Q2 2022 Royal Caribbean Cruises Ltd Earnings Call
Total revenue per guest versus 2019 levels, our north American itineraries are now selling at over 100% load factors and we are building on this momentum as we expect to reach load factors in the mid Ninety's in Q3, and then a return to triple digit load factors globally by year end. This will set us up very well.
For 2023.
The combination of consumers' strong propensity to experience and travel accelerating demographic trends, which are pulling in more bucket list and multi generational travel.
A very compelling value proposition and a strong preference for our brand is translating into strengthening demand.
Lastly, the other major milestone for the group and the industry is related to the C. D C ending its program for cruise ships as we are now transitioning to the point, where everyone will be able to vacation with us.
As we've always said the health and safety of our guests crew in communities, we visit our our top priority in cruising has proven to be one of the safest environment anywhere.
After two years of successfully working with US the CDC has transitioned from enforcing protocols and policies for the cruise industry to suggestions and recommendations to be in line with the travel and tourism sector.
That speaks to the great work, we've done together as an industry. While we plan to continue to operate our healthy returned to service shipboard protocols. One immediate change then I'm happy to report is that starting August 8th pre embarkation testing for vaccine guests on voyages of five days or less will no longer be Rick.
Wired.
This will be subject to local destination requirements and we will continue to test all unvaccinated guests. We also anticipate in the not too distant future that pre embarkation testing for longer duration voyages will be reduced.
Before going in to the booking commentary I wanted to share some of the behaviors that we are actually seeing from our guests.
Keep in mind that every day, we have well over 100000 guests experiencing and spending on our ships.
Every day, we take tens of thousands of bookings from our guests looking to travel to a wide range of destinations anywhere from a quick weekend getaway to perfect day to a bucket list trip to the Galapagos islands or Antarctica ever.
Every day, we witness and engage in millions of interactions on our web sites and through our call centers as guests learn about and book their dream vacations, we see a lot.
Overall, we continue to see a financially healthy highly engaged consumer with a strong hunger to dream and seek experiences.
And they are willing to spend more than ever with us to create those memories.
Let me give you some more concrete data points.
The 100000, plus guests that we have on our ship every day, including the 125000 guests that are currently on our ships today had been spending at least 30% more onboard our ships across all categories when compared to 2019. These.
These spending trends have been consistent across our customer base, even as we are approaching full load factors.
Approximately 60% of our guests book, they're onboard activities before they ever stepped foot on our ships as.
As we said in the past every dollar of guest spends before the voyage.
<unk> into about 70 cents more on the dollar when they sell with us and double the overall spending compared to other guests.
As we look into the second half of 2022 pre cruise revenue a P. DS are up over 40% versus 2019 levels.
The strong consumer demand in our commercial and technical capabilities are contributing to the strong performance.
Our distribution channels are now fully up and running our websites are receiving close to double the visits compared to 2019, and we are generating record level of direct bookings.
In addition, our trade partners are fully up and running and are generating bookings in excess of 2019 levels.
We are also seeing in our consumer data.
That cruise interest is now basically back to 2019 levels as the continued easing of travel protocols and the attractive value proposition.
Is making cruising more and more appealing.
The attractive new to cruise segment is now returning faster with non loyalty guests doubling in Q2 compared to Q1.
And the mix is essentially on par with 2019 levels.
Our attractive brands as well as strategically adjusted deployment towards shorter itineraries are driving more new to cruise.
We also continued to benefit from secular tailwind anchored in the shift of consumer preferences from goods to experiences and we are squarely in the experience business.
Recreational services are now growing four times the rate of goods and are expected to continue to outpace 2019 levels.
Favorable demographic trends support our growth as well.
More than 3 million adults retired during COVID-19 double than what was expected. Meanwhile, millennials are financially healthy as they reach their peak, earning years, forming households, and looking for vacations with their families.
These trends combined with the emergence of more paid time off and more flexible work environments allow guests to spend more vacation time on our cruise ships.
The value proposition for cruising remains incredibly attractive and the strength of our brands and platform allows us to continue and capture this quality demand as we ramp up the business this year and build for a successful 2023 and beyond.
All of this quality demand is translating into strong booking activity during the second quarter. We saw strong demand for closing sailings, which contributed to better than expected load factors bookings for 2022 sailings average about 30% above 2019 levels throughout the second quarter and more recently have been up to 35%.
The second half of 2022 is booked below historical ranges, but at higher prices in 2019 with and without future cruise credits.
Cancellations are at pre Covid levels. In addition, we are now seeing the booking window starting to extend back out providing further confidence and forward looking business as our guest thoughtfully plan for the future.
As a result, all four quarters of 2023 are booked within historical ranges at record prices with bookings accelerating every week.
Our customer deposits are at record levels and over 90% of bookings made in the second quarter were new while steady FCC redemptions continued.
Inflation continues to impact businesses across the globe and we're no exception as.
As we discussed before food and fuel are the main categories for us that are susceptible to inflation. We continued to navigate those cost pressures as we seek to enhance our margin profile, while delivering the incredible vacation experiences that are expected by our guests.
There are some initial positive signs with respect to inflation trends and our food basket.
Our more recent month over month F&B inflation indicator has increased at the slowest pace, thus far in 2022.
This combined with direct conversations with our key suppliers indicated inflation levels are peaking.
And now we would start seeing some relief in the coming months.
On the fuel side, we continue to optimize consumption and have partially hedged the rate below market prices, which is mitigating the impact on our fuel costs.
As we mentioned in the last few quarters, we have taken and continue to take numerous actions to reshape the cost structure of the business to support growing margins as we execute on our recovery.
We are now starting to see benefits of these efforts as we ramp up the fleet to full operations.
We also expect the growth in margins to accelerate in the second half and into 2023.
Yeah.
Earlier this month, we acquired the ultra luxury cruise ship Endeavour originally.
Originally delivered in 2021 ship joined Silversea cruises expedition fleet.
The ship is scheduled to begin service this November and an article with bookings already commencing.
This opportunistic acquisition allows us to add capacity and capture growth opportunities in a very attractive expedition segment.
Financially it was a unique opportunity to acquire a brand new high quality expedition vessel significantly below the building costs and that is fully financed through an attractive long term unsecured financing arrangement. We expect this transaction to be immediately accretive to earnings cash flow and ROIC.
While the last two and a half years, we're certainly challenging we have proven that our business and company are resilient. Our business is now fully back up and running and our operating platform is larger and stronger than it has ever been.
We have the best brands in their respective segments industry, leading ships and one of a kind private destinations like perfect day.
Our diverse distribution channels and commercial capabilities allow us to reach more quality demand.
Our itineraries are strategically planned to be closer to home with an emphasis on shorter itineraries that appeal to both new to cruise and loyal customers.
Our data shows that consumers seek vacations and all economic conditions cruising has always been an attractive value proposition when compared to land based vacation alternatives and that is true today than ever before.
Our strategy remains consistent continue to ramp up occupancy to generate yield growth, while managing costs enhancing profitability and repairing our balance sheet.
Our business has a proven track record of generating robust cash flows through various economic cycles, and our platform is bigger and better than ever before.
Our liquidity is strong and we have access to capital as we look to refinance debt and improve our balance sheet.
We continue to expect 2022 to be a strong transitional year as we approach historical occupancy levels.
This will set a strong foundation for success into 2023 and beyond.
We are also providing guidance for the third quarter for the first time.
Since Q1 of 2020 with a stronger platform and proven strategies I am confident about our recovery trajectory and the future of the Royal Caribbean Group with that I will turn it over to Tony <unk>.
Thank you, Jason and good morning, everyone let.
Let me begin by discussing our results for the second quarter.
This morning, we reported a net loss of approximately 500 million or $2 <unk> per share for the quarter.
Revenue was $2 $2 billion double the first quarter and we generated almost half a billion dollars of operating cash flow.
EBITDA was $124 million and turned positive in May a month before our expectations.
Second quarter results were meaningfully ahead of our expectations driven by accelerating demand further improvement in onboard revenue and better cost performance. We expect these trends to continue.
Our business is now back to generating cash beyond our operating and capital costs, which is further strengthening our strong liquidity position.
It also positions us to continue to methodically and proactively improve the balance sheet and refinanced near term maturities.
As Jason mentioned, we finished the second quarter at 82% load factors with June at just about 90% in North American product at about a 100% overall.
And in fact, our Caribbean itineraries finished the quarter at a load factor of 103% overall with some ships, receiving particularly strong close in demand and selling with Occupancies as high as 107%.
Our north East and West coast products, including Alaska settled at around 90% in June .
Both factors on our European Itineraries, which were impacted by the Ukraine War averaged 75% in June .
During the second quarter total revenue per passenger cruise day increased 5% in constant currency compared to the second quarter of 2019.
Both ticket and onboard revenue continue to perform well for us even as we approach full occupancy.
As we discussed before the inclusive pricing and packages offered by our brands blurred the line between ticket and onboard revenue.
Our goal is to maximize over revenue and the best way to evaluate performance is by focusing on our total cruise revenue metrics.
Next I will comment on capacity and load factor expectations over the coming period.
We plan to operate about $11 6 million a P C d's during the third quarter.
From a deployment standpoint, just over a third of our capacity is in the Caribbean a third is in Europe and the remainder is mostly sailing north American itineraries, such as Alaska and Bermuda.
As Jason mentioned, we have consistently seen strong demand across all open deployment.
Overall, we expect load factors of approximately 95% for the third quarter and triple digits by the end of the year.
Like me breakdown third quarter load factors by itinerary.
We have been sailing at above 100% of the Caribbean since mid June and most of our other North American base itineraries are now averaging about 100%.
The ramp up has been a bit slower for European sailings, which were impacted by omicron The war in Ukraine, and the Covid testing requirement for travelers returning to the United States.
The lifting of the testing requirement accord well into the typical booking window for Europe , and while we saw improved booking trends. It occurred too late to have a meaningful impact on this summer sailings.
Despite that European sailings are now achieving average load factors of around 85%, but still well below other key itineraries in the third quarter.
This has two main impacts on our metrics burst it pushed a recovery of 100% fleet wide occupancy did the fourth quarter of 2022.
And second overall pricing appears less favorable in the third quarter, when compared to 2019 levels, because European sailings generate higher than average prices.
The impact of pricing is isolated to the third quarter because of the heavier weighting of European deployment adjusting for this impact price trends are more similar to the mid single digits in recent quarters.
As expected book load factors for sailings in the second half of 2022 remained below historical levels at slightly higher rates than 2019, both including and excluding FCC's.
As Jason mentioned accelerating demand levels and the recent booking pace are aligned with our load factor expectations for the third quarter.
Our customer deposit balance as of June 30th was $4 2 billion a record high for the company.
Now that the full fleet is in service and occupancy is ramping up we expect to return to a more typical seasonality and customer deposit levels.
In the second quarter, approximately 90% of total bookings were new versus FCC redemptions, we continued to see the redemption of FCC's by our customers as ship's return back into service deployments firmed up and protocols have been easing.
To date <unk>.
Proximately, 60% of the FCC balance has been redeemed and half of those have already sailed.
Approximately 20% of customer deposit balance is related to FCC's, which is a 7% improvement from the last quarter.
For new bookings, we have returned to typical booking on cancellation policies that were relaxed during the pandemic.
Shifting to costs net cruise costs, excluding fuel per a P. C D improved 60% in the second quarter compared to the first quarter.
The second quarter costs included $7 75 for a P. C D related to enhanced health protocols and onetime cost to return ships and crew back to operations.
We expect to see significant improvement in net cruise costs, excluding fuel per a P. C. D. In the second half of 2022 compared to the first half.
Lower expenses related to returning ships and crew to operations and easing health protocols as well as the fact that the full fleet is now back in operations are driving this improvement.
In addition, the benefit from actions taken during the last two years to improve margins are now beginning to materialize as the full fleet is operating and Occupancies are returning to historical levels. We expect this benefit to continue its ramp up through 2022 and into 2023.
As Jason mentioned, we are actively managing inflationary pressures menu related to fuel and food are.
Our teams continue to demonstrate the ability to manage cost pressures, while delivering the incredible vacations expected by our guests.
Net cruise costs, excluding fuel per APC D.
I expect it to be higher by mid single digits for the second half of 2022 when compared to 2019.
Third quarter is expected to be higher.
On the fuel side, we continue to improve consumption have partially hedged the rate below market prices, which is mitigating the impact on our fuel costs.
As of today fuel consumption is 56% hedged for the remainder of 2022 and 36% for 2023.
In the third quarter of 2020 to our hedge position is 49%, which is slightly lower than the average for the second half of the year on.
On the other hand consumption contingence to improve across the fleet driven by benefits from our prior investments to reduce our energy consumption and adding eight new vessels to our fleet in the last 18 months.
Shifting to our balance sheet we.
We ended the quarter with $3 3 billion in liquidity during.
During the second quarter, we generated almost half a billion dollars of operating cash flow and repaid $700 million of debt maturities.
Our liquidity remains strong and we are now generating cash beyond our operating and capital costs. We are also expanding our margins to further enhance the EBITDA and free cash flow.
We are very focused on returning to the balance sheet, we had pre COVID-19. Our plan is to methodically and proactively refinanced near term maturities and debt issued during the pandemic. We have demonstrated access to capital through the last two years, even in very challenging conditions as well as thoughtful management of the balance sheet.
Now turning to guidance.
We're providing guidance for the third quarter for the first time since Q1 2020.
For the third quarter and based on current currency exchange rates fuel rates and interest rates, we expect to generate $2 $9 billion to $3 billion in total revenues adjusted EBITDA of $700 million to $750 million and adjusted earnings per share of <unk> 25.
Due to increases in fuel rates interest rates and foreign exchange, we expect a slight net loss for the second half of 2022.
We stay focused on executing on our recovery by ramping up our load factors expanding margins and managing the balance sheet. When our business is fully operational it generates significant cash flow. We are confident in our ability to continue R&R recovery as we build the future of the Royal Caribbean Group.
With that I will ask our operator to open the call for your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Yeah.
Your personal lines. Your first question comes from the line of Steve Lesinski with Stifel. Your line is open.
Hey, guys good morning.
So Jason so Jason.
I mean, there's clearly a.
Concern out there in the marketplace today about your current liquidity position and the options that you guys have in terms of.
Attacking I think it's let's call it $5 billion plus of 23 debt maturities.
And at this point, we've seen one of your competitors go out and.
Issue equity raise that north of 10% so I.
I guess the question everybody is trying to figure out is.
How can you get these maturities refinance in the current high rate environment.
Without the use of equity and hopefully that all makes sense.
Okay, well, thanks, Steve I thought you were going to first start off and say Wow.
Positive EBITDA positive cash flow.
I was hoping for a little bit of a hug.
But I think I need to just kind of going into.
I know that there is a focus around the balance sheet and especially when the current state of the capital markets.
First I think you are.
There's clearly ramping up we're generating cash flow.
After opex after Capex.
We're not seeing slowing down in activity and demand, we're actually seeing acceleration with our bookings and onboard activity.
I think we have clearly shown through this that.
We have been very thoughtful and very methodical about capital raising balancing liquidity and minimizing dilution, especially relative to others.
So I.
I think when we have raised equity it has been to manage liquidity in and as we are right now we are generating cash flow.
We do think we have access to the capital markets.
We are confident that we're going to be able to continue to to to manage our balance sheet and repair. It here here over time I would note that you're issuing equity one is obviously, it's a board decision bars and exceptionally high for us to be issuing equity we don't have any plans to issue equity.
What the board is really focused on is how do we get back to pre COVID-19 levels as soon as possible and by that meaning earnings, meaning roissy and getting our balance sheet back in leverage back to what it was pre COVID-19.
So I think we feel that we have a plan and a path.
And I think that the.
What we're seeing in the business and the improvement in the cash flow in the business is also giving us opportunity.
Two.
To be able to address some of these maturities with cash.
Okay understood that's very that's very clear.
Second question is a it's going to be a two part question I guess.
In your in your prepared remarks.
You made a comment about how the business is getting back to pre COVID-19 levels.
Want to understand maybe the timing a little bit more about the timing behind that comment and then the second question is the opportunity right now on the cost side with.
And what I mean by that is what the CDC essentially leaving.
<unk> alone so to speak.
I would assume there are probably hundreds of millions of COVID-19 costs out there right now across the industry and wondering potentially.
Essentially about the timing of getting.
The majority of those costs removed.
Sure well I'll I'll leave I'll leave the question on cost.
Fair enough.
I would say is I don't know if I would categorize as the CDC, leaving us alone I think it's.
It's us proving through empirical data that cruising is an extremely safe environment and that our protocols are working effectively in.
We follow the science, and our and our and are managing it, but but I think to your point. There is a significant amount of cost that we were spending on healthy returned to service and.
And testing and so forth and I'll, let <unk> address here in a second.
So I think just to address a little bit on the pre COVID-19 and I do I do appreciate the question.
Okay.
A number of factors that provide that I've talked about in my remarks, just incredible tailwind to earnings and margin.
And returns as we accelerate to 2023 and beyond.
As I mentioned, there are really strong secular trends demographic trends that are providing tailwind for our business and the consumers are clearly looking to spend on experiences and of course cruising has a really great value proposition probably.
Proposition relative to land based vacations I would argue with.
Its way too good of a value proposition.
We're all working very hard on.
Dealing that relative to land based vacations.
Also during the past few years, we worked pretty hard on reshaping our cost structure.
Improving our margin profile, reducing non guest facing costs, we divested out of low margin businesses to position ourselves for significant margin growth.
Also like our brands they are leading positions with each and in each of their respective sectors and we continue to go out and build the most innovative fleet in the industry.
And that growth will lead to higher margins as we've talked about in the past better inventory mix better onboard revenue venue better fuel consumption and more scale brings more margin onto our G&A.
And then you know with with my my comments today about the CDC and our and our change in our policies around that and when we look at our booking environment that is accelerating we expect 2023 to be a normal operating year.
By normal I mean, it will be a normal load factors will be a better rates and in that and that will all lead to strong EBITDA and earnings performance.
And with that comes a positive cash flow and that cash flow will be prioritized.
And scrutinize to make sure it's in going.
Going towards high returning investments and deleveraging.
We do anticipate swiftly reducing our negative carry.
Which will then return us to a pre COVID-19 earnings over the next couple of years.
I do want to be clear that getting back to pre COVID-19 financial metrics, it's part of the journey.
We call it internally just getting back to base camp. So we're not going to be doing laps around the building when we get to pre COVID-19 levels, because our ambitions around our financial performance.
Based off of our are our brands our ships our growth is much greater than just getting to pre COVID-19 levels.
And I do anticipate as we get towards the latter part of this year, giving a lot more color and definition to a longer term program.
Which will include getting to base camp.
And beyond and and our plan is to give more clarity as we have done in the past with programs like double double that help us galvanize, our internal teams to focus on delivering on those results.
Hi, Steve it's enough. So let me just touch on your thoughts so youre right.
In the earnings release, we also disclosed that in this quarter in the second quarter, we had $7.75 per <unk> cost that is related to to help verticals and as well as one time cost to return to ships and crew back to operation and just as a reminder, we actually returned eight ships in the second quarter. So that's obviously part of the cost.
And as we look forward into the rest of 2022.
We expect the improvement in our cruise cost part of it is because of those easing protocols and then as we look beyond that we we think that those costs will be.
Be materially eliminated and be absorbed whatever is left to into the business.
Okay, great. Thanks, guys for the color really appreciate it.
Your next question comes from the line of Robin Farley with UBS. Your line is open.
Thanks, I wanted to ask about how quickly you think you might be able to remove the test requirement for the year.
Six plus seven plus day cruises.
The majority of your your I'm curious how quickly you may be able to do that which obviously would be a demand driver.
Yeah. So.
We're starting off here by by doing the five days or less and we're going to look at that but I think our expectation here.
Over the next 45 days or so.
And of course, following local requirements, which will somewhat dictate some of our destinations.
What it was testing requirements will be that the majority of the testing requirements will will be lifted, especially around the majority of our of our deployment.
We might depending on where the ships are going.
You'll take some additional protocols and of course, we're going to continue to follow.
Where COVID-19 is in society and take the necessary actions.
Okay, great. Thanks, and then just as a follow up.
On the maturities that are related to the export credit agencies is there an opportunity to push back some of those maturities given that they don't have the same lending characteristics is there's a lot of your capital markets maturities and is that something that could happen sooner rather than later.
Yes, hi, Robyn Thanks, Naftali so as.
You noted our relationships with ECA is a very very strong.
They have supported us as well as our commercial banks or other lending partners throughout the pandemic through multiple <unk>.
Actions.
And we.
No we have not we don't have anything to talk about today, we are very confident with our ability to generate free cash flow.
To cover our operating and capital costs. Our liquidity is strong. So we're very confident that we can manage the maturities.
In the next 18 months.
Great. Thank you.
Thanks Robyn.
Your next question comes from the line of Fred Wightman with Wolfe Research. Your line is open.
Hey, guys good morning.
It sounds like and this is totally fair that the European occupancy numbers were impacted by Ukraine, and then also some of the reentry testing requirements, but have you seen a pickup in bookings for those it sounds like 'twenty two is not going to benefit but as you look into 'twenty. Three have you seen those European bookings numbers accelerate as some of those reentry testing requirements for.
Or lifted.
Well I'll just I think a few comments one on 2022 as soon as that the U S. Testing requirement was lifted I think we immediately saw a nine or 10% lift in.
And our booking activity.
Hum.
The summer sailings and summer sailings me into 2022 sailings. So we've actually made up quite a bit of ground.
Since since that was lifted.
Of course, you are getting your flights.
And can also be a challenge, especially in the current state of the.
The airline world in Europe .
But we have seen very strong demand for Europe for 2023.
The volume really starts to pick up here as they as we exit the summer, but from what we can see relative to 2019 levels of historical levels. We do expect Europe to act and behave very similar to what it did.
In 2019 in terms of load factors and rates.
Perfect and then I guess, just you know all the metrics that you guys gave Jason was Super helpful. Just from a consumer health perspective, but if you look at all that strong spending both pre departure and onboard and it seems a little bit.
The disconnect versus some of the comments you've heard from Walmart and some of these other retailers like <unk>.
Can you sort of explained that away from where you say this is just a customer base difference is theres something.
Totally different I mean, how do you sort of see the consumer spending holding up here going forward.
Well I mean, I think it's too it's two things and certainly you Michael one off can hop in on others, but I think I think first and foremost, but we're not like we're not selling stuff. We're selling experiences. Yes, we might have a couple of things you are buying in a retail store on our ships.
But in reality right. The vast majority of that spend orbitz around experiences, creating memories multi generational travel et cetera that that people are.
One they have a lot of pent up demand for it and.
I think they also value.
<unk> experience and relationships differently than they did historically, so I think that's one tailwind.
Tailwind, which we had we had been.
Debit or we're talking about a pre COVID-19 and we continue to invest in it during COVID-19 was that we replaced our commerce engine for pre cruise or.
For our onboard sales and so shifting more and more.
That purchase pre pre cruise.
It effectively becomes one they're able to plan and experience as they want so they're getting what they want in terms of the customer, but also that becomes a sum cost to them.
Already paid that credit card bill et cetera, and so it's it's new it's new spend for them to consider.
Those two things and of course, our teams have become much much more sophisticated and yield managing and enhancing the experience that people are willing to buy I think is what's driving that uplift more than anything else.
Michael.
Fred It's Michael.
Just to add one nugget of information to Jason's comments.
We've seen.
Really it's been an amazing response to the software and communication and how we've been talking to the customers about experiences and just one nugget is that yesterday, we sold one just one of our over water cabanas for one day for $4000.
And we just see there is theres just a lot of demand for these experiences as Jason said, we've also seen this in Alaska for example, with the product that we have in Alaska. The people just seem to be more willing to open their wallets and purchase these experiences. So it's been a very positive.
Our response to a lot of the products and services and experiences that we have.
The only thing I would just add just anecdotally, we all bought we bought a lot of stuff there.
During the pandemic.
I'm sure like all of you I had 10, Amazon box and show up in my House every single day, and I think people have absorbed and consumed all that they they're looking I mean.
Using hyperbole here, but things like.
They want to buy and I think they are really.
Again, very very focus on experience.
Makes sense, thanks, a lot.
Thanks, Ron.
Your next question comes from the line of been shocking with credit Suisse. Your line is open.
Hey, How's it going.
On the on the booking side, you guys mentioned, plus 30% and QQ person.
The same period in 2019, it sounded like that got my interpretation was that got better through the quarter and then even better than that presumably that CDC change would drive incremental demand above and beyond that have you guys thought about how youre going to message that the consumer likes.
Is there any are you expecting there just any kind of like.
The news is going to pick that up are you guys going to reach out proactively and would love to hear how you're thinking about it.
Hey, Ben It's Michael Yeah, I mean, I think what we're going to see today, we're already expecting it in our call centers.
And we've we've already worked on our obviously, our talking points and what have you. It's it's already going out into social media, we've started communicating to our distribution and with starting to communicate through emails to our customer base. So this kind of change I think will be seen very positively and we've got you know some distributors who have been anxiously.
Weighting changes as long as along with many of our customers.
One of the calculations that we have is about 40% of all of the S. C. She's sitting on the by lines of people who've been waiting for the protocols to change. So I think this easement and this change is gonna be viewed very positively so we're expecting to see.
An increase in bookings literally starting today.
That's helpful. And then you mentioned $500 million in operating cash flow in the quarter and then based on the net income guide.
I think napkin math would suggest that inc.
That was taken over $1 billion in operating cash flow in <unk> is there anything on the.
Working capital side I need to consider that would throw that all.
Yes, so I think the way I would characterize it is that we are generating now positive EBITDA and cash flow, we are covering more than our operating costs and capital costs and and Theres nothing unique in the third quarter in terms of.
Anything.
To point out and all of that cash flow will be to prioritize to pay down debt.
Yes. Thank you.
The only one comment I want to make about just broader working capital just to keep in mind is we're now in the high season right in and we've added capacity.
During this time, so our customer deposit balance has been rising but they are you.
We're moving into now is one is we're getting to normal load factors that we will now start to see the historical.
Seasonality of customer deposits.
Just kind of keep that in mind as youre looking at comparable to previous quarters that I would look more and how it is relative and in previous period on a seasonality basis than I would quarter over quarter.
Thank you that's helpful.
Your next question comes from the line of Brett My Tour with Barclays. Your line is open.
Thanks, everyone and good morning, and thanks for all the helpful color.
I was wondering if you could just address jason or or Michael or anyone the perception.
From the market that there is an elevated level of discounting for the industry. Overall, I mean, obviously that doesn't really fit with the really good accelerating booking volume commentary that you guys are saying.
But obviously I'm wondering how much of that is related to the still sort of COVID-19 protocols and customers just waiting for the experienced normalized.
Sure.
Well I think I'll, just make a few comments and Michael.
Please jump in on it.
So first I think that there is a reality of.
We're packaging much more than we have had in the past and some of that comes in that in that.
Right some of the pre cruise.
Activity that I was talking about in terms of the onboard experience so depending on how youre looking at the discounting sometimes it's more about geography of whats going into ticket and what's going into to onboard and so theres a little bit of that reality that has been evolving now for many many years not just with us but also.
Also inside.
The industry and then there is also we brought up eight ships in the second quarter and so as we're bringing those ships up and Theres more short product et cetera. Some of those comparables look like there's the highly promotional environment, which is more promotional than it typically is.
But it's something that is yielding higher rates because of.
That combination of the ticket and the onboard are yielding a higher apd.
Okay. That's really helpful. Thanks, and then a follow up on enough colleague's comments in his prepared remarks about the adjusted.
Mid single digit sort of net revenue per PCB and the <unk> that'll be two quarters, where you guys have net net revenue per <unk> mid single digits versus 19, I'm just curious considering both those quarters had heavily disrupted booking cycles as well as notable COVID-19 constraints.
In which you talked about.
Is there any reason why we shouldn't.
Think of that mid single digit as it as a base case going forward.
Yeah, well I think I think that what we're seeing and even in our commentary into 2023 right being within historical ranges at higher rates.
I think that's what we're continuing to see and I think it also lead a little bit into my comments about the value proposition right. There is a very healthy gap and a larger gap today than there has been with land based vacations and I think when now that these protocols are falling off and we're operating in our guests.
Were incredible advocates of ours are sharing their experiences experiences and telling them that cruise is just like what it was pre COVID-19.
That all of that is kind of manifesting into this opportunity where people look at cruising and saying Wow. This is a really good value proposition and even if I pay a little bit more money, it's still a huge gap to if I did a land based vacation.
Okay excellent thanks for the comments and congrats on the results.
Thank you.
Your next question comes from the line of bids people with Cleveland Research Company. Your line is open.
Hi, Thanks for taking my question, you talked about using cash flow to focus on deleveraging as well as high returning investments.
Part of Thats your investments and your existing ships can you talk about how you approached maintaining those through COVID-19 and what type of kind of cash capex pretty existing fleet, you kind of envision in 'twenty, two or 'twenty three.
Yeah.
Thanks for the question so first throughout the last two years.
We're very focused on one of our guiding principle was to maintain the quality.
To help of our assets and we continue to do dry docks, we the way that we laid out the ships was very.
They are unique such that when we knew that when we come back we would minimize the.
The need for more investment.
On maintenance and I think were very very pleasantly surprised and as expected as we are now back to the operations, we don't see any elevated needs.
For capital.
For any deferred maintenance so of course, we are doing in Gov.
And have a regular maintenance dry docks.
And those are very.
There was obviously within our numbers that we've.
With you, but there is nothing elevated outside of that.
And we at this point generating cash flow beyond our operating capital needs and again as you mentioned, we are prioritizing that cash flow to pay down debt.
The other point I just wanted to add just to build on <unk> point that we had invested a significant amount of money pre COVID-19 and the modernization of our fleet.
Because as our fleet, our ships got more and more innovative in larger and more incredible activities to do that.
That gap is widening and we pre COVID-19, we close that gap considerably.
Adding a lot of those features onto our are our legacy fleet and.
And so that's why I think we as I've said, we will continue to invest in high returning programs Hum.
We've actually invested a lot to keep our our core our core business relevant within our brands.
Thanks, and another kind of housekeeping item.
Right.
Talk a little bit about fuel I think that the guide for <unk> came in a little bit higher than I would have would have thought.
Especially with the recent decline in fuel prices. How are you thinking about kind of pricing into next year can you talk about any changes going on.
<unk> versus pre Covid, MTO versus ISO and any efficiencies.
Keep in mind.
Consumption or L D D.
Yes. So thanks for the question so first.
On the consumption side, we continue to make progress on improvement of a consumption we did it.
The last.
Several years and continues to happen obviously, we have newer ships are much more efficient so I think with the consumption side.
Obviously, we're continuing to make that progress specifically about the quarter two things in mind one in my prepared remarks, I mentioned that we are.
Lower than the average in terms of our hedging.
And that obviously means that some of that.
Fuel costs in the third quarter.
But we are obviously going to be higher hedged in the fourth quarter the.
The other thing is that the consumption is a little bit more skewed in this quarter towards.
Joe and Les <unk>.
<unk> was also contributing to a little bit of a higher fuel expense, but it's very isolated.
<unk> to the third quarter.
Thanks for that color.
Your next question comes from the line of Paul Golding with Macquarie Capital. Your line is open.
Thanks, so much and congrats on returning to positive EBITDA and cash flow.
I wanted to circle back on <unk> comments in terms of the shorter itineraries to attract new to cruise.
Is this a sort of a post COVID-19 only move or is this something maybe more structural that we should expect to see just in terms of.
Hum.
Jumpstarting the new to cruise return and are there any costs associated with what may or may not be based on your response, a higher mix of shorter itineraries and certainly that lines up with the testing requirement commentary as well and then I have a follow up about the booking curve.
Thanks.
Hey, Paul its Michael.
No I mean, we we we'd be very focused on new to cruise pre COVID-19. We had a great degree of success with generating new to cruise and it's always been part of our strategic intent and we planned and had tactics around that and when we feel like we were making exceptional progress pre COVID-19.
Post Covid I think we commented in the past that the the real return was supported by our loyal guests and the new to cruise lag behind but we've now kind of normalized and we see the new to cruise returning to kind of pre COVID-19 levels. So, but certainly the short product is the on ramp for <unk>.
New to cruise and with perfect day.
Which now we're close to taking 10000 people a day to perfect day, which is proving to be a real continued success and it really does drove the new to cruise. So it was it is and it'll continue to be very much part of our overall strategy.
And then just one point to add.
We're also staying very kind of tuned in with the with the customer and Youre during COVID-19 at the early days you know they were very local reminded now they're becoming much more regionally minded as we're seeing them being comfortable booking of different products in North America bookings products in Europe.
They kind of know move more and more towards back being globally minded, which is where they were pre COVID-19 in and I think we're we're very tuned into our brands are very tuned into that and in many cases, the product or the itineraries are a reflection of where we think the consumer is today relative to their travel preferences.
Thanks for that and then on the booking curve the commentary in the press release continues to suggest.
Closer in trend I guess are you seeing that closer in trend abate at all and to what extent.
Do you see that maybe is being a bit more structural does that inform sort of how we should think about your commentary in future periods on the booking curve and just any commentary around.
The consumer trend in terms of how far out the booking.
[noise] integration tends to be right now.
Thanks.
Well I.
I mean, what we're seeing is that the booking curve is no longer really contracting is now expanding again. So I do think we expect it to return here over the coming call. It six six months or so to a normal level of a booking window relative to historical.
Hum activity.
As our ships are coming up and as I think people are as protocols begin to to fall away here now.
We would expect there to be a further acceleration in close in demand for whatever inventories left.
Which can can lean a little bit on that macro statistic around the booking window, but what we have seen over the over the coming over the past several weeks and months as that window beginning to extend.
Just just to add to Jason's point I mean, if you think about a deployment. During this period, we had a lot more regional drive two product. So we skewed a little bit more heavily towards that drive two product, which is easier in many ways to book and has less logistics to deal with so I think it did kind of favor.
A later booking.
Patent because of that.
Okay. Thanks.
Thank you.
Yeah.
Your next question comes from the line of Daniel <unk> with Wells Fargo. Your line is open.
Hey, good morning, everyone.
So I had a question on the net cruise costs I think you mentioned that they should be higher.
For the second half of 2022 bites I think you said mid single digits with a sequential improvement.
As we think about kind of the pacing of that and going into 2023 should it continue to improve or you know is inflation going to be offsetting some of that improvement.
Yes.
Thanks for the question. So yes, we do expect to see an improved by mid single digits for the second half.
And this should be also a sequential improvement from a quarter to quarter.
The protocols are easing obviously, we're building the load factors as well.
And as we look into 2023, our goal is to get to our pre COVID-19 margins as soon as possible.
On one hand as you mentioned there is inflation and we mentioned commented on though on the baskets that are impacting us the most on the other hand, we also as Jason mentioned, we've done a lot in the last two years to reshape our cost structure.
And we.
We expect that to ramp up the second half and well into 2023.
Got it and then you know as as the.
Covid protocols have been.
Take it away and you would think that theres going to be accelerated demand. How do you think about maybe ramping up marketing expenses in the coming quarters.
Just given it's probably a little bit different than your typical seasonality.
Yeah.
No I mean, we.
I'll, let Michael comment on it but I mean, we you know we have been investing in marketing and we continue we have our marketing plans I don't think the CVC changes.
Is something that really impacts our marketing activities, but I'll yield see whatever else Michael wants to add to it.
Just going to I mean I.
I agree with Jason's comments I mean it doesn't.
Obviously, a natural cadence that flows through the year and we're kind of moving out of the summer into into September and the fourth quarter and all of our attention now switches really 223, and just historically or normally once we get past.
June and July a lot of the consumer activity does tend to focus on the 23 vacation and what have you. So our marketing tends to really begin to ramp up as we move into the into Q4 and of course in <unk>.
All in preparation for wave and we're quite optimistic with what we're seeing in bookings and the acceleration of the pace of those bookings week by week. So we're thinking that 23 is going to look pretty good.
Yeah.
Understood. Thanks.
Yeah.
We have time for.
For one more question.
Your next question comes from the line of Chris <unk> with Susquehanna. Your line is open.
Everyone. Thanks for taking my questions here so.
The onboard spend the strength of the onboard spend and in your prepared remarks, you spoke about the dollar and pre book when I think 70 cents on the dollar.
With translating to onboard so.
Is that do you feel that that's sort of part of.
Some revenue initiatives that you had going into the pre pandemic that are now starting to reengage or.
Do you feel that sort of something has changed dynamically and this is in response to the pre show.
So the pandemic just wanted to better understand how you're thinking about the sort of the.
Stickiness and that's sort of the go forward dynamic.
Onboard spend.
It's Michael I think you know everything is the same and everything's changed I do think that the consumer has changed in terms of how they engage with with commerce and we know from what we see with our distribution in the different channels that there's a higher propensity to go to the weapon to book on the web Etsy.
Sure.
And I think certainly the investments that we made in our technology as it relates to communicating to customers about the cruise experience and the opportunities and experiences that were available to them has proven to be successful and I think that penetration rate has grown dramatically and I think that's connected and reflects the kind of.
The acceptance of the consumer has now at a much greater level to buy online and and I think that that change is structural and it's going to stay with us and I believe that everything that we've done with our pre cruise marketing is really proving to be.
Very effective.
I think just one thing I just wanted to add onto it.
<unk> that we saw this pre pandemic and been very much kind of leave it into the investments that Michael was talking about is that we have for for decades.
I'm thinking that the customer because the customer was focused on buying a cruise.
And then and they have and we saw this when we saw the shift from goods to experiences pre COVID-19 is that they're really focused on buying an experience and we had to make the investments on a technology basis to make sure that when a consumer is whether it's when they're when they're booking their vacation or where they're leading up to their vape.
Patients that we were able to put in front of them.
The overall experience that they were going to have and they want to put it all together so that they can create the memories that they wanted to create.
Just leveraging kind of the canvas that we that we provide them and I think that's really what.
A lot of these investments and how we've been marketing.
To them, which is leading to more and more.
Of the onboard pre booking activities, but I would say that when we think about the technology that we've installed.
We're still very early innings.
It has opportunity to be very sophisticated.
Even easier to interact with them and I think that we're we're very bullish on what can come out of that and then of course, there's there's money to be made in it but it's really.
By focusing on enhancing the experience that's that's going to lead to.
Happier customer customer that is willing to pay more and that leads to better returns.
Okay. Thank you and my follow up question. So obviously, there's a lot of concern around the potential cyclical slowdown here and that sort of the view is that when you ask the cruise lines or the airlines for that matter that people will continue to take vacations during a recession.
Were you, specifically cruising being the better value versus land based alternatives. So just curious if you could kind of frame I realize the great recession might not be the best comp here, but what you've seen in the slowdown with respect to repeat cruisers, new cruisers cruising and then what does.
The levers in the slowdown that you could kind of pull or what's just sort of you know.
Your RMS team has and its playbook into a slowing in similar sort of idea on your unit cost. Thank you.
Yes, so I mean this is obviously a very.
Difficult question to answer because depending on which recession you were talking about I mean, the U S. Over the past 30 years has really had.
Episodic.
The type of economic downturns, whether it was the.
Fortunate circumstances with 911.
The great recession et cetera.
What we see in other markets that just have kind of modest.
Hum.
Downturns.
We actually don't see a lot of impact on our pricing and I think it's more focus on the value proposition gap between land based vacation.
Cruising tends to do quite well because of that.
That gap that that's out there now in saying that what they you know when we do see is they will they will tend to look for the overall cost of their vacation and I think leading into what we were talking about with short product and seven night, and so forth and traveling more regionally, which is how we reposition our deployment that typically lead.
To us coming out of that.
And in very good shape, but I think it's important to stress in my comments is we we do not see any of this.
In the day to day.
The trading of our business the day to day spend that's happening on our business.
And we're we're we're a nimble organization and of course, you can't save your way to greatness, but but we do think our revenue managers do think that we can continue to to.
Improved yield even even in a N a.
And impact on economic standpoint.
Economic standpoint.
Yeah.
Okay.
Oh.
Okay.
Thank you for your assistant Joanne with the call today and thank you all for your participation and interest in our company Michael will be available for any follow ups. You may have I wish you all a very good day.
This concludes today's conference call you may now disconnect.
Yeah.
You talked about feeling carefree to adventure, Dave on the biggest city in the world feeling great.