Norwegian Air Shuttle ASA (NAS) Earnings Call Transcript & Summary

Well, good morning. My name is Tore Østby, and I would like to welcome you to this presentation of the first half of 2021 and the second quarter. The presentation will be held by our CEO, Geir Karlsen; and then also our Vice President, Sustainability, Anders Fagernæs, will have -- share some thoughts on our sustainability strategy. After the presentation, we will open up for a Q&A session related to the financial report. Media will be also kind of given the availability to ask questions related to the report. Questions may also be e-mailed to investorrelations@norwegian.com. So with this, I'll give the floor to you, Geir.

Thank you, Tore, and welcome to all of you. It's very good to be back here in doing the regular quarterly presentations. I think it's a year ago since last time. I guess we can all agree that it has been a very special year for all of us, and I can certainly say that, that has been the fact for Norwegian. Today, I was planning to go through a few areas and update you on the financials for the second quarter, but also give you a little bit of insight on how we are doing now into the third quarter, how the liquidity position is developing, and then trying to give you a little bit of insight on the plans going forward. I'll take you through the restructuring and how we look, more or less from -- mostly from a balance sheet point of view. We are coming out of the quarter with close to net 0 net interest-bearing debt. And we have a cash position, as we have seen, of NOK 7.5 billion. I will take you through how we are thinking now to get back in the market, to get the passengers up in the air and the focus that we have during that. Looking at the financials, I would say that at least from our point of view, it is as expected. I think when we went to market to raise capital earlier this year, we promised the investors a certain balance sheet. I think we have delivered that, yes, maybe even over-delivered a little bit, in my opinion. We have -- we are planning to say a little bit about our sustainability strategy, so Anders will give us a little bit of insight on that. I will also go through the momentum that we are seeing now in the market when it comes to bookings. It started back in June, and it has certainly continued through July and also through August. I'll give an explanation on how we are thinking on ramp-up for the months to come and through the coming winter and also give you some updates on the big projects that we're running internally these days, meaning to plan for a successful 2022 and to make sure that we have a company when we're coming into Easter next year that is extremely competitive, maybe as competitive as ever before. And we are going to play it smart from now to then to be ready. The reconstruction is, I guess, for many of you, a little bit of news, but the balance sheet is new news as per today. I mean we have taken out debt and forward liabilities in the area of NOK 140 billion through the restructuring. We have taken out more than 2/3 of the fleet, and we have taken out and canceled 185 aircraft orders. We have, as you know, terminated or exited the long-haul business, and we are focusing now on the Nordics, inter-Nordics and in and out of the Nordics to Europe. Unfortunately, when we are downsizing the company the way we have, we have also reduced the workforce with more than 6,000 employees. And then we rent -- then we raised NOK 6 billion in capital, as you know, and we are sitting with a very comfortable cash position as per today. We were able to negotiate with the leasing companies what we call power-by-the-hour towards Easter next year, which gives us a massive flexibility through the remaining part of the COVID-19 situation, I would say. And then we did, at the same time, reduce our ownership costs with more than 35% compared to pre-COVID that we will benefit from during the next years. We have also done quite a lot on the organizational side. So right now, we are having 51 aircraft, we own 4, we have leased the rest of them. As I said, more than 35% reduction in costs, which will make us more competitive, obviously. We were also able to negotiate a complete reset of what you call the maintenance accruals. That is an obligation of building up when you lease an aircraft and where you would have to pay that amount normally when you redeliver it. That was reset to 0. So by that, you can treat it as we are sourcing aircraft on the market from scratch with no legacy. And again, no aircraft orders. We have approximately 3,200 employees in Norwegian today. 24% of them are still furloughed, but that won't last long. Many of these are in Spain. By end of October, we expect to have all Norwegian crew up in the air again, which is fantastic. We are still working to streamline -- to continue the streamlining of the company, and that will continue throughout the winter. On the cost base, we have, as mentioned earlier, in-sourced crew management. And we have worked very hard through the last year, I would say, to create better deals for ourselves from vendors, from credit card companies and from others. We have also been talking about the so-called AOC structure over the last 2, 3 years. Finally, I think we can say that we have now -- we are very close of finalizing that project. And within the next couple of months, we will end up with more or less, for all practical purposes, one AOC, which will be a Swedish one. We have a Norwegian one as well, but then that job is done, and we can start to take out the efficiency gains from that process. So by that, I think we have created a company now that has the right fleet, the right balance sheet, the right depth and the right cost level. The cost there will be still be something we will continuously bombard every single day throughout the next 6 months. But it takes us into a position where we can start really to focus on our customers again. We have a very attractive reward program, more than 4 million numbers still, only in the Nordics alone. I think we are -- we would like to have a little bit more scale. But with 50 aircraft, we were able to -- or maybe to bring it up to 60, 70 aircraft. We are, after all, able to put out for sale more than 250 routes for the summer of '22. A little bit on the financials. The P&L is really not very exciting, I would say. We had NOK 335 million for the quarter. We have NOK 1 billion in loss in EBITDAR -- sorry, NOK 538 million loss on EBITDAR. I think it is important to say that this P&L for the quarter is including kind of the last elements from the restructuring. We have had to let people go, and we would have to kind of pay severance packages. And everything is now included in Q2, even if many of these employees are still with us for at least for a period. So this is what we call one-offs. We also have that on, let's say, on the more financial side and with NOK 130 million in what you say call-off -- or one-offs. And if you take this out, you could say that the EBITDAR, excluding the one-offs, is in the area of NOK 336 million loss. And then you have also the last kind of portion of the financial restructuring, which is NOK 3.8 billion, and it is included in the NOK 3.5 billion there on net financial items, which takes us then to a profit of 2 -- close to NOK 2.8 billion for the quarter and NOK 1.6 billion for the half year. The balance sheet, that is probably a little bit of news for some of you. The intangible assets there is the deferred tax assets, and that is an asset that we will enjoy for the years to come, hopefully, if we do well. And then you have the aircraft side, NOK 5.4 billion, NOK 4.8 billion of that is aircraft, and it includes both the leased and the owned, and the rest is properties that we own and in equipment related to the aircraft. Then we have receivables. We still have an issue with the credit card companies. That has been easing up through the third quarter, and we do expect it to continue to ease up through the remaining part of the year. Now we are in a situation where it's not that much related to the credit, the Norwegian credit. It's more related to IT issues with -- between us and credit card companies or the credit card acquirers. And this is about to be solved and then we can -- this is hundreds of thousands of transactions that is involved. And we do expect that this will get back to not normal levels, but we will certainly get back to 100% holdback very soon, and then we will start to work with these guys over the next months in order then to bring it back to normal levels. Then down to the debt side. In debt today in Norwegian, you can see it on the right top side there, we have NOK 4.7 billion in aircraft financing. We have the NOK 700 million, which is the new bond, NAS13. That is the bond that is having a security in the London Gatwick slots. I'm very, very happy that we reached an agreement with the bondholders here because that could make us keep all the London Gatwick slots. And I certainly believe that as the market is coming back, these values will come up. The value of the loan in Gatwick slots in our balance sheet today is listed as 0. So it's clearly an upside. And if we can keep these slots for the next years, it will certainly give us value going forward. Cash and cash equivalents, NOK 7.5 billion, which is good. We know that we have promised to pay the creditors NOK 500 million, and that will -- that has been paid now since we raised capital and up until today. I'll come back to the cash position as per today a little bit later. You might be a little bit surprised of the equity level, NOK 1.5 billion. You might have expected it to be a little bit higher. We will convert the dividend claim in the current quarter of NOK 1.245 billion. So in real terms, the equity book equity is close to NOK 2.8 billion. We also have this 0 coupon bond, NOK 3.75 billion. That is discounted down to NOK 2.409 billion, as you can see on the right-hand side there. And if you add up all these debt instruments, you could say that -- and take out the cash, that's why we say that we have closed to 0 net interest-bearing debt of NOK 483 million. Other than that, I mean we have traffic liabilities that you all know, NOK 1.122 billion. And then you have the NOK 4.3 billion other current liabilities. That one includes cash points of -- in the area of NOK 2.4 billion. That is cash points that belongs to our customers. Obviously, when we have exited long haul, quite a portion of these cash points might not be used. And thereby, you will have a positive effect, accounting-wise, if that's going to be the case. So I think we have a balance sheet here with 7 -- NOK 17.6 billion. And then you have NOK 1.2 billion that will be converted into equity in the current quarter cash flow. Not very exciting, I would say, but what we have done through the quarter is to repay the debt that we had on the hangar at Gardermoen, NOK 250 million. That was the old NAS09 bond. We have paid down NOK 50 million on the NAS13. And we have also paid down on a bank facility, adding up to NOK 351 million. Then, Anders, it's you. And I will wrap it up thereafter.

Thank you, Geir. Good morning. I'll take you through our environmental sustainability strategy. And I think Norwegian is well positioned to tackle the transition to a low-carbon economy. As you can see from the graph, over the last decade, we have -- our low-cost business model has reduced fuel and resource consumption by 28%. And at the same time, as we cut emissions, we cut ticket prices and costs. We measure our emissions as grams of CO2 per revenue passenger kilometer. And the efficiency gains that we've got over the last decade is mainly through fleet renewal and carbon efficiency. But although that we are on the right track, we must do more to get an environmental performance at an acceptable level. And in 2019, we started integrating environmental sustainability into our business. Our overall strategic goal is to use fewer resources and increase profitability. And this overall goal rests on the principle that environmental actions must deliver a profit to be economically sustainable and operationally scalable. And to measure how we perform, we have decided upon 3 key performance indicators that you see on the left-hand side. The first KPI is carbon efficiency. In 2018, scientists at the International Panel on Climate Change found that to limit global warming to 1.5 degree, emissions must be reduced by 45% by 2030 compared to 2010 levels. This also forms the basis of our target. We're committed to reducing our emissions per passenger kilometer by 45% by 2030 compared to a 2010 baseline. It's an ambitious but achievable target. And if we look at the numbers there, that means that we're going down from 97 grams in 2010 to 53 grams in 2030. And in 2020, we jumped up to 82 grams, mainly due to lower load factor and shorter average sector length because of COVID-19. In Q1, we emitted 190 grams CO2 per RPK, while in July, we were down to 84 grams. For the Q2 in total, we landed on 119 grams. And we expect a slight increase in 2022 compared to 2019, mainly due to shorter sector length in our network. The second KPI is waste optimization. We consume large quantities of disposables and single-use plastics in our operations. These items have apparent benefits, such as low weight, which reduces fuel burn and efficient infection control. However, we believe it's possible to improve the in-flight service we offer and reduce costs at the same time. Therefore, we will remove all unnecessary waste onboard our flights and make sure that our waste resources can be used again. We commit to stop all consumption of nonrecyclable plastics by 2023, quite fast. In the same period, we will also reduce consumption of single-use plastics by 30% and make sure that all single-use plastics in Scandinavia are recycled. And the third KPI is accountability. We have developed our targets, so they are action-oriented and measurable, and we will be open and share our progress actively. We commit to integrate climate risk and environmental factors into corporate governance, risk management and annual reporting. And this year, we reported our assessment of climate-related risks and opportunities to the Carbon Disclosure Project for the first time. So we know where we are and we know where we want to go. And the big question now is how to get there in the most cost-efficient way. This picture you see here illustrates the main levers we can pull. We've developed a carbon efficiency model based on the actual fuel burn from our fleet. And the model allows us to estimate this level of carbon efficiency, each action must deliver, given full utilization of our current fleet in 2030. The number that you see there in italics refer to the potential each action has for improving our grams of CO2 per RPK in the period 2022-2030. And firstly, on the bottom right-hand side, operational efficiency will deliver a reduction of 5 grams CO2 per RPK mainly through improved fuel management and improved load factor. We've started implementing a set of environmental actions that are both profitable and operationally scalable. In 2019, we started testing the SkyBreathe pilot app, which gives our pilots feedback on how they perform on various fuel savings best practices right after they've landed. We're now intensifying training to scale and improve our performance. We have also partnered with the Swedish company, AVTECH, which delivers real-time advanced weather data straight into the cockpit during flights. This allows our pilots to adjust the altitude according to the best wind conditions. Flying in tailwind instead of a headwind is much more efficient. We've also signed an LOI with MSG Aviation, a Norwegian company that plans to build a semi-automated washing machine at the Gardermoen Airport, clean aircraft, reduce friction and lower fuel burn, in turn, reducing carbon emissions. And in aviation, an empty seat is considered waste. And the fuller the plane is, the more people share the environmental costs. Higher load improves both our Boeing line and our carbon efficiency KPI. And secondly, on the top-left corner, we need sustainable aviation fuels to reach our target. Our NGs, the fleet that we have now, can tank up to 50% sustainable aviation fuel today, which is more than sufficient for the 15 grams contribution we need. Thirdly, full renewal of the NGs can deliver 9 grams in CO2 per RPK. And in this scenario, sustainable aviation fuels only need to deliver 7 grams. So in conclusion, our strategy allows for flexibility, and we can reach our target without fleet renewal. Future projections and profitability assessments remain uncertain under current market conditions and regulatory framework. We're working to improve visibility and reduce uncertainty in key variables before deciding upon the most cost-efficient way to achieve our targets. Nevertheless, we remain committed to deliver on our targets and show our customers and investors that we deserve our current rank as the most sustainable brand -- airline brand in Norway. Thank you.

Thank you, Anders. So if we look a little bit forward, and I will also give you some insight on how the summer has been developing for us. I mean we came in -- or out of the restructuring in May into June. And suddenly, we saw a quite nice curve on bookings. This is 7-day rolling sales from, let's say, from June up to Friday last week. And you are seeing that we have been ramping up definitely into, let's say, from 10 up to 30 aircraft. Then we have continued throughout July and into August where we are flying more than 40 aircraft. And we came out of June with 74.4% load. August, as per today, is looking at approximately 70%, so still a good load even if we have put more capacity into the market. And if you look at the very nice curve in August, we are really seeing a momentum now in the booking curves. Looking at the sales for the last 2 to 3 weeks, we see a lot of these travels are also meant for September. So September is also looking very good. It's still not enough, but it's very good. And if you look at the cash position that we have in Norwegian, we came out of the quarter with 7.5 -- second quarter with NOK 7.5 billion. NOK 500 million of that is owed to the creditors, so you have to kind of take that out. But even then, you could say that the cash position today is more than NOK 7 billion. And with the sales we are seeing now for September, we have a target of having the third quarter cash neutral on the operational side. I think the way we have organized the fall, meaning the fourth quarter, is also looking good when it comes to cash burn. And I think we could end the year with a relatively low cash burn, so to say. And that will take us into a position through Q1 next year as well where we should sit very comfortable with a good cash position and ready to compete with -- into the top season of 2022. If you look at the ramp-up, as mentioned, as I said, we have 30 to 40 -- or more than 40 aircraft in the air today. We have power-by-the-hour throughout the winter. That means that we can fly when we want, and we will not fly loss-making routes as such. But at the same time, the way we have structured the power-by-the-hour agreement works in the way that we can keep a higher portion of the fleet in the air even if we fly it with reduced capacity. That means that over the winter, we can cover a wider part of our markets, but still with lower capacity. This is a massive flexibility and obviously gives us help to get through the low season. And we will definitely play it smart as well through this period to be ready for 2022. If you look at 2022, that is really our main project internally these days. We have just put our summer sales for 2022 out in the market. We are offering more than 250 routes. We have 50 aircraft, as I mentioned earlier. We have a plan of increasing that fleet with 10 to 20 aircraft then, first of all, into the second, third quarter of next year. That will be on, let's say, on the basis that we can find good terms with the leasing companies. They are still available for us. I think even one of them are represented here today. And we are very excited now to start looking at how we can source aircraft for the years to come. We have also launched an internal program where we are going to deep dive into all kinds -- all parts of our organization where we are going to look for efficiencies. I think one of my kind of concerns since I came into the company is that we are losing way too much money in low season. And I really think that the bottom line in Norwegian is not delivered during the summer, it's actually delivered through the winter. So what I think you will see going forward is that we will take out much more capacity than before in the winter season. We will park aircraft during the winters. And we -- so the project in itself will be to try to get out the cost base, serving those aircraft, especially for the low season. Thereby, we are also looking into crude efficiencies. We are not good enough compared to the best-in-class, for sure. We are good enough in part of the markets we operate, but we are certainly not good enough in other parts of the market. This is a very high focus internally now. And we will make sure that we can, for 2022, have a better crew efficiency and more in line with the best guys in the market. We will also focus on ancillary revenue, as we have, but we implemented quite a few of these kind of products, I would say, already back in 2019. It never came into action because of the COVID-19. And we are seeing now, when we have started to really sell tickets, that the ancillary revenue is also coming up as an amount per ticket. So the focus now is to make sure that we can play the fall coming winter smart. We're going to preserve a lot of liquidity. It's looking really, really good. And then the business plan for 2022 is in the makings. And that's really the year when we are going to deliver results for the company, for the shareholders and also being able then to continue to offer the really liked product, Norwegian, to our customers. So by that, I think we end the presentation, Tore. And there might be some questions.

Yes, thank you, Geir. If there are any questions, please wait for the microphone because of the live stream.

I think I'll start with a question from the web from Petter Nyström at ABG. On the cash flow, you had a positive working capital effect on both traffic settlement liabilities and receivables. What is this related to? And how do you see the working capital development in second half?

Well, as I said, we came out of the quarter, second quarter was NOK 7.5 billion in cash. Cash position as per today is also, let's say, above NOK 7 billion. I'm saying that the third quarter is, as it looks now, cash neutral. And I think we can also get through the fall if we play this smart with a very limited cash burn until the end -- to the end of the year. We also have, as I mentioned, still an issue with the credit card companies. We know that, that has eased up a little bit now during the third quarter, and I think it will continue to ease up through the fall, which is also helpful for us. So it looks good as long as we can do the ramp-up in a controlled way.

Second quarter (sic) [ question ] from Petter, your book equity is expected to increase by NOK 1.25 billion in the third quarter, as mentioned, given dividend claims. However, can you remind us if there are more debt that could be more to equity in the next coming year?

I mean we have done a legal process as well where we are going to streamlining the legal structure in the company. When we entered -- pre-COVID, we had 74 companies in Norway in the whole group. When we are ending all these restructurings on the legal side as well, you will most likely not have more than 20 to 22 companies, and that gives efficiency gains in itself. So I think because we are not completely fine with all that -- all those processes, I think we could say that in -- on the debt side, there are -- there might be some reserves that should potentially be converted to equity, yes.

And then the third quarter (sic) [ question ] from Petter, how do you -- what do you think about the ticket prices post-COVID versus pre-COVID?

I think the bookings we are seeing today and throughout the summer is showing, I would say, good signs, really good signs. And looking at the load factors that we are seeing this today -- seeing today as well is very promising. It's still not good enough, but it's definitely moving in the right direction. We are seeing, in general, I would say, that the booking curve is getting shorter. So you have to wait longer before you are starting to -- before you start to yield up as you know, Tore. And that is -- that applies more or less due to the whole market regardless of where we are. But I think I think Norway domestic today is performing well. The best country performing right now is actually Denmark, followed by Sweden, I would say, thereafter. And -- but the booking curve and the load factors I showed you here actually applies to all markets now where we are operating in. That means Norway, Sweden, Denmark and Finland domestically and also international. So it's not good enough still, but it's moving in the right direction.

A question from Kenneth Sivertsen at Pareto. Based on your comments, is it correct that expected cash flow for Q3, Q4 is about 0?

Well, I'm -- at least I'm saying that it's probably cash neutral for the third quarter. And I think the cash burn for Q4 depend -- a little bit on depending on the market as well, but it will be a very low cash burn, that's for sure.