Earnings Call: Q1 2018

Jul 24, 2017

Hey, good morning, ladies and gentlemen, and welcome to the Ryanair Q1 results presentation. I'm Mike O'Leary, Chief Executive of Ryanair. I'm joined this morning by Neil Soren, CFO. You have seen on the Ryanair.com website the quarterly results press release together with the MD and A and the shareholder presentation. We're going to briefly take you through that. This morning, we've announced Q1 profits are up 55% to just under €400,000,000 due primarily to a very strong Easter in Q1. But I caution, we're not changing the full year guidance. We're pleased to report the 55% increase in profits, But the Q1 results have been distorted by the presence of Easter, which was absent from the prior Q1. Average fares in the quarter rose 1% to just over €40 This was due to a very strong April boosted by Easter, but offset slightly by adverse sterling, lower checked in bag revenue as more customers switch to our 2 free carry on bag policy and at lower fares following a series of security events in Manchester and London. During the quarter, we took delivery of 14 new Boeing 737s ahead of the peak summer period. We've opened new bases in Frankfurt Main in March. In Naples in April, they're performing well. In September, we'll increase the Frankfurt base from 2 to 7 aircraft. We'll also launch 2 new bases in Memming and Munich and Poznan and opened 170 new routes during winter 'seventeen. We continue to see significant growth opportunities for Ryanair across Europe as many of our competitors are either closing bases or legacy airlines are restructuring. In June, we added 10 more units to our 7 37 MAX 200 aircraft order. 5 of these will deliver in the spring of 2019, 5 in the spring of 2020. In addition, we recently agreed extensions for 10 operating leases, which will provide us for 3 more aircraft for summer 'eighteen and 10 more for summer 'nineteen. This addresses the temporary capacity shortage we had in summer 'nineteen before the BOE MAX deliveries kick in, in September 'nineteen onwards. Year 4 of AGB is underway. In May, we launched flight connections at Rome Fumucino. In July, we extended this to Milan Bergamo on the Ryanair network. We started setting Air Europa long haul flights to the Americas from Madrid on our website, and we've become the exclusive airline partner of the EU Erasmus Student Network. From June, our customers who purchased reserved seats now enjoy a 60 day check-in window. On Ryanair Rooms, we added the 5th hotel's partner hostels club and Ryanair holidays continues to roll out across the network as we went live in Italy and Spain in Q1. We continue to invest heavily in Travel Labs and our recruiting now have opened a third DEV facility in Madrid, where we hope to recruit up to 200 highly skilled digital professionals over the next 2 years. On time performance in Q1 improved to 89%, up 2 points from the 87% in Q1 last year. And we're working hard to ensure that our customers can enjoy Punzouille flights. We're campaigning with A4 partners and A4E to encourage the EU to take action to mediate the impact of ATC Strikes. On costs, the gap between Ryanair and our competitors continues to widen. We delivered a 6% unit cost reduction in Q1 as our fuel bill fell despite a 12% increase in traffic. Ex fuel unit costs helped by weaker starting, which we will believe will be reversed in H2, fell by 3% as we delivered unit cost reductions across nearly all of our cost lines. For FY 'eighteen, fuel is 90% hedged at about $49 a barrel, And we're now about 45% hedged for H1 FY 'nineteen at about $48 a barrel. We expect, though, however, that these will continue to be passed back to Ryanair customers in the form of lower fares. We remain very concerned about Brexit and the continuing uncertainty over the terms of the U. K. Departure from the European Union in March 2019. We continue to campaign to persuade the U. K. To remain in the EU Open Skies Agreement. But and we caution, but if they leave the Open Skies Agreement, We worry that there won't be sufficient time or goodwill on both sides to allow a bilateral to be put in place between the UK and the EU 27 in time for September, October 2018, which would allow us to roll out the summer 'nineteen schedule. In those circumstances, we think there may be a disruption to flights for a period of weeks or months after March or after April 'nineteen onwards, and we're certainly campaigning to try to avoid any such disruption. On balance sheet, our balance sheet remains one of the strongest in the industry. The The Board has approved a 600,000,000 ordinary share buyback program. In Q1, we spent about €165,000,000 Sornar. On this program at an average price of €18.20 We also purchased almost €40,000,000 worth ADRs under the Evergreen ADR buyback program. Despite this spend of over €200,000,000 on buybacks And CapEx of over €400,000,000 in Q1, we still reduced our net debt position by about €150,000,000 from €244,000,000 at March at the end of March to €100,000,000 at the end of June. On outlook, we previously guided The Q as previously guided, the Q1 results were substantially boosted by the presence of a very strong Easter in April, but not in the prior year comparable. The H1 outcome remains heavily dependent on close in Q2 summer bookings, and we continue to guide that the H1 fares will be down about 5% as we grow traffic by almost 11% and checked in bag revenues are steeply declining. Thanks to the higher Q1 load factors and the Completion of our summer winter 'seventeen schedule, we're now raising the full year traffic target by 1,000,000 to 1,000,000. Ex fuel unit costs are on track to deliver a 1% reduction this year. Our fuel hedging program should Our savings of £70,000,000 but as I said, these will be passed on in the form of lower fares. Ancillary revenues continue to grow in line with traffic as we discount pricing to drive penetration drive increased penetration. And based on this all of these factors, we continue to think it's sensible to guide for an unchanged profit after tax for FY 'eighteen in the range of 1,400,000,000 to 1,450,000,000. This guidance remained heavily dependent on close in summer bookings, H2 average fares and the absence of any further security events, ATC strikes our negative Brexit developments. And I'm going to ask Neil to take you through the slide presentation before we open up to Q and A. Thank you very much. Ryanair has the lowest fares and the lowest costs of any airline in Europe. This year, we will grow by 9% from 31,000,000 customers making us again the number one airline for traffic. We're number 1 for choice in coverage with 86 bases in over 200 airports Stated around Europe, our customers enjoy number 1 customer service. We're now in 4th year of the always getting better program. As a result of all of the above, We have 240 aircraft on order, which will see us grow to 200,000,000 customers by March 2024. Our average fare last year of €41 is significantly lower than everybody else, on average about 2 30% cheaper than the high cost comparators. And the reason why we have such low fares is because we have the lowest costs. Our unit cost ex fuel in the year ended March 2017 was just under €27 or a 5% reduction on the prior year. We're forecasting a further 1% reduction This year, thus widening the gap between ourselves and everybody else at a time when they're talking at best of flat unit costs, but in most instances, rising unit costs in their business. Our base network is unique to Ryanair. We have 86 bases dotted around Europe, over 200 airports, the majority of which Our primary airports, we operate in 33 countries and have over 1800 routes in the entire network. We enjoy Strong market shares across Europe, where we're typically number 1 or number 2. And we're seeing massive opportunities to grow as airlines restructure across Europe. In the quarter just ended, profit was up 55 percent to €397,000,000 although this was boosted by a strong Easter Sarnar in April. Passenger numbers, our customers increased by 12% to 35,000,000 customers with a record load factor of 96%. Unit costs are in a very good shape and we're down 6% within the quarter. Earnings per share, which is boosted by the buyback programs that we've been undertaking, Sorenar. And we're up 63% to just under $0.33 per share. Our balance sheet remains one of the strongest In the industry where we saw our net debt drop by €150,000,000 at March 31 to €94,000,000 at the end of the quarter. This is after €200,000,000 on share buybacks and CapEx of just under €400,000,000 On current developments, our low fares in AGB are driving our passenger numbers where we'll deliver 131,000,000 customers In the current year, we see significant growth opportunities in Italy, Germany and elsewhere. In the quarter, we added 10 new game changer aircraft To our order, just bringing us up to 110 firm orders and 100 options. And we're well through our buyback program of 45% More or less complete at this point in time. So as I indicated, 131,000,000 customers in the current year, Thanks to AGV. We also expect to see our numbers grow to 200,000,000 customers by March 2024, thanks to our low fares and our Boeing order. Connecting flights have been rolled out to a 2nd base in the quarter with Milan Bergamo now joining Rolfo Macino for connecting flights within the Ryanair network. We're connecting up 20 airports out of Milan and have lots of opportunities to grow. We would expect to have a 3rd party long haul partner by the end of this year. In relation to the MAX order, we've added 10 additional MAX game changers to our order, bringing us up to 110 firm and 100 options Within the order, the first of these delivers in the spring of 2019. It will deliver 8 extra seats, which enables us to spread our costs Over more customers and enhance their ancillary opportunities, it's 16% more fuel efficient per passenger and has 40% less noise emissions. In relation to Brexit, this continues to be a big area of uncertainty, particularly with the volatility in currency, which we've seen in the past Quarter and indeed into the summer period. In a best case scenario, the U. K. Will remain within open skies. However, hard Brexit looks A bit more likely at this stage, which means we need bilateral to be in place between the UK and the Euro27 by the end of March 2019. Otherwise, there's a good chance that there may not be flights for a period of time between the U. K. And the EU. In relation to our guidance for the full year, our past new numbers will be up 9% to 131,000,000 customers. Fares, we believe, will be down in the region of minus 5% to minus 7%. As previously guided, they'll be down minus 5% in the first half. And with very limited visibility into Page 2, we're guiding FERC down as much as 8%. We believe that checked bags will continue to see penetration drop Where we were previously seeing penetrations in the 20s, we're now looking at penetration somewhere around 16% today. Our fuel hedging, after adjusting for volume increases, will deliver a €70,000,000 saving, which we passed on in lower fares. Our ex fuel unit costs are in good shape, and we expect to see a 1% unit cost reduction in the current year. So as a result of all of that, we're We're maintaining our guidance of profits in the region of €1,400,000,000 to €1,450,000,000 on Full year basis. However, this is highly dependent on close in summer bookings, the fair outlook for H2, the absence of ATC strikes And security events and of course, Brexit developments. With that, back to Michael for Q and A. Thanks, Neil. Well done. The tax rose 55 percent to €397,000,000 Why? A number of reasons in relation to that. Firstly, passenger numbers up 12% To 35,000,000 customers, as we had a 96% load factor, our average fares were up 1% in the quarter and unit costs were down 6%. I have to say, however, that the numbers were somewhat distorted by a very strong Easter in Q1 and the outlook is the same at the same time last year. Average fares are up by 1%, why? Well, again, as Neil said, April was very strong. We had Sornar in the month of April. But I think that masks an underlying softer yield trend. As we move into Q2 and the remainder of the year, we have lower checked in bag revenues, our checked in bags are in the yields. We have adverse sterling And we have seen certainly lower prices since the 3 security events, 1 in Manchester, 2 in London in recent months. We're seeing softer pricing into the Q2, and I think that will characterize the overall pricing in for the remainder of the year. Why did fuel fall 1%? This is primarily down to our better hedging in the quarter. How did ex fuel unit costs perform in Q1? Sorenar. Actually, ex fuel unit costs were down 3% in the Q1. And I compare that with contrast that with Wizz's report last week of unit costs up 3%. This is for a company that claims it's going to close the gap or will have costs as low as Ryanair. Yet, like most of our competitors, they talk a good story on Hospital. When they report, it's usually costs up. In Ryanair unit costs are still falling. The gap between us, with and all of our competitors is getting wider. And I think that underpins our model well into the future. Why are airport and handling charges up 11%? It's primarily due to a 12% increase in passengers in In the quarter offset by lower costs at many of our airports and indeed a slight sterling benefit as well. Why are route charges up 7%? Because the number of flights operated rose 10% and we had the benefit of some Eurocontrol price reductions in markets like France, Germany in the U. K. In the quarter. Why are staff costs up 10%? Yes. This is below the 12% increase in past new numbers and it's primarily due to a 10% increase In sectors, a 2% pay increase that we awarded our people back in April and some positive sterling translation impact on the U. K. Payroll. Why is depreciation up 11%? Because we added 50 more owned aircraft in the quarter, But depreciation growth of 11% is less than the 12% growth in traffic. Why is marketing distribution another up 15%? Key drivers of this are the EU261 compensation. Passenger compensation just increased and the input costs Se. Which are rising in line with our increased onboard spend. Why is maintenance, materials and repairs down 13%? Because we had fewer leased aircraft and we had no handbacks or lease handbacks in Q1. Why did the finance expense decrease by 15%? Lower interest rates and we're seeing benefits of our low cost financing coming through. Why is finance income down by 700,000? Because of lower interest rates. What is your fuel hedging position? Well hedged, we're 90% hedged for the current financial year at about $49 a barrel. And as we look into next year for the first half of FY twenty nineteen, we're about 45% ahead, dollars 48 a barrel. Ancillaries rose 13%, why? Ancillaries are 1% more per passenger in Q1, although I think that's slightly overstated. We expect ancillary spend per passenger to be constant over full year as we try to increase penetration by being more aggressive on pricing. How many My Ryanair members do you have? We've got 27,000,000 members at the moment, and we're well on track to increase that to about 35,000,000 by the end of this financial year. How many app downloads? Currently, we've just over 23,000,000 app downloads, and we'll be hoping to get to about 30,000,000 by the year end. Is there any change to the ancillary per passenger target for FY 'eighteen? No, we're comfortable with the broadly flat spend per passenger As we reinvest in various products, we've seen growth in the likes of the reserve seating and priority boarding due to discounting and we're also Sorenar. What is net debt at quarter end? Net debt is just under €100,000,000 and we've reduced that I have €150,000,000 in the Q1 despite the fact that we spent almost €400,000,000 on CapEx and €200,000,000 on share buybacks. How is the €600,000,000 buyback progressing? Doing well. We're about 45% of the way through at this point in time and well on track to be done by the end of October. Have you bought back any ADRs in the €150,000,000 Evergreen program? Yes, we bought €39,000,000 worth of ADRs during the quarter. What are the details of the new MAX order? We've ordered 10 additional aircrafts. So this brings us up to 110 firm and 100 options In the aircraft order, the first of these will deliver in the spring of 2019. We have 5 aircraft coming in for summer of 'nineteen and we have an additional 5 coming in the spring of Saenz. Have you done any further hedging on the 737 MAX? Yes. We've now hedged the currency exposure on all the firm orders for delivery through from FY FY 'twenty one to FY 'twenty four, we have hedged some of the CapEx for FY 'twenty And all has been done at a rate of just over $1.20 to the euro. What is the likely outcome of Brexit on flights to and from the UK? It's It's probably a little bit too early to say at this stage. However, if we see a heavy or hard Brexit and no bilaterals have been R. S. In advance of March 2019, there was a chance that there may be suspension of flights for a period of time from April 1, 2019. What about your U. K. Domestic routes? Yes, we've 3 U. K. Domestic routes. In a hard Brexit, we believe we, as a European eware, we wouldn't be allowed to operate U. K. Domestic routes. A couple of alternatives there, either we close those three routes, it's less than 1% of our capacity, we take a minority stake in a U. K. AOC shareholders that will continue to operate those routes under some license from Ryanair. And we'll continue to be therefore He's flexible depending on how the Brexit discussions transpire over the next 18 months. Has Brexit affected UK consumer behavior? Yes, it has. Sterling is an awful lot weaker than it was this time last year. So we're stimulating customers with lower fares as it loads activity with passive airline, whoever Sorenar. What about your U. K. Shareholders post Brexit? Yes, we have about 20 Percent of our share register, we think, are U. K. Nationals. Some of those, which will be institutions, may be able to move their holding or reallocate shareholder out of the U. K. Other than that, there may be 2 options. 1, you disenfranchise those U. K. Shareholders, so You limit their ability to own or control or we force them to sell their shares, which would facilitate certainly further share buybacks on our part. What will Brexit mean for your growth plans? We'll have no impact on our growth plans. We still have ambitions to grow to 200,000,000 customers by March 20 And that's going to happen. It just may mean that we will do so in mainland Europe, but there's lots of opportunities with restructuring going on at the moment and move some growth out of today. How was on time performance in the quarter? Q1 on time performance was up 2 points from 87% last year, 89% this year. I'm still not happy with that performance. We would want to have the operating in the 90 percentile. But nevertheless, it is an improvement. But we have struggled, I think, with Thunderstorms over Europe and occasional air traffic control strikes. Easyjet are closing their Hamburg base in March 2018. How is Ryanair's Hamburg base It's performing well. We opened in November. It just passed 25 routes in it. We're very pleased with the way it's going at the moment. Is there any update on the feeder plans? Not really. We're now doing connecting flights on the Ryanair network at Sorenart, Rome from Macchino and at Milan Bergamo. We've begun selling Air Europe as long haul flights from Madrid, but we don't yet connect or feed into those yet. We are working with their IT people to get systems that the IT systems talk to each other. Once we get to that, then I think you'll see us for connecting flights through Madrid onto Air Europe Air Europa. And that would be a precursor, I think, for other feeder arrangements, maybe with Sorenar, Norwegian. Is there any change to the full year is there any change to the FY 2018 profit Tax guidance of 1,400,000,000 to 1,450,000,000. No, we're sticking with that after a strong Q1, which was boosted by Easter as previously guided. Fares are dropping into Q2, and we believe in the winter period, plus we will see the decline in bags most likely to continue into Q2. How are forward bookings into the peak summer performing? They're marginally stronger, up about 1% on the same time last year, but I caution at lower fares into Q2. What are the components of your full year guidance? We see past new numbers increased by 9% to 131,000,000 customers, which is 1,000,000 ahead Of previously guided, we believe average fares on a full year basis will be down minus 5% to minus 7%. Sorenar. Unit costs ex fuel, we believe, will deliver savings of approximately 1%. And we have €70,000,000 savings on our fuel bill, which we passed on to our Saarinen. With passengers increasing $1,000,000 to $131,000,000 and 10 new aircraft ordered, Will this increase your 200,000,000 passenger target for FY 'twenty four? No, not really. We would expect there may be minor adjustments to the passenger target going forward. But to the extent that we're taking some 10 additional new aircraft, it may release the resale or the return from lease of some of the older aircraft. At the moment, it's far too early to adjust the €200,000,000 passenger target for 2024. Can Ryanair retain its cost advantage over other airlines? Absolutely, and we are after a 5% unit cost reduction last year. We're targeting a further 1% unit cost reduction in the current year. Key drivers of our cost savings going forward are the 86 base agreements that we have in place across the Ryanair network. We have got discounts coming forward on all of our airport deals, both primary and secondary alike. We're financing our aircraft very cheaply. And indeed, we've got the first of the game changer aircraft delivering in the spring of 2019. And these aircraft will deliver 8 extra seats, 16% more fuel efficiency per passenger and 40% noise emission savings. Michael, Neil, thank you very much. Thank you. Pleasure. Thank you.