Arnold W. Donald - President and CEO David Bernstein - CFO Beth Roberts - IR

Harry Curtis - Nomura Securities International Steve Kent - Goldman Sachs Felicia Hendrix - Barclays Capital Steven M. Wieczynski - Stifel Nicolaus Capital Markets Robin Farley - UBS James Hardiman - Wedbush Securities Jaime M. Katz - Morningstar Tim Conder - Wells Fargo Securities Assia Georgieva - Infinity Research Sharon Zackfia - William Blair & Company Arnold W. Donald: Good morning everyone and welcome to our third quarter 2015 earnings conference call. This is Arnold Donald, President and CEO of Carnival Corporation & plc. I'd like to thank you all for joining us this morning. Today, I am joined by our Chairman, Micky Arison, by phone from Europe, and with me here in Miami are David Bernstein, our Chief Financial Officer; and Beth Roberts, our Vice President of Investor Relations. Before I begin, please note that some of our remarks on this call will be forward-looking, and therefore I must refer you to the cautionary statement in today's press release. Our team continues to deliver along our path for a double-digit return on invested capital in the next three to four years. In fact, we have just enjoyed a record quarter and are on track to achieve a nearly 35% annual non-GAAP earnings improvement. That's over $0.5 billion of year-over-year profit improvement on top of the 25% annual earnings improvement we achieved in 2014. This year is clearly trending ahead of pace with constant currency yield now forecasted to be up 4%. We overcame numerous headwinds including ongoing macroeconomic malaise in Europe, global geopolitical disruptions, public health scares like MERS, and even ship construction delays. Concerning construction delays, in the end, our cash position is essentially unchanged, but due to accounting treatment cash flow is transferred from the income statement reducing our earnings to the balance sheet. Again, this was another strong quarter for our Company, significantly exceeding the high end of our guidance at $0.17 per share above the midpoint. In fact, our non-GAAP performance year-over-year improved by $0.17 also, despite a slight drag from fuel and currency – by any measure, another quarter of strong operational execution. The strong demand environment that we have worked hard to cultivate enabled us to fill more close-end business at higher prices and higher occupancy levels. Constant currency net yield increased 5% in our seasonally strong summer season. We enjoyed strong performance on both sides of the Atlantic, particularly in North America, again led by the Carnival brand. Carnival Cruise Line achieved another double-digit improvement in revenue yield this quarter and is now expected to eclipse 2008 yield this year. The higher occupancy level combined with the continued rollout of onboard revenue initiative, leveraging our scale, helped to drive an improvement in onboard revenues despite the more difficult year-over-year comparisons that resulted from our prior year's success. China has clearly made world news in recent weeks but continues to be an aggressive growth region for us. In fact, we will grow to a six ship fleet next year from a base of four, strengthening our position as industry leader, yet still representing only 5% of our global capacity next year. Given the low penetration levels for cruise and the pent-up demand for travel, we remain very confident in the long-term potential for this expansive market. As importantly with less capacity growth in the rest of the world, only 2% in fact by our Company, we have an improved supply/demand balance in our core markets. During the quarter, we made progress on multiple initiatives designed to further out journeys toward consistent yield improvement by creating demand in excess of supply. Our public relations effort continues to outperform. We generated positive media impressions in the first half of this year that almost equalled our positive impressions for all of 2014, which were already well above the historical highs. In the first half, our brands generated 75% of the entire cruise industry's positive coverage, and as that even includes the recent announcement regarding Cuba, another industry first by our Company. As you know, last month we received a historic approval from the U.S. government to offer cruises to Cuba by our Fathom brand, which is still pending approval from the UN government. And the environment for travel to Cuba has just gotten even better with the recent changes proposed by the U.S. government. Fathom and Cuba are clearly garnering a lot of attention, generating over 18 billion media impressions from our Corporation since the brand launched. Clearly a combination of our efforts to increase demand not only built yield improvement this year but helped to build a solid base of bookings for 2016. We have continued to drive a significant lengthening in the booking curve and have less remaining to book for the first half than last year. That along with the continued optimization of our yield management practices increases confidence in our ability to drive yield improvement next year. We are moving forward on our initiative to leverage our scale and yield management. We have made the decision to invest and begun the initial implementation of a joint yield management system initially to be rolled out across six of our brands. We've also made progress with onboard revenue initiatives to leverage our scale. It's just one example in the area of beverage we concluded a cross-brand bar pricing exercise for Spirit that we are currently testing and rolling out, soon to be followed by similar exercises for soft drinks and [health wine]. We remain focused on exceeding guest expectations and customer feedback indicates that we continue to deliver on our guest experience. Intent to repeat is currently very strong across all our brands. We continue to heighten the guest experience not just aboard our vessels but through enhanced experiences at our port destinations, including our newest destination Amber Cove. Amber Cove, which is in Dominican Republic North Coast, will open next month. This strategically important port introduces an innovative new itinerary option in the Caribbean. The seven-day central Caribbean now joins our current seven-day Eastern and Western locations and will be our most fuel-efficient seven day Caribbean deployment. It will also bring new appeal to the Caribbean by showcasing the Amber Coast of the Dominican Republic where they mine for amber and there are over 27 waterfalls. This winter, six of our brands will feature Amber Cove in combination with other premier developments. Princess Cay, Half Moon Cay, and Grand Turk, all of which we own and operate. This allows an improved guest experience in keeping with our effort to consistently exceed guest expectations, and it's yet another powerful way we can leverage our scale and our balance sheet. All of these initiatives are building blocks for capturing the multi-year yield growth needed to deliver double-digit return on invested capital in the next three to four years. We continue to look for opportunities to invest to drive yield in 2016 and beyond. At the same time, we remain focused on our initiative to contain costs by leveraging our scale. Good progress has been made delivering savings for 2015 in a variety of procurement areas, including air-travel, food, particularly produce, and hotel supplies like mattresses. We have further opportunities to leverage our scale to reduce costs, while maintaining and in many instances even enhancing the guest experiences in 2016 and beyond, including projects targeted at the areas of technical, ports, and shore experiences. These projects will be rolled out over a multi-year periods and help to offset inflation. Concerning sustainability, just last week we published our sustainability goals. We continue to reduce our environmental footprint as evidenced by our 2% fuel consumption reduction in the third quarter and remain on track for a 2% consumption reduction this year. In the area of talent development, we have made further talent development in China by relocating to Shanghai seasoned cruise executive, Michael Ungerer, to the newly created position of Chief Operations Officer for Asia. Long time executive and a rising talent, Felix Eichhorn, replaces Michael as President of AIDA Cruises. We remain focused on measured capacity growth by delivering innovative and significantly more efficient ships while at the same time removing from service less efficient capacity. During the quarter we announced Costa Cruises will build two new cruise ships to be delivered in 2019 and 2020 as part of our previously announced agreement with Meyer to construct four next-generation cruise ships, having previously announced the other two ships will be dedicated to AIDA Cruises in the German market. These ships will be the most efficient in our fleet and have the largest guest capacity in the world through innovative design comfortably accommodating up to 6,600 guests. They will also be the first in the industry to be powered by LNG, both at sea and at portfolio, and in addition we have a host of guest experience innovations yet to be announced. Our newbuild program continues to be self-funded through our strong cash flow which will exceed $4 billion in 2015, still with cash remaining. We remain committed to returning this cash to shareholders as demonstrated in our most recent quarter with a 20% increase in our recurring annual dividend to $1.20 per share. Dividend distributions now exceed $900 million annually. Along our path for double-digit return on invested capital, our already strong cash flow will continue to build. We look forward to further enhancing total shareholder returns by distributing even more cash to shareholders over time. The path to double-digit return on invested capital may not always be a straight line. Obviously in any given year we may be ahead of pace or more challenged to keep the pace. Be assured regardless, we continue to have a clear line of sight on delivering double-digit return on invested capital in the next three to four years. And with that, I would now like to turn it over to David.

Thank you, Arnold. Before I begin, please note all of my references to revenue and cost metrics will be in constant currency, unless otherwise stated. I’ll start today with a summary of our record third quarter non-GAAP results and then provide an update on our full year 2015 guidance. I'll continue with some insights into booking trends for the first half of 2016 and I'll finish up with some preliminary color on the full year 2016. Our non-GAAP EPS for the third quarter was $1.75. As Arnold indicated, it was $0.17 above the midpoint of our June guidance. The improvement was driven by three things. First, $0.10 from net revenue yields due to better than anticipated ticket and onboard yields. Second, $0.04 for the lowering net cruise cost without fuel due to the timing of expenses between the third and fourth quarters. Lastly, $0.03 from the favorable impact of fuel price and currency. Now, turning to the third quarter operating results versus the prior year, our net ticket yields were up almost 5%. The increase in net ticket yields was driven by our North American brands with double-digit yield improvements in the Caribbean and mid-single-digit yield improvements in Alaska. Onboard and other yields increased over 5% with both sides of the Atlantic up. Net cruise cost per ALBD excluding fuel was up 2%. This was driven in part by the previously discussed increase in dry dock days for the year. During the third quarter, we did benefit from the impact of lower fuel prices which were more than offset by the stronger dollar. The net impact of fuel and currency was just $0.02 unfavorable versus the prior year as these two items acted as a hedge of each other. In summary, third quarter non-GAAP EPS was $0.17 higher than the prior year, mainly driven by improved net revenue yields worth $0.26, partially offset by higher net cruise cost without fuel costing $0.05. Now looking at our full year 2015 guidance, as Arnold indicated, we now expect net revenue yields to be up approximately 4% versus the prior year, which is at the higher end of our June guidance range of 3% to 4%. Net cruise costs without fuel per ALBD are now expected to be up approximately 3.5%, essentially the same as our June guidance. For 2015, we are now forecasting the benefit from the net impact of fuel and currency by $0.25. Taking all these factors into consideration, I'm pleased to say that we have increased our non-GAAP EPS guidance for the full year 2015 to a range of $2.56 to $2.60 versus $1.93 for 2014. The midpoint of our full year guidance range increased $0.16 while we beat the midpoint of our June guidance in the third quarter by $0.17. However, $0.04 of the third quarter's $0.17 was due to the timing of expenses between the third and fourth quarters, so only $0.13 from the third quarter flows through to the full year. For the fourth quarter, we increased our revenue forecast by $0.04 and we expect an additional $0.03 benefit from the net impact of fuel and currency. All of this is partially offset by the delayed delivery of the AIDAprima which we are forecasting to have a $0.04 impact versus our previous guidance. While we will be compensated by the shipyard in 2016 for the late delivery, the accounting rules require that the compensation be treated as a reduction to the cost of the ship on the balance sheet and not flow through to the P&L, which essentially transfers the benefit from the P&L to the balance sheet in the near-term. Since we have been made hold from a cash flow perspective, there is no change in the enterprise value. Let's turn to booking trends for 2016. Bookings for the first half of 2016 taken during the last quarter have been very strong, up nearly 20% at lower constant dollar prices. At this point in time, cumulative fleet-wide bookings for the first half of 2016 are also nicely ahead at lower constant dollar prices. As Arnold indicated, we have continued to drive a significant lengthening of the booking curve. Despite the almost 3% capacity increase in the first half of 2016, we have less remaining inventory to sell than last year and this gives us increased confidence in our ability to drive yield improvement as we continue to optimize our yield management practices. Now let's drill into the cumulative bookings position for the first half of 2016. For our North American brands, the pattern is the same as fleet-wide, bookings are nicely ahead at lower constant dollar prices. The lower constant dollar prices are driven by unfavorable transactional currency impacts and our strategy to [build] [ph] earlier and mitigate discounting closer to the sale base. For our European, Australia and Asia brand, also known as our EAA brand, bookings are in line with the prior year at lower constant dollar prices driven by the continuing economic challenges these brands faced throughout 2015. Finally, I want to provide you with some color on 2016. Although it's early, 2016 appears to be shaping up to be another good year. We are forecasting capacity to increase 3.7%. For 2016, we are expecting to see constant currency net revenue yield improvement. I will provide guidance on the December call when we have more visibility. On the cost side, net cruise cost without fuel per ALBD could be up slightly next year. While we expect a year-over-year benefit from fewer dry dock days and additional savings from leveraging our scale, these cost reductions could be offset by inflation in certain areas of our business and investments to drive yield improvements and develop new markets, both of which are under evaluation. We are working through our planning process now and we'll be meeting with the brands next month and expect the finalized decision shortly thereafter. As we discussed on previous conference calls, we increased our capital expenditures for a variety of vessel enhancement projects and exhaust gas cleaning systems to meet the eco requirements without having to utilize a more expensive fuel grade. We have made excellent progress on both these areas and most aspects of these investments are expected to be completed by the end of 2016. With the increase in using capital investments as well as new ship deliveries, we expect depreciation expense to be $1.8 billion in 2016, approximately $0.20 higher than 2015. We experienced a similar trend in 2015 but was ultimately masked by currency movements. As I previously mentioned, the delay in delivery of the AIDAprima had an impact on our 2015 guidance. We are currently anticipating that this delay will also likely impact 2016. We will be compensated by the shipyard for the 2016 impact as well, but like I mentioned earlier, it will reduce the cost of the ship on the balance sheet and not flow through the P&L in 2016. Although AIDAprima will be delivered late, we are expecting her to be a fantastic ship which will provide an incredible experience for our German guests for many years to come. Despite the lower price of fuel, we remain committed to continuing fuel consumption reduction. Given the timing of our investments in this area, we expect fuel consumption on a unit basis to decline 1% to 2% for 2016. Lastly, at the current spot prices for fuel, we expect a $0.20 benefit in 2016. However, we do expect this will be partially offset by the stronger U.S. dollar which will cost us approximately $0.10 based on current FX rates, most of which will impact the first half of 2016. And now I'll turn it back to Arnold. Arnold W. Donald: Thank you, David. We're now happy to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Harry Curtis with Nomura. Please proceed.

I'm hoping to drill down into the somewhat more conservative than expected outlook for both yields and cost in the fourth quarter. In your guidance, it would imply that there's been a sequential decline in your pricing power in the fourth quarter, and so my first question is if you could address whether or not there has been a sequential decline? Arnold W. Donald: So there are a couple of factors involved. We have first of all more difficult comparisons in the fourth quarter than the earlier quarters. For example, in the fourth quarter of 2014, we were up 2.8% whereas in the quarters prior we were up 1.8%, actually now 2.2% in the third quarter. And so, it's a tougher comparison. That's one aspect. And in addition, we are still facing some continued headwinds in Europe that can affect yield. But overall, we are very pleased with the yield result for this year, and we have increased our overall guidance for the year in terms of results and are looking to finish the year strong, and with the lengthening in the booking curve going to next year, well-positioned for continued yield improvement.

How much space do you still have to fill for the fourth quarter, is there still some opportunity there to see some stronger pricing in these quarter-end bookings?

Typically, we say for the current quarter, we're at 85% plus booked. I mean so we are very strongly booked. We gave our best guess. And given the strong close in bookings that we saw in the third quarter is part of the reason why we took up the yield guidance for the fourth quarter. And by the way, we took it up both on the ticket and the onboard side. And so that was the $0.04 improvement that I was talking about in revenue yield for the fourth quarter. So there might be some more upside, but basically we gave you our best shot at the overall yield for the fourth quarter.

And on the cost side, could you comment on the fourth quarter cost?

Sure. Harry, on the fourth quarter costs, remember as I commented on the third quarter, what we had indicated was that there was a seasonalization of cost between the third and fourth quarters, so there's about $0.04 of cost that we do still expect to spend for the full year, but we flow it into the fourth quarter, which drove that number up. A lot of that was advertising, and it just has to do with the timing between the quarters. Arnold W. Donald: And the decision to invest to drive revenue and yields next year. Go ahead, Harry.

Okay. And just the last piece of it, on the timing of the delay, and did I read this correctly that that should also impact the fourth quarter by $0.04?

Yes. And remember, Harry, we've said this many times in the call before, it's very hard to get the timing of expenses between the quarters correct and you really have to kind of judge us on the full year, and we didn't make any change in the overall cost for the full year, it's just a flip-flop between the quarters.

The reason I'm drilling down into it, and I appreciate that is that we've gotten a number of questions on why the yields are so sequentially or apparently weaker and then the cost apparently higher, so I'm just trying to drill into that a bit more, but thanks for the color.

The next question comes from the line of Steven Kent with Goldman Sachs. Please proceed.

Just to follow up, just quickly on what Harry just said about this is once again a beat and raise quarter, and then the guide seems to be once again a little bit lighter than people expected. Besides the stock implications, I just wanted to know from an operating environment, how do you focus your organization on goals if you seem to be not getting to them quarter to quarter? And then separately, the yield management system which is interesting that you're going to integrate all of them, at least integrate six brands together, are you using an outside consultant and are there potential for integration or any other issues, which sometimes seen that with other companies and I just wanted to see how that process is going to work? Arnold W. Donald: First of all, I'll take the second part first, on the yield management, revenue management system, it’s just a system, so it's a platform and it involves the [indiscernible] modeling and inquiry systems and what have you, we'll just go to a common platform that six brands will initially adopt and over time the other brands may migrate to it as well. Each of the brands have their own revenue management system today, very different platforms, some are more sophisticated than others. So, this will be an overall enhancement, so two. And obviously we are using outside resources to help us develop to and implementation has already begun. So, it's part of work that we have undertaken over the last couple of years. In terms of setting goals and whatnot, first of all we think about it over the long-term as well as annually, and we manage the business to double-digit return on invested capital in the next three to four years. To do that, we have to have solid yield growth, we have to contain costs, and we have to be disciplined in capital management. Our teams have performed very well. This year, we just had record earnings, we feel very good about it, we just increased guidance for the year, and we are marching forward. In fact, we are ahead of pace based on this year and that's why I put in the caution that we don't expect always to be ahead of pace, but this year we are ahead of pace. We are going to grow earnings 35% and that's despite drag of a few pennies net of fuel and currency compared to prior year.

I'd just like to add on the fourth quarter that the comparison for transactional currency is greater in the fourth quarter, so on a constant currency basis the fourth quarter yields are up 3% relative to the third quarter which was up 5%. And again, the sequential from last year had much more difficult comps in the fourth quarter of last year.

Okay, so thank you for that color both of you. Just, Arnold, on the yield management system, because I think it is very interesting and I think it shows the integration that you have started to put through within the different brands, is it really just so that they can see some of the trends that one brand is seeing, so it's really more informational or are you going to start to link some of the pricing and mechanisms together, or is that sort of step two at some point? Arnold W. Donald: The reality is again is the behavior of communicating, coordinating and collaborating. So the yield, the revenue management instrument itself is a combined ideation of best practices across the brands and then new ideas from the outside and inside. So it's an elevation of capabilities that we are going to introduce, and six of the brands can adopt it at once. The other brands already have more sophisticated revenue management tools and will migrate over time as we make the enhancements and refinements to the basic system once it's in place. So the reality here is, our brands are very different from each other, they compete in different typographic markets, but they can learn from each other and common itineraries and common regions of the world and intelligence in terms of what's happening with booking curves and reactions, especially since they all tend to extend chasing newer cruise than chasing different newer cruise individuals because of the typographic profile, but they are all chasing newer cruise. So we've had benefit to date which is why we have had some of the outstanding operating results we've had and this too will allow us to capture even more benefit, regardless of the environment.

The next question comes from the line of Felicia Hendrix with Barclays. Please proceed.

David, in the release and then also in your prepared remarks, you gave us some color on the booking curve and on pricing next year. I'm wondering when you all talk about the pricing being at lower constant dollar prices for next year relative to better bookings, can you give us that color in constant currency? Is it also down year-over-year in constant currency?

We don't have all the details in constant currency in bookings, which is why I gave it to you in constant dollar, but we can clearly see a portion of it, as I indicated in my remarks, for the North American brands was attributed to the transactional currency impact. So that's part of it.

Yes and I recall you saying that, so that's why I was wondering, it was kind of begging the question, if it were just for the transactional currency or the pricing, is the pricing up?

The pricing would still be down, but less. But overall when you look at this, Felicia, when you look at the whole position, you got to keep in mind that it's not about where we are today, it's about where our goals and what do we want to be at the end of the day when we closeout the first, second, third and fourth quarter of 2016, and we are driving the booking curve ahead, we're well positioned, we said we have less to sell. And so what we are looking to do is to mitigate the discounting that's closer into the sale and to drive yields up for 2016, and we feel very good with all the things that Arnold talked about relative to yield management practices and other things and we feel very confident we'll be able to do that in 2016.

That's great to hear because we're just getting a lot of questions from investors about the pricing power of your brands because it seems like you are in a very good position, and Arnold, you said earlier that Carnival was booked at better pricing than you have seen since 2008, so just questions on why the pricing, why you wouldn't have more pricing power now?

Keep in mind though, when you start putting all this together, keep in mind that we don't necessarily have to raise prices from where we are to finish-up up. If we discount less as we go forward, which is something we have been talking about for quite a while now, that we will finish the year 2016 with increased yields, as I indicated in my prepared remarks. Arnold W. Donald: I think the simplest statement we can make is for those who are considering cruising next year is, better to book now, because this is the best time for them to book.

That's very helpful, thank you. And Arnold, you've been consistent with your outlook for getting to double-digit ROIC, consistently staying up three to four years. Just wondering if you could help us understand what the starting point or the potential ending point is in terms of year? Arnold W. Donald: In the next three or four years.

So are we starting from today or starting from…? Arnold W. Donald: No, that's three or four years from today, yes. So if fuel stays low and currency improves for us, meaning the dollar weakens [indiscernible] gets stronger, then we get there sooner. If not, we'll get there in that timeframe or at the tail end of it, dependent on what happens with all those dynamics, but fundamentally we started out four to five years last year, we are down to three to four, next year we'll be down to two to three.

Just as a point of reference, at the midpoint of our September guidance, we'll be about 7% ROIC for 2015.

Okay, that's helpful. Thank you.

The next question comes from the line of Steve Wieczynski with Stifel. Please proceed. Steven M. Wieczynski: Going back to David, in 2016, I understand when you talk about pricing being down, it makes sense, especially in North America, given your pricing strategy, but when you look at the EAA markets, I guess that's the one that's a little bit more surprising. So what I'm trying to get at is, as you look at the EAA markets, are there any markets that would particularly stand out to you that are a little bit more challenging at this point?

Overall, Continental Europe is probably more challenging. When you think about all of the economic difficulties and the geopolitical issues and the growing refugee concerns, that's the area that has had the most challenges in terms of pricing for 2016, but we've had these challenges all year in 2015 to some extent and we are forecasting that we are going to get yield improvement for our EAA brands for 2015. So hopefully despite all these challenges, we'll be able to do that in 2016 as well. And one of the things to keep in mind as well is we are also seeing a transfer, we have announced the Costa Fortuna will be going to Asia in 2016. So Costa will have reduced capacity, which also helps play in less supply in this type of environment which should help yields for 2016. Arnold W. Donald: The other comment too is to just keep in mind, and I know why you guys focused on yield and we do too, but there is another aspect to this, we can be return accretive and drive return on invested capital in certain markets across certain brands, even with some challenging yield, and that results from just capacity additions and overall improvement in total mix and onboard revenues, et cetera. So while yield is definitely a key metric and we totally focus on it as well, slower than you might expect yield growth does not necessarily equals slower than you might expect return accretion. Steven M. Wieczynski: And just to follow up on that, the Asian component of that EAA, you guys are still pretty encouraged about what you are seeing so far for 2016? Arnold W. Donald: Absolutely. Asia, again that will be a good case in point, China yields may come down a bit but they're going to be return accretive because of the significant increase in capacity. Now at the same time, with that capacity increase, they are still going to represent 5% of our total capacity, and by having the capacity there, it actually reduces our capacity growth in the rest of the world. And so we won't be happy even though we have 3.7% capacity growth for next year. Only 2% of it is outside of the Asian market. And so 2% capacity growth in the rest of the world is reasonably conservative growth for us in the current environment, which is also good. Steven M. Wieczynski: David, can I ask you one more question in terms of the NCC, I know you talked about next year that that being slightly up or that's what you guys are seeing right now, I guess maybe what is driving, what potentially would drive that up next year, and is there anything, are there any levers that you guys can pull, especially on the marketing side given where the Carnival brand is in terms of their pricing now relative to where it was back in 2008? Arnold W. Donald: Just real quickly before David comments, and we will give you guys full guidance in December, we are about to go through our planning meetings that David mentioned, we are evaluating all the reviews from the brands in terms of investment spending they may want to make in digital media, broadcast media, events and PR, promotions and other things to drive demand. So we'll take a hard look at all that. Our plan is to deliver the double-digit return on invested capital and we're not going to save our way there but we also have a focus on cost containment. And as I've mentioned to you in previous calls, we are focused on cost containment for two reasons, one is the drag on earnings, but the other one is it creates the dollars to invest to drive revenue. And so we are achieving the cost savings that we set out to do, and then the question is, whether that will flow through the bottom line, are we going to invest them to drive yield. The investments we have made to date appear to have paid off because of the significant improvements and the business and we'll be taking a hard look at that going forward.

And I went through some of the areas, I mean Arnold just talked about the investments that we could potentially make and we'll evaluate, but the other things that I had mentioned in my notes are the fact that while headline inflation is zero, because of commodity prices there is inflation in certain areas of our business and we built that into our 2016 numbers as well. But offsetting all of that, we are looking at leveraging our scale. We had talked about the fact that we saved $70 million to $80 million in 2015 and we're working hard to do something similar for 2016 and we also have some benefit from the reduced drydock days as well. So it's a combination of all those things which let me to give you guidance that cost could be up slightly next year.

The next question comes from the line of Robin Farley with UBS. Please proceed.

So I do have a question that I was in line for already, but first I just wanted to clarify, Arnold, you just said something about Asia yield, I'm just wondering was that a theoretical comment, you said something about Asia yields may come down next year but it would still be return accretive, was that kind of theoretical or is that describing what you're seeing with yields? Arnold W. Donald: It's too early to delve on that but it's plausible and it's possible, but it's too early to conclude that at this point in time. But what would not be too early to conclude is that if the yields come down, it will still be return accretive. Robin, I'm surprised you're this deep into the call. If I heard a question from you, so normally…

I tried to get in line earlier. So I just wanted to clarify, so that was, you weren't giving that as a guidance, you were just sort of saying as theoretical… Arnold W. Donald: No, that was for example.

Okay, great. And then so my original question was this, I think the comments about expenses shifting between quarters and your yields going up for this year, I think that's pretty straightforward that it's a better outlook than the year started. My question was really on 2016, and I know that David you mentioned that certain things about the base of comparison getting better means that your prices wouldn't necessarily have to change, but I guess I just wanted to clarify, in your June release you talked about 2016 prices being lower due to FX, and then in this release you said prices are lower in constant currency, and so I understand that lower prices but higher volume means that you can raise prices as you get closer, but can you just kind of clarify if we were talking about apples to apples, what you are seeing now versus what you were seeing in June, just because the commentary and the release is kind of on a different basis, so just sort of what happened with pricing for 2016 just since June?

It's really an apples and oranges comparison because in June the comments that we were making related to the back half of 2015, the last two quarters, and the first quarter of 2016, whereas the comments I made here related to the first half of 2016. So because the prior year comparisons are different, it's hard to read in and these are apples and oranges comparison because they are different time periods.

So if you were talking about just the 2016, what would you have seen just incrementally since June on just the 2016?

As we had indicated in the third quarter, I mean we had seen a 20% increase in volume. I mean we were very pleased with the volume but we did say it was at lower prices, so we are driving the booking curve ahead, and overall we believe we'll get yield improvement for 2016. Arnold W. Donald: I will just add to David's comment to December, it's too early to give yield guidance for 2016, but if you're saying what's the feeling compared to June, I would just say that we remain very confident in our ability to drive directionally towards the double-digit return on invested capital in next three or four years. To do that, we have to have solid yield improvement and we feel very confident, probably even more confident than we did in June, that we can deliver on solid yield improvement next year, and that's despite some of the headwinds that today exist in Europe, and by the time we get to December maybe those things won't be the same, but today with some of the headwinds in Europe, geopolitical, macroeconomic malaise, the intense tension over there around the refugee situation, that has affected all travel, not just cruise but all travel. So those things may still be present or they may wane between now and when we get to December, but we will give you full guidance then.

The next question comes from the line of James Hardiman with Wedbush Securities. Please proceed.

A couple of quick follow-ups here. So sort of going back to handicapping the yield guide for the fourth quarter, remind us what the mix of business is between the Caribbean and Europe 3Q versus 4Q? I don't know if you have those numbers in front of you but it seems to me that your mix of European business goes down, your mix of Caribbean business goes way up, European business is trending not quite as well as or not nearly as well as your Caribbean business, it sounds like. So it seems like there is a pretty nice sequential yield benefit just from mix. Help us dimentionalize that, am I thinking about that the right way?

I think I'll just start with a general comment. From a deployment standpoint, I think that's a fair statement, and David will certainly comment on those numbers, but I think the comment we are making from a source market perspective, we are still sourcing a substantial amount of consumers in the third and fourth quarter and that doesn't change from quarter to quarter. On the deployment, in terms of whether ships are sailing, David?

In the third quarter, it's about a quarter of our capacity is in the Caribbean and 45% in Europe, and that goes up to 30% in the Caribbean in the fourth quarter and Europe goes down to 30%. So you are right, there are more ships in the Caribbean and less in Europe in total in the fourth quarter than the third, but I think you have to remember that on a year-over-year basis it was a similar trend in 2014. And so when you are comparing year-over-year, you are comparing then apples and apples, and as Arnold indicated, we saw some pretty good yield improvement in the fourth quarter of 2014, and so as a result of that yield improvement, we are guiding to 3% constant currency yield increase in the fourth quarter, which may be down slightly from the third, but remember the fourth quarter last year was higher than the third quarter last year in improvement. So it is a more difficult comparison.

Got it, that makes sense. And then maybe this is slicing the information a little bit too finely, but obviously at the end of your quarter, at the end of August, stock market was in freefall. Could you see any discernible change in demand over that period of time, and if so, has that then recovered so far during the month of September? Arnold W. Donald: We did not see any falloff in demand related to stock market or general economic fluctuations, none whatsoever.

Okay. And then just last question for me, sort of going back to this lengthening of the booking curve, basically it seems like, David, what you are saying here is that we should very much expect bookings to be up and prices maybe to be flat to down just based on how you are doing your pricing strategy. I guess the question is, A, is that right, is that what we should expect going forward, and B, does that have any impact on your guidance in that a lot of the pricing strength that you are going to get is ultimately going to be close in? I guess the other way to put it is, are you assuming that close-in pricing is better in your guidance or are you sticking to a wait-and-see approach with respect to the close-in numbers in light of the new pricing strategy?

By moving the booking, driving the booking curve further out, we are actually hoping to have a lot less to sell closer in overall and we are looking at it as a situation where as we have said before, what we want to do is have people book early, it is the best time to book because the pricing will only go up and there won't be last-minute deep discounting to fill those cabins. That's the strategy we've been talking about for about two years now. And so as a result of that, I think we're on the right path towards good yield improvement for 2016. Arnold W. Donald: There are other factors in addition to transactional currency and stuff that influence the appearance of early pricing and yields. We have targeted affinity groups that some of the brands target. They book earlier that kind of make the yield look lower, but in fact it's just coming sooner then it's spread over time with those affinity groups. Those affinity groups have big onboard spend patterns and overall we yield in total very nicely on those. Of course we don't have the onboard revenue yield factored in to this at this point in time. So there are a lot of dynamics that can influence what it looks like early. Some of it is just pricing philosophy of a brand and some is just booking patterns and charters and all that can come into play as well as affinity groups to fill out cabin to drive onboard revenue.

The next question comes from the line of Jaime Katz with Morningstar. Please proceed. Jaime M. Katz: Most of my questions have been answered but I'm curious if you guys have changed your hedging strategy at all now that energy prices are pretty low and they look like they're going to be sustained at low levels for some time going ahead? Arnold W. Donald: Our policy has been to use the cash flow as collars. We have already I believe 48% of 2016 already collared and the future pricing which is what you have to establish the collars on, is not the same of course as the spot pricing. At this point in time we have seen no advantage to unwinding those collars or anything to that effect. When we looked at it once earlier this year, we would take them and then if we had done it, we would have lost on both ends, unwinding and then setting new collars. And so at this point wouldn't have any particular plans to change but we review it constantly.

And we also, as you can see in our filings, we have got the cash flow collars for 2017 and 2018 as well, and so we are well positioned and well hedged at this point in time, but we continually re-evaluate it as Arnold indicated. Arnold and Mickey and I and Josh Weinstein, our Treasurer, frequently get together and talk about it and take a look at it and review input from other sources as well. Jaime M. Katz: Okay. And then for Europe, you guys had discussed a couple of areas that were struggling. Was there any geography that came in really well ahead of expectations overseas? Arnold W. Donald: First comment I'd like to make is that our European brands have performed well. So I don't want to leave an impression like they are stumbling and bumbling or anything, they performed well, and as David mentioned, EAA [indiscernible] despite all the stuff we've been talking about, and that has occurred this year, we have seen yield improvement and have seen return improvement. So that's the first comment. The second comment is that Continental Europe has been hit hardest. We have seen, we have the 175th anniversary year for Cunard, that was a very successful year for the Cunard brand. We had the spectacular launch of the Britannia which helped elevate the entire P&O brand. So the U.K. did well, very well this year. And again, AIDA continues to perform in Germany despite capacity introduction from competitors as well as just also the impact of sailings related to geopolitical tensions and so on and so forth. But the brands continue to do well and are doing better collectively than they have in the past and we expect that to continue into next year despite the challenges.

The next question comes from the line of Tim Conder with Wells Fargo Securities. Please proceed.

Just a couple of things here on the booking curve, you mentioned several times that you'll continue to push to lengthen that or being successful in doing so. Historically, if we go back pre lot of incidents and the financial crisis from that, the industry was running about a six-month window on bookings. Could you tell us specifically where you're at right now and sort of where do you consider the sweet nirvana spot to balance that, don't give away too much upside on remaining bookings versus give enough all into persuade the consumer that they will understand and get the best price the earlier they book?

The sweet spot will vary over time as you would expect, as people change, environments change and those types of things. So I don't think there is a nirvana. That's something that we continue to look at over time and will evaluate that. But where we stand today, as I talked about in my notes, the North American brands were well ahead. So the North American brands are at a higher end of the historical booking curve whereas the EAA brands, which I said were in line with the prior year, while they are still within the historical booking curves, they are at the lower half of the historical booking curve. So it's a mix of two worlds. As we have talked before, the strength of the economy in North America clearly has helped shape the booking curves in the two segments of our business.

And, David, is there a specific number where you are on a global blended basis or a specific, those ranges of historical booking curve ranges that you are referring to?

We've given you the ranges before, and as I said, North America is in the higher half and EAA is in the lower half, and for competitive reasons that's all the detail I want to share.

Okay, fair. Regarding the 2016 cost that you said would be up slightly at this point, on that cruise cost, should we think about that you are winding down the accelerated dry docks in the first half of 2016, and therefore from a cadence standpoint all else being equal, and assuming that you are increased marketing or other investments would be spread evenly, would we expect the first half of the year to have a little more skew of that higher cost versus the back half?

It's very early to tell, so it's very hard. We have not gone through, we have a difficult time and uptime analyzing it quarter by quarter within 2015, as you saw the timing of expenses between the third and fourth quarters that I referred to. So it's very difficult to tell this early in the year where we are. The one thing that I did mention relating to the first quarter or the first half is that there is a significant transactional currency impact, particularly in the first quarter. And so as you think about next year, keep that in mind.

The next question comes from the line of Assia Georgieva with Infinity Research. Please proceed.

This is Assia. I will just ask one question. Given that last year Europe was surprisingly a strong performer, was [indiscernible] this year the Caribbean seems to be the star performer. So it seems that especially for Q4 and Q1, when we have a lot more of the ships being deployed in the Caribbean and the Bahamas, there probably is a lot of upside especially given your good booked position at this point. Would you, Arnold and David and Beth, agree with this? Arnold W. Donald: I would say again, we're not going to give any more guidance for 2016, it's too early for us. But the reality is that Carnival outperformed late last year as well and they continue to outperform throughout this year, the Carnival brand, which is primarily in the Caribbean. They have had an outstanding year with strong demand and strong yield, as reflected in everything we said to this point and reflected on the fact we've raised guidance for the full year. So we have a lot of momentum there and we feel very good about it, but at this point it's too early to give firm yield guidance on anything for 2016.

And Arnold, it seems that the Carnival brand was very helpful in terms of the excellent Q3 results? Arnold W. Donald: Absolutely, yes. All the brands [indiscernible]. We had growth in both sides of the Atlantic, as David pointed out, but the Carnival brand definitely outperformed again, yes.

Okay. Thank you, Arnold, for taking my questions. Again congratulations on a great Q3.

We'll take one more call, operator.

The last question comes from the line of Sharon Zackfia with William Blair.

So two quick questions, I guess capacity growth, did that change for the fourth quarter given the AIDA delay and what are you expecting for capacity now?

Yes, it did change a little bit. For the year, our capacity growth came down to 1.7% and for the fourth quarter it's 2.3%.

Okay, perfect. And then I think you changed some commission structure elements at the Carnival brand. Can you talk about that and kind of what the travel agent response has been and whether that's something you are assessing within the other brands? Arnold W. Donald: Fundamentally for the Carnival brand, to get everyone up to speed, we basically allow people to achieve a certain payout at a lower tier level in the commission structure. That was a combination of one acknowledgment to travel professional partners for the great work and contributions they have made to our success this year, and also just the recognition for the brand and their Carnival conversations discussing the travel professionals, changes that the travel professionals thought would really make a difference and would balance things from their perspective. So it's in response to input from the travel professional partners and the acknowledgment of their contributions and what we thought it would take to help them help us sustain the momentum. Each brand does their own evaluation. The brands have some overlap in travel professional partners. There is also [indiscernible] because the guests are different, and each brand makes its own evaluation, and Carnival brand was starting from a different point, just some of the other brands were so that all of the brands will make independently their decision.

Okay, great. Thank you. Arnold W. Donald: Everyone, thank you very much again. We appreciate your interest. We feel great about the quarter. We have increased guidance for the year. We feel strongly looking ahead that we are on a good path to deliver the double-digit return on invested capital in the next three to four years. We see solid yield improvements for next year. We'll give you actual yield guidance and stuff in December as well as tighter cost guidance for the future, but we feel very good about the business and the momentum and we thank you for your interest.

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.