Icelandair Group hf. (ICEAIR) Earnings Call Transcript & Summary

Good morning, and welcome to the presentation of Icelandair's quarter 2 results. My name is Bogi Bogason, CEO of Icelandair. And here with me is our CFO, Ivar Kristinsson. And as usual, we will start by presenting the financials and the outlook for the rest of the year. But following the presentation, we will have a -- we'll answer questions, and we encourage you to send us questions to ir@icelandair.is. But first, a few key takeaways from the Q2 financials that we published yesterday afternoon. Icelandair turned its highest profit since 2016 in the quarter. And the main drivers for improved profitability was very strong revenue generation, strong performance within our leasing business at Loftleidir and lower fuel cost compared to last year. Total revenues increased by 26%, and the unit revenues increased by 8%. Our cash flow was very strong. The cash flow from operations during the quarter was very high. And the liquidity at the end of the quarter was USD 521 million, the strongest that we have ever seen, but Ivar will go through the balance sheet later on. Our EBIT guidance for the year, for the whole year, remains the same as in April, or at 4% to 6% compared to an actual ratio of 1.5% last year. So we firmly believe that we are on a good track to reach our long-term goal of 8% EBIT over the cycle. And we saw, during the quarter, considerable growth in most of our markets and business segments. In the passenger network, our capacity grew by 17%, and the number of passengers on the Via market increased by 30%; on the To market by 18%; on the From market by 7%. There was a small decline on the domestic market, but the performance and the results there were quite strong. Freight ton kilometers increased by 30%. But because of challenging market conditions in the quarter, revenues decreased between years. And as I said, our leasing business at Loftleidir is performing very well with considerable growth in revenues between years. And Ivar will now take us through the financials, and I will come back with the outlook. So please, Ivar.

Thank you, Bogi. And as we announced yesterday, EBIT in the second quarter was USD 21 million, and the EBIT margin was 5%. The results are, as Bogi mentioned, the strongest that we have seen in the second quarter since 2016. If we go through some of the key insights, starting with the operating income, that amounted to $414 million, up by $85 million from last year or 26%. Passenger revenue was $353 million and increased 28%, driven by improved load factor and yields in all of our markets in addition to 17% increase in capacity. Cargo revenue, $22 million, decreased by $2 million year-on-year, while leasing revenue increased by a healthy 41% and was at $19 million. Other operating revenue amounted to $20 million, rose 34% year-on-year, where the growth was driven by revenue from tourism, that increased to $10 million in the quarter. Looking at the expenses then, operating expenses excluding depreciation were $359 million and were up $57 million year-on-year or 19% on more production in all of our business segments. As we mentioned in our announcement yesterday, we wet-leased aircraft in June for a few weeks to ensure the integrity of our network due to delays in aircraft induction and in maintenance projects. And the overall cost impact of that on the delays is estimated at $8 million in the quarter as a one-off. Salary and related cost was $106 million, increased by $22 million year-on-year due to more production and contractual wage increases. We employed or recruited around 1,000 employees in the quarter and the average number of employees rose 19% between years. Other aviation expenses amounted to $71 million, up by $20 million. And other operating expenses were at $88 million, rose $27 million year-on-year. And both those categories are increasing in line with the increased scope of the operations. Looking at the finance cost then, net finance cost was $7.2 million, $1.1 million lower than last year, that is if we exclude the changes in fair value of warrants that were included in the accounts last year. And profit before tax, $15.3 million and after tax profit of $13.7 million, $10 million improvement from previous year. If we look at the production in our passenger network, we can see that we added more capacity in North America than Europe, as the demand has been stronger in that area recently. Overall capacity, the increase of 17%. But however, if we look at it by region, then capacity to North America increased 19% while to Europe increased by 14%. And around 60% of the passenger revenue in the quarter came from North American market, while Europe represented 23% and Iceland represented 16%. Load factor was also higher on the North American flights, 86% on the North American flights versus 84% for the system in total. As Bogi mentioned, Via was 41% of the mix in the quarter compared to 37% last year. And the proportion of From passengers reduced slightly between years, although we saw the overall number increase by 7%. Fuel expense in the quarter was $96 million, down by $10 million or 10% from previous year. We had 50% hedges in Q2 at the average price of $878 per tonne, which was higher than the underlying market price in the quarter. All-in fuel cost in the second quarter was $913 per tonne compared to $1,092 in the first quarter this year. And we saw a positive impact of flying around 60% of all flights on the more fuel-efficient MAX aircraft compared to around 50% last year. Looking ahead at the hedging positions then, we are 49% hedged in the third quarter at $878 per tonne. We are up to 33% in Q4 at an average of $841. And we have hedges in place now for 2024 over the first half, around 12% of the expected consumptions at $760 per tonne. Looking at unit revenue and unit cost then, the unit revenue, the RASK, it was a record RASK, the highest we have seen in this quarter and was USD 0.086, 8% higher than last year. And the improvement, as mentioned before, we both saw improvement in the load factor and the yields. And also, if you look at some of the other revenue generation development then, [indiscernible] revenue continued to develop favorably, as we have seen in the last few quarters. Partnership revenue was very strong, especially in North America with our partnerships there with JetBlue in Alaska. On the unit cost was $0.082, 1% lower than last year, helped by the reduction in the fuel price and more utilization of the MAX aircraft. If we look at the CASK, excluding fuel, that increased 11% year-on-year, and approximately half of that can be attributed to the one-off costs associated with the short-term wet leases that we had in June. General wage increases explain the rest of the CASK increase year-on-year. And we do see increased efficiency in the business compared to the pre-COVID levels. But however, we are in an environment where inflationary pressures do exist in many areas of the supply chain. Looking at the cash flow. Very strong cash flow from operations, $129 million in the quarter, the strongest we have seen in this quarter. Investing activities were $51 million, of which net CapEx was around $38 million. The CapEx was mainly due to purchase of aircraft engines, investment in heavy maintenance and other operational assets. Cash used in financing activities was $26 million, and that was due to repayment of loans as well as a reduction in lease liabilities. And overall liquidity, in addition to the cash at hand, we had committed credit lines that were undrawn at the end of Q2 of $52 million, bringing total liquid funds to $521 million, like Bogi mentioned before, which is a record liquidity for the company. And finally, looking at the balance sheet, it's increasing from the start of the year to $1.8 billion compared to $1.4 billion at the beginning. Operating assets increasing $41 million. That's due to investments in one Q400 aircraft in aircraft engines and heavy maintenance, as I mentioned before, in the -- that we invested in the second quarter. Right-of-use lease assets increasing by $55 million. We had 2 new lease agreements for MAX aircraft in the first half as well as one 767 freighter. Cash and marketable securities growing significantly on strong booking inflow, and that can also be reflected on the liabilities as we saw deferred income growing by $230 million in the first half. Noncurrent liabilities growing by $92 million. That increase is mainly due to new aircraft lease agreements as well as financing of 2 MAX aircraft that was completed in the first quarter. And total equity, $241 million. Equity ratio at the end of the second quarter was 14%, the same as we had in the second quarter a year ago, but lower than in the beginning of the year due to the seasonality of the business, and the equity ratio tends and always goes up in the second half of the year. So with that, over to you, Bogi, for the outlook.

Thank you, Ivar. And before I go into the outlook, I would like to close the first half of the year by saying it was a very eventful first half for Icelandair. We on-boarded around 1,200 employees. We did add 6 new aircraft to our fleet, there are 4 Boeing 737 MAX aircraft; and 5 new destinations in our network on both sides of the Atlantic and 1 in the Middle East, Tel Aviv. And all the new destinations have been very well received by our customers. And regarding the positive numbers, we carried 1.8 million passengers, exceeding last year by over 400,000. And then on to the outlook. The current booking status is strong, and the book load factor now is considerably stronger than at the same time last year as we return to a normalized booking pattern for the first time since the COVID pandemic. However, we are seeing some small signs of a slowdown in revenue increase in the second half of the year, mainly on our routes between Iceland and Europe. And here, you can see the capacity increase that is taking place on the market to win from Iceland and on the Via market as well. And Iceland, the capacity increase to and from Iceland is higher than on the most -- on most other markets in the world. And at the same time, economies in many European countries are going through some challenges. And as we see it, this situation is putting some pressure on the revenue growth in the second half of the year. But as always, this is a very dynamic market with our valuable commercial infrastructure, strong foothold and brand awareness, both in Europe and North America, we will definitely continue to shift focus between markets just based on how they are developing and performing. Then briefly to the outlook within the other businesses, cargo leasing, or the businesses than our passenger network. We are expecting continued challenges within our cargo operations during the summer, mainly because of weak export markets, but we believe that we will see an improvement in the autumn. And we are also taking a lot of actions to restore the profitability there. But at the same time, the outlook for our leasing business at Loftleidir is very bright, and we expect to see continued profitability there. And that brings us to the guidance for the full year. The Q2 results were in line with our expectations despite the one-off cost that we experienced. Fuel prices continue to be lower than we expected earlier this year. And as I mentioned, the booking status for the second half of the year is robust. However, the signs, I already mentioned, are a bit impacting our revenue projections for the second half of the year. So when we take all those information together into the account, our EBIT ratio guidance for the full year remains the same as when we published the Q1 financials in April, or at 4% to 6%. And the guidance is, as always, subject to change in case of some unforeseen events or financial -- external financial developments, financial markets developments. And looking further ahead, we have already secured 3 new aircraft for the spring of 2024. With that, we have the flexibility for growth, and we have already announced 3 new destinations: Verona, Innsbruck and the Faroe Islands. And our ambitions are, as always, to develop our network further in the coming years with more new destinations, more frequency to many of our current destinations and then further development of our connecting [ back ] structure in Keflavík. But of course, all final decisions on that will be based on how market conditions and demand scenarios will develop. And at the beginning of July this month, we signed the purchase agreement of up to 25 Airbus 321XLR aircraft, thereof 13 are firm orders. And at the same time, earlier this month, we finalized an agreement for the lease of 4 Airbus 321LR aircraft, which will be delivered to us during the winter '24-'25. So our plan is to start to operate them before the high season '25. So our work on replacing the 57 aircraft continues. The Airbus 321 aircraft will give us excellent opportunities to develop our network and business model further. And the preparation for the introduction of the Airbus aircraft into our fleet has already started, and our great team is very excited for that project. So to summarize the information that we have been going through here. We are very pleased with the Q2 results, especially when we bear in mind the challenges we experienced by generating the best Q2 results since 2016. We firmly believe that we are on a great track to our long-term EBIT ratio goal of 8% over the cycle. Looking back to the beginning of Q2 2021. Just over 2 years ago, our passenger network was in a hiatus because of COVID, and we only had a handful of flights per week. The growth of the company during the last 2 years in terms of passengers, destinations, number of aircraft and employees has been just amazing. And being able to do that in a profitable way clearly shows the strength of the great Icelandair team. And our employees have done an amazing job. There's a big kudos to them. So now to the questions. I hope you have some interesting questions coming from the audience.

Good morning. Yes, we have -- here, we have a question. Are the $8 million one-off costs incorporated into the 4% to 6% EBIT margin guidance?

Yes. So I'll take that. Yes, so the EBIT guidance takes that or incorporates that. I mean that's a cost that we incurred in the second quarter. It's included in the accounts. So the 4% to 6% guidance does include that one-off cost.