Royal Caribbean Cruises Ltd

NYSE:RCL

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Joanne, and I'll be your conference operator today. At this time, I would welcome you to the Royal Caribbean Group Business Update and Second Quarter 2022 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Michael McCarthy, Vice President, Investor Relations. Mr. McCarthy, the floor is yours.

[Michael McCarthy, Vice President-Investor Relations]

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.

[Jason Liberty, Chief Executive Officer]

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 so incredibly hard under unthinkable and ever-changing circumstances to execute on 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. It 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 in travel, accelerating demographic trends, which are pulling in more bucket list and multigenerational 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 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. Now 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, anywhere from a quick weekend getaway to bucket list trip to the Galápagos Islands or Antarctica.

Every day, 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. 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 100,000-plus guests that we have on our ship 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 when 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. As we said in the past, every dollar a guest spends before the voyage translates into about $0.70 more on the dollar when they sail with us and double the overall spending compared to other guests.

As we look into the second half of 2022, precruise revenue APDs 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 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 4x 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, doubled 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 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 with and without future cruise ship credits.

Cancellations are at pre-COVID levels. In addition, we are now seeing the booking window starting to extend back out, providing further confidence in forward-looking business as our guests thoughtfully planned 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 study FCC 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 F&B inflation indicator has increased at the slowest pace thus far in 2022. This, combined with direct conversations with our key suppliers, indicate inflation levels are peaking and that 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. 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 ROIC.

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 when 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. Naf?

[Naftali Holtz, Chief Financial Officer]

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. 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 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 1/3 of our capacity is in the Caribbean, 1/3 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. 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. First, it pushed our recovery of 100% fleet-wide occupancy to 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 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, 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 FCCs. 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 FCC redemptions. We continue to see the redemption of FCCs by our customers as ships returned back into service, deployment firmed up and protocols have been easing. To date, approximately 60% of the FCC balance has been redeemed and half of those have already sailed. Approximately 20% of customer deposit balance is related to FCCs, 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 onetime 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 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, 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 when compared to 2019. 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 en`hance 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 2 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.

[Operator]

[Operator Instructions] Your first question comes from the line of Steve Wieczynski with Stifel.

[Steve Wieczynski, Stifel]

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.

[Jason Liberty, Chief Executive Officer]

Okay. Well, thanks, Steve. I thought you were going to first start off and say, wow, you're back positive EBITDA, positive cash flow. I was hoping for like a little bit of a hug. But I think to just kind of going into -- I know that there is focus around the balance sheet and especially in the current state of the capital markets.

First, I think our business is 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. And so I think when we have raised equity, it has been to manage liquidity and as we are right now, we are generating cash flow.

We do think we have access to the capital markets, and we are confident that we're going to be able to continue to manage our balance sheet and repair it here over time.

I would note that issuing equity, one is obviously, it's a Board decision. The bars are 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 levels as soon as possible and by that, meaning earnings, meaning ROIC and getting our balance sheet back and leverage back to what it was pre-COVID. 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 to be able to address some of these maturities with cash.

[Steve Wieczynski, Stifel]

Okay. Understood. That's very clear. Second question is a -- it's going to be a two-part question. I guess, Jason, in your prepared remarks, you made a comment about how the business is getting back to pre-COVID levels. And I just 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 you guys alone, so to speak. I'd assume there are probably hundreds of millions of COVID costs out there right now across the industry. I'm wondering potentially about the timing of getting, I guess, the majority of those costs removed?

[Jason Liberty, Chief Executive Officer]

Sure. Well, I'll leave the question on cost for Naf. The one thing I would say is, I don't know how it categorized as a CDC leaving us alone. I think it's us proving through empirical data that cruising is an extremely safe environment and that our protocols are working effectively. And like them, we follow the science and are managing it. But I think to your point, there is a significant amount of cost that we were spending on healthy return to service and testing and so forth, and I'll let Naf address here in a second.

So I think just to address a little bit on the pre-COVID, and I do appreciate the question because there are a number of factors that provide that I've talked about in my remarks, just incredible tailwinds 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 tailwinds for our business. And the consumers are clearly looking to spend on experiences and of course, cruising has a really great value proposition relative to land-based vacations. I would argue it's way too good of a value proposition, and 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, like 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 -- 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 with my comments today about the CDC 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. And by normal, I mean, we'll be at normal load factors, we'll be at better rates, and that will all lead to strong EBITDA and earnings performance. And with that comes positive cash flow and that cash flow will be prioritized and scrutinized to make sure -- and going towards high-returning investments and deleveraging. And we do anticipate swiftly reducing our negative carry, which will then return us to pre-COVID earnings over the next couple of years.

I do want to be clear that getting back to pre-COVID financial metrics, it's part of the journey. I think 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 levels because our ambitions around our financial performance based off of our brands, our ships, our growth is much greater than just getting to pre-COVID 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 our plan is to get 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.

[Naftali Holtz, Chief Financial Officer]

Hi, Steve. It's Naf. So let me just touch on your costs. So 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 onetime 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 costs. Part of it is because of those easing protocols. And then as we look beyond that, we think that those costs will be materially eliminated and be absorbed whatever is left into the business.

[Operator]

Your next question comes from the line of Robin Farley with UBS.

[Robin Farley, UBS]

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?

[Jason Liberty, Chief Executive Officer]

Yes. So we're starting off here by doing the five days or less and we're going to look at that. But I think 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.

[Robin Farley, UBS]

Okay. Great. And then just as a follow-up on the maturities that are related to the expert 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?

[Naftali Holtz, Chief Financial Officer]

Robin, it's Naftali. So as you noted, our relationships with the ECAs are very, very strong. They have supported us as well as our commercial banks or other lending partners throughout the pandemic through multiple actions. And 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 operating and capital costs. Our liquidity is strong. So we're very confident that we can manage the maturities in the next 18 months.

[Operator]

Your next question comes from the line of Fred Wightman with Wolfe Research.

[Frederick Wightman, Wolfe Research]

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 '22 is not going to benefit. But as you look into '23, have you seen those European bookings numbers accelerate as some of those reentry testing requirements were lifted?

[Jason Liberty, Chief Executive Officer]

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 9% or 10% lift in our booking activity for the mean the 2022 sailings. So we've actually made up quite a bit of ground since that was lifted. And of course, you're getting flights close in. It can also be a challenge, especially in the current state of 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 we exit the summer. But from what we can see relative to 2019 levels or 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.

[Frederick Wightman, Wolfe Research]

Perfect. And then I guess just all the metrics that you guys gave, Jason, was super helpful just from a consumer health perspective. But if you look at all the strong spending, both predeparture and onboard, and it seems a little bit of a disconnect versus some of the comments you've heard from Walmart and some of these other retailers, like 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 sort of see the consumer spending holding up here going forward?

[Jason Liberty, Chief Executive Officer]

No, I think it's two things, and certainly, Michael and Naf can hop in on others. But I think first and foremost, we're not -- like 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, right, the vast majority of that spend orbits around experiences, creating memories, multigenerational travel, et cetera, that people are -- when they have a lot of pent-up demand for it, and I think they also value experience and relationships differently than they did historically. So I think that's one tailwind.

The second tailwind, which we had been -- or talking about a pre-COVID and we continue to invest in it during COVID was that we replaced our commerce engine for pre-cruise or for our onboard sales. And so shifting more and more of that purchase pre-cruise that 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. They've already paid that credit card bill, et cetera and so it's new spend for them to consider.

So I think those two things, and 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?

[Michael Bayley]

So 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 our software and our communication and how we've been talking to the customers about experience, and just one nugget is that yesterday, we sold one -- just one of our overwater cabanas for 1 day for $4,000. And we just see there's just a lot of demand for these experiences, as Jason said. And 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. So it's been a very positive response to a lot of the products and services and experiences that we have.

[Jason Liberty, Chief Executive Officer]

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

[Operator]

Your next question comes from the line of Ben Chaiken with Credit Suisse.

[Benjamin Chaiken, Credit Suisse]

On the bookings side, you guys mentioned plus 30% in 2Q versus the same period in 2019. It sounded like that got -- my interpretation was that got better through the quarter and then a lot -- even better than that. Presumably, the CDC change would drive incremental demand above and beyond that. Have you guys thought about how you're going to message that to the consumer? Like is there just going to be -- are you expecting there's just going to be kind of like -- like the news is going to pick that up? Or are you guys going to reach out like proactively? Would love to hear how you're thinking about it.

[Michael Bayley]

Ben, it's Michael. Yes, I mean, I think what we're going to see today, we're already expecting it and our call centers are prepared and we've already worked on, obviously, our talking points and what have you. It's already going out into social media. We've started communicating to our distribution, and we're starting to communicate through e-mails to our customer base.

So this kind of change, I think, we'll be seeing very positively. And we've got some distributors who have been anxiously awaiting changes as long as -- along with many of our customers. One of the calculations that we have is about 40% of all of the FCCs that are sitting on the buy lines of people who've been waiting for the protocols to change. So I think this easement and this change is going to be viewed very positively. So we're expecting to see an increase in bookings literally starting today.

[Benjamin Chaiken, Credit Suisse]

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 Naf -- and math would suggest that, I think if not mistaken, over $1 billion in operating cash flow in 3Q. Is there anything on the working capital side, I need to consider that would throw that off?

[Naftali Holtz, Chief Financial Officer]

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 there's nothing unique in the third quarter in terms of anything to point out. And all that cash flow will be to prioritize to pay down debt.

[Jason Liberty, Chief Executive Officer]

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

[Operator]

Your next question comes from the line of Brandt Montour with Barclays.

[Brandt Montour, Barclays]

I was wondering if you could just address, Jason or Michael or anyone, the perception from the market that there's an elevated level of discounting for the industry overall. I mean, obviously, that doesn't really foot 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 we're just waiting for the experience to normalize?

[Jason Liberty, Chief Executive Officer]

Well, I think I'll just make a few comments and sorry, 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 and that accelerates some of the pre-cruise activity that I was talking about in terms of the onboard experience. So depending on how you're looking at the discounting, sometimes it's more about geography of what's going into ticket and what's going in to onboard. And so there's a little bit of that reality that has been evolving now for many, many years, not just with us but also inside the industry.

And then there's also -- we brought up eight ships in the second quarter. And so as we're bringing those ships up and there's more shore product, et cetera, some of those comparables look like there's -- it's a highly promotional environment, which is more promotional than it typically is. But it's something that is yielding higher rates because that combination of the ticket and the onboard are yielding a higher APD.

[Brandt Montour, Barclays]

Okay. That's really helpful. And then a follow-up on Naftali's comments in his prepared remarks about the adjusted mid-single-digit sort of net revenue per PCD in the 3Q. That will be two quarters where you guys have net revenue per PCD 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, again, which you talked about, is there any reason why we shouldn't think of that mid-single digit as a base case going forward?

[Jason Liberty, Chief Executive Officer]

Well, 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 leads 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 and our guests who are incredible advocates of ours are sharing their experiences and telling them that cruise is just like what it was pre-COVID, 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.

[Operator]

Your next question comes from the line of Vince Ciepiel with Cleveland Research Company.

[Vince Ciepiel, Cleveland Research Company]

You talked about using cash flow to focus on deleveraging as well as high-returning investments. I think part of that's your investments in your existing ships. Can you talk about how you approached maintaining those through COVID? And what type of kind of cash CapEx for the existing fleet you kind of envision in '22 or '23?

[Naftali Holtz, Chief Financial Officer]

Yes. Thanks for the question. So first, throughout the last two years, we were very focused. One of our guiding principle was to maintain the quality and the health of our assets. And we continue to do dry docks. We delayed the way -- we laid out the ships was very unique such that when we knew that when we come back, we would minimize the need for more investment on maintenance.

And I think we're very, very pleasantly surprised and as expected, as we are now back to operations, we don't see any elevated needs for capital for any deferred maintenance. So of course, we're doing kind of regular maintenance dry docks. And those are very -- those are obviously within our numbers that we've shared with you, but there's 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.

[Jason Liberty, Chief Executive Officer]

The other point I just wanted to add, which -- just a bit on Naf's point that we had invested a significant amount of money pre-COVID in the modernization of our fleet. As our ships got more and more innovative and larger and more incredible activities to do, that gap was widening. And we -- pre-COVID, we closed that gap considerably by adding a lot of those features onto our our legacy fleet. And so that's why I think we -- as Naf said, we will continue to invest in high-returning programs. But we've actually invested a lot to keep our core business relevance within our brands.

[Vince Ciepiel, Cleveland Research Company]

And another kind of housekeeping item on the modeling front. Talk a little bit about fuel. I think that the guide for 3Q came in a little bit higher than I would have thought, especially with the recent decline in fuel prices. How are you thinking about kind of pricing into next year? And can you talk about any changes going on in mix versus pre-COVID, MGO versus IFO and any efficiencies to keep in mind on the consumption per ALBD?

[Naftali Holtz, Chief Financial Officer]

Yes. So thanks for the question. So first, on the consumption side, we continue to make progress on improvement on consumption. We did it the last several years, and that continues to happen. Obviously, we have newer ships that are much more efficient. So I think on 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 impacts some of that fuel cost in the third quarter, but we are obviously going to be higher hedged in the fourth quarter.

The other thing is that the consumption is a little bit more skewed in this quarter towards MGO and less IFO is also contributing to a little bit of a higher field expense. But it's very isolated to the third quarter.

[Operator]

Your next question comes from the line of Paul Golding with Macquarie Capital.

[Paul Golding, Macquarie Capital]

Congrats on returning to positive EBITDA and cash flow. I wanted to circle back on Naf's comments in terms of the shorter itineraries to attract new-to-cruise. Is this sort of a post-COVID only move? Or is this something maybe a bit more structural that we should expect to see just in terms of jump starting 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.

[Michael Bayley]

Paul, it's Michael. No, I mean we've been very focused on new-to-cruise pre-COVID. We had a great degree of success of generating new-to-cruise, and it's always been part of our strategic intent. And we planned and had tactics around that. And we feel like we were making exceptional progress pre-COVID.

Post COVID, and I think we commented in the past that the real return was supported by our loyal now kind of normalized, and we see the new-to-cruise returning to kind of pre-COVID levels. So -- but certainly, the shore product is the on-ramp for new-to-cruise. And with Perfect Day, which now we're close to taking 10,000 people a day to Perfect Day, which is proving to be a real continued success and it really does draw the new-to-cruise. So it was, it is and it will continue to be very much part of our overall strategy.

[Jason Liberty, Chief Executive Officer]

Yes. And I think just one point to add, we're also staying very kind of tuned in with the customer. And during COVID or the early days, they were very locally minded. Now, they're becoming much more regionally minded as we're seeing them being comfortable booking in different products in North America, booking products in Europe as they kind of now move more and more towards back being globally minded, which is where they were pre-COVID. And I think we're very tuned in. 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.

[Paul Golding, Macquarie Capital]

And then on the booking curve, the commentary in the press release continues to suggest a closer in trend, I guess. Are you seeing the closer-end trend abate at all? And to what extent do you see that maybe as 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 configuration tends to be right now?

[Jason Liberty, Chief Executive Officer]

Well, the booking curve is no longer really contracting. It's now expanding again. So I do think we expect it to return here over the coming, call it, 6 months or so to a normal level of a booking window relative to historical activity. But as our ships are coming up and as I think people are -- as protocols begin to fall away here now, we would expect there to be a further acceleration in close-in demand for whatever inventory is left, which can lean a little bit on that macro statistic around the booking window. But what we have seen over the coming -- over the past several weeks and months, is that window beginning to extend.

[Michael Bayley]

Just to add to Jason's point, I mean if you think about our deployment during this period, we had a lot more regional drive-to products. So we skewed a little bit more heavily towards that drive-to 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 pattern because of that.

[Operator]

Your next question comes from the line of Daniel Politzer with Wells Fargo.

[Daniel Politzer, Wells Fargo]

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, but I think you said mid-single digits with a sequential improvement. I mean, as we think about kind of the pacing of that and going into 2023, should it continue to improve? Or is inflation going to be offsetting some of that improvement?

[Naftali Holtz, Chief Financial Officer]

Yes. So thanks for the question. So yes, we do expect to see an improvement in mid-single digits for the second half, and this should be also a sequential improvement from a quarter-to-quarter as 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 margins as soon as possible.

On one hand, as you mentioned, there is inflation, and we mentioned -- commented 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 expect that to ramp up this in the second half and well into 2023.

[Daniel Politzer, Wells Fargo]

Got it. And then as the COVID protocols have been taken away and you would think that there's 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?

[Jason Liberty, Chief Executive Officer]

I mean we -- I'll let Michael kind of comment on it. But I mean, we have been investing in marketing, and we continue -- we have our marketing plans. I don't think the CDC changes is something that really impacts our marketing activities, but I'll yield and see whatever else Michael wants to add to it.

[Michael Bayley]

No, I was just going to -- I mean, I agree with Jason's comments. I mean, there's obviously a natural cadence that flows through the year, and we're kind of moving out of the summer into September in the fourth quarter. And all of our attention now switches really to '23. And just historically and normally, once we get past June and July, a lot of the consumer activity does tend to focus on their '23 vacation and what have you.

So our marketing tends to really begin to ramp up as we move into Q4 and, of course, 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.

[Jason Liberty, Chief Executive Officer]

Okay. We have time for one more question.

[Operator]

Your next question comes from the line of Christopher Stathoulopoulos with Susquehanna.

[Christopher Stathoulopoulos, Susquehanna]

So the onboard spend, the strength on the onboard spend in your prepared remarks, you spoke about the dollar prebook and I think $0.70 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 prepandemic now starting to reengage? Or do you feel that, that sort of something has changed dynamically and this is in response to the pre -- to the pandemic? Just want to better understand how you're thinking about the sort of stickiness in the sort of the go-forward dynamic on onboard spend.

[Michael Bayley]

It's Michael. I think everything is the same and everything has changed. I do think that the consumer has changed in terms of how they engage with commerce. And we know from what we see with our distribution in the different channels that there's a higher propensity now to go to the web and to book on the web, et cetera.

And I think, certainly, the investments that we made in our technology as it relates to getting to customers about their cruise experience and the opportunities and experiences that are 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 that the consumer has now at a much greater level to buy online. 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.

[Jason Liberty, Chief Executive Officer]

Just I think just one thing I just want to add on to it, that we saw this pre-pandemic and very much kind of lead it into the investments that Michael was just talking about is that we have for decades thinking that the customer -- because the customer was focused on buying a cruise. And they have -- and we saw this when we saw the shift from goods to experiences pre-COVID 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 booking their vacation or they're leading up to their vacation 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 want to create just leveraging kind of the canvas 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. And I think that we're very bullish on what can come out of that. And yes, of course, there's money to be made in it, but it's really by focusing and enhancing on the experience, that's going to lead to a happier customer, a customer that's willing to pay more and that leads to better returns.

[Christopher Stathoulopoulos, Susquehanna]

Okay. And a follow-up question. So obviously, there's a lot of concern around the potential cyclical slowdown here. And the 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. And for 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 a slowdown with respect to repeat cruisers, new to cruisers cruising? And then what are the levers in a slowdown that you could kind of pull? Or what's your sort of your RMS team has in its playbook into a slowing and then similar sort of idea on your unit costs?

[Jason Liberty, Chief Executive Officer]

Yes. So I mean, this is obviously a very difficult question to answer because depending on which recession you're talking about, I mean, the U.S. over the past 30 years has really had episodic type of economic downturns, whether it was the unfortunate circumstances with 9/11, the Great Recession, et cetera. What we see in other markets that just have kind of modest economic downturns, we actually don't see a lot of impact on our pricing. And I think it's more focused on the value proposition gap between land-based vacation that cruising tends to do quite well because of that gap that's out there.

Now in saying that, what we do see is they will tend to look for the overall cost of their vacation. And I think leading into what we were talking about with shore product and 7-night and so forth and traveling more regionally, which is how we position our deployment. That typically leads to us coming out of that in very good shape. But I think it's important to stress in my comments is we do not see any of this in the day-to-day trading of our business, the day-to-day spend that's happening on our business. And we're a nimble organization. And of course, you can't save your way to greatness, but we do think our revenue managers do think that we can continue to improve yield even in an impact on an economic standpoint -- broader economic standpoint.

[Jason Liberty, Chief Executive Officer]

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.

[Operator]

This concludes today's conference call. You may now disconnect.