Carnival's (NYSE:CCL) main business challenge frequently comes down to a difficult balancing act. While the global cruising industry as a whole is underserved, pockets of oversaturation often pop up to pressure pricing as the supply of available cruise packages outpaces vacation demand.

That situation hurt the company's core Caribbean market in the fiscal third quarter. However, the cruise giant still posted solid global growth.

CEO Arnold Donald explained the main drivers of that outperformance in a conference call with Wall Street analysts. Executives also provided key details about the company's outlook for 2019 and beyond. 

Below are a few highlights from that discussion.

A cruise ship docked by an island.

Image source: Getty Images.

A record-setting quarter

Our record adjusted [earnings per share] for the third quarter was $2.36. This was $0.09 above the midpoint of our June guidance. The improvement was primarily driven by two things: $0.06 from increased net ticket yields, which benefited from stronger pricing on close-in bookings on both sides of the Atlantic, and $0.03 from lower net cruise costs, excluding fuel. -- CFO David Bernstein

Carnival edged past its growth targets for the third straight quarter as strength in its European and Asian tours offset weakness in the Caribbean market, which is still recovering from last season's multiple hurricane strikes. 

Overall net revenue yields, a core industry growth metric, expanded 2.9% to surpass management's forecast of between 1.5% and 2.5%. Executives credited healthy pricing and a spike in last-minute bookings during the summer for producing surprisingly strong EPS despite the damage from fuel costs and currency exchange moves. "Strong execution delivered the highest quarterly performance in our company's history," Donald said.

Financial wins

"Our strong cash flow and balance sheet enable us to accelerate our share repurchase program, opportunistically acquiring nearly $750 million of Carnival shares since June, and investing over $1.2 billion in share repurchases so far this year," Donald said.

Carnival's financial strategy aims to pair capacity growth with cost cuts so that the company can boost earnings and cash flow without relying so much on robust revenue-yield gains. The key metric for investors to watch here is return on invested capital, which is on track to cross into double digits for the first time in over a decade.

CCL Return on Invested Capital (TTM) Chart

CCL return-on-invested-capital data by YCharts. TTM = trailing 12 months.

Management says there are many benefits to achieving this level of efficiency, but one of the most direct is that it provides financial flexibility to opportunistically return excess cash to shareholders. Executives took advantage of that ability this past quarter by scaling Carnival's stock buyback spending up to $750 million, or double the prior quarter's rate.

Managing capacity over the long term

"We will continue on our path of measured capacity growth, adding more-efficient ships, replacing less-efficient ships over time," Donald said.

Carnival sees steady but slower growth coming over the next few quarters. Vacation bookings are trending higher for the fourth quarter of 2018, which should translate into net revenue yields between 1% and 2% compared to this past quarter's 2.9%. The slowdown will continue from there, executives said, as revenue yields dip closer to flat for the first half of 2019.

Management is looking past that speed bump toward what it believes will be stronger overall gains over the next five years, powered by favorable demographic trends that push passenger volume far higher over time. Carnival is targeting 20 new ships joining the fleet between now and 2022, and it hopes to place them in the right geographies to meet the seasonal demand spikes.

"We operate in an industry that is both underpenetrated and capacity constrained," Donald said, "and we're working aggressively to grow demand for our brands." That's a tough challenge, but Carnival has a good track record for meeting it, just as it has so far in fiscal 2018.

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