Royal Caribbean Group (RCL) — Q2 2022 Earnings Call Transcript

Good morning, everyone, and thank you for joining us today for our second quarter 2022 business update conference call. Joining me here in Miami are Jason Liberty, our Chief Executive Officer; Naftali Holtz, our Chief Financial Officer; and Michael Bayley, President and CEO of Royal Caribbean International. Before we get started, I'd like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP items can be found on our website and on our earnings release available at www.rclinvestor.com. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our second quarter results and an update on our latest actions and on the current booking environment. We will then open the call for your questions. With that, I'm pleased to turn the call over to Jason.

Thank you, Michael. Good morning, everyone, and thank you for joining us today. Over the past several months, our teams have reached several very important milestones in our pursuit to quickly return our business back to 2019 financial metrics and beyond. In June, we successfully completed the return of our entire fleet into operation. This was a Herculean task by our team, and I'm so thankful and proud of our shipboard and shoreside teams who have worked incredibly hard under unthinkable and ever-changing circumstances to execute such a successful return to delivering the best vacations in the world. Our complete operating platform is now up and running. That platform, which includes our leading brand, the most innovative fleet in the industry, our global sourcing and technology apparatus, and the best people in the world, is now positioned to deliver the best vacations in the world responsibly and accelerate our business back to superior financial performance. Another major milestone for the group this past quarter was that our business turned operating cash flow and EBITDA positive. During the second quarter, we achieved, earlier than we had expected, positive EBITDA and operating cash flow. This achievement further strengthened our liquidity position and positions us well to continue methodically and proactively improving the balance sheet and refinancing near-term maturities as we seek to return to 2019 metrics and beyond swiftly. This outperformance in Q2 versus our expectations was driven by continued strength in our onboard revenue and accelerating load factors, which hit nearly 90% in June and delivered 82% for the quarter. This combination led us to achieving higher total revenue per guest versus 2019 levels. Our North American itineraries are now sailing at over 100% load factors, and we are building on this momentum as we expect to reach load factors in the mid-90s in Q3 and then 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 travel, demographic trends, which are pulling in more bucket list and multigenerational travel, a 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 CDC 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, and communities we visit are our top priority, and cruising has proven to be one of the safest environments 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 return-to-service shipboard protocols, one immediate change that I'm happy to report is that starting August 8, pre-embarkation testing for vaccinated guests on voyages of 5 days or less will no longer be required. 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 into 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 100,000 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, from a quick weekend getaway to bucket list trips to the Galápagos Islands or Antarctica. Daily, we witness and engage in millions of interactions on our websites and through our call centers as guests learn about and book their dream vacations. 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 100,000-plus guests that we have on our ships every day, including the 125,000 guests that are currently on our ships today, have been spending at least 30% more on board our ships across all categories compared to 2019. These spending trends have been consistent across our customer base even as we are approaching full load factors. Approximately 60% of our guests book their onboard activities before they ever step foot on our ships. Every dollar a guest spends before the voyage translates into about $0.70 more on board when they sail with us, doubling the overall spending compared to other guests. As we look into the second half of 2022, pre-cruise revenue average per day are up over 40% versus 2019 levels. The strong consumer demand and our commercial and technical capabilities are contributing to this strong performance. Our distribution channels are now fully operational. Our websites are receiving close to double the visits compared to 2019, and we are generating record levels of direct bookings. Additionally, our trade partners are fully operational and generating bookings in excess of 2019 levels. We are also seeing in our consumer data that cruise interest is now essentially back to 2019 levels as the continued easing of travel protocols and the attractive value proposition are 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 and strategically adjusted deployment towards shorter itineraries are driving more new-to-cruise. We also continued to benefit from secular tailwinds 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, double 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 capturing this quality demand as we ramp up the business this year and build for a successful 2023 and beyond. All this quality demand is translating into strong booking activity. During the second quarter, we saw a strong demand for close-in sailings, which contributed to better-than-expected load factors. Bookings for 2022 sailings averaged 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 than 2019, both with and without future cruise credits. Cancellations are at pre-COVID levels. Furthermore, we are now seeing the booking window starting to extend back out, providing further confidence in forward-looking business as our guests 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 future cruise credit redemptions continued. Inflation continues to impact businesses across the globe, and we are no exception. As we discussed before, food and fuel are the main categories for us that are susceptible to inflation. We continue 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 in our food basket. Our more recent month-over-month food and beverage inflation indicator has increased at the slowest pace thus far in 2022. This, combined with direct conversations with our key suppliers, indicates inflation levels are peaking, and 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, 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 the 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. Earlier this month, we acquired the ultra-luxury cruise ship Endeavour. Originally delivered in 2021, the ship joined Silversea Cruise’s expedition fleet. The ship is scheduled to begin service this November in Antarctica 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 return on invested capital. While the last 2.5 years were 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 in all economic conditions. Cruising has always been an attractive value proposition compared to land-based vacation alternatives, and that is truer 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 our 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 Naftali.

Thank you, Jason, and good morning, everyone. Let me begin by discussing our results for the second quarter. This morning, we reported a net loss of approximately $500 million or $2.05 per share for the quarter. Revenue was $2.2 billion, double the first quarter. And we generated almost $0.5 billion 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 refinance near-term maturities. As Jason mentioned, we finished the second quarter at 82% load factors with June at just about 90% and North American product at about 100% overall. 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 sailing with occupancies as high as 107%. Our Northeast and West Coast products, including Alaska, sailed at around 90% in June. Load 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 blur the line between ticket and onboard revenue. Our goal is to maximize overall 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 APCDs during the third quarter. From a deployment standpoint, just over one-third of our capacity is in the Caribbean, one-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. Let me break down third quarter load factors by itinerary. We have been sailing at above 100% in 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 occurred well into the typical booking window for Europe. While we saw improved booking trends, it occurred too late to have a meaningful impact on this summer's 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. First, it pushed our recovery of 100% fleet-wide occupancy to the fourth quarter of 2022. 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 to 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, booked load factors for sailings in the second half of 2022 remained below historical levels at slightly higher rates than 2019, both including and excluding future cruise credits. 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 30 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 in customer deposit levels. In the second quarter, approximately 90% of total bookings were new versus future cruise credit redemptions. We continue to see the redemption of future cruise credits by our customers as ships returned back into service, deployment firmed up and protocols have been easing. To date, approximately 60% of the future cruise credit balance has been redeemed, and half of those have already sailed. Approximately 20% of the customer deposit balance is related to future cruise credits, which is a 7% improvement from the last quarter. For new bookings, we have returned to typical booking and cancellation policies that were relaxed during the pandemic. Shifting to costs. Net cruise costs, excluding fuel per APCD improved 60% in the second quarter compared to the first quarter. The second quarter costs included $7.75 per APCD related to enhanced health protocols and one-time costs to return ships and crew back to operations. We expect to see a significant improvement in net cruise costs, excluding fuel per APCD in the second half of 2022 compared to the first half. Lower expenses relate 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 benefits 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, mainly related to fuel and food. 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 APCD, are expected to be higher by mid-single digits for the second half of 2022 compared to 2019. The third quarter is expected to be higher. On the fuel side, we continue to improve consumption and 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 2022, our hedge position is 49%, which is slightly lower than the average for the second half of the year. On the other hand, consumption continues 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 ended the quarter with $3.3 billion in liquidity. During the second quarter, we generated almost $0.5 billion 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 EBITDA and free cash flow. We are very focused on returning to the balance sheet we had pre-COVID. Our plan is to methodically and proactively refinance 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 are 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 $0.05 to $0.25. 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 on our 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.

So Jason and Naftali, I mean, there's clearly 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. At this point, we've seen one of your competitors go out and issue equity and raised debt north of 10%. So I guess the question everybody is trying to figure out is how can you get these maturities refinanced in the current high-rate environment without the use of equity? And hopefully, that all makes sense.

Thank you, Steve. I expected you to first acknowledge our positive EBITDA and cash flow. I was looking for a little recognition. To address the concern regarding our balance sheet, particularly in the current capital market conditions, our business is clearly ramping up. We're generating cash flow after covering our operating expenses and capital expenditures. We’re not experiencing any slowdown in activity and demand; in fact, we're seeing an increase in our bookings and onboard activity. We've demonstrated that we approach capital raising thoughtfully, balancing liquidity while minimizing dilution compared to others. The equity we've raised has been to manage liquidity, and as we stand now, we're generating cash flow. We believe we have access to the capital markets, and we're confident in our ability to manage and improve our balance sheet over time. I want to emphasize that any decision to issue equity is made by the board, and currently the bar is set very high for such actions. We have no plans to issue equity. The board's primary focus is to return to pre-COVID levels as quickly as possible, which includes earnings, return on invested capital, and restoring our balance sheet and leverage to pre-COVID conditions. We believe we have a clear plan and path forward, and the improvements in our business and cash flow give us the opportunity to address some of our debt maturities with cash.

Okay. Understood. That's very clear. The second question is a two-part question. Jason, in your prepared remarks, you mentioned how the business is returning to pre-COVID levels. I would like to understand more about the timing of that comment. The second part of my question is about the current cost opportunities. I mean that in the context of the CDC essentially allowing you some freedom. I assume there are probably hundreds of millions of COVID-related costs across the industry right now. I'm curious about the timing for removing most of those costs.

Sure. I'll leave the question about costs for Naft. I think our situation isn’t fittingly categorized as the CDC leaving us alone. We are demonstrating through solid data that cruising is a very safe activity and our protocols are effective. Like them, we are guided by science and managing the situation. However, there are considerable costs we incurred for a healthy return to service and testing, which Naf will address shortly. Regarding pre-COVID comparisons, I appreciate the question because several factors I've mentioned contribute to positive momentum for earnings, margins, and returns as we move into 2023 and beyond. There are strong long-term trends and demographic shifts supporting our business. Consumers are eager to spend on experiences, and cruising offers an excellent value compared to land-based vacations. I believe our value proposition is exceptionally compelling, and we are working hard to communicate that compared to other vacation options. Additionally, we've focused on reshaping our cost structure over the past few years, enhancing our margins by cutting non-guest-facing expenses and divesting low-margin businesses to prepare for significant margin growth. Our brands hold leading positions in their sectors, and we are committed to developing the most innovative fleet in the industry. This growth will drive higher margins, improved inventory mix, enhanced onboard revenue, better fuel efficiency, and increased scale will contribute to better margins on our general and administrative expenses. With our recent remarks about the CDC and our shift in policies, we look at our booking environment which is strengthening, and we anticipate 2023 to be a typical operational year. By typical, I mean we expect to achieve normal load factors and improved rates, leading to strong EBITDA and earnings results. This will also bring positive cash flow, which we will prioritize for high-return investments and debt reduction. We expect to quickly decrease our negative carry and return to pre-COVID earnings within the next couple of years. It's important to note that returning to pre-COVID financial metrics is part of our journey, which we refer to internally as getting back to base camp. We won't just be satisfied with reaching pre-COVID levels because our ambitions for financial performance based on our brands, ships, and growth are much greater than that. As we approach the end of this year, I plan to provide more details on a long-term program that will encompass getting to base camp and beyond. Our strategy includes bringing clarity as we have previously with initiatives like Double-Double to motivate our internal teams to achieve these goals.

Hi, Steve. It's Naf. So let me just touch on your costs. You're right. In the earnings release, we also disclosed that in this quarter, in the second quarter, we had $7.75 per APCD cost that is related to the health protocols as well as one-time costs to return our ships and crew back to operations. Just as a reminder, we actually returned eight ships in the second quarter. So that's part of the cost. As we look forward into the rest of 2022, we expect improvement in our cruise costs. Part of it is due to easing those protocols, and as we look beyond that, we think that those costs will be materially eliminated and absorbed whatever is left into the business.

I wanted to ask about how quickly you think you might be able to remove the test requirement for the six-plus, seven-plus day cruises just since that's the majority of your itineraries, how quickly you may be able to do that, which obviously would be a demand driver?

Yes. So we're starting off here by doing the five days or less, and we're going to look at that. Our expectation here, call it, in the next 45 days or so and of course, following local requirements, which will somewhat dictate in some of our destinations what those testing requirements will be. That the majority of the testing requirements will be lifted, especially around the majority of our deployment. We might, depending on where the ships are going, take some additional protocols. And of course, we're going to continue to follow where COVID is in society and take the necessary actions.

Okay. Great. 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 as a lot of your capital markets maturities? And is that something that could happen sooner rather than later?

Robin, it's Naftali. Our relationships with the export credit agencies are very, very strong. They have supported us as well as our commercial banks or other lending partners throughout the pandemic through multiple actions. We don't have anything to talk about today. We are very confident in our ability to generate free cash flow to cover operating and capital costs. Our liquidity is strong. So we're very confident that we can manage the maturities in the next 18 months.

It sounds like, and this is totally fair, that the European occupancy numbers were impacted by the Ukraine and then also some of the reentry testing requirements. But have you seen a pickup in bookings for those? It sounds like '22 is not going to benefit. But as you look into '23, have you seen those European booking numbers accelerate as some of those reentry testing requirements were lifted?

I have a few comments. First, regarding 2022, once the U.S. testing requirement was removed, we immediately noticed a 9% to 10% increase in our booking activity for sailings in 2022. We have made significant progress since that change. However, booking flights close to departure can be challenging, particularly in the current state of the European airline industry. Nevertheless, we are experiencing very strong demand for Europe in 2023. We expect the volume to significantly increase as we move beyond summer. Based on our observations compared to 2019 and historical levels, we anticipate that Europe will perform similarly to 2019 regarding load factors and rates.

Perfect. And then I guess just all the metrics that you guys gave, Jason, were super helpful just from a consumer health perspective. But if you look at all the strong spending, both pre-departure and onboard, it seems a little bit of a disconnect versus some of the comments you've heard from Walmart and some of these other retailers. Can you sort of explain that away from where you sit, just a customer base difference? Is there something structurally different? I mean how do you see the consumer spending holding up here going forward?

No, I think it's two things, and certainly, Michael and Naf can hop in on others. First and foremost, we're not selling stuff; we're selling experiences. Yes, we might have a couple of things you're buying in a retail store on our ships. But in reality, the vast majority of that spend orbits around experiences, creating memories, multigenerational travel, et cetera, that people have a lot of pent-up demand for. They also value experiences and relationships differently than they did historically. So I think that's one tailwind. The second tailwind, which we've been talking about pre-COVID and we continue to invest in it during COVID, was that we replaced our commerce engine for pre-cruise or onboard sales. Shifting more of that purchase pre-cruise 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 sunk cost to them. They've already paid that credit card bill, and so it's new spend for them to consider. I think those two things, of course, our teams have become much, much more sophisticated in 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?

Just to add one nugget of information to Jason's comments. We've seen an amazing response to our software and our communication and how we've been talking to the customers about the experience. One nugget is that yesterday, we sold one of our overwater cabanas for 1 day for $4,000. We see there's 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 that people just seem to be more willing to open their wallets and purchase these experiences. It's been a very positive response to a lot of the products and services and experiences that we have.

The only thing I would add, just anecdotally, we all bought a lot of stuff during the pandemic. I'm sure like all of you, I had 10 Amazon boxes show up at my house every single day. People have absorbed and consumed all that they're looking to buy. And I think they're really again, very, very focused on experience.

On the bookings side, you mentioned a 30% increase in the second quarter compared to the same period in 2019. It seemed that this improved throughout the quarter and possibly even more than expected. The change from the CDC might create additional demand beyond that. Have you considered how you will communicate this to consumers? Are you planning to rely on the news to share this information, or will you proactively reach out? I would love to hear your thoughts on this.

Yes, I mean, I think what we're going to see today, we're already expecting it. Our call centers are prepared, and we've already worked on our talking points. It's already going out into social media. We've started communicating to our distribution and are starting to communicate through emails to our customer base. So this kind of change will be seen very positively. We've got some distributors who have been anxiously awaiting changes alongside many of our customers. One of the calculations that we have is about 40% of all of the future cruise credits are sitting on the buy lines of people who've been waiting for the protocols to change. This easement and change will be viewed very positively. So we're expecting to see an increase in bookings literally starting today.

Yes. So I think the way I would characterize it is that we are generating positive EBITDA and cash flow. We are covering more than our operating costs and capital costs. Nothing unique in the third quarter to point out, and all that cash flow will be prioritized to pay down debt.

Yes. The only one comment I want to make about broader working capital is we're now in the high season, right? We've added capacity with during this time. So our customer deposit balance has been rising. We're moving into a zone where we're getting to normal load factors that we'll now start to see the historical seasonality of customer deposits. So I would look at that more in how it is in a previous period on a seasonality basis than I would quarter-over-quarter.

I was wondering if you could address the perception from the market that there's an elevated level of discounting for the industry overall. It seems that doesn't align with the really good accelerating booking volume commentary you're seeing. But I'm wondering how much of that is related to still sort of COVID-19 protocols and we're just waiting for the experience to normalize?

I think I'll just make a few comments, and sorry, Michael, please jump in on it. I think that there is a reality that we're packaging much more than we have had in the past. Some of that accelerates some of the pre-cruise activity I was talking about in terms of the onboard experience. Depending on how you're looking at the discounting, sometimes it's more about geography, what's going into ticket and what’s going into onboard. There's that reality evolving now for many years. We brought up eight ships in the second quarter. More shore product, et cetera, some of those comparables look like there’s a highly promotional environment, but it's something that is yielding higher rates because that combination of ticket and onboard is yielding a higher average per day.

That will be two quarters where you guys have seen mid-single-digit net revenue per passenger cruise day. I'm curious, is there any reason why we shouldn't think of that mid-single digit as a base case going forward?

What we're seeing, even in my commentary into 2023, being within historical ranges at higher rates, I think that's what we're continuing to see. It leads to my comments about the value proposition. There is a very healthy gap today than there has been with land-based vacations. Now that protocols are falling off, and we're operating, our guests are incredible advocates of ours, sharing their experiences, and telling others that cruise is just like what it was pre-COVID. All that is manifesting into this opportunity where people look at cruising saying, wow, this is a great value proposition. Even if I pay a little bit more money, it's still a huge gap to if I did a land-based vacation.

You talked about using cash flow to focus on deleveraging as well as high-returning investments. Can you talk about how you approached maintaining those through COVID? What type of cash CapEx for the existing fleet do you envision in '22 or '23?

Throughout the last two years, we were very focused. One of our guiding principles was to maintain the quality and health of our assets. We continue to do dry docks. We laid out the ships in such a way that, when we knew we come back, we would minimize the need for more investment on maintenance. I'm very pleasantly surprised, as expected, we're back to operations. We don't see any elevated needs for capital for any deferred maintenance. We're doing regular maintenance dry docks; those are within our numbers.

We invested a significant amount of money pre-COVID in the modernization of our fleet. As our ships became more innovative, larger, and had more incredible activities, we closed the gap considerably by adding those features onto our legacy fleet. While we will continue to invest in high-returning programs, we invested to keep our core business relevance within our brands.

On fuel, the guide for 3Q came in higher than expected, especially with recent decline in fuel prices. How are you thinking about pricing next year? Can you talk about any changes in mix versus pre-COVID? On the consumption side, improvements continue. Our newer ships are much more efficient, and we expect to see that trend continue. In the third quarter, our consumption is a bit skewed towards MGO and less IFO, which is driving higher fuel expenses. It's very isolated to the third quarter.

I wanted to circle back on Naf's comments regarding shorter itineraries to attract new-to-cruise. Is this a post-COVID move? Or is there something structural we should expect to see in terms of jump-starting the new-to-cruise return? Are there any costs associated with that higher mix of shorter itineraries and certainly, that aligns with the testing requirement commentary?

We've been very focused on new-to-cruise pre-COVID and had success generating new-to-cruise guests, always part of our strategic intent. We planned around that and made exceptional progress pre-COVID. Post-COVID, we see new-to-cruise returning to pre-COVID levels. The shore product is key for new-to-cruise. Perfect Day, which takes close to 10,000 people a day, has been a major success and continues to draw in new-to-cruise.

We're staying tuned in with the customer. They are becoming more regionally minded as we see them becoming comfortable booking different products in North America and Europe, where they were pre-COVID. Our brands are very tuned into that, and the product or itineraries reflect what we think the consumer wants in terms of their travel preferences.

On the booking curve, the commentary in the press release continues to suggest a closer-in trend. Are you seeing the closer-in trend abate? How should we think about that in future periods?

The booking curve is no longer contracting; it’s now expanding again. We expect it to return to a normal level of a booking window relative to historical activity over the next 6 months. We've observed a further acceleration in close-in demand for remaining inventory, which can influence the macro statistic around the booking window. That window is beginning to extend.

Our deployment during this period included a lot more regional drive-to products. We skewed more heavily towards that drive-to product, which is easier to book and has less logistics involved. This has favored a later booking pattern because of that.

I had a question on net cruise costs. You mentioned they should be higher for the second half of 2022 but improved mid-single digits. Should we expect further improvement into 2023, or will inflation offset that improvement?

We do expect an improvement in mid-single digits for the second half, and this should also be a sequential improvement quarter-to-quarter as the protocols ease. Looking into 2023, our goal is to get to pre-COVID margins as soon as possible. While inflation is a factor, the actions we've taken to reshape our cost structure will ramp up through 2022 and into 2023.

We've been investing in marketing, and we have our marketing plans. The CDC changes don't necessarily impact our marketing activities, but we do plan to increase marketing efforts as we approach Q4. Bookings are accelerating, and we’re positive about what we’re seeing for 2023.

The onboard spend, the strength on the onboard spend in your remarks, is that part of some revenue initiatives you had going into the pandemic? Or has something changed dynamically, and is this response to the pandemic? How are you thinking about the stickiness in the go-forward dynamic on onboard spend?

Everything is the same and has changed. The consumer has evolved in terms of how they engage with commerce. There's a higher propensity now to go online and book, and our investments in technology have proven successful in growing penetration. I believe that this change is structural and will remain. Our pre-cruise marketing is proving to be highly effective.

We're focused on selling experiences. We see this as a trend that continues, and consumers are increasingly willing to invest in creating memories. Our investments have made it possible for us to present a better overall experience, which is positively influencing spending levels onboard.

Just to add that we've observed increased spending at our destinations, and there's high demand for experiential offerings. This positive response showcases customer willingness to invest in memorable experiences.

Thank you for assisting, Joanne, with the call today, and thank you all for your participation and interest in the company. Michael will be available for any follow-ups you may have. I wish you all a very good day.