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Carnival Corporation and plc (NYSE:CCL) (NYSE:CUK)
Q2 2018 Earnings Conference Call
June 25, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Arnold W. Donald -- President and Chief Executive Officer

Good morning, everyone, and welcome to our second quarter 2018 earnings conference call. I am Arnold Donald, President and CEO of Carnival Corporation and plc. Today, I am joined by our Chairman, Micky Arison, who is in Europe right now, as well as David Bernstein, our Chief Financial Officer, and Beth Roberts, Senior Vice President, Investor Relations, both here in Miami.

Thank you all for joining us this morning, and thank you for joining us on what is known internationally as the Day of the Seafarer. Thanks to all those seafarers out there for the positive impact they have on our everyday quality of life the world over.

Now, before I begin, please note that some of our remarks on this call will be forward-looking. Therefore, I must refer you to the cautionary statement in today's press release. We delivered the strongest second quarter adjusted earnings in the history of our company, and that's on top of last year's record results. Adjusted earnings of $0.68 per share were more than $100 million higher; that's more than 30% higher than prior year, as well as $0.10 above the midpoint of March guidance, and $0.08 above the high end of our March guidance range.

These record results reflect the efforts of our passionate, 120,000+ employees, who go above and beyond every day, as well as that of hundreds of thousands of travel professionals who support our brand. Collectively, those efforts helped to mitigate a $0.19 drag for the year from fuel and currency, both moving against us since the time of our March guidance.

Our full-year guidance is now below March guidance in the range of $4.15 to $4.25. We continue to have strong operating performance. Despite the impact of fuel and currency, the midpoint of our original December guidance of $4.15 has become the floor for our current full-year guidance, reflecting continued strength in the business.

Essentially, strength and underlying demand for our approved offerings fostered greater ticket prices year-to-date, and more than offset the unfavorable impact of fuel and currency for the full year compared to our December guidance. It was reinforcing to see constant currency revenue yield growth this quarter of roughly 4.8%. Now, that's on top of the 4.1% improvement achieved in the second quarter last year. We continue to drive revenue yield growth by increasing demand in excess of our measured capacity growth through our ongoing guest experience, marketing, and public relations efforts.

By all accounts, this was a significant quarter for our company. Not only because of our record-breaking financial results, but because of a milestones which will contribute meaningfully to our future success. We introduced two spectacular new ships, an important part of our measured capacity growth strategy.

In March, we delivered Carnival Horizon, offering Carnival Cruise Line guests even more ways to choose fun from a new Dr. Seuss-theme waterworks aqua park to Guy's Pig & Anchor Smokehouse Brewhouse, serving up real deal barbecue favorites by Guy Fieri, as well as four new craft beers brewed onboard, a nice complement to Guy's hugely popular Burger Bar, serving arguably the best burgers at sea. The ship also features the skyride aerial experience and IMAX theater, and Family Harbor, featuring extra roomy accommodations.

Carnival garnered nearly 250 million media impressions around its creative naming ceremony in New York City, which included showcasing the talented young artists from St. Jude Children's Research Hospital, reaffirming Carnival's long-standing strong support of St. Jude's. Festivities included an entertaining lip sync battle between Horizon's godmother, Grammy-award winning artist and actress, Queen Latifa, and Philadelphia Eagles Super Bowl Champion kicker, Jake Elliott.

Also during the quarter, our ultra luxury brand, Seabourn, debuted the fifth all-suite ship in its fleet. Seabourn Ovation provides guests with a private veranda in every luxurious sweet, sophisticated décor fashioned by Adam Tihany, and a new al fresco dining venue, Earth and Ocean at the Patio, as well as a number of innovation programs including an evening with Tim Rice, Spa & Wellness with Dr. Andrew Weil, and the Grill by Thomas Keller.

Select sailings will also Adventures by Seabourn program, which are expedition-style excursions featuring a team of world-class expedition experts with a focus on allowing guests to experience nature up close. Seabourn Ovation launched on May 11 at a distinguished naming ceremony in the Lesser Maltas with highly acclaimed actress and singer, Elaine Page, serving as godmother during the ceremony that lit up the UNESCO World Heritage site.

Our measured capacity growth strategy also takes into consideration the replacement cycle of less efficient ships. Over the last 12 years, we have sold 22 vessels into the secondary market, including the two ships that left the fleet this past quarter. We plan to continue removing ships from our fleet and remain on track to sell, on average, one to two ships annually, with more announcements expected later this year.

Moreover, we achieved a number of milestones in a strategic core development efforts around the globe. In the Alaska, Holland America Group recently announced a minority position in a joint venture to further strengthen our ties in Skagway, Alaska, the gateway to a legendary gold rush region and destination for 80% of our Alaskan cruises. In Spain, we recently opened a second, new, state-of-the-art terminal in Barcelona. We bring over 1 million cruise guests a year to Barcelona.

In Australia, where 7 of our 9 brands operate, we entered into an important, long-term agreement with the Port of Brisbane. We will have priority berthing rights at a new terminal to be completed by 2020, enabling our brands to have even more calls and take even larger ships to Brisbane. At the same time, we are expanding and diversifying the home ports we sail from in China, while engaged in strategic port development throughout Asia, providing additional attractive ports of call for our Chinese guests.

For example, we recently signed an agreement for preferential berthing for our brands in Sasebo, Japan. We also announced a long-term, preferential berthing agreement in Dubai, and broader strategic alliance for the development of cruising in the region. Dubai will not only serve as an attractive port of call, but will facilitate the development of source markets in the Arabian Gulf.

During the quarter, we also received meaningful recognition for our brands. Now, while each year we receive well over 500 awards, there are a few I would like to highlight, including Carnival Cruise Line being named Most Trusted Cruise Line by Reader's Digest for the fourth year in a row, and Princess Cruises, and the cast of the Love Boat being inducted into the Hollywood Walk of Fame.

Our ocean original TV program, Ocean Treks with Jeff Corwin, the Voyager with Josh Garcia, and Vacation Creation, have been honored in their second year with 14 Telly awards; that's even more than last year. In the U.K., reality-based series, The Cruise, filmed onboard Princess, has ranked among the most watched factual programs on prime-time television in Britain, with 4 million viewers per episode.

Our CSMART Center for Simulated Maritime Training was recognized as the world's first center for safety excellence by DN VGL, one of the leading maritime classification societies. Citing SMART's commitment to safety and ongoing training to our 7,000 bridge and engineering officers across our nine world-leading cruise lines, with the industry's most advanced simulated equipment technology and curriculum.

Also worth noting, our corporation earned a perfect score in Human Rights Campaign, Corporate Equity Index; was acknowledged by Forbes as one of the top 500 best large employers, and by Corporate Responsibility magazine as one of the 100 best corporate citizens and ranking highest in the travel sector.

Progress continues on our new revenue management system, which is expected to be rolled out to approximately 90% of the inventory for six of our brands by the fall. We also remain on track to deliver nearly $80 million of cost savings in 2018, as we continue efforts to contain costs by leveraging our industry-leading scale.

With strong and growing cash from operations, we remain committed to distributing cash to shareholders. During the quarter, we accelerated returns to shareholders by increasing our dividend of $0.50 per quarter, generating annual distributions now exceeding $1.4 billion.

At the same time, we reauthorized our $1 billion share repurchase program. Since March, we invested more than $375 million in Carnival stock, bringing the cumulative total share repurchase to over $3.7 billion since late 2015. In addition to all our efforts to drive operating performance, there are several structure advantages to our industry. We have a significant long-term opportunity to increase penetration levels in all of our existing markets.

All told, the cruise industry represents less than 2% of all hotel rooms in the world and we will continue to be underpenetrated as we operate in an industry that's capacity constrained. We also enjoy significantly higher satisfaction levels than land-based alternatives, yet we offer a greater value for money, with a value gap that can range anywhere from 15% to 45% for a comparable land-based resort vacation.

Of course, demographics are supporting a growth in cruising, benefiting from the millennial generation, and the aging of the Baby Boomers. In North America alone, the number of people reaching retirement age goes from 48 million in 2015 to 56 million in 2020, and 74 million by 2030. Now, that's a target-rich environment for us, as this segment has the time and the resources, given our value proposition, to sail multiple times per year.

Fractographic trends also support the growth in cruise as consumers invest more in collecting experiences, rather than buying things. At the same time, increasing wealth in emerging markets is yet another powerful driver. To capitalize on these many structural advantages, we continue to proactively generate demand by increasing consideration for cruise globally, through our marketing and public relations efforts, while at the same time stepping up our already high guest experience levels to increase retention, frequency, and propensity to recommend to others.

Our ongoing efforts to generate demand build confidence in our continued ability to increase capacity and prices. All told, the strong execution in the quarter, the fundamental strength and demand, combined with many achievements realized already this year to sustain the momentum, all bolster our conviction in delivering double-digit return on investment capital in 2018 and beyond. With that, I'll turn the call to David.

David Bernstein -- Chief Financial Officer

Thank you, Arnold. Before I begin, please note all of my references to revenue, ticket prices, and cost metrics will be in constant currency unless otherwise stated. I'll start today with a summary of our 2018 second quarter results. Then I'll provide an update on current booking trends and finish up with some additional color on our 2018 June guidance. As Arnold indicated, our adjusted EPS for the second quarter was $0.68. This was $0.10 above the midpoint of our March guidance.

The improvement was driven by three things: $0.05 was from increase net ticket yield, which benefited from stronger pricing on coasting bookings on both sides of the Atlantic for all our brands; $0.02 was from improved on-board in other yields, which continued a benefit from a variety of ongoing efforts; and $0.03 was from lower net cruise costs, excluding fuel, due to the seasonalization of costs between the quarters.

Now, let's look at our second quarter operating results versus the prior year. Our capacity increased 1.4%. Our North America and Australia segment, more commonly known as our NAA brand, were up 2.1%. While our Europe and Asia segment, more commonly known as our EA brands, were flat. Our total net revenue yields were up 4.8%.

Now, let's break apart the two components of net revenue yield. Net ticket yields were also up a strong 4.8%. Overall, the net ticket yield increase was comprised of first, a decrease in our NAA brand itinerary in the Caribbean, which was included in our previous guidance as a result of last fall's hurricane impacts. Second, increases in our NAA brands' itineraries in Europe and Alaska. And third, increases in our EA brands' itineraries in Europe and China, as well as various other programs, including world cruises. I will add that we do expect to see an improving trend in the Caribbean over time.

Net onboard and other yields likewise increased 4.8%, with similar increases on both sides of the Atlantic, will all the major categories showing solid growth. In summary, our second quarter adjusted EPS was $0.16 higher than last year, with a strong 4.8% revenue yield improvement worth $0.22, being partially offset by 3.6% higher net cruise costs, excluding fuel, costing $0.10, which was driven by more dry-dock days during the quarter, which we previously highlighted.

Now, turning to 2018 booking trends. Booking volumes for the remaining two questions of 2018 have been running ahead of last year at prices that are in line with the prior year. At this point in time, cumulative bookings for the remaining two quarters of 2018 are slightly ahead of the prior year at higher prices.

Now, let's drill down into the cumulative book position. First, for our NAA brand. The Caribbean is behind the prior year on occupancy year at lower prices. Given the negative news flow from Puerto Rico, the hurricane impact continues to affect the Southern Caribbean itineraries. As a result, the lower prices are driven principally by San Juan itineraries. This is consistent with the comments we made on our previous earnings call and the expectations we built into our guidance.

The seasonal European program is ahead of the year on occupancy at significantly higher prices. Alaska is in line with the prior year on occupancy at lower prices. However, as we indicated on the last two conference calls, Alaska yields are impacted by mix. In the end, we expect that like-for-like itineraries in Alaska will have higher yields than last year's record levels.

Second, for our EA brands. For their European itineraries, occupancy is slightly ahead at higher prices. While it is early and I caution you not to read too much into the numbers, I will provide our 2019 book position. At this point in time, cumulative bookings are slightly ahead of the prior year at higher prices.

Finally, I want to provide you with some color on our 2018 June guidance. As Arnold said, while our full-year guidance is now in the range of $4.15 to $4.25, we continue to have strong operational performance. The change in our guidance was driven by three things compared to our March guidance. First, we flowed through the $0.07 of operational benefits from higher revenues in the second quarter. Second, we benefit from $0.02 of accretion related to the shares repurchased in the second quarter that Arnold mentioned. And third, higher fuel prices net of fuel derivatives and the stronger dollar is expected to unfavorably impact the year by $0.19. Higher fuel prices net of fuel derivative cost of $0.11, while currency was an unfavorable $0.08.

While I'm on the topic of fuel and currency impact, for those of you who are modeling 2019 using June guidance fuel price and FX rates, the impact of higher fuel prices and the stronger dollar would unfavorably impact 2019 by $0.14. Remember, we have no fuel derivatives for 2019, so this calculation includes year-over-year benefits from realized fuel derivative losses in 2018. Now, I'll turn the call back over to Arnold.

Arnold W. Donald -- President and Chief Executive Officer

Thank you, David. Operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1, followed by the 4 on your telephone. You will hear a prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before answering your request. One moment, please, for the first question.

Once again, to queue up for a question, you may press 1, 4 on your telephone keypad. Our first question comes from the line of Steve Wieczynski with Stifel. Please go ahead.

Steve Wieczynski -- Stifel -- Analyst

Good morning, guys.

Arnold W. Donald -- President and Chief Executive Officer

Good morning, Steve.

Steve Wieczynski -- Stifel -- Analyst

Good morning. The question is when you look at your yield outlook now for 3% for the year and given the stronger yield that you had in the second quarter, I guess your stock [inaudible] and I guess the implied expectations for your yields in the back half of the year are probably a little bit lower than I think than where the typical investor's thoughts were. So, could you maybe help us think out the back half of the year in terms of are there any markets out there where you guys are taking a little bit more of a conservative view at this point?

Arnold W. Donald -- President and Chief Executive Officer

Well, let me open on that. Dave can add some color to it. First of all, we're very confident about the business going into the second half of the year. We're coming off a really fantastic last year. The back-half comparisons obviously are tougher. But we have confidence. The adjustment in our guidance, as we said on the call, as David pointed out, was strictly related to fuel and currency. Because we always factor in -- we've got a hurricane season coming. Things can go wrong. We think it's prudent to give the guidance we have for the back half, but we didn't modify our perception of the back half of the year. Dave, you want to comments on this?

David Bernstein -- Chief Financial Officer

Sure, as Arnold said, the back half yield expectation is the same as it was last quarter. I think what we saw was if you're looking at the first half versus the back half, keep in mind that there was some particularly strong markets, particularly in the second quarter, that more than offset what we had indicated was a down yield in the Caribbean. So, it's really the extraordinary strength in the first half of the year in some of the other markets that drove it. But we are seeing, as Arnold said, great booking volumes and excellent business trends. So, overall, we feel very comfortable.

Steve Wieczynski -- Stifel -- Analyst

So, if I heard you guys right, I guess when we look at the way you're viewing the Caribbean herein probably late 3Q and 4Q, it sounds like you are taking a pretty conservative view there. Is that the right way to think about it? I mean, are you guys expecting your typical consumer to maybe book a little bit closer in this year, just because of the fear around potential hurricanes?

Arnold W. Donald -- President and Chief Executive Officer

First, the booking curves are strong. Again, we had a great year last year and we're doing even better in terms of occupancy with significant capacity increase and so on and so forth. So, booking is strong. Having said that, there's no question that we got impacted originally by missing a booking period during the hurricane season.

Now, for portions of the Caribbean, and we keep referencing Puerto Rico and San Juan because it was so obvious there, there is a hurricane malaise. But having said all that, the Caribbean is strong. We're talking about performing well against a very strong year last year, with significant additional growth.

David Bernstein -- Chief Financial Officer

So, building on what Arnold said, we are seeing, if you break the Caribbean into the three different segments, as we indicated the pricing being behind the prior year was driven by the San Juan itineraries or the Southern Caribbean. I think last quarter we had indicated that the Eastern Caribbean, the cumulative booked position was down. We have seen an improvement there and now we're in line with the prior year. The West continues to be up. So, we do expect to see an improving trend in the Caribbean.

The second quarter was probably the biggest impact from the hurricane last year and we expect to see an improving trend over time.

Steve Wieczynski -- Stifel -- Analyst

Okay; that's great color. Thanks, guys. Appreciate it.

Arnold W. Donald -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Felicia Hendrix with Barclays. Please go ahead.

Felicia Hendrix -- Barclays -- Analyst

Thank you. I think that you really hit on a lot of the concerns in that last dialogue. Just wondering, the first two sentences of your 2018 outlook, where you talk about at this time cumulative advance bookings for the next three quarters are in line with the prior year at higher prices. Then you say since March, booking volumes for the next three quarters have been running slightly ahead of the prior year prices that are in line with the prior year.

David, I know you went through this, but maybe perhaps for the people on the call who aren't as familiar with your business and with the industry in general, can you just talk about that sentence since March and explain to us what that, what you're saying there?

David Bernstein -- Chief Financial Officer

That since March or that the booking volumes are slightly ahead and prices are in line?

Felicia Hendrix -- Barclays -- Analyst

Yes.

David Bernstein -- Chief Financial Officer

This is what was booked during the second quarter for cruises where we'll recognize revenue in the third, fourth, and first quarter. So, we're not including when we say for the third and fourth and first quarter we're not including the bookings that were made in the second quarter for the second quarter. We're only looking at the future period because what's in the quarter for the second quarter is history and that's in our actual results. So, we're trying to give you a dynamic of what the future looks like.

Now, if you break that apart, the Caribbean impacted that booking volume because, as I said, we are seeing overall, as I said in the second quarter it is an improving trend in the Caribbean, but all the major markets were up, but the Caribbean was impacted and that's why prices were in line.

Felicia Hendrix -- Barclays -- Analyst

Okay. So, and again, I don't want to beat a dead horse, but like you said, the Caribbean is improving. You kind of went through all the other itineraries and there's no change in your operational or yield outlook since your reported the last quarter?

David Bernstein -- Chief Financial Officer

Correct.

Felicia Hendrix -- Barclays -- Analyst

Okay. And when you talk about --

David Bernstein -- Chief Financial Officer

For the back half of the year, other than fuel and currency.

Felicia Hendrix -- Barclays -- Analyst

Yeah, other than fuel and currency, which I always consider exogenous. When you talk about, just you gave us some color for 2019, fuel and FX. What fuel price are you using?

David Bernstein -- Chief Financial Officer

We use $75.00 for fuel. It has bounced around, but at some point late last week, we kind of looked at that price.

Felicia Hendrix -- Barclays -- Analyst

Okay, thanks. And then just getting back to that March sentence as well. I think that some of the language that you used to have in your press release was for all future periods and now you're talking about in the next three quarters. Was there any reason behind that?

David Bernstein -- Chief Financial Officer

No. Generally, we actually have for the next three quarters in the press release. That has traditionally been what we've done. In the first quarter of this year, we saw a way season. Because there was a lot of bookings for 2019 during way season, we just chose to give you a broader picture, but if you look back, you'll see its traditionally been three quarters.

Felicia Hendrix -- Barclays -- Analyst

Okay. And final for me, throughout this conference call, even throughout your answers to my question and for Steve's which I thought were pretty clear, your stock keeps going down. So, Arnold or David, is there anything you'd like to say?

Arnold W. Donald -- President and Chief Executive Officer

I think I'll -- look, the reality of our business, as I kind of said on the call, is we have large, addressable markets around the world. They're all under-penetrated. We have highly differentiated product offerings. I know people are concerned about capacity and so on. But overall, the industry is actually capacity constrained. So, when we build a ship for Aida, and one for P&O in the U.K., and one for Carnival, and one for Seabourn, they don't even complete with each other, OK? What happens with the German-source market versus the British-source market, etc. versus the ultra-luxury market, those things don't even overlap.

There are positive trends and population growth and in travel in general. Whether it's millennials, who over-index in cruise, or whether it's retirees; the retirees are going to increase dramatically here in North America, but elsewhere as well, that's people with time on their hands and with some assets, and we're very affordable from the mass contemporary brands to those who have more assets, the ultra-luxury brands. People have time and we're a better vacation value than land-based vacations.

So, we have a lot of fundamental things going. We don't have a problem right now in terms of looking ahead with booking curves or yields or any of that. So, we know there's concern about capacity. There's actually not even any empirical evidence to show a correlation between capacity and yield; it doesn't exist. More importantly, we're here to grow earnings and further improve our return on investment capital. That's exactly what we've been doing and it's what we're going to do.

There have always been pocketed markets in any given year, where it appears there's a capacity problem. Usually, it's complicated by something else by hurricane malaise or something other things. But that exists; has always existed every year in the business. But our assets are mobile and so we can move. For us, we intend to create the demand for our capacity, and if we don't, we'll moderate our supply.

So, that's why I said the business is super strong. We just had a record quarter. We look ahead -- there are little dynamics in one market or another. Last year, people were very concerned about China and so on. We had a bit of a mess in China and a bad hurricane season. We still performed well. This year, our guidance is to grow earnings double-digit and to achieve along with any promise we made about returns on investment capital getting to double-digit and that's going to happen. We have multiple pathways to keep that going in the future. That's what I have to say. Okay. Next question.

Beth Roberts -- Senior Vice President, Investor Relations

I would just add something on the booking pattern. When you look at the booking patterns, please keep in mind the context that booking patterns today are post-hurricane and we're comparing to very strong pre-hurricane booking patterns. Also, keep in mind that a lot of the beginning part of this year was well-booked at the time the hurricanes occurred. So, we're really seeing that impact more later in this year, as David said, starting with the second quarter.

Felicia Hendrix -- Barclays -- Analyst

Thank you.

David Bernstein -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Robin Farley with UBS. Please go ahead.

Robin Farley -- UBS -- Analyst

I have two questions. I just want to make sure I understand the kind of subtlety of what you're saying. David, you mentioned sort of a difference in bookings that came in during the second quarter for the second half versus everything booked for the second half, including prior to the second quarter. I think what you said was the doing Q2 bookings are ahead last year at prices in line, but cumulatively they're slightly, you're slightly ahead at higher prices. Does that mean that prices in the second half of the year have decelerated during Q2? Perhaps the premise of my question is wrong. I might have misheard. That's what I wanted to clarify.

David Bernstein -- Chief Financial Officer

No. You repeated what I said, which is essentially correct. But you have to keep in mind that when you're looking at the -- you have to look at if you break it apart market by market, so the fact that prices were in line, the booking volume was in line during the second quarter, as I indicated with the other major markets except the Caribbean, the prices were up. The in line was impacted by the Caribbean. So, as Arnold was indicating before and as Beth said, we have not lapped the Caribbean the hurricane from last year.

The booking situation won't lap the Caribbean from a booking perspective until we get to September and October, which is during our fourth quarter. So, we're just seeing the impact of the hurricane affecting our bookings. But we're in great shape as far as booking volumes are concerned. We're being patient on the Caribbean and managing to the highest yield. Does that answer your question?

Robin Farley -- UBS -- Analyst

I think so. I guess the biggest point is the idea that comparing pre-hurricane to post-hurricane so that year-over-year is not. But then I guess maybe if also I could ask about your guidance commentary versus a quarter ago. The outlook a quarter ago, we had that same sort of approach and pre-hurricane issue. You said price is in line for the next three quarters and in March, the commentary was price is ahead for all future periods. I know you mentioned the subtlety that you thought you'd just give a wider view on the -- you know, because there was some 2019 in ways, but in there anything else with the comparability that would make the pricing guidance you're saying now be in line and a quarter ago it was ahead if we were comparing the same periods? Like three quarters versus next three quarters or all periods versus all future periods of three months ago? I'm just trying to think about apples-to-apples what's happened to price on year-over-year basis.

David Bernstein -- Chief Financial Officer

The comment on the three quarters would be similar if we included all future years. There isn't a significant difference overall because the majority of the bookings coming in are for the next three quarters. Remember that the second quarter rolled off and we did have, as you saw, the 4.8% ticket yield in the second quarter. So, that was a very strong period that we saw bookings in the first quarter for the second quarter and that was in our March commentary.

Robin Farley -- UBS -- Analyst

Okay. No, that makes sense. The QC rate; obviously the strong upside from Q2 rolling off. That makes sense. And then maybe just last, sort of clarification. It seems like your close-end bookings was very strong in Q2 or possibly that you were just very conservative going into Q2, but either way, the [inaudible] strong. Is there anything we should be thinking about with mix of itineraries or things that would not -- where the close-end would not be maybe as good in the second half? I mean, Caribbean is actually sort of lower weighted in Q3, I guess, a little more in Q4. But just thinking about the second half cumulatively. In other words, you've beaten your close-end guidance very nicely the last few quarters and so, and obviously being conservative is all good as well. But is there anything we should be keeping -- is there anything, any reason why close-end wouldn't continue to maybe have more upside that what you see further in advance?

David Bernstein -- Chief Financial Officer

We try to give you our best quarter each quarter in terms of the guidance. We include an expectation for close-end bookings. As Arnold indicated, we've got a hurricane season coming and so we build in an expectation. It's very difficult. There's always something. We build that into our guidance as well. Depending on how things go, the one thing I would say about a forecast, it always wrong. We just never know by how much and in which direction. We give you our best guess.

Robin Farley -- UBS -- Analyst

Great. That's it. I think that's appreciated that you're conservative with the guidance. I guess I just wanted to stress test it to see if there's anything else other than your conservative approach. Thank you. That's very helpful.

Operator

Our next question comes from the line of Jaime Katz with Morningstar. Please go ahead.

Jaime Katz -- Morningstar -- Analyst

Good morning. Thank you for taking my questions. In our model, it looks like expenses in the fourth quarter trail off a little bit. I'm curious if there are any timing things that we should be thinking of that are maybe being pushed into 2019 and then on the heels of that, how do we think about long-term cost growth in this business? I know historically you guys have said maybe flattish to half of inflation, but has that changed at all? Thanks.

David Bernstein -- Chief Financial Officer

Sure. We did talk about the quarterly seasonalization of costs on previous calls. The seasonalization this year has to do with the timing of dry docks. I mentioned that costs were up in the second quarter and that had to do with the large number of dry-dock days. Well, the fourth quarter is the exact opposite. So, with the lower dry-dock days, you will see a reduction in net cruise costs per ALBD excluding fuel in the fourth quarter. We mentioned that on the previous call. It's not some sort of delay of expenses. Our cost guidance for the year has not changed since December. We're still estimating up approximately 1%.

As far as the future is concerned, we have been leveraging our scale on the sourcing side. Arnold mentioned that we're on track for $80 million of cost savings this year. We see opportunity to do similar things in the next couple of years. There's a lot of opportunity there. Also, in 2019, right now, our capacity increase is 5.6%. So, we will have the opportunity to leverage our scale there as well, both with larger ships that we're bringing in on the ship expenses, as well as shoreside. There are good opportunities for us to keep costs under control. But it is premature for us to give some specific guidance as to costs for 2019.

Jaime Katz -- Morningstar -- Analyst

Understood. Then on a housekeeping note, you had touched on the Alaska tours business in the prepared commentary. I'm curious what the scale of that business is. If it's meaningful, obviously some part of that is going to be consolidated in the income statement. I don't have a good sense for what the size of that business is. If you could help us think about that, that would be great.

David Bernstein -- Chief Financial Officer

Okay, so the business that we purchased, it isn't going to be consolidated because we're taking a minority interest, 45%, and our partner will have 55%. The deal will close hopefully sometime this summer. So, it will have a positive impact in the long run on our net income. However, for 2018, the impact will be very minor because we'll be well through most of the season before we take ownership. So, I don't expect it to have much of an impact on our 2018 numbers.

Jaime Katz -- Morningstar -- Analyst

Okay, and that will flow through other income as a solid number, right?

David Bernstein -- Chief Financial Officer

Yes.

Jaime Katz -- Morningstar -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Harry Curtis with Nomura Instinet. Please go ahead.

Harry Curtis -- Nomura Instinet -- Analyst

Thanks very much and good morning. Going back to David's comment about building in an expectation for hurricanes. David, could you comment on to what degree your guidance factors that in for the third quarter?

David Bernstein -- Chief Financial Officer

You know, Harry, we take an educated guess based on all the things we've seen over time. I hate to try to give a specific number at this point because we know things are going to happen and we try to factor it in for both third and fourth quarter.

Arnold W. Donald -- President and Chief Executive Officer

Harry, we don't necessarily do hurricane-specific. There are things that happen every year around the world. Markets get taken away from us, high-yielding itineraries for geo-political reasons, there's disease scares and all these different things happen. So we look at historical stuff that's happened and level of impact and we come up with a general rule of thumb and then we put judgment on it based on the climate at the time, the global climate. That's how we do it. It's just a matter of trying to be practical because realistically, every year something happens. Usually more than one thing.

Harry Curtis -- Nomura Instinet -- Analyst

As a follow-up to the projections for 2019, given that 2018 is being impacted by the Caribbean negatively, can you give us a sense of whether or not the pricing so far that you're seeing in the Caribbean for next year is encouraging?

Arnold W. Donald -- President and Chief Executive Officer

Can I say one thing? When you say negatively, I just want to emphasize to everyone, we're growing in the Caribbean. We're generating more earnings in the Caribbean. We're growing and generating more earning everywhere else in the world too. On a relative growth basis, yeah, the Caribbean might be weaker on yield than some other markets. But overall, we're growing earnings and there's no weakness in the business. Go ahead, David.

David Bernstein -- Chief Financial Officer

If you look at the first quarter, which is probably the most meaningful because after that there's not much around the books, the occupancy is in line in the Caribbean and pricing is slightly ahead. Again, just like I said before, we are continuing to see an improving trend in the Caribbean.

Arnold W. Donald -- President and Chief Executive Officer

We may be a victim of our conservativism, but the reality is, and it's not conservativism, for us it's just trying to be practical, but just to reinforce, all that happened with our guidance is we offset a lot of the fuel and currency, but we haven't put in the guidance completely offsetting all of what the current fuel and currency is and that, of course, can change.

Harry Curtis -- Nomura Instinet -- Analyst

Very good. Just one quick one. Can you talk about your performance recently and looking into the second half by brand. Are you seeing any brands generating more pricing versus less pricing? If so, does that give you any indication as to customer health, the health of their wallet by segment?

Arnold W. Donald -- President and Chief Executive Officer

I would say always certain brands in any given year one brand may be a significant increase relative to others and so on. That's just a common practice when you have a portfolio of brands. Is there some systemic, long-term, underlying trend in terms of appetite by source market for the brands? No, we don't see any intrinsic patterns that would suggest certain brands are going to be much stronger for the next 5 to 7 years versus some others. But sure, in any given year, one brand has a big increase relative to other brands. It's a the portfolio and it happens.

Harry Curtis -- Nomura Instinet -- Analyst

Thanks, everyone.

Arnold W. Donald -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Jared Shojaian with Wolfe Research. Please go ahead.

Jared Shojaian -- Wolfe Research -- Analyst

Good morning, everyone. Thanks for taking my questions. I wanted to ask about the 2019 booked position. I think you said slightly ahead and higher prices. I think last quarter you said ahead at higher prices? Can you just elaborate on that. Has the 2019 booked position changed at all since last quarter?

David Bernstein -- Chief Financial Officer

Last quarter, I hadn't gone through the details of 2019 at all. I'm not sure what you previously are referring to, but remember, I also have mentioned sometimes when you're talking about the difference between ahead and slightly ahead, there is a point where we change our adjectives. I wouldn't read too much into that.

Jared Shojaian -- Wolfe Research -- Analyst

Okay. Got it. Then, I'll another question about your stock. I'll ask this a little differently. If I look at your leverage today, you're at a low point historically at 1.7X net debt to EBITDA. If you guys really aren't concerned about the supply growth that's coming online and you think the market has it wrong on your stock, what prevents you from getting more aggressive on the buy-back right now and is there a leverage level that you'd be willing to go to in order to get more aggressive on the buy-back in the near term?

Arnold W. Donald -- President and Chief Executive Officer

Two quick comments. One is, we obviously have a strong credit rating. We don't feel a need to have it be even stronger. We can go up to 2.5 pretty comfortably we feel from a leverage standpoint. Say we're at 1.8, 1.9 now. So, from that vantage point, and of course in a situation like this, I'm not going to make any comments other than to say our strategy on stock buy-back is opportunistically return cash to shareholders through stock buy-back.

David Bernstein -- Chief Financial Officer

Factually, we did buy more stock in the second quarter than we did buy in the first quarter. Again, being opportunistic. As you point out, we actually -- just so you understand, we look at the leverage going forward and do look at where we expect to be at the end of the year. We're not 1.7 at the end of year. We're more like 1.9. And so, as Arnold indicated, we do have an opportunity there to continue to borrow and to use those funds to buy back shares throughout the remainder of the year. As I'll mention, we don't include those share buy-backs in our guidance. Traditionally, we just don't share buy-backs to date.

Jared Shojaian -- Wolfe Research -- Analyst

Okay; that's helpful. Thank you. Just to confirm, you'd be willing to go up to as high as 2.5 by the end of the year, you look at it?

David Bernstein -- Chief Financial Officer

No, no.

Arnold W. Donald -- President and Chief Executive Officer

No, I wouldn't say that. That's the range within which we can operate and maintain our strong credit rating, but we don't have a plan or anything. I don't want you to misinterpret the goal to 2.5.

David Bernstein -- Chief Financial Officer

We've talked. In many cases, what we've said previously is that we're looking broadly at a range of 2.0 to 2.5 and in good times, we would be at the better end of the range and we've allowed the leverage to increase at other times. That's obviously something that we'll have conversations on and we'll take a look at, as a management team, going forward.

Jared Shojaian -- Wolfe Research -- Analyst

Great. Thank you very much.

Operator

Our next question comes from the line of Stephen Grambling with Goldman Sachs. Please go ahead.

Stephen Grambling -- Goldman Sachs -- Analyst

Thanks for taking the question. Changing gears a little bit to fuel. When we look at the relationship between Brent and your fuel prices, there's been a bit of a shift and certainly more volatility. What are you expecting in that relationship between Brent, as you've talked about that $75.00, giving the forward curve [inaudible] there's even a wider gap in Brent and fuel oil as we look further out. Maybe as part of that, just remind us of your thought process on hedging?

Arnold W. Donald -- President and Chief Executive Officer

I'll do the hedging. We've never hedged. We've done the collars. We did them before to prevent against spikes in fuel prices. That could compromise us in the capital markets when we had commitments for capital. We didn't want to have to go into the capital markets not knowing what the capital markets would be at the time. So, we did cost protect ourselves in that regard.

Since then, things are a lot different. Obviously, our ratio is much better. We have a lot more cash than we had then. So, we're in a much better position to weather any type of fuel spike or whatever. So, fundamentally, we've never believed in hedges. The Board hasn't. The management hasn't. We continually look at that situation because No. 1, we want to maintain our freedom to operate and make sure we're doing it at an advantageous way for the shareholders. But we never try to play the fuel game, because even oil companies don't know where the fuel prices are going. That's not the business we're in.

David Bernstein -- Chief Financial Officer

Steve, when we do our guidance -- I think we've said this many times before -- we basically take the spot price of fuel today as we see it, and we use that price going forward through the balance of the year and in any forecast. We're not trying to make a projection for the fuel price. As Arnold said, we don't know where it's going but we try to use the current existing fuel price.

Stephen Grambling -- Goldman Sachs -- Analyst

I guess there's two related follow-ups. One, given some of the airlines have started to implement changes to their fuel surcharges, what are your thoughts on potentially implementing something like that? And then just to be clear, as we look out to 2020, there's a pretty wide gap in the Brent versus heavy fuel curve, so is there any reason why you wouldn't be able to purchase the lower cost fuel amid the IMO implementation? Thanks.

Arnold W. Donald -- President and Chief Executive Officer

First of all, in terms of forward purchasing of Brent and what not, again, we try not to play the fuel game for obvious reasons. The variability there is crazy. You just never know where you're going to be. We tend not to do that. The first part of your question once again?

David Bernstein -- Chief Financial Officer

The fuel surcharge.

Arnold W. Donald -- President and Chief Executive Officer

Oh, the fuel surcharge, yeah. In the past, we've implemented fuel surcharge whenever there was a rapid spike in fuel prices, etc. That's always something that we can take a look at. So far, we have not done that and considered doing that. At this point right now, I don't think we would. But if prices were to continue to spike, obviously it's something we would have to look at.

Stephen Grambling -- Goldman Sachs -- Analyst

Thanks. I'll jump back in the queue.

Arnold W. Donald -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Tim Conder with Wells Fargo. Please go ahead.

Tim Conder -- Wells Fargo -- Analyst

Thank you. A couple questions here. One related to Alaska. David or Arnold, whoever wants to take this. You've commented a couple times the last couple calls regarding the mix in Alaska. Just to clarify that the mix of somewhat restraining your yield growth there this year is one of limited capacity on the short excursion side, right? You still have very strong demand.

Arnold W. Donald -- President and Chief Executive Officer

That's correct.

Tim Conder -- Wells Fargo -- Analyst

Okay. And the recent transaction --

David Bernstein -- Chief Financial Officer

Tour business, yeah. [Inaudible] hotel capacity.

Tim Conder -- Wells Fargo -- Analyst

Okay. How do you see addressing that here? Will the recent transaction help address that going forward or are there other things you need to do?

Arnold W. Donald -- President and Chief Executive Officer

No, the recent transaction would not because it really is hotel-based because we have properties there. It's purely just a mix issue. Alaska is doing great. Earnings are growing. Capacity is there. We're making really good money. It's a very popular destination, it's just that we don't have more hotel rooms, and so some of the bookings have that with them. Then others don't. The ones that don't are at a lower price. As that volume increases, that makes it look like a yield impact, but it's not a yield on cruise or anything.

David Bernstein -- Chief Financial Officer

Tim, as you can imagine, we plan our itineraries to optimize revenue for the company. While within the context of just Alaska, it's a mix issue that we commented on, but we believe that the way we plan the itineraries would be incremental inside passage to Alaska will have a positive impact on the overall company yield. It's not flowing through negatively to the company; it's just a mix within Alaska.

Tim Conder -- Wells Fargo -- Analyst

Okay. Thank you. Then again, we've talked about a lot here on this call, but within the Caribbean, you cited Puerto Rico last call, this call also, the San Juan in particular. Is there something in your Eastern Caribbean itinerary mix relative to the industry that's maybe giving you a little bit more difficulty than broader industry in the Eastern Caribbean?

Arnold W. Donald -- President and Chief Executive Officer

We home port in San Juan. That's one thing that's different. I'm not sure that we're that different than the industry. I think you'd have to talk to the others, I guess. Norwegian changed their itineraries or something and went to a different part of the Caribbean for the year. But frankly, we don't see it as anything particularly unique, but we do home port.

David Bernstein -- Chief Financial Officer

But Tim, as I mentioned before, I said the Eastern Caribbean had been behind on price and now we're in line on price. So, we are seeing an improving trend on the Eastern Caribbean from what we saw last quarter. The San Juan itinerary is mostly the Southern Caribbean that were impacted to a great degree, as Arnold said, because we home port there. San Juan was a source market for us for those itineraries as well.

Tim Conder -- Wells Fargo -- Analyst

Okay. Lastly, China. Can you give any specific color there what you've seen over the last 90 days there? It appeared Q1 was pretty good for you guys, even though you really did not have the easy comparisons yet. Then Q2 onward appeared to have easier comparisons. So, just any update there? For the industry as a whole, including yourself obviously, it would appear that there's really a pretty low risk of anything related to sanction [inaudible] anything else going on with tariffs and so forth also.

Arnold W. Donald -- President and Chief Executive Officer

Yeah, my usual contextualization of China it's a small part of our capacity, an embryonic market, basically still a B2B market, etc. All those qualifiers. The bottom line is, yeah, things are stronger for sure than they were last year at this time. It looks positive for the year on a relative basis so far. But China is China. We'll have to see how things play out for the full year. But right now, conditionally things definitely look stronger.

In terms of sanctions, we haven't heard of any sanctions on either side that would directly impact the cruise industry. Obviously, the Chinese still are not going to Korea at this point in time. If that changes, that could open up the possibility on some itinerary planning and maybe help the situation there even more. But in terms of additional sanctions or new sanctions, given what's going on, we've heard nothing. I just happened to be in China last week and had the opportunity to participate in some high governmental-level stuff and nothing was talked about in those.

Tim Conder -- Wells Fargo -- Analyst

Great. Gentlemen, thank you for the color.

Arnold W. Donald -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Assia Georgieva with Infinity. Please go ahead.

Assia Georgieva -- Infinity Research -- Analyst

Good mornings, guys. This is Assia. If I am to summarize basically the Caribbean outlook for Q4 and Q1 specifically, at this time last year, we had very strong close-end demand. Because of the hurricanes in September, we're not seeing quite as much of that. So, is it because we're in a tougher comp mode as opposed to a specifically a slow-down in terms of bookings for Q4 and Q1? It seems to me that things are starting to normalize quite a bit and we saw pretty much most of the impact during Q1 and Q2 of this year and we're starting to get normal. Is that a fair read?

David Bernstein -- Chief Financial Officer

I think I would rather saw that we saw most of the impact from the hurricane in Q2 and Q3, as opposed to Q1 and Q2, because by the time the hurricane came last September, we were very well booked for Q4 and Q1. So, it was really Q2 where you started seeing it and then it gets better over time.

Assia Georgieva -- Infinity Research -- Analyst

As we enter Q4, basically early September when we saw the hurricanes last year, isn't it fair to assume that bookings, barring another active hurricane season, that the comparisons will ease significantly so at this point we're looking at timing year-on-year as opposed to necessarily poorer trends for the Q4-Q1 period?

David Bernstein -- Chief Financial Officer

There's no doubt we'll have easier comparisons, as I mentioned before, in the fourth quarter when we lapped the hurricane.

Assia Georgieva -- Infinity Research -- Analyst

And we just haven't gotten there yet? We need to wait three months before we get there?

David Bernstein -- Chief Financial Officer

Correct. Which is why I was indicating it's baked into the current booking volumes all the other markets were higher.

Assia Georgieva -- Infinity Research -- Analyst

Great. Thank you, David. I appreciate that.

Operator

Our next question comes from the line of Greg Badishkanian with Citi. Please go ahead.

Greg Badishkanian -- Citi -- Analyst

Great, thanks. Just in terms of Europe, I know that's been strong for you. To the differences that you're seeing in the consumer of the North America going to Europe versus the European sourced, just how sustainable you think that the strength in that market will be?

David Bernstein -- Chief Financial Officer

Overall, keep in mind, Greg, that 90% of the guests on our ships in Europe are Europeans. That has to do with the fact that we have all of our European brands. Overall, Europe for us has been a very strong market. I did comment in the second quarter, both for our NAA and our EA brands, that we saw really good yield increases that drove the yield.

When I talked about the booking commentary, I talked about the seasonal European program, we were ahead at significant higher prices for the NAA brand. For Europe, I had said that occupancy was slightly ahead at higher prices. We are seeing it's a great market for us and things continue to move forward. I won't repeat all the comments that Arnold made about the overall market for the sake of time, but we believe this will continue to be an excellent market for us.

Greg Badishkanian -- Citi -- Analyst

Thank you.

Arnold W. Donald -- President and Chief Executive Officer

More questions, please.

Operator

Our next question comes from the line of Patrick Scholes with SunTrust. Please go ahead.

Patrick Scholes -- SunTrust -- Analyst

A real quick question here. You noted that the booking curve continued to be strong. Since your last reported earnings, would you say that booking curve has gotten stronger, stayed the same at strong, or gotten slightly less stronger?

Arnold W. Donald -- President and Chief Executive Officer

It was very strong and it remains very strong.

Patrick Scholes -- SunTrust -- Analyst

Okay. I'll leave it at that. Thank you.

Arnold W. Donald -- President and Chief Executive Officer

Thank you. Last question, operator.

Operator

Our next question is from Vince Cipiel with Cleveland Research Company. Please go ahead.

Vince Cipiel -- Cleveland Research Company -- Analyst

Thanks. I wanted to come back to China. You recently introduced the Princess Majestic. You have the Costa Venezia arrive in that market next year. I'm curious your thinking on sending [inaudible] premium purpose-built hardware to that market, the returns you're seeing there, and if it makes sense to continue to send new capacity into that market? Then secondarily, can you just give us an update on how the distribution system with the charters has been evolving and do you think it's making progress or maybe a time for the progress you'd like to see it make?

Arnold W. Donald -- President and Chief Executive Officer

Excellent. Okay. First of all, we believe eventually China is going to be the largest cruise market in the world. Right now, we're teeny tiny and it's embryonic, so absolutely it makes sense putting hardware there and new hardware. Shèngshì Gōngzhǔ Hào, which is Majestic, is ideally suited for Chinese. It's home port some of the year in China. The rest of the time it's sailing elsewhere in Asia. But filled with lots of Chinese cruisegoers.

The Costa Venezia, as you mentioned, will be introduced in 2019 in China. The Costa brand currently has several ships home ported there. It'll be a great addition to their fleet. It's purpose-built, again, for the Chinese cruisegoer. The market there is very large in terms of overall travel. Both from cities in China and, of course, is a huge source market potential for fly cruise all over the world. So, we will continue to have a presence.

As I mentioned, I was just over there recently. We definitely are excited about our joint venture with CSSC and moving that forward and establishing a brand in China that's in partnership with state-owned enterprises there to drive cruise as they've mandated in their 5-year plan. All of that stuff is very positive.

In terms of distribution system itself, yes, we've moved from full-ship charters primarily now to group sales and partial ship charters, etc. We've added a large number of additional distributors. All of that kind of de-risks things a bit from being overly concentrated and what in effect today is still pretty much a B2B market. The direct sales component is slowly growing a bit there. There's opportunity to grow that over time. But a timeline in China, we'll see. It's a small market. I don't see it today for us and for the industry. I don't see a dramatic increase in percent of total capacity in the short-term there.

The reason is not so much because of China, but because of the demand everywhere else in the world. As I mentioned, there's large addressable markets everywhere in the world that are under-penetrated, including the United States. The ships are needed to continue to grow and serve the market demand that we've been creating over the past several years. But China long-term is going to have a cruise market, but it's China. There will be starts and stops and fits and turns and so on. It's the nature of the animal. But our assets are mobile and as long as it's accretive, we'll participate. When it's not, we'll move the ships elsewhere. Thank you for your questions.

Thank you everyone. We really appreciate your participation on the call. We always do our best to give you the best guidance that we can. I just want to leave you with the thought that our business is strong. The guidance we've given is reflecting some changes in fuel and currency. But beyond that, the business is strong. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's call. We thank you for your participation and ask you to please disconnect your lines.

Duration: 75 minutes

Call participants:

Arnold W. Donald -- President and Chief Executive Officer

David Bernstein -- Chief Financial Officer

Beth Roberts -- Senior Vice President, Investor Relations

Steve Wieczynski -- Stifel -- Analyst

Felicia Hendrix -- Barclays -- Analyst

Robin Farley -- UBS -- Analyst

Jaime Katz -- Morningstar -- Analyst

Harry Curtis -- Nomura Instinet -- Analyst

Jared Shojaian -- Wolfe Research -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

Tim Conder -- Wells Fargo -- Analyst

Assia Georgieva -- Infinity Research -- Analyst

Greg Badishkanian -- Citi -- Analyst

Patrick Scholes -- SunTrust -- Analyst

Vince Cipiel -- Cleveland Research Company -- Analyst

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