Carnival PLC
LSE:CCL
Earnings Call Analysis
Q2-2023 Analysis
Carnival PLC
Starting with a round of celebrations, the company marks a significant turnaround from the challenges of the past few years. Net yields have outperformed 2019 levels, showing a 7.5% increase in constant currency, which beat guidance by 4.5 points. This trend is expected to continue with an additional increase of over 2.5 points for the second half. Furthermore, adjusted EBITDA projections for the year have been raised to $4.1 to $4.25 billion, reflecting the solid recovery. The company achieved record bookings, surpassing previous high points with a 17% increase over 2019. The strategic shift to longer booking lead times and bundled packages has significantly increased customer deposits to $7.2 billion, demonstrating strong future revenue potential and a committed customer base.
The company is embracing a more agile and efficient operational structure. It removed a management layer between the corporate and brand levels, leading to direct reporting of six major brands, representing over 90% of the capacity, to the CEO. This enables quicker response to market opportunities and aligns with the goal to become the employer of choice in the travel and leisure industry.
The SEA Change 3-year targets (Sustainability, EBITDA per ALBD, Adjusted ROIC) underscore a commitment to sustainable and profitable growth. The company plans to cut carbon intensity by over 20% earlier than the 2030 goal and achieve a 50% rise in adjusted EBITDA per ALBD. With low capacity growth of under 2.5%, the strategy prioritizes reducing debt and achieving investment-grade metrics, with a forecast of over $10 billion in debt reduction from its peak by 2026 and a projected 12% adjusted ROIC. This approach aims to transfer significant enterprise value from debt holders to shareholders.
Reallocation of assets within the company's portfolio concentrates growth on high-return brands, while an increase in advertising investments is anticipated to yield significant benefits in 2024 and beyond. The company has begun deleveraging, with a $1.4 billion debt prepayment as part of its disciplined capital allocation strategy. As of the last reporting, reserve funds held by credit card processors stood at $2.2 billion, expected to be released predominantly by 2024 and used for further debt reduction, aligning with the company's goal of capital structure optimization.
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Good morning. This is Josh Weinstein. Welcome to our second quarter 2023 earnings call. I'm joined today by our Chair, Micky Arison; our Chief Financial Officer, David Bernstein; and our Senior Vice President of Investor Relations, Beth Roberts. Before I begin, please note that some of our remarks on this call will be forward-looking. Therefore, I'll refer you to the cautionary statement in today's press release. There are many milestones we've hit over the last 2 years, and this past quarter is no exception. In fact, there was much to celebrate in the second quarter. We reached a meaningful inflection point for revenue with net yield surpassing 2019 strong level. And on top of that, operating income, cash from operations and adjusted free cash flow were all positive. Adding to those achievements, we just hit all-time highs for bookings and customer deposits. And remarkably, we are still experiencing a phenomenal [indiscernible], which started early, gained strength and is still going strong midway through the year. The strength in demand delivered outperformance in the second quarter for revenue, adjusted EBITDA and the bottom line, a credit to the dedicated efforts of our 160,000 amazing team members ship and shore. Net yields in constant currency turned positive in the second quarter compared to 2019 as we drove cruise ticket prices above 2019 while maintaining record onboard revenue growth and continuing to close the gap on occupancy. In fact, net per diems in constant currency were up 7.5% over 2019 in the second quarter. This was 4.5 points better than the midpoint of guidance which we were able to achieve while meeting our forecasted occupancy. Based on continued strength in pricing, we have also raised our expectation for net for diems in the second half by over 2.5 points while again, maintaining our occupancy expectations, which is supporting our guidance of higher net yields in the second half of 2023 over 2019 in constant currency. This revenue growth will be significantly higher than the increase in our cost guidance, which David will elaborate on. All told, we are bringing another $275 million to the bottom line for the year, thanks to the strength in revenue as well as the interest expense benefit we are capturing from deleveraging. On a per ALBD basis and holding fuel price and currency constant to 2019 levels, we progressed from 59% of 2019's EBITDA in the first quarter to 73% back in our second quarter. We expect to hit about 85% for the third quarter and be all the way back for the fourth quarter. We are now expecting adjusted EBITDA of $4.1 billion to $4.25 billion, above the high end of our prior guidance range. As I mentioned, booking volumes reached an all-time high in our second quarter, exceeding the record levels we achieved in the first quarter, which would normally be our peak period. Booking volumes were 17% higher than 2019, which is multiple of our capacity growth. We experienced double-digit growth in booking volumes on both sides of the Atlantic. Demand for our European brands has continued to strengthen and is now outpacing 2019 booking volumes at a rate that's comparable to our North America brands and the strength in demand has carried into June. In North America, the booking curve is as far out as we have ever seen it, while our European brands are quickly catching up to 2019 levels. With over 90% of this year on the books, 2023 is now essentially behind us, and we are strategically building a strong base of revenue for 2024. In fact, our book position for 2024 also stands at record levels. Reflecting this performance, our customer deposits are also at an all-time high of $7.2 billion, significantly higher than our prior peak of $6 billion. Customer deposits grew 26% over the prior quarter and are multiples of our measured capacity growth as we strategically push out our booking lead times and pull forward more onboard spend through bundled packages and pre-crew sales. Onboard revenues were once again off the chart this quarter as the strategy delivers an added benefit of elevating spending once on board, enabling us to capture more of our guests vacation wallet. Our brands are laser-focused on our strategy to pull forward both ticket and onboard spend, which only enhances the visibility and predictability of our recurring revenue base. We have over 50% of the next 12 months, both at any given time and over 1/3 of onboard revenues now on the books in advance or sailings. Our demand generation efforts are in full swing. Our cumulative number of new-to-cruise and new-to-brand guests who sailed with us in the second quarter have already exceeded 2019's level. Our natural search performance is up across the board with an 87% increase over 2019 which is up from a 63% increase last quarter, affirming the success of our new marketing campaigns in driving awareness and consideration. Our lead generation efforts are also working with a 60% increase in paid search clicks over 2019, which is nearly double the 35% increase just last quarter. To accommodate the success and our increased demand profile, we've grown our sales and sales support staff by over 50% in recent months. At the same time, we can see the impact it is also having with the trade. As I've said before, in order for us to be successful, we need all of our sales channels to excel, and that certainly includes our travel agent partners who are critical in helping us widen the pipeline for new-to-cruise guests. And I've got great news on that front. The trade is continuing to rebound significantly with sales volumes up 45% year-over-year as we increase training, engagement and support activities. And of course, our advertising investments benefit not only us, but our trade partners as well. By any measure, our decision to increase our investment in advertising is paying off. The sequential improvement in these important KPIs suggests the strength we are seeing in demand will continue. All of this has built confidence not just in our 2023 outlook, but in our ability to launch SEA Change, 3-year targets that will demonstrate our progress towards delivering strong profitability and rebuilding our financial fortress. The acronym S-E-A stands for Sustainability through carbon intensity reduction, EBITDA per ALBD and Adjusted ROIC. Three very important key performance indicators. And for each of these items, we expect to see significant improvements from current level and well above 2019. In fact, the 2 financial measures will be the best we have seen in almost 2 decades and the carbon intensity rate will be unprecedented. For the S for sustainability, we plan to reduce our carbon intensity by more than 20% compared to 2019. Essentially, we plan to deliver on our 2030 decarbonization goal 4 years early. Reducing our carbon intensity has been and continues to be a priority for our company. It is critical to improving our environmental impact and to improving our financial performance. We are widening the gap to peers on what is already the most fuel-efficient fleet out there. For the E, we are targeting a 50% increase in adjusted EBITDA per ALBD compared to our 2023 guidance. This would also represent a 25% increase over 2019 levels both the fuel price and currency constant. EBITDA per ALBD best measures the increasing unit profitability of our business as we execute on our strategy to deliver revenue yield improvement on lower capacity growth. And finally, for the A, we expect Adjusted ROIC to reach 12% and more than doubling from 2023 level. We already have the lowest investment base in our industry, and our strategy is designed to deliver outsized returns through high-quality yield-driven revenue growth while maintaining our industry-leading cost structure. These targets are all grounded on low-capacity growth of under 2.5% compounded annually which will allow us to use our cash flow generation to pay down debt and rebuild the balance sheet as we work towards investment-grade leverage metrics. Essentially, we pulled forward our most important sustainability goal and expect a step change in both profitability and return on invested capital in just 3 years. And importantly, these targets are not our angle. They are measurable markers of continuous improvement. To make this happen, we have a sense of urgency to further our brand efforts to drive net yield improvement and while it's working, we recognize these efforts do build over time. As mentioned on previous calls, to help support this growth and drive overall revenue generation over time, I've actively been working with each brand on their strategies and road maps to ensure they will truly own their space in the vacation market. This means having clearly identified target markets, capacity that is appropriately sized to the market potential, demand generation and marketing capability to hone in on the target market at the lowest possible acquisition costs, revenue management execution to generate optimized pricing across the booking curve and amazing onboard guest experience delivery to drive Net Promoter Scores and resulting advocacy higher. This will allow us to continue building on our large base of loyal guests as we work to increase awareness and consideration among new-to-cruise guests. To make it happen, we also need to ensure we set our brands up for success organizationally. Accordingly, during the quarter, I completed the restructuring of our global executive leadership and company structure by removing a layer of management between the corporate and brand levels, I now have the leads of all 6 of our major brands representing over 90% of our capacity reporting to me. This is up from one brand and less than 1/3 of our capacity previously. This will facilitate more direct engagement between me and our brand leaders. To provide me with more bandwidth to do this, I also consolidated several corporate functions under fewer leaders, streamlining our organization. While this leaves me with the same number of direct reports overall, these changes make for a more nimble and accountable organizational structure better able to respond to market opportunities. And we are also positioned to work smarter, excluding sales and sales support. Our shore side staff count is down 18% from 2019. And the team is executing across the board at a high level. I recognize that we need to make sure we are doing our part to make Carnival Corporation an amazing place to work and grow each team member's career. And so we are driving initiatives across the board, ship and shore to meet our long-term goal of being travel and leisure's employer of choice, and it is really showing. The improvement we've seen in our internal metrics on employee satisfaction and culture improvement have been phenomenal. Turning from our most important assets, our best-in-class people to our hardware. We are actively managing our diverse portfolio of world-class brands which are #1 or #2 in each of the largest markets for cruise travel. Following our portfolio and fleet optimization efforts, our capacity growth has been concentrated in our highest returning brand. Carnival Cruise Line, AIDA and P&O Cruises U.K. These efforts have also been driven by a purposeful reduction in our overall capacity growth, which combined with our strong and accelerating demand outlook supports further yield improvement, and we still retain the excitement from 14 newly delivered ships, representing nearly 25% of our capacity. Just this month, we completed the transfer of Costa Venezia to our highly successful Carnival Cruise Line brand, launching Fun Italian Style with a spectacular naming ceremony featuring our very first ship godfather, comedic icon, Jay Leno. I couldn't think of a better personification of Carnival Cruise Line than Jay Leno with his unpretentious and gregarious personality which aligns perfectly with the brand's target segment. Keep it seamlessly with Carnival Cruise Lines brand ambassadors who help amplify Carnival's messaging and appeal such as its Chief Culinary Officer, Emeril Lagasse, Chief Phone Officer, Shaquille O'Neal; and the Mayor of Flavortown himself, Guy Fieri. So far, Fun Italian Style has generated 1.5 million earned media impressions. The instant success of Carnival's Fun Italian Style supports the entry of Venezia, the second cost to ship transferring over to Carnival Cruise Line next year. These transfers are part of our portfolio management strategy, which is contributing to Carnival Cruise Lines capacity, growing 22% more than pre-pause expectations and cost us capacity being reduced by 36% compared to pre-pause expectations. The added capacity to Carnival Cruise Line will not only generate outsized returns for the company, but rightsizing the Costa brand is also having the desired effect of supporting its revenue profile confirmed by recent booking and pricing trends. We remain committed to our strategy of owning a portfolio of world-class brands, many of which are truly dedicated to specific markets. And it's clear the strength of this portfolio is now shifting into high gear. In fact, with respect to our European brands, bookings taken in the second quarter for the European deployment for each of the third and fourth quarters, achieved double-digit percentage increases in both volume and price compared to 2019. This is also supported by our homeporting strategy that puts nearly 75% of our capacity where our brands guests live. We are also working to further leverage and monetize our industry-leading land-based assets in the Caribbean and Alaska. We are leaning into our strategic advantage in the Caribbean with the expansion of [indiscernible], consistently voted among the best private islands and the development of our largest Caribbean destination yet, Grand Bahama port. It's being designed to deliver wow factors tailored to Carnival Cruise Line guests to drive higher revenue yields and margins. It's also strategically located to deliver a wide array of lower fuel consumption itineraries, furthering our carbon reduction efforts.
Our Caribbean destinations already serve about 5.5 million of our brand's guests each year. And upon completion, Grand port will push that to 7.5 million annually. We also own cruising in Alaska with an unmatched strategic footprint across hotels, rail and motor coaches to deliver unique land sea packages of a lifetime as well as the most itineraries by far, featuring the iconic Glacier Bay. We plan to lean even more into marketing the benefits of all of these assets. Turning to our capital structure. As we indicated on our last call, we have now begun deleveraging our balance sheet and are already $1.4 billion off the peak. During the quarter, we used excess liquidity to opportunistically prepay over $1 billion of debt, while still retaining $7.3 billion of liquidity, which we expect to ratchet down as we rebuild our balance sheet over time. We remain disciplined in making capital allocation decisions and our lowest order book in decades provides a pathway for further deleveraging. We are clearly gaining momentum on an upward trajectory, positioning us well to deliver strong profitability and rebuild our financial fortress. We are already executing on our strategy with a demonstrated ability to grow revenue by taking up ticket prices even while maintaining record onboard spending levels, building occupancy and growing capacity. We are implementing a range of initiatives to capture incremental demand for cruise vacations and working hard to close the outrageous and are warranted 25% to 50% value gap to land-based offerings over time. We are well positioned to do so given our high satisfaction and low penetration levels. And we are working hard to mitigate 4 years of inflation, maintain our industry-leading unit costs, all while reinvesting in advertising and sales support to build future demand. We are focused on the durable revenue growth and margin improvement that will deliver on our SEA Change program, propel us on the path to delevering and investment-grade leverage metrics, and drive the continued shift of the enterprise value of our company from debt holders back to equity holders. I can't end without once again thanking our travel agent partners for their support and our best-in-class people ship and shore who deliver unforgettable happiness every day by providing extraordinary cruise vacations to our guests while honoring the integrity of every ocean we sail, place we visits and life we touch. With that, I'd like to turn the call over to David.
Thank you, Josh. Before I begin, please note all of my references to ticket prices, net per diems, net yields and adjusted cruise costs without fuel will be in constant currency unless otherwise stated. I'll start today with a summary of our 2023 second quarter results. Then I'll provide a recap of our cumulative advanced book position. Next, I'll give some color on our 2023 full year June guidance and finish up describing the impact of our SEA Change program on our financial position. As Josh indicated, in the second quarter, we outperformed our guidance. For the second quarter, our adjusted EBITDA was $681 million at the high end of our March guidance range. The improvement was driven by $108 million of favorability in revenue from higher ticket prices. Net per diems were up 7.5%, and 4.5 points higher than the midpoint of our March guidance range. In fact, second quarter revenues of $4.9 billion was a record and we achieved a significant milestone with net yields turning positive as compared to 2019. However, our revenue favorability was partially offset by a $13 million unfavorable net impact from higher fuel prices and currency, and $52 million of unfavorability in adjusted cruise costs without fuel due to the timing of expenses between the quarters as well as other factors that will impact our cost guidance for the full year. Turning to our cumulative advanced book position. For the remainder of 2023, our cumulative advanced book position is at higher prices when compared to strong 2019 pricing. Despite headwinds from the loss of St. Petersburg as a marquee destination due to the suspension of cruises to Russia and normalized for future cruise credits with a booked occupancy position that is near the high end of the historical range. With the strength in booking volumes above 2019 levels, we are in a great position with less inventory remaining to sell for 2023 as compared to 2019 to achieve our guidance despite the 5.7% capacity increase in the second half of the year. Next, I will give some color on our 2023 full year June guidance. Full year 2023 occupancy is expected to be 100% or higher as we continue to close the gap each quarter on occupancy levels as compared to 2019 which is at the higher end of the historical range. On the pricing front, we expect net per diems to be up 5.5% to 6.5% for the full year 2023 and compared to a strong 2019, which is 2.5 points higher than March guidance based on the acceleration of booking trends we saw during the second quarter. We increased our guidance for the second half of 2023 by over 2.5 points, substantially all of the second half improvement in net per diems is driven by passenger ticket revenue on both sides of the Atlantic. We do see a continuation of strong onboard revenue trends we have been experiencing, which were included in our previous guidance. Now turning to costs. Off the base of our industry-leading cost structure, adjusted cruise costs without fuel per available lower berth day or ALBD, for the full year 2023 versus 2019 are now expected to be up 10% to 11%. This is 1.5 points higher than our March guidance. The change was driven by 3 factors: first, increases in various incentive compensation programs reflecting the expected improvement in the company's current and long-term performance consistent with June guidance and the SEA Change program are worth 0.5 point; second, further investments in advertising were 0.2 point, which we believe will benefit 2024 by multiple times the investment; and third, a slower-than-expected ramp down in inflationary pressures than previously anticipated, particularly in the area of port costs, freight, crew travel due to air cost and crew compensation collectively worth 0.7 point. While we are disappointed by the slower ramp down in inflation than previously anticipated, our 2.5-point increase in net per diem guidance far outweighs our cost guidance increase, improving margins and the bottom line. There is no doubt inflation has been a significant factor driving costs higher in 2023 versus 2019. However, let's not forget, we are talking about 4 years of inflation and our teams have managed the situation well, mitigating much of the inflationary impact. In fact, crew costs per available lower berth day in our June guidance are up less than 2% versus 2019 despite significant increases in airfares. This is a testament to the ingenuity and creativity of our teams as well as the benefits of our scale around the globe. The details of depreciation and amortization, interest expense and fuel expense can be found in the earnings press release we issued earlier this morning in the section titled guidance, so I will not take the time to walk you through the numbers. However, I would like to point out that the increased confidence in our future drove us to use a portion of our liquidity to prepay $1.4 billion of variable rate debt mostly with 2023 and 2024 maturities, which combined with other factors, will reduce our interest expense for the year by over $80 million and leave us with approximately 80% of our debt having fixed interest rates protecting us from rising rates. Putting all of these factors together, we expect $4.1 billion to $4.25 billion of adjusted EBITDA for the full year 2023, which is above the high end of the previous guidance. We expect to reach another milestone in the third quarter 2023 as we return to profitability with adjusted EPS expected to be in the range of $0.70 to $0.77 per share. And now I will finish up describing the impact of our SEA Change program on our financial position. As I said last quarter, I feel great as I report that we are beyond the peak of our total debt. Total debt peaked at over $35 billion in the first quarter of 2023 when we drew on the export credit for P&O Cruises Arvia at the time of delivery. We believe with over $7 billion of liquidity, our improving EBITDA and our return to profitability in the second half of 2023, we are very well positioned to pay down debt maturities for the foreseeable future. With the debt prepayments announced in today's earnings release, we now expect our total debt at year-end to be below $33 billion. Now looking beyond 2023 using the SEA Change program targets as our guide. We expect cash flow from operations will average over $5 billion per year during the next 3 years, 2024 through 2026 and with optimized non-new build capital commitments and the lowest new build order book in decades, annual CapEx, net of the $3 billion of export credits will average less than $2 billion per year during the next 3 years. This will result in an average of over $3 billion in annual adjusted free cash flow to reduce debt, driving more than $8 billion in total debt reduction through 2026, inclusive of the $3 billion of export credit financing drawn during the period and over $10 billion of debt reduction from the $35 billion peak in first quarter 2023. At the end of 2026, with a significantly lower level of debt and a 50% increase in adjusted EBITDA per ALBD, we are expecting to approach investment-grade leverage metrics. Our SEA Change program from debt reduction alone will transfer over $10 billion of enterprise value from debt holders to shareholders, which represents approximately $8 per share. On top of that, it will also deliver improved operating metrics and an adjusted ROIC of 12%, representing the highest level of ROIC in almost 2 decades. Before I turn the call over to the operator, let me remind you to visit our website for our second quarter earnings press release and presentation. Now operator, let's open the call for questions.
[Operator Instructions] Our first question comes from Robin Farley with UBS.
[indiscernible].
Robin, can you hear me?
Yes.
It's a little hard to hear your question. You're coming in and out. Sorry.
Is this -- hopefully this is a little bit better?
Yes. Thanks.
Great. So I wanted to ask a question about this 3-year guidance. But first, just a quick clarification on the comments about 2024 bookings. In the release you mentioned, it's ahead of volume and you say strong prices. Is it fair to assume that strong means that '24 price on the books is up above '23 price? I just want to clarify that strong means up year-over-year, just that briefly. And then on your 3-year targets, just thinking about what is kind of implied yield growth to get there. It seems like -- and I haven't been able to do the full math, just given the time constraints, but it looks like at least 7 points of yield growth between '23 and '26 would just come from the occupancy gap closing, maybe even kind of 7 to 10 points based on the comments today. And can you sort of walk us through what you're expecting in terms of price increase or per diem increase in that period kind of implied in your EBITDA guidance for '26.
Got it. So with respect to 2024, the book position at record levels at strong price. What we're going to do is we're going to give you some more color on that when we get into our next quarter, and we'll talk more in depth about 2024 overall in the first half. But suffice it to say, the brands are doing a very good job at getting ahead and doing it at pricing that we're happy with and still a long way to go for 2024 and a lot to play for. So we're very pleased with the progress that we've been making while still ratcheting down on the occupancy, as we've talked about over the course of every quarter this year. So the trajectory is very, very good. With respect to the 3-year targets, it's probably on the low end of what you're talking about for occupancy, and we expect to make up -- it's probably sub-7 points at this point, but pretty close around there. We're probably going to make -- probably -- I expect to make all of that up in 2024 as we get back to normalized operations. On top of that, we're looking at low to mid-single digits with respect to price increases as we get from '24, '25 and '26. And that type of profile we've got experience with as we look back over the period from 2015 to 2019, so we feel real good about our ability to be able to make those types of step over time.
Our next question comes from Steve Wieczynski with Stifel.
Congrats on the solid quarter and the change in the full year outlook. So Josh, I want to go back to actually the last question there in the SEA Change program. So you talked about that low to mid-single-digit kind of bump in yields. But can you also maybe help us think about how you're thinking on the -- from a cost perspective, too. So are we kind of thinking about a low to mid-single digit kind of bump in yields and then maybe like a 1- to 2-point spread between net yield growth in NCC. Is that kind of the right way to think about this?
I don't know if I'm talking to you anymore, Steve. But putting that aside, nice to hear from you. We -- basically, we'd expect to be getting back to the norm, which is low single digit cost increases. So we expect a nice differential between what we'd be expecting on the yield side and what we'd be expecting on the cost side. There is -- as we think about the ins and outs, there's good news with the occupancy, but it does come with a little bit of bad news, which is that type of step-up in occupancy will have a bit of a cost drag, which we're very happy to take. We're still going to be thinking through our advertising planning as it gets to '24 and beyond. And as you've heard us talk about before, that's been very successful. And so we'll come to more concrete plans as we get into the fall for the following year. And so there are some particular things as we think about our trajectory. But overall, you can expect a -- I would expect a difference between those growth rates.
Okay. And then since you already don't like me, I'm going to stay on costs a little bit. But you guys have now -- you've raised your cost guidance 2 quarters in a row. And look, I understand the stock comp stuff, I understand the inflationary pressures. But first of all, I just want to make sure -- I hope that you guys now have a good handle on costs for the remainder of the year and more so around the advertising investments that you mentioned in your prepared remarks and how you expect those to pay off over time. I guess I'm just a little bit confused about what we're seeing today from a demand perspective versus the fact that you need to market more aggressively. So any color there would be helpful.
Sure. So with respect to the comments about looking at the fourth quarter advertising spend and maybe taking it up for '24, there's 2 things. There's getting the occupancy and getting it at a price that we want to get it at. And we do think that the advertising spend and the way we've been doing it has been effective, not just on getting the volume but getting it to a place where we can take the price up to where we want to get it to. And so we will continue to look at that to see where we can get to, to be honest with you.
So I wouldn't look at advertising as a one and done. We've somehow gotten back to something. We want to maximize, we want to optimize. And so we're going to keep doing -- sorry, there's some sirens in the background here. So we'll keep thinking that through and ratcheting up or ratcheting back depending on its effectiveness.
Our next question comes from James Hardiman with Citi.
Hopefully, everything is going okay over there.
I'm in New York. That's all you need to know, right?
That's all I need to know. Exactly. Just a clarification on the 3-year target math. I get to about $6.7 billion in adjusted EBITDA for 2026. And then -- is that the right math? And then also, as we think about getting back to investment grade, 3.5x leverage seems to be the number that would presumably get you there. Are those 2 generally in line with how you're thinking about EBITDA and leverage metrics for '26?
Yes, you got it right on the head.
Got it. Really helpful. And then you gave us a bunch of good math in terms of how you think about paying down debt, both this year and through 2026. Maybe walk us through where you see the cash balance going? I think you said you expect total debt to finish the year -- this year at $33 billion. What's the net debt number? Or what's the cash balance that you expect? And then similar question for 2026. I think you called out $8 billion total debt reduction. What's that look like on a net debt basis?
Yes. So James, the cash balance should start coming down over time. You're trying to get into a level of precision that goes beyond our forecasting. Remember, it's not just debt and cash. Remember, there's customer deposits, other balance sheet items. But putting it all together, our liquidity at the end of the second quarter was $7.3 billion, and we do expect to see that decline over time. Pre-pause, we were targeting $2 billion to $2.5 billion. And as we rebuild our financial fortress, we will bring our level of liquidity down to that level. Keeping in mind that most of the time, a good portion of our liquidity will wind up to be the undrawn revolver. So even if we have $4 billion of liquidity, it may only be $2 billion of cash or something like that. So we do see the cash balance coming down, but the level of precision by year by quarter is very difficult to project. But your math in all the numbers are -- is good and we're continued and confident that we can work through and achieve those.
One more point of clarification. So in the queues, there's a mention of $1.7 billion of reserve funds from customer deposits and other assets. What's the status of that, the opportunity to sort of bring that onto the cash balance?
Yes, we are pretty confident that, that will be ratcheting down nicely, and we should get the majority of that back in -- off of that line item and into our cash, the majority by the end of next year and the rest of it in the following year. So we're making good progress.
Our next question comes from Fred Wightman with Wolfe Research.
Do the '26 targets assume that you return to China? And if so, what are you sort of baking in there?
No, there is no assumption in these numbers that we return to China. As you know, Costa was our brand that was our China platform and through our efforts at portfolio management, we were able to take the tonnage and move them to Carnival Cruise Line, which has gone fantastic. As a matter of fact, Carnival Fun Italian Style met our expectations and frankly exceeded them with respect to how it was embraced by the Carnival guests so far. And so frankly speaking, our assets are in a good place, and they're yielding more than they would had we stayed the course, I believe. So we're very excited about China opening up for international travel with cruise companies, and we think that's a great thing for the industry. But the fact is we're going to be probably on the sidelines of that for a few years because our assets are right where we want them to be. And we can always relook at that. Obviously, our assets are mobile, and we'll do that, but we feel real good.
Makes sense. And then last quarter, you guys talked about exiting the quarter, some improving performance out of Europe. It sounds like based on everything that you've said today that, that trend has continued and maybe even accelerated. But can you just frame sort of where you see the European cruise recovery versus what you've seen in North America and how to think about that in the back half?
Yes. So you heard me in my prepared remarks, and I was talking about the fact that over this record second quarter that we had in bookings, Europe was right there alongside North America. And the really encouraging thing about that in our European brands profile this last quarter. On the bookings side, double digits in both volume and price versus 2019, specifically for the European itineraries, which, by the way, for our European brands is the vast majority of their deployments. You're talking more or less in the second half of the year. It's probably about 90%, give or take.
And so our strategy of having our ships deployed with really strong brands, the strongest we've got in Europe, the #1 brand in Germany, the #1 brand in the U.K., #1 or 2 in Italy and France and Spain, doing that and catering to those markets specifically is really starting to bear fruit. And so the trajectory is fantastic. And when you think about the improvement that our European brands made to think about the first quarter versus the second quarter, how are they comparing against '19 in the first quarter? And how are they comparing against '19 in the second quarter with respect to their yields? We saw a 10-point improvement in the comparison for our European brands. Our North American brands improved too, but much less than 10%. And that's not a bad thing for our North American brand. They just have been improving like wildfire over the last several quarters. And as we said, the European brands, they're catching up. They're catching up, and it's great to see that they've really started to pull everything forward.
Our next question comes from Jaime Katz with Morningstar.
I want to talk a little bit about the booking curve. I know you guys are articulating that it's extending and there's always this contemplation on if there is some optimal pricing being left on the table with the extension of the booking curve. So can you talk about how you're thinking of managing that over the next few quarters?
It's really a brand-by-brand question, right? Because there are definite dynamics for each brand about, hey, where are they in the booking curve? What does their capacity increase look like over the next 18 months? What source markets are they in? What's the state of the source market? So it's really hard to give you a holistic answer other than to say, holistically, all of our brands, their goal is obviously what's going to generate the most revenue when the ship leaves, right? That's it. And as we've been not only getting back to a normalized booking pattern, we've also been putting things out for sale even more to give our guests actually what they're demanding. So I'd say the best answer I can give you is that each is very, very diligent in thinking about how to optimize for the variables that they have got. It's been very encouraging to see how far we can push it out. I would say there is a point where we'll stop. It's just not worth it to your statement about leaving it on the table. It's -- that's part of the equation. So it might not be a satisfactory answer for you, but the -- it's because it's complicated and there are a lot of factors to consider.
Of course. And then is there anything you'd like to add or elaborate on reorg and maybe where you think there were some opportunities to improve the structure of the business and how we might see that sort of come to play going forward?
Yes, sure. I think that there are purposes of how you organize the corporation with operating units and ideally with an operating unit, you're doing it because you're going to get scale within that operating unit. And if you're not getting the appropriate level of scale, then you're taking away from the nimbleness and agility and the ability for brands to move quickly to take advantage of opportunities. And so we -- I looked around and basically by being able to deconsolidate a couple of operating units and give them more nimbleness and flexibility and have a direct line of reporting directly into me, it speeds up the whole process, and it lets us act much quicker and much more, I would say, purposefully for the brand's needs. At the same time, we did -- it's not just about giving the brands autonomy and nimbleness. We also pulled a few things up to the corporate level to support brands more holistically. So effectively, we -- in deconsolidating, we've benefited both scale on the corporate side and nimbleness for particular brands. And as a result, as you heard in my notes, I've now got -- it's actually 93% of the capacity that effectively reports directly to me through 6 of our presidents who lead that specific brand. And finally, by having our 7% of capacities, which are great brands, but small, they can piggyback on a bigger brand. and it works very, very well. Q&R piggybacks on P&O Cruises in the U.K., Seabourn piggybacks on Holland America and P&O Australia can now do the same with Carnival Cruise Line, which are both full year players in Australia.
Our next question comes from Matthew Boss with JPMorgan.
Congrats on a nice quarter. So maybe if we dig a little deeper on the SEA Change plan, could you speak to the annual EBITDA glide path embedded in the 3-year plan? Or maybe specifically, help us to break down the 50% increase target as we think about the year-over-year opportunity in '24? Maybe just given the visibility that you have today, versus the level of improvement that you're embedding in the outer years within that 3-year plan?
Well, it's a tough question to answer since we're not giving you '24 guidance yet. So I'd say if we think about pluses and minuses for '24 and maybe we can start there. There's a lot of wind at our backs in 2024. The occupancy is going to be a big jump, as I talked about on one of the earlier calls, which is going to be a nice pickup in yields on top of what we would expect to be that low to mid-single digit price improvement. The booking curve is in good shape. We're in the best book position in our history, all those commercial activities that I've talked about over the last several quarters are in full swing. The capacity that we have, we're about 5.5% capacity growth in 2024 versus 2023 and 2/3 of that goes to Carnival Cruise Line, which is -- it's our highest returning brand, which we're very excited about.
So we feel good about the trajectory and what we should expect some nice pickup in 2024. Now 2024 is not going to be without challenges. The Ukraine, we don't forecast that having a reversal such that we can get back to St. Petersburg and those really high yielding types of trades. We're not planning on China, as you've already heard me say, question mark, hopefully, energy security concerns won't come back. But I don't have a crystal ball there. We do have more dry docks in 2024. So there are pluses and minuses, frankly. There always are. We do feel good that we expect '24 to be a nice step-up versus where we are now because of the trajectory in getting back to normal and full and then pulling ahead. David, I'm not sure if there's anything you'd like to add with recent...
Yes. The only thing I'll add to what you indicated, Josh, is the fact that going into the call, if you looked at consensus, it was similar to our annual step-up towards that $6.7 billion of EBITDA that James had calculated. So just take a look at that, and you can see, but that was going into the call.
Great. And then maybe just as a follow-up, Josh, as we think about historical profitability, and now your new delayered more simplified operating structure that you've laid out. I guess maybe as you think about this 3-year plan, particularly in the back end of that plan, what would you say? Or is there a way to rank maybe the areas of potential conservatism that are not in the plan?
Rank, I wouldn't even begin to try. Look, we set out our -- we set out our targets about what we hope to meet and frankly, as you'd expect the CEO to say, I will strive to exceed showing a 50% growth in unit EBITDA which does not take into account capacity benefit in the EBITDA number. Getting to the highest points in ROIC and EBITDA in what will be just about 20 years, I think that that's a good trajectory. And we'll do our best, like I said, to go well beyond. I would expect -- I expect our margins to get back in line with historical norms. So that's certainly part of it. I'll let you take another crack at asking you in a different way, but that's probably the best I'll give it to you.
Our next question comes from Patrick Scholes with Truist Securities.
Shifting gears a bit here, looking at your balance sheet. Last quarter, you had about 1 -- if I'm wrong, correct me, $1.7 billion of reserve funds from credit card processors. Where does that stand right now? And how should we think about that balance going forward? Is that still accumulating? And when would realistically, you might think that you'll be able to release that cash and I assume that would probably be used for debt reduction at that time?
Yes. Thanks, Patrick. Somebody asked it earlier on the call, they were probably referring to it in a little bit of a different way. But we would expect the vast majority of that to be released back to us effectively by the end of 2024 with the rest by the end of 2025. So that's the trajectory that we expect.
And to your point, yes, that's increased liquidity and cash, and we'd be using that to continue our process of deleveraging.
Okay. And what is that balance today, specifically the $1.7 billion, which was at the end of 1Q, where are you now?
At the end of Q2, you'll see when the queue is filed, it's $2.2 billion. It has since customer deposits went up, the reserve funds went up correspondingly.
Our next question comes from Dan Politzer with Wells Fargo.
For the 3-year plan, I wanted to hit on the 12% ROIC target. Can you talk about -- are there strategic things that maybe are not obvious as we think about your current business that bridge you to get there? Are there changes -- and what I mean by this, are there changes in mix in terms of brands or further reallocating capacity to higher ROIC brands? And along with that, in terms of your cost of capital, it's obviously now higher. How do you think about the threshold for investments now? And maybe what are the things that you're focusing on that are going to help bridge us to the improved 2024 costs that you've been referencing?
Okay. Well, so from a strategic perspective and a portfolio of brands, it assumes -- and we're marching forward with the same brands that are in our current portfolio. We have taken action to reallocate our assets within our portfolio on the makeup such that -- I don't have it in front of me, but a Carnival Cruise Line over this period will be about 1/3 of our capacity. And in the timeline that I was talking about, if you look back in our pre-pause last 4-year period, they were closer to what was it, 26%, 27%, Beth? Yes, about -- yes, about 26% -- 27%. Pardon me?
25%.
25%. So you're looking at our highest return brand being 1/3 of our business, up from 1/4, which is certainly part of our strategy. At the same time, our focus is generating incremental and accelerated demand for all of our brands. And I think you see that in the booking numbers that we've been talking about, the pace at which we've really been coming back every single quarter, and we expect performance to continue. So from a strategic perspective, it's letting the brands focus on their commercial operations, ensure they got the capability and the capacity to do everything that we expect and build their ships with folks who are very willing to pay for the amazing experiences that they give. And I think that's starting to really shine through. We do have some wind in our backs as well with respect to our land-based portfolio because Grand port is not currently in our portfolio, even though we've got an amazing footprint in an unparalleled footprint in the Caribbean, that alone will take our annual number of guests that we carry from about 5.5 million this year to 7.5 million, and we expect that will be a very nice pickup in our business.
Got it. And then just turning to the pricing gap. You and your peers have talked about relative to land-based vacations. To the extent that there is some uncertainty, certainly on the consumer side still, and these prices have elevated considerably on the land-based side. How do you think about your cushion here? And to the extent that we were to see a slowdown in lodging in RevPAR, how do you think about that as impacting your pricing stability or resilience?
Sure. Well, obviously, based on what we've been telling you today, we don't see a slowdown, which is very good, especially because one of the benefits we have is we are very well booked for the next 12 months, and those bookings are sticky. So that is incredibly helpful to our outlook.
Now what I call -- I actually call it outrageous and ridiculous value gap to land, and that is a double-edged sword in our favor because if there is a slowdown and if hotels take their rates down a bit and airlines take their rates down a bit and resource, whatever that might be, we are still outsized in our value. And as a result, if there is a recession, we stick out. We stick out for the right reasons because of how far your holiday dollar can go. And on top of that, because of our home porting strategy with about 75% of our ships positioned where our guests don't have to get on a flagship they chose not to. That sets us up very, very well for people who are trying to figure out how to stretch their vacation dollar. So to be honest with you, our focus on base loading for 2024 and pulling ahead with all of those factors at our back, we feel quite good. And we probably said this in other calls. Every recession is different. This one happens to be one where there's record unemployment, people still wanting to purchase experiences, particularly travel, which bodes quite well for us. We've got time for one more question. Operator, we've got time for one more question or I could just end the call. So I think we've lost our operator. So I will do that. Thank you, everybody, for joining us today. And for those that we'll see tomorrow, I look forward to seeing you for the Investor Day. Thank you very much.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.