Norwegian Air Shuttle ASA

OSE:NAS

Earnings Call Transcript

[Stine Klund, Investor Relations Officer]

Welcome to Norwegian's second quarter presentation. We'll do this the same way as the last few quarters with questions after the presentation, both from the audience and from questions sent to [email protected]. And the session is live streamed, so I will pass around a microphone. That is only for the live stream, so don't be stressed -- don't -- given the sound.Yes? We'll start with the presentation by CEO Bjorn Kjos and CFO Geir Karlsen.

[Bjorn Kjos, Chief Executive Officer]

Morning to everybody. Go straight into the presentation for the second quarter. We have successfully completed the subsequent offering of NOK 200 million. We have taken in 5 aircraft this quarter, 3 Dreamliners and 2 MAXs with an -- ended up with an EBITDA result of NOK 538 million up from NOK 59 million last year. One of the reasons why we have been able to get the cost down is high utilization where we increased the utilization of the aircraft up to 12.7 hours up from 11.5 hours last year.And we have won a lot of awards this year. This is especially thanks to those passengers that voted for us, so -- and also an award from the American ambassador for bilateral relations between U.S. and Norway that we appreciate very much. So [indiscernible] fantastic job with the passengers that we can read directly out of all the awards we get. And we were -- not at least voted the most innovative company in Norway.Right into the figures, we have had the stable load in this quarter, and -- but we have the very high growth rate this year -- or this quarter, much higher than we actually had in our strategy [indiscernible] thing going that because we got to of course very good lease rates on some of the [indiscernible] aircrafts, some of the Dreamliners, so we were able to put a lot of capacity in the revenue. We can get really good [indiscernible] rates and very good capacity and adjusted with the costs, so we will be able to drive the cost down. We are now set this capacity, ended up with 48% growth and 46% growth in RPK, so you will see a more stable situation going forward. Of course, it will not be much less the first coming quarters, but it will gradually decrease up to where we should be.Flew 10 million passengers, up 16%, so we are able to fill airplanes, and we have continued growth on all the airports, slightly more than -- 1 million more passengers over -- we send with a stable market share of 43%, largest -- they increased market shares they have in actually all the airports, but mostly at the [indiscernible].Interesting to see where our revenues come from. Our revenues -- 58% of our revenues now come from outside the Nordics, even though we have strong growth in the Nordics, 13%, our significant growth is now U.S., and as you see, the revenues from U.S. is now the second-biggest revenue part in the region. We have more revenues from Spain and Sweden than have here to -- into U.S. and so second-biggest after Norway.Network 60 intercontinental routes -- more than 60 intercontinental routes. It's more routes than our European operator now. So going forward now, it's to set this network and get it to work, so it's -- and we have done so by, so far, we have taken in 9 Dreamliners this year, 2 more to go, taken in 2 NGs. That was #99 and 100 and taken in 11 of the new MAXs that will, in due course, actually replace the NGs, and we are starting to phase out other aircraft, especially the leased aircraft for -- the leased aircraft is being phased out to us over the [indiscernible] right after the summer.So then we go on to the financials. Okay?

[Geir Magne Karlsen, Chief Financial Officer]

Yes. Thank you, Bjorn. I will jump straight into the P&L.If we look at the top line, it's at NOK 10.2 billion for the quarter. It's actually the highest ever, and we have ancillary revenue of NOK 1.6 billion, which has increased -- has a nice increase in it. I'll come back to the details. On Other revenue, it includes cargo and then lease-out income on the Hong Kong Express aircraft.On the cost side, I think there's probably one item to mention. That is the technical maintenance expenses, which is down from -- which is low, I would say, compared to last quarters -- to the last quarters. And this is one of the items where we have achieved a cost saving on. I'll come back to the details on that.We have an item, other losses/gains, of NOK 455 million as an income. NOK 250 million of that is related to fuel hedges, profit on those, and we also had some effects on the FX on the working capital in the area of NOK 180 million. It takes us down to an EBITDA of NOK 538 million and that EBIT at NOK 154 million.Net financial items is actually positive this quarter, and the main reason for that is really that we've had some good effects on currency on our debt portfolio. So that consists of -- in the area of NOK 430 million to NOK 440 million. Interest expenses is in the area of NOK 270 million. Tax was down to NOK 370 million in EBT and a net profit of NOK 300 million.On the revenue side, total income increased by 32% compared to same quarter last year. Unit revenue is down 11% compared to last year. Compared to first quarter this year, it's up from 0.28. Ancillary is pretty stable compared to the first quarter this year at NOK 162 per passenger, and cargo is also pretty stable at around NOK 160 million for the quarter.On the cost side, very pleased to see that the cost has a decrease of 19% compared to the same quarter last year. It had some help on the currency side, not much but a little bit. So in constant currency, we also have a nice, nice decrease. For this quarter, as you can see, we have a unit cost of 41 -- 0.41, which is a very, very -- a very good number.During the quarter, we have had some discussions with some of our suppliers, vendors. We have been evaluating and going through the contracts we have with these vendors. We have renegotiated a few of them, which should give us savings going forward with better terms. We have achieved some compensations from a few of the vendors in this quarter relating to the contracts we have with them. So we have been able to book a cost saving in the area of NOK 400 million in the quarter. That is taken then into the P&L as reduced costs. That reduced cost is not reflected in the cash as per today but will be reflected going forward.We have a very strong focus on reducing costs in the company as we have told the market earlier. And if you look at these different sections of cost, as you can see, we have a flat development or reducing development in all of them, except, of course, the fuel. And what we do, we -- so the focus is definitely on reducing all of them going forward, and we hope to be able to show that development during the next quarters as well. I come back to the fuel side and how we are hedged going forward.Over to the balance sheet. Intangible assets. That's pretty much unchanged from the last quarter. It's the deferred tax asset as we have. Aircraft, PDP and delivered aircraft is up by approximately NOK 5.5 billion and relates to deliveries that Bjorn mentioned. We have a fixed asset investment of close to NOK 1 billion. That is cash that we have put on deposits relating to the debt facilities we have.We have investments of NOK 3.265 billion. That is our shareholdings in the Bank Norwegian. We had a TRS of 4.7 million shares maturing during the quarter. That has been rolled for 6 months until the end of the year.On the debt side, we have increased debt of approximately NOK 2.5 billion during the quarter. And on the -- we have an increase, as you can see, in current liabilities of 7 point -- or let's say in the amount -- we have an increase from last quarter in current liabilities. It stands at NOK 7.4 billion as per today. That includes a final delivery payment of the Dreamliner we took delivery of very late in June, and that was then also paid very early in July, so that is why that has increased to some extent. The equity is up to NOK 3.6 billion, up from approximately NOK 2.1 billion in the last quarter.Cash flow. Not much to comment there, really. We have principal repayments of NOK 1.7 billion. That includes the NOK 1.1 billion repayment we did of the unsecured bond. And obviously then, we got in the majority path of the equity raise we did in the first quarter. We got that in this quarter of NOK 1 billion.CapEx commitment going forward. As you can see, we have a reduction from last quarter on, actually, both 2018 and 2019. That relates to a few delays, as we can see it today, on deliveries of aircraft. So the CapEx now for '18 is $1.75 billion, and for '19, it's down from $2.6 billion to $2.2 billion. That CapEx does not reflect a case where we are actually divesting aircraft as we have told the market as well. This is on the basis that we will take delivery of all the aircraft we have ordered into our own balance sheet.Liquidity. As I mentioned, we have repaid the NOK 1.1 billion unsecured bond. We have finalized the equity raise. And we still have close to NOK 300 million in undrawn credit facility.Long-term financing. We have completed the financing for the two MAXs and one 787 during the quarter at very good terms, I would say. As guided last quarter, we have done that based -- on the basis of a so-called AFIC financing, which gives us a very good cost of -- a very low cost of capital and which should also bring the cost of capital in the company, as such, down going forward.We are also in the process of finalizing -- financing for the remaining deliveries in 2018, more or less with the same structures, and we -- as we did on the first line there, and that is the focus on doing financing going forward in the company.As we are now -- as Bjorn mentioned, we are now starting to redeliver the old leases, which has a pretty -- or relatively high cost of capital. So going forward, as long as we finance the aircraft we take delivery of in the manner that we have done in the last periods, the cost of the debt in this company will come down in the quarters to come.Outlook. If we look at the booked volumes for the -- let's say for the second half of '18, what we're seeing today is that we have a marginally lower load compared to the same period last year, but the yield is marginally up so pretty much in line with what we saw at this time last year.Production growth is still at 40%. We have taken it slightly down compared to last quarter for the remaining 2 quarters in '18. That is due to the fact that we expect to take down the production slightly as we are in the process of divesting a few of the aircraft this year.On fuel hedging. We have hedged slightly more today than we had done the last quarters. So as per today, we have 22% at $525 in '18, and we have 7% in for '19. Spot price fuel today is around $700, and we're able to hedge today for 2019 in the area of $675, which we are looking into.Guiding on unit costs. We keep the guiding, x fuel, compared to what we did last quarter. So we would -- we keep the same. As per today, we are at -- in the lower fraction of that window, so hopefully, hopefully in the next quarters to come, we can be able to take that a notch down. However, because of the increase in the fuel prices, we have had to take the guiding slightly up on unit costs, including fuel.But if you look at, compared to last year, even with fuel included, we are guiding a 4% reduction and a 12% reduction in cost -- unit costs x fuel.Cost reduction is, as I mentioned, a very high focus in the company, and we hope to be able to share good results on that -- on those initiatives in the quarters to come. Bjorn?

[Bjorn Kjos, Chief Executive Officer]

Now going forward, we are committed to our long-term strategy. We are -- more or less set the routes that we are going to fly for the next 2 years. You will see us adding up more frequencies, but we are satisfied with these routes that we have set so far. You will not see us taking in so many airplanes for the coming quarters. It will go down to a moderate growth phase. Our focus will be on cost reduce -- reduction. And as Geir explained to you, we expect to be able to drive the cost further down, especially when we have set the routes, and we do not have to fill total crew members and the pilots that we need -- that we have already be done -- and already done and train them accordingly. That takes -- that costs a lot. So we don't have those costs to such an extent that we have experienced so far. As I said, we'll be skewed towards increased frequency on existing routes. So -- and that means it's much easier for us to increase the frequency than opening new routes.When it comes to Argentina, we are on the track. We expect to start flying there in the last quarter of this year. And finally, we have established a long-haul base [ #10 in -- and ] this time in Copenhagen in order to take care of flights in and out of Scandinavia, and we expect that, that will also go into a lot of cost savings.All in all, yes, we managed to have a profitable quarter. Are we satisfied with it? Of course, we are not. We are on the track -- we are on the right track, but it's not good enough. Going forward, we expect that we can, of course, we'll be able to, given the routes are set, we will normally see that we will be able to increase the yield. This summer, of course, we had a lot of good weather. That also hit us in the second quarter. So there's enough to take into consideration going forward. What we see, as Geir mentioned, is that we are satisfied with the cost initiatives that we have entered into. Some of them, you will see coming as to -- and being further explored and actually be input into operation in the quarters going forward.So yes, we have finally set most of the production now that we have -- especially on the long haul. A very tough quarter for us. Actually, first half year have been very tough. We have some more than 100% increase in the ASK on long haul, up to more than 400% out to some large cities in Europe, and more than 200% -- actually, 250% out of London. But the production is set. People are flying. And they're even paying. So in that respect, yes, we are satisfied, but it's -- but we -- it's not good enough going forward. It's okay, but it's not good enough.So then I leave them to you to ask the questions.

[Kenneth Sivertsen, Research Analyst]

Ken Sivertsen, Pareto. If I may, the cost improvements you -- is it recurring? You had mentioned NOK 400 million in -- during the quarter. Or is it a onetime effect?

[Bjorn Kjos, Chief Executive Officer]

They seldom give donations. Of course, this -- if it is, it's never donations. At the best, it's reimbursements of part of the cost. You might -- obviously, we have had more costs than we have got reimbursed. It's not a secret that with -- some engines on the fleet have come up with a lot of problems with the engine changes and so on, and they are in the process of fixing it. But nevertheless, we have had to downsize a lot of our routes because the wetlease is going to take -- not going to take all the passengers that we have on the Dash-9 because we are not able to wetlease new aircraft like the Dash-9, so it's been asking for us and not at least for some of our passengers. And I can assure you, we are not able to collect the cost that it -- that we are -- that these have incurred. You might have something to say to that, Geir.

[Geir Magne Karlsen, Chief Financial Officer]

Yes, I would say that [indiscernible] of the NOK 400 million, I would say the majority of that is a onetime effect this quarter. But on the renegotiations we have done with on-contracts, that should give us savings going forward as well.

[Kenneth Sivertsen, Research Analyst]

Okay. With the divestment, you mentioned up to 140 aircraft in Q1, and I think you expect to reach a conclusion now in Q3. Can you just tell a little bit how growth could look? I guess, you have a fairly wide range for '19 in terms of growth, capacity growth. You could take growth massively down or you could continue growing.

[Bjorn Kjos, Chief Executive Officer]

Look, we are -- our long-term strategy is to have a normal growth, slightly larger than the market, of course, especially on the long haul. But today, we did a really big jump in 2009 out of several leases. Going forward, it should be normalized. Yes, we will have growth, but not like we have seen this last half year, at least -- or this last year. We will divest aircraft, but that's mainly old aircraft. And you have to remember that we get a lot of new aircrafts in next year and the year after, so that will replace the NG, as an example, that we will phase out. We'll sell it off. And also part of the Airbus fleet that we are not going to use ourselves like we have done with the Hong Kong Express airplanes. You will see us divest it -- divesting parts of it. There's been a lot of interest in these aircraft.

[Ole Martin Westgaard, Analyst]

Ole Martin from DNB. Can you please elaborate on the NOK 500 million cost savings in the quarter? How many vendors have you been able to renegotiate terms with? How much of this figure is related to compensation for the Rolls-Royce engine problems? And also, you mentioned a slight delay on the aircraft delivery schedule, which aircraft is this delay related to?

[Bjorn Kjos, Chief Executive Officer]

I can take the last part first. The deliveries of the Airbus have been delayed because of the engines on the Airbus. And on the cost savings side, naturally, we first go on the large partners, large contractors that we have, large vendors and -- but we have gone all over. Geir, you can probably add something to that.

[Geir Magne Karlsen, Chief Financial Officer]

We have been going through the main -- the contracts with the main suppliers. We have had good -- very good discussions with them. We have with some of them agreed the way going forward at better terms for Norwegian. We have reached deals with them -- with a few of them on where they're actually compensating us. That is a compensation of costs that Norwegian already has had. And so we're very happy that we reached a conclusion with a few of them during the quarter, which gives us ability to take in close to NOK 400 million in cost reduction. To share any further details on that is difficult.

[Bjorn Kjos, Chief Executive Officer]

The only thing I can say, they do not give donations. So, obviously, needless to say, we have had more cost than this that we have, to some degree, been compensated.

[Ole Martin Westgaard, Analyst]

One extra question from Ole Martin Westgaard, DNB. How should we think about maintenance cost going forward?

[Bjorn Kjos, Chief Executive Officer]

There have been one-offs on compensation, and -- but we should -- scale is very important here as well. But going into details, MRO worldwide is simply -- it has increased costs for everybody. So it's difficult to reduce technical costs. The best actually is flying new aircraft. You have something to add to that, Geir?

[Geir Magne Karlsen, Chief Financial Officer]

I think that the unit cost of 0.24 this quarter, you should not expect to see that in the third quarter. That's just a fact. So in that sense, you should actually rely on the guiding we are giving. But have in mind that we have a very strong focus on this going forward. And then hopefully, hopefully, we will be able to take that guiding down.

[Unknown Analyst]

[indiscernible] Two questions, one about Russia. Is there any news about the flight possibilities over Russia? Any kind of discussions going on there? And the second thing, of course, which, I guess, most of the audience is curious about, is there any news to the market about the ownership discussions?

[Bjorn Kjos, Chief Executive Officer]

The first thing I can answer. We have waited 5 years now for being able to fly to Russia, so Siberian corridor. Appreciate all the efforts our Prime Minister is doing, but there hasn't been any movement, sorry to say. So in these 5 years, nothing has happened except that we have 3,500 daily flights of Russian -- or yearly flights of Russian aircraft on Norwegian territory and non-Norwegian or Russian territories. So it's not a balanced agreement. But that's what kind of everybody see. Loss is of course thousands and thousands of jobs for in the tourism industry and in our export industry. So that's the waste. Well, as to the last question, my job is to concentrate on running Norwegian, and I will concentrate on running Norwegian. We have had a lot of interests, and that means that, yes, we are in the right way. Otherwise, they wouldn't have had an interest in us. They see that we would -- somebody doesn't like it, but our strategy is, I wouldn't have had -- actually, had that interest to so many of the large airlines if we were already on the right track. But otherwise, yes, we have had a lot of interest, but my job is concentrated on running Norwegian. It's the board that have to take care of those interesting partners.

[Unknown Analyst]

[indiscernible] looking into your fuel consumption and fuel cost for Q2 and H1. Q2 was up 84% and H1 is up 67%. Will you be more aggressive on hedging fuel in the future?

[Bjorn Kjos, Chief Executive Officer]

It's a very -- insight we should have had, of course, we should have had 100%. We tried to mitigate the risk in what we have seen. It was -- I remember, because, in many years, [indiscernible] trade when it was $130 and everybody told us that it will go to $200. And those who hedged at $130, they went into bankruptcy, except [indiscernible], so there's always a risk, to -- one shouldn't underestimate the risk of hedging as well. With the turbulence happening in the world, will it go up or will it go down or will it stay? I don't know. Might go up like it did last time and then [indiscernible] out. What we have [indiscernible] in order to be -- to mitigate risk as much as possible, yes, we should -- I would like to hedge when it goes up, but probably around 50% then you're both at the upside and the downside in the long term. But it's, in this world, with all the trade barriers and all these things coming up, where's the industry going, I think our strategy is actually to take down risk as much as possible. Yes, we hedged too little going forward, so...

[Geir Magne Karlsen, Chief Financial Officer]

Normally, I think, if you look back, you can see that we have normally been hedged up to 50% 12 months going forward. Now we're obviously lower. And as Bjorn said in hindsight, yes, we would have liked to be more hedged. On the other side, which is not giving us any comfort anyway, but if you look at the development in U.S. dollar-NOK compared to the fuel price, it's pretty correlated. So you can say that in -- let's say in a 1% increased fuel price, it will give us approximately 1 -- 0.7, 0.75 strengthening of the U.S. dollar-NOK. In that case, you could say that you have kind of a natural hedge. But what we have seen lately in this year is that we have had an increased oil price and actually a weakening NOK, which is kind of a double effect negative. So we do expect that, that spread will come in, but obviously, yes, we would have liked to be more hedged.

[Stine Klund, Investor Relations Officer]

Any further questions? A question from [ Christian Labart ]. A lot of the legacy airlines are placing significant orders for Dreamliners. How will Norwegian compete with them long term when a big source of Norwegian's competitive advantage is lost?

[Bjorn Kjos, Chief Executive Officer]

First of all, it takes -- it -- in order to be in effect takes -- if you have -- if you are a Dreamliner customer, it takes you 24 months. So that will happen in 2020/'21. And I expect that, at least in 2021, we will have set our volume. And another thing, there aren't -- they don't build anymore on risk. Even today, try to find slots in New York. It's not very easy. You can get slots, but not that you can fly in Europe because of the curfew. So another one of the reason why we ramped up so much this year and concentrated on U.S. because we know that, in the future, there will not be many slots available.

[Stine Klund, Investor Relations Officer]

Okay. Thank you.

[Bjorn Kjos, Chief Executive Officer]

Thank you. Have a good summer to everybody.