Carnival Corp Ltd. Q4 FY2022 Earnings Call

Good morning. This is Josh Weinstein. Welcome to our Fourth Quarter 2022 Business Update Conference 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 must refer you to the cautionary statement in today’s press release. Our business continues to accelerate on an upward trajectory as we rapidly close the gap to 2019. In fact, we are already exceeding 2019 revenue per diem, and we’re gaining momentum on our return to strong profitability. Taking a step back, this year, we’ve completed a monumental 18-month journey, and with our scale, what we believe to be the world’s largest start-up, returning 90 ships to service, re-boarding over 100,000 team members, and restarting our unmatched portfolio of 8 private islands and port destinations, plus our unrivaled land-based footprint in Alaska and the Yukon, all while welcoming back nearly 9 million guests. For that, I sincerely thank our global teams around the world for the ingenuity and sheer determination it took to see that through to completion. Throughout 2022, we have aggressively built occupancy from a 50-point gap in the first quarter to less than 20 points in the fourth quarter. We achieved this on growing capacity as we returned another 35% of our fleet to service in 2022, reaching 99% of our 2019 capacity levels during the fourth quarter. And on top of this, our constant dollar revenue per passenger cruise day was 2% higher than 2019’s record levels for the full year and 4% higher in the fourth quarter, overcoming the dilutive effect of future cruise credits. Without this impact, each would have been two points higher, and in the process we sustained record-breaking onboard revenue per diem significantly higher than 2019. We’re also not losing sight of our cost base as we’ve worked through our restart and continue to absorb and mitigate the impacts of the high inflationary environment we’ve all been living in. We’ve reduced the increase in adjusted cruise costs, excluding fuel per ALBD in constant currency from up 25% in Q1 to up 11% in Q4. We’ve also significantly ramped up our advertising and sales support to drive future demand. Thanks to this, and the hard work of our amazing trade partners, our percentage of first-time guests has continued to sequentially improve, closing the gap to 2019 levels. And we’ve been working smarter with our shoreside teams’ headcount already having been significantly reduced from 2019 levels for some time now. We delivered stunning new flagships for five of our brands, including Carnival Celebration, AIDAcosma, Costa Toscana, and Discovery Princess, as well as our first luxury expedition ship, the finest in the world, Seabourn Venture. All of these ships were purpose-built to generate higher returns. We broke ground on a new exclusive destination, Grand Bahama port, which will be a game changer for Carnival Cruise Line, while at the same benefiting more than ever from our existing private islands and unique port destinations, which captured 6 million visits from our guests, all while working to minimize our environmental impact, with a 7% reduction in carbon intensity, a 30% reduction in food waste, and 290 million fewer single-use items compared to our baseline. Most importantly, we are back to doing what we do best, delivering millions of unforgettable and much-needed vacation experiences to our guests. And we are truly a global company with 45% of those guests who are outside of North America in 2019. In fact, we practically carried more people outside the U.S. than any of our peers carried in total. We believe that having the number one or two brands in each of the largest cruise markets such as North America, the UK, Germany, Australia, Italy, France, and Spain, is the foundation of our portfolio strategy and allows us to tailor our experiences and offerings to those specific source markets, enabling us to generate stronger brand loyalty and gain greater penetration and profit. In this current environment though, there are two factors that have had an outsized impact on our results: an uneven reopening of cruise travel around the world in the aftermath of COVID; and the more direct impact the war in Ukraine has had on European countries. While all of our brands are on an upward trajectory, the pace of the recovery has trailed for those brands most heavily exposed to these factors. In 2019, one-third of our non-North American guests, 2 million people came from Australia, Asia, and the Baltics. The vast majority of these guests were sourced through Costa and Princess, representing 40% of Costa’s guests and 25% of Princess’ guests. At this point in time, Australia’s reopening is where North America was a year ago, and Japan is closer to two years behind. The lagging reopening of these markets has triggered multiple changes in deployment and guest sourcing approaches, as we anticipate the impacts will continue to be felt, particularly for the first half of 2023. Of course, China also has yet to reopen. Given Costa’s significant presence in Asia with five ships planned to operate there year round pre-pause, we’ve taken actions to right-size the Costa brand with the removal of another two smaller, less efficient ships from the Costa fleet. This is in addition to the previously announced three ships transferring to our highly successful Carnival Cruise Line brand. This positions Costa well with a competitive fleet focused on its core markets in continental Europe. We have already been encouraged by the recent strength in booking volumes for the Costa brand. In fact, last month Costa’s booking volumes in these core markets were above 2019 levels for the fourth quarter of 2022 and the first quarter of 2023 as they navigate a closer-in booking curve. The war in Ukraine remains concerning for us all, and especially those in the affected regions. Given the closer proximity for both Costa and our German brand, AIDA, the war and associated impacts have weighed heavily on consumer confidence in those regions, resulting in greater uncertainty and closer-in booking patterns. To help manage, we’ve made strategic deployment decisions, leaning into more itineraries that homeport where the guests originate, as well as shorter duration cruises helping us to reduce the friction of air travel, lower the overall cost, and facilitate a closer-in booking environment. We believe this positions us well to attract more new-to-cruise guests and make us even more of a value proposition versus land-based alternatives by bringing our ships closer to where our guests live. We have furthered our fleet optimization efforts again this quarter, bringing the cumulative number of ship dispositions since the pause to 26 when coupled with the delivery of larger, more efficient ships including the successful introduction of Carnival Celebration last month, and the addition of Arvia for P&O Cruises just last week. This will result in nearly a quarter of our fleet consisting of new capacity. This fleet transformation results in an 8 percentage-point increase in balcony cabins, along with a tremendous increase in available real estate onboard to deliver even more differentiated onboard experiences and generate associated revenues contributing to durable revenue growth going forward. We will also benefit from lower ship-level unit costs that help to mitigate inflation with 9 percentage points higher fuel efficiency and 6 percentage points greater efficiency in remaining operating costs. Our revenue generation will also benefit from the launch of Carnival Venezia’s Fun Italian Style in New York. The program is off to a great start, having been met with strong demand and high prices, building confidence in prospects for this creative initiative. Overall, in 2023, we’ll have just 3% capacity growth compared to 2019, while still retaining the excitement and demand from 12 fantastic ships delivered in 2020. Thanks to our portfolio optimization efforts, our capacity growth is weighted toward three of the highest returning brands: Carnival Cruise Line, AIDA, and P&O Cruises UK. There is no doubt 30-year assets will hold dividends along our path to strong profitability as we build demand and generate higher revenue yields over time. Having said that, brand by brand, there is high-capacity growth that we are managing in 2023. In this transition year, P&O Cruises is absorbing 40% more capacity than 2019, thanks to Iona and Arvia. AIDA has 20% more capacity at the start of the year. Costa will have significantly more capacity in its core markets versus 2019 as the full benefits of our fleet optimization program won’t be completely felt until 2024. And Princess will source more heavily than ever before from North America, given its source market disruptions. As I mentioned on the previous call, to help support this growth and drive overall revenue generation, I’ve actively been working with each brand on their strategies and roadmaps. As a result, I have authorized our brands to take a significant step up in advertising activities, including a nearly 20% increase in our investment this past quarter over 2019 to elevate awareness and consideration and to drive demand for both the near and the longer term. This should be particularly impactful with those new to cruise, where we draw about one-third of our guests, as we position to take share from land-based alternatives. We are capitalizing on the 25% to 50% value gap to land-based alternatives that frankly should not exist with new marketing campaigns to communicate our significant value advantage to land-based alternatives, including newly launched digital creatives from several brands. We plan to continue these increased investments in advertising as we head into next year to promote a strong wave season where we capture disproportionately higher bookings for the year, particularly our important summer season. Having been in pause status for the better part of two years, we are also rebuilding top-of-funnel demand to the army of advocates coming off our ships every day, recommending our cruise vacations, with a renewed focus on our trade relationships and a growing sales force. On the revenue management side, we are ensuring that each brand is utilizing pricing philosophies to maximize revenue from launch to sailing and sharing best practices across brands. Our teams are focused on higher value add from bundle packages supported by a market-to-fill approach and consistently capturing incremental revenue streams from many initiatives such as more robust cabin upgrade programs. While building back demand and enhancing our yield management tools and strategies, we are optimizing the combination of occupancy, ticket, and onboard revenue to deliver revenue to the bottom line in the near-term while maintaining price integrity for the long-term. Given the close-in nature of the booking curve from the disruption caused by the Omicron variant earlier this year, and the friction from protocols in effect through the bulk of the year, most brands have leaned heavily into opaque distribution channels, like our friends and family rates, which allow us to achieve higher occupancy and resultant onboard revenue while still preserving pricing power over time as they are rates that are not offered in the general marketplace. These channels are beneficial in reaching higher occupancy levels and higher onboard revenues, particularly for our North American brands. Booking volumes have already strengthened following the relaxation in protocols. Cancellation trends are improving globally, and we have seen a measurable lengthening in the booking curve. This applies across the board. Since the start of the year, our EA brands have pushed the booking curve out and narrowed the gap by more than a month, while our North American brands have pushed the curve out and narrowed that gap by two months, now nearing 2019 lead times. We enjoyed a strong response to our recent Black Friday and Cyber Monday activities, and the momentum has continued into December, building our base occupancy and marking an early start to a strong wave season ahead. It is important to recognize much of the first half of 2023 was booked prior to the relaxation in protocols. And in actuality, many of these first half cruises are still implementing certain more restricted protocols given the itinerary profiles consist of lengthier exotic deployment, including our long-awaited return to world cruises and long winter deployments for our European brands operating from colder climates. And much of this relies heavily on long-haul flights, which are not conducive to a closer-in booking environment. Nonetheless, we expect our first quarter occupancy gap to 2019 to be reduced even further and on higher net per diems, on our way to historical occupancies in the summer. This bodes well for 2023 overall, as we expect more markets to open for cruise travel, protocols to continue to relax, our closer to home itineraries play out, and our brands continue to hone all aspects of their revenue-generating activities. And as we continue to invest to build demand, we are positioned to pull back on promotions and opaque channels to drive meaningful ticket price improvement over time. On a complementary basis, our industry-leading operating costs and fuel consumption for ALBD set us up to effectively deliver more of this revenue to the bottom line. Normalizing for 2019 fuel price and currency changes, which provides a better sense of the strength of the underlying fundamentals of the business and our progress, we expect adjusted EBITDA per ALBD to reach 50% of 2019 levels in the first quarter of 2023 with sequential quarterly improvement as we progress through 2023 that should rival 2019 levels by the end of the year. Turning to capital expenditures, we actively managed down our spend by over $500 million during 2022, and we’ve taken a hard look at 2023 and beyond and reshaped investment spending by $300 million annually for a cumulative reduction of $1.7 billion. We have reprioritized project lists and hurdle rates to reflect the current environment while absolutely maintaining our commitments to excellence in compliance, protecting the environment, and the safety and well-being of our guests, team members, and communities we serve. Going forward, we are committed to using our expected cash flow strength to repair the balance sheet over time and will be disciplined and rigorous in making new build decisions accordingly. We have just four ships on order through 2025, plus our second incredible Seabourn luxury expedition ship to be delivered in 2023. This is our lowest order book in decades. We don’t expect any new ships in 2026 and anticipate just one or two new builds each year for several years thereafter. Turning back to our operating performance, we are effectively addressing near-term challenges in the post-pause transition with higher first quarter net per diems expected and have been reshaping our portfolio to drive revenue growth as we return to historically high occupancy levels and delivering measurable pricing improvements over time. We are fast-tracking our momentum by investing in marketing and sales support to effectively communicate the amazing vacation experiences we deliver day in and day out, offering an unparalleled level of convenience and personalized service and at way too good of a relative value to land-based alternatives at every price point from mass contemporary to ultra-luxury. Overall, we remain focused on driving revenue growth that hits the bottom line and accelerating our return to strong profitability. And over time, this revenue generation, our industry-leading cost base, and our more focused capital expenditure profile will support significant free cash flow and propel us on the path to deleveraging investment-grade credit ratings and higher ROIC. This has been a truly remarkable year, and we have come a long way in an incredibly short amount of time. These efforts highlight what we’ve always known: our people are our greatest asset, and now they are armed with an even greater skill set built up over the last few years: creativity, agility, and perseverance that will help push us forward. We’re looking forward to 2023 and are positioning for our first strong wave season in four years, enabling us to deliver a strong summer period where we generate the bulk of our operating profit for the year. With that, I’d like to turn the call over to David.

Thank you, Josh. I’ll start today with a recap of our cumulative book position and our financial position. Then I’ll provide some color on 2023. Turning to our cumulative book position. Marking an early start to wave season, we ended the year with multiple brands breaking records on very strong Black Friday and Cyber Monday booking volume. Our full year 2023 cumulative advanced book position is at higher prices in constant currency normalized for FCCs when compared to strong 2019 pricing and is higher than the historical average book position. The second, third, and fourth quarters all have a book position that are above the historical average, while the first quarter 2023 book position was impacted by heightened protocols during its prime booking period, which have since been responsibly relaxed. As a result of the relaxation of the protocols, booking volumes for the first quarter 2023 along with all future sailings have increased. Therefore, we expect to continue reducing our occupancy gap in the first quarter 2023 to 2019 by nearly 5 percentage points from the fourth quarter 2022. The strong cumulative book position has resulted in total customer deposits hitting a fourth quarter record of $5.1 billion as of November 30, 2022, surpassing the previous record of $4.9 billion as of November 30, 2019. Next, let’s talk about our financial position. During 2022, we continued to take refinancing risk off the table by addressing our 2023 debt maturities and getting ahead of our 2024 maturities. As a result of this, we ended the fourth quarter of 2022 with $8.6 billion of liquidity. Looking forward, we expect to turn free cash flow positive in the back half of 2023 and continue to be free cash flow positive in 2024 and beyond. We anticipate utilizing this free cash flow to delever our balance sheet on our path back to an investment-grade credit rating. Now, I’ll finish up with some color on 2023. For the first quarter 2023, we expect capacity growth to be 3.7%, when compared to the first quarter 2019 and 3.3% for the full year 2023 as compared to the full year 2019. During 2023, we expect to continue to close the gap on occupancy to 2019 levels. Occupancy for the first quarter 2023 is expected to be 90% or slightly higher, just a 14 percentage-point gap or better. As I said before, this would be nearly a 5 percentage-point improvement from the fourth quarter 2022 gap, but that is not enough. We are working hard and expect to close the gap to 2019 with occupancy returning to historical levels in the summer of 2023. On the pricing front, for the first quarter 2023, we expect net per diems to be up 5.5% to 6.5% in constant currency, and 3% to 4% in current dollars as compared to the first quarter 2019, a great accomplishment as we start the New Year. However, net per diems for first quarter 2023 are expected to benefit from brand mix when compared with the first quarter 2019. During 2023, while our European brands expect onboard and other revenue per diems to be up significantly versus 2019 as they were in 2022 and as has been the case with our North American brands, absolute onboard spending on our European brands is less than that on our North American brands. Our European brand guests tend to drink a little more but gamble a lot less. As the European brands catch up on occupancy with our North American brands during the second and third quarters and fill their ships, they will make up a larger percentage of the total changing the per passenger average. And with their historically lower onboard revenue per diems, we will no longer benefit from the brand mix. Also for 2023, we do anticipate returning to non-GAAP financial measures to report revenue performance and use net per diems as opposed to revenue per passenger cruise day we used in 2022. For 2023, we once again expect the onboard and other revenue per diems to be up significantly versus 2019, helping to drive the net per diems up. However, as I indicated in the past, as we change the bundled package offerings, we reevaluate the revenue accounting allocations. As a result, in 2023, more of the revenue will be left in ticket and less allocated to onboard, impacting the onboard and other revenue per diem comparisons to both 2022 and 2019. Just another reason to add to the list of reasons why the best way to judge our revenue performance is by reference to our total cruise revenue metrics, such as net per diems. Now, turning to cost. Off the base of our industry-leading cost structure, adjusted cruise costs without fuel per ALBD for the full-year 2023 versus 2019 are expected to be up 5% to 6% in current dollars and 7.5% to 8.5% in constant currency. For the first quarter 2023, the ranges are up one point less driven by lower dry dock costs per ALBD versus first quarter 2019, but the first quarter 2023 does include an over 30% increase in advertising to further accelerate demand. There are three main drivers of the cost increase. First, our forecast is for an average mid-teen level of inflation across all our cost categories globally. Second, our decision to further invest in advertising to drive demand and pricing in 2023 and beyond is expected to add 1 to 2 percentage points to the cost per ALBD. And third, deployment optimization and other small investments are likely to add 1 percentage point. Significantly mitigating these increases are our fleet optimization program that is expected to drive a 6 percentage point improvement in ship operating costs per ALBD, that is worth 4.5 points of adjusted cruise costs without fuel per ALBD, and the creativity, resourcefulness, and hard work by our global teams producing sourcing and productivity savings of approximately 4 percentage points, a great accomplishment. I would like to say thank you to all the team members who contributed to this effort. The details of depreciation and amortization, interest expense, and fuel expense can be found in the business update press release we issued earlier this morning in the section titled Selected Forecast Information. So, I will not walk you through all the numbers. However, for those of you modeling our fuel expense, please note that we expect MGO to represent about 40% of fuel consumption for 2023, however, that percentage may be slightly higher during the early part of the year. While we’re on the subject of fuel consumption, I would like to recognize everyone on our global team who contributed to the expected 15% reduction in both fuel consumption per ALBD and carbon emissions per ALBD for the full year 2023, both as compared to 2019. We are working aggressively to drive down our carbon footprint, fuel consumption, and costs through technology upgrades being rolled out like the Air Lubrication Systems mentioned in this morning’s business update along with investing in port and destination projects, and even more focused on itinerary optimization across our portfolio of brands while realizing the benefits of our fleet optimization efforts, so that everyone can fully understand the underlying strength of our business. I did want to point out that for 2023 versus 2019 at current fuel prices and FX rates, we did expect a negative impact from fuel price, fuel mix, and currency of approximately $150 million for the first quarter and an impact that is multiple times that for the full year, including a full year currency impact of over $70 million. Putting all these factors together, we expect $250 million to $350 million of adjusted EBITDA for the first quarter 2023 and sequential improvement compared to 2019 in each quarter of 2023 as we continue to close the gap. However, given the significance of the wave season ahead of us, we will be in a much better position to provide full year guidance for net per diems, occupancy, and EBITDA early next year. We plan on providing that guidance during our first quarter business update in March.

Our first question is from Steve Wieczynski with Stifel. Please go ahead.

Good morning, Josh and David. My first question is about the marketing budget for 2023. I was under the impression that marketing expenses would ramp up in the fourth quarter of 2022 and continue into the first quarter of 2023, then start to decline. However, it seems you may maintain a high marketing budget for the entire year. I'm curious why you are keeping it elevated throughout 2023 and if you could provide some insight into what the expense pattern will be like over the year. Are there specific quarters where marketing or other costs might increase or decrease? I hope that makes sense.

Regarding advertising in 2023, we've been increasing our efforts throughout 2022 and are excited about the momentum we've gained. We started the wave season very strongly with our Black Friday and Cyber Monday campaigns, and our overall position in November has improved significantly. We believe advertising plays a key role in reaching new customers, building awareness, and encouraging consideration in a meaningful way. We have strong brands, but we need to improve our outreach, and advertising is an excellent way to achieve that. This not only benefits us but also supports our trade partners and enhances bookings overall. For 2023, we've provided guidance for the first quarter, and one advantage of advertising is our ability to adjust spending based on what’s effective. Currently, our initiatives in both mainstream media and digital performance marketing are beginning to yield positive results, and we are satisfied with our progress.

Yes. Steve, the only other additional color that I’d add to that is, remember, I’ve said historically, the best way to judge our cost structure is the full year, and I gave you the guidance there of 1 to 2-point increase. The problem with the seasonality is as we go along, we make decisions that are most appropriate and we remain agile and flexible. But with that said, I will say that the advertising is likely on a quarterly basis to be the highest in the first quarter and the lowest in the third quarter. But the third quarter traditionally has always been a low quarter in terms of advertising. So, that’s probably the best guidance we can give you at this point.

And to follow up on that, I guess, as we kind of think a little bit further down the road, I mean if you guys kind of get back to those normalized load factors and demand still looks pretty solid through the majority of ‘23. Would you expect as we get to ‘24 that you would be able to pull back a good bit on that marketing spend?

Yes. I mean, it’s certainly within our control. Ultimately, we’re not just trying to get back to occupancy levels that are historical. We’re trying to really drive the unit pricing as well. And so advertising is a big component of that. So, I hope we’re having that conversation in six months, Steve.

Okay, great. And then just one quick housekeeping, if possible. David, the 2 ships that are leaving Costa, were they sold, or are they just going to be scrapped?

No. We announced a total of three ships, two of which we currently have a contract for, while we are working on a contract for the third one.

Our next question is from the line of Robin Farley with UBS. Please go ahead.

There are a couple of key points I would like you to clarify. First, regarding the comment on the 2023 price adjusted for the FCC, which I believe is only impacting the price by about 1% or 2% at this stage. Is your recorded price for 2023 in constant currency higher than in 2019, even including that factor? Additionally, I am a bit surprised that there's no yield guidance for Q1 since you provided substantial details leading to the EBITDA figure, including occupancy rates, and I haven’t had enough time to do all the calculations since the release just came out moments before this call. It seems like you must have a yield target for Q1, especially since 80% or more should be booked by now. Could you provide us with a rough estimate that aligns with the EBITDA you're discussing to help us verify our calculations? Lastly, about the EBITDA outlook, you mentioned guidance for Q1 ranging from $250 million to $350 million and then increasing sequentially each quarter thereafter. Can you confirm whether you believe it’s reasonable to assume that the full year EBITDA will exceed $3 billion? In other words, could this sequential growth still allow for such a low full-year EBITDA number? I would appreciate it if you could provide some clarity on that. Thank you.

Hey Robin, how are you doing? That was a lot of questions. Let me start backwards because I can remember the last one. Regarding EBITDA, what we're trying to convey is that on a performance basis, when you remove the effects of fuel and currency fluctuations, we want to understand our trajectory and how we're looking at things. Based on that, we expect to reach 50% of 2019 levels in Q1 and gradually close that gap throughout the year. I am certainly hopeful that we will exceed 2019 levels by Q4, though we have a lot of work ahead to achieve that. As for your question about yield guidance, do you want to address that?

Yes. Robin, perhaps you missed the part in my notes where I addressed this. I mentioned that we expect net per diems to increase by 5.5% to 6.5% in constant currency, which translates to 3% to 4% in current dollars. We provided information on per diems, and we also mentioned an occupancy rate of 90% or slightly higher in the press release, so you can deduce the associated revenue from that. Regarding booking trends, you're correct that we indicated FCCs would be less than 1 point for the year. Pricing will remain elevated even without factoring in the FCCs. I believe that answers all your questions. Do you have any follow-ups?

That does. I have more, but I will get back in the queue. Thank you.

Okay. Great.

Our next question is from the line of Fred Wightman with Wolfe Research. Please go ahead.

I just wanted to sort of follow up and build on the occupancy ramp. If we look just from 3Q to 4Q, 10 points of improvement, if we look at sort of what you guys are expecting in 1Q, it sort of 5-ish percent. So, can you just sort of walk us through what’s driving that lower sequential improvement relative to the 2019 levels? And maybe how we should think about that in the context of the expectation that you guys are going to be back to sort of full occupancy over the summer?

Sure. Sure, Fred. So one thing to think about when you think about our Q1 deployment profile, it is very different from what we typically have the rest of the year. We’ve got actually 9 ships in Q1 on World Cruises, another 4 ships on 70-plus night Grand Voyages and then a host of ships that are doing longer exotic voyages, 35-nighters, 28-nighters. And so, with that profile, those are longer lead-time type of itineraries, some bucket list types of things. And so, it is progressing for Q1 exactly where we thought it would be with respect to closing the occupancy gap given the dynamic of that itinerary profile. And as we get into Q2, those have stopped or wound down, and we get back to the cadence that we expect.

Understood. That makes sense. And just on the booking momentum, there was a comment in the release just talking about November booking volumes exceeding 2019 levels. Also, a comment about momentum continuing into December. Are December bookings still above 2019 levels, or did those sort of tail off after some of the promos in November?

No. They’ve continued very strong, and they’ve continued well above the 2019 level. So, we’re very pleased with the overall position and the bookings that are coming in to date.

Our next question is from the line of David Katz with Jefferies. Please go ahead.

I have two quick questions. First, you've mentioned previously the goal of reaching a 10% ROIC. Can you explain the steps needed to achieve that and what challenges might arise? Second, regarding advertising, do you have any shareable metrics that illustrate the effectiveness or productivity of your efforts? That's all from me. Thank you.

Thank you, David. Regarding advertising, our brands are performing well in awareness and consideration, which relate to bookings. They monitor lead generation and website conversions and assess performance through marketplace deals. We understand the impact of our activities and track these metrics, discussing them with the brands to make informed decisions on what is working and what isn't. It's beneficial that we have nine brands sharing insights with each other. As for our return on invested capital (ROIC), revenue will be the key driver in returning to double-digit levels. While maintaining our industry-leading cost structure is important, the focus will ultimately be on revenue, which is where our brands are directing their efforts.

And one thing, David, I’d like to add on the advertising front. One thing we’ve been tracking is we take a look at our book position for 2023. And in the last 6 months, since we have increased the advertising, we have seen a shift and a lot more new-to-brand customers. In fact, it’s an 8-percentage-point improvement. So at this point in time, what we’re seeing for the 2023 book position is that it’s roughly half of the guests are repeat guests and the other half are new to the brand. Unfortunately, these people have an old sail. So, I don’t know whether they’re new to cruise or they’re brand switchers; we’ll find that out shortly as they sail. But the fact is we’re getting a lot of great demand and we’re seeing it in the booking volumes.

And that’s an indication also of the growing health of our trade partners because they are a huge piece of our ability to drive first timers on board. So, a shout out to them as well.

Our next question is from the line of Jaime Katz with Morningstar. Please go ahead.

In the prepared remarks, there was a comment on reprioritizing project list. Is there anything noteworthy to update us on maybe what you guys are shifting focus on or shifting focus away from, anything sizable there?

A lot of the changes are related to timing. From a broader perspective, the decrease in capital expenditures is largely due to the departure of 26 ships from our fleet, which were smaller and less efficient. As a result, we don't require such a high overall CapEx figure as we did in the past. When it comes to prioritization, timing plays a significant role as we address the most important projects first. This is part of the reason why you observed a decline in CapEx in 2022. Additionally, in terms of our office space, given the new working conditions today, we are significantly reducing the amount of CapEx we will likely need to expand our offices as we continue to grow.

Yes. I can give you an example of where we would and where we wouldn’t prioritize. So, we talk in the press release and some of our prepared remarks about the impact we’re making on our carbon footprint and the fuel consumption that drives that. That’s going to continue full steam ahead. We see, a, great returns in that; and b, doing our part on the sustainability front, which is critical to our long-term success as well. There could be things that when it comes to making a decision about the speed at which we want to introduce new venues on board of a particular brand, we can pace those out differently. We can take a little bit less risk on trial and error of creating new experiences. So, it’s all a question of what we think the appropriate return could be, where we want to take risk and where we just want to be more focused on managing the cash balance.

Okay. And then I know there’s been a lot of discussion on marketing spend. And I’m not sure if you guys have directionally elaborated on maybe the ROI of marketing spend, there seems to be a pretty decent push to sourcing more North American consumers across the cruise operator landscape. And so, I’m wondering if the marketing spend is as productive as it has been historically or if you expect that to be maybe temporarily depressed before you can prune that back? Thanks.

Well, I can repeat what we said, which is we are spending more and we are very happy with the results, and we’ll keep monitoring it and adjusting as appropriate. But we feel real good about our brands to strengthen the market and our ability to champion them with additional advertising.

Our next question is from the line of Brandt Montour with Barclays. Please go ahead.

So Josh, I want to explore the marketing opportunity further. Can you help us understand how much of the current shift in channel mix compares to 2019? Specifically, what potential benefits could we see from reducing promotional activities in those less clear channels? Can you provide some insight into the scale of that opportunity once we remove those additional factors?

I’d love to give you a straight answer, but I got to be honest. So I’m not sure that I could in a way that I feel comfortable will make sense in a short amount of time.

So Brandt, I realize this is another way of asking about our yield guidance for the remainder of the year. I want to emphasize that wave season is significant, and we will provide guidance on net per diems, occupancy, and EBITDA for the rest of the year. We already provided the net per diem guidance for the first quarter, as I previously mentioned when Robin asked the question. I also noted that the first quarter benefited from brand mix, which contributed about 2 points. As you consider the rest of the year, there will be positive factors to consider, but please take this into account as we forecast the per diem for the year.

Looking back at our trajectory from Q3 to Q4, we are pulling back, which is helping to improve our per diems. The good news is that it's relatively easy to adjust our approach. As we enter this wave season, the momentum is strong, and it gives us a lot of excitement about what we can achieve as we move into 2023.

That was really helpful. My second question is about China. It seems the two ships whose destinations were uncertain are now being taken out of service. Does this indicate that there are no immediate or even medium-term plans to return to China? Do you still see China as a medium to long-term opportunity, and are you monitoring that market for a potential return to ease supply pressures in other areas? How are you viewing that market at this time?

Yes. The great aspect of our assets is their mobility, allowing us to reposition them to enhance our demand and revenue. If and when China reopens, not just for domestic cruising but more broadly, we will certainly consider that possibility, although we are not depending on it. We currently hold the number one or two position in all the major cruise markets, which we value and plan to focus on increasing our presence in those areas.

Our next question is from the line of James Hardiman with Citi. Please go ahead.

So, there was a comment in the prepared remarks about discounting through opaque booking channels. That seems like an important comment. I know criticism by at least one of your competitors is that you guys have been discounting in such a way that it’s going to be difficult to recover from that anytime soon. It seems like you disagree with that criticism. But also, it seems like, if I look at the big difference between 3Q and 4Q, it’s sort of the turnaround in those per diems, which is obviously a focus for you guys. So maybe speak to that strategy and your level of confidence that it’s ultimately going to pay off?

Sure. So, I’ll speak for ourselves. I won’t speak for anybody else. We are a global company. We have a different profile than our competitors. With respect to how our brands are optimizing revenue, which is price, it is occupancy, and onboard spending. They are all using different levers and different mechanisms, including opaque channels, which, as you just referenced, we’ve been able to pull back over time without much of a problem. We focus on the revenue that is going to get to the bottom line, and that’s our focus, not just driving revenue but driving revenue that doesn’t get caught up in the cost and not hit our EBITDA or not hit our operating income, and that’s where we’re focused.

Got it. That’s helpful. My second question is about the recent news regarding illnesses affecting children in schools. Many students seem to be dealing with flu, COVID, RSV, and the media’s term "tripledemic" comes to mind. I'm curious if you're noticing any changes in your metrics and booking statistics that indicate these health issues are impacting your business, or do you think consumers are largely moving past these concerns when considering booking a cruise?

Yes. Having come through two years of COVID, we see that people are eager to get on with their lives. I'm not dismissing the challenges that some individuals and their families may be facing, but overall, we're observing a return to normal attitudes regarding illnesses. We anticipated this shift, recognizing that as masking and social distancing faded, there would be a resurgence of certain elements in the world, although not on our ships. We are adapting to this change, and it doesn’t appear to be a significant issue.

Our next question is from the line of Patrick Scholes with Truist Securities. Please go ahead.

How should we read into your comments regarding pricing for next year? Certainly, semantic theory. Previously you said higher, now it’s slightly above. I mean, technically, they could mean the same thing, but a little more color on that, please. Thank you.

Well, I think you gave my answer, which is the language change, but it’s really not a significant change in our book position. Half one, we are really trying hard to close that occupancy gap. We are using the opaque channels where we think it makes sense and where we’re going to lean harder, and we plan to keep pulling that back as we get through a great wave season. And regardless, we anticipate very strong onboard spending to supplement our ticket prices. So for us, pun intended, it’s full steam ahead. What we’ve been saying all along is that the direct business held up relatively well throughout the pandemic and the trade had to build itself back up, and we’ve been trying to support them to do just that. And the great thing is, as we’ve referenced in some of the other questions, the trade has been doing great lately. They’re as excited about our advertising as we are because it helps them too, and they’ve really started to push on the volumes. And we couldn’t be happier with how they’re progressing.

Yes. So, the combination of the removal of the smaller, less efficient ships with the new ships that were delivered make up 9% of the 15%, and then the other 6% has to do with all of the itinerary optimization as well as the investment in fuel reduction technology, things like the Air Lubrication System, which I mentioned in my notes and was also in the press release.

I think we got, Chris, time for one more question.

Certainly. Our final question will be from the line of Vince Ciepiel with Cleveland Research Company.

I wanted to get your overall perspective on the potential margin path for the business. It seems there are real fuel efficiencies to be gained on the consumption side. You're facing higher fuel prices, but your operating cost outlook looks strong. When you consider a return to historical occupancy along with a solid price position for 2023, do you anticipate margins returning to historical levels or even exceeding them as we move from 2023 into 2024? What are your long-term targets?

Well, because we’re not giving guidance, I think the best I can tell you is how we’re thinking about that EBITDA on a per unit basis. And when you get rid of the noise from currency and the fuel prices, operationally, what we’re really trying to do is exceed 2019 levels by the time we get to the end of the year, and that’s where we’re focused. As far as the longer term, maybe we can have more of a conversation on that in March when we’re going to be talking more wholly about our full-year guidance.

But it’s fair to say, there’s a lot of potential relating to the revenues, all of the advertising that we’re doing, which should bode well for the return on invested capital, which we expect to increase considerably over time as we move through the next year or two.

Thank you. So, to everybody on the call, thank you very much for joining us and happy holidays. And I’d encourage you to go to our website for our presentation materials and some supplemental schedules. Thank you all very much.