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La-Z-Boy Incorporated (LZB) Q4 2022 Earnings Call Transcript

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La-Z-Boy Incorporated (NYSE: LZB) Q4 2022 earnings call dated Jun. 22, 2022

Corporate Participants:

Kathy Liebmann — Investor Relations

Melinda Whittington — President and Chief Executive Officer

Bob Lucian — Senior Vice President and Chief Financial Officer

Analysts:

Bradley B. Thomas — KeyBanc Capital Markets — Analyst

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Alessandra Jimenez — Raymond James & Associates, Inc. — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to the La-Z-Boy Fiscal 2022 Fourth Quarter and Full Year Conference Call. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Kathy Liebmann, Investor Relations. Kathy, over to you.

Kathy Liebmann — Investor Relations

Thank you, Jenny. Good morning, and thank you for joining us to discuss our fiscal 2022 fourth quarter and full year results.

With us this morning are Melinda Whittington, La-Z-Boy’s President and Chief Executive Officer; and Bob Lucian, Chief Financial Officer. Melinda will open and close the call and Bob will speak to segment performance and the financials midway through. We will then open the call to questions. Slides will accompany this presentation and you may view them through our webcast link, which will be available for one year. And a telephone replay of the call will be available for one week beginning this afternoon.

Before we begin the presentation, I would like to remind you that some statements made in today’s call include forward-looking statements about La-Z-Boy’s future performance and other matters. Although we believe these statements to be reasonable, our actual results could differ materially. The most significant risk factors that could affect our future results are described in our annual report on Form 10-K. We encourage you to review those risk factors as well as other key information detailed in our SEC filings. Also, our earnings release is available under the News and Events tab on the Investor Relations page of our website and it includes reconciliations of certain non-GAAP measures, which are also included as an appendix at the end of our conference call slide deck.

With that, I will now turn over the call to Melinda Whittington, La-Z-Boy’s President and CEO. Melinda?

Melinda Whittington — President and Chief Executive Officer

Thanks, Kathy, and good morning, everyone. Late yesterday afternoon following the close of market, we reported record results for fiscal ’22. Highlights for the year included, record delivered sales and profits for the fourth quarter and the full fiscal year for the total consolidated company; record delivered sales for our Wholesale segment; record delivered sales and profits for our company-owned Retail segment; strong delivered sales and profit performance for Joybird; returns of $118 million to shareholders through dividends and share repurchase, the highest level in our history; and the launch of Century Vision, our growth strategy through our centennial year in 2027.

All in, these are great results in a volatile environment. Sales were $2.4 billion, driven by the strength of our consumer brands, our vast distribution and strong demand for home furnishings. We delivered $3.11 in non-GAAP earnings per share, 19% ahead of last year and 45% more than pre-pandemic fiscal ’19, all while continuing to navigate the challenges of the pandemic, global supply chain disruption and a tight labor market and we finished the year strong. Sequentially, from Q3, our fourth quarter exhibited momentum in delivered sales and significant operating margin improvement.

I’d like to take this opportunity to thank our talented team across the entire company for their hard work, perseverance and dedication. Our employees are amongst our greatest assets and are responsible for delivering these phenomenal results in challenging times. As we celebrate these outstanding results, we note that written sales for Q4 reflect the consumer impact of inflationary pressures and geopolitical concerns. After a strong February with positive year-over-year growth, we saw significant deterioration of written trends in March, some recovery in April and ongoing volatility.

Written same-store sales for our company-owned Retail segment decreased 9% for fiscal ’22 fourth quarter, primarily due to lower traffic. Written same-store sales across the entire La-Z-Boy Furniture Galleries network decreased 4% in the fourth quarter. The difference versus Retail is mainly due to the base period as many Canadian stores were closed in last year’s fourth quarter and this more dramatically impacted the broader network than our own Retail segment.

For the full fiscal year written same-store sales for the La-Z-Boy Furniture Galleries network increased 1% and were flat for the company-owned Retail segment. And compared with fiscal 2020, written same-store sales for the entire network as well as for our company-owned Retail segment grew at a compound annual growth rate of approximately 15% over the last two years. Our Joybird business rose 3% more this Q4 than last year’s fourth quarter. And for the full fiscal year, Joybird’s written sales were up 27% and grew at a compound annual growth rate of 44% over the last two years.

As we begin fiscal ’23, we will leverage our strong balance sheet and historically high backlog to continue to grow the business and strengthen our capabilities for the long-term. We are focused on, first, continuing to enhance our manufacturing capability to better service our consumers and customers with shorter lead times. In fact, over the Memorial Day weekend, we were pleased to begin offering customers — consumers customized product in 10 to 14 weeks versus our previously quoted four to seven months. Second, focusing on consumer with enhanced marketing and sharper execution to drive traffic and sales conversion. And third, strategically investing in our Century Vision work to enhance the power of our La-Z-Boy brand with the consumer, disproportionately grow the young Joybird business and strengthen our company’s foundational capabilities so that we continue to profitably grow the company from this new base.

In our first year of Century Vision execution, we’ve expanded our consumer insights organization, initiated significant consumer research and launched new television spots featuring La-Z-Boy brand ambassador Kristen Bell, who resonates with a broad range of consumers, including a younger demographic. And in fiscal ’23, we have plans to expand the La-Z-Boy Furniture Galleries network by about 10 new stores. These investments will allow us to canvas the marketplace, improve shop ability and ensure our omnichannel offering enables us to engage consumers wherever they wish to purchase.

On Joybird, since acquiring the company in 2018, we’ve more than tripled sales and achieved reliable profitability. As a relatively new brand with significant opportunity to grow share, we will continue to invest in marketing to build Joybird’s brand awareness and accelerate growth. And while we’ll stay true to Joybird’s digital routes, the important element of our strategy is focusing on reaching new consumers and enhancing the omnichannel experience. We already have five well performing small format Joybird showrooms in popular urban locales and have several more stores slated to open in the first six months of fiscal ’23.

And finally, as we strengthen foundational capabilities across the company, we’re improving our ability to execute acquisitions, including opportunistic purchases of independently-owned La-Z-Boy Furniture Galleries stores, which further strengthen our high performing company-owned Retail segment. These margin-enhancing acquisitions provide the benefit of our integrated retail model where we are in a profit on both the wholesale and retail sides of the business and our strongest ownership of the end-to-end consumer experience.

In fiscal ’22, we acquired eight La-Z-Boy Furniture Galleries stores. And I’m pleased to note that we have already signed agreements to acquire six stores in fiscal ’23, five in the Denver market and one in Spokane, Washington. And we are enhancing the agility of our supply chain. Today, we are producing more furniture than ever, a testament to the strong manufacturing foundation La-Z-Boy developed over its 95-year history. Building on that strength and recognizing the environment will remain dynamic, we are focused on increasing agility across the enterprise to work down our backlog, significantly shorten lead times and position La-Z-Boy to successfully complete and win share going forward.

During fiscal ’22, we made a series of enhancements across the enterprise to drive agility and increase production capacity efficiently. We’ve added to our experienced team with key leadership from other industries to bring fresh perspective. And we’ve made structural changes across our supply chain to increase production, including expanding our North American operations with multiple new facilities in Mexico. These operations will help in servicing our backlog in the short-term as they ramp to full capacity and longer term will contribute to a lower cost manufacturing footprint with improved capabilities to service the West Coast.

We have also changed processes within our plants to maximize output with a better product mix, shifting procurement strategies with an expanded supplier base in multiple geographies and are strategically managing inventories to protect against future parts outages and disruptions. Sales and operating margin progress made in Q4 reflect these initial moves, but there is more work to do. In short, we’re structuring the business to be successful in what will continue to be a volatile environment. As a premier, well loved furniture company that ranks number two in a highly fragmented market, we’ll become more nimble going forward to ensure we grow out of the pandemic and gain share.

Now let me turn the call over to Bob to review the results in more detail. Bob?

Bob Lucian — Senior Vice President and Chief Financial Officer

Thank you, Melinda, and good morning, everyone. As a reminder, we present our results on both a GAAP and non-GAAP basis. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. Non-GAAP results exclude items which are detailed in our press release and in the tables in the Appendix section of our conference call slides. Additionally, fiscal ’22 included 53 weeks with the additional week falling in the fourth quarter. For those of you new to La-Z-Boy, our fiscal year ends on the last Saturday of April, and every five or six years, we have an extra week in our fiscal year.

On a consolidated basis, fiscal ’22 fourth quarter sales increased 32% to a record $685 million versus the prior year quarter, reflecting higher pricing and surcharges, increased unit production and the extra week in the quarter, which increased sales by approximately $49 million. Consolidated GAAP operating income increased to a record $79 million and non-GAAP operating income was a record $65 million, an increase of 24% versus last year’s fourth quarter. The quarter had a record non-GAAP operating profit level even without the extra week of results.

Consolidated GAAP operating margin was 11.5% and non-GAAP operating margin was 9.4%. GAAP diluted EPS was $1.33 for the current year quarter versus $0.81 in the prior year quarter. Non-GAAP diluted EPS was $1.07 in the current year quarter versus $0.87 in last year’s fourth quarter, a 23% increase.

Moving on to full year results for fiscal ’22. Sales increased to a record $2.4 billion, up 36% versus the prior year, reflecting strong demand, ongoing manufacturing capacity increases, higher pricing and surcharges and the extra week in Q4, which increased sales by approximately $49 million.

Consolidated GAAP operating income increased to a record $207 million and non-GAAP operating income was a record $191 million, a 22% increase versus fiscal ’21. The year had record non-GAAP operating profits even without the extra week. Consolidated GAAP operating margin was 8.8% and non-GAAP operating margin was 8.1%. GAAP diluted EPS was $3.39 for fiscal ’22 versus $2.30 in the prior year. Non-GAAP diluted EPS was $3.11 for the year versus $2.62 in fiscal ’21, a 19% increase.

As I move to the segment discussion, my comments from here will focus on our non-GAAP reporting, unless specifically stated otherwise. Starting with our Wholesale segment, delivered sales for the quarter grew to a record $513 million, a 34% improvement compared with the prior year period and increased 24%, excluding the extra week. The growth was driven by pricing and surcharges as well as higher unit volume.

Non-GAAP operating margin for the Wholesale segment was 8.8% versus 10.2% in last year’s fourth quarter. This was driven by increased material costs, differences in channel mix and plant inefficiencies related to increasing manufacturing capacity, partially offset by pricing and surcharges. Sequentially, from Q3, non-GAAP operating margin increased 230 basis points, reflecting many of the changes made to drive agility across our supply chains.

Casegoods begin to receive a steadier stream of product from Vietnam in April, following the country’s COVID-related shutdown with elevated freight costs, continuing to impact operating margin during the first two months of the quarter. We expect casegoods operations to normalize in the first half of this fiscal year as we more consistently receive product, ship it to consumers and realize freight pricing.

For the quarter, our Retail segment delivered sales were a record $233 million, a 20% increase over prior year’s fourth quarter and 12% higher excluding the extra week. Same-store delivered sales were 16% higher versus the year ago quarter. Retail posted record high non-GAAP operating profit dollars and non-GAAP operating margin increased to 13% versus 12.2% in the prior year quarter, driven primarily by fixed cost leverage on the higher sales volume. As Melinda noted, growing La-Z-Boy Furniture Galleries network is a key element of Century Vision. And we look forward to our company-owned Retail segment continuing to grow and becoming an even larger contributor to our long-term success.

I’ll now spend a few moments on Joybird, which is reported in corporate and other. Joybird delivered a great quarter with record delivered sales of $53 million, a 40% increase versus the prior year quarter and a 30% growth rate adjusting for the extra week of sales. For the quarter, Joybird delivered profitable growth with an improved gross margin versus last year’s fourth quarter. During the quarter, the Joybird business exhibited multiple positive sales metrics, including written sales, web conversion, retail store traffic, average order value and average sales price. Moving forward, we will continue to invest in marketing both digitally and through new channels to drive brand awareness, customer acquisition and disproportionate growth of this relatively young brand.

Putting all of this together, consolidated non-GAAP gross margin for the entire company for the fiscal year decreased 390 basis points versus the prior year. The decrease was due primarily to higher raw material and freight costs, costs related to increasing manufacturing capacity, labor challenges and the unavailability of component parts which resulted in plant inefficiencies. These costs were partially offset by pricing and surcharge actions which were increasingly realized in the second half of the fiscal year as they begin to flow through the backlog to delivered sales.

Consolidated non-GAAP SG&A as a percent of sales for the year decreased 300 basis points, primarily reflecting fixed cost leverage on the higher sales volume across all our businesses. Our effective tax rate on a GAAP basis for fiscal ’22 was 25.9% versus 26.3% in fiscal 2021. Impacting our effective tax rate for fiscal ’22 was a net tax benefit of $0.7 million from the tax effect of the fair value adjustment of contingent consideration liability related to the Joybird acquisition. We expect our effective tax rate to be in the range of 25% to 26% for fiscal ’23.

Turning to cash. For the year, we generated $79 million in cash from operating activities, finishing the year strong with $34 million in cash generation in Q4. We ended fiscal ’22 with $249 million in cash, no debt and held $27 million in investments to enhance returns on cash. During the year, we invested $72 million in higher inventory levels to help protect against supply chain disruptions and support increased production and delivered sales. We also spent $77 million in capital during the year, primarily related to retail store upgrades, new upholstery manufacturing capacity in Mexico, plant upgrades at our manufacturing and distribution facilities and technology projects.

In Q4, we continue to buy back shares, spending $15 million repurchasing more than 400,000 shares of stock in the open market, leaving 7.5 million shares in our existing authorized share repurchase program. For the full fiscal year, we returned $91 million to shareholders via share repurchase and $28 million through dividends, including $7 million paid in dividends in the fourth quarter.

Before I turn the call back to Melinda, let me highlight several important items for fiscal ’23. Please keep in mind that fiscal ’23 will be a 52-week year and comparisons will be against the 53-week fiscal ’22 period. Additionally, comparability will be affected, as always, by fiscal ’23’s first quarter containing 12 production weeks, reflecting our annual one week shutdown in July.

While we maintain our long-term commitment to steady sales and margin progress, we anticipate results may vary during fiscal ’23 as macroeconomic factors and geopolitical events impact consumer confidence and furniture demand. Despite this volatility, we remain focused on driving demand to outperform the industry, strengthening our agility, working to reduce our large backlog and continuing to navigate through supply chain disruptions to better service the demand for our highest value products, which disproportionately sell through our Furniture Galleries stores. We will prudently navigate through the current environment in the short-term, while executing against our Century Vision strategy to drive long-term profitable growth.

With the height of the pandemic behind us, we expect seasonality to return to the industry as consumers revert back to normal spending patterns and focus less on home furnishings purchases during the summer months. As a result, we will likely experience lower than year ago written sales during Q1 and Q2 for both our direct-to-consumer businesses and our wholesale customers as they experience fluctuating consumer demand and related inventory adjustments.

As we continue to service our existing backlog and improved delivery times, we are also beginning to increase investments in marketing to drive demand for our strong brands to leverage their power in the marketplace. In addition, we expect a slight decline in delivered sales per week in our Wholesale segment, driven by a number of larger customers which have temporarily delayed receiving product due to warehouse constraints. We expect these delays to clear up in the second quarter.

Taking all these factors into consideration, we now expect delivered sales for fiscal ’23 first quarter to be up 7% to 10% versus the first quarter of fiscal ’22 in a range of $560 million to $575 million. Additionally, we expect consolidated non-GAAP operating margin to be in a range of 6.5% to 7.5%. Finally, we expect non-GAAP adjustments for purchase accounting charges for the year to be in the range of $0.01 to $0.03 per share. Capital expenditures are expected to be in the range of $85 million to $95 million for fiscal ’23 as we invest to strengthen the company for the future, consistent with our Century Vision strategy.

Our capital allocation strategy over the long-term is to invest approximately half of operating cash flow into the business and return the other half to shareholders through dividends and share repurchases. This 50-50 split may vary in any given year. In the near-term, including fiscal ’23, we have numerous strategic investments to make as we execute Century Vision and anticipate capital allocation to be more heavily weighted to investments in the business where our ROIs are 2 to 3 times our cost of capital.

And now, I will turn the call back to Melinda.

Melinda Whittington — President and Chief Executive Officer

Thanks, Bob. I’m very excited about the future of La-Z-Boy Incorporated. We manufacture and sell great brands, have broad distribution, a strong and growing company-owned Retail segment and a talented team in place to execute our Century Vision. Although the macroeconomic environment is volatile and will remain choppy for the foreseeable future, our focus is on the long-term, controlling what we can and driving agility through every facet of the organization. Our balance sheet is strong and will allow us to move through this uncertain period, while making important investments in our future. We have every intention of growing from our new base and believe the best is yet to come as we deliver long-term profitable growth and returns to all stakeholders.

We thank you for your time this morning, and I’ll turn the call back to Kathy.

Kathy Liebmann — Investor Relations

Thank you, Melinda. We will begin the question and answer period now. Jenny, please review the instructions for getting into the queue to ask questions.

Questions and Answers:

Operator

No problem. [Operator Instructions] Your first question is coming from Brad Thomas of KeyBanc Capital Markets. Brad, over to you. Please check you’re not on mute, Brad.

Bradley B. Thomas — KeyBanc Capital Markets — Analyst

Yeah. Sorry about that. It was muted. Good morning. Good morning, Bob and Kathy. And first of all, just wanted to give my congratulations on a strong quarter and obviously a record year for the company.

Kathy Liebmann — Investor Relations

Good morning, Brad. Thank you.

Bradley B. Thomas — KeyBanc Capital Markets — Analyst

We’re getting a lot of questions about recent trends in the industry, and so I had a couple of questions about that. But I was hoping to address, maybe first of all, Melinda, I believe you commented that trends have been more volatile of late. Could you give us any more detail on how May and June have been trending so far?

Melinda Whittington — President and Chief Executive Officer

Yeah. I mean, since year end, traffic continues to be challenged across the industry and there is decent amount of volatility on any given week or month right now. I will tell you that as we look at this going forward, the first thing we continue to be focused on is the production side of things and what we’ve been working on over the last couple of years on our ability to produce, both to manage cost to service the backlog that we have, and importantly, to get down to shorter lead times to help impact that consumer proposition and drive conversion on the traffic that we do see.

As far as the consumer, the entire industry over the last three, four months is certainly seeing a slowdown in traffic, and I think there’s a couple of things driving that. Overall, consumer sentiment no doubt is challenged as we talked about everything from inflation and we can certainly go into more there. The other piece that I think we don’t know the relative impact of each of these is the return of seasonality. So for the last couple of years, we really haven’t had kind of a big difference quarter-to-quarter in consumer sentiment. This is the first spring in several years that consumers were getting a regular spring and summer. People are traveling again and all.

And so if you go back pre-pandemic, the spring and summer were always significantly slower than kind of the back half of our year. And so that return of seasonality is definitely driving some of it. And then we have to keep in mind that furniture pricing is still quite high across the industry. We’re 25% to 35% higher due to all of the input costs than we were pre-pandemic. And again, those are all across the industry.

So what we’re doing about it? Like I said, the first one is really making sure we’re managing our own production capacity so that that proposition is better and we have shorter lead times over Memorial Day. We were now quoting 10 to 14 weeks on custom furniture versus four to seven months. We’re increasing marketing spend back up to levels more consistent with what we were doing pre-pandemic. You’ll recall, over the last two years, we backed off significantly because there was really no reason to drive the consumer into an urgency to purchase and then bring them in the store and have them frustrated by lead times. And then we’re also really focused on in-store execution. So while traffic is lighter, our conversion remained strong with the excellent work that we’re doing in our stores. So that’s what we talked about. I think the reality across the industry is challenge on traffic right now with the consumers, some of that more temporary than other. And so we’re working on what we can control.

The other piece we have is of course for a portion of our business, we’re selling direct to the consumer. For more than half of our business, we’re selling in a B2B capacity. And so we’re seeing a little bit of our customers sort of adjusting their stock inventory right now, but still healthy pull through on the custom side. So that remains our focus on that side as well.

Bradley B. Thomas — KeyBanc Capital Markets — Analyst

And to follow-up on that, Melinda. What are you seeing in terms of the trends at Joybird and how is that brand performing versus La-Z-Boy? Is it performing better? Is it — has it slowed down more because it’s more D2C or perhaps a customer that might be more constrained by the environment we’re in?

Melinda Whittington — President and Chief Executive Officer

Yeah. I think if you look at — so back pre-pandemic times, right, we used to talk about Joybird was maybe written trends in the high-teens when our older more mature La-Z-Boy business had written trends in the low-to-mid single-digits roughly directionally. That differential has continued. If you look at sort of for the fiscal year, for the fourth quarter and ongoing, we’re still — we’re seeing slower — some slowing of the written trend, but it’s still positive and significantly stronger than what we’re seeing across the entire furniture industry on average.

Bradley B. Thomas — KeyBanc Capital Markets — Analyst

Thanks. It’s very helpful. And then with regard to the retail customers that you have that have wanted to delay receipt of product, I presume this is a function of their sales having slowed down. How does that work? How long can they delay it out before this starts to turn into canceled orders? And what are you hearing from these larger customers?

Melinda Whittington — President and Chief Executive Officer

In the near-term, it’s really been more — and again, time will tell here. But in the near-term, it’s really been more a matter of you think about these retailers spent the last year and a half trying to get product from anywhere they could and ordering. And then as things have started to deliver, they’ve got warehouse constraints in the near-term. And in particular, suddenly, where they may be ordered ahead on some stock, that’s filling up warehouses, that is slowing down their ability to deliver the orders that are sold through to there end consumer.

And so really the near-term has been — the near-term effects have been more about just flow through and getting the right product in there. You might have a lot of one thing and not as much of another. And that could be from us or for general dealers that could be from a lot of different consumers. So I really see the majority of that shift that we’ve seen thus far has been much more about sort of near-term shifting as we’ve gone from this very dramatic, everybody trying to get anything they could for the consumer to suddenly kind of a slowdown with the consumer and just the logistical side of managing that.

Bradley B. Thomas — KeyBanc Capital Markets — Analyst

That’s very helpful. Thanks so much, Melinda, and best of luck.

Melinda Whittington — President and Chief Executive Officer

Thank you.

Operator

Your next question is coming from Anthony Lebiedzinski of Sidoti. Anthony, please ask your question.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Yes, good morning, and thank you for taking the questions. So first, in terms of your…

Melinda Whittington — President and Chief Executive Officer

Good morning.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Good morning. So in terms of your own production capacity, just wanted to get a better sense as to how did the quarter progressed in terms of your delivered revenue gains? Was it consistent throughout the quarter or was there any notable changes as the quarter progressed?

Bob Lucian — Senior Vice President and Chief Financial Officer

It was fairly consistent, a slow increase as the quarter progressed. Our latest — our last plant down in Mexico, Torreon, was coming online and that was allowing us to slowly increase capacity over the quarter as it went through. So we finished the quarter well.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Got it.

Melinda Whittington — President and Chief Executive Officer

We took some opportunity in the fourth quarter to reposition some lines to make sure — we’ve talked for a long time about like our Mexico cells. We’re making maybe more simple product as they were training. We’ve started re-pointing cells as well to make sure we’re making the right product for demand. And so we feel good about the progress there as well.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Got it. Yes. So yeah, Melinda, during your remarks, you said you changed some of the processes in your plants. So is that what you referred to or is there something else there as well?

Melinda Whittington — President and Chief Executive Officer

Yes, sir. Yeah.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Okay. Got it. Okay. Thanks for that. And then just in terms of your inventory, so obviously, like a lot of other companies, your inventories have increased. How would you characterize the health of your inventory? And kind of given what’s going on with traffic and just overall macro concerns, how does — how do you feel about the health of your inventory?

Bob Lucian — Senior Vice President and Chief Financial Officer

We ended the year with the level of inventory we wanted to end the year with. We’re still holding that right now given what’s going on over in China to ensure that the lockdowns and some of the delays that are occurring from some of the parts and fabric and things like that to come from China don’t impact our production facilities. So we’ll continue to maintain a slightly higher level of inventory to make sure that we’re able to make product as we’re able to.

And the inventory, what I’m talking about there is on the raw material side. The inventory from a finished product side, that’s generally speaking, being made and being moved out and we’re adjusting production as needed to ensure we don’t build up a whole bunch of finished goods inventory as we see customers modify their receipt timings.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Got it. Okay. And then in terms of price increases, obviously, as you noted, pricing has gone up quite a bit. Are you — so within the guidance that you provided for the first quarter, does that include any additional price increases that you may have taken since the fiscal year end or how should we think about additional pricing actions that you may take?

Bob Lucian — Senior Vice President and Chief Financial Officer

Well, we never comment on future pricing actions we take. We will always continue to look at what’s going on with the pricing of our materials and price accordingly to make sure that we’re maintaining our margins. The last pricing we took was in February. And that pricing is working its way through the backlog, parts of it’s coming in faster than others. But generally speaking, that’s working its way through and will continue to work its way through Q1 and into Q2.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Got it. Okay. And then lastly from me. So you stated that you will open 10 stores in fiscal ’23. So is this a new annual run rate or how should we think about your long-term plans for store growth?

Melinda Whittington — President and Chief Executive Officer

You’ll see some variability in any given year. Honestly, some of it right now it’s happening even in our Joybird stores has been around — you don’t hit quite the cadence you’d like because of just construction delays. But in general, what we’ve talked about is that we saw that we see the opportunity for about 400 stores, and today we’re at about 350. So — and we’ve said we’ll do that over our Century Vision time period. So the 10 run rate is not a bad ballpark number, but there will certainly be some volatility on any given year.

Anthony C. Lebiedzinski — Sidoti & Company, LLC — Analyst

Got it. Thank you, and best of luck.

Melinda Whittington — President and Chief Executive Officer

Thanks, Anthony.

Bob Lucian — Senior Vice President and Chief Financial Officer

Thanks, Anthony.

Operator

Your next question is coming from Bobby Griffin of Raymond James. Bobby, please ask your question.

Alessandra Jimenez — Raymond James & Associates, Inc. — Analyst

Good morning. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking our questions.

Melinda Whittington — President and Chief Executive Officer

Good morning.

Alessandra Jimenez — Raymond James & Associates, Inc. — Analyst

First, I just wanted to touch a little bit on the wholesale backlog. It continues to trend well above historic levels and even was up year-over-year at the end of the fiscal year. Can you talk about your expectations for working down that backlog this year?

Melinda Whittington — President and Chief Executive Officer

Yeah, I want it to go down. So if you think about what’s in the backlog, there are — I guess, I’ll start by saying, there are two things in the backlog. One are orders that are sold all the way through to the end consumer. And so to me that backlog, while it’s nice to have written orders on your books, that backlog is a dissatisfied consumer that’s waiting for their product. So historically, we have been able to deliver customized product to our end consumer in four to six weeks and that’s been out in the four to seven months. We are very pleased that since Memorial Day with a real focus on that custom order to the end consumer, as of Memorial Day, we’ve been able to quote 10 to 14 weeks. So that’s real progress. That will make the backlog go down, but that’s a good thing.

The other thing that’s in the backlog then is stock orders. And again, somewhat similarly, these are for the most part B2B customers that have placed orders with us on what they believe they’re going to need to keep an inventory. When we’re out six months on production, they’re having to put six months of orders on the books with us for backlog to ensure they have their production space. As we bring this capacity on and get more and more efficient, if we’re three months out, we only need three months of orders on the books. If we’re one month out, we only need one month.

So our goal this year is to bring that backlog down very significantly, ideally to kind of the minimal level, sort of the four to six week backlog that we’ve had pre-pandemic historically, but on a larger manufacturing base which would mean more throughput. Now there’s obviously there are multiple variables as we’ve talked over recent years. There’s how many orders are coming in and how many orders are servicing. And so I expect that we’ll see some volatility on that as well as we move through the year.

Alessandra Jimenez — Raymond James & Associates, Inc. — Analyst

Okay. That’s really helpful. And then just a follow-up on that. How much flexibility do you have with your current capacity build-out? How do we protect from getting too much capacity?

Bob Lucian — Senior Vice President and Chief Financial Officer

See, the way we manage that and the way we’ve been planning to manage all along is, as we see or if we see demand go down, we will manage it via a combination of reducing over time that’s being run at virtually every single one of our plants right now. We have the opportunity to reduce shifts. And again, in this business, there is some natural attrition that goes on in the plants because it’s difficult manual work that if we choose to try to drop our production of the plant, just not rehiring that allows us to also right-size the plant from a production perspective over time. So we’re going to employ those types of strategies to try to balance out our production so that we balance it out consistent with what we are seeing from incoming orders as well as trying to, again what Melinda just talked about, working down the backlog.

Alessandra Jimenez — Raymond James & Associates, Inc. — Analyst

Okay, perfect. And then lastly for me. You guys mentioned beginning to increase investments in marketing. Can you walk us through some of those investments? Is it just a function of additional advertising of existing content? Are you developing new content?

Melinda Whittington — President and Chief Executive Officer

A bit of both. So from a pure share of voice standpoint over the last two years as a percent of sales, we have been significantly down. And we’ve called that out for a while, because again, in a world where the consumer was coming in at record levels already and then our backlog was as long as it was, we’re choosing not to spend money to exacerbate the frustration, if you will. Again, we still kept some level of share of voice on across a total mix.

As we go forward, the — just the share volume we’re taking back to kind of share of voice levels are heading back towards levels like we had pre-pandemic. The mix of that marketing and the content is not at this stage dramatically different. But as I mentioned in my prepared comments, as we look at our Century Vision work and really reinvigorating kind of that consumer focus and being data based on what resonates with the consumer, you will continue to see a shift over time in the content, in the types of marketing mix and really just how we’re reaching the consumer overall, because that is part of the work certainly on the La-Z-Boy brand to ensure we’re reaching the consumer in a meaningful way, we’re helping a broad array of consumers and certainly even aging down that consumer in a way that they recognize we have product that is right for them.

It go back to, we always talk about the La-Z-Boy brand is people will have very positive attributes when they think about the La-Z-Boy. They don’t always think about the La-Z-Boy brand being for them. And so that’s a lot of the database work to ensure we’re telling that story well. And then of course, we’ve been clear that within the Joybird brand, being that it’s still quite a young brand, we’ll disproportionately invest there to continue to grow that brand recognition.

Alessandra Jimenez — Raymond James & Associates, Inc. — Analyst

Thank you. That’s very helpful. Best of luck on the first quarter and the balance of the year.

Melinda Whittington — President and Chief Executive Officer

Thank you.

Bob Lucian — Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you very much. There appear to be no further questions in the queue. I will now hand back over to Kathy.

Kathy Liebmann — Investor Relations

Thank you very much, Jenny. Thanks everyone for joining our call this morning. If you have any additional questions, please reach out to me. Have a great day.

Melinda Whittington — President and Chief Executive Officer

Bye, bye.

Operator

[Operator Closing Remarks]



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VIG ETF: Time To Buy For Higher Total Growth

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ThitareeSarmkasat/iStock via Getty Images

Dividends are one of the best options for passive income. They don’t require any creativity on the part of the shareholder. This differs from the passive income that comes from royalties that arise from writing a song or a book. There’s no real work other than putting money to work from a job. Unless you’re investing in REITs, holding real estate for passive income can actually come with quite a bit of work before you have enough income to outsource much of the work.

Once you buy a diversified collection of stocks or a fund, dividends will continue to flow your way, hopefully indefinitely. However, like other options for cash flow, dividends can lose some of their purchasing power if they don’t constantly grow to keep up with the rate of inflation. Many people decide to purchase dividend growth stocks as a result. These stocks have a history of growing their dividends, usually at a rate that exceeds inflation. If you’re looking to find a fund that’s invested in stocks that pay growing dividends, Vanguard’s Dividend Appreciation ETF (NYSEARCA:VIG) might catch your eye. However, this might not be the best time to enter a position with VIG.

VIG And Dividend Growth

This fund holds only dividend payers. Vanguard summarizes the fund, which had its inception in April 2006, by noting that it seeks to track the S&P’s Dividend Growers Index. It primarily looks at large-cap stocks that have a history of dividend increases. The top 10 holdings in VIG include some with decent dividends, like Coca-Cola (KO) and Johnson & Johnson (JNJ). These stocks yield 2.48% and 2.79% as of June 24, 2022, respectively. Also, both of these stocks have grown their dividends for 60 straight years. There’s no doubt that investors in KO and JNJ have been well-compensated over time.

However, VIG also has some stocks that have very low dividend yields in the top 10 holdings. Microsoft (MSFT) has a dividend yield of 0.93% and Visa (V) has a current yield of 0.73%. These dividends tend to grow more rapidly than stocks like Coca-Cola and Johnson & Johnson, even though their yield appears paltry at the moment. Overall, VIG has a current yield of 1.95%. However, this has elevated because of the recent drop in the stock market, which has caused a corresponding drop in the price of VIG.

Current yield of VIG is 1.95%

Current yield for VIG (YCharts)

According to YCharts, the yield of VIG has been as low as 1.48% in the past year.

Growth History For VIG

The Vanguard Dividend Appreciation ETF has indeed shown solid growth over the past several years. As of the end of last year, the fund had seen a compounded annual growth rate of the dividend of 8.54% over the past 10 years. Since its first full year of existence, the CAGR of the dividend has been 8.28%. This is definitely healthy dividend growth. However, for a fund that promises dividend appreciation, it is not as impressive as it might seem.

Vanguard also offers a High Dividend Yield ETF (VYM). This fund holds some of the same stocks as VIG. For example, companies like JNJ, JPMorgan Chase (JPM), and Procter & Gamble (PG) show up on the top 10 lists of both VIG and VYM. However, this fund attempts to get a higher yield, which it does. Its current yield is 3.10%. Over the past ten years, VYM has had a yield that’s generally been between 1% and 2% higher than VIG’s. Additionally, the 10-year dividend CAGR is 8.84% for the higher dividend ETF. This is actually higher than the Dividend Appreciation ETF, although the CAGR when tracked to the inception of the fund has only 6.07%, which is a little more than 2% less than VIG’s dividend growth rate. However, it’s interesting that a dividend growth fund has a lower growth rate than a high yield fund over the past decade.

Both funds come with a low 0.06% management fee, so this is a negligible cost for investors for both options. When it comes to volatility, VYM has a more stable price. Over the past 52 weeks, there is only a 15.86% difference between the high and low price in VYM. This is compared with a 24.21% difference in the high and low for VIG. Both have bounced slightly above the recent lows.

Inflation

Inflation is currently running at more than 8% on a year-over year basis. Therefore, investments will have to return more dividend growth to maintain purchasing power. In the past several years, inflation held generally between the 2% and 3% range. A dividend increase of 8% or 10% did a good job of increasing the purchasing power of a person’s dividend income. Those who allowed their dividends to compound did an even better job of seeing this growth.

However, when inflation is running 8% and dividend growth is running at 8%, it’s basically a wash in the amount of goods and services your dividend income can buy. There’s also the possibility of a dividend cut in individual companies, and this will get passed down to dividend-focused funds like VIG. In both 2009 and 2013, VIG cut its dividend payment on a year-over-year basis. This is more likely in a recession, and economic growth actually dropped by 1.4% in the first quarter of this year. If this continues for another quarter, the US will technically be in a recession, which is usually defined as two straight quarters of economic contraction.

Recessions frequently come with higher unemployment, which can lead to lower demand for products and services. A recession may or may not lead to lower costs for producers. If there is a period of low economic growth with relatively high inflation, this will likely put pressure on profits as companies try to move inventory, which will likely put pressure on dividend growth (and stock prices) in the short run. If prices start to drop because of lower economic activity, this will also impact dividend growth.

Conclusion

A long-term investment in VIG will likely provide solid returns over the long run. However, those who are looking for dividend growth with a higher starting yield and lower volatility might opt for VYM. These two ETFs have a solid record of dividend growth over the last decade, but the higher yield with a similar growth rate will lead to more income over the long run. Where VIG has done better than VYM is the share appreciation. Both entered the market at $50 a share in 2006, but VIG’s share price is currently $146, whereas VYM’s is $103.

Those looking for higher total growth would likely do better with VIG in the future. Those looking for higher income in the near term might look elsewhere. However, both types of investors are likely to be disappointed in the short run as inflation erodes the power of the dividends to provide a higher level of purchasing power in relation to passive income.



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Carnival Corporation & plc (CCL) Q2 2022 Earnings Call Transcript

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Carnival Corporation & plc (NYSE: CCL) Q2 2022 earnings call dated Jun. 24, 2022

Corporate Participants:

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Josh Weinstein — Chief Operations Officer

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Analysts:

Steven Wieczynski — Stifel Financial Corp. — Analyst

Robin Farley — UBS — Analyst

Jaime Katz — Morningstar, Inc. — Analyst

C. Patrick Scholes — Truist Equipment Finance Corp. — Analyst

James Hardiman — Citigroup — Analyst

Daniel Politzer — Wells Fargo Securities — Analyst

Assia Georgieva — Infinity Research — Analyst

Presentation:

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Good morning, and welcome to our Business Update Conference Call. I am Arnold Donald, President and CEO of Carnival Corporation & plc. I’m joined today telephonically by our Chairman, Micky Arison, who is in Europe; and here with me in Miami, David Bernstein, our Chief Financial Officer; Beth Roberts, Senior Vice President, Investor Relations; and as part of our previously announced transition, our Chief Operations Officer, Josh Weinstein. Thank you all for joining us this morning.

Now 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. This is my final business update as CEO. While very disappointingly, our share price unfortunately reflects the current market conditions, I am nonetheless very proud of all that the team has accomplished over the last 9 years. I am especially proud of how well we have collectively overcome what seemed like insurmountable obstacles at times these last few years.

And I remain very excited about our future. With cash from operations now turning positive, we have reached an inflection point and, in fact, turned the corner and are headed on a positive trajectory. I’m not only excited about, I am also very confident in the future of our company, and I’m looking forward to its continuous success. I strongly believe in this team and we are enjoying a smooth transition. As Vice Chairman, far and away, my number one responsibility will be to support Josh and his management team as they work to build on the current momentum.

Josh is a proven executive. He is well respected throughout the company. He served in key leadership roles. He’s driven strong business results during his tenure. And he played an integral part in tuning the company through the global pandemic. Josh’s thorough understanding of our industry, of our operations and our business strategy puts him in a strong position to lead the next phase of our company’s journey. With his vision, intensity and core values truly aligned with those that characterize our company, I cannot think of anyone better suited for this role than Josh.

Now turning to our business results. It is reinforcing to see the continued strength and demand for cruise. We are aggressively, yet thoughtfully, ramping up to full operations, with over 90% of the fleet now in service. And at the same time, we are driving occupancy higher on those ships that have been sailing and we are focused on improving pricing compared to pre-COVID levels.

As we had indicated, for the 20 ships that restarted over the last quarter, occupancy has been intentionally constrained. That said, occupancy increased from 54% last quarter to 69% this quarter, while we also increased available capacity by 25%. Now the combination drove an over 60% sequential improvement in passengers carried. In fact, we carried over 1.6 million guests this past quarter. And partly in the month of June, we are already approaching 80% occupancy and, again, on even higher capacity.

Now what makes that even more impressive is we were able to achieve that in an environment of uncertainty, given frequently changing protocols, including those that were far more restrictive than those in broader society and that were far more restrictive than those found even in other portions of the travel and leisure sector. While thankfully, vaccination and test requirements are starting to relax given the improvement in the state of the virus, we continue, nonetheless, to face constraints in the pool of potential guests due to ongoing requirements in a number of places. Yet, we have been able to make very meaningful progress.

As you know, the CDC recently lifted the testing requirements for reentry into the U.S. for air travel which, going forward, clearly removes some of the friction from our North American brands deployment in both Europe and due to Canadian embarkation Alaska. Usually requiring a longer duration flight, these itineraries are typically associated with longer lead times. Consequently, we expect the real benefit to be realized in 2023 and beyond.

Importantly, customer deposits increased by $1.4 billion in the second quarter, topping $5 billion. Now we have seen a continued increase in express demand, and we expect to see that demand continue to build as protocols are further relaxed and as society becomes increasingly comfortable managing the virus. Concerning the threat of global recession, while not recession-proof, our business has proven to be recession-resilient time and again.

As we have seen in prior cycles, even in downturns, employed people take vacations. And that’s even more true in today’s environment where people prioritize spending on experiences over spending on things. Cruise remains an especially appealing vacation option during downturns because of its compelling value proposition relative to land-based alternatives. Also, there is pent-up demand for travel globally which is a powerful tailwind.

Currently, we are seeing success for close-to-home cruises, with many sailings achieving occupancy at or above 100%, where guests perceive far less friction than with international embarkations. In fact, our Carnival Cruise Line brand, sailing its entire fleet, is expected to reach nearly 110% occupancy during our third quarter. We also saw an improvement in new-to-cruise guests in the second quarter, and we have begun to ramp up our advertising efforts selectively to help support attracting first-time cruisers.

Concerning pricing. We remain focused on improving price through next year. We are focused on optimizing the occupancy while preserving long-term pricing. In this current environment of travel restrictions and health protocols where we have coast unavailability, we use OPay channels and limited promotions to capitalize on near-term demand. We are building on our aggressive fleet optimization efforts. Given challenges in parts of Europe, we have reallocated capacity to capitalize on markets where there is stronger demand.

In fact, we just announced an especially creative approach that we think holds great promise-, the launch of Costa by Carnival. With Costa by Carnival, we bring the ambience and beauty of Italy to Carnival Cruise Line guests. Costa Venezia, Costa Firenze, both newly introduced and both spectacular, will be managed by Carnival Cruise Line, catering to Carnival’s guest base beginning in the spring of ’23 and 2024, respectively.

This new concept will offer a unique experience for Carnival guests to choose fun, Italian style while capitalizing on Costa’s beautiful Italian design elements. Deployment for Venezia will be announced shortly and will represent a new itinerary option for Carnival guests. Separately, we also announced the transfer of Costa Luminosa to the Carnival brand beginning in November 2022 catering to Australian guests. Now with these changes, the Carnival brand will replenish capacity that have been removed from recent ship exits and contribute to manage growth for the brand.

These new and differentiated product offerings enable us to capitalize on demand among Carnival Cruise Line guests and strengthen return on invested capital across our portfolio. In addition, we continue to further optimize our fleet and have announced a removal of an additional smaller, less efficient ship, bringing the total to 23 ships to be removed from the fleet since 2019. The accelerated removal of these less efficient ships, coupled with the delivery of 9 larger, more efficient ships delivered since 2019 fosters higher revenues over time through a 7 percentage point increase in the mix of premium priced balcony cabins and an even better platform for onboard revenue opportunities as well as generating a 6% reduction in ship level unit costs, excluding fuel, moderating the effects of inflation and enabling us to deliver more revenue to the bottom line.

Upon returning to full operations, nearly a quarter of our capacity will consist of newly delivered ships, expediting our return to profitability and improving our return on invested capital. Moreover, next year, our capacity growth compared to 2019 is concentrated in brands with our highest returns. Concerning recent fuel prices, we continue to aggressively manage our fuel consumption. Upon reaching full fleet operations, we anticipate that we will achieve a further 10% reduction in unit fuel consumption and 9% reduction in carbon intensity as compared to 2019.

With our proactive efforts to reduce fuel consumption, we actually peaked our carbon footprint in 2011, and that’s despite an over 30% increase in capacity expected through 2023. In fact, we have reaffirmed and strengthened our carbon intensity reduction goals for 2030 and are on an accelerated path to achieve them through our fleet optimization efforts, investing in projects that drive energy efficiency, designing energy-efficient itineraries and investing in port and destination projects.

During the quarter, Carnival Cruise Line broke ground on an exciting new destination project, Carnival Grand Bahama Cruise port. This destination is expected to open in late 2024 and will offer guests a uniquely Bahamian experience with many exciting features and amenities. Now this private guest experience destination will join Princess Cay, Half Moon Cay, Grand Turk, Mahogany Bay, Amber Cove and Cozumel, securing our strong foothold in the Caribbean. In fact, we benefit from a total of 9 owned or operated private destinations and port facilities, including terminals in Santa Cruz de Tenerife and Barcelona.

Again, I believe we have operationally reached an inflection point and we are heading in the right direction with cash from operations turning positive this quarter. We have a strong liquidity position of $7.5 billion and have already managed our debt maturity towers down through 2024. We have 91% of the fleet now operating and at improving occupancy levels, which bodes well for future cash generation.

And while to date, travelers perceive uncertainty and friction continues to be a headwind as protocols become less restrictive and society continues to become increasingly more comfortable managing the virus, we expect to see demand continue to build, as we have already seen with the strength for Carnival Cruise Lines closer-to-home cruises. The attractive value proposition relative to land-based alternatives, which is even greater today, and the continued strength in onboard revenues should help foster a good environment for pricing and should help to accelerate our momentum going forward.

Once again, I don’t have the words to adequately convey how personally rewarding and inspiring the commitment, the dedication, the creative ingenuity and the phenomenal execution of our Carnival team, shipboard and shoreside around the world has been. And that, of course, includes our Chairman, Micky Arison, and the rest of our Board of Directors. In the face of constantly changing barriers and constraints, in an environment of continuous and extreme uncertainty, our global team of tens of thousands successfully tackled challenge after challenge after challenge, honoring our commitment to our highest priority of compliance, environmental protection and the health, safety and well-being of everyone while stewarding the shareholders’ assets and positioning us for great success over time. I simply can’t thank them enough and it’s truly a privilege and an honor to work with them.

Thank you also to our valued guests. Their loyalty to our 9 world-leading brands and the countless letters and calls of support are so deeply appreciated. Thank you to our travel agent partners, who are more critical than ever and helping to deliver the great story of our cruise. Thank you to our home port and destination communities who have stood by us throughout these challenges, among other contributions providing vaccines and lobbying for workable protocols.

Thank you to our suppliers and other many stakeholders who stood by us and worked hard to meet our needs while facing challenges of their own. And of course, thank you to our shareholders, our bondholders, the banks, the export credit agencies for continued confidence in us and for ongoing support. We are indeed poised for a great future because of the efforts and contributions of so many.

With that, I would like to take the opportunity to introduce Josh and give him the chance to say a few words before turning the call back to David. Josh?

Josh Weinstein — Chief Operations Officer

Thank you, Arnold. And thanks again to Micky and the entire Board of Directors for this great opportunity. I strongly believe in our company and our ability to create happiness by delivering unforgettable and much-needed vacations for our guests. This need is even more important in the current environment given the stresses of the past two years and the value that we all place on shared experiences with friends and family.

Now we are uniquely placed to deliver on this through our 9 leading cruise brands, each with a focus on meeting their specific guests’ needs and wants. We plan on renewing our efforts to ensure each brand achieve clarity of positioning and effectively reaches their target audience. This, alongside providing cruise experiences that really resonate with their distinct guest base, will help each brand optimize its yield and growth aspirations to drive revenue.

We also expect to capitalize on our revitalized fleet, our continued portfolio optimization efforts and our unparalleled destination footprint, particularly in the Caribbean and Alaska. In addition, we have an exciting sustainability road map that underlies all of our efforts. What also gives me tremendous confidence is our determined and resilient team around the world. They’ve proven time and time again for the last 2.5 years that they can absolutely achieve anything and they do it while staying true to Carnival Corporation’s collective values and positive culture. All of this will help us accelerate revenues and returns, drive durable earnings growth and improve the balance sheet.

As you said, Arnold, we are clearly at an inflection point and have a bright future ahead. I’m looking forward to putting the perspectives I’ve gained here in my 20 years in multiple roles to work for the benefit of our shareholders and our many other stakeholders.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Thanks, Josh. We’re looking forward to your leadership. David?

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Thank you, Arnold. I’ll start today with a review of guest cruise operations, along with a summary of our second quarter cash flow. Next, I will touch on our 2024 mandatory auditor rotation. Then I’ll provide an update on booking trends and finish up with adjusted EBITDA expectations and our current financial position. Turning to guest cruise operations. During the second quarter 2022, we restarted 20 additional ships, resulting in 74% of our total fleet capacity in guest cruise operations for the whole of the second quarter. This was a substantial increase from 60% during the first quarter 2022.

As of today, 91% of our fleet capacity is in guest cruise operations. We were pleased to see that the second quarter 2022 revenue increased by nearly 50% compared to first quarter 2022, reflecting continued sequential improvement. For the second quarter, occupancy was 69% across the ships in service, a significant increase from the 54% in the first quarter. We were encouraged by the very close-in demand we experienced during the second quarter for the second quarter, resulting in nearly double the close-in occupancy gains in second quarter 2022 versus second quarter 2019, a trend we had anticipated.

Revenue per passenger day for the second quarter 2022 decreased slightly from a strong 2019. As Arnold indicated, we are focused on optimizing occupancy while preserving long-term pricing. However, let’s not forget the impact due to the future cruise credit, or FCC as they are more commonly called, which cost us a couple of percentage points in second quarter 2022 versus second quarter 2019. Excluding the impact of FCC’s revenue per passenger cruise day, the second quarter would have been higher than a strong 2019.

Once again, our onboard and other revenue per diems were up significantly in the second quarter 2022 versus second quarter 2019, in part due to the bundled packages as well as onboard credits utilized by guests from cruises canceled during the past. We have recently expanded our bundled package offering given their popularity. The new bundled offerings require us to make changes to the accounting allocation. As a result, in the third quarter, you will see more of the revenue left in ticket, unless allocated to onboard, impacting the onboard and other revenue per PCD comparisons for the third quarter as compared to the second quarter.

Just another reason to add to the list of reasons why the best way to judge our performance is by reference to our total cruise revenue metrics. On the cost side, our adjusted cruise cost without fuel per Available Lower Berth Day, or ALBD as it is more commonly called, for the second quarter 2022 was up 23% versus second quarter 2019. The increase in adjusted cruise cost without fuel per ALBD is driven by essentially 5 things: First, the cost of a portion of the fleet being in pause status. Second, restart-related expenses for 20 ships. Third, 24 ships being in dry dock during the quarter, which resulted in over double the number of dry-dock days during the second quarter versus the second quarter 2019. Fourth, the cost of maintaining enhanced health and safety protocols. And finally, inflation.

Remember that because a portion of the fleet was in pause status during the second quarter and the higher number of dry-dock days, we spread costs over less ALBDs. The first half of 2022 had an unusually large number of ships in dry dock as part of our resumption of cruising ramp-up, optimizing our dry-dock schedule while the ships are not in service and ensuring that the ships were great and work great when they welcome their first guess back on board. However, the second half 2022 dry-dock schedule looks more normal by historical standards. We anticipate that many of these costs and expenses driving adjusted cruise costs without fuel per ALBD higher will end during 2022 and will not reoccur in 2023.

As a result of all of the above, we expect to see a significant improvement in adjusted cruise costs, excluding fuel per ALBD, from the first half of 2022 to the second half of 2022, with a mid-teens increase expected for the full year 2022 compared to 2019. Next, I’ll provide a summary of our second quarter cash flow. We ended the second quarter 2022 with $7.5 billion in liquidity versus $7.2 billion at the end of the first quarter. The change in liquidity during the quarter was driven essentially by 6 things: First, negative adjusted EBITDA of approximately $900 million due to our ongoing redemption of guest cruise operations, an improvement from the first quarter.

Second, our investment of $500 million in capital expenditures. Third, $200 million of debt principal payments. And fourth, $400 million of interest expense during the quarter. All of which was more than offset by a $1.4 billion increase in customer deposits during the quarter, along with the $1 billion principal amount of senior unsecured notes we issued last month. Now I will touch on our 2024 mandatory auditor rotation. I wanted to take a moment to explain our situation as it is very different from most publicly listed companies outside the U.K. and the EU. Carnival plc, our U.K. publicly listed company, which is part of our dualistic company structure, is subject to U.K. law which requires mandatory auditor rotation.

Therefore, PricewaterhouseCoopers, or PwC as they are more commonly called, must be changed as Carnival plc’s auditor for the fiscal 2024 audit at the latest. Therefore, we conducted a competitive RFP process for the independent audit of Carnival plc as well as the consolidated entity, Carnival Corporation & plc. As a result of the recently completed RFP process, yesterday, our Board of Directors appointed Deloitte as the company’s independent auditor for fiscal 2024. We completed the RFP process in the first half of 2022 to ensure an orderly transition of non-audit services for the remainder of 2022 and to ensure independence by Deloitte in 2023, as required under U.K. law.

Before I continue, I would like to add that the Board of Directors and management of Carnival Corporation & plc would like to thank PricewaterhouseCoopers for its continued service as the company’s independent auditor. Now let’s look at booking trip. The higher March weekly booking volumes we talked about on our last business update continued throughout the quarter. This resulted in booking volumes for all future sailings during the second quarter 2022 being nearly double the booking volumes during the first quarter 2022. Second quarter 2022 booking volumes for all future sailings were the best quarterly booking volumes we have seen since the beginning of the pandemic, although they were still below the 2019 level.

I am happy to report that booking volumes since the beginning of April for the second half of 2022 sailings have been higher than 2019 level. All of this reflects the previously expected extended wave season. And as I said before, we were very encouraged by the close-in demand we experienced during the second quarter for the second quarter, resulting in nearly double the closing occupancy gain in second quarter 2022 versus second quarter 2019, a trend we had anticipated. While the cumulative book position for the second half of 2022 is below the historical range, we believe we are well situated with our current second half 2022 book position given current booking volume, coupled with closer-in booking patterns.

We continue to expect that occupancy will build throughout 2022 and return to historical levels in 2023. Pricing on our cumulative book position for the second half of 2022 was lower, with or without FCC, normalized for bundled packages as compared to 2019 sailing. For the full year 2023, our cumulative advanced book position continues to be at the higher end of the historical range and at higher prices, with or without FCC, normalize for bundled packages as compared to 2019 sailings. This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison as that was a high watermark for historical yield.

During the second quarter 2022, we once again increased our advertising expense compared to the first quarter 2022 in anticipation of our full fleet being in guest cruise operations and our 8% capacity increase for 2023 versus 2019. Second quarter 2022 was the first time since the pandemic that advertising expense was above 2019 level.

I will finish up with our adjusted EBITDA expectations and our current financial position. We all know that booking trends are a leading indicator of the health of our business. With improved recent booking trends leading the way, driving customer deposits higher, positive adjusted EBITDA is clearly within our sights. Adjusted EBITDA over the first half of 2022 was impacted by restart-related spending and dry-dock expenses as 34 ships, nearly 40% of our fleet, were in dry dock during the first half of fiscal 2022.

For the third quarter, with over 90% of our capacity back in guest cruise operations and occupancy percentages building, we expect ship level cash contribution to grow. As a result, we expect adjusted EBITDA to be positive for the third quarter 2022 which, after everything we’ve been through, will be something worth celebrating. With EBITDA turning positive, more liquidity than last quarter, debt maturity towers that have been well managed through 2024, we have already refinanced a portion of our 2023 maturities and we will do the rest over time.

And now I will turn the call back over to Arnold.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Thank you, David. Operator, please open the call to questions.

Questions and Answers:

Operator

Thank you [Operator Instructions]. Our first question comes from the line of Steven Wieczynski with Stifel. Please go ahead.

Steven Wieczynski — Stifel Financial Corp. — Analyst

Yeah, hey guys. Good morning. Arnold, congratulations, and it was a great run. So thanks for your service. So first question would be around the booking patterns, which clearly here are continuing to strengthen. However, I guess, investors are going to, at this point, based on where your stock is, they’re going to look past booking — current booking patterns and they’re going to focus on what could come next given an uncertain macro backdrop.

And I guess my question is, how would you guys attack a slowdown in bookings or load factors? In the past, you would have typically cut prices in order to keep load factors high. But this time around, if you do see bookings slow, do you think you guys and your peers will be able to stay more disciplined on the pricing side of things, so the recovery wouldn’t be as steep on the other side?

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

A couple of quick comments. First of all, I wouldn’t comment on what the others would do. You can talk to them directly. For us, we have, as we’ve been hit with different variants and invasion of Ukraine and other things and bringing more capacity on board, we’ve had to consider all of that. And at this point in time, largely we have done everything in mind of trying to keep our pricing strong going forward because we think that’s the right move right now.

The positive thing here is that there is pent-up demand. And so even if there was a global recession, the reality is we are, as I said in my comments, recession-resilient historically. And this time, if there was a recession, there’s tremendous pent-up demand, which in the past wasn’t necessarily the case because it’s been a couple of years where people have not been able to travel the way they wanted to. So a combination of things. One is we are naturally somewhat recession-resilient. We have added tailwind of pent-up demand. And yes, we’re focused on doing what we can to ultimately drive the cash we need but, at the same time, do in a manner where we can maintain pricing strength. David may have a comment.

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Yes. Just one thing I’d add to that. Remember, Steve, not every recession is the same. And we are currently in a very strong labor market. And given that, if people have jobs and they feel comfortable in their jobs, they’re likely to need a vacation. And remember, vacations are no longer a luxury, they’re a necessity in today’s world. So I think we will do very well. As Arnold said, we are recession-resilient and we’ll do very well in a recessionary environment.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

And then there’s — we’ll see if a recession comes right now. Savings are really high. As David pointed out, employment rates are really low. And so there’s economic strength for the time being. We’ll see what happens.

Steven Wieczynski — Stifel Financial Corp. — Analyst

Okay. Got you. And then second question, I guess, probably for you, David, around the recent debt raise. And we got a lot of questions from investors about why you guys would go out and raise debt north of 10% and maybe what drove you. Or maybe there was an underlying reason as to why you had to raise debt at those levels. And I guess from here, the question is going to be, what is the opportunity moving forward to refinance? Or maybe there is enough chance to refinance given where rates are at this point?

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Yeah. So if you — as I said on the last conference call, we were looking to, over time, refinance the $3 billion of 2023 maturities, and we were focused on that. And we took a look and we believe that we’re in a rising interest rate environment. And so we did go out and we raised $1 billion at 10.5%. It was a difficulty in the market, nobody could have predicted what would happen in the overall market. But what’s interesting is despite the market backdrop, we were able to raise $1 billion within the price talk that we wanted on that day and we felt very good about that.

We’re looking to do $2 billion to refinance the remaining portion, as I said in my notes, over time. But we’re just averaging in. If you look at it today, interest rates are higher than they were a month or so ago when we actually did our bond offering. So I’d say that we were in a good position. We feel good about what we did. And we’ll look to refinance the other $2 billion over the ensuing months ahead. And we’re just averaging in. Keep in mind, despite, I will say, adding 10.5%, if you look at our portfolio of debt, our average interest rate today is 4.5%. So we’ve done a great job managing the whole portfolio. And this is just one minor piece in the portfolio.

Steven Wieczynski — Stifel Financial Corp. — Analyst

Okay, great. Thanks guys. Really appreciate it. Best of luck Arnold.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Thanks Steve.

Operator

Next question from the line of Robin Farley, UBS. Please go ahead.

Robin Farley — UBS — Analyst

Great. Thank you. Arnold, best wishes, since this is the last earnings call you’ll be joining it for. Good luck with everything.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Thanks Robin.

Robin Farley — UBS — Analyst

I had a question on occupancy. I think investors kind of struggle with how much of the lower occupancy is sort of temporary, like the Omicron cancellations in Q1 and new ships going into service at lower levels. And how much — in other words, to try to kind of see the path demand there, I wonder if you could give us a little bit of color on sort of the sequential build in occupancy through Q2, I know you normally wouldn’t give that level of detail and/or maybe something with your visibility on Q3, which I think normally you would be 80% to 90% booked by now. And just kind of are you seeing, for ticket price relative to ’19 and occupancy, with that level of visibility, I don’t know if you can comment a little more specifically.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Yeah, you bet, Robin. I’ll have David share some details. But the overarching comment would be that we have real strength in occupancy. And we had some intentionally constrained occupancy as we brought ships on back online because of protocols in different places and so on. We also had some isolated situations where we’re moving crew around temporarily as we were staffing up with crew and constrained capacity for those reasons as well.

But overall, our occupancy — but our occupancy rates, as we shared, have really improved over time here. And as we mentioned, the Carnival brand is looking at 110% occupancy in the third quarter. So we have more capacity sailing and occupancy is rising nicely. And as the world continues to relax and become comfortable managing the virus and restrictions are relaxed, we see things moving more into the direction of the Carnival brand where things are more normalized even though they still have some restrictions right now. David?

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Yes. So during the second quarter, I mean, the variance between the months, it went from 67% to 71%, which is why we wound up overall with that 69% occupancy for the quarter. So — and as Arnold said, we’re approaching 80% for the month of June. And with booking trends good, we continue to build. So — but keep in mind, that as I had indicated, we started 20 ships in the second quarter. And of course, there are a number of cruises, we’re early on, we constrain occupancy to ensure we practice and the guests have a great time. And so we build on those ships, and you can see the benefit of that when we got to June. So we feel very good about the overall trend. It is positive. Moving in the right direction. And we do expect to see an improving trend in the third quarter and into 2023.

Robin Farley — UBS — Analyst

Okay, great. Thank you. And maybe just as a follow-up question on the expense commentary. You put — you mentioned a lot of sort of buckets about pause status, ship restart costs, dry dock, all of those as being part of that 23% increase. And I know you mentioned that will improve significantly by year-end. I wonder if you could quantify a little bit of how much of that increase was just inflation in health and safety. In other words, the other factors all being somewhat temporary, the pause status, the restart cost, the dry dock, how much of those sort of 23 points are — go away automatically just by having your — the fleet back in service? Just so we can think about kind of where you could get to by the end of the year in terms of expense per passenger per se.

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Yeah. I think the best way for you to — you can do your own quantification and it’s pretty easy. If you think about, we were sort of 24% up per ALBD for the first half. And all you have to do is if you’re mid-teens for the full year, you can back into where we were for the second half, taking out the pause status, the restart, the dry docks. Because I did say that the dry docks in the back half of the year were going to be sort of more normal like in terms of the number of dry-dock days. So if you back into the number, you’ll be able to see where we are for the back half of the year, which is a better reflection overall than the first half. Now there’s still noise in that because supply chain disruption and other things. And we are working really hard to manage that down. And we will do that. So — but that’s probably the best way to back into it.

Robin Farley — UBS — Analyst

And I know that that simple average would get you to kind of a mid-single digit for the second half. But I guess I was wondering by kind of the end of the year, really thinking about 2023, that’s how I was looking for sort of what pieces would maybe go to.

David Bernstein — Chief Financial Officer and Chief Accounting Officer

I understand. And I’m not in a position to give cost guidance for 2023 at this point. But I was just trying to give you some directional. You can see what the back half is, and we’ll manage through all of those items effectively over the next six months. And like I always say, we hope to do better. But at this point, it would be premature for me to give you cost guidance.

Robin Farley — UBS — Analyst

Okay. Understood. Thank you very much. Thanks.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Thanks Robin.

Operator

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

Jaime Katz — Morningstar, Inc. — Analyst

Hi. Good morning. Thanks for taking my question. I’d be interested in hearing how you guys are seeing differences between domestic and international consumers, particularly because of this transition of Costa ship, maybe being this rebranding with Carnival and whether or not that’s signaling anything?

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Yeah, I think just generally, obviously, Europe in many ways is more challenged from consumer demand standpoint as it relates to travel to an extent than North America. And what you’re seeing in the move with Costa by Carnival and the transfer of the Luminosa in Australia to Carnival is part of a rightsizing of Costa for what we see as a European environment which has complicated not only by COVID and macroeconomic conditions, somewhat triggered by invasion of Ukraine, but also the invasion of Ukraine. And so all of those things are impacting the European market sector.

So we’re reallocating to brands that have stronger demand, that are in a stronger position. That’s one of the beautiful things, our assets are mobile. So — but overall, we still see strong demand in Europe. And there are portions of Europe, the U.K. in particular. Also we see some continuing strength in portions of Germany and what have you. And so we see a good market in Europe, a strong market in North America. And we’re just reallocating across the brands to optimize our portfolio and maximize the cash generation and position us for the long term.

David Bernstein — Chief Financial Officer and Chief Accounting Officer

If I can build on that a little bit. I did want to point out, so we talked about our bookings in the second quarter nearly doubling the — what they were in the first quarter. So the NAA brands were a little bit over double than the EA brands, which includes Costa, we’re a little bit less than double book, I mean everything is heading in the right direction. There is good, solid, strong demand in all the brands. But the NAA brands are doing, from a booking trend perspective, a little bit better than the EA brands.

I’d also like to point out, add to Arnold’s comments, about Costa by Carnival. Because keep in mind, a big chunk of Costa’s capacity in 2019 was in China. And so with that market at the moment closed, we rather than take all of that capacity and put it in Europe, we created a new market towards the Carnival guests which we think will expand the market here in North America and we’ll be in a much better position overall. So we feel very good about all of our brands and the direction and we are managing it appropriately as you could see, what Arnold talked about the moves of the ships.

Jaime Katz — Morningstar, Inc. — Analyst

Okay. And then David, I don’t think it was explicitly noted, but in the past, I think you guys had pointed to 2023 EBITDA above 2019 levels. And do you still feel like the business is tracking in the right direction to achieve that?

David Bernstein — Chief Financial Officer and Chief Accounting Officer

So I said that quite a number of times. I think we are — what I’ve always said is we have the potential for EBITDA to be greater in 2023 than 2019. That one big wildcard, of course, is the price of fuel which has risen quite a bit in the last few months. So just keep that in mind. But there is, with the occupancy improving over time, there certainly is that potential.

Jaime Katz — Morningstar, Inc. — Analyst

Thank you.

Operator

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

C. Patrick Scholes — Truist Equipment Finance Corp. — Analyst

Hi. Good morning everyone. Arnold, best wishes as well.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Thank you Patrick.

C. Patrick Scholes — Truist Equipment Finance Corp. — Analyst

Thank you. Well, first question is, can you comment on your potential willingness to sell brands to — one or more brands to help shore up the balance sheet?

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Well, we’re very pleased with our portfolio of brands. Having said that, our job is always to keep an open mind and do what’s best for the shareholders. And so we would absolutely, again, evaluate any and all options. But we’re only going to do what makes sense for the shareholders given our projections of opportunity given the portfolio we have.

C. Patrick Scholes — Truist Equipment Finance Corp. — Analyst

Okay. Fair enough. And then my second question is a bit of a clarification on some of the text in the earnings release where you noted that cumulative advanced bookings for the second half of ’22 are now below the historical range, which implies — obviously it was lowered from the previous where you said it was at lower end. Specifically, you noted here, this position is consistent with its expected improving occupancy levels for the second half of ’22. Can you explain a little bit more what that last phrase means? I’m not quite understanding what you mean by consistent with expected improving occupancy levels.

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Yeah. So what we were trying to — yes, what we’re just trying to say there is, like Arnold indicated, that in the month of June, in his prepared remarks, he said occupancy was approaching 80%. And so what we were trying to say is despite the fact that we were below the historical range, we do expect, because of the closer-in nature of the booking patterns, to see occupancy in the back half of 2022 to be higher than the 69% in the second quarter. And that’s all we were really trying to indicate to people with that statement.

C. Patrick Scholes — Truist Equipment Finance Corp. — Analyst

Okay. Thank you for the clarification.

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Sure.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Thank you Patrick.

Operator

Next question from the line of James Hardiman with Citi. Please go ahead.

James Hardiman — Citigroup — Analyst

Hey, good morning. Thanks for taking my questions. And Arnold, I wanted to reiterate congratulations and good luck with what’s next. Wanted to hone in a little bit on some of the pricing commentary, particularly the revenue per passenger cruise day. I think you said that number was down a little bit. There was some — a little bit of an FCC headwind there. But I think that same number was up north of 7% in the last quarter.

Obviously, there’s this growing concern that the industry is going to need to push price a little bit to fill these ships. Maybe speak to that idea. As we continue to fill up the ships in the third quarter and beyond, should we expect that pricing number to go down, down further? And then obviously, we’re going to get back to some of that FCC impact. But sort of excluding that piece, how should we think about revenue per passenger cruise day as we continue to raise occupancy?

David Bernstein — Chief Financial Officer and Chief Accounting Officer

So — okay. I think, overall, Arnold in his notes talked about the fact that we were focused on maximizing occupancy while preserving price in the long term. And so we are very keen on that. We did increase advertising expense in the second quarter for that purpose to create more demand. We are seeing more first timers. We had mentioned the fact that we saw a significant improvement in first timers. So what we’re trying to do here is we’re building towards historical occupancy levels in 2023 with better pricing. As we indicated, the pricing for 2023 is up.

But with the shorter booking window and the use of OPay channels and the use of limited promotions, we are driving occupancy in the short term in order to optimize the EBITDA and the cash flow from operations of the business. So while I’m not prepared to give you guidance on the third and fourth quarter gross revenue per PCD, which, by the way, if you just think about the third quarter, one of the things to remember is we hope to have a lot of kids on board in the third quarter.

And those thirds and fourths will also generally, they add to the revenue, they add to the bottom line. But they will also on a per PCD basis be lower than the lower berths, both for the ticket and the onboard. The kids don’t generally spend as much on board either. But we’re happy to have them all on board. So there are factors in there that you have to consider as you think about the trend per PCD from third to fourth quarter and beyond.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

And with the increase in occupancy that we experienced in the second quarter, even with also the capacity increase we had in the second quarter, when you normalize the FCCs, our pricing did not decline.

James Hardiman — Citigroup — Analyst

That’s really helpful color. And maybe you already answered this to some degree, but if I sort of zoom out here for a minute. Historically, the industry has largely used this price to fill paradigm. And I think with some of these metrics, the concern is that we’ll return to that. We were — pre-pandemic, we were — it seemed like in a better place, thinking more about long-term pricing opportunity. Maybe speak to if there’s been any change in your philosophy pre pandemic to now just given the importance of filling up these ships and getting to positive free cash flow.

David Bernstein — Chief Financial Officer and Chief Accounting Officer

So one of the things that you have to think about in all of this is, over time, we are already seeing it, but we — the protocol friction is reducing. Just recently, they dropped — the U.S. dropped the testing requirements for people to get back into the U.S. from international places. And we are seeing — we are starting to see the ability for us to reduce our protocols and reduce the friction. And I think that will bring back people from the sidelines and will create additional demand which will allow us to get better occupancy at a better price. So directionally, with more first timers coming on board and the reduced protocols, we feel very good about the future over the next few quarters in 2023.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

And keep in mind, as you track all of this, that there are mix issues in here, too. Just portfolio mix and overall brand positioning as well as specific itinerary — itineraries available and what have you. So the average price is, there’s a lot of noise in that. And the overall — the message we’re sending and what we are experiencing is an encouragement of a strong market coming back, pent-up demand and us carefully managing that, thoughtfully managing it, as we create the cash and at the same time position the business well for the future.

James Hardiman — Citigroup — Analyst

That’s really helpful color. Thank you both.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Thank you.

Operator

Next question from the line of Dan Politzer, Wells Fargo. Please go ahead.

Daniel Politzer — Wells Fargo Securities — Analyst

Hey, good morning everyone. And Arnold, best of luck. And Josh, congratulations on the new position. So I had a question on customer deposits and how we should think about this for the rest of the year. Obviously, it was very strong in the second quarter. I mean, there’s typically a decline sequentially. So just as we think about cash flow for the rest of the year and how customer deposits flow through, is it safe to say that the third quarter should — is not going to be cash flow positive or — just given that there’s that sequential decline? Or given the extent that you guys continue to recover in terms of your bookings and operations, the third quarter could continue to be cash flow positive?

David Bernstein — Chief Financial Officer and Chief Accounting Officer

So that’s a great question and we’ve been trying to answer that. I will tell you that in the last — since the end of May, customer deposits have continued to increase. They’re up a few hundred million dollars. So that at least directionally in the last — what has it been, 3.5 weeks, that’s where we’re at. Normally, during the third quarter, there is a reduction because we reach the seasonal high peak at the end of May. But there are offsetting factors this year that we would expect to see. With more ships coming back online and higher occupancies, that should mitigate any normal seasonalization. Whether it completely mitigates it or not, it’s very hard for me to predict at this point. But there are some mitigating factors to the normal seasonalization of customer deposits.

Daniel Politzer — Wells Fargo Securities — Analyst

Yeah. One more quick one, if I could just squeeze it in. On just the newer cruise product, a lot of your fleet has been refreshed. To what extent have you been able to capture that pricing? Typically, the newer product gets a premium price but this is kind of a weird environment. Have you been able to capture that? And if so, any kind of metrics or a way to quantify that?

David Bernstein — Chief Financial Officer and Chief Accounting Officer

Yeah. It’s very hard to tell. I mean we look at so many things, but.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

There’s so many variables right now.

David Bernstein — Chief Financial Officer and Chief Accounting Officer

So many variables right now, it is just very, very difficult to tell in a comparison going back to 2019. So we look at the total, we manage it appropriately. I will tell you, those new ships are performing very well, high levels of occupancy, generating significant cash flows. And as we move forward, I suspect that we will be able to continue to generate a premium there. Arnold indicated nearly a quarter of our fleet will be new in 2023 or newly delivered.

The average age of our fleet, believe it or not, I think I said this before maybe on one of the previous calls, but from 2019 to 2023, despite the passage of four years, the average age of our fleet went down one year. So that we’ve got a lot of new capacity which should help very well both on the revenue side and on the cost side from an efficiency perspective and better fuel consumption. So we are very excited about the future and delivering memorable vacation experiences to probably 14 million people in 2023 as we go for historical occupancy levels.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

Operator, we’ll take more question. Let’s make it a good one for Josh. Go ahead.

Operator

Our next question comes from the line of Assia Georgieva, Infinity Research. Please go ahead.

Assia Georgieva — Infinity Research — Analyst

Good morning. Arnold, you’ll be missed. But Josh, very happy that you received this great position responsibility and triple promotion. So I do have a good question for you, hopefully. With the Costa by Carnival concept, that is obviously something that would be a long-term fixture. We’re not just moving ships around for the next two or three years. Do you believe that this is something that could be expanded?

And does the Costa fuel play any role in terms of what ships might actually continue to join the new concept? LNG deliveries have been somewhat difficult, I guess, in Europe. We had issues with Costa in South America last winter season. So how do you see the development of the concept? And what are the key parameters that would actually play into it?

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

I’m going to have Josh comment on the overall brand positioning and stuff as we go forward. But real quickly on the LNG fuel question. LNG, as you know, is the cleanest burning fossil fuel. It gives us a 20% reduction in carbon emissions, etc. But the shifts are dual, so they can also burn MGO. And so that, unto itself, wouldn’t impact the future of the Costa brand. We’ll burn LNG whenever it makes sense to do so, which we think will be the majority of the life of the ships. But there are times where we’ll obviously opt to burn MGO. But in terms of the Costa by Carnival positioning, it’s a new concept, and I’ll let Josh share his thoughts on it. Go ahead, Josh.

Josh Weinstein — Chief Operations Officer

Just one thing to clarify. Obviously, the two ships that we’re talking about that are going under this Costa by Carnival umbrella are not LNG ships. So that obviously didn’t enter into our mindset at all. So just to reiterate Arnold’s point. And with respect to the positioning, I think this is a great example of leveraging the scale of this corporation. Because what we could have done is taken those ships, new beautiful ships, solely under the Costa name and try to introduce them into the North American market on a standalone basis.

But this is actually the opportunity to leverage everything that Carnival does so well here in the United States and Canada for its guest base. So by marrying that along with Costa’s beautiful tonnage and onboard experiences, we have the ability to marry that up and make a best go of creating something really special. So the short answer is, we absolutely expect this to be successful and we don’t look at this as something short term. But ideally, it will be something that works and we can build upon.

Assia Georgieva — Infinity Research — Analyst

Okay. So currently, no further plans. Obviously, you’ve made plans for 2023 and 2024. So that’s plenty of time and capacity coming in the two ships. So at this point, it’s too early to discuss whether this would become sort of a mini brand on its own.

Josh Weinstein — Chief Operations Officer

Yeah. I think let’s try it out with two ships, and then we’ll see how we do. But that’s it for now.

Arnold W. Donald — President, Chief Executive Officer and Chief Climate Officer

So, thank you, everyone. Go ahead. Go ahead. I’m sorry. Okay. Thank you, everyone. Really appreciate it. And looking forward to listening to these as we go forward and hearing the great news coming from Josh and our team. So thank you all very much, and have a great day.

Operator

[Operator Closing Remarks]



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Virtually every corner of Wall Street is being rattled by worries that rising interest rates will drive the economy into a recession, spurring large price swings in everything from junk bonds to foreign currencies.


Fear has gone missing in Wall Street’s slow-motion bear market

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NamePriceChange% Chg
Ntpc136.600.100.07
Indiabulls Hsg100.951.451.46
Sbi454.252.850.63
Rec117.951.050.9

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Forum

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YOUR OPINION

Which of these youngsters will score more runs this ipl?

COMMENTS

Thank You for Voting