
reduced capacity by moving the Grand Voyager out of the brand, and our competitors,
Pullmantur, have also pulled capacity out of the marketplace. So was it realistic to continue
to assume that we're just going to add capacity when we're actually reducing capacity? And
so when we pulled that capacity out of the model, it required this write-off. David...
David Bernstein
Correct. Yes. We just basically slowed down the future growth of capacity. We still believe in
the Spanish market longer term. But at the moment, I think we've said a number of times
that Ibero was struggling as a result of the economy. I think the unemployment rate is still
like 20% in Spain. And as a result of that, we felt this was the right thing to do.
Howard S. Frank
Yes. I mean, I think, Steve, it's going to take longer. I think we felt it's going to take longer
for the Spanish economy to return to reasonable levels of strength so that -- it was hard to
justify today, that 3 or 5 years, whenever we're adding a ship, would happen. We just -with a marginal call on the goodwill for a while, we were covered with this additional
capacity 3, 5 years out. But once we took that capacity out of the model and it was difficult
for us to support it internally, we just felt uncomfortable with it, that let's just take it out
and take the charge so we don't have to deal with it later on. It doesn't mean we wouldn't
add that capacity later on if the market supported it. And clearly, we think the Spanish
market will come back, but it may take a few more years than we originally thought. That's
clearly seems to be what people are saying.
Steven E. Kent - Goldman Sachs Group Inc., Research Division
I guess I just -- if you did add capacity back on, then what's the accounting for it? I mean, if
you decided to do that in 2 years?
David Bernstein
There's no change. You can't write back up goodwill.
Steven E. Kent - Goldman Sachs Group Inc., Research Division
That's what I thought. Okay. So then the second issue is, just on Costa, I think it was you,
Howard, who had said that you thought it would come back in 1 year or -- that was your
number. What was -- or your time frame. What's giving you the confidence that it's 1 year
and not 6 months or 3 years?

Howard S. Frank
Well, there's been a lot of -- when I said -- let me get into that. When I said come back, I
said, for most markets, the pattern should start to -- they expect the patterns should start
to normalize in about a year. Now what -- all the work and research have been -- huge
amount of research done over in Europe by Costa on the process by which -- how this is
going to happen, using benchmarks from other companies had in crisis situations. I think
that -- while there's nothing that says that this pattern's going to follow those patterns,
there is a feeling that on many of the major -- and by the way, we're starting to see -many of Costa's markets are coming back already and starting to show some normalization,
but they're not the major markets. The major markets for Costa will be Germany, Italy of
course, France and Spain. We're seeing evidence in France and Spain, actually, of their
business coming back already, less so in Italy and Germany. But we need Italy and
Germany. Italy for sure, and...
Micky M. Arison
Actually, Germany had a good week last week, but 1 week is not...
Howard S. Frank
Yes. Italy, for sure, is going to be the major challenge. But I think the feeling is that 1 year
from now, based on these very smart people who seem to have been through this before
and the sense of the positive trending we're starting to see now without any marketing out
there, that we should get back to more normal booking levels. Where the pricing -- I think
-- I'm not sure pricing will come back to the same levels, but we'll see. But I think we'll
gradually come out of this in '13. I think '13 should -- obviously will show an improvement
over '12, but it may take 1 year or 2 to get back to the kind of profitability that we expected
to have in 2012.
Micky M. Arison
And obviously -- it's blatantly obvious, but from 1 year ago, Costa's capacity now will be
down 3 ships with -- they sold the Costa Marina, the Concordia and, now, the Allegra. So
their capacity is 3 ships less than we would have expected in '13.
Operator
Our next question comes from the line of Harry Curtis with Nomura.
Harry Curtis - Nomura Securities Co. Ltd., Research Division

Just a clarification and then a bigger-picture question. So in your comments, you mentioned
that Costa has swung about $500 million in profitability to a loss of $100 million. About how
much of that -- how much is that on an earnings basis? And is that -- that's embedded in
your 2012 guidance?
Howard S. Frank
Yes. I mean -- yes, that's all in -- what I was trying to do was explain the major reduction in
guidance, and that represented $0.65 of the $1.15 in lower guidance, Harry.
Harry Curtis - Nomura Securities Co. Ltd., Research Division
Okay. And then just a 30,000-foot question. In the hotel industry, there's an adage that the
industry doesn't really know if it's overbuilt until it builds one room too many, and that's a
topic that probably applies to the cruise industry as well. And my question is, is it overbuilt?
Should the industry really be adding any capacity here?
Micky M. Arison
We're still -- you can go back to the normal stuff. We're still a very, very small piece of the
vacation market. And the reality of the growth potential in many of our markets is still very
big. And we've said that we're growing at a much, much slower pace, 2 to 3 ships a year,
and we've also said that the 2 or 3 ships a year will not be all incremental capacity because
some of the older ships will be sold and taken out of the fleet. And in fact, the Allegra was
for sale, and we had anticipated taking her out of the fleet as soon as we had a buyer. So
the growth rate will be coming down, but I still think there's plenty of growth potential in
this industry. Remember, unlike the hotel industry, we operate at full occupancy. Hotel
industry operates at 70% or 75% occupancy.
David Bernstein
And with 2 to 3 ships a year, if you net out some sales as Micky mentioned, you're really
probably only talking about a 3% or 4% capacity growth, which was really in line with the
population growth in many of the markets and where we operate. And actually, it is less
than the growth of the, let's say, the 45-plus age population growth in many of the markets
we're operating. So we feel that we have slowed down the capacity growth in line with our
overall marketplace.
Harry Curtis - Nomura Securities Co. Ltd., Research Division
But as a practical matter, the industry through the cycle has really only averaged maybe
just over 1% yield growth, and that's not going to drive your return on invested capital. I

think you've got to get your pricing higher to do that. And so has there been any
consideration that the 2 to 3 ships a year should really be a lower number?
David Bernstein
But keep in mind, Harry, the 1% you're talking about is in a period of time where you're
talking about a high-single digit, and in many cases, double-digit capacity growth. And so
now, we're talking about low-single-digit capacity growth. And the reason we changed the
strategy was for the very point you mentioned, in the hopes that we wouldn't necessarily
have to discount the cruises as much compared to other vacation alternatives. We could
begin to close the gap, get a little bit more pricing power and improve our return on
investments.
Howard S. Frank
There's no question, we agree with you, that the product deserves much higher yield growth
and, hopefully, in the future, we'll see it. But we have gone through a financial crisis, and I
won't go through the whole litany of stuff. But the reality is that we believe, with the slower
capacity growth, that in a normalized period of time, we can get significantly higher yield
growth. And historically, we haven't had cost growth so that the returns could return.
Operator
Our next question comes from the line of Greg Badishkanian with Citigroup.
Gregory R. Badishkanian - Citigroup Inc, Research Division
As you look out to 2013, I'm assuming, if you kind of even exclude the Costa line, that
things will be normalized by then. And if that's the case, would you actually expect maybe
even a greater bump up in terms of the growth rate, in terms of whether it's bookings or
net yields, just because you face really easy comparisons from -- you'll face easy
comparisons from 2012?
Howard S. Frank
Greg, the one thing I will agree with you on is the comparisons will be easier for 2012. I
hate to get into talking about 2013 just yet. I think it's still early. But clearly, the
comparisons will be easier. I think we like -- look, I think we've got a great business. I think
we like -- we got our strong brand positionings in each of the major markets. When we
started the year, this year, the first 2 weeks of January, where I mentioned our business was
quite strong, our bookings were up, our pricing was up, especially in North America, we
were feeling that this could be a very, very strong year, and then this event came along. So
yes, I think 2013, absent exogenous events that -- and the European economy going into a

real tailspin, we're doing okay. Even the U.K. market -- North America looks fine to us,
actually. U.K. market, even with all this noise out there, is coming right -- it's coming
through very nicely right now and with very little sign that the incident is affecting their
business at all right now. And so we feel good about that, and we know Germany's going to
come back. The AIDA brand is an amazing brand with an amazing management team, very
talented people running it and the strongest position in the German market. And Costa, we
think it's going to go through a little bit of pain this year and a little bit less pain in 2013,
but it clearly will be better. And so I think the future is bright for us. I really feel good about
the business right now.
Gregory R. Badishkanian - Citigroup Inc, Research Division
And just kind of keeping on the theme -- I mean -- so when you look at your price versus
occupancy, how do you look at that? Because, I guess, in -- next year, it's a lot harder to
recover if you start discounting now. So are you thinking maybe even give up a little bit of
occupancy because then it's easier to kind of work off the pricing base that you'll have in
2012?
Micky M. Arison
Our long-term strategy on occupancy and price has not changed. Our discussion about
giving occupancy in Costa is a short-term tactical situation based on present events. But
you should expect that our long-term strategy, which we believe is the way to maximize
profitability, has not changed.
Operator
Our next question comes from the line of Tim Conder with Wells Fargo.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
First of all, just a clarification. The $30 million, roughly, deductible, or right about that
amount for the ship, where is that included in relation to the whole comments regarding
Costa? So just a clarification from that standpoint. And I guess the other one also, if you
would have the capacity by quarters, inclusive of Costa? And then I guess more of a real
question here too. Given that Costa, the Carnival brand and AIDA appear to be your most
profitable brands, and the Carnival brand, you've already commented on, what it's doing;
and then AIDA, as AIDA starts to come back, how much of a recovery, I guess, have you
built into your expectations for this year for the AIDA brand in 2012 from the present levels?
David Bernstein

Okay. Well, let me start with the $30 million deductible relating to the Costa Concordia. At
the time we put that into the 10-K, it wasn't clear what the end result of the ship would be.
Now that it's been declared a constructive total loss, the deductible no longer applies. It's
just a part of the overall policy. And therefore, that $30 million disappeared from the
financial analysis. As far as the capacity by quarter, let's see. The total capacity, were up
3.7% in the first quarter; 2.7%, second; 2.9%, third; 2.9%, fourth; and 3.0% for the full
year.
Howard S. Frank
That includes Costa.
David Bernstein
And that includes Costa, yes.
Howard S. Frank
On the AIDA question, Tim, I think they've taken down their revenue yields as a result of
these -- this hit. This interim hit. But they see the business coming back so their -- but they
have -- for purposes of our forecast, they have taken down their revenue yields as a result
of the incident. But I think that they're starting to see business come back. But there will be
some level of hit because they've taken -- in order to fill close-in, they've had to take pricing
down a little bit.
Micky M. Arison
I think last week, they were up year-over-year for the first time. So that was very
encouraging.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
On the bookings, Micky?
Micky M. Arison
Yes, yes.
Howard S. Frank
Correct.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

And then I guess my other question is back to more, let's call it, normal state of affairs, one
of the prior questions related to the slower capacity and so forth. Yes, you've had some
good cost leverage and a good history of doing that. Do you still feel comfortable of
maintaining that -- I guess you'd said before roughly 1/2 the rate of inflation or so, with the
lower capacity growth as you look out into '13, '14 and '15 at this point.
David Bernstein
We've consistently said flat to 1/2 of inflation. And the reason we're comfortable with that is
because we are working on quite a number of things. We have a corporate group. Weve got
a profit improvement program. They've got lots of different things going on. The gold mine
of opportunity for us is the continuation of the brands working together to leverage our size,
to work through collectively in order to save money. And we've been working on that
extensively over the last couple of years, and that gold mine of opportunity is far from
completely harvested at this point.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Okay. And if I may, one...
David Bernstein
Short answer is yes.
Howard S. Frank
Answer is yes.
Timothy A. Conder - Wells Fargo Securities, LLC, Research Division
Okay, okay. One last clarification. The Allegra, at this point, scrap? Or can it be recovered
and then eventually sold as you were originally planning?
Micky M. Arison
Yes. I mean, we've written her down because it was our intent to -- it is not our intent to
put her back into service, and we believe that the repair cost will be more than we'd want to
spend to put her back in service. Whether we sell her or scrap her, that decision hasn't been
made yet. We have to get a full cost of what it will take to repair her. She's on the market
for sale, she has been, but we're going to have to obviously reduce the price of the ship for
sale, and well see what happens.
Howard S. Frank

In the last year or so, there have been a couple of different groups expressing an interest in
that ship.
Micky M. Arison
We've written her down to a level that we feel comfortable that we'll be able to get at least
that.
Operator
Our next question comes from the line of Steve Wieczynski with Stifel.
Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division
Most of my questions have been answered, but just going back to the expense question,
David, I guess when we look at your expense forecast now, I'm pretty surprised it's
essentially still flat from where it was back in December. And you talked about that you guys
identified some expenses that you can cut out. Can you just walk us through just where
those are coming from or maybe what buckets those are coming out of? And then does your
expense forecast include anything in terms of higher cost for whether it's safety standards
or insurance deductibles or anything like that?
David Bernstein
Yes. We looked at every single line item. To start with, on the advertising front, I mean, we
had talked about the fact that advertising was down in the first quarter because all the
brands essentially stopped advertising for some period of time after the event. We do expect
to spend most of that money in the remainder of the year, but probably not all of it. So
some of it came in the form of advertising. We looked through the G&A expenses, travel,
training, cutting back in all areas that weren't essential. All of the operating companies'
CEOs talked to their people and identified numerous items relating to ship operating
expenses that could be saved without impacting the product. And one other item is we built
our forecast early in the year on inflation assumptions. And what we noticed was, in the first
3 months of the year, our inflation assumptions were a little high, so we brought them down
for the back half of the year. And as a result of the lower expectations, we were able to
reduce costs in the remaining 3 quarters to cover some of those one-time expenses we
talked about.
Howard S. Frank
I guess just a clarification, just probably because I'm more sensitive to it than some other
people. But when David talks about saving on training, the focus is on hotel training, not
safety training, not emergency training. Just hotel and that sort of stuff.

David Bernstein
Mostly shore and shore-side training.
Micky M. Arison
Just to finish up on the issue of potential regulations, clearly, this is something that, with the
safety group that we have, both internally and with CLIA, those recommendations, when
found, would go to the IMO. And if they think that we can institute immediately, we would
obviously do that like we did with the muster drill change that we did with CLIA. But
anything that was more structural or anything like that, that would be costly would have to
go through the IMO process that would take quite some time. So it's not something that
would be in our '13 expectations -- our '12 expectations, sorry.
Operator
Our next question comes from the line of Assia Georgieva with Infinity Research.
Assia Georgieva
Howard, I wanted to ask for a clarification. When you gave Q3 and Q4 outlooks, those were
without Costa. Is that correct?
Howard S. Frank
Yes. And I didn't give -- actually, it wasn't the outlook. It was really the current status of
bookings, and it was without Costa, x Costa.
Assia Georgieva
Would you be able to give us that type of color on Costa only?
Howard S. Frank
I think the issue with Costa is that since it's -- everything related to what that company is
going to do this year is going to be such a one-off situation that to try to -- and even
speculating on the situation or giving you data points, I don't think is worthwhile
information. Let's just look at it for this year as a very challenging year, a rebuilding
process, a retooling process, a remarketing process. So when you're not looking -- when
you don't have marketing out there, your websites aren't doing any marketing. Even your
basic website is difficult to market on today. Giving you information like that, I think,
wouldnt enable you to get a sense as to what the real business is doing. That's why I chose
to say -- look, this is what the profit we expected it to be, this is what the profit loss is
going to be, this is the swing, and let's look forward to 2013.

Assia Georgieva
Okay, fair enough. Going back to the state of affairs for Q3, and again, I guess, excluding
Costa at this point, do you -- have you built any upside on a year-on-year basis, given that
in April and May we are entering much easier comparisons when we had the Arab Spring
and the Japan earthquake events impacting bookings in the year-ago period? Is that built
into your Q3 forecast? Or are you waiting to anniversary it and then see how it goes?
Micky M. Arison
Our forecast is built on what our brand's booking patterns are now and what they perceive
they will wind up with at the end of the year. And then we look at it for reasonability. And I
think, based on everything that's happened, everybody's a bit conservative. But obviously,
it's our best shot at where we're going to wind up. And historically, we've done a pretty
good job of that. Obviously, this is the unique set of circumstances, and that's why the
ranges are a little broader. But I don't think it has anything to do with last year. I think it's
based on what we're seeing right now and what the perception is going forward and where
we're going to wind up.
Howard S. Frank
And remember, the MENA effect last year was mostly within Costa. A large portion of the
cost of MENA was actually in the Costa brand. So most of the other brands, I think, are
marginally affected by MENA, but not to a great degree.
Micky M. Arison
Yes. The 300 itinerary changes that were made last year because of MENA were virtually all
Costa.
Howard S. Frank
And maybe that's why you were interested in Costa, Assia. I mean, I don't know, but yes.
Assia Georgieva
Well, partly because of that, and also just to get more of a sense as to how you expect their
booking patterns to recover over time, since you gave us the breakdown the first 4 weeks -the most recent 3 weeks. I thought that would be interesting. And again, one last question.
Any update on the time frame for the removal of the Concordia hull at this point? Or are you
still waiting on bids to actually finalize plans?
Howard S. Frank

Well, one of the challenges, I think, is going to be the salvage of that ship. Salvage bids just
came in earlier this month, and theyre being evaluated right now. Realistically though, I
mean -- and that's one of the challenges Costa's going to have -- we don't expect -- it's
going to be a unique salvage. It's never been done in this order of magnitude. So there's a
lot of planning and engineering that needs to go into it and probably building some unique
tools to do it with. And it's realistic to think that the process -- what they're saying right
now is we shouldn't expect the salvage process to begin until after the summer. So it could
be there for quite some time, the hull of the ship.
Assia Georgieva
And I imagine winter -- yes, go ahead David.
David Bernstein
Yes. No, Costa did indicate in a press release this morning that because of the complexity,
they do expect the duration to be 10 to 12 months overall.
Operator
Our next question comes from the line of Jaime Katz with Morningstar.
Jaime M. Katz - Morningstar Inc., Research Division
Can you guys talk a little bit about how the incentives have changed, the level of them yearover-year, and maybe how that might impact onboard spending in the next quarter or 2?
And then also if you have any more color on Alaska, that would be really helpful. I think -I'm not sure if I recall correctly, but I think it sounded a little bit more positive on last
quarter's call.
David Bernstein
Jaime, when you say -- you said the level of incentives, you're talking about the pricing?
Jaime M. Katz - Morningstar Inc., Research Division
Well, yes, the pricing and what you guys are using to get people onboard, whether that's
onboard credits or some sort of program like that to incentivize them.
David Bernstein
Well, overall, I mean, all our brands, depending on the marketplace and the itinerary, in
some cases, it's pricing. In some cases, it's an upgrade. In some cases, it's an onboard
credit. Our brands are very creative, and they do what works in each situation. So there's a

little bit of everything thrown in across all of the brands around the world. As far as the
onboard spend is concerned, Howard did indicate that excluding Costa, he expected the
prices overall for the year to be in line with the prior year. So taking a look at that, we
weren't necessarily expecting a significant change, and we built into our onboard revenue
forecast an increase. We actually had -- excluding Costa, we probably had about 1.5 points
of yield increase on the onboard side in the December guidance. The first quarter came in
much more than we had anticipated, and so we did build in a little bit of an increase in
those numbers for the remainder of the year. So we are seeing some good onboard spend
increases. All of the categories are up, all the major categories, including casino in the first
quarter. I was quite pleased by that.
Howard S. Frank
On the Alaska question, Jaime, I dont remember what actually -- what we actually said on
Alaska. I think Alaska's been pretty consistent and solid. Not spectacular. But I think -- if
anything, I think it may -- the picture maybe look a little bit better, maybe at the expense of
Europe for all I know. But I mean -- people doing more Alaska cruises than Europe cruises
because of the cost of Europe cruises going up. But Alaska seems to be doing okay.
Operator
Our next question comes from the line of Jamie Rollo with Morgan Stanley.
Jamie Rollo - Morgan Stanley, Research Division
I've got a couple of questions on yields. First of all, on Costa, you're saying it has a 2- to 4percentage-point impact on group yield, which applies Costa yields down 15% to 25% or so.
But then you also said bookings are down, I think you said, 40% to 50% of the last 4
weeks. That seems to imply quite a sharp recovery over the next few months. And then the
other question was -- I'm just interested in trying to strip out the sort of noise postConcordia and what sort of trajectory you were on. In ways, you said it started well. Your
onboards are better. Royal was guiding originally to 2% to 4% underlying. I'm just
wondering whether you would have increased your original yield guidance of 1% to 2%.
David Bernstein
Okay. Well, as far as Costa's concerned, Jamie -- I mean, you're right. The math -- the way
the math works since it's 15% of our capacity, that 15% to 25% range makes sense. One
thing to keep in mind that we talked about is the majority of that is going to come in the
form of occupancy when you're talking about yield decline. So at the moment, Costa's
behind in terms of bookings in the high-single digits. So they can continue to be behind on a
year-over-year basis considerably to wind up with a 15% to 25% occupancy decline -- or
yield decline, most of it coming from occupancy. This isn't a situation where Costa has to

catch up. It's not a zero-sum game. They don't have to exceed last year's booking patterns
in order to make this guidance. So it's a little bit different from that perspective. As far as
the full year guidance is concerned, we did exceed the guidance in the first quarter. It was
1.5% to 2.5%. We came in at 2.9%. So the year was starting off strongly. We're very
pleased. I think Micky indicated that before. So I'd like to believe we might have increased
it, but it's very hard to say at this point what would have happened.
Howard S. Frank
I'm not sure if I said this, but [indiscernible] is asking me this question. But North America
brands for that first 2 weeks of January were up in the mid-teens levels in terms of
bookings. So it was off to -- we were off to a very, very positive start for North America.
Micky M. Arison
Even the booking period over the holidays, which is normally extremely quiet, was very
strong this year. So we were very encouraged up until January 13.
Jamie Rollo - Morgan Stanley, Research Division
Okay. And if I could just follow up on Costa. Are you absolutely confident in the future of the
brand? Is there any risk it does need a sort of rebranding or anything like that? And also,
what's the goodwill for Costa please?
Howard S. Frank
We are totally confident in the brand. I mean, it's a global brand. All the surveys we've done
so far, whether they're in Continental Europe or other markets, indicate that the issue,
certainly in other markets, is becoming less and less of an issue, the incident itself. Business
has picked up in these other markets, and we're forecasting that it will take time in the
Central European markets or primary European markets to get back to normal. But there's
no reason -- I think people, even in Italy, are seeing this as a one-time freak event and
don't see it as a fundamental issue with the company or the brand or the management or
the safety of the ships. It's just a very unfortunate incident, and most of the polls seem to
support that notion, so -- and are getting better and better on the issue. So we think it's
going to come back fairly -- take 1 year, 2 to come back, but it's going to come back.
David Bernstein
Jamie, we don't have the goodwill for Costa with us, but you can call Beth after the call. I'm
sure she can fill you in on some of the details. I will say that when we last did the Costa
goodwill test, which we did -- we do every July, there was a considerable amount of

headroom. And our expectation is that the brand will be rebuilt, and it will perform, and so
we're not concerned about a goodwill impairment in relation to Costa.
Micky M. Arison
One of the encouraging things is -- obviously, Italy is the biggest issue. And our surveys -we've done extensive surveys in Italy. And the encouraging thing is that the Italian
consumer continues to view Costa as a great vacation option and a terrific vacation value.
When the majority of the population feels that way, you feel very strongly that once we get
past this, they're going to want to experience the product because that's the way they feel
right now. So wherever -- there's no question that Costa's going to come back and come
back stronger than ever over the long term.
Jaime M. Katz - Morningstar Inc., Research Division
On the comment about the $3.3 billion of free cash flow, which includes, I guess, $0.5
billion of insurance proceeds, that just about covers the capital investment and the quarterly
dividend as it currently is. Are you signaling you're unlikely to return additional cash to
shareholders this year, please?
Micky M. Arison
We're not trying to signal anything. We're just trying to give the facts as they are. We
weren't trying to signal anything.
Howard S. Frank
Just that [ph] there would be no need to go to the markets to borrow any money in the
banks. And our cash flows will cover our dividend, as well as our capital cost for the year.
Operator
Our next question comes from the line of Edward Stanford with Oriel Securities.
Edward Stanford - Oriel Securities Ltd., Research Division
Just one question, if I may, picking up on your comments just now on the dividend. Should
we read anything into your declaration of the dividend post the Concordia incident? And how
does that fit relative to guidance in your 30% to 40% payout ratio plans, please?
David Bernstein
I think, overall, we said in the long term the 30% to 40% was our target. But the reason we
chose the 30% to 40% was because we believe that, that was sustainable through all

cycles. This is a cycle, and therefore, we're -- we believe the dividend is sustainable until
the earnings comes back.
Micky M. Arison
And that was kind of -- I mean, that's what we have pointed out in the press release, that
the cash flow is sufficient to cover all our CapEx and the dividend.
Operator
Our next question comes from the line of Ian Rennardson with Jefferies & Company.
Ian Rennardson - Jefferies & Company, Inc., Research Division
It's Ian Rennardson of Jefferies. I just have one final question. Are you comfortable that
your insurance will cover all eventualities?
Howard S. Frank
Yes, we're comfortable.
David Bernstein
Yes.
Micky M. Arison
Yes.
Operator
Our next question comes from the line of David Liebowitz with Horizon Kinetics.
David Liebowitz - Horizon Kinetics LLC
First, when will the Italian Naval Board issue their report?
Micky M. Arison
We have no idea. No. Italy is Italy, and they're going through their process. We're
cooperating in every way we can.
Howard S. Frank

You mean the Coast Guard or Naval? Or Coast Guard?

David Liebowitz - Horizon Kinetics LLC
Well, whatever the point of inquiry is, are we talking then something, let's say, by June or
October? I mean do you have...
Howard S. Frank
No, I suspect that -- look, I don't know which particular -- there are a number of different
organizations regulatory-wise looking at the incident and probably will do some -- their own
evaluations. There's also a prosecution -- ongoing question of prosecution for the -- against
certain people or potentially the company. But we don't think that's going to happen relative
to the event. That could go on for quite some time in Italy, as Micky indicates.
David Liebowitz - Horizon Kinetics LLC
Well, second, how are we doing with our -- if not hedging whatever contractual
arrangements we're making for fuel for the balance of this year?
Micky M. Arison
I think David went over that. You want to...
David Bernstein
Yes. It's in the press release. We've got the table for the back half of 2012, as well as '13,
'14, and '15 where 20% of our consumption is collared.
Micky M. Arison
Is collared, yes.
David Bernstein
So nothing for the second quarter, but 20% in the third and fourth.
David Liebowitz - Horizon Kinetics LLC
And given the collars, et cetera, how low would the price of fuel have to go for you to
foreshorten the Q1, Q2 crossings so you could get an extra selling or 2?
Micky M. Arison

We'll never do that if the fuel consumption is just too large. The likelihood is we'd lengthen
it rather than shorten it. When we lengthened it from 6 to 7 days, the fuel savings was high
enough that we didn't need any additional revenue to make the profitability increase. And in
fact, we did get some additional revenue. So it was the correct decision, and we're actually
studying lengthening it again to reduce the speed again. I mean, we have a huge focus on
reducing consumption.
Howard S. Frank
And the passenger response on the ship has been terrific. They don't have a problem taking
the additional day at sea.
David Liebowitz - Horizon Kinetics LLC
And lastly, the amount or quantity of bookings you are receiving from onboard passengers,
has that been continuing to go up as it was the last few years? Or is there some sort of
ceiling it may have hit?
Micky M. Arison
Im sorry. I don't know the answer there.
Howard S. Frank
I really don't know the answer. That will vary, by the way, by brand, David, in terms of how
much marketing. Certain brands do a lot more marketing onboard than others for future
cruises. So it really varies by brand. But I don't -- we don't have any across-the-board
answer for you on that. Sorry.
Operator
Our next question comes from the line of Manis Menarils [ph] with Exane [ph].
Unknown Analyst
I just have 2 quick questions, please. Did I hear you correctly when you said that you would
expect 1 to 2 years to come back to the expected profits for the group? So would that read
-- would I have understood well? And the second point, on the operating cash flow of $3.3
billion, given the CapEx you've guided for and your dividend expectations, would that mean
that you would operate on a broadly stable net debt in FY '12 versus 2011?
Micky M. Arison

The first part of your question, I would say that -- we said 1 to 2 years for the Costa brand.
I think we believe the other brands will recover much more quickly. And as I think we've
said, Carnival Cruise Lines is actually booking up year-over-year. So we think the recovery
will be much more quick for the non-Costa business. It's hard to tell on Costa. There is
feeling that it's going to be 1 year or 2. Actually, I have to say that although the consensus
is that, I believe it will come back faster than that. So we'll see. Second part of your
question?
David Bernstein
As far as the net debt, it will be -- essentially, that does imply it will be flat. We do have
some maturities this year, but we also have a couple of export credits associated with the
ship deliveries. So it should be essentially flat for the year.
Unknown Analyst
Okay. And can I just have a follow-up on CapEx? After the Allegra, do you have any
expectations for boosting your CapEx or revisiting some of your ship engines or safety or
whatever that you should book this year?
Micky M. Arison
We have a very extensive refit program going on at a number of our brands, and that is
already in our CapEx expectation prior to this quarter. We also, based on lessons learned
from a prior but similar event, we have had extensive refits to a number of our ships to
improve the safety of the fire prevention systems in the engine rooms. And we've spent
many millions of dollars over the last 12 months refitting the ships with additional safety
equipment in those areas.
Beth Roberts
The CapEx requirement for this year is expected to be $2.6 billion, dropping down to $1.9
billion for 2013. Included in those numbers is an investment of $700 million to $750 million
for other CapEx for the existing fleet.
Operator
And we have no further questions at this time.
Howard S. Frank
Okay. Well, I thank you all for calling in. And if you have any further questions or details,
Beth will be available for the rest of the day. Thanks so much. Have a great day, everyone.

Micky M. Arison
Thank you very much.
David Bernstein
Thank you.
Operator
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.