Mar 30, 2016
Executives
Micky Arison - Chairman Arnold Donald - CEO David Bernstein - CFO Beth Roberts - IR VP
Analysts
Steven Kent - Goldman Sachs Robin Farley - UBS Harry Curtis - Nomura James Hardiman - Wedbush Securities Felicia Hendrix - Barclays Jaime Katz - Morningstar Greg Badishkanian - Citigroup Tim Conder - Wells Fargo Securities Kevin Milota - JPMorgan Ian Rennardson - Jefferies Stuart Gordon - Berenberg Jared Shojaian - Wolfe Research Dan McKenzie - Buckingham Research
Arnold Donald
Good morning everyone and welcome to our First Quarter 2016 Earnings Conference Call. This is Arnold Donald, President and CEO of Carnival Corporation & Plc.
Thank you all for joining us this morning. Today, I’m joined by our Chairman, Micky Arison, via phone from Italy as well as David Bernstein, our Chief Financial Officer and Beth Roberts, who heads up our Investor Relations here with me in Miami.
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. Our Company is off to a strong start this year, with first quarter adjusted earnings nearly double the prior year and well above the high end of our December guidance range.
The first quarter results combined with our strong book position has enabled us to increase the midpoint of our previous guidance range by $0.05 and raised the floor on our full year earnings expectations. I am proud to acknowledge all of our employees globally for the industry leading guest experience efforts that are central to our sustained earnings improvement.
I specially thank our travel agent partners for the critical role they play in connecting guests with our great brand experiences. It was reinforcing to see revenue yield growth of 5.7% in constant currency, marking the fourth consecutive quarter of mid, single digit yield improvement.
We enjoyed ticket price improvements for both our North American as our EAA brands with particularly robust ticket price improvements in our core Caribbean itinerary, which represents 47% of our first quarter deployment. We grew revenue yield growth at Costa by creating relative scarcity through our brand team success and the increasing demand via ongoing guest experience efforts, coupled with new impactful creative featuring Shakira.
While at the same time we reduced supply in the more challenging trading environment in Southern Europe by transferring Costa capacity to China. As you recall, our Costa brand was the first global cruise line as a home port in China back in 2006.
Today we are the largest in China and the first global cruise company with six ships based there across two of our brands, Costa and Princess, representing nearly half of the Chinese cruise industry. While it represents less than 5% of our global capacity, for us China continues to be a promising unit growth opportunity.
China has quickly become the worlds’ largest outbound travel market at an estimated 135 million strong, yet just over 1 million cruise today. We expect to continue to grow overtime and have further plans for AIDA and Carnival Cruise Lines to enter China in the near future.
China contributed to our strong quality results. We absorbed over 60% more capacity there and enjoyed strong profit improvements and return on invested capital accretion.
At the same time, the capacity shift to China helped create relative scarcity in our other markets supporting global revenue yield growth. Beyond China during the quarter, we made further progress globally in creating demand for all our brands that excess of measured capacity growth.
Part of that demand creation is the excitement around the much anticipated delivery of AIDAprima, and I can tell you she is well worth the wait. The ship is absolutely fantastic, the first of a next generation platform for AIDA that combines leading edge environmental attributes and well designed features that foster an exceptional guest experience.
All of her features, whether racing waterslides, a lazy river, multiple climbing walls an expensive German spa, an ice rink for skating, for hockey for curling and even a traditional Christmas market, together create an experience that truly resonates with AIDA’s nearly exclusively German guest. And we have additional opportunity for demand and creation in just a few short days with the delivery of Holland America's new flagship Koningsdam.
Koningsdam was designed with our Holland America guests in mind and to reintroduce Holland America for those who have yet to experience our award winning service, our five star dining, our extensive enrichment program and compelling worldwide itineraries. Our new flagship will offer fine dining and several alternative restaurants, including a new French seafood brasserie and a new immersive upon the table dinner experience in the culinary art center.
Part of enhancing an already great Holland America guest experience includes taking on board entertainment to a whole new level. We have carefully engineered a Music Walk area which showcases different genres while offering Chamber Music in Lincoln Center Stage, rocking the crowd with chart topping hits and Billboard on board, and bringing the best of Memphis music to sea in our popular B.B.
King's Blues Club. Responding to our guests, our new flagship will feature Holland America Line’s first ever purpose-built staterooms for families as well as singles staterooms Newbuilds will also provide additional demand creation opportunities later this year as well, with the delivery of Carnival Vista followed by Seabourn Encore.
When it comes to ships, Newbuilds are not the only way to stimulate demand creation; we continue to invest in our existing fleet to further enhance guest experiences, including the recent recreation of Holland America’s Eurodam, incorporating million of sailing experiences on board as Koningsdam. In addition, we are undergoing an extensive remastering of Cunard’s Queen Mary 2 later this year.
Destinations are often a powerful tool for demand creation as well, especially when it combine with the effective public relations. Last week, we made history when we became the first U.S.
cruise operator in over 50 years to receive Cuban approval to bring U.S. cruise guests directly from the U.S.
to Cuba. We made worldwide news showcasing cruise in a very positive light with nearly 5 billion media impressions and still counting.
We very much look forward to launching our historic Cuba inaugural season in May with Fathom, initially with itineraries including Havana, Cienfuegos and Santiago de Cuba. We believe there is no better way to experience so much of Cuba in seven days that with a enriching guest experience on our premium fathom brand.
As the Adonia carries just 700-guests per sailing, if you have any interest in seeing Cuba doing extraordinary Fathom experience, I sincerely recommend you book now. Concerning the future of cruises in Cuba, we have already begun the process for approval for other brands for sails to Cuba in the months and years ahead.
Now beyond ships and destinations, our ongoing marketing and promotional efforts are also part of demand creation. As part of our efforts to keep cruise in a forefront of vacationers mind, Princess is airing a new reality based show on Prime time U.K.
television entitled “The Cruise”. The documentary followed the lines of our amazing crew and guests on board Regal Princess through a six-week series.
In fact, we’ve already seen a 40% increase in web traffic for Princess in the U.K. since the show began airing.
Also airing in the U.K. P&O Cruises Battlechefs, , a new cookery contest that at sea on board Britannia featuring five celebrities testing their culinary skills and judged by celebrity Chef, Marco Pierre White.
In Italy, Costa Fortuna was to set up a major motion picture, Vacanze ai Caribe, Holidays in the Caribbean, launched earlier in the quarter partially cast with Costa crew members. More recently an episode on Italian reality TV [Indiscernible] The Colors of Love was based on the love story between two young Costa crew members who met onboard.
In North America, just last week Carnival cruise line was featured nicely on the ever popular television show “Wheels of Fortune”, while early in the quarter Carnival announced an exceptional partnership with Grammy award winning country music superstar Carrie Underwood, and Operation Homefront supporting our U.S. military personnel.
Media coverage from that announcement alone generated more than 1 billion media impressions and our Carnival brand continues to outperform. Also in North America, we partner with AT&T and Samsung to create a virtual reality experience that is showcased in nearly 1,200 AT&T stores promoting consideration for cruise by allowing new to cruise to virtually experience a cruise vacation.
We estimate nearly 400,000 people have already had the virtual reality experience showcasing our portfolio of leading brands. All of these efforts heighten global awareness and consideration for our world leading cruise line as we continue to capture a greater share of the vacation suitcase.
During the quarter, we continued to make progress on cost brand efforts to leverage our scale. On the revenue side, work on our revenue yield optimizing system continues and in summer of 2016 will be rolled out on 30% of our inventory.
The portal type will cost the yield uplift as well as inspire improvements of final system developments. Since most of this year’s bookings will be behind us by the summer, we look forward to a greater contribution in this effort in 2017.
And on the cost side, work in our procurement area continues. We have negotiations underway on 16 separate purchasing categories with 22 more RFPs outstanding, all of which will contribute to our stated $75 million of expected cost savings in 2016.
Our ongoing operational improvement is a testament to the success of our combined efforts to create demand in excess of measured capacity growth and to leverage our scale. The strong first quarter we have enjoyed affirms our conviction to deliver this year’s earnings forecast and accelerates progress towards double digit return on invested capital.
We remain well on track for the delivery of over 8.5% return on invested capital this year and crossing the double digit directional in the next two to three years. At the same time, we have accelerated our return on capital to shareholders.
Since resuming our stock repurchase program late last year, we have completed our first $1 billion share repurchase authorisation and are well onto our second billion bringing the cumulative total of purchase to date to $1.3 billion and approximately 27 million shares. We are planning to continue with the return of free cash flow to shareholders with our strong balance sheet and leverage ratio now comfortably at the better end of our targeted range.
And now, I will turn the call over to David.
David Bernstein
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 2016 first quarter results. Then I’ll provide some insight on booking trends and finish up with an update on our full year 2016 guidance.
Our adjusted EPS for the first quarter was $0.39. This was $0.09 above the midpoint of our December guidance despite a $0.01 drag from Q1 currency.
The improvement was essentially driven by two things. $0.07 from net ticket revenue yields, which benefitted from stronger pricing on closing bookings on both sides of the Atlantic, and $0.03 from lower net cruise cost excluding fuel as a result of timing of certain expenses between the quarters.
Now let’s turn to the first quarter operating results versus the prior year. Our capacity increased almost 4%.
Our total net revenue yields were up 5.7%. Let’s break a part with two components of net revenue yields.
Net ticket yields were up almost 7%. As Arnold indicated, we enjoyed ticket price improvements on both sides of the Atlantic.
The increase was driven by the strength of pricing in the Caribbean, which represented 47% of our capacity in the quarter. In addition, our European, Australian and Asian brands also known as our EAA brands saw solid price improvements on their year round European programs.
Onboard and other yields increased almost 3% in line with December guidance. The increase was mainly related to bar, casino and communications as our efforts in these areas continued to pay dividends.
Net cruise cost per ALBD excluding fuel were up about 1.5% which was less than planned in our December guidance, again due to the timing of expenses between the quarter. In summary, first quarter adjusted EPS was $0.19 higher than the prior year, driven by operational improvements worth $0.15 and favourable net impact of lower fuel prices and currency worth $0.03.
Now let’s turn to booking trends for 2016. Bookings during this year’s wave season were strong.
Volumes are ahead of last year’s historically high level at higher prices. At this point in time, for the remaining three quarters of 2016, cumulatively wide bookings are well ahead at slightly higher prices.
The fact that we are well ahead on the booked position with less inventory, less to sell for the remainder of the year compared to last year bodes well for pricing over the next few months. Now let’s drill down into the cumulatively wide book position.
First, for our North American brands. Caribbean occupancy is well ahead of the prior year at nicely higher prices.
For Alaska, occupancy is in line with the prior year also at nicely higher prices. 2015 was a great Alaskan season and I’m happy to say 2016 is shaping up to be even better.
With the seasonal European program, occupancy is nicely ahead of the prior year at lower prices driven by the geopolitical risk impacting the Mediterranean trade as anticipated in our guidance. Secondly, for our DAA brand.
For Europe, occupancy is ahead of the prior year at slightly higher prices. Australia and Asia are consistent with our prior guidance, while we are behind on pricing and not surprisingly behind on percentage occupancy given our over 60% increase in China capacity and our significant increase in Australia capacity.
Remember Asia and particularly China is the unit growth opportunity and we are achieving strong unit profits and returns that exceed our corporate average. Finally, I want to provide you with an update on our full year 2016 guidance.
As Arnold indicated, our first quarter results combined with strong book position enabled us to increase the midpoint of our previous guidance range by $0.05 and raised the floor on our earnings expectations for the year. Our 2016 March guidance is now $3.20 to $3.40.
The $0.05 improvement was driven by improved net revenue yields worth $0.04 and the accretive impact from the additional shares we repurchased until December call worth $0.05. These improvements were partially offset by a $0.04 drag from fuelling currency.
Net cruise costs without fuel for ALBD are still expected to be up approximately 2% no change from our December guidance. While we were favourable to the guidance for the first quarter, as I had previously indicated the favourability was due to the timing of expenses between the quarters.
Remember that while the year is expected to be up approximately 2% there are differences between the quarters. The first quarter was up about 1.5% while the guidance for the second quarter is expected to be up only 0.5% to 1.5%.
However, for the third quarter we expect net cruise cost without fuel for ALBD to be up 5% to 6% driven by the remastering of Queen Mary 2 in dry dock and higher advertising expense. Offsetting that however, is the expectation that costs will be down slightly in the fourth quarter.
So far this fiscal year, we have repurchased over 21 million of our shares and we still have almost 700 million left under the second $1 billion share repurchase authorization that was approved by the board of directors just two months ago. Our March guidance EPS calculations assume approximately 760 million shares outstanding on a weighted average basis.
On a final note for your planning purposes, I wanted to let you know that we expect our June conference call to be a little later in June than usual to allow some extra time for quarter end reconciliation and analysis given that we are currently in the process of implementing a significant upgrade to our Oracle Enterprise reporting platform, which includes moving to a single instance of the general ledger as we further leverage our scale. And now, I’ll turn the call back over to Arnold.
Arnold Donald
Thank you, David. Operator, please open it up for questions.
Operator
[Operator Instructions] Our first question comes from the line of Steven Kent with Goldman Sachs. Please proceed.
Steven Kent
Hi, good morning. Couple of questions, one first can you just I think it was David, you just made some comments on China and I wanted to understand them, are you saying that pricing is still higher in China than the rest of the world.
You are adding capacity in China and that this is a unit growth store. I wanted to understand those two things.
So to me it sounds like almost like you are simply adding more capacity at a higher price relative to the rest of the fleet but that the pricing maybe is not as high as it was maybe last year is that what you are saying and then one other thing on this China opportunity which I think its outside attention because it really is a huge opportunity and is a big prizing opportunity to is how are the travel agents doing in that market, is there anything we can read from them and their reaction to the capacity that is coming on.
Arnold Donald
I’ll answer, this is Arnold. First of all good morning and thanks for your questions.
I’ll answer the travel agent or what we call the distributors in China question first. We don’t have direct line of site into their profitability but what I can tell you is that our relationships are strong, they continue to book with us.
Our actual occupancy on sailings are the same and we are seeing great results and we see no easing of interest or demand on anything from the distributors and the best line of site we have says that the relationship is working for us and for them and its definitely working for us. You had a question; I’ll let David answer directly the question you asked of him.
David Bernstein
Yes you know Steve; the yields are higher than the group average on the ticket prices. But that’s not really our key metric.
I mean, operating income for ALBD is really the key metric and there too the yields were higher. So that is what we're looking at as a metric in terms of overall for China.
But the one other thing I will add, keep in mind, since mid last year the Renminbi is also devalued by 7%. So, when you're looking at an apples-to-apples comparison on a current dollar basis that does affect the overall ticket yields and the overall yields for our China business.
Arnold Donald
I think the main point is China is a very positive story for us, it is strong, it is a contributor, it only represents 5% of our capacity today. So, we're well-positioned from that regard as well.
But its definitely a nice add and we certainly have benefited from it and see continues strength.
David Bernstein
And let's not forget the benefit that we see in the rest of the world as a result of the growth in China and the more around measured capacity growth in the established market which is 95% of our business.
Steven Kent
Okay. Thank you.
Thanks for the color.
Operator
Thank you. Our next question comes from the line of Robin Farley with UBS.
Please proceed.
Robin Farley
Great. Thanks.
Two questions. One is, I'm just curious there's no change in your full year yield guidance, but Q1 obviously came in quite a bit stronger, so that sort of implies that your next three quarters guidance are lower from where you thought it was, which I think its not the case and you are probably just being conservative.
So I wonder if you could – if anything I would think the strength of the close in bookings in Q1 would lead you to feel better about the next three quarters. So I just, I wonder if you can adjust that?
David Bernstein
Sure. Robin, as I've indicated in my comments, the first quarter revenue yields were $0.07 lead on the guidance.
So $0.07 keep in mind is 0.4 for us in total in terms of the full year yield. And when you take a look at it, our yield guidance for the year was approximately 3%.
So, depending on where you are, if you're two-tens of a percent below that and now you're two-tens of percent above that, so essentially it's still approximately 3% than the rest of the year didn't changed.
Robin Farley
Okay. And to the strength of the close and it's not changing your view on the next three quarters?
Arnold Donald
Well obviously we're going to strive to do better, but what we've experienced so far gives us conviction to maintain our guidance and actually increased guidance by a Nickel. And we feel very positive about our booking situations, so obviously we're going to strive to do even better, but at this point with all the dynamics around the rest of the world on the fact that the Caribbean which has been very strong for us becomes a smaller percent of the total in the subsequent quarters.
We think it's prudent to stick with the guidance we've given.
Robin Farley
Okay. That's great.
Thank you. And then, my other question was just on China and you talked about tremendous potential for unit growth there.
Can you just put a little color around the Carnival brand originally it was going to send the ship there for the first time in 2017, it sounds like that its now going to be 2018. Is that just sort of taking time to market a new brand that you wanted to have give a little more lead time to or just given the -- obviously the volume growth in China?
Thanks.
Arnold Donald
No problem, Robin. Yes.
The CCL decision, the Carnival brand decision in China, when we originally – when they originally gave their estimate it was preliminary thing. As they got into the detail deployment planning, we have a number of home ports here in the U.S.
serviced by the brand and as they looked at moving ships, ships fit in certain ports, not in others, so on and so forth, it just became prudent for them to look at launching in 2018 rather than in 2017. But it's strictly around deployment planning.
It has nothing to do with the environment in China.
Robin Farley
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Harry Curtis with Nomura.
Please proceed.
Harry Curtis
Hi. Good morning everyone.
Follow-up question on the booking and yield strength, just turning to Europe for a second, can you give us a sense of the recent incident in Brussels and whether or not that's had any impact. And David I think that I didn't catch your -- fully your outlook for Europe based on your current booking strength.
I think you said it was slightly higher but I didn't catch the occupancy?
Arnold Donald
Thank you, Harry. First of all, obviously our thoughts and prayers go out to the victims and their families in the Brussels situation.
This is really too early for us to know the exact impact of that. Historically, there has been some temporary impact from events like this and the level of the impact depends on the lot of different factors.
But historically, eventually people adapt, we don't know exact, we're in the process at this point, but right now we see no reason to change guidance. And as you know our philosophy is things happen every year and we anticipate that without knowing exactly where or what things will happen and we factor that in to an extent.
So it's too early to see the full fallout of that. But at this point in time we're comfortable with the guidance that we've given and see no reason to change it.
Micky Arison
And as far as the booking position for our EAA Brands which really is the majority of our European program. We said that for Europe occupancy is the head of the prior year at slightly higher prices.
And for the seasonal programs for our North America brands, which is really just like 5% of our overall capacity for the company. We said that our occupancy was nicely ahead, but that pricing was a little bit lower because of the geopolitical risk and the things that Arnold had indicated.
Harry Curtis
Very good. And then my follow-up question speaks to the share count assumption.
David you mentioned, but I'm not sure I got this right that the guidance for the balance of the year assumed a fully diluted share count of 760 million shares. Is that correct?
David Bernstein
That was for the whole year. And as I think I had indicated in the December call, the way we do our guidance is we include the shares that we purchase to-date, because as we've always said, our share repurchase program is opportunistic, so build in to our guidance does not include any future share repurchases.
And as I mentioned, we do have almost 700 million left on that second billion, so we do have the opportunity to continue to repurchase.
Harry Curtis
Okay. That's how you anticipated my last question.
Thanks very much guys.
Operator
Thank you. Our next question comes from the line of James Hardiman with Wedbush Securities.
Please proceed.
James Hardiman
Hi, good morning. So just real quick clarification on some of what's been going on in Southern Mediterranean based on some of the terrorist attacks.
Have you had to move any itineraries around at all, and if so, does that have any impact on your numbers?
Arnold Donald
First of all, good morning. There is always in every year some itinerary adjustments and we go where people want to go.
So if we see there is a heavy reaction from guest about going to particular itinerary we have previously planned, obviously we will choose to alter that. So, yes, there have been some changes in some of the ports.
In Turkey for example, this year we still have a number of brands go in to Turkey and we are in constant contact with every intelligence agency in the world and all the various security enforcement agencies as well, safety to our guest is number one. But frankly right now we see more just what is driving our decision making is the desire of guest to go to locations and that's where we are right now.
James Hardiman
Very helpful. And then just maybe walk us through the changes in fuel and currency since the last time you guys reported.
The constant currency numbers for both yields and costs look to be unchanged, but the current currency numbers look to be slightly better for both. Now this might just be a rounding thing and these are all approximate estimates or maybe it’s a function of the repositioning of ships, but normally sort of things get better for yields and worst for costs or vice versa, it seems like they got a little bit better with respect of FX.
And then with fuel certainly the crude oil prices that we look at have gotten little bit worst, although your guidance for the year seems to gotten -- to have gotten a tad better, just walk us through some of the puts and takes there?
David Bernstein
I'll start with fuel. You probably notice that overall we for the year we were $2 – our guidance is $2 per metric ton better.
At the moment in time that we did the December call versus our March guidance, I mean, Brent was within a dollar, the crack spread was virtually the same. So the numbers move very little on the fuel side.
Of course, we have a little benefit there. We had offsetting that with some additional derivative losses, so the overall fuel number was negligible in terms of a change from our December guidance.
Currency did move against us, and remember we have a basket of currencies. So it depends on the movement.
The one currency from December through March that moves the most was the British pound. And if you look back we were using one 151 as the rate for the British pound back in December, the rates now I think in our press release in the second quarter was like 143, so there was like a 5% movement.
So, depending on what you're looking at because of the different basket of currencies and the movements, the British pound is the biggest impact and that was a negative impact on our bottom line. And that's what droves the majority of the currency drag.
James Hardiman
Got it. Thanks guys.
Operator
Thank you. Our next question comes from the line of Felicia Hendrix with Barclays.
Please proceed.
Felicia Hendrix
Hi. Thank you and good morning.
David, I just – I wanted to clarify something – some commentary that was in the release in the outlook section, please. When you were talking about the cumulative advance bookings for the first three quarters of 2016, in the release you said that they are well ahead of the prior year at slightly higher at constant currency prices.
And then in the December release you talked about 2016 in the context of slightly higher prices. So I just wondering is there any difference in the two outlooks?
Beth Roberts
No. They are both constant currencies.
Felicia Hendrix
Okay. That's helpful.
Thank you. And then also, Arnold on the last call you had talked about the high end of the guidance range, the net yield guidance for the year is being 4%.
I know you reiterated med to 3%, but just wondering if you're looking at the high end similarly.
Arnold Donald
I think Robin, the reason we had said.
Beth Roberts
Felicia.
Felicia Hendrix
Felicia.
Arnold Donald
Felicia, sorry. I apologize.
The reason why we had said the high ends of the range was 4%. It related to the $3.40.
And when you start looking at the midpoint of our guidance and it was at $0.30 range and a point of yield is $0.15, so we had said the $3.40 related to 1% higher yield or 4%. So, obviously time has gone on and we've narrowed the range down to $0.20 range.
But we still – we're giving you the best estimates that we can. It still relatively close to approximately 4% at the high end.
Felicia Hendrix
Okay. That's helpful.
And then, can you just refresh us in terms of how much of that is ticket and onboard. Has that changed?
Arnold Donald
It really hasn't change significantly from the December guidance to ticket and onboard. The December guidance we used about 2% for onboard and it was a little over 3% for ticket and [Indiscernible].
Felicia Hendrix
Okay, great. Thank you.
Operator
Thank you. Our next question comes from the line of Jaime Katz with Morningstar.
Please proceed.
Jaime Katz
Good morning. Thanks for taking my questions.
My first question is on this revenue management yield system that you guys are using across your brands. And I think the commentary that indicated that's about 30% of the inventory would be up over the course of the year.
And I'm curious first one that might completed all over the brands or eventual beyond it. And there was a comment that there would be some yields uplift, so I guess I'm curious what your expectations for benefit there are?
Arnold Donald
Good morning, Jaime. Yes, so, on the revenue management tool that we're implementing.
We have six brands, six of our brands that initially will be on the new tool. When its implemented this summer we only have about 30% of their collective inventory going through the tools, obviously that will ramp up over time and we'll have more inventory that goes through it.
By the time it's up and running 2016 will be pretty much booked and so the real impact we won't see until 2017. But I have to tell you we are enjoying some benefits now just from the brand collaborating, working on the tool, together sharing lots of information.
There is improved decision making going on revenue management all along the way and is definitely contributing to some of the yield improvement that we have enjoyed the past few quarters and including this past quarter. So, over time when we go to the next phase of the tool, which will be implemented next year, pretty much all the brands will be using the tool.
We have some brands that have already more sophisticated tools than others, and this tool both base loaded will be one of sophistication we put the next layer on top, it will be at a whole other level of sophistication. So we'll have a build of impact over the next few years from having the two and it will make a difference.
Jaime Katz
Okay. And then I have sort of an esoteric question for you guys.
How do you think about differentiating the brands that are going into the China market versus the competitors, obviously Costa has been there for some time there's a lot more brand awareness than maybe some of the other brands, but I think the messaging is going through the travel agents, the way that the distribution network there works, might be a little skewed. So, I'm curious if there's an easy way to articulate how Carnival's brands in the regions are different and maybe a better value to those consumers?
Arnold Donald
The easiest way to do it is to actually have the distributors experience the brands, because once the go on the ships and experience the brands, the differences dramatic and very much get a very different feel from one brand to the next in terms of what type of cruise experience is. And because those brands resonate around the world across different what we called cryptographic segments.
We're 1.3 billion people. China is very capable of absorbing lots of different brands.
And so see at this stage we just have a toe in the water. There is a 135 million estimated outbound Chinese tourists today are ready.
And less than a million of them or maybe roughly a million of time are cruising today. So, we have even touch – begun to touch the surface hardly, but there's plenty of room and capacity.
Our belief is that at the consuming level, at the guest level that in the price ranges we're in the guest today are relatively pricing elastic where them in Austria, I was in Cuba last week, the Mainland Chinese fill the power door that I was in the private restaurant in Havana I was in. And so they have money.
They are able to travel. They are not exactly shopping for price.
They fill up the retail outlets and spend several levels higher than the typical tourist would from other places in the world. So, we don't see any major barriers at this point except as you just refer good communication, execution, training the distribution system, given them the exposure they need so they can represent various brands well.
We think there's plenty of room for everybody for several of our brands and we're going to bring our Idida in 2017 and Carnival Brand right now I guess is going in 2018.
Jaime Katz
Okay. And then lastly just a housekeeping question.
With so much capacity coming on, can you guys offer your outlook for D&A in the current year?
Beth Roberts
$1.716 billion to $1.780 billion [ph] is the range for the year.
Jaime Katz
Thank you.
Operator
Thank you. Our next question comes from the line of Greg Badishkanian with Citigroup.
Please proceed.
Greg Badishkanian
Great. Thank you.
Just to put the Brussels impact in perspective, kind of comparing it to the Paris attacks, any change in behavior that you have seen that were different than the initial 10 days or so with North American sourced passengers versus European sourced as well as cancellation rates?
Arnold Donald
Again, as early, in Paris there was some impact on bookings, which faded pretty quickly, may have had some net minor impact on results. But again, is one of many things affecting us in Europe and we factored that into our guidance but it is still early for Brussels.
We don’t see, haven’t seen anything dramatic yet. The question is how things build and so on.
But frankly, again we’ve kind of have it in our guidance, barring some major dramatic shift in reactions.
Greg Badishkanian
Okay. So nothing dramatic.
Arnold Donald
No, nothing dramatic. No.
Greg Badishkanian
Good. And then moving just to Cuba and kind of thinking about the opportunity and congratulations by the way and getting your ship there.
How quickly before you think that you will be able to ramp up capacity in Cuba? I know there is a regulatory perspective than there is just a logistical perspective.
Arnold Donald
Yes. You nailed it both.
First of all, regulatory first, so we are already are talking to Cuba, obviously about the other brands, when might they come and which ports and so on and so forth. We are looking forward to working with Cuba to help develop the cruise industry there.
We think, again is different story than China but is similar and that there is room for everybody. And we are looking at it, as a refresher for the Caribbean.
We think is going to help us, is going to help the industry, is going to help the Caribbean and is certainly going to help Cuba. So, we are excited.
We are very honored and privileged to have been given the honor of being first for approval by Cuba and we are really enjoying the work relationship and looking forward to working with them. In terms of timing of all this, the logistics do matter too because of our ships, we just talked about the brands being booked by the summer for ’16 pretty much and so, itineraries have been established.
Guests and plan all going places. As we get additional brands approved by Cuba, those will have to adapt to their current itinerary planning schedules.
So, practically speaking, while we may have some additional itineraries in 2016, you are probably looking at 2017 for any kind of significant impact.
Greg Badishkanian
Thank you.
Arnold Donald
Thank you.
Operator
Thank you. Our next question comes from the line of Tim Conder with Wells Fargo Securities.
Please proceed.
Tim Conder
Thank you. Just a couple clarification questions, one on your yield guidance.
Basically, 1% difference due to the change in accounting that you called out in December. Is that build into the guidance now or not?
I just want to clarify that. And then secondly, David -- I think, Arnold, on one you were commenting on China relative to one of the earlier questions.
Did you -- just to clarify, did you say at this point, yields were up down as they are looking for the year?
David Bernstein
First of all, in China, again, it’s the unit growth story. We want to keep emphasizing that.
But to answer your question, yes, ticket yields are higher than the average for the fleet and their forecast will be that for the year. So that’s the truth but we don’t want you guys over focusing on yield because the real story is the great accretion in earnings that we are getting from China and it is going to be a volume growth story for a while because we are at the very beginning were nascent in that market.
And there is just so much potential in that market. In terms of….
Arnold Donald
The other question was about the accounting reclassification but yes, we built into the guidance in December and we built that into the guidance in March. There is no change in the methodology there and it is about 1%.
Tim Conder
Okay. And Arnold, I apologize, my question on clarification on China was just more -- I totally understand it’s a unit growth story and if they are highest in the world then it’s a positive mix and these things continue to grow.
But just more on the year-over-year comparison, perhaps slightly down?
Arnold Donald
We’ve never given a range on yields in China but yields are down on just a year-to-year basis but we’ve never given a range and wouldn’t until now.
Tim Conder
Okay. And then to stay kind of on that versus the rest of the world, any color for the industry that you could comment on as to how maybe the tiny yields combined are different relative to say North America or Europe?
Arnold Donald
No. I don’t have any color for you on that.
No.
Tim Conder
Okay. And then two other things on yield and that will be it.
The implied net yields in your guidance for the year, just by major geographic region, Europe, Asia, North America and then specifically related to the Brits and onboard spending, anything that you are seeing given the pound depreciation that you’ve seen here since the beginning of the year or over the last six months in onboard spending trends by Brits in particular?
Arnold Donald
Just onboard in general, onboard revenues has increased every year over the last, I don’t know 10, 12 years except one. And so onboard revenues tend to increase every year and the question is how much.
Last year, we had large percentage increase in onboard revenues overall. And this year, we are seeing again an increase on top of that, not necessarily at the same level as last year but a nice increase.
And so the correlation to economy and all that tend not to -- we have difficulty tracking that and correlating in any specific way. Even the degree of increase in onboard revenue isn’t always correlated to particular economic conditions in a given destination market or a given source market.
And so there is just so many variables that come into that, not the least of which is just constantly giving guests more what they want and if you do that, the guests onboard will spend more. And that’s really the issue for us is always tweaking that and figuring out exactly what do guests want.
So, we give it to them in a way they want it and what they want and the way they want it and we continue to grow. So, to be honest with you, we haven’t seen -- we've tried it every which way and we just haven’t seen any tight correlations to general economic trends.
David Bernstein
And also keep in mind that the overwhelming majority of our British guests sail on P&O Cruises, which is the British pound onboard. So, as far as they are concerned, there really is no change.
Of course, it does affect on a translational basis, those onboard revenues into U.S. dollars but it doesn’t change their spending patterns onboard.
And as far as the overall cruise revenue yields are concerned, we had talked in December between our North America brands and our EAA brands. We were expecting increases in both segments of our business.
The increases were slightly better in the North American brands than the EAA brands once you net out the accounting reclassification which I had mentioned affected the EAA brands in December.
Tim Conder
Okay. And it’s very nice to see everything really starting to come together and bear fruits.
Thank you, gentlemen.
Arnold Donald
Thank you.
David Bernstein
Thank you very much. Much appreciated.
Operator
Thank you. Our next question comes from the line of Kevin Milota with JPMorgan.
Please proceed.
Kevin Milota
Hey. Good morning everyone.
Just have two quick ones here. First, obviously China, fairly small right now in terms of total capacity at 5%.
With your capacity introductions in ’17 and ’18, could you give us a sense for where your total -- where those capacity stats will go in those years? And then secondly, I guess for David on fuel.
At current fuel levels, could you give us a sense for what’s baked into the $3.20 to $3.40 guidance as it relates to the unrealized losses from your derivatives? Thank you.
Arnold Donald
Okay. Thank you for your questions.
First of all on China, as you know, the industry, believe it or not is capacity constrained because of the limited number of shipyards to build ships and obviously, we’ve got partnerships with both Fincantieri and with Meyer in Germany in terms of securing slots to enhance our fleets. Having said that in China, we can’t grow too fast because just the limited availability of ships.
So, we will probably be by 2020, somewhere in the 8% to 9% range of our fleet, which means most of the growth and capacity we have will actually be going to China. And that means that we will be growing on a much lower rate in the rest of the world markets, 1% to 2% there while big percentage increases in China.
But in terms of absolute number ships, still relatively small compared to the latent demand that exists in the country. So to answer your question by 2020, depending on how things go -- and that’s the beauty of this, we have flexibility.
Depending on how things go, we could be 8%, 9% of our capacity in China. And that means therefore that we didn’t grow a lot in the rest of the world but that fits with our measured capacity growth overall plan to help create relative scarcity.
We continue to drive demand, create excess demand relative to that measured capacity, which obviously allows us to capture more of the value gap that currently exists between land-based vacations and cruise. We are still a much better value than land-based vacations and we have lots of room to move.
David?
David Bernstein
And as far as the derivatives, you said unrealized but I think what you meant is how much was in our guidance in terms of realized loss on the fuel derivatives for the year and the number is 300 -- about $330 million of realized losses.
Kevin Milota
Okay. Very good.
Operator
Thank you. Our next question comes from the line of Ian Rennardson with Jefferies.
Please proceed.
Ian Rennardson
Hi. Good afternoon.
Couple of questions for you. How much more are you sold than this time last year?
Is it 5%, is it 10%, is it 20%? Could you give us a sort of numerical answer, please?
And moving on to yield expectations, Q2, 1.5% to 2.5% growth at constant currency after a very strong end to Q1. You mentioned close in pricing, why this sort of slight disconnect, please?
Thank you.
David Bernstein
So, as far as how -- we are ahead on bookings but we don’t give the details for competitive reasons about exactly what percentage points we are ahead. So, we just rather leave it more general.
And as far as the comparisons on the quarterly basis, the second quarter is lower than the first quarter but you got to remember, you got to look back against the prior year. The second quarter last year was much stronger than the first quarter.
We were up about 2% more the second quarter. So it has a tougher comparison in the prior year, as well as the fact that in the first quarter this year we had indicated we were 47% in the Caribbean versus 30% in the second quarter.
The Caribbean was a very strong market for us and so, you are seeing some differences between the first and second quarter in terms of yield increases.
Arnold Donald
But that yield improvement in the second quarter, obviously is consistent with the overall guidance and is going to lead us to 20%, or better at the midpoint of our guidance, earnings improvement year-over-year.
Ian Rennardson
Okay. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Stuart Gordon with Berenberg.
Please proceed.
Stuart Gordon
Yes. Good afternoon, guys.
Just a quick question on the close in bookings, have obviously been very strong and held beat on the yield. Could you give an indication as to whether this has been helped by less sort of onboard concessions that’s helped drive up that ticket price rather than driving up onboard spend?
Thank you.
David Bernstein
Yes. When we package -- what you are talking about is some value-added packages and when we provide those value-added packages, we do segregate a portion of the revenue and record it in onboard.
So, you wouldn’t see an artificial drive up in ticket prices from a value-added package.
Stuart Gordon
Okay. But did you have to give away less value-added packages in the close in of this quarter, which than perhaps has been the case in previous quarters?
Arnold Donald
Well, certainly compared to the prior quarter, the yields are up significantly. So overall, pricing at total was stronger, whichever way you want to look at it and so that means -- I don’t know whether they gave more packages out or not, but again, that would have been reflected on onboard versus ticket.
But the practical reality across the fleet -- we have so many different brands across the fleet. Overall, close in was much stronger this year than last period.
So that means that they reduced pricing less.
Stuart Gordon
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of Jared Shojaian with Wolfe Research.
Please proceed.
Jared Shojaian
Hi. Good morning.
Arnold Donald
Good morning.
Jared Shojaian
Have you guys stopped hedging fuel? It looks like you haven’t put on anything new for a while.
Can you just give us an update on your current policy here?
Arnold Donald
Yes. Well, we have collars that went out a number of years and right now we continue to live with those, as you can see from the derivative losses.
So at his point in time, we evaluate it constantly to see what we should do. In the past, we did it to avoid significant spike in fuel pricing that could have created any kind of short-term cash issues and we don’t see, at this point of time a need to do anything.
We are collared all the way into 2018 at various levels. I think next year is -- David?
David Bernstein
Next year, we’ve got 8.1 million barrels collared and a little over 50% and 5.4 million barrels in 2018, which is less than 50%. But as Arnold said, we are collared out almost three years now.
So, we are comfortable with our current position. We constantly talk about it and analyze it and think about it.
But as you said, we haven’t done any fuel derivatives since it was October of 14th and we will give it more consideration as we go forward.
Jared Shojaian
Okay. Great.
Thanks. And then should we expect the pace of your buybacks year-to-date to continue throughout the balance of the year?
And if so, are you comfortable financing CapEx in order to do that? And if not, can you just help us understand why you wouldn't take on some incremental debt right now while still being able to maintain the investment-grade credit rating?
Thank you.
Arnold Donald
So, first of all -- yes, you bet. First of all, we do have an authorization.
We will do as we have done in the past, which is opportunistically use that authorization. Beyond that that’s a Board decision.
The Board is constantly looking at it. In terms of our debt position, we are, as you can tell, by our balance sheet is in pretty good shape.
I will let David add any additional color you would like. Go ahead, David.
David Bernstein
Yes. We have said many times that we would return all our excess free cash flow to the shareholders.
We have done that. We did get the second billion dollar authorization from the Board of Directors.
We will be opportunistic as we purchased throughout the rest of this year and when we get completed with that, we will take a look and we will talk to the Board about what’s next. But you have to keep in mind that this is a Board decision.
So, we don’t want to preempt the Board but when we get done with the 700, we will look at potentially what’s next in the program.
Jared Shojaian
Okay. Great.
Thanks for the time.
Arnold Donald
One last question, please? Operator?
Operator
All right. Thank you.
Our next question comes from the line of Dan McKenzie with Buckingham Research. Please proceed.
Dan McKenzie
Well, hey. Thanks.
Good morning, guys.
Arnold Donald
Good morning.
Dan McKenzie
With respect to the revenue beat, I am just wondering how much of it was tied to investments and advertising spend over the past year? And then with respect to the uptick in advertising in the third quarter, I am wondering why then and how you have been measuring the link between the campaigns and the revenue production?
Arnold Donald
We have 10 brands. They all have segments that they are catering to and they all have their independent marketing plans.
We do look at it collectively. We are leveraging our scale in terms of looking at common media buy and those types of things to be even more efficient as paying dividends for us.
But the reality is we are expecting a return on any investment we make and that includes advertising and whether it’s mass media advertising, product placement advertising, digital, all the various forms of it and PR, public relations effort. So, our belief is that we have to keep cruise out in the public space in a positive way on a constant basis.
So that when people are considering vacation there’s been enough noise about cruise that they say, well, I have an idea, hey, let’s look at a cruise. And so, the idea is just keep it out there and that’s utilizing all the various forms.
There is no question we have created incremental demand. We also know there is no question that incremental demand has been in part created by the fantastic work of our team members across our 10 brands who literally exceed guest expectation every day when they come on board and that word of mouth and that personal experience of having your expectation exceeded is the most powerful marketing tool we have by far.
And that’s by the work of our people and engineering the experiences on board and then delivering against it. So to your question, yest we’ve increased to advertise on overall and we’ll continue to look at it, we don’t do it really nearly we do a lot of measuring and tracking to see what kind of impact we get both in attitude and in bookings and so on and that we are constantly monitoring that and tweaking it, but the third quarter rational is a peak communication time to prepare for the coming year and that’s why you often see an increase in that period.
Dan McKenzie
Very good. The next question gets at the competition for the upper scale traveller and specifically your key competitors have products within their core brand to chip away at that market share in that segment.
And so you have got the Norwegian Haven, the Royal suite products, looking ahead Virgin seems poised to also chip away at the upper scale traveller. So, I am wondering if you can help us put some brackets around the revenue that this market segment represents, how you are thinking about these moves by key competitors and how Carnival is responding.
And thanks for the questions.
Arnold Donald
You bet. Our primary competitor is land based vacations.
And one of every two people cruise and we all cruise with us and we have tremendous respect for the other companies that operate and we want them to be successful. We -- that helps us a lot.
The stronger they are, the better it is for us. So having said that, we have 10 brands.
We have ultra luxury and Seabourn, we have luxury in Cunard both our Queens Grill, and Princess Grill, we have Holland America or Neptune. We have premium brands and Fathom our newest premium brand but obviously our long established premium brands of Princess and Holland America and AIDA and then we have mass contemporary brands like Costa and Carnival.
So we look at that, but again the really important thing about cruise is this. We’ve had Steve Wozniak who we pay to lecture on Seabourn, but he pays the go on Carnival, okay because it’s not a demographic choice per se, we have taxi drivers who will stay for five years ago on a Seabourn cruise and we have billionaires who want to sail on Carnival.
And the reality is the experience that you are looking for. And each brand is a different experience caters to a different psychographic market.
So we have ultra luxury brands, luxury brands, premium brands etcetera each with their own experience and that’s what drives us first. But for us we are definitely looking at penetrating more land based vacations because all the cabins in the world added up together represent less than in the industry represent less than 2% of the hotel rooms in the world.
So that means there is 98% of the market to chase as opposed to 1% because 1 of that 2%, 1% is ours already, so that’s kind of our approach.
Dan McKenzie
Thanks much.
Arnold Donald
Thank you very much. I really appreciate the questions.
Thanks for your support. We look forward to talking to you guys next quarter and in between and as always feel free to call Beth with any additional questions or insights you might want to offer us.
So thank you.
Operator
Thank you, ladies and gentlemen. That does conclude the conference call for today.
We thank you for your participation and ask that you please disconnect your line.