Carnival Corp

NYSE:CCL

Earnings Call Transcript 2018-Q4

[Arnold Donald, executive]

Good morning, everyone, and welcome to our fourth quarter 2018 earnings conference call. I am Arnold Donald, President and CEO of Carnival Corporation and plc. Thank you all for joining us this morning, and a sincere happy holidays to everybody.

Today, I am joined by our Chairman, Micky Arison; by David Bernstein, our Chief Financial Officer; and by Beth Roberts, Senior Vice President, Investor Relations.

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. Collectively, our people, our fellow team members have achieved a very important milestone, and I'd like to take my prepared remarks on this call as an opportunity to share it with all of you.

Five years ago, we established a target to deliver by the end of 2018 double-digit return on invested capital. I am very pleased to share that we have achieved double-digit return on invested capital, while finishing the year with another record quarter of adjusted earnings, leading to the highest full year earnings in our company's history, our fifth consecutive year of adjusted earnings growth and third consecutive record year. I sincerely thank our 120,000 team members who went above and beyond to deliver for our shareholders a more than doubling in return on invested capital and near tripling of adjusted earnings per share in just 5 years through executing on our strategy to create demand in excess of measured capacity growth, while leveraging our industry-leading scale. It was their efforts that drove a $12 billion increase in market capitalization and the return of $11 billion to shareholders through strong dividend growth and opportunistic share repurchases, all of which was accomplished, while also achieving A minus and A3 credit ratings from S&P and Moody's, respectively.

It was also their efforts that enabled us to execute despite a plethora of headwinds, like rising geopolitical tensions all over the world, including the attacks in France and Germany impacting people's willingness to travel; actual geopolitical conflicts affecting our ability to retain some of our high-yielding destinations, like Turkey and Egypt for a period of time; there were disease scares and there were natural disasters like Hurricane Maria and Typhoon Talim; disruptions in China like with the trade and stoppage and travel to Korea; economic malaise in some key countries in Europe, including uncertainty around Brexit; and temporary overconcentration of industry supply at times in regions like the Caribbean. These headwinds caused consternation, in some cases even doubt amongst the investment community that we would, in fact, deliver. Again, I'd like to thank our team globally. It was their passion and their commitment that overcame all of that to still perform. And when combined with the strong support of our valued travel agent partners, enabled our record-breaking results.

While the journey to sustained double-digit return on invested capital is built on the foundation of exceeding guest expectations every single day, we have had contributions from many areas that helped pave the way to double-digit return on invested capital and have left us better positioned to sustain and grow return on invested capital over time.

While the list of areas that will continue to pay dividends going forward is very long, I'd like to highlight just a few. Essential to our core strategy is creating demand in excess of measured capacity growth by increasing consideration for cruise globally and continuing to enhance our already high guest experience. Five years ago, if you had not yet cruised, there was little press coverage that would make you want to take your first cruise. Our proactive public relations effort has clearly had a positive impact. While we believe those efforts have benefited the entire cruise industry, today, our brands consistently capture over 75% of all positive media in our industry, and the absolute number of positive media mentions are multiples of what they were just five years ago.

Our brand's marketing efforts have shared the spotlight with many well-known personalities who brought with them a greater audience of potential new to cruise to our respective brands, like Oprah Winfrey for Holland America, Shaq for Carnival Cruise Line, Shakira for Costa and Her Majesty, The Queen, for P&O Cruises, just to name a few.

Our brands were featured on television programs all around the world, including The New Celebrity Apprentice; The Ellen DeGeneres show; the ITV reality show, The Cruise, in its sixth season in the U.K. and Ant & Dec also in the U.K. But we didn't stop there. We created our own original content TV programs, which have already reached more than 400 million views and counting, airing on major U.S. networks, including ABC, NBC, Telemundo and Univision. Our proprietary shows, The Voyager with Josh Garcia, Ocean Treks with Jeff Corwin, Vacation Creation and for the Spanish-speaking market, La Gran Sorpresa, are among the most popular travel series on TV using authentic storytelling to share the powerful way travel by sea connects, people, places and cultures around the world. All of these programs and more can also be found on our own television network, OceanView, or our own mobile app, OceanView Mobile.

Through our history-making voyage to Cuba, we captured over 55 billion very positive media impressions and became the first U.S. cruise operator in over 40 years to bring U.S. cruise guests directly from the U.S. to Cuba. At the same time, opening up an exciting new destination option for our guests through now 3 of our brands, Carnival Cruise Line, Holland America Line and Seabourn, with more planned in the future. We made global news through the historic signing of a joint venture agreement with CSSC, China State Shipbuilding Corporation, forming a local cruise operating company. More importantly, we forged a significant long-term relationship to help build the cruise industry in China, which over time has the potential to become the largest source market for cruise in the world. And we made history with the debut of our Ocean Medallion, our patented guest experience innovation, which enabled us to become the first travel company ever to be asked to keynote at CES, the largest technology trade show in the world. So far, Ocean Medallion has received 36 billion favorable media impressions for our company, and has won recognition globally for our innovation effort, including being recognized by Fast Company as one of the top 10 most innovative companies in the travel category.

While so far our ocean efforts have increased awareness for cruise globally, particularly in new forums, like technology forums, the opportunity going forward has the potential to be even greater. We believe the Medallion class experience can elevate the guest experience by enabling the delivery of more personalized guest services, including features like expedited boarding, keyless stateroom entry, on-demand food and beverage delivery just about anywhere, anytime, crystal clear and easy-to-follow wayfinding and the absolute best Wi-Fi at sea.

In the first quarter of full ship operation onboard Caribbean Princess, our Medallion class experience is clearly resonating with guests and with crew. And we now have Medallion class activated for all guests on our second ship, Regal Princess. But ocean is just one of many technology-enabled milestones. Across our other brands, we're in the process of rolling out new technology, both onboard and shoreside, including enhanced targeted marketing, improved CRM capabilities, new mobile app and redesigned website, which collectively contribute to enhanced guest experience, and an empowerment of our travel agent partners, increased revenues and reduced cost of sales.

Our state-of-the-art revenue management tool, YODA, has been deployed across half the company to facilitate further yield growth, particularly in the second half of 2019 and beyond. Our cruise brand continues to make great strides in furthering the guest experience, whether through new destinations like Cuba, Amber Cove, new terminals, like Barcelona or Dubai. Our multibillion-dollar fleet-wide reinvestment efforts, like Fun Ship 2.0 for Carnival, are signature of excellence for Holland America. Of course, our ongoing fleet replenishment efforts are central to our strategy to create demand in excess of measured capacity growth. Over the last 5 years, we welcomed 12 state-of-the-art larger, more efficient vessels, at the same time exiting 9 less efficient ships from our fleet, building a more return resilient fleet. And we leveraged our scale to reduce cost, achieving cumulative savings of over $350 million in just 5 years, and we believe we have more runway ahead to continue the momentum.

We also had many notable achievements in our sustainability efforts, including the opening of our significantly expanded Arison Maritime Center in the Netherlands, delivering state-of-the-art maritime training through cutting-edge bridge and engine room simulators and curriculum. And we opened 3 state-of-the-art fleet operation centers around the globe to provide real-time support, ship to shore 24 hours a day.

On the environmental front, we exceeded our target unit fuel consumption reduction of 25% 3 years ahead of schedule. And we made history just this week with guests sailing on our first ever cruise ship able to be solely powered by even more environmentally friendly liquefied natural gas. We are fully committed to continuous improvement in health, environment, safety and security.

The last five years have been transformative, achieving breakthrough results against considerable odds. It's a great foundation to build on. In fact, today, our business model is more sound than ever, having built into the fleet even greater return on investment resilience on top of an even stronger balance sheet.

As our journey continues, we will stay on much the same path to create demand in excess of measured capacity growth, while leveraging our industry-leading scale to deliver a sustained and growing double-digit return on invested capital. That said, the relative contribution from the components of our earnings model may change a bit going forward.

In the past 5 years, we grew capacity on average 2.5%. We achieved average annual yield growth greater than 3%, while containing cost increases to less than 2% compounded annually. Going forward, our fleet replenishment efforts are purposely designed to achieve greater economies. Over the next 5 years, we will welcome 17 larger more efficient ships and continue to divest our less efficient ships, representing net capacity growth of roughly 5% compounded annually. We expect this more efficient capacity to drive greater earnings growth going forward. Now this higher rate of capacity growth will enable us to better contain cost leaving us less reliant on revenue yield growth to produce double-digit earnings growth over time.

Our strong and growing cash from operations, which reached $5.5 billion in 2018, is more than enough to fund our debt service requirements, our non-new build capital expenditures, our annual dividend currently $1.4 billion and opportunistic share repurchases. In addition, we have access to $14 billion of committed export credit financing at attractive rates to fund our future growth CapEx. Of course, all of which will continue to be in the context of maintaining our investment grade credit ratings. The underlying fundamentals are strong. Of course, in any given year, a confluence of events can occur that would temporarily disrupt the consistent growth path we've been delivering, but there is no doubt, no doubt that our business is poised to perform extremely well over time.

Our guidance for next year reflects, once again, delivering record results. We expect net yields in constant currency above this year's historical highs on mid-single-digit capacity growth, producing nearly $1 billion of incremental net revenues, resulting in yet again growth in earnings and end return on invested capital. While this has been a very turbulent time for the equity capital market, we are working to ensure our corporation will come to be valued for the resilience and consistent execution that our portfolio brands has proven over these last 5 years and time and again.

Going forward, we plan to continue to grow our earnings and to deliver sustainable and growing double-digit return on invested capital over time.

With that, I'll turn the call over to David.

[David Bernstein, executive]

Thank you, Arnold. Before I begin, please note all of my references to revenue ticket prices and cost metrics will be in constant currency, unless otherwise stated. I'll start today with a summary of our 2018 fourth quarter and full year results. Then, I'll provide an update on current booking trends for 2019 and finish up with some color on our 2019 December guidance.

Our record adjusted EPS for the fourth quarter was $0.70. This was $0.03 above the midpoint of our September guidance. The improvement was revenue driven, $0.08 favorable as increase in net ticket yield benefited from stronger pricing on close-in bookings on both sides of the Atlantic, while onboard and other yields continue to benefit from a variety of our ongoing efforts. The revenue favorability was partially offset by $0.03 from higher net cruise costs, excluding fuel, due to the timing of cost between the quarters and $0.02 from the net impact of fuel price and currency.

Now let's look at our fourth quarter operating results versus the prior year. Our capacity increased 2.3%. Our North America and Australia segment, more commonly known as our NAA brand, was up almost 5%; while our Europe and Asia segment, more commonly known as our EA brand, was down almost 2%, driven by 2 ship sales earlier in the year.

Our total net revenue yields were up 3.7%. Now let's break apart the 2 components of net revenue yields. Net ticket yields were up 2.7%. This was driven by yield increases in Europe, Australia and China itinerary programs, partially offset by lower yields in the Caribbean. However, the Caribbean program in the fourth quarter did reflect the anticipated improving trend from the third quarter. Onboard and other yields increased 6.4%, with similar increases on both sides of the Atlantic.

In summary, our fourth quarter adjusted EPS was $0.07 higher than last year, with solid 3.7% revenue yield improvement worth $0.18 and lower net cruise costs excluding fuel per ALBD worth $0.02, both being partially offset by the net impact of fuel price and currency costing $0.13.

Now let's look back at the full year 2018. We grew our earnings 12%, with adjusted EPS rising to $4.26 versus $3.82 for the prior year. The $0.44 improvement resulted from a 15% operational improvement worth $0.56, driven by a strong 3.7% revenue yield increase and the $0.09 accretive impact from the stock repurchase program, both of which were partially offset by the $0.21 cost of higher fuel prices and currency.

Had it not been for the movement in fuel price and currency, our adjusted EPS would have exceeded the high end of the initial guidance range we gave last December of $4 to $4.30. The net improvement over the midpoint of last December's guidance range resulted from 3 things: $0.24 of higher net revenue yield as both net ticket yields and net onboard and other yields exceeded our initial guidance; and the $0.06 from the accretive impact of the stock repurchase program, both of which were partially offset by the impact of fuel price and currency costing $0.14.

Turning to our cash flows for 2018. Cash provided by operations was $5.5 billion. As a result of our strong cash flows during the year, we were able to return almost $3 billion to our shareholders via the regular quarterly dividend and share repurchases of $1.5 billion.

Now let's look at 2019 booking trends. Since September, booking volumes for 2019 had been running significantly ahead of last year well into the double digit and well ahead of capacity growth. As expected, prices on booking since September for the Caribbean program are significantly higher as we lap the 2017 weather impact in September. However, prices on overall bookings since September are in line with the prior year, driven by our EA segment sourcing in Continental Europe. At this point in time, cumulative advance bookings for 2019 are considerably ahead of the prior year at prices that are in line with last year.

Now let's drill down into the cumulative booked position for 2019, first for our NAA brand. The Caribbean program is considerably ahead of the prior year on occupancy at higher prices. The seasonal European program is ahead of the prior year on occupancy at considerably higher pricing, while Alaska is in line with the prior year, a very strong prior year, by the way, on both price and occupancy. Second, for our EA brand. The Caribbean itineraries are considerably ahead of the prior year on occupancy at lower prices and their European itineraries are ahead of the prior year on occupancy at slightly lower prices.

Booking trends for next year have been strong, driven by yield management decisions, which we believe will optimize on net revenue yield growth. In fact, even with a 4.6% capacity increase, we have less inventory remaining for sale than we had at this time last year.

Finally, I want to provide you with some color on 2019. The forecasted capacity increase is 4.6%, which I just mentioned, and is broken down by quarter as follows; 4.1% for the first quarter, 4.6% for the second, 5.9% for the third and 3.8% for the fourth. Based on current booking trends, we expect 2019 net cruise revenue growth of approximately 5.5% and an increase in net revenue yield of approximately 1%, with the first half expected to be up somewhat less than the full year, primarily due to very strong prior year comparison.

Now turning to cost. Net cruise costs without fuel per ALBD is expected to be up approximately 0.5% for 2019. Broadly speaking, there are 3 main drivers of the cost change: First, our forecast is for an average of 2 points of inflation across all cost categories globally; second, we are able to more than offset this inflation from the economies of scale we achieved by taking delivery of larger, more efficient ships, while disposing of less efficient ships as well as the cost savings from further leveraging our global sourcing scale; the third and final point relates to certain marketing and other ramp-up costs associated with the 3 ships, which will be delivered late in the year during the month of October as well as other smaller investments in IT and other areas of the business.

We currently expect depreciation to be around $2.22 billion for 2019 versus $2.02 billion for 2018. And we currently expect net interest expense to be around $220 million for 2019 versus $180 million for 2018. On a year-over-year basis, we benefit from lower fuel prices by $0.34, including the impact of last year's fuel derivative losses, while the stronger dollar unfavorably impacts us by $0.19. The net favorable impact of fuel prices and currency is unfavorable in the first half of the year, but more than offset in the second half. By quarter, the net impacts are $0.03 unfavorable in the first quarter, a $0.01 unfavorable in the second, $0.06 favorable in the third and $0.12 favorable in the fourth. Putting all these factors together, our adjusted EPS guidance for 2019 is $4.50 to $4.80 versus $4.26 for 2018.

I will finish up by sharing with you our current rules of thumb about the impact that currency and fuel prices can have on our 2019 results. To start with, a 10% change in all relevant currencies relative to the U.S. dollar would impact our P&L by approximately $0.27 for the full year and $0.01 for the first quarter. For fuel price changes, a 10% change in the current spot price represents a $0.21 impact for the full year and $0.05 for the first quarter. Fuel expense in our guidance is $1.45 billion for the full year.

And now I'll turn the call back over to Arnold.

[Arnold Donald, executive]

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

[Operator]

[Operator Instructions] And we'll get to our first question on the line from the line of Felicia Hendrix with Barclays.

[Felicia Hendrix, analyst]

I have a few questions that just -- before I forget because if I don't ask this first, then I'm going to forget. But just, Beth, if you can give us the first quarter '19 D&A and interest, that would be helpful?

[Beth Roberts, executive]

D&A is about 560, and I will come back to you on the interest in one second. Go on to your next question, please?

[Felicia Hendrix, analyst]

Yes, sure. I think this is both for Arnold and David, and I just was hoping you could give us a few clarifications on your guidance. First, last quarter, you said, you'd see solid growth in 2019. I think for most of us just up 1% doesn't really count as solid, so I was just hoping you could help us kind of with the semantics there? But also, David, I thought some of your commentary was really interesting in terms of the color because it looks like your NAA brands are up on occupancy and prices in each of the regions. You said very nicely strong -- you're using some pretty kind of robust language there. So it seems like in those regions, you're up more than 1% and it seems like your EA brands are dragging things down. So I was just wondering if you could give us some more color on that? And in the EA, what brands are having the challenges with right -- raising prices? And why would -- why?

[Arnold Donald, executive]

Okay. So Felicia, first of all, on the opening part about the solid 2019, we're -- we see a very strong base for our business in 2019. We're going to grow our earnings, we're going to grow return on invested capital and so we focus on earnings. As you know, yield is one of the tools that -- to get to earnings and with the capacity increase we have, and at this point in time we're before wave season, we don't have that and, obviously, we have to factor in the unknowns, like we always do. So the 1% is our best guidance. But of course, we're going to be striving to beat that, as we have in previous years, but that's our guidance at this point in time. We also have just a combination of mix issues, which I'll let David talk a bit about. Go ahead, David.

[David Bernstein, executive]

So Felicia, the -- keep in mind as we talked in September and, again, I will reiterate, in the first quarter last year, we really did achieve net yield revenue growth of 4%. The Caribbean in the first quarter is nearly half our deployment. And in the first quarter, we were so well booked last year, and we had minimal impact from the weather disruptions. And so that led to nicely higher yields and we have a tougher comparison for the first quarter of 2019. And, however, keep in mind that the Caribbean continues to improve sequentially quarter-to-quarter. The net revenue yield in the Caribbean in the first quarter 2019 is expected to be better than the fourth quarter and that's with significant capacity increase in the Caribbean as well. And then when you look at the second quarter of 2018, we achieved nearly 5% yield increases with the challenging Caribbean. So that was more than offset by high -- net revenue yield growth in other programs of 8%. So all of these factors combined in the first half are headwinds or challenges. And when you put that together, and you combine these with the challenging -- these challenging comparisons, with the uncertain economic environment we have in our EA brand, particularly in the Continental Europe sourcing, where we're experiencing significant double-digit capacity increase to those brands, and as a result of this, we are factoring all of this into our guidance for the year and try -- and we're expecting slight improvements in the second quarter and a stronger second half.

[Felicia Hendrix, analyst]

Okay. Because ultimately, what I'm just -- I'm trying to do is kind of understand. Your two peers have provided -- they haven't given guidance yet, but they've provided very bullish outlooks for next year. And I'm just trying to call through what the differences might be between what they're seeing and what you're seeing. And it seems like, again, it's coming from some of this uncertainty in your EA brand, which are specific continental brands, which are increasing capacity and perhaps more specific to what's going on at your company than what's going on in the industry, or I mean, in the -- kind of in the marketplace, is that fair?

[David Bernstein, executive]

Yes, that's a fair representation. I'd just say when you repeated that, I would add the uncertain economic environment in Continental Europe as well.

[Felicia Hendrix, analyst]

Okay. And are you seeing -- have you -- yes, and we all know that and we've heard some things, retail and stuff through the quarter, but I'm just wondering if you're seeing a significant change there from when you last reported?

[Arnold Donald, executive]

No. I wouldn't say it's significant change or anything. Again -- I think the other difference, Felicia, a bit is, we're really focused on earnings and return on invested capital. And so as we have the higher capacity increases, so even the European brands are going to grow in earnings, okay. And that's where we're driving towards. And so with greater capacity, you're less reliant, obviously, on yield increases. But obviously, we're going to strive to get the yield increases. But at this point in time for our guidance, given we're in front of wave and uncertainties and some of the challenges that were referenced in terms of economies in Europe, we think that's the prudent guidance at this point, but that guidance takes us to where we want to be in terms of earnings and increase in return on invested capital.

[Felicia Hendrix, analyst]

Okay. And Beth, just whenever you have that interest number that's fine.

[Beth Roberts, executive]

It's $55 million.

[Operator]

We'll go to our next question on the line from David Beckel with Bernstein Research.

[David Beckel, analyst]

Just sort of following on with guidance and potential changes in expectation. Last quarter, you indicated that you expected yields in the first half to be -- I'm paraphrasing, but a little bit less robust than what Q4 '18 guidance was, which was interpreted by most to be sort of a little bit less than 2. And so now you're obviously indicating probably a little bit lower than that with maybe a step up in Q2. So I'm just wondering what exactly changed between then and now that informs a more conservative view?

[Arnold Donald, executive]

Nothing really changed. I mean, we don't have a more conservative view to be blunt. I mean, we feel confident about the year. Again, we're focused on earnings and return on invested capital. We're giving the best guidance we have at this point. But I would say what's changed is that we're well ahead on occupancy. We have -- even with the capacity increases we have, we have less to fill next year than we had at this point in time last year. And so we're actually seeing strength. And so we're not -- we don't -- nothing has changed. We aren't more conservative than we were before or whatever.

[David Bernstein, executive]

We do have more visibility because we've had 3 months of bookings, but we had indicated that our guidance for the first half that the -- would be less than what the guidance we gave for the fourth quarter. But we never quantified the exact number because we had less visibility and said we would give guidance in December, which we are now doing. So nothing -- as Arnold said, nothing has changed.

[David Beckel, analyst]

Understood.

[Arnold Donald, executive]

In fact, we are in a better looking position than even thought at that point in time.

[David Bernstein, executive]

Yes.

[David Beckel, analyst]

So following on that point, specifically, your better booked position, is it fair to assume that YODA has sort of informed or suggested that you increase volumes in bookings or business on the books at the expense of price at this point of the year? Is that an active tradeoff that you made heading into the year?

[Arnold Donald, executive]

I think YODA is a tool, and it allows us more frequent inquiry and more frequent adjustments, and it's a powerful tool. It will show up more in the second half of '19 in terms of impacting real results. But fundamentally, it builds up from the bottom. So the key in yield manage to us is by ship, by itinerary, et cetera, and you're looking at it's not just 9 brands, it's all of the itineraries and specifics and it builds up to what it is. So for certain on some of those itineraries, I am sure along with the tool and the experience of revenue management [ scientists ] that with capacity increase they wanted to be at a certain point on the booking curve, et cetera, that may have driven decisions, but there are a lot of other variables. How much you bundle, how much of the bundling is allocated to onboard versus ticket, affinity groups, charters, there's a lot of moving dynamics there from a booking standpoint. But overall, for the guidance in terms of where we'll end up, that's what we have given our best shot at, at this point in time.

[David Beckel, analyst]

Got it. And just a last quick question, if I could. I want to -- there's a lot of concern about the impact of Brexit and you have a U.K. dedicated line. Just to confirm, have you seen any sort of weakening in demand or purchase intent from that specific market?

[Arnold Donald, executive]

We don't give it brand by brand, but the reality is at this point in time, no.

[Operator]

And we'll get to our next question on the line from the line of Harry Curtis with Nomura Instinet.

[Harry Curtis, analyst]

First question is, what percentage of your business is European sourced? And how does that look through the year?

[David Bernstein, executive]

So it's probably in total about 30% of our guests come from Europe. I'm not sure exactly what that is by quarter, but that's in total for the year.

[Beth Roberts, executive]

And it's pretty [ confirmed that it is the ] European brand versus from Europe, [ year-round. ]

[Harry Curtis, analyst]

Okay. And looking at the performance of the stock, it seems to me that after you back out the $0.14 fuel benefit -- fuel FX net benefit in your guidance, your earnings growth is really only up 5% for next year despite the 4.6% lift in new capacity. And I'm a little bit -- and I'm somewhat disappointed that we're not getting more of -- or a higher lift, both on yield and earnings contribution from a bigger growth in your base?

[Arnold Donald, executive]

Again, the timing of capacity when it comes on, et cetera, all those things factor in, but what we can assure you is that, we have the foundation for double-digit earnings growth over time -- over the near term here, the medium term. And I don't know exactly the 5%, it might be a little higher than that, but the bottom line is that's our best guidance at this time, and, of course, we're going to be working to beat that.

[David Bernstein, executive]

And one of the things that we did, Harry, is, over time, we have made a number of investments in capital and we have mentioned this on the previous calls, so that the depreciation went up a bit more than capacity, which impacted the numbers you're referring to. And these are investments, which we believe over time will pay dividend. So I think we're in very good shape, as Arnold indicated in his prepared comments, looking forward in the future.

[Harry Curtis, analyst]

And just a real quick question on your cash flow. How much capacity do you, really have to buy back stock next year, given the bulge that you see in CapEx, because with the dividend already at $1.4 billion, you're pretty much using most of the operating cash flow after CapEx. So to what degree do you feel like you want to turn to your balance sheet to buy back stock?

[David Bernstein, executive]

Well, we ended the year with a debt to EBITDA ratio of 1.96. So we do have some room on the balance sheet side. And so if you take a look at our guidance for 2019, we would end the year assuming no buybacks, which, as you know, is the way we put together the guidance, it is slightly above 2x. We have almost $700 million remaining on the authorization. So clearly, we have the flexibility to complete the authorization. And beyond that, the buyback is a board decision and we'll be discussing that with the board. But one thing I did want to mention, because you brought up capital expenditures and cash flows, is the capital expenditure forecast going forward. And let me just give you the years -- the numbers by year and then explain the changes. So for 2019, our CapEx number is $6.8 billion; for 2020, its $5.7 billion; for 2021, it's $5.9 billion; and for 2022, it's $5.3 billion. The 2019 number is probably higher than you'd seen before, but keep in mind, as we mentioned in the press release, we had the delay delivery of the AIDAnova and it was just simply delayed from November to December. So the CapEx that we anticipated in 2018 just fell into the first month of the new fiscal year. The other numbers have also gone up. We got some feedback because typically, our cap -- the CapEx that we were giving out was new ships that were contracted for as well as non-new build CapEx, the capital improvement. And so every time we ordered a new ship, our annual CapEx numbers went up. So what we've done is, we've tried to anticipate the new ships we plan to order, and we've included that in the total CapEx projections. So hopefully, we get that -- you'll see the numbers will be much closer in the future as we go forward.

[Operator]

We'll go to our next question on the line from the line of Steve Wieczynski with Stifel.

[Steven Wieczynski, analyst]

So I have got to ask another European question, you probably are going to get sick of this stuff, but I think that's where we're getting most of our questions here this morning. And I think there's panic out there at this point because you have seen some -- whether it's tour groups or retail providers, start to call up some weakness in certain parts of Europe. So I want to ask this a little bit differently, but I guess, in some of your key European brands, whether it's P&O, Costa, AIDA, whatever you want to look at, have you seen any material changes there in terms of onboard trends that you might want to call out in the last couple of weeks or last month or whatever time frame you want to look at?

[Arnold Donald, executive]

No, no, not at all. I would say that, obviously, there are some challenges in Europe broadly on continental Europe from turbulent economies or what have you. But the bottom line is with everything we just told you, our European -- our EA brands are going to grow in earnings and they are absorbing the capacity. They're going to be better than they've ever been. And so for us, it's still very strong. On a relative basis, average to the fleet, all those kinds of things, all that impacts our average numbers that we share with you guys. But in the end, we are focused on growing earnings and growing return on invested capital. Our makeup is different than some of the others in the industry. But Europe is going to grow earnings. Europe is doing well. They're absorbing their capacity and they are absorbing it, and we'll see they're working to grow yields in the end and we will see where we end up.

[Steven Wieczynski, analyst]

Okay, great. And second question would be just in terms of your yield guidance, in general, and maybe what's embedded in there for onboard? And obviously, you're coming off a couple of years of very strong onboard trends, and I guess I'm wondering if you're taking a little bit more conservative view around that metrics -- that metric, even not only the tougher comparisons, but maybe also some global economic uncertainty as well. Is that a fair way to kind of characterize that?

[David Bernstein, executive]

Yes. Well, we haven't generally historically seen onboards impacted by economic environments the way they have in ticket. The way we put this together is the onboard and other increase is slightly above the 1% overall. And the net passenger or the net ticket is slightly below, getting you to that 1% for the whole year. So -- and typically, I think I've said this in the past, we do typically use sort of a 2-ish percent onboard and other guidance number as we go forward and we work very hard to do better than that.

[Arnold Donald, executive]

Yes, there's a blurring between ticket and onboard. Brands try different combinations as they move along their booking curve and whatnot. So -- but clearly, pre-wave we have a little bit better visibility on yield, on ticket yield. Obviously, on onboard, we just have to factor in whatever we can and come up with a forecast, but we work hard to beat it, and that's what our team is about. But we -- the guidance we've given you, we see the foundation for what we promised, which is over time double-digit earnings growth and continued growth in return on invested capital.

[Steven Wieczynski, analyst]

Okay, great. And David, one quick housekeeping question. I guess, can you help us think about maybe when you put together your fuel guidance? And I guess, what I'm getting at there is, if we kind of, obviously, look at fuel prices over the last week or 2 weeks, it's obviously collapsed a little bit more. So just trying to figure out maybe at what point in time, you were -- you essentially put that together?

[David Bernstein, executive]

Yes. We -- it was a couple of days ago. Brent at that moment was $59. I know fuel has moved considerably. Keep in mind, Brent is just one factor, there's also the crack spread as well in determining our fuel price. So look at both of those before you do your calculations.

[Operator]

We'll get to our next question on the line from the line of Robin Farley with UBS.

[Robin Farley, analyst]

I was struggling a little bit I guess...

[Arnold Donald, executive]

Robin, you are deep in the call this time. Normally, we would have heard from you by now.

[Robin Farley, analyst]

I know. I'm not sure what happened. I [ think it ] was a little bit. With how much you exceeded close-in guidance, by 170 basis points at the midpoint, is there something about the close-in activity that you think won't recur? Something that has, obviously, been driving your results to come in like 150-plus basis points over the last several quarters that is nonrecurring or that sort of -- that you think the trend is going to change?

[Arnold Donald, executive]

I'll make a comment, and I'll let David comment as well. Frankly, as you know, Robin, by now working with us, there are so many unknown things that happen every year. And so we find it prudent to anticipate -- you can't anticipate unknown things, but anticipate that things are going to happen. And that's always in our guidance at this point of the year. If more things happen, that guidance seems to be prudent. If fewer things happen, that guidance seems conservative. And we never know what the future is going to hold and whether it's going to be more less or the same. And that will be my general statement. I'll let David make a comment.

[David Bernstein, executive]

Yes. You know if you break up the pieces, the onboard and other probably accounted for 60-ish or 65% of the improvement. And we have very little visibility on the onboard and other going into the quarter. So that's just a factor of our business. And fortunately, we worked hard and we did better in the onboard and other, which drove it.

[Robin Farley, analyst]

Okay. That's helpful. And maybe just as follow-up. You were calling out some of the continental sourcing brand, the softer -- the uncertainty there. Did they exceed your expectations on a close-in basis in Q4? Or no, did they come in just as you anticipated or did they also come in a little better than your expectations?

[David Bernstein, executive]

No. I did say in my prepared remarks that the close-in bookings was stronger on both sides of the Atlantic.

[Arnold Donald, executive]

So they exceeded.

[Robin Farley, analyst]

So that includes the continental, not just the U.K.?

[David Bernstein, executive]

Yes, both of -- yes, North America as well as Europe.

[Robin Farley, analyst]

Okay. But I asked you -- I meant, the continental brand, not just the U.K.

[David Bernstein, executive]

Yes, the continental, yes.

[Arnold Donald, executive]

Yes.

[Robin Farley, analyst]

Okay, great. That's helpful. And then this is just a very minor last question. Before some of the EPS impact from the AIDAnova delay, don't the shipyards usually pay a penalty, where, in other words, there would not be an earnings impact for you? I was just surprised to see an earnings impact when usually the yard would cover that.

[David Bernstein, executive]

Yes, they do. There are liquidated damages, but the accounting rule say that we have to reduce the net book value of the ship by the liquidated damage payment. So unfortunately, it doesn't go through the P&L and -- but we made [ a hole ] by those losses.

[Arnold Donald, executive]

Yes. It's the balance sheet, yes...

[Operator]

We'll get to our next question on the line from Jared Shojaian from Wolfe Research.

[Jared Shojaian, analyst]

So you made some comments about how the higher capacity growth leaves you less reliant on yield growth? And I appreciate that there are yield mix differences between each of your brands. But I would still think that every ship you're taking delivery of should still be yield accretive to your system yields, just given that your system yields are already more weighted to the contemporary segment. So I guess, the question is, shouldn't this incremental step up in capacity growth in 2019 and beyond give you a tailwind on the yield side relative to the prior years? Or do you disagree with that thought?

[Arnold Donald, executive]

Within a brand, in general, true. And not necessarily clearly on yield, but definitely on earnings for that brand. But across the brand, it depends where the capacity is, if [ you have a ] mix. So we have some brands that have are below our fleet average and yield and some that are above. Greater capacity increases in those that are below is still earnings accretive. It grows our earnings, but it doesn't necessarily allow you to grow as much in yield because it's holding back as you get more capacity and a below average fleet. You can understand the math. So that's only about the [ capacity. ] There's a bunch of other variables, too. Because again, what is included in ticket versus in booking kind of -- is included in ticket versus onboard. And then, if we shifted to more onboard, we have to actually realize that in onboard. And again, we're giving you guidance right now, we're not reporting actuals for 2019, we're giving you guidance. And so all of those factors come into play, but it's not automatic that everything will just [ floss ] up because it's not all even. Certain brands have capacity 1 year, other brands the next year, increased capacity, et cetera.

[David Bernstein, executive]

We have given our size -- yes...

[Arnold Donald, executive]

I want to leave with you at this. I understand why you guys focus so much on yield, but it's one lever to grow earnings. For us, again, we're totally focused on growing the earnings and return on invested capital. And we're managing everything to effect that. And there's timing issues of when capacity comes in, when capital is recorded on and on and on. All that mix of stuff confluence of things can create, at any point in time, a particular number. But what happens over time is what we're focused on. And clearly, we're going to grow earnings on top of a record year that we just experienced. We're going to grow return on invested capital. We've got the double-digit return on invested capital, and we're going to do that in the year. And then we're going be double-digit on average over the near term in earnings and continue to grow return on invested capital. We have a very strong business with very strong demand.

[Jared Shojaian, analyst]

Okay. And then just switching gears here. Last quarter, you announced the 4 ship sales for 2019. Can you just talk about the strength of the transaction market? And whether you think the new IMO 2020 rules may be driving more of a robust secondary market right now as really the private companies look to become more compliant? And then I guess, on that, how are you thinking about additional ship sales beyond the 4 that you've already announced? And is it possible that you could do more in 2019 in the near term here?

[Arnold Donald, executive]

Yes, the practical reality to us if the ship is relevant to our guests and is delivering double-digit return on invested capital and we'll -- as we have to invest more in that ship over time, we'll continue with the ship in the fleet if it's relevant to the guests and it's earning its keep. If it's not, then the ship will be gone. And so in terms of there being a robust secondary market, there's no question the secondary market has opportunity, not only because of eco regulations, but simply because the aging of the ships that are in the secondary markets. Those ships are now -- many of them are getting 40, 45 years old and they're just going to need to rotate out. So there should be a market for a number of the ships, but at the same time, to drive earnings and return on invested capital, if we had a need to scrap a ship and not sell it, we would do that. We don't see that at this point in time, but if it came to that, we have no problems doing it.

[David Bernstein, executive]

We've also -- over time, we sold 28 ships since 2006. So it's been roughly 2 ships a year and it's hard to predict. It depends on the demand in the market, but we say consistently, we'd likely sell 1 to 2 ships a year over time as the ships get older, which isn't a big surprise.

[Arnold Donald, executive]

But we're not going to hold on to an underperforming asset because we're not able to sell it. I mean, we would scrap it if we had to. I don't anticipate that, but if we had to do it, we would do it.

[Operator]

We will get to our next question on the line from the line of Greg Badishkanian from Citigroup.

[Frederick Wightman, analyst]

It's actually Fred Wightman, on for Greg. If we look at the full year guide for net cruise costs, just compared to the first quarter outlook, can you remind us what's driving some more of that favorable outlook beyond 1Q?

[David Bernstein, executive]

So overall, our guidance, as we put it together and I mentioned in the prepared remarks, we do have the capacity increase, we get economies of scale from that. We have our global sourcing efforts where we're leveraging our scale. So those are 2 major items that I had indicated are more than offsetting inflation for the full year. When you look at the quarters, I know the first quarter was up, like, 2% -- in the full year, we're talking about being up just 0.5%. So what that implies is that the rest of the year is relatively flat. I always say judge us on overall the cost for the year because there are timings between the quarter, whether it be things like drydock or advertising that does vary year-to-year, quarter-to-quarter.

[Frederick Wightman, analyst]

That makes a lot of sense. And then I think you had mentioned the China ticket prices were up in 4Q. Wondering if you could just talk a bit about the broader yield environment in that market today? Are things stabilizing? How are you thinking about industry capacity in that market and competition overall?

[Arnold Donald, executive]

Things are definitely better than they were, say, a year plus ago. In China, some of that is -- there's has been capacity that's moved out. But a lot of it is, frankly, the distribution system just becoming more familiar with cruise. So we see China, again, as small, very small part of our overall mix today. We see the real opportunity, of course, being our joint venture with CSSC and building a domestic cruise brand there. But there's [ 1s and 2, 3 ] ships in and out. So it's a market that is more important for the development for the future than it is right now. But just in terms of yield environment, the yield environment is certainly better.

[Operator]

We'll get to our next question on the line from Jaime Katz with MorningStar.

[Jaime Katz, analyst]

I just had one quick question. I think you guys mentioned the rollout of the Ocean Medallion on the Caribbean Princess. I'm curious if you guys have any learned lessons from that yet? Whether that has stimulated incremental onboard spend? And if so, is there a timeline to roll it out the rest of the brand?

[Arnold Donald, executive]

Thank you, and happy holidays to you. Look, we're very excited about Ocean, but it's still at the early stages. And so to answer your question directly, yes, we've seen blips here and there, but we want to see consistent delivery and performance over time before we make any hard assessment on revenue and ticket yields. And keep in mind, it's new technology. So maybe you have an Apple phone, I don't know if you ever use your AirDrop feature on it, if you happen to have one, you know a lot of people don't know the AirDrop even exists; if they do, they don't know how to use it and so on, but it's a great feature if you want to just share photos at an event or something. And once people use it, they love it. So similarly for us, with ocean, there so many features, our crew has to get used to it and then, of course, we have to activate with guests and guests have to become familiar with it. We have every indication from guest satisfaction scores, from crew satisfaction scores, that it's definitely elevating the guest experience and the crew experience and now we see potential, but it is new. And so we have to let it play out. We have the full ship now active on Regal Princess. We have 6, 7 other Princess ships ready to go when the time comes. And we're learning and educating and practicing and experiencing, meanwhile the guests are having a great experience with it. But we see potential, but it's a little too early to count the chickens.

[Operator]

We'll get our next question on the line from line of Tim Conder with Wells Fargo Securities.

[Timothy Conder, analyst]

I wanted to circle back on the topic of the day, Europe continental sourcing. Any comments that you can give us by color, Italy, Germany and U.K. Obviously, your 3 main source markets. I mean, U.K. is not on the continent. So Italy and Germany, a lot of budgetary uncertainty over the last couple of months in Italy. How has that impacted? And is that -- are you seeing any similar type of impact with changes in the government in Germany and maybe one being impacted more than the other?

[Arnold Donald, executive]

Okay. I'll start and I'll let David fill in what the details are. First of all, I just want to emphasize, again, that Europe is strong, and we're talking double-digit capacity increase and number of brands there that are ahead on bookings with less to book even with that capacity increase than they've had even last year. So first comment is, it's strong, that's number one. Number two is that, yes, in general, the average ticket yield there is less than the average for our fleet. And so even with a strong performance, it can pull down when we give you an average number, especially at booking time. Across 9 brands, it can pull down the yield picture, but it is strong. And so I'll let David color in on, but Germany is strong and U.K. is strong. Go ahead, David.

[David Bernstein, executive]

So overall, we're well ahead of the prior year and on an increased level of capacity. So as Arnold said, we are -- things are very strong and we see an improving trend. I mean, overall, we [ say it ] on a cumulative position, where pricing is in line. And when you look forward, you see that the second half of the booked position for the rest of the year is obviously -- is expected to be up considerably from where we are to date to get to the 1% yield guidance. So we're seeing positive trends, we're seeing very strong volume. And we are seeing a lot of economic uncertainty within those countries that you mentioned, which is impacting the overall booking situation, which we've said before that economic uncertainty does affect the consumer, which affects our business.

[Timothy Conder, analyst]

Okay. So it sounds like that maybe Italy is the lead of the problem then followed by Germany and U.K. is doing well?

[Arnold Donald, executive]

Let me -- first of all, I can't emphasize enough. There is no problem. We're talking double-digit capacity increase, our bookings are ahead of where they were last year. We have less to book even with double-digit capacity increases in some of those brands than we had last year. So there is absolutely no problem. Those brands are going to grow their earnings this year over last year. So we had a growth in earnings. So there really isn't a problem. You're just talking weighting of averages and numbers, but there is not a problem in the market, there's is not soft demand, there's -- none of that's happening.

[Timothy Conder, analyst]

So mix, as you said, some brands yield lower, but still have higher profitability there, is that the key?

[Arnold Donald, executive]

Well, the fact is, even though they may be below the fleet average, they earn money. And then even if they improve year-to-year, they may not get to the average of the fleet. So you're still not seeing an overall increase in yield as they have more capacity that can pull it down. Now in the end -- by the end of the year, by the time we get there with onboards and everything, your mix may not even have any impact; historically, it doesn't, okay. But we've got unusual capacity increases in some of the brands and so we'll see what happens. But it's not -- there's not a problem. The only reason why you guys feel, I think, some of you might is because you're so focused on the yield number, which is definitely a lever in growing earnings and return on invested capital, but it's not the only lever when you have a portfolio of 9 brands with lots of moving parts. It's not as simple a picture as a simple yield number. And when you try to compare it to other companies, you're comparing apples and oranges. And so the comparison, you'd have to get to a huge amount of detail, which we don't do, we won't provide you details by every brand because it's not how we run the business for obvious reasons. We run the business by brand, but we wouldn't share that, right?

[Timothy Conder, analyst]

Okay, okay. No, no. Lastly, back to the fleet and kind of maybe looking a little bit longer-term here. David, you talked about in your earlier comments about the D&A being up, given the reinvestments. How should we think about that looking now over the next 3 to 5 years? Obviously, you'll have ship retirements. Obviously you've got ships on order. But just given the scale of the fleet, should we anticipate that existing fleet reinvestment rate to further accelerate and then, therefore, D&A maybe to grow at a higher clip from that reinvestment alone, excluding that new ship orders?

[David Bernstein, executive]

It's really hard to say because there's a lot of decisions yet to be made over time. But we've been saying for a couple of years now that the expectation is that D&A would grow a few percentage points higher than capacity. And exactly how many -- we've got a lot of decisions left to make to determine that, but that should help in your modeling.

[Operator]

We'll get to our next question on the line from Assia Georgieva with Infinity Research.

[Assia Georgieva, analyst]

I had one quick question. If you look at the cadence of yields for fiscal 2019, and again, I understand that we still don't have European source passenger bookings quite firmed up, occupancy is up, but we probably still need a couple more months, would it be fair to say that Q1 might be the weakest link in the year and as we go through Q2, 3 and 4, we might see actually higher yields, higher earnings?

[David Bernstein, executive]

So I did indicate in my comments that the first half was a tougher comparison. And so we do see this back half being stronger than the first half. And we do see an improving trend in the second half ,which was a little bit of what I was getting at before. So you are correct in your paraphrasing of the year.

[Assia Georgieva, analyst]

Well, David, I was trying to paraphrase and try to actually dig a little bit deeper. So Q2 is going to be better than Q1, is that a fair statement?

[David Bernstein, executive]

That is what we expect at this time, it builds into our overall guidance.

[Assia Georgieva, analyst]

And in Q4 because you're getting new builds, that should be a good quarter as well?

[David Bernstein, executive]

We're getting new builds in late October. So the impact is very minimal in the year, it's like just a month, so careful about that. And keep in mind that every month in the quarter is not the same, and now you're going to get into the mix impact as well in a quarter.

[Assia Georgieva, analyst]

That is totally fair.

[David Bernstein, executive]

So operator, we will take one more call.

[Arnold Donald, executive]

One more question.

[Operator]

We'll proceed then with our final question for today from the line of Sharon Zackfia with William Blair.

[Sharon Zackfia, analyst]

I guess, there's been a lot of commentary about mix and all of that, and perhaps just to clarify because it sounds as if Europe growing so quickly is part of the dynamic with the yield outlook for next year. Within that construct of looking at Europe versus Europe, are you expecting yield to be positive in the EA, but it's the mix that's bringing down the consolidated? I just want to make sure I understand that correctly.

[David Bernstein, executive]

Generally speaking, we don't -- while I do make commentary historically on the actuals, we don't give guidance by brand or by segment of the business. But we -- as Arnold said before, we see the volumes being strong on both sides of Atlantic, in Europe as well as in North America. And we're well-positioned to achieve our guidance and we're working hard to do better than that.

[Arnold Donald, executive]

Okay. Thank you all very much. First of all, I just want to reiterate that we're marching down the path to double-digit earnings growth and continued growth from return on invested capital. Clearly, on the bookings that we shared with you, given the environment, some of our brands have chosen to put more business on the book earlier to optimize in an uncertain environment. But even with the uncertain environment, we're going to grow earnings, we're going to grow return on invested capital and we're marching down the path. I want to thank you all very much. I'd like to acknowledge 120,000 colleagues here at Carnival Corporation, again, for delivering on the promise of double-digit return on invested capital this year. And I really want to wish everyone a joyful, safe, and happy holidays. Thank you all very much.

[Operator]

Thank you, everyone. And ladies and gentlemen, this concludes the conference call for today. We thank you for participation. I ask you to disconnect your lines, and have a great day, everyone.