Finnair Oyj

Good afternoon, ladies and gentlemen. I'm Erkka Salonen from Finnair Investor Relations, and it's my pleasure to welcome you all to this Finnair's third quarter 2023 earnings call. I have here with me Finnair's CEO, Mr. Topi Manner, and he is joined by our CFO, Mr. Christian Pullola, for the Q&A session. I will now turn this call over to you, Topi. Please, go ahead.

Thank you, Erkka, and good afternoon, everybody. And thank you for joining this call today. So, the main headline for our Q3 was that we experienced strong growth and profitability in the busiest quarter of the year. And now we are getting ready for our extraordinary general meeting this Friday. And the rights issue that we are proposing for the EGM is the next logical step in our strategy implementation. So we have a busy summer season behind us and Q3 indeed was operationally as well as commercially strong for us. We experienced double digit revenue growth when we compared to Q3 last year, 13.7% to be exact. The comparable EBIT landed at 94 million euros operating margin being 11.5 and this was despite the fact that the fuel price increased toward the end of the quarter. This was the fifth consecutive quarter of positive comparable operating EBIT operating result for us, and that is a testament of our successful strategy implementation. So we were yet again successful in our revenue optimization, in our sales efforts, in our revenue management, ancillary sales increased, but also the cost efficiency measures that we have been taking are visible in terms of declining CASC. The net result for the quarter was also positive, this time 53 million euros, and that was for the fourth consecutive quarter. Number of passengers during the quarter was 3 million. And the capacity that we flew in terms of ASKs was 77% in comparison to Q3 2019. And this number is including the vet lease operations that we are currently flying, especially to British Airways. The unit revenues RASC increased 28% compared to pre-pandemic brand pandemic levels and here the revenue optimization measures are very visible. Load factor landed at 81% and our on-time performance was 82% and after the pandemic we have been one of the most punctual and reliable airlines in Europe and that certainly was the case for Q3 as well. We are putting a lot of focus on customer experience these days. During the quarter, we announced a renewal of our Finnair Plus program, moving to a new spend-based platform, introducing new membership benefits for our tier customers, and then adopting Avias as the new loyalty currency. And this will take effect at the start of the next year. With AVS adoption we will be creating a lot of new opportunities for our customers to earn and burn AVS points, our loyalty points and that we estimate is certainly a welcome change for our customers in Finland but especially internationally as 50% of our customers are international customers and we also see opportunities in expanding our international customer base. The new Schengen Lounge investment is part of our Finnair Plus program renewal, and that new lounge will be opening during summer of 2024. We also recently received a five-star rating from Apex based on the customer feedback that they have been receiving. And we see continued growth in our business, especially toward the next summer. And for that purpose, we are recruiting now new cabin crew members and gate service agents for the needs of this increasing traffic. We have been receiving thousands of applications for the little bit more than 200 jobs that we have been posting open and that is clear evidence of Finnair being an attractive employer these days. Also our investments to new cabins continue. We have been executing on our widebody cabin renewal for a while and at this point of time 21 out of our 25 widebodies have been refurbished. And the feedback to the new business class, the air lounge seat, as well as to new premium economy and the refreshed economy has been overwhelmingly positive from our customers. And when we compare the new cabins, the routes that where we have the new cabins vis-a-vis the routes where we fly with the old cappings, there is a clear difference in terms of customer satisfaction in favor of the new cappings. We continue these capping investments and today we have announced that we will be renewing the cappings of all of our Embraer fleet, the regional aircraft, altogether 12 aircraft that we have in our fleet. Aurinkomatkat, our package holiday arm, is delivering well. Delivering well in terms of financial results and delivering well in terms of customer satisfaction. They have a record high net promoter score as we speak, and that is 66, which is a very high number in comparison to any given company on the travel industry. So toward the end of the quarter, we started to see increasing jet fuel price and that that was to some extent impacting our numbers. Even with that, the 94 million euro operating result is a strong number and tells a convincing story about the underlying development that we have in terms of implementing our strategy, both in terms of revenue initiatives as well as cost initiatives. And when we compare the current jet fuel price, approximately $1,000 per ton or euros per ton, then when we look at the longer history of jet fuel price development, we clearly see that we are in a high jet fuel environment as we speak. So the revenue for the quarter landed at 817 million euros. So there was almost 100 million euro growth when compared with Q3 last year. And the comparable operating result indeed was mentioned 94 million euros. notable pickup from the operating result of last year. With the financial expenses, with the taxes, our result for the period was 52 million euros. And I think that when we look at the commercial performance during the quarter, we can say that that really was strong. The measures that we have been doing in terms of changing our distribution, in terms of being better at digital sales and marketing, driving sales to our own channels, Finnair.com, are clearly bearing fruit big time as we speak. Also, we have been changing our offering and that those changes have been contributing to increase in our ancillary sales that all are contributing to revenue growth of 13.7% plus the 28% RASC growth. And this is indeed visible in this picture. So when we compare to Q3 last year, we see a clear pickup in terms of RASC. And especially when we compare to pre-pandemic levels, there's a clear step change in terms of RASC. In terms of CASC, we also see trend-like decline on the back of our cost savings measures. There's a little bit of volatility between Q2 and Q3 in this one. Q2 was artificially low. in terms of CASC and then during Q3 there were a bit of one-offs related to maintenance reserves in the CASC figure so if we even those out then we are seeing a more linear trend-like decrease in CASC that we would expect to continue during the quarters to come as we haven't yet seen all of our cost initiatives materializing. So when we look at our business on rolling 12-month basis, the comparable EBIT for the last 12 months has been 179 million euros. And on the back of that, we are able to specify our operating result range for this calendar year. And we expect... the operating result to land between the bracket of 160 million euros to 200 million euros. The midpoint there being the 180 million euros. During the past 12 months our revenue has been 2.95 billion euros and we expect the revenue during this calendar year to land between 2.9 to 3.1 billion euros. When we look at our cash situation, we see strong operating cash flow during the quarter. And also it is important to note that we paid back the 200 million euro hybrid bond, including the interests. So we started the quarter with a little bit more than 1.5 billion euros in our coffins. The operating cash flow EBITDA plus the net working capital change amounted to a positive cash flow of 95 million euros. And indeed, the hybrid bond repayment plus the interest was 220 million euros altogether. So at the end of the quarter, we had 1.3 billion, a bit more than 1.3 billion euros of cash at hand. And the cash to sales ratio was 46%, a very strong number. When we look at the balance sheet, there of course has been quite a bit of movement in the balance sheet. But if we compare with Q3 last year, our equity ratio has increased from 8.3% to 11.5%, despite the fact that we paid back the hybrid bond. And now, when we are in the middle of executing a rights issue, we impact that after successful rights issue, our equity ratio will be landing around 15%, taking into account that we will be paying back the 400 million euro capital loan that is being granted by the state of Finland. Also, the gearing has clearly decreased between the years. And now after the rights issue, we expect that the gearing will land around 150, which is a healthy number for going forward. We updated our strategy during this summer after the Q2. And now when announcing the rights issue, we included a couple of additional financial targets. And the bottom line of all of this is that with the six strategic themes that we have and with the disciplined determined implementation of those we expect to achieve a comparable operating profit margin of six percent by the end of 2020-25 even if the demand picture would be a bit more subdued than it is today, and even if there would be increasing sustainability costs going forward. In terms of sustainability, we are indeed in the middle of adopting the so-called science-based target initiative targets, and we expect those targets to be verified at the start of the year. We are keeping our long-term target of reaching carbon neutrality by 2045. And related to the balance sheet, in connection to the right issue announcement, we introduced two new targets. The first one being that we aim to achieve net debt of one to two times the comparable EBITDA by the end of 2025. And we also want to restore our ability for shareholder distributions from 2025 onwards, meaning that we would be paying these dividends based on the result of full year of 2024. And indeed, the plan with the right issue is to build a sustainable balance sheet. By paying back the 400 million euros of capital loan, we will, alone with that move, reduce our financing costs with 54 million euros. That will be a significant relief in terms of our profitability and rent net result going forward. the right issue will reinstate our ability to do shareholder distributions. And it is very, very important to support our continued strategy implementation, especially over the longer run when we know that we need to make investments to new fleet, most notably the narrow body fleet. And we expect those investments to gradually materialize over time during the next couple of years so that the annual capex would be remaining in check. The transaction is fully supported by our main shareholders. Approximately 60% of the shareholders, the state of Finland, Ki, Finnish pension funds like Varma, Ilmarinen and Elo are supporting the rights issue. And the same applies to the arranging banks, Nordea and Deutsche Bank, who have been underwriting the rights issue. The proposal of the right issue will be put forward to the extraordinary general meeting that we will be having this Friday on the 27th of October. And that brings me to the guidance. We are reiterating our capacity guidance, estimating that during this year we will be operating an average capacity of 80 to 85% ASKs in comparison to 2019 level. And this number includes the wet leases to other airlines. We specify our previous guidance for the full year revenue, and as stated, we estimate that to land within the range of 2.9 to 3.1 billion euros. And the operating result in turn for the full year, we expect to be in the range of 160 to 200 million euros. In terms of risks, as we have been stating previously, we see that the specific risks related to our operating environment, namely the pandemic impacts, have faded and also the market on the overall has adjusted to the closure of Russian airspace. So those risks do not apply anymore. Instead, we have the generic risks of inflation, the higher interest rate levels and the geopolitical risks, and now most recently also the Middle Eastern situation. So that brings me to the end of the presentation. We are also getting ready to celebrate the 100th birthday of Finnair that will be taking place next week. The official day is on the 1st of November. It is a big thing for us. An airline turning 100 years is not self-evident, especially after all of the crisis and the hardship that the industry has been going through during the past couple of years. Finnair is today the sixth oldest operating airline in the world. and indeed because of that it feels very very good and timely that we can present strong growth and strong profitability from the last quarter just in time for our 100-year celebrations. So I will stop at this and then I guess we will be opening for questions after.

Correct. So thank you, Topi. Indeed, now would be a perfect time for any questions you may have. Please follow the operator's instructions to present them.