Royal Caribbean Cruises Ltd.

Good morning. My name is Shelby and I'll be your conference operator today. At this time, I would like to welcome everyone to Royal Caribbean Group's Business Update and Third Quarter 2020 Earnings Call. All participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to introduce Chief Financial Officer, Mr. Jason Liberty. Mr. Liberty, the floor is yours.

Thank you, Shelby. Good morning, everybody, and thank you for joining us today for our business update and third quarter earnings call. Joining me are Richard Fain, our Chairman and Chief Executive Officer, Michael Bayley, President and CEO of World Cricket International, and Corolla Mingolini, our Vice President of Investor Relations. During this call, we will be referring to a few slides which have been posted on our investor website, www.rclinvestor.com. Before we get started, I would like to refer you to our notice about forward-looking statements, which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Please note that we do not undertake to update the information in our filings as circumstances change. Also, we will be discussing certain non-GAAP financial measures which are adjusted as defined and a reconciliation of all non-GAAP historical items can be found on our website. Richard will begin the call by providing a strategic overview of the business. I will then follow up with a recap of our third quarter results. I will then provide an update on our latest liquidity actions and will then provide an update on the booking environment. We will then open the call for your questions. Richard.

Thank you, Jason, and good morning to everybody. It's been almost seven months since we paused our cruise operations, and every single day has been extremely frustrating and challenging on so many levels. But while emotionally and financially it hurts us tremendously to see our ships laid up, we've tried to use this time to good effect. Our teams, together with the Healthy Sale Panel, have worked tirelessly to produce a thoughtful set of health protocols to resume operations. Simultaneously, our finance team has worked aggressively in securing liquidity to position the company well for the recovery. One of the most frustrating elements of COVID-19 is how little the world knew at the beginning of this pandemic about the virus and how many false paths We have all gone down over this period. Fortunately, the science has made remarkable strides, and there are a few observations and predictions that we can make. We are seeing an upsurge in infections in the United States and in other countries around the world. The experts seem to expect a second wave over the coming months. After seven months of agony, the prospect of a further surge is beyond frustrating. However, the advances on the science fronts give us optimism that this coming surge will not be as devastating as the early surges in March and April, and it will lead to a better 2021. Therapies are dramatically better and they are more effective. Testing capabilities are already at extraordinary levels and moving higher. And the progress on vaccines has advanced at unprecedented speeds. Personally, at this point in this unfathomable crisis, I feel more positive that we're beginning to see the light at the end of the tunnel. That light needs new batteries, but the light is clearly visible. Please don't get me wrong. I don't mean to minimize the trauma that this disease is causing and will continue to cause, but progress is being made, and that progress is fundamental for our recovery. As you should know by now, this past September, the Healthy Sale Panel submitted their recommendations to us and the CDC, and they were extremely well received. We all know that we can't eliminate all risk of COVID-19, or anything else for that matter. Therefore, we asked the panel to help us to meet two specific goals. One, to reduce the risk of COVID below the level in our guests' home communities. and two, to assure that we can properly handle a COVID incident on board effectively and without inconveniencing all the guests or the local community. The panel made 74 specific recommendations towards accomplishing these two goals. By implementing their recommendations, we intend to make our ships an environment, a bubble if you will, that presents less risk of transmission than our guests would find on land. The entire industry here has agreed to abide by these recommendations, and we believe they can serve as a foundation for a gradual and methodical healthy return to service. The CDC and other regulators have been working on this for a long time. We're grateful for the CDC's focus on health and the time they and their observers have spent on this important topic with the Healthy Sale Panel. I don't want to anticipate any decisions that the CDC might take when the current no-sail order expires, but I am optimistic that through our continued dialogue and the pathway that we have outlined, we are moving in the direction of a healthy return to service. We propose to start slowly by training our crew and embarking on a series of non-revenue trial sailings where we can rehearse and validate the new protocols. The panel has recommended that this process be carefully evaluated by independent outside observers, and we will do that. And then, only on a ship or two at first, and in a gradual and methodical way, we expect to start sailing again. There'll be short cruises at first with limited destinations and controlled shore excursions. But as we learn, and as the science continues to improve, we will expand. Now, besides the CDC in the United States, we're also working with governments and health authorities across the globe to resume operation in a healthy and phased manner. Notably, TUI Cruises, Hapag-Lloyd, and Silversea have all already started sailing again, only with a few ships, but it is a start. And this month, the Singaporean government gave us the approval to sail as well. As a result, Quantum of the Seas will begin cruising in that region in December. Now, before I turn the call back to Jason, I want to say that I'm immensely proud of all our people, partners, travel advisors, lenders and guests for sticking with us and helping us get to this point. The workload has been tremendous and the pressure and the uncertainty nonstop. There's still more work to be done and the environment is still uncertain. But our industry has faced significant challenges in the past, and yet it has continued to demonstrate that it can overcome them. Not only overcome them, but continue to thrive and grow. Why? Simply because the product, the vacations that we offer are so extraordinary, and some would argue that the value is even higher. With that, I'll turn the call back to Jason to talk through the numbers some more. Jason?

Thank you, Richard. This morning we reported adjusted net loss of $1.2 billion and a quarter with muted revenues as all failings that should have been recorded during the period were canceled. These painful results were underpinned by a strong focus on reducing operating expenses. As a result, our cruise operating expenses are down more than 80%, or $1.2 billion versus our first quarter, and $371 million, or 55%, versus our last quarter, as the fleet transitioned to its various levels of buy-up, reaching their desired state by the end of August. Our top financial priority remains ensuring that we are in a strong liquidity position. To that end, we have continued to take opportunistic actions to improve our liquidity. During the month of August, we obtained a one-year commitment for a $700 million unsecured guaranteed 364-day facility. Including this new financing, we ended the third quarter with $3.7 billion in available liquidity. Moreover, during this month, we bolstered our overall liquidity even further by raising an additional $1.15 billion through a combination of convertible notes and a public offering of common stock. The convertible notes and equity offerings were multiple times oversubscribed, and our convertible notes were priced at a rate of 2.875% with a conversion premium of 37.5%. This was really a superb outcome and a testament to the value of our brand and to the amazing execution of our finance, legal and accounting teams. We believe that the additional liquidity provides us important flexibility, both as we plan for a gradual return to service and as we work to deliver our balance sheet and our path back to investment grade metrics. As it pertains to our cash spend, we spent approximately $1.1 billion in the third quarter, driven mainly by ship operating expenses. These expenses came sequentially down each month as our ships entered their various levels of layup. Notably, during the third quarter, our average monthly cash burn was consistent with our previously announced range for a prolonged suspension. When excluding cash refunds of customer deposits, commissions, debt obligations, cash inflows from new and existing bookings, and fees and collateral postings relating to our financing and hedging activities. This morning, we reaffirmed that the cash burden will be on average in the range of $250 million to $290 million per month during a prolonged suspension of operations. As we mentioned in the press release this morning, this number excludes refunds of customer deposits, debt obligations, commissions as well as cash inflows from new and existing bookings. When we return to service and start to rev up our sales and marketing machines, we anticipate the customer deposits and cash inflows from operations will further improve our cash position. However, in addition to increased sales and marketing activities, ramping up our business will also include startup costs related to bringing our amazing crew back to operations and costs related to some of the healthy return to service protocols. I know that you would all like to understand precisely what those cash flows and costs will be, but the fluidity of the situation makes providing such guidance impossible today. What I would say is that we look to be very thoughtful as to the cadence of how we will bring our fleet back up to its pre-COVID levels. The ramp-up will not be a light switch, but instead capacity will increase based on a set of criteria. First and foremost, our decision-making will be guided by the safety of our guests and crew. Also, we want to ensure that we are delivering the world-class vacation that our guests expect and that we are bringing the ships back in the most profitable way, which will be mainly guided by our demand profile. Also, we will continue to evaluate more actions that can be taken to further reshape our cost structure and improve our operating leverage as we return to service. Another element that impacts our cash flow is our capital expenditures. As we reported this morning, we expect these to be approximately $500 million for the fourth quarter of 2020 and $2.1 billion for 2021. Approximately 80% of these expenditures do relate to new build projects, the majority of which have committed financing already in place. As it relates to 2020, the capital expenditures include the delivery of the Silver Moon this week. And for 2021, they include the delivery of Odyssey of the Seas during the first quarter and Silver Dawn during the fourth quarter. Now I will provide an update on the business, starting first with our capacity. As I previously noted, the situation regarding our return to service is fluid, but we are currently planning for a very limited initial return and a gradual ramp up during the first half of 2021. As a result, our 2021 capacity will be significantly lower than 2019. Deployment in the spring is expected to be highly focused on short sailings from key dry markets in both the U.S. and Asia Pacific regions. We will also make the most out of our incredible private destination in the Bahamas, Perfect Day at Coco Cay. Now I'll provide you an update on what we are seeing in the demand environment for 2021 sailings. On our last earnings call, I had commented that the cadence of demand was generally determined by COVID-19 cases and that and that has mostly continued to be the case. Over the last couple months, with very minimal marketing activities, we have seen a steady improvement in bookings for 2021, with summer sailings mainly driving the uptick in demand. Bookings for the spring season have remained below pre-COVID-19 levels, which is consistent with our staggered return to service approach and lower planned occupancy expectations. From a cumulative standpoint, our book load factors for sailings in the second half of 2021 is within historical ranges at prices that are down slightly. When you exclude the dilutionary impact of the FCCs, pricing for the second half of the year is relatively flat. Overall, 2021 is continuing to benefit from the rebooking activities associated with FCCs and the Lips and Chip program. However, approximately 80% of all of our 2021 bookings made to date are new, and more than 65% of bookings made since early August have been new. For the full year, pricing is relatively flat at the same time last year and is up slightly when you exclude the negative impact of the bookings made with 125% FCC. Now, about three weeks ago, we announced the quantum of the seas will start sailing from Singapore on December 1st. And over the following week of the announcement, we saw bookings spike up significantly. While this is just one out of a fleet of 53 ships, it clearly highlights the pent-up demand for cruising. Regarding our customer deposits, the balance at the end of September was $1.8 billion, relatively equal to the balance reported in our last quarterly update, as inflows from new bookings mostly offset the outflows from refunds. Approximately half of our customer deposit balance is associated with FCCs, and half is related to new deposits for future sales. Moreover, about one-third of the overall balance is non-refundable. Also, approximately half of the guests who booked on the canceled sailings have requested refunds, with the other 50% either holding an FCC or lifting and shifting their booking to 2021. As it pertains to our financial results for the fourth quarter, I'll note that the timing and trajectory of the recovery still remains uncertain, and we are therefore unable to provide further guidance for the year. We do expect, however, to incur a net loss on both the U.S. GAAP and adjusted basis for the fourth quarter and 2020 fiscal year. The magnitude of the loss will depend on the timing and extent of our return to service. Lastly, I'd like to thank our teams across the whole enterprise for all they've done through this extraordinary time. Now, as Richard mentioned, these seven months have been challenging on so many levels, but we're all pulling through it together and exceptionally dedicated and commit committed to getting our business back. I know that we'll all emerge a stronger, more resilient company. And with that, I will ask Shelby to open up the call for a question and answer session. Shelby?

If you would like to ask a question, you may do so by pressing star, then the number one on your telephone keypad. We do ask that you limit yourself to one question and one follow-up. We'll pause for just a moment to compile the Q&A roster. Your first question is from Robin Farley of UBS.

Robin Farley Great. Thanks very much. I know you don't want to jump ahead of anything the CDC might do in the next couple of days, but I wonder if you could share with us a little bit about what factors they've expressed are important to them because you mentioned that one of the goals of the Healthy Sale Panel was to have a The incidence rate of the virus, you know, be better than it is on land. And that's certainly the case, I guess, with the cruises in Italy from other brands that test everybody before they get on board. It's been like less than a 0.1% or something incidence rate. So is that, in other words, is that what matters most to the CDC from your discussions with them when they think about restarting? Or are there other factors that you think are more important than that? Thanks.

Well, you know, it's a complex subject and I don't claim to be the expert on this. And we, together with Norwegian Cruise Holdings, put together this panel and they spent four months going through the details of this process. They did so with the CDC observers at the meetings, and there are a lot of factors. And we've talked about that before, Robin, where we believe that there are things that make ships more demanding in terms of what you might want to take. but there's also the advantage that the ship has and the biggest advantage is that we have a controlled environment and so that we can do and the whole industry here has accepted to abide by the 74 recommendations and a big part of that is to create this kind of bubble in the beginning to do screening No other industry that I know of has agreed to do 100% screening of everyone. And I think that's a big part of what makes this a viable project. But I think I would be very cautious about speaking on behalf of the CDC. I think they're looking at all aspects of it. As I say, they've were at all the the healthy sale panel meetings and we've had discussions with them and I think they're trying to put all of that together and I don't think at this stage also they're going through a process that we don't necessarily see all of so I think they also have to remember that that is not all of this is visible to us but They're looking at all the aspects of it and I think the no-sale order is due to expire shortly anyhow. So I think we're eagerly and hopefully waiting for their specific comments.

Okay, great. Thank you. And then just as a follow-up question, I think one of the things when we think about the cash burn rate and restarting is Is that potentially the risk of restarting and then having to stop again that, you know, maybe the cash burn would go up? Just, you know, we saw AIDA this morning say that they're going to pause in Germany for the month of November. Is there, can you give us some thoughts about what, when you restart, what could be, you know, whether it's like crew contracts are only going to be month to month and not six months or things that might Keep your expenses from sort of going back up and then having to carry higher expenses again in the case of, you know, perhaps a pause somewhere. Thanks.

Yeah. Hey, Robin. I think one of the kind of key things to point to is, you know, we've operated about 70 sailings now between TUI Cruises and Hoppog Lloyd Cruises and Silver Sea Cruises. utilizing the protocols that have been developed and put forward by the recommendations with the Health and Sales Panel. And as you pointed out, the number of cases are exceptionally low and it shows that the protocols do work. And so we are very, very focused on doing whatever we possibly can for there not to be A situation where we come online and then we have to go offline. And while, you know, sure, nothing's perfect, I think the protocols have shown they're working. The second thing I would say is, and this kind of goes back to my comments around slowly ramping up the business, we do look to do this in a very methodical way where we're able to see, you know, have test cruises and have cruises, and as we're looking at those cruises, really watching how they're performing on both an experience level, a safety level, profitability level, and then slowly kind of turning the dial back up to kind of avoid a situation where we have to bring all of our crew back, which took us many, many months to do between the spring and the summer. So I think we're being very thoughtful. We're learning a lot through the sailings that have already occurred, which provides us confidence and then, of course, I think by just solely ramping up the business, it avoids too much pressure on our cash firm.

Robin, because the question you've asked is, I mean, I think is so apt and it is something that people are focused on, I'd like to maybe embellish a little bit Jason's comments as well, because this whole concept of the trial voyages is really quite We're not just suddenly coming back. It's going to take a while to organize those voyages, and we're going to have the opportunity to see the protocols in action and to adjust them. So, frankly, I don't think we're going to be making the big leap until we and the other authorities and our Healthy Sail Panel are all comfortable that this is now a viable thing to do. and we really do believe that it is possible to make it so that you are safer on a cruise ship than you are on Main Street. And the evidence in the startups in Europe have demonstrated that. When there have been instances, and there will be because there are everywhere, I think you've seen The response has worked. That's really the key. And so we think that this slow trial trips and the slow startups will give us the opportunity, one, to watch the technology improve and the knowledge of the virus improve, and two, to prove out our protocols. And I think that's why we're so optimistic about where this is leading.

Your next question is from Felicia Hendrix of Barclays.

Hi, thank you so much. Richard, understanding that this is kind of a sensitive subject, just wondering, you know, what do you think the CDC needs to see for them to give you the green light? You know, what are the key metrics they're looking for? and then also just, you know, with TUI and Hapag-Lloyd in Germany and with the German shutdown, what do you think is going to happen with those lines?

Sure. Well, good morning, Felicia. Good morning. And as you say, this is a sensitive time. We're not part of their process. And so I think it really would be awkward for me to speak and wrong for me to speak on behalf of the CDC. I think they're looking at all aspects of it and it is very complicated. And I think we really made some dramatic inroads with the work of the Healthy Sale Panel. To have people of this level of expertise, this level of experience, These aren't just leading experts in the field. These are the leading experts with the experience of regulating as well. So I think we learned a lot in that process. And the cooperation with the CDC was very helpful. But I can't predict how they will do it here. And so I'm not I'm not too much willing to comment on it, except to say I'm assuming that if you really look at the fairly long, and I know it's dry, but analysis that was done by the safety panel and you see the depth of detail they went into and the transparency that they had, I think that should give the CDC a lot of comfort. and I think that, plus the trial trips. The trial trips are important. That was an important issue for our LD sale panel and I think it will be an important point for the CDC and I'm very optimistic that that will go well.

The second part of your question was on TUI and HOPI, Laurie?

Yes. So they continue to operate because we have seen such Good results. And frankly, the knowledge that we're getting from these operations is helpful to us. It's helpful to the CDC. We are seeing both an ability to limit the spread onto the ship and we're seeing an ability to deal with incidents when they occur to keep it from becoming an outbreak. And so I think that experience is positive for us and It's small. We understand that. We're not rushing to do this. We've said from the beginning, we're not going to go until we and the experts are convinced that this is the right thing to be doing and it's safe and prudent, and we're sticking to that. But we are learning from this, and that will make us safer and healthier as we go forward.

I guess I was just wondering if the German shutdown was going to affect those brands.

does not appear to be no and again that's because of the success of the protocols.

Okay great and then okay so the next question is a little even more sensitive and I apologize for this but we just we get a lot of questions on this almost daily and I'm just going to caveat it which I do not think this is a place for political commentary so there you have it but We are getting asked all the time to walk investors through a scenario where the CDC no-sale order is extended to after the election and how or if a potential Biden administration would have any impact on when the order would be lifted.

So I'm quite pleased that we're working cooperatively with the experts and it is my strong hope that this is going to be decided on the basis of the science, not on the politics. I'll express a personal view that I will be pleased to get my television and my computer back when the election ads are over, but I think our focus is on the science We think the industry has done a very strong job, the whole industry. You know, I've talked about the Healthy Sale Panel, but I also remind you that before the startup in Europe, they all used experts to guide that. They all worked with the governments. It wasn't a political issue. It was a scientific issue. I think the science is strong. I'm definitely hopeful that regardless of who's in power, the science will lead us to a good answer. But the other thing is that people do want to see the industry back in operation. There's a lot of people suffering because we're out of work. And if we can restart one important element of our economy, In a safe and healthy way, I think that's in everybody's interest.

Okay, thank you for that answer, Richard.

Your next question is from Steve Wazinski of Stiefel.

Yeah, hey, good morning, guys. So, Richard, I hate to do this to you, but I'm going to keep you on the hot seat a little bit here. I'm not even sure if this is a, I'm not sure if this is going to be a fair question or not, so you can tell me one way or the other, but I think there have been rumors out there that you have had direct conversations with the White House. And maybe if you did or you did not, anything there you could help us understand how those conversations, if there were conversations, how they progressed and maybe what the White House is looking for that's different from the CDC, if that makes sense.

So I'll have conversation with anyone who will talk to us on this subject. We're sort of obsessive. I'd like to get out of my house after seven months. And there obviously is a lot of interest in this throughout the country. This is a huge issue for employment in our country. The cruise industry is an important employer, important driver of Economic Activity, and also it's a respite, and I think it will be soon seen as a respite from the isolation that we're all feeling here. Steve, I certainly never mind your questions, but you'll also understand what I can and can't say, and the conversations I've had are private and I would respect the privacy of those. But I will say that we have worked hard to make sure that the decision is a scientific one, that it is led by the best minds with experience both in terms of the specific science of the disease and of the engineering and of the as well as the impact on the economy and how you regulate this. So we've talked essentially to all the people who are involved in this kind of decision. And I think I have to say that everybody we've talked to has taken this seriously. They understand the importance of controlling the spread of this virus. They understand the importance of getting the protocols right. And I really am very excited to have watched the methodical way that the panel worked and other panels. You saw this, the cooperation in Europe between the public health officials and the political officials and the cruise lines cooperatively trying to solve something that's a problem for all of us. And I'm really not going to comment on who's on what on any given issue. It is complicated. I think everybody is trying to find the right solution. I'm optimistic. I am optimistic that we will soon have a path that we all see as a pathway back to resuming operations. It will be slower than I would wish, but faster than many are assuming. And I think that slow, methodical, careful approach speaks well for our industry. It speaks well for the regulators around the world. And we're going to continue on that process.

OK, gotcha. Thanks. Thanks for trying to answer that.

Yeah, no, never, never a problem to ask, even as you well know. And if I can answer it, I will. But this is a fluid situation. That's the other thing I think we have to say. And I know I hate to sound like a broken record, but what we don't know, we don't know.

Right, exactly. So let's let's go to a couple of years down the road now and hopefully the world is You know, back to normal. And I guess the question I want to ask is around supply and supply outlook for the industry. But, you know, we've seen certain operators remove, you know, a good bit of capacity from the market, you know, already. And you guys and I can't imagine other operators are going to be ordering new ships for, you know, an extended period of time. So, I mean, as we look a couple of years down the road, is it fair to say the cruise industry, you know, could be set up for a multi-year period of supply growth that could be I mean, basically close to zero. Am I thinking about it the right way? Hey, Steve, it's Jason.

Well, I don't know if I would say close to zero. Certainly, capacity growth, as we were all collectively expecting pre-COVID, is certainly going to be less, whether that's exits out of the industry where ships are being scrapped, whether it's ship sales being sold to kind of tertiary operators. and of course, I think we do expect that there'll be slower new build growth probably towards the latter part of four or five years from now. But the shifts that are in order as we see them though delayed by probably eight to 10 months, I think we expect to continue to come online. And the question will be how many shifts will be retired or sold or scrapped during that period of time. I know for us, we've been selling about a ship or two a year. We have scrapped some ships and we're certainly very or being very opportunistic about the situation when our point of view is that ship with inside of one of our brands does not fit strategically or we can't invest to have that fit strategically with inside the brand. And so that's something that's kind of an ongoing process for us, which has been similar in the past.

Okay. And Jason, one more, sorry, real quick one. But the cruises that you're operating in Europe today, are they operating at a break-even or even a profitable level at this point?

I would say that the ships that are operating in Europe today in terms of break-even relative on a ship-specific basis are probably at or about break-even. I'm talking more kind of direct profit. Obviously, there are fixed costs that their ships probably don't cover as of yet. But the occupancy levels, the demand that we're seeing is relatively good all things considered. And I think a little bit what we've experienced to date, which is a little bit different than in the U.S. with COVID news, you know, sometimes when there's negative COVID news over there, you know, because the consumer gets or the guest gets an opportunity to kind of get out of town and get some fresh air, you actually see elevation in demand. and that's one of the things for sure two Cruises has been saying. Great. Thanks, guys. Appreciate it. Thanks, dude.

Your next question is from James Hardiman of Wedbush Securities. Hey, good morning.

Thanks for taking my questions. I've got three of them, but I think they're pretty quick, so I'll ask them all at once. And I think, you know, everybody generally understands that 2021 is, It's going to be a rocky year and it's hard to anticipate. But maybe if you could walk us through, A, to follow up on Steve's question, is there any easy way to think about your capacity in 2022, 2023 versus, say, what you had in 2019? That's number one. Number two, any way to think about leverage? And I fully understand that your leverage is going to be a function of You know how long these layups last and you're ultimately burning cash. But is there any way to think through what leverage looks like once you emerge from this in 2022 and beyond? And I guess just more broadly, if I look at the consensus numbers for 2022, revenues are basically almost back to 2019. Obviously, there's a bunch of incremental interest and everything else that's hurting earnings power. Is that realistic or are there some considerations that we should be thinking through once we get past the mess that will be 2021? Thanks.

Thanks, James. So I think on a capacity standpoint, there's obviously a lot of time between now and 22 and 23. Certainly, I think our current expectations is that our fleet will be back up and running certainly by 2022 and 2023. Capacity for us is likely to be higher because of the new ships that I talked about in my remarks coming online. But at the same time, as I commented on Steve's question, we do continue to opportunistically look at ship sales or Scrapping in very kind of remote type of situations, which could lower that capacity growth number down a little bit. But I would expect our capacity as we look in 2022 and 2023 to be higher than it was in 2019, driven by new capacity. We've already taken out some capacity, the scrapping of some ships. And, of course, as we know, as these new ships roll on, the higher inventory mix, The more onboard revenue venues, they're much more fuel efficient, lead to really enhancing our margins. Moving on to leverage, it is certainly a goal of ours to get back to our pre-COVID level metrics, especially as it looks getting to investment grade. I think how we look to do that is obviously putting more of our free cash flow towards paying down debt. We've taken some action here recently to put ourselves in a position to pay down debt. And hopefully the sooner we get started here, the less of the cash that we're holding today we're going to need, and that could be purposed to also paying down debt. But it is definitely one of our management team on our board's kind of core objective to look at how do we get to pre-COVID leverage as soon as possible. I won't really comment on, just wait to really talk about consensus for 2022. I think important variables will be when we get the green light to get back into service and what that ramp up looks like. What the universe looks like around therapeutics and vaccines and testing. And of course your wave is very important to 2021, but waves also begins the momentum into 2022. And so the more for us the flywheel is spinning as we go into all of that, the more momentum I think we'll build for 2022. We're cautiously optimistic. I won't talk about whether we'll be at pre-COVID levels by 2022 or 2023, except to say that we're trying to build momentum as quickly as we can and making sure we're doing it in a very safe and healthy way.

That's all really helpful. Thanks, Jason.

Thanks, James.

Our next question is from Jamie Katz of Morningstar.

Hi, good morning. Can you help us unpack what is in that negative onboard and other revenue line item? It looks a little optically funny, so I'm just curious if that's a one-time thing I should be aware of or if it's something that could potentially repeat.

Yeah, sure, sure, Jamie. It's a very immaterial amount of money, but as we were Going through in the kind of Q1 and Q2 and processing tons of refunds and cancellations and so forth, there's some cancellation or penalty income that we're reversing here in our Q3 numbers. And these are small numbers. Of course, we don't really have any onboard revenue. We don't really have any ticket revenue. So just a small correction there stands out.

Okay, and then on the capital allocation front, you guys called out pretty long on putting out an equity issuance to raise capital. I'm curious how you're thinking about that going forward, if there is a preference or sort of a rule set you're thinking of for capital raises ahead. Thanks.

Yeah, well, I think we're going to continue to be patient and methodical on how we raise capital if and when we need it. I think we feel pretty good about our liquidity position. We took action here to put ourselves in a posture to be able to deliver as we return to service. And I think that we'll continue to evaluate if we do need to raise capital, the debt markets, the convert markets or the equity markets. But our focus here is to fix the balance sheet as soon as we can. but also doing it in a very thoughtful way. And so I think what we'll continue to do is to evaluate those options as well as looking at within our business, how do we improve our margins to generate more cash flow to have that to be available in order for us to pay down debt and invest in our business. Thank you.

Your next question is from Brent Montour of JP Morgan.

Good morning, everyone. Thanks for taking my questions. So thinking about pent-up demand and possibly, you know, meaningful inflection bookings that you may be expecting when you're allowed to sail, can you just weigh which factors or events you think will be most important for how that curve looks between actual expiration of the no-sail but weight that against the cruise-specific travel warning the CDC put out last week? Obviously, the recent lifting virus data is another drag, but I guess what I'm asking is, Is it possible we have to wait until you're actually able to prove you can cruise safely before we see that big inflection in bookings?

Hi, Brent. It's Michael. You know, interestingly, when I think Jason commented on Quantum in Singapore, when we opened for sale after we received We were really quite surprised by the level of demand that came in for the product over that winter season that we've got it open. Those cruises are basically ocean voyages that sail for three, four, five days. Within the first two weeks, we had literally the triple demand that we were expecting at rates above what we were expecting. I think going back to Jason's point earlier with regards to what they're seeing in Europe with demand, even when COVID increases, there is demand in the marketplace and it's coming quite naturally. The other comment I would make on demand that we're seeing is that in the American market, it's really correlated with how consumers feel about COVID and what they believe is occurring with COVID in terms of it moving behind us. About three or four months ago, a large group of consumers, you know, we're checking consumers every single month. And about three or four months ago, most people believed that COVID would be kind of moving behind us by the end of 2020. Of course, that's shifted now. And the belief from most consumers is that As you move through 21, COVID will move behind us with vaccines, therapeutics, et cetera, et cetera. And you very much see a correlation between what people are believing and how they're booking. So I think we commented before that a lot of consumers effectively lost their summer 2020. There's a belief that COVID will be behind us at some point in 21. and we kind of see that in the booking behavior out of the American market for our products through 21 with a particular emphasis on summer 21. And I think, you know, there's a kind of a it feels and it looks as if customers are thinking this is going to be behind us and we're going to have a summer vacation. I think with regards to the no sale order, I do believe that If there is a change in the no-sail order and a pathway is created for a safe return to cruising, there will be an uptick in demand. But I think people will naturally wait and see. And I think also there'll be As I just mentioned, the correlation between what's occurring with COVID in the community and how people feel confident about taking a vacation and booking a vacation. So it's complicated. It's very much connected to consumer ups and feelings about COVID.

Got it. That's incredibly helpful, Carla. Thank you for that. My second question is following up on the universal testing front. We all read the 74 points and I know that the recommendations include sort of a dual layer where the customer brings their own sort of PCR level test and then there's another perhaps rapid test at the port. Is that what you've committed to across all your brands, this sort of dual layer and is that an industry-wide thing as well? We haven't heard much detail on specific, you know, how many tests, what kind of tests and things like that. Any color you can provide, thank you.

Yeah, so I think your comment on that is accurate referring back to the panel report. Part of the point that the panel made was how quickly this whole testing issue is changing. And I think that's one of the more exciting things that we're seeing. You know, we've gone from a very small number of tests to now the tests are regularly running one million, a million two a day. And that number has the potential for troubling in a fairly short period of time. So the panel really did conclude that as this technology improves, we ought to improve. Our mantra is continuous improvement. We think that as the new tests are coming out, these lateral flow tests are quite dramatically an improvement in speed and accuracy and in availability and in cost. So we do think that testing is going to be an important part of it. I'm not going to get into all the different kinds of testing and which we would do where, because that's all going to change tomorrow. As I say, it's interesting that even today, no other industry that I'm aware of has said they would do 100 percent testing. And that's what we are committed to do. and frankly, the whole industry has said that they think that's the right thing to do. So I won't get into the specifics because I think if I do, we'll be wrong tomorrow. But I think we will be starting with 100% testing and over time, we hope that will get even faster, cheaper, etc.

Helpful. Thanks and good luck. Thanks.

Your next question is from Greg Badashkanian of Wolf Research.

Hey guys, good morning. It's actually Fred Whiteman on for Greg. Jason, you gave some stats for the full year 21 pricing on a cumulative basis, and it sounded like that was unchanged versus what you guys had provided last quarter. I thought you were expecting that number to come down as more FCCs were redeemed. So can you just sort of talk about what, if anything, differed versus your expectations? Great.

Yeah, and this will be our last question. So that's exactly right. On the pricing standpoint, as we've been taking on new bookings, we've been able to hold our rates despite the FCCs coming more and more into play. And I think it is a testament to demand. It is still very early. But at least what we're seeing from the back end, really quite frankly from June on, is our pricing is holding up quite well.

And then if I could sneak one more quick one in. I think last quarter you talked about there was a line in the sand, sort of early middle 2Q as far as where that consumer demand really did pick up. Have you seen that timeline change in any way? Are people sort of moving their bookings either earlier or later in the year?

It's very consistent with what Michael said. I mean, you can really draw a line from when the summer begins. And you can see that it's not just about the new booking. It's also seeing where people are lifting and shifting their bookings is very much similar to what they were expecting to do this year as we look at the summertime and beyond. And by summer, we mean really kind of when kids get out of school. Okay. Thank you for your assistance, Shelby, with the call today, and we thank you all for your participation and ongoing interest in the company. Carilla will be available for any follow-ups you might have, and from all of us, we wish you all a very great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.