Norwegian Air Shuttle's (NWARF) CEO Bjorn Kjos on Q3 2018 Results - Earnings Call Transcrip

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About: Norwegian Air Shuttle Asa (NWARF)
by: SA Transcripts

Norwegian Air Shuttle Asa (OTCPK:NWARF) Q3 2018 Earnings Conference Call October 25, 2018 3:30 AM ET

Executives

Stine Klund – Investor Relations

Bjorn Kjos – Chief Executive Officer

Geir Karlsen – Chief Financial Officer

Analysts

Kenneth Sivertsen – Pareto

James Hollins – Exane

Andrew Lobbenberg – HSBC

Daniel Roeska – Bernstein

Stine Klund

Hi, and welcome to our Q3 presentation. We’ll do this the same way as last time with the presentation from CEO, Bjorn Kjos; and CFO, Geir Karlsen, and then we’ll turn to you for a Q&A, and I will read out questions sent to investor.relations@norwegian.com. So let’s go ahead.

Bjorn Kjos

Good morning, everybody. Coming to our third quarter and go directly into third quarter. As you will see, we have, this quarter, taken in 4 MAXs and 1 Dreamliner and sold eight engines for deliveries this year as well as next year. We had an EBITDA on NOK 2.266 million, up from short of NOK 2 billion last year.

Most important flight was, this year, our UNICEF flight went to Chad. Very well received and, of course, touching to see how we can help all the children down there. Together with us was the Minister of International Development. Took the position as the largest non-U. S. airline serving New York this year. And what we are very proud of is that we have been voted as the most fuel-efficient airline in transatlantic routes in a new report from International Council on Clean Transportation. We took the first place last year also so we are keeping the position.

We have won a lot of awards. Also this year, World’s Best Low-Cost, Long-Haul Airline and Best Low-Cost Airline in Europe for the sixth year in a row. And other than that, a lot of awards, among them from Global Travel Magazine, and named the Four-Star Low-Cost Airline by APEX. The market have received us very well so far. The load factor this quarter was 90.5%, very stable.

We absorbed all the growth we put into the market. And we put in a lot of growth this quarter, 33%, and it was absorbed by 32%. So we are very satisfied with – that the market could absorb all the growth that we put into it. That resulted in 10.9 million passengers in the third quarter, up 11%. Then we have a rolling – 12-month rolling – carrying 36.4 million passengers. So we’ll see, we have continued growth on all the airports, short of 1 million in Oslo and 0.5 million in Stockholm, 400,000 – close to 400,000 in Copenhagen and around that in Helsinki. We have – our biggest growth was in UK, at Gatwick, with slightly more than 1 million passengers. That’s why, of course, we have a large number of Dreamliners now serving Gatwick, so that is the result of this increase.

And also, we increased on the Spanish basis. Interesting to see where our passages are coming from, and although we have a growth in the Nordics as well on a 12-month rolling basis, 6%. But our most significant growth now is from the U.S. As you see, departing passengers, it’s almost the same as Norway now. So 46% of our transatlantic passengers originate from U.S. Outside the Nordics, it’s more than 50%. So we are very satisfied with the growth there, but on the U.S., that’s actually, as you can see, where we have the strongest growth.

Today, we are flying network on more than 60 intercontinental routes. 55 on wide body – actually on 11 narrow body. So we have a huge network now coming – especially coming into New York. We have, this year, added 25 aircraft and down from last year where we had 34 coming in. Of course, this year, we have been – we will receive – we have received MAXs and Dreamliners. Today, we fly 158 aircraft and five aircraft on external leases. We are, as we speak, all the way, all the time redelivering all the engines, especially with the high lease cost that also drive down the lease costs and drive on our costs overall so – and that will continue going forward. Going to the financial guy. You are the king of the financials.

Geir Karlsen

Thank you. Okay. So I will just take you through the main items on the financials. On the top line, we are at NOK 11 billion. Ancillary is picking up nicely. I think it’s approximately 10% from last quarter, NOK 1.9 billion. Other revenue includes the cargo income, which is also taking up pretty nicely, 10% since last quarter. The other income also includes commission on board and then some services that we’re actually selling to Boeing on our own aircraft of NOK 35 million. That’s a small item but an interesting one.

On the cost side, I will come back to that more in detail. Other losses, gains, net this quarter is NOK 398 million profit. NOK 310 million of that is realized profit on fuel hedges and the other one is NOK 64 million, which relates to the profit on the TRSs we are having on our shares in Bank Norwegian. Net financial items, NOK 233 – NOK 290 million of that is interest expense. And then we have a gain on Eurodollar on the debt we have in euro in the dollar – U.S. dollar companies.

EBITDA of NOK 2.3 billion, and then EBITDA of NOK 1.6 billion. Due to the issues that we have been talking about the last quarters on the Rolls-Royce engines, I think, I would like just to mention that in addition to the kind of cost that we had on those issues, so it’s outside what we expect to get compensated, we do expect to have a loss due to these issues of more than NOK 1 billion for the 2008 as a total. Meaning, if it hadn’t been for those problems, the long-haul business would have made at least NOK 1 billion more for the 2,000 as – in total.

On the revenue side, 33% year-on-year. RASK to 0.14. It’s an increase. We have had a little bit of help on the currency there. Again, ancillary revenue is coming up nicely. It’s the same as the cargo. We expect that to continue going forward. Further, on the cost side, year-on-year compared to same last – same quarter last quarter, we are down 10%. So we have a little bit – yes, 12% in constant currency.

Even with fuel costs, we have a decrease in constant currency by 2%. This is a tendency that we will make sure that continues. On the fuel side, it’s not really what we can do other than trying to hedge. Of course, I’ll come back to that, but the base cost in the company should continue to decrease. If you go a little bit now into the details on the cost side, a few comments to that. Obviously, the fuel price is tough. It’s hurting us. You could say, "You’re in hindsight. You should have been more hedged." Yes, but it is what it is and we have been trying to play this a little bit smarter in the last months, meaning that we are trying to hedge a little bit more than we have seen – we have seen kind of the dips going downwards on the fuel price.

So fuel price is, obviously, a tough one. Handling cost is also up with some percentages. A lot of that relates to the current compensation that we have to pay to our passengers due mostly to the issues that we have on the engines, on the 787s. Higher technical costs is – it’s a little bit of an accounting effect because we have a higher portion now of 787 and MAXs on what we call total maintenance deals, which means that you will take a higher portion of your maintenance straight through your P&L compared to taking as a part of the aircraft and depreciating that over time.

So – but all in all, I would say that the tendency to trend, most of the cost lines is trending downwards. Then having just included a kind of a fuel efficiency slide, which shows you how many kilometers you’re flying per passengers per liter. Jet fuel, and it shows that we are – we should be very competitive in that area compared to everybody else, really. Over to the balance sheet. Intangible assets. This is deferred tax loss we have, that’s reduced this quarter due to the fact that we have a decent profit.

On the aircraft and aircraft parts, NOK 31.8 billion, that’s up from NOK 29.7 million in the last quarter. As Bjorn said, we have taken delivery of four MAXs and one 787. Attainment on the aircraft includes PDP, NOK 4.3 billion of that is on the 787s; NOK 2.2 billion on the MAXs and NOK 1.8 billion on the NEOs. On investments, that includes our share of stocks in Bank Norwegian. It also includes approximately NOK 600 million in unrealized profit on the fuel hedges that we have on. Receivables. That is – it includes the kind of holdbacks from the acquirers we have.

As I told you last quarter, we are working to get more acquirers in order to give us capacity as a result of the growth. We have got two new acquirers during the quarter. It takes time to implement on the IT side, so – but we expect that to give an effect during the current quarter and into the first quarter. There’s also a significant amount included in this receivable that relates to the compensations that we have agreed due to the engine issues and that will turn into cash shortly. So that’s part of the reason that you might have expected a little bit higher cash balance by the end of the quarter.

But that takes us down to an equity of NOK 5.3 billion, approximately 9%. On the debt side, we have increased the debt to NOK 33.4 billion, up from NOK 30.4 billion in the second quarter. And just a few comments on the cash flow side. We have paid NOK 3.3 billion in either taking delivery of aircraft or paying PDP, and we have done – drawn on facilities of approximately the same. I’ve just included a slide there that I have mentioned the last couple of quarters that shows kind of the blended average cost of our debt over time.

And as I’ve said previously as well, the most costly debt we have is the debt that was taken on back in 2008, 2009 and 2010 and 2011, which relates to the sale leasebacks and operating leases. The – all these operating leases will be redelivered and we are already in the process of redelivering them. And that’s why we can say that the average cost of the debt in this company will come down, almost regardless, as long as we redeliver these aircraft and you’re not doing anything stupid when you’re financing new aircraft that will be delivered.

So what this shows, it gives you a blend on what kind of – type of facilities that we have used over the time. And it also shows that the cost – the average cost of the debt in the company is going down despite that we have an increase in LIBOR. And we expect that it will continue to come down in the quarters to come. CapEx. The CapEx is unchanged really from last quarter, both for 2018 and 2019. That does not include the aircraft that we are planning to sell during 2019. The focus is still, and it has been during the last months, on reducing the CapEx.

Also to divest the so-called NGS. We have sold eight of them now during this quarter. All of them is sold either at book value or with a profit. We expect to repay approximately $130 million in debt. At delivery of these aircraft, we are going to free up close to $70 million in free liquidity after repayment of debt. And as I’ve said, we have done every – all of them with either at – very close to book value or with a profit. Liquidity.

We have an undrawn facility that we have had for a while. We haven’t done anything with it. On financing. I should also say that on reducing CapEx commitment, I mean, we will continue to sell the NGS as I – we have said. I think, hopefully, we can come to the market with another transaction shortly. What I can also say is that we have been running a process for the last couple of months, couple of two, three months now. And what I could say is that we are in, what shall I say, advanced discussions with – on a joint venture structure for part of the fleet. There’s no guarantees in that, but this is something that we have been working on for a while.

The 2018 deliveries, they are secured and we have raised financing all of them. And we have a very high focus now on making sure that we have financing in place at least for all deliveries for the first half of 2019. And the aim is to be able to do that before the end of this year. And we will continue to do the type of facilities with a low cost of capital, hopefully with a long repayment profile in order to take the cash breakeven on these aircraft as low as possible. I’ve said – I think I said in the second quarter that we were not looking to do any more sale leasebacks. I think we’re actually going to do a couple of sale leasebacks in the fourth quarter.

And that’s just because that market has really been tightening in. So instead of the typical lease factors we have done previously at higher than 0.7%, we are now able to do a few aircraft in the 0.6% level, which takes the cost of capital to a very competitive point really. And it’s – and this is typically the transaction that you can do supported by the Japanese. So that’s the plan going forward. Outlook. If you look at the bookings as for today, what we are seeing is a slight increase in yield.

Obviously, we are very curious to see how that affects the load during the next months and for sure, into the winter. The market is tough. The oil prices is kind of hitting us definitely, but that’s the situation as it looks now. The growth in 2018 is 38%, slightly down from what we told you last quarter. And we expect the growth in 2019 to be between 15% and 20%, all depending on what we are doing with the divestment of aircraft, as I mentioned.

On fuel hedging. What we have done there since last quarter is – I think, last quarter we had, for 2019, 7% hedged at $648. Now we have 22% hedged at $663. If you look at the fuel price, I think it was approximately $650 a ton first of July, and then it went up to – all the way up to $770 just recently.

Now it’s down to 730’s , again. And we are now able to hedge 2019 at around $710, which we have done the last days, really, and currently doing. So we expect to take that percentage up slightly, at least during the quarter – during the fourth quarter.

On unit costs. We stick to the guiding ex fuel, but we have to increase the guiding inclusive fuel, as I said. But hopefully, we could, during the next couple of quarters, have a look at the guiding, especially when it relates to ex fuel.

On the cost side, we have also started a program internally, where we aim to have significant saving. If you look at 2,000 – if you look at the cost base in Norwegian on the basis of the full year 2018, we have a cost base in the area of NOK 37.5 billion. If you look at the increase that we are going to have in 2019 in capacity and you increase the cost at the same level as we have seen in 2018, then you will have an increase in your cost base of approximately $5 billion. So the 37.5 will go up to 42.5. What we are saying here is that will not happen. So we expect that it will increase with 2 billion less as a minimum.

So we have initiated a set of initiatives, and the 2 billion is, what I would say a minimum, and we are going to make it. Hopefully, we are going to do more than that. That is what we plan to say here today. And we do also plan to come back to you at later quarters with a more updated figure and not – at least, what we have achieved at the time when we report back. Bjorn?

Bjorn Kjos

Okay. Thank you, Geir. And going forward, we also are committed to deliver on the long-term strategy. I must say that we have succeeded on the long run, and the long run today would have very good if it hadn’t been for these engine problems that we have encountered that had a lot of strain on us, a lot of – cost us a lot of money. As Geir said, more than NOK 1 billion outside what we expect to get back from Rolls.

So they have a goal on having this engine problem fixed by the end of this year, by the end of December, but we anticipate it might take longer. So we are – we have – within our company, we anticipate it will go both to January and February. But the – Rolls is having a date in November-December for that. In our agreement with Rolls, they are going to put new engines on all our airplanes, those we have got with the older engines. Entering a moderate growth phase, as you will see – as you have seen, and we have a strong focus on cost-reduction initiatives that Geir touched upon.

And what we are doing is actually, we are doing what we have already started, and that is the reason why we are implementing cost reduction and we have already been able to do that. And we are – it’s a conservative figure that I gave you, showed on – showed up here for NOK 2 billion. So we expect it to be more.

We have secured the financing on the remaining deliveries in 2018. And we are in the process, actually, of securing deliveries on – into 2019, first half 2019. Continuing the fleet renewal program where we are selling off the NGS. NGS is very attractive, actually, as we speak. So we sold two of them yesterday evening. So I wanted actually more, but we couldn’t take out more. On – and it’s very interesting to see if – on – that Geir touched upon, this program we have with also taking into a joint venture, and we are in advanced discussions on joint venture.

So the fleet renewal program will continue, and it’s very, very efficient airplanes that we are taking in. The MAXs, and also, the new Airbus aircraft. Very efficient aircraft. So our growth for the next years on ASK as an average will be between 5% and 10%, 3% to 5% on narrow body operation. It depends on how many – and actually, how many NGS we will keep, how many we will sell. We have 108 MAXs coming in and we have 115 NGS so that will not match, so we have to keep some of our NGS.

So – and our wide-body operation, of course, the growth of that will come down considerably for the next two years. And in four months or less than 18 months, we are finished with wide body – sort of taking in more wide bodies on the Dreamliners. So that is what we intend to do going forward. So yes, Stine, we might open up for questions. Geir, you probably have to come up here unless people want to hear you.

Stine Klund

Any questions from the audience first?

Question-and-Answer Session

Q - Kenneth Sivertsen

Kenneth Sivertsen from Pareto. Just a few ones here. First of all, the cost program, is that including the engine issue you had in – you mentioned in 2018? And secondly, yields. With the rising fuel price, I guess you have to do something on your top line. But how easy is it actually for you to lift the ticket price? Or is it more relevant to look at ancillary or other things? That’s the second one. And the third one, actually, on the outlook for the winter seems quite rough for the industry. Given your book equity, it’s – the equity market is at least concerned. Are you concerned for the winter?

Bjorn Kjos

It depends on the oil price. If the oil price goes to $900, I think a lot of companies have to be concerned. What we have seen it trend downwards, and that’s very good. We – as for the time being, it looks quite fine, but you never know when going forward. And one thing we know is that the cost will come down. That is for sure. We expect, actually, to – this year, we have – because of these engine problems, we have around NOK 1 billion that we paid out in indemnification to our passengers, so according to euro 261 – you will not see that next year. And that’s not taking into the count of the NOK 2 billion that we are saving. Not taking into account.

Geir Karlsen

No. That’s right. You could say that what it takes into account that it – is when you don’t have these problems, you will also see an improvement in the on-time performance, especially on the 787s. So by having this low on-time as we’re having today due to that problems, it has costs involved obviously. So in that sense, you could say that do you don’t expect to have savings in that area.

But it doesn’t take into the fact that – because we have kind of an agreement with Rolls-Royce and Boeing on how we should move forward with these issues until they come to an end. But yes – but they’re really struggling a long time and which – and we’ve sold these compensation to the customers through 2018, NOK 1 billion. And what I said earlier, that – and that is on top of the kind of compensations that we can expect from the two parties.

Kenneth Sivertsen

Just a follow-up on the reimbursement. Is the – you mentioned that the reimbursement is not yet included in the balance sheet. Will it provide any impact on the equity as well when it’s provided?

Geir Karlsen

Well, first of all, given the fact – well, it depends on what kind of agreements that we can do with them from now going forward, depending on how long these problems will continue. But first of all, it will be giving an effect on the cash.

The cash position and such in the company. If you look at the receivables number, for example, that includes a significant portion of the compensation that we have agreed with the two, which will turn into cash.

Kenneth Sivertsen

And the yield question or ticket price. How easy is it for you to change the ticket price in this environment with a slightly overcapacity in Europe?

Bjorn Kjos

I can answer on that. During – obviously, most of the airlines will run out of their hedges. And we are well ahead of them on the fuel consumption. So in that respect, I mean, we have – from our fleet, we have a 20% advantage just in the fleet of the fuel burn. So that’s actually the best hedge you can have long time forward. But there is no way that the airlines can continue, especially those with the lower end of the table, where you’re seeing a lot of fuel. There’s no way they can continue without increasing the prices. It – whether it be one, two months or three months, I shall not say what the timeline will be, but they will have to increase the prices.

James Hollins

James Hollins from Exane. Which new transatlantic routes in 2018 have performed better or worse than expectations? And the second question, what’s the split between short-haul and long-haul growth capacity in 2019?

Bjorn Kjos

Well, on the first. Of course, we don’t say from what we earn and not on the transatlantic routes, on what route is best. But you don’t need to be Einstein to understand where we fly most, we have the best return. So it’s hardly likely that where we fly with highest frequency, it will be the best return. Geir, anything to add on that?

Geir Karlsen

Not really.

James Hollins

And the split, short haul, long haul?

Geir Karlsen

I think we actually told that. I think it was on one of Bjorn’s slides that gave the expected growth on that for 2019, it’s actually included.

Andrew Lobbenberg

And from Andrew Lobbenberg from HSBC. Can you explain the broad concept of what you mean of a JV divestment fleet?

Geir Karlsen

Well, what we are seeing now is that we have been selling now 8 NGS. And what we can say is that the market out there to – for selling aircraft is, I would say, pretty good. On some transactions, it takes time, as it did with the one for the six aircraft. But the last one, for the two that we sold last night was done in – I think it was six weeks. And so I think what’s important is to find the smaller companies that can buy aircraft.

They are normally willing to pay a little bit more. The two last ones, they are going to China. They are going to be operated in Pakistan. So that’s the type of transaction that we will look for on the NGS because they just pay better. On the JV, this is a process that has been going on for a while. And the only thing we can see now that it’s in advanced discussions and hopefully, we can come back with more firm feedback shortly.

Bjorn Kjos

But I can also add that obviously, interesting to put aircraft that we want to use ourselves also into the JV because the JV is a very interesting concept that we are in advanced discussion with.

Geir Karlsen

What I can say in addition is that we – obviously, we’re looking for a partner that has significant capacity in order to contribute with capital, not only to invest equity into a JV, but also to be a factor when it comes to financing on the same aircraft.

Andrew Lobbenberg

One more question from Andrew Lobbenberg. You have been catching now about the transatlantic flying. Isn’t the concept working?

Bjorn Kjos

It’s working. We really don’t have the higher APD. We’re – actually, the higher APD, like we have in Scotland, that means the taxes on every passenger have to pay. When you fly a narrow body on low-cost regime, that’s very hard to get it to work. Outside the – outside where you don’t have the high taxes, it works very good.

Daniel Roeska

And Daniel Roeska from Bernstein. Can you give us more detail on your plans for debt financing next year?

Geir Karlsen

Yes. I think, as I said, we are focusing on doing the type – asset type of deals with a low cost of capital. They tend to give us 80% to 85% leverage. We are also looking into doing more financial leases, especially in China. They have even – they have a very competitive cost of capital as well and very long repayment profile. So I think that could be kind of mix that we can bring into our balance sheet going forward. But it will be the low-cost capital transaction that you will aim for, definitely.

Stine Klund

Any more questions from the audience?

Unidentified Analyst

[indiscernible]. Looking into your ancillary revenues, as the pressure on fares is expected to continue during the winter months, as capacity increases in Europe and also North Atlantic, your growth on ancillary so far this year is really good, even more than RyanAir. But we’re seeing all that – what we’re seeing on RyanAir is a change in the concept of carry-on luggage where they’re going to charge for that for all types of fares. And Norwegian, still, is very liberal on that, that all fare types can bring luggage – carry-on language. Do you have any plans to change that, to start charging for carry-on luggage?

Bjorn Kjos

I cannot say it straight out, but obviously, we are looking at – not taking – maybe not doing that but taking different charges of how much you carry on when you travel. So we are looking into it. But the most interesting part – actually, what we are looking into is on the cargo side because that’s really – as you saw, we have strong year, we have a 90% – 97% spike in the – spiking on the cargo side, so that’s incredibly interesting.

And we will move some of our aircraft, especially out of London and Paris over to – as an example, from Fort Lauderdale into Miami also because they have to refurbish the airport there, but that will spike up the – hike up the revenues on the cargo side. But we are looking on different – other concepts. And actually, we have launched concepts on in-flight rate and preorder meals and so on. And so that – have been incredibly interesting. And we are – we will roll that out on all our flights on the short also. That’s actually very interesting. But I – we have studied this that you mentioned. It’s an interesting concept, but I don’t think we are still ready for it.

Unidentified Analyst

Your competitors, they have between 40% and 70% of the total ancillary revenue comes from this kind of fees on carry-on luggage.

Bjorn Kjos

That’s very interesting, we have seen that, but we are actually attacking it, so far, from a different angle.

Geir Karlsen

And I also think, on the cargo side, I think, if we hadn’t had to take in all these wetleases that we have done this year due to the engine issues, I think you would probably have seen even a more increase on the cargo side.

Bjorn Kjos

Wetleases have been very damaging. So we try to get out of wetleases as soon as we can to free up aircraft, to prevent the wetleases. It’s caused damaging for our brand and it’s just cheap aircraft that get out there.

Geir Karlsen

Didn’t hear me saying that.

Stine Klund

Any further questions? Okay. I think that was it then.

Bjorn Kjos

Thank you.

Geir Karlsen

Thank you.