Carnival Corp. (CCL) Q2 2023 Earnings Call Transcript

Carnival Corp. (CCL -0.66%)
Q2 2023 Earnings Call
Jun 26, 2023, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Josh Weinstein

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 two 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 yields surpassing 2019 strong levels. 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 wave season, which started early, gained strength, and is still going strong midway through the year.

This strengthened 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 and constant currency turned positive in the second quarter compared to 2019 as we drove cruise ticket prices above 2019 while maintaining record on board 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 and pricing, we have also raised our expectation for net per 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. Also, 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 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 multiples 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 booked position for 2024 also stands at record level. 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-cruise sales.

Onboard revenues were once again off the charts this quarter as this 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 booked at any given time and over one-third of onboard revenues now on the books in advance of sailing. Our demand generation efforts are in full swing.

Our cumulative number of new day crews and new brand guests who sailed with us in the second quarter have already exceeded 2019 levels. 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 this 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 three-year targets that will demonstrate our progress toward delivering strong profitability and rebuilding our financial fortress. The acronym SEA 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 levels and well above 2019. In fact, the two financial measures will be the best we've seen in almost two decades, and the carbon intensity rate will be unprecedented.

For the S, or 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 four 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, holding 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 levels. 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 toward investment-grade leverage metrics. Essentially, we've pull forward our most important sustainability goal and expect a step change in both profitability and return on invested capital in just three years.

And importantly, these targets are not our end goal. They are measurable markers of continuous improvement. To make this happen, we have a sense of urgency to further our brand's 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 roadmaps to ensure they will truly own their space in the vacation market. This means having clearly identified target market, 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 six of our major brands representing over 90% of our capacity reporting to me. This is up from one brand and less than one-third of our capacity previously. This will facilitate more direct engagement between me and our brand leads.

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 shoreside 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 No. 1 or No. 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 brands, 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. He fits seamlessly with Carnival Cruise Line's brand ambassadors who help amplify Carnival's messaging and appeal, such as its chief culinary officer, Emeril Lagasse; chief fun officer, Shaquille O'Neal; and the mayor of Flavortown himself, Guy Fieri. So far, Fun Italian Style has generated 1.5 billion earned media impressions. The instant success of Carnival's Fun Italian Style supports the entry of Firenze, the second Costa ship transferring over to Carnival Cruise Line next year.

These transfers are part of our portfolio management strategy, which is contributing to Carnival Cruise Line's capacity, growing 22% more than pre-pause expectations and Costa's 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 home porting 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 Half Moon Cay, 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 Lines 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 brands 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 on board 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 unwarranted 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 four 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 delivering 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 visit, and life we touch. With that, I'd like to turn the call over to David.

David Bernstein -- Chief Financial Officer

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 advance 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%, 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, a 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 advance book position.

For the remainder of 2023, our cumulative advance book position is at higher prices when compared to strong 2019 pricing, despite headwinds from the loss of Saint Petersburg as a marquee destination due to the suspension of cruises to Russia and normalize 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 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 three 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 half a point. Second, further investments in advertising were two-tenths of a 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 costs, and crew compensation collectively worth seven-tenths of a 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 four 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 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 three years, 2024 through 2026. And with optimized nonnewbuild capital commitments and the lowest newbuild 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 three 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 two 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.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Robin Farley with UBS. Please proceed.

Robin Farley -- UBS -- Analyst

[Technical difficulty] to clarify --

Josh Weinstein

Hey, Robin. Can you hear me?

Robin Farley -- UBS -- Analyst

Yes.

Josh Weinstein

It's a little hard to hear your question. You're coming in and out. Sorry.

Robin Farley -- UBS -- Analyst

Hopefully, this is a little bit better.

Josh Weinstein

Yup, thanks.

Robin Farley -- UBS -- Analyst

Great. So, I wanted to ask a question about the three-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 in 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 three-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, you know, 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? Thanks.

Josh Weinstein

Got it. So, with respect to 2024, the book position, yeah, 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 we're 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, you know, 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 three-year targets, you know, it's probably on the low end of what you're talking about for occupancy. And we expect to make up -- you know, it's probably, you know, it's probably sub-7 points at this point, but pretty close around there. We're probably going to make -- we're 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, you know, 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. You know, so, we feel real good about our ability to be able to make those types of steps over time.

Robin Farley -- UBS -- Analyst

OK. Great, thank you.

Josh Weinstein

Sure, thanks.

Operator

Our next question comes from Steve Wieczynski with Stifel. Please proceed.

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

Hey, guys. Good morning, and 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 and NCCs? Is that kind of the right way to think about this?

Josh Weinstein

Well, I don't know if I'm talking to you anymore, Steve. Putting that aside, nice to hear from you, we -- you know, 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. You know, there is -- you know, 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, you know, that type of step up in occupancy will have a bit of a cost drag, which we're very happy to take.

You know, we're still going to be thinking through our advertising planning as it gets to 2024 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 -- I would expect a difference between those growth rates.

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

OK. And then, since you already don't like me, I'm going to stay on costs a little bit.

Josh Weinstein

Fine, go ahead.

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

But you guys have now -- you know, you've raised your cost guidance two quarters in a row. And look, I understand the stock comp stuff, I understand the inflationary pressures. But, you know, first of all, I just want to make sure -- I hope that you guys now have a pretty 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, you know, what we're seeing today from a demand perspective versus the fact that, you know, you guys need to, you know, market more aggressively.

So, any color there would be helpful. 

Josh Weinstein

Sure. So, with respect to the comments about looking at the fourth quarter advertising spend and maybe taking it up for '24, you know, there's two 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 it. 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.

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

OK. Got you. Thanks, guys. Thanks, Josh, appreciate it.

Josh Weinstein

All right, cheers.

Operator

Our next question comes from James Hardiman with Citi. Please proceed.

James Hardiman -- Citi -- Analyst

Hey, good morning. Hopefully, everything's going OK over there.

Josh Weinstein

I'm in New York. That's all you need to know, right?

James Hardiman -- Citi -- Analyst

That's all I need to know, exactly. Just a clarification on the three-year target mass. 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, you know, 3.5 half times leverage seems to be the number that would presumably get you there.

Are those two generally in line with how you're thinking about EBITDA and leverage metrics for '26?

Josh Weinstein

Yup, you got it right on the head.

James Hardiman -- Citi -- Analyst

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 an $8 billion total debt reduction. What's that look like on a net debt basis?

David Bernstein -- Chief Financial Officer

Yeah, so, James, the cash balance should start coming down over time. You know, 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, you know, was $7.3 billion. And we do expect to see that decline over time. You know, pre-pause, we were targeting two to 2.5. 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 and all the numbers are -- is good, and we're continued and confident that we can work through and achieve those.

James Hardiman -- Citi -- Analyst

One more point of clarification. So, in the Qs, 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?

Josh Weinstein

Yeah, 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.

James Hardiman -- Citi -- Analyst

Got it. Perfect. Talk to you guys tomorrow. Thanks.

Josh Weinstein

Thank you.

Operator

Our next question comes from Fred Wightman with Wolfe Research. Please proceed.

Fred Wightman -- Wolfe Research -- Analyst

Hey, guys. Good morning. Do the 26 targets assume that you returned to China? And if so, what are you sort of baking in there?

Josh Weinstein

Hey, good morning, Fred. No, there is no assumption in these numbers that we returned 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.

Fred Wightman -- Wolfe Research -- Analyst

That makes sense. And then, last quarter, you guys talked about, you know, 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?

Josh Weinstein

Yeah. 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 and our European brands profile this last quarter on the booking side, you know, double digits in both volume and price versus 2019, specifically for their 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, you know, with really strong brands, the strongest we've got in Europe, you know, the No. 1 brand in Germany, the No. 1 brand in the U.K., No. 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, think about the first quarter versus the second quarter, how were they are comparing against '19 in the first quarter and how were 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 brands. 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.

Fred Wightman -- Wolfe Research -- Analyst

Great, thank you.

Operator

Our next question comes from Jaime Katz with Morningstar. Please proceed.

Jaime Katz -- Morningstar -- Analyst

Hey, good morning. Thanks for taking my questions. 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, you know, if there's 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? Thanks.

Josh Weinstein

Yeah, good morning. It's really a brand-by-brand question, right, because there are different dynamics for each brand about, A, where are they in the booking curve, what does their capacity increase look like over the next 18 months, you know, what source markets are they in, what's the state of those source markets. 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 it's because it's complicated, and there are a lot of factors to consider.

Jaime Katz -- Morningstar -- Analyst

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? Thanks.

Josh Weinstein

Yeah, sure. You know, I think that there are purposes of how you organize a 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.

You know, 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. It's actually 93% of the capacity that effectively reports directly to me through six 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. Cunard 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.

Jaime Katz -- Morningstar -- Analyst

Excellent, thanks.

Operator

Our next question comes from Matthew Boss with JPMorgan. Please proceed.

Matt Boss -- JPMorgan Chase and Company -- Analyst

Great, thanks, and congrats on a nice quarter.

Josh Weinstein

Thank you.

Matt Boss -- JPMorgan Chase and Company -- Analyst

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 three-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 three-year plan.

Josh Weinstein

Well, it's a tough question to answer since we're not giving you '24 guidance yet. So, you know, I'd say, if we think about pluses and minuses for '24, and maybe we can start there, you know, 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 two-thirds of that goes to Carnival Cruise Line, which is, you know, 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. You know, the Ukraine, we don't forecast that having a reversal such that we can get back to Saint Petersburg and those really high-yielding types of trades. We're not planning on China, as you've already heard me say.

You know, question mark, hopefully, energy security concerns won't come back. But, you know, I don't have a crystal ball there. We do have more dry dots 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 and 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 respect to --

David Bernstein -- Chief Financial Officer

Yeah, 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 toward 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.

Matt Boss -- JPMorgan Chase and Company -- Analyst

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 three-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?

Josh Weinstein

Oh, boy, rank? I wouldn't even begin to try. Look, we set out our targets about what we hope to meet. And frankly, you know, as you'd expect a CEO to say, I will strive to exceed. You know, 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, you know, I think that, you know, that's a good trajectory.

And we'll do our best, like I said, to go well beyond. I would expect -- you know, 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 it a different way, but that's probably the best I'll give it to you.

Matt Boss -- JPMorgan Chase and Company -- Analyst

Great color. Best of luck.

Josh Weinstein

Thank you.

Operator

Our next question comes from Patrick Scholes with Truist Securities. Please proceed.

Patrick Scholes -- Truist Securities -- Analyst

Hi, good morning everyone.

Josh Weinstein

Hey, Patrick.

Patrick Scholes -- Truist Securities -- Analyst

Shifting gears a bit here, looking at your balance sheet, you know, 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, you know, 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? Thank you.

Josh Weinstein

Yeah. Yeah. Thanks, Patrick. Somebody asked it earlier on the call, and they were probably referring to it in a little bit of a different way.

Patrick Scholes -- Truist Securities -- Analyst

OK.

Josh Weinstein

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, yeah, you know, that's increased liquidity and cash, and we'd be using that to continue our process of deleveraging.

Patrick Scholes -- Truist Securities -- Analyst

OK. And what is that balance today, specifically the 1.7, which was at the end of 1Q? Where are you now?

David Bernstein -- Chief Financial Officer

At the end of Q2, you'll see when the Q is filed, it's 2.2 billion. It has -- since customer deposits went up, the reserve funds went up correspondingly.

Patrick Scholes -- Truist Securities -- Analyst

OK. Thank you. That's it.

Josh Weinstein

Thanks, Patrick.

Operator

Our next question comes from Dan Politzer with Wells Fargo. Please proceed.

Dan Politzer -- Wells Fargo Securities -- Analyst

Hey, good morning, everyone. Thanks for taking my questions. For the three-year plan, I wanted to hit on the 12% ROIC target. Can you talk about, you know, 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 hire ROIC brands? And along with that, in terms of your cost of capital, it's obviously now higher.

How do you think about the thresholds 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?

Josh Weinstein

OK. 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 and the makeup such that, I don't have it in front of me, but Carnival Cruise Line over this period will be about a third of our capacity. And in the timeline that I was talking about, if you look back in our pre-pause last four-year period, they were closer to, what was it, 26%, 27% best? Yeah, about 26%, 27%. Pardon me?

David Bernstein -- Chief Financial Officer

Twenty-five.

Josh Weinstein

Twenty-five percent. So, you're looking at our highest returning brand being a third of our business up from a quarter, 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 fill our 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.

Dan Politzer -- Wells Fargo Securities -- Analyst

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, you know, 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?

Josh Weinstein

Sure. Well, you know, 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 it, I actually call it an 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 resorts, 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 flight should they choose not to, that sets us up very, very well for people who are trying to figure out how to stretch their vacation dollars. So, to be honest with you, you know, our focus on base loading for 2024 and pulling ahead with all of those factors at our back, we feel quite good. And I -- 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.

Dan Politzer -- Wells Fargo Securities -- Analyst

Got it.

Josh Weinstein

We've got time for one more question. Sorry, thank you.

Dan Politzer -- Wells Fargo Securities -- Analyst

Thanks.

Josh Weinstein

Yeah. 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'll 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. Take care.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Josh Weinstein

David Bernstein -- Chief Financial Officer

Robin Farley -- UBS -- Analyst

Steve Wieczynski -- Stifel Financial Corp. -- Analyst

James Hardiman -- Citi -- Analyst

Fred Wightman -- Wolfe Research -- Analyst

Jaime Katz -- Morningstar -- Analyst

Matt Boss -- JPMorgan Chase and Company -- Analyst

Patrick Scholes -- Truist Securities -- Analyst

Dan Politzer -- Wells Fargo Securities -- Analyst

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