Q3 2012/13 SAS AB Earnings Conference Call
Sep 04, 2013 AM EDT
SAS.ST - SAS AB
Q3 2012/13 SAS AB Earnings Conference Call
Sep 04, 2013 / 08:00AM GMT
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Corporate Participants
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* Rickard Gustafson
SAS AB - President & CEO
* Goran Jansson
SAS Group - CFO
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Conference Call Participants
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* Jacob Pedersen
Sydbank - Analyst
* Dan Togo
Handelsbanken Capital Markets - Analyst
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Presentation
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Operator [1]
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Good day and welcome to the Q3 2013 SAS AB earnings conference call. Today's conference is being recorded. For your information the presentation is also available on the SAS Group website and the webcast.
At this time I would like to turn the conference over now to Rickard Gustafson, President & CEO; please go ahead, sir.
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Rickard Gustafson, SAS AB - President & CEO [2]
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Thank you very much and good morning everyone, and welcome to this teleconference for SAS Group's third quarter results.
I hope that you have the presentation in front of you, and I'm going to try to guide you through the pages and refer to the right page as I speak. But if I may ask you then to flip straight onto page 8, and let's start -- sorry page 1.
With our Q3 result I think we can conclude that SAS's ambitious restructuring program is working. In the third quarter we have delivered a capacity growth of 7.7%, through increased productivity and efficiency, while rapidly improving our cost base.
Traffic was up 5.6% driven by an optimized summer program, tailored to the needs of the Scandinavian frequent travelers.
Unit cost on a currency and fuel adjusted basis was down 5.8%, and our [extensive] restructuring program has reduced our operating expenditure with approximately SEK600 million in the quarter.
Altogether SAS delivered an earnings before tax at SEK1.1 billion, an earnings level that we haven't seen in a single quarter for many, many years.
Operating profit doubled versus the same period last year to SEK973 million.
It is very satisfying to see that all our hard work and efforts are having the expected impact, but we also know that one quarter doesn't make a full year. We are committed to deliver on our restructuring program to its full potential.
Strengthened by the fact that we see rapid improvement in our earnings, we are taking the required decisions to also secure our long-term competitiveness.
In June we placed an order to renew our long-haul fleet that complements our existing efforts to renew our short-haul fleet.
When we launched our restructuring program in November last year, we promised to swiftly address three critical issues and we're making progress on all three.
Firstly, we promised to improve our cost position and earnings; in Q3, unit cost is down 5.8% and earnings before tax up to SEK1.1 billion.
Secondly, we promised a rapid pension switch over. We are on track to reduce the negative IFRS equity impact by more than SEK7 billion and Goran will take you more [through] that in more detail shortly.
And thirdly, we promised to improve our financial preparedness. We have line of sight to reach a target of SEK3 billion in asset disposals and asset refinancing.
Our financial impairments reached 21% in the quarter, and again Goran will come back to that shortly.
If we then go on to the next page, I'd like to take you through the highlights of the quarter, but I would also like to provide a perspective on the European aviation market that sets the framework for our strategic priorities.
European aviation is an -- industry EBIT margins are very thin in a global perspective, driven by strong low-cost carrier footprint in Europe.
SAS is primarily short-haul carrier, 70% of our ASK produced domestically within Scandinavia and Scandinavia to Europe. Therefore we must build a profitable and sustainable short-haul business, and cannot just solemnly rely on the profitable long-haul business, like some other European full service carriers.
Given the high low-cost carrier penetration in Europe, traditional full service carriers are forced to respond. Significant cost and productivity improvement measures are being enforced; some carriers are reducing European short-haul capacity to stop their bleeding; and some carriers outsource, through wet lease or own LCC subsidiaries, their European short-haul operations.
But also low-cost carriers must look for new customer segments to maintain growth rates of their businesses. A large number of corporates have deployed a lowest price travel policy for the short-haul need, enabling low-cost carriers to also target the low end of the corporate segment to fuel their growth.
The European short-haul markets are showing signs of convergence, and airlines need to differentiate about pricing to retain and grow its customer base.
In this context, SAS has developed a clear path to sustainable profitability also in the European short-haul market.
If you flip to the next page, you see that our primary objective is to be a viable and profitable stable airline, connecting Scandinavia and the world. Scandinavia is a region of industry, trade and travel. As a relatively remote and large geographical area with scarce population, aviation is a vital part of staying connected.
To be competitive in the Scandinavian market, SAS customer proposition must be relevant for modern people and businesses that have huge demand on their time, and expect hassle-free and time-efficient travel. We must make travel easier.
Given the competitive landscape in Europe, the customer value proposition must be underpinned by market-based conditions.
Therefore, to deliver on our objective, SAS's focus rests on three pillars. One; establishing an efficient operating platform to be delivered through our current restructuring program and we see significant progress made in the third quarter.
Two; we need to be the natural choice for the Scandinavian frequent travelers. An enhanced summer program attracted more frequent travelers in June and July 2013 than last summer.
And three; we need to invest to stay competitive, a very clear roadmap now laid out for our long-haul and short-haul fleet.
Let me give you some more details on our progress in the third quarter on these strategic priorities.
Next page please.
SAS is going through a massive and necessary transformation that delivers rapid and timely improvements in our critical KPIs. Currency-adjusted passenger revenues are up 5.3%, driven by improved productively and flexibility.
Capacity is up 7.7%, with no additional aircraft. Aircraft utilization is up close to 7%, and in the month of July, utilization was up one full hour per day, both in our short-haul and long-haul fleets.
Despite a significant capacity growth, total operating expenditure is down 5% on a currency-adjusted basis, causing our unit cost to continue on a positive trajectory.
Currency and fuel-adjusted unit cost is down 5.8% in the quarter and the key drivers are our new collective agreements and also reduced administration. More than 300 FTs have already left the business and close to 400 FTs in the process of leaving the business.
We are determined and committed to continue a rapid execution of our restructuring program and deliver on our SEK3 billion cost reduction target. So far we have realized approximately SEK1 billion in savings and implemented more than two-thirds of all activities within the program.
Next page please. We are targeting frequent Scandinavian travelers. This group is defined as people conducting more than five round trips per year. There are approximately 2 million frequent Scandinavian travelers; that accounts for 10% of the total population. And they account for approximately 70% of the SEK66 billion market for air travel booked in Scandinavia.
Frequent travelers value service components that low-cost carriers struggle to deliver, such as schedule, shortest total travel time, global reach, accessible airports, punctuality, correct delivery and flexible terms. Historically we have reduced our networking capacity during summer, forcing frequent travelers to choose other carriers for their vacation needs; but not this summer.
We have tailored our network to suit our frequent travelers' needs. We've opened 32 new summer destinations. We've opened more direct routes, primarily from Oslo and Stockholm. We shifted long-haul capacity from Bangkok to San Francisco to capture more business in [USA] traffic.
We launched a new short-haul service concept to be more relevant for our frequent passengers, SAS Go and SAS Plus, and our efforts are delivering strong results in the quarter. We welcomed 100,000 more passengers on board in the quarter and the number of EuroBonus members travelling on SAS this summer is up 46% versus last summer.
And next page. With the restructuring program, we are delivering in line with our expectations and we are investing in our future. We have secured a clear fleet roadmap, both short haul and long haul. On long haul, we have ordered 12 new aircraft; four Airbus 330-300 Extended and 8 A350-900, with the first delivery in 2015.
On short haul, we are rapidly replacing our older aircraft, our MD80s, with the Boeing 737NGs in Stockholm, and Airbus A320s in Copenhagen. This is to be fully completed by October 2013. We have ordered Airbus 320neos with the first delivery in 2016.
And to stay competitive we also initiated an upgrade in our existing cabins. Short haul, new seats are being installed for improved comfort and fuel efficiency; and in long haul, we're installing new seats, including fully flat business seats and a new inflight entertainment system. This is to be initiated as soon as possible.
With this introduction, I like to hand over to Goran Jansson our Group CFO to take us through the quarter results in more detail. Goran, please.
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Goran Jansson, SAS Group - CFO [3]
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Thank you, Rickard.
If you start on slide number 9. The profit and loss shows evidence that our restructuring program delivers and total operating revenues are at the same level as last year in nominal values. But there is an underlying increase in traffic revenue, which represent SEK10.4 billion of the SEK11.6 billion. The difference is mainly other income from ground handling, payment from sub-leases. But let me come back to the traffic revenues.
If we start off with the payroll line, you can see a decrease of more than SEK200 million giving a positive effect to the margin with 1.8% units.
The fuel costs, development has been favorable in the quarter and improved margin with 3% units.
Government charges on the same level as last year and the operating costs up, driven by volume and inflation. Giving an EBITDAR margin of 18% compared with 14% last year.
Lease costs slightly up, driven by new aircraft deliverance, giving an EBIT margin of 10.3% compared to 7% last year.
Financial items down considerably to SEK225 million from SEK318 million last year. The EBIT margin -- EBT level or earnings before tax doubled to SEK973 million from SEK497 million last year.
The non-recurring items consist mainly of release of provisions for the headquarter rent agreement, while last year it included the sale of properties; giving an EBT of SEK1.120 billion compared with SEK726 million last year.
So we go to next slide. If you look at the revenues, the optimized traffic program growing our traffic revenues. But the effect -- been affected negatively by the depreciated Norwegian krona with almost SEK400 million.
The increase in volume has improved the traffic volumes with 600 million, but as planned, the load factor and the business routes have a lower load factor during the summer. The yield on expansion has a lower yield due to the difference in price level.
The other traffic revenues have been negatively affected by the lower cargo levels, but with increased revenues in the third quarter. This give us a currency-adjusted increase of 3.7% of the traffic revenues.
So if we look at the next slide. Despite 7.7% higher capacity, we managed to lower our costs with 5%. Our fuel cost was down, driven by lower price levels and positive hedge effect compared with last year, and these effects add to SEK296 million in the period. The volume-related cost amounts to SEK229 million.
Our program shows significant effects in the quarter with SEK580 million cost improvement. Other cost included increased maintenance and the cost of shifting out our fleet, as Rickard mentioned, and more inflation-driven price increases on general cost base.
This [resulted in a cut of the] cost of almost SEK0.5 billion.
If we then flip to the next slide.
Our cost restructuring delivers according to plan, if you look into what we said a year ago, or what we wanted to accomplish, and look at the different cost initiatives.
The new collective agreement delivers during the quarter with lower compensation levels and more flexible working hours. The new agreement has enabled us to increase the production significantly during the summer and this initiative will give SEK700 million in savings.
Regarding the new pension schemes, we are now through with the old local agreement in the three countries. We handled all applicable employees in Denmark and Sweden to these plans and by the end of 2013 we will see all the Norwegian employees moved over to these plans as well. This initiative will give SEK500 million in savings.
Administration centralization has advanced considerably with 300 people that have left and more than 400 people that have been noticed to leave SAS. In terms of this, there will be 1,000 people that will be affected by this initiative. The initiative in itself will give a saving of SEK700 million.
The IT restructuring project has accomplished a great part of its objectives and Tata, the new outsourcing partner, has started to migrate into its own operation. This initiative will give SEK600 million.
Commercial and Sales item here consists of a number of different smaller projects that have been started and these initiatives will give some SEK500 million in total.
We feel sure that we will reach our target of SEK3 billion in savings and have initiated more than two-thirds of all that activities.
When it comes to our ambition to increase the variable proportion of our cost base, it seems to be a misperception in the media that we need to divest our ground operation within a short period. And that should generate a large cash injection.
The savings target of SEK3 billion does not include savings from the ground in the target period and the cash generation divestment does not need to include the ground to reach SEK3 billion.
The whole industry's moving towards the lower degree of vertical integration and decoupling of the ground service in order to focus on the core element and to get more flexible cost base and lowered exposure to revenues from other airlines.
We have the same belief and therefore we have this idea to outsource our ground operation. This is something that needs to be done in an orderly fashion as it involves most of our customers and a lot of employees. We are currently engaged in final negotiations with Swissport and will soon have more to tell.
When it comes to flexibility in the new crew agreements, the important piece -- this is an important piece that gives us an opportunity to increase the level of wet lease. It has been used to a larger extent this summer than last year and it gives us lot of more capacity therefore.
We have also completed outsourcing our call centers.
So you switch to next slide.
As I mentioned, we have no urgent need to divest the ground to reach the SEK3 billion target of cash generation. The deal to sell our subsidiary Wideroe will be completed in the end of this month. It will generate a cash improvement of SEK1 billion and decrease the interest bearing debt with SEK1 billion.
We made a sale/leaseback on spare engines that generated SEK700 million in cash and we have made sale/leaseback and financing activities of aircraft that have generated SEK1 billion.
So we are now not far from the SEK3 billion we set out to accomplish in terms of generating cash [savings].
When it comes to pension, we are in the final phase of completion of the switchover to defined benefit plans as I said. This will lower the impact of the new accounting rules on our equity from SEK13.5 billion to SEK6.9 billion, where SEK3.4 billion comes from the new agreements, SEK1.5 from the reversal of deferred taxes, SEK0.7 billion will be amortized during this year, and SEK1 billion will come out of the balance sheet when we sell Wideroe.
In total, we will -- the new agreements will lower our defined benefit commitment and future exposure with SEK19 billion, or 60% of the outstanding amount.
Then flip to next slide.
Our financial preparedness has still strengthened and we now show 21% up from 18% in last quarter.
Our operating cash flow, before change in working capital, improved with SEK304 million compared with last year. The negative change in working capital increased, due to the higher level of pre-paid tickets that was flown during the quarter.
We have started to access the debt market and issued EUR35 million under our EMTN program. It is encouraging that Standard & Poor has acknowledged our progression over our efforts to strengthen and trim SAS to a competitive airline and therefore upgraded our credit rating.
I hand over to Rickard to finalize the presentation.
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Rickard Gustafson, SAS AB - President & CEO [4]
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Thank you, Goran. I'm going to try to round it up then on page 15.
We are delivering on our strategic priorities and our promise. We are rapidly implementing some fundamental changes and improvements to our business.
We are establishing an efficient operating platform. We've seen improved unit cost. Unit cost is down by 5.8%.
We've delivered a swift pension switch-over, moved from defined benefit to defined contribution, significantly reduced the negative equity impact from new IFRS accounting standards and reducing future results variation.
We are becoming less dependent on external credit facilities for our financial preparedness.
We delivered a strong result in Q3. Earnings before tax north of SEK1 billion, but we know that there are still a lot of hard work ahead of us to deliver the full potential of the program.
We are building a strong value proposition, tailored to frequent Scandinavian travelers. Some proof points are currency-adjusted passenger revenues are up 5.3%; 100,000 more passengers in the third quarter 2103 versus the third quarter 2012; number of EuroBonus passengers increased 46% in the summer versus last year.
We are investing in our future, creating a very competitive fleet structure, and our last MD80 operations to be conducted in October this fall.
Altogether, our outlook remains firm. Given no significant unforeseen events, we will deliver an EBIT margin over 3% and a positive earnings before tax for the full year 2012/2013.
With that, I'd like to thank you for your attention and hand back to the operator to initiate the Q&A session.
Operator, please.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Jacob Pedersen, Sydbank.
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Jacob Pedersen, Sydbank - Analyst [2]
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Hi gentlemen, congratulations on improving underlying earnings. I have a couple of questions. First of all, if you look at the competitive situation in your markets for the past half-year and try to look into the future also, what should we expect -- how do you see the winter market developing? As late as today, we've seen Ryanair being quite bearish on the outlook.
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Rickard Gustafson, SAS AB - President & CEO [3]
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I struggle to give you some real guidance on yield and RASK development for the future. As you know, we don't really do that, but I'll try to give you a perspective on your question.
We have seen a continued competitive pressure throughout the last six months. We, to some extent, see that given that the Southern European markets are pretty tough at the moment, with a decreased demand, and the pretty flat development of Central Europe, there's been more capacity redirected to our part of Europe, where we still have some pretty strong demand growth.
So that has increased the competitive landscape and pushing further pressure on yields and RASK. And that's what we have built in into our plan and that's what we expected.
Looking into the winter, I can't really see that I see a significant trend shift either in the -- either directly in a worsening way or in an improved way, but we are planning for a continued competitive environment and continued RASK pressure.
And our only response there is to continue to deliver on our restructuring program, as we've done so far. That's the way for us to deliver a comprehensive and competitive cost base, at the same time, invest in our customer proposition to ensure that we get the frequent travelers on board on our aircrafts.
It's a tough market and we're aware of it, but we also believe that we've taken some strong counteractions to mitigate it.
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Jacob Pedersen, Sydbank - Analyst [4]
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Yes, but you've still realized a positive yield development for the first nine months of the year and you entered the year by saying that you expected yields and RASK to be downwards. So you must have had a better grip on the yield side of things than you expected nine months ago.
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Rickard Gustafson, SAS AB - President & CEO [5]
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That is correct. We have been able to hold our yield somewhat better than we expected in the beginning and the RASK that is down is also due to a pure mathematical reason, so to speak. We have increased our ASKs and therefore the RASK is down.
But looking forward, Jacob, I cannot and I don't count on that we're going to maintain that yield level. I'd rather see a continued pressure. That's what we have -- that's the mindset and framework that we operate under.
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Jacob Pedersen, Sydbank - Analyst [6]
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Okay. Next question, turning to your restructuring charges. Earlier you said that you expected restructuring of around SEK400 million in this financial year. As I read your report now, you expect a positive effect for SEK150 million, an income of around SEK150 million.
Could you talk a bit more about that reversal and should we expect restructuring costs dipping into the next year or what's happening?
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Goran Jansson, SAS Group - CFO [7]
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But when we set up and made that statement a year ago, we were not sure of all the details of the program at that time, and we were not sure -- at that time, one needs to have very clear evidence of certain things when it comes to being able to account for a provision.
Therefore, we then made that statement. We are now much more into the details during the year and understand where we are. It's also with the fact that we, at that time, didn't know really what to do with the situation on -- for our headquarter and possible further provisioning for that; we have decided now to move back, and therefore can release that provision. That's why you see a positive number instead of a negative number.
So it's very much -- we are much more sure now where we are on the provisioning and therefore we guide with SEK150 million.
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Jacob Pedersen, Sydbank - Analyst [8]
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Okay, and we should expect no restructuring costs in -- related to 4Excellence Next Generation in the next financial year?
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Goran Jansson, SAS Group - CFO [9]
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No, not on top of the already provided for.
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Jacob Pedersen, Sydbank - Analyst [10]
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Okay. Then a question on ground handling. It seems like your rhetorics surrounding ground handling and how quickly to dispose of this is changing a bit, as I understand it.
What should we expect in this regard? There have been rumors in Danish press that this will be pushed all the way into 2015. Could you talk a bit more of the positives and negatives on making a more long-term outsourcing?
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Rickard Gustafson, SAS AB - President & CEO [11]
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Right, I'd like to start, Jacob, to provide a perspective again on this initiative. As Goran outlined in his presentation, the outsourcing of our ground handling activities are not an integrated part of -- for us to deliver on the SEK3 billion costs target or the SEK3 billion liquidity enhancement target.
We are doing this for other strategic reasons. Primarily for two reasons; I truly believe that a professional ground service operator will be better positioned to grow the business and improve the business. And from an SAS point of view, we are keen to shift more of our fixed costs to variable costs to have more -- be more flexible to meet ever-changing dynamics in our industry.
So those are the drivers. We have a letter of intent with Swissport. We are still negotiating with Swissport and I promised in the past that you will get a clear answer where we're going to end up on this particular deal within the year 2013.
I'm not backing down from that, but I need to ask you to be a bit patient and I will come back to you as soon as I have more information to tell. And I hope that that shouldn't be too long.
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Jacob Pedersen, Sydbank - Analyst [12]
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Great. Last question from my side. What are your thoughts regarding Norwegian's expanding its long-haul business? How has this affected you and do you see a bigger effect, going forward, or how -- what do you do to improve your position in this market?
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Rickard Gustafson, SAS AB - President & CEO [13]
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First and foremost, I'd like to state that we have operated in a very competitive environment, long haul, for many, many years.
And it's true. Now with Norwegian entering into the market, as we know, as they have announced for quite some time now, there will be one more player in the market. That's a fact.
But also, our focus on these frequent Scandinavian travelers is pretty profound here. We want to make sure that we have a product that has a clear transparency in terms of there should be no negative surprises. What you pay for is what you get. You don't have to have hidden fees.
For us, it's also very important with the schedule and the frequencies, Jacob; just to give you again the perspective. Already today, we operate more than 100 flights between Scandinavia and North America on a weekly basis.
When Norwegian is up and fully running with their operation in a year and a half from now, they will have roughly 30 flights a week to North America.
That gives you a perspective of the schedule. And then finally, we know that it's also extremely important for our customers to have easy and efficient connections in the US, to transfer domestically in the US. When we land either in Washington, San Francisco Chicago or New York, we know that a large part of our cabin will actually have their end destination elsewhere in the US.
So all of that has proven so far to be a pretty compelling value proposition. As you know, we are now investing our value proposition further both in terms of cabin comfort and fleet renewal that will further strengthen our proposition; and we'll be constantly looking for new growth opportunities long haul, where we also will assess and value direct links also from Stockholm and Oslo in the future.
So again, Jacob, to sum that up, yes, I do acknowledge there is one more competitor coming into play, but I also believe that we have a pretty strong value proposition, as it is today, that we're further enhancing.
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Jacob Pedersen, Sydbank - Analyst [14]
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Great, thanks. That's very helpful.
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Operator [15]
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Dan Togo, Handelsbanken.
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Dan Togo, Handelsbanken Capital Markets - Analyst [16]
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Just one question regarding the production expansion of 32 new routes here during the summer, boosting production. But how has it affected profitability and how should we see these, say, initiatives going forward? Will you be more opportunistic in your program going forward, targeting specific routes, destinations, etc?
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Goran Jansson, SAS Group - CFO [17]
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But it's always a very important survey before and such job to know where you should expand your roads to. Of course, any new destination that you add needs to have certain number of passengers and as we've said, we will target routes which are the preference of our customers that travel a lot. So what you will see is, as in we have shown this year, that we saw an increased number of EuroBonus travelers on our new routes. That is where you will see us.
Of course, I don't have in hand now the exact -- any of the new routes we're looking into. It's also, as said, a question on what will be the preference of our customers. But it is, of course, important not just to increase number of routes as per se, it needs to give a positive contribution to the bottom line and that's why you increase.
And an important part here is the fact that with the new setup and the new agreements we have, we have a lot more flexibility. We have a lot more ability to do wet lease and with the new aircrafts coming in, we will also have larger aircraft which will give a more competitive price -- cost level in comparison before, which enable us to actually go for more routes that in the past have been impossible for us to make money on.
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Dan Togo, Handelsbanken Capital Markets - Analyst [18]
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But I guess most of these 32 new routes are exiting the program come winter?
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Goran Jansson, SAS Group - CFO [19]
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Yes, they are. Some -- quite a few of them are, of course, seasonal. But we also started up from Denmark to Stockholm last week, so there are also more business-related routes that we -- and we're continuously looking to new business opportunities to see where especially, as I said, where our key customers want to fly.
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Dan Togo, Handelsbanken Capital Markets - Analyst [20]
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So what is the conclusion for this -- from this summer? Did this boost pay off, profitability-wise?
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Goran Jansson, SAS Group - CFO [21]
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Absolutely. It was really with the new cost level we have accomplished, we really were able to make more money out of -- and you can see that part of the profit generation in this quarter compared to last year came from the fact that we increased our number of routes and actually flew to -- a lot more to a number of destinations. So yes, this certainly improved our profit.
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Dan Togo, Handelsbanken Capital Markets - Analyst [22]
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Okay, thank you.
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Operator [23]
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(Operator Instructions). As there are no further questions in the queue, I would like to turn the call back to one of the speakers for any additional or closing remarks.
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Rickard Gustafson, SAS AB - President & CEO [24]
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Well, if there are no more questions, I think we wrap this up. Again, I thank you for taking the time to participate in this teleconference and again, we see a -- some clear signs that our massive restructuring and necessary restructuring program, I should say, is making the right inroads and showing the right footprint in our results.
We are also determined to make sure that we deliver on this to its full potential and we know that's a lot of hard work ahead of us. But we take this with us and we're encouraged by the fact that we see an improvement and we are keen to move forward.
So, with that, I'll thank you so much and I'm sure I'll hear back from you shortly. Thank you very much.
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Goran Jansson, SAS Group - CFO [25]
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Bye then.
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Operator [26]
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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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