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Edited Transcript of SAS.ST earnings conference call or presentation 27-Aug-19 8:00am GMT

Q3 2019 SAS AB Earnings Call

Stockholm Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of SAS AB earnings conference call or presentation Tuesday, August 27, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rickard Gustafson

SAS AB (publ) - President & CEO

* Torbjørn Wist

SAS AB (publ) - Executive VP & CFO

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Conference Call Participants

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* Achal Kumar

HSBC, Research Division - Analyst

* Hans-Erik Jacobsen

Nordea Markets, Research Division - Senior Analyst

* Jacob Pedersen

Sydbank A/S, Research Division - Head of Equity Analysis & VP

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the SAS Interim Report Q3 2019. Today, I'm pleased to present Rickard Gustafson, President and CEO; and Executive Vice President and CFO, Torbjørn Wist. (Operator Instructions)

Speakers, please begin.

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Rickard Gustafson, SAS AB (publ) - President & CEO [2]

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Thank you, and welcome ladies and gentlemen to this interim report for SAS third quarter. Today, we're going to follow the normal procedure which means that I will start providing an overview of the quarter and give you some insights to our business, and I will then be followed our CFO Mr. Torbjørn Wist, who will take you through some further details in our numbers. And then at the end of this session, we will facilitate a Q&A session where you have the opportunity to ask us any of the questions that you may have.

I hope that you also follow us online where you have the presentation, and I will try to prompt you to the page that we are speaking to. So with that, I think we begin to it and I ask you to go to the first page, the highlights of Q3 2019.

And I'm very pleased to report a stable operational quality during the whole summer season and I will come back to more details on that shortly. But that is one reason why we've also been able to increase our revenues in the quarter. And revenues are up 3% to SEK 13.5 billion, which is actually satisfying given the market conditions. We've also seen that the domestic and European traffic came in a bit stronger than the early indication. When we entered into the summer, the booking levels primarily for leisure travel to the Mediterranean were not at levels where we wanted to be. It's picked up later during the summer to some extent and we were able to report record number of passengers as well as in the month of June as well as for July.

We have continued our good recent development related to revenue and yields, especially unit revenue and our yields. They continue to be positive. And -- but despite some of these positive things, we do report a earnings before tax at SEK 1.5 billion, which is SEK 500 million below the same quarter last year. So that is a clear signal that while our unit CASK is not developing in the right direction and we need to drive further initiatives and I will come back to that as well.

If I may take an outlook into the market by some of the opportunities and challenges, in the short term, there is a new trend that we haven't seen in a while or a situation, maybe it's not a trend but rather a situation where we normally have seen a rather aggressive ASK growth every single program or every single year. This year, when we look into the next winter program, we see basically a flat development in terms of capacity versus last year, where we have normally in the last few years seen 4% to 5% capacity growth. So that's a good sign. Longer term though, I'm more concerned because of the large orders of aircraft that all carriers have across Europe. And when they will deploy that metal, that is a risk for a significant increase in capacity and maybe even increase capacity over the demand. So longer term, it's more problematic; short term, it's a positive.

We also experienced a weak Swedish krona, which is putting, I think, some significant impact into our results, and you will hear that as Torbjørn go through and explains why we are SEK 500 million short in EBT this year versus last year. One key reason is, of course, the development of the Swedish krona; another reason is the development of fuel price. And of course, we also have the aftermath of the conflict -- the pilot conflict impacting that number, but you'll hear more about that. But we are very continuously concerned about the positioning of the Swedish krona that remains rather weak versus especially the U.S. dollar. So those are the highlights. More of the financials you will get more from Torbjørn shortly.

But if I may then ask you to flip to the next page. I have unfortunately to come back to the conflict -- the unfortunate conflict we had in spring with our pilots, and we were concerned about how long it would take for us to regain the trust among our customers after that conflict. And I'm pleased to report that I think we have seen a rather rapid recovery in terms of customer confidence. And looking at the 3 months in isolation of the quarter, of course, there's a big drop in number of passengers in the month of May given that we were not operating for 2 days. But then in June, we reported the best month ever in -- for us in SAS history, and also we reported in July, a record July for July. So customers quickly came back. And I believe that is a proof point that we have an attractive customer offering. We have further enhanced and improved our offering throughout the quarter. We have continued to adapt our offering to seasonality and added more leisure routes for -- or seasoned routes in -- during the summer program where customers have responded well. And also, we have had a very, very robust operational quality, that's driven significant customer satisfaction. And I think that one is a significant and worthwhile doing a little bit further deep dive into.

So if I may ask you to swap to -- flip to the next page, I'll give you some highlights of the operational quality during the summer. We know and we acknowledge that last year -- last summer was not a great summer from an operational point of view for SAS. We had a number of issues that we wrestled with. After that summer, we have taken the time to investigate the root causes of our issues and we've taken a number of actions. And I'm very pleased to see that those actions have paid dividend during the summer. Some of the things that we have done is on this left-hand side of this chart and let me quickly go through some of them with you. We have more seasonal capacity in terms of employees that are manning our ground-handling activities and our technical services, which has provided us more flexibility during the summer, which has proven very, very important.

Our network team, they have rethinking or rethought and designed the network to some extent, adding some more kind of slack into the network so in order for us to cope with a digested central European airspace. So some of the enabled potential delays will not actually be escalated throughout the full day but rather managed and contained during that particular flight. That has proven to be very successful.

Our operating control center, they have had 2 extra aircraft at their disposal to deploy wanting to cover up for unscheduled technical downtime or maintenance, which has also proven to be effective. And then we have equipped our colleagues with more digital tools to aid customers, both during irregularities but also during on the procedures so that they can walk the floors at the airports and engage with customers and aid them where they are without having to queue in front of a desk.

All of this has paid off and I'm proud to present some of those key metrics on the right-hand side of this chart, where regularity is up significantly versus last year and well above 99%, which is very, very satisfying. We also see that punctuality has improved significantly versus last year even though the -- this is our 15-minute punctuality. Even though 75% is not in line with our long-term target, but for a summer season with congested airports, it's a rather strong number, and I think it ranks and stacks well with our other carriers across Europe.

And we see the response from our customers that we see [it reports] a significant increase in our customer satisfaction index. Normally during the summer season, we have lower satisfaction primarily due to kind of the congested airports and a number of passengers that are not as frequent and familiar with aviation transportation. But this summer, those numbers have increased. And I believe that even though that we have made some investments and there've been some additional costs to secure this stability, I believe that has paid off in terms of investment and a proof point for that is that I put a new metric for the cost of claims as an index. This is the index what we paid in claims cost this year versus last year. And we're at index 66, which is, of course, a significant reduction in claims paid during this year versus last year.

Another area like I draw your attention to is related to sustainability and that's on the next page. Sustainability is for us an existential issue. We need to demonstrate clear leadership on transforming our industry towards more sustainable aviation. Our customers demand that, our corporate customers demand it, other stakeholders around us demand it and our employees demand it. We want to make sure that we secure that people can continue to enjoy the freedom of aviation. We want to make sure that the aviation can continue to contribute to the wealth and well-being of our societies, and that people have a chance to get inspired by meeting other people and other cultures. The only way forward to do that longer term for the generations to come is that we here and now start the journey towards a more sustainable aviation.

And we've done a number of things. And you know that we have aggressive targets that you see on this chart, longer term. You know that will work both in many dimensions. We work short-term, reducing our emissions here and out by introducing new and more fuel-efficient aircraft, reducing weight in our aircraft through a new interior or asking our customers -- or incentivizing our customers to preorder food and drinks. We do a number of things to reduce emissions here now. We also engage actively for the next generation of aviation. And hereby, Airbus has selected SAS as a partner to help them, aid them in their research for the next generation of aircraft. So we're heavily engaged with them in that space. But then we also know that we need to find the bridge between today and that future that will come. And for us, that bridge will require more access to buyer base or sustainable jet fuels. Therefore, SAS is also actively engaged in trying to drive incentives to provide for large-scale bio-based or jet fuel production in Scandinavia.

So those are activities and I'm also like to share with you some proof points what we have done also in this quarter in this respect. We have new taken delivery of new aircraft. There are 3 new Airbus 320neos entered into our fleet. And we -- also during the high season, we took delivery of a new wide-body aircraft, a brand-new Airbus 330 enhanced, that will replace an old 340 aircraft that we had as a spare aircraft. So that has now been left the fleet, and also from a customer point of view, we now have a fleet where they -- the same exact comfort and interior across all our fleet, including our spare aircraft. So that's a major step.

We have also introduced an opportunity for customers to voluntarily purchase biofuel even though we know that this is not a massive uptake on this, but it's an opportunity to provide for customers to do good and contribute if they like to, and also put the spotlight and create some transparency around the cost for biofuel versus fossil fuel. We do -- we have no intention to do any margin on this. We sold it at cost, but it's actually something that we think is good for customers to have that option and create that transparency.

We also announced that we're going to remove our tax-free store on board. It's also a move in the right direction, where we said that we cannot in 2019 continue to fly heavy bottles of liquor across the world, but rather find ways for our customers to purchase those items when they land either at their home destination or their outbound destination. So we're going to find other ways for customers to get [assess this] without us flying it around onboard.

I mentioned the partnership with Airbus. We signed that partnership in the beginning of the summer season. We are actively engaged with Airbus and we believe that we want to make sure that we contribute to the extent that we can to ensure that we see a future for a 0 emission aviation industry in maybe the 15- to 20-year horizon.

But if we also know that as of today, we can't eliminate 100% of our emissions. We still emit CO2 into the atmosphere when we operate. And therefore, we continue our efforts to CO2 compensate for our EuroBonus numbers. And I think we have -- in this quarter, we have compensated for more than 3.5 million trips, representing 38% of our tickets in this quarter. So sustainability will be -- continue to be a key strategic initiative for SAS.

But [I mostly] talk about cost and cost development and then I ask you to move to the next page. We are staying firm when our targets deliver a cost-efficiency savings of SEK 900 million for this fiscal year. In this quarter, we delivered just about SEK 200 million. So year-to-date, for the first 3 quarters of this year, we are at around SEK 600 million. So we've got SEK 300 million to go in the last quarter, and we are standing firm on that target. But we also recognize that despite that we do these efforts, our unit cost is actually increasing. You saw that on my overview that unit cost is up just over 2% even if you do it on an adjusted basis for FX and fuel, it's still up, north of 2%. There are some strike effects in those numbers, but still the efforts that we do in the cost program are barely mitigating the underlying cost inflation in our business.

So with that, said, we also know that we are facing further headwinds going forward. We see a very volatile jet fuel price. At the moment, it has been actually moving in our dimension in the right direction, but it's still rather volatile. The Swedish krona continues to develop negatively also in the eyes of SAS versus some our key currencies and I like to again stress the U.S. dollar. We have seen that -- we have not seen a drop in demand yet for -- on Swedish domestic though, there has been a drop in demand, not for SAS but in the market as such, there's been a demand drop for Swedish domestic. I'm pleased though that we are holding the fort quite good also in that market, but we take notice and we know that there is a strong correlation between GDP development and demand for aviation services. So if we're going to see a decline in GDP, we will know that, that also will decline, meaning a decrease in demand, since those 2 parameters are highly correlated. So that's something to watch for. And then as I mentioned in the longer term what's going to happen to capacity and those fairly sizable order books. So altogether, this means that we are pleased that we maintain our momentum in our cost journey and we are determined to deliver that for the full year, this year. But looking ahead, we acknowledge and understand that we need to do more things. We need to drive further efficiency and flexibility going forward.

And to give you some flavor on that, I ask you to flip to the next page, where I'm going to give you some ideas on areas where we see that there's still opportunities for SAS to grab in the years to come, areas where we believe that we can drive further efficiency and flexibility. Starting then with the one-type fleet -- the single-type fleet. Of course, that will have a huge impact on SAS in a positive sense moving forward as we get more and more 320neos delivered. A single-type fleet will reduce complexity and improve cost efficiency in our business. That's something that we need to make sure that we realize the value in that.

Another area we know and we must continue to drive our digitalization automation efforts and also our lean activities. Lean has proven to be very powerful management philosophy with our technical departments. We are now also expanding that into our ground handling, and we couple that with a aggressive digitalization automation efforts. There are still a number of manual tasks performed in aviation, and therefore, also in SAS and we need to find a way to automate a number of those, and there are opportunities that we need to grab in the near future.

Thirdly, we believe that there's sizable potential in further improve our asset utilization by streamlining our very complex planning procedures that we have. It is a -- it's a very challenging task to set up the network and plan each and every individual aircraft. When that aircraft should depart, what network that aircraft should fly, when it needs to be into, say, kind of overhaul and technical maintenance, part of that with availability of crew. To do all of that, it creates a lot of slack and buffers in the system by improving robustness and transparency and using technology we can improve utilization of our assets and there's a significant gain to get from that longer term. And finally, our operating model has proven to provide further flexibility and efficiency. And I think we can continue to optimize our operating model to increase our ability to adapt to seasonality and also drive further efficiency.

And for today, I'm not prepared to give you kind of numbers on how much value we see in these areas, but we identify that there are tangible benefits derived from these areas that we need to go after, and in order to ensure that we start to dig deep in these areas and we start to build robust plans in the path forward, I'll set a new organizational structure in place as of 1st of October. And you can see that on the right-hand side of this chart. Where it's going to be clear that the responsibility and ownership to drive these further efficiencies will be clearly articulated and owned within this organization.

So the key changes here, as I like to point out, is that previously we operated all of what we call the operations in one entity. I now split that into where Simon Hansen steps up and takes responsibility, what we call, airline operations. That is the responsibility for our SK operation, i.e., all the flight operations that we do to, from and within Scandinavia originates from here. We also have our wet lease operation resort under Simon's responsibility as well our SAS Ireland operations. So our operating model basically will be under his regime. And he will also take charge in relation to drive further utilization of assets. It's going to be key also for his responsibility going forward and also realizing the benefits from one type fleet.

We created second unit for other operations that we call airline services where Kjetil Håbjørg will take on the operational responsibility for ground handling, technical maintenance and cargo. And of course, here we see further opportunities to drive automation, leverage lean as I described before and drive further digitalizations to drive efficiencies.

And the third thing I'd like to point out is that previously we had our commercial agenda spread on different functions. Now those have been consolidated under one entity and under Karl Sandlund's responsibility. This will eliminate some of the redundancies that we have built into the system. I think it will strengthen our ability to have a clear and tangible strategic direction for our customer offering and better prioritize where we spend our money going forward in terms of building our customer proposition. So this is going to be the foundation that we have in order to drive further efficiencies. And I'm sure, in the future, we will come back to you and share more insights on how you see opportunities to drive further efficiencies under these headings delivered by this organization.

So with those comments, I like to pause and stop kind of the overall presentation and hand over to our CFO Torbjørn Wist to provide some more knowledge and depth around numbers. So Torbjørn, please.

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Torbjørn Wist, SAS AB (publ) - Executive VP & CFO [3]

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Yes. Thank you, Rickard. If we can start with Page 9, with a high-level summary of the quarterly results. First of all, as Rickard touched on, we're pleased to see that we had an increase on our top line, which shows a healthy increase of 3.1% compared to the same quarter last year. Approximately half of this increase stems from currency, whereas the main contributors behind the underlying improvements are improved passenger and charter revenues, a higher degree of ancillary revenues, increased sales of EuroBonus points as well as increasing credit card fees.

If we turn to OpEx, this has increased with 7.4% year-over-year and approximately 60% of this increase is currently related as an effect of the historically weak Swedish krona versus the dollar, which continues to inflate our cost base. The other factor is the increase in jet fuel costs, which amounts to SEK 277 million or 11% increase. The recent decline in jet fuel prices have been offset by our hedges, which year-over-year have moved from positive to negative territory.

If we look at our earnings and we noticed that despite the increase in revenues, our EBT has decreased with over 25% year-over-year. Besides the weak Swedish krona and jet fuel cost, that I just touched on, the pilot union strike had a negative impact on earnings before tax amounting to some SEK 185 million in the quarter.

If we look at some of the other key metrics, we noticed that the effects of the strike reduced capacity as well as revenue passenger kilometers by minus 1% and minus 3%, respectively. We are pleased to see that the positive underlying in unit revenue, which we mentioned a couple of quarters, continued in our third quarter. And compared to last year, the currency-adjusted figure is up nearly 2%. The currency-adjusted unit cost ex jet fuel increases with over 2% compared to last year. But if you adjust for the reduced capacity due to the strike, we would actually show a flat unit cost year-over-year.

With that I'd like to turn to Page 10 to look at the revenue development in some more detail. Year-over-year, revenues increased by SEK 406 million versus last year. And as mentioned, approximately half of this comes from the currency. If we look at the passenger traffic or passenger revenues, the main drivers behind the improvement is explained by continued good yield development, which is up SEK 390 million. We also see good contribution from other traffic revenues, which are up SEK 80 million year-over-year and this includes things like sale of pre-seating as well as charter. We also see an increase in the operating -- other operating revenues, including a stronger sale of EuroBonus points and an increase of credit card fees.

On the negative side, we noticed a decline in capacity, which hits negatively with nearly SEK 100 million. The decline in capacity is mainly an effect of the strike. Also a slightly lower load factor compared to last year decreased revenues with a bit over SEK 200 million. Our cargo revenues show a decline of SEK 68 million compared to last year due to lower volumes. Approximately 1/3 of this or SEK 21 million is strike related, SEK 11 million relate to price levels because the price in cargoes very linked to jet fuel, but the remainder of the decline is mainly related to increased competition which leads to price pressure.

So if we turn to the OpEx development on Page 11, as you will have seen, the operating expenses increased with some SEK 722 million compared to last year. Approximately 60% is related to FX, which has a total negative currency effect of SEK 428 million. Adjusting for the currency effect the increase in OpEx was nearly SEK 300 million, which corresponds to an increase of approximately 3% year-over-year.

Looking at the currency-adjusted OpEx, the main drivers behind the increase can be found in the higher jet fuel cost. Although the jet fuel price is lower than the same quarter last year, our hedges for the quarter offset the decline in prices. Another factor is personnel costs, which increased with SEK 83 million. This increase is related to an increase in FTE primarily in ground, which is closely linked to the operational quality initiatives, which help secure the summer as well as standard salary increases.

Also, wet lease costs show an increase of nearly SEK 30 million year-over-year. Since last year, we have introduced 2 hot spare aircraft that we can utilize in situations with traffic disruptions. Even though this is associated with a slightly increasing costs, it does reduce the potential claim costs significantly. And as Rickard mentioned, when you look at the index, it clearly shows a significant reduction in these irregularity costs year-over-year.

If you turn to the points that have mitigated the increase in OpEx, we noticed that lower government charges, mainly driven by the reduced capacity during the date of the strike when we don't pay the airport landing fees, et cetera. But this is also an area where we've had continuous efficiency initiative. And we also noticed a decrease in other expenses and this is mainly an effect of our stable and efficient operations during the quarter, which reduces the cost for traffic disturbances.

So if we turn to Page 12, to describe the current jet fuel and currency hedges. SAS's hedging strategy allows us to share some of the upside when the fuel price decreases in the market, while protecting against the downside with upward movements, and this is important given the volatility we are seeing. For the coming quarter, we have hedged 68% of the consumption at a maximum price of $687 per tonne. So if the jet fuel would decrease to levels below $678 per tonne, the 68% of our fuel cost will be locked in at $678, whereas we would benefit with 32% of call it the additional decrease in the price.

For foreign currency, our policy is similar to our jet fuel where we hedge 40% to 80% of the expected deficit and surplus currency for the next 12 months. In terms of Norwegian kroner, which is our largest surplus currency, 68% -- 60% was hedged for the next 12. If we look at, call it, our general currency exposure, a weakening of the Norwegian kroner against the SEK of 1% will generate a negative earnings impact of SEK 58 million, excluding hedge effects. Whereas on the other side, weakening of the dollar against the SEK would generate a positive earnings impact of SEK 126 million, excluding hedge effects. And just to note, we have hedged 51% of the dollars the next 12 months.

As you can see on the table, you can see that an appreciation of SEK 0.5 from the current level of around SEK 9.5 and a decrease of $100 per metric tonne in terms of jet fuel from the current level would equal a decrease of cost amounting to SEK 200 million during the remaining 3 months of the fiscal year. If they [mark it], on the other hand, develop in the opposite direction, this would increase by the corresponding amount.

If we move to Page 13 for our debt maturity profile and aircraft orders, the current maturity profile is basically unchanged compared to last quarter and shows robustness as well as minimal long-term funding risks. Our aircraft orders also remain firm and compared to our communication last quarter. During the third quarter, we have received 4 deliveries from Airbus, of which 3 A320neos and 1 A330. The A330, as you know, replaces an older and less efficient A340. And during the fourth quarter of our fiscal year, we expect an additional 2 neos to be delivered. Our CapEx remain unchanged in terms of (inaudible) for the year and we expect that to come in at about SEK 7 billion for '19.

If we move to Page 14, you can see the development in our cash position. Cash flow from operations during the last year contributed positively with nearly SEK 3 billion, of which SEK 1.1 billion stems from changes in working capital. We have made and continue to make significant investments in new aircraft, which in turn decreased cash with over SEK 6 billion and this includes SEK 1.1 billion of predelivery payments to aircraft manufacturers. At the same time, we have also sold aircraft, another fixed asset, for SEK 2.5 billion, and we have divested our shareholding in Air Greenland for nearly SEK 0.4 billion. Altogether, this has generated positive cash flow contribution of SEK 2.9 billion from sale of aircraft and affiliated entities over the past 12 months.

The redemption of our preference shares reduced cash with a total of SEK 1.2 billion, if you include the final dividend. And if we look at our external financing, this is increased with SEK 0.3 billion. During the period, we have issued new loans amounting to SEK 2.6 billion and amortized SEK 2.3 billion, of which SEK 1.6 billion is related to the repayment of the convertible bonds. Altogether, this leaves us with the strong cash position of SEK 7.3 billion at the end of the period compared to SEK 8.5 billion last year.

If we look at our financial targets, it is worth reiterating that all these metrics are based on the rolling 12 months metric and are not just impacted by the financial development this quarter but also the preceding 3 quarters. If we start with the return on invested capital, the decrease from last quarter is driven by the weaker EBIT during the last 12-month period, where earnings have been affected by the metrics such as higher fuel cost, the weak Swedish kroner as well as the full effect of the pilot union strike. The invested capital, which is (inaudible) denominator, has at the same time increased driven by the renewal of the fleet.

Our adjusted net debt-to-EBITDAR increased to 3.8x compared to 3.4 last quarter and this increase is mainly driven by increasing financial net debt as well as the weak EBITDAR development due to the factors mentioned like fuel, currency and strike.

The financial preparedness is fairly unchanged compared to quarter and increases with 1 percentage point compared to the last quarter. The decrease since the end of last year is primarily related to the redemption of the preference shares and the repayment of the convertible bond, which has decreased our cash position.

Before I hand back to Rickard, I'd like to talk you through our outlook for the rest of the year. And as in the previous quarter, the outlook remains unchanged where it is going to be challenging to reach a positive result before tax and items affecting comparability for the full year. If we start with our full year capacity growth, it remains unchanged at minus 1% for the fiscal year. In our Q2 update, the capacity growth was reduced mainly because of lost capacity during the strike, but also some slighter delays of newer aircraft as well as updated maintenance schedules. We have also updated our outlook taking into account the weak Swedish kroner to dollar FX rate. And we continue to see negative development and, I believe, the Swedish kroner depreciated a further 1.15% during the quarter itself.

We have seen a small decline in the jet fuel price, which is positive, but again, that is offset by the hedges. In terms of our efficiency program, our assumptions remain unchanged. And the full effect of the pilot strike, which was estimated to be SEK 650 million, came in at SEK 615 million for the year. Our outlook for the year remains unchanged.

And with that, I'd like to conclude my section and hand back to Rickard who will summarize this morning's presentation before opening up for Q&A.

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Rickard Gustafson, SAS AB (publ) - President & CEO [4]

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Thank you, Torbjørn. And if you all go to the final page, the Summary and Key Takeaways, please. Just to summarize what we have been through this morning. Of course, we are very pleased with the improved operational quality. That we think throughout the high season and the resulting improvement in revenues from that is satisfying. We see a disappointing decline in earnings driven by 3 very distinct reasons: the FX, as you heard, the fuel and the conflict. We note that our efficiency program is on track and we are determined to deliver the SEK 900 million for the full year. But we acknowledge that looking ahead, we need to continue to drive new and further initiatives to strengthen our competitiveness and flexibility. And in order to do that and today announced a new organization to ensure that we can accelerate the pace in our transformation and also drive accountability to identify new areas and new efficiency measures. And as you heard Torbjørn mention, we reiterate our outlook from the second quarter that it remains challenging to deliver a positive result for the full year 2019.

So with that, I'd like to end the formal presentation and ask the operator to help us to facilitate the Q&A session. Thank you very much, and operator, please help.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jacob Pedersen from Sydbank.

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Jacob Pedersen, Sydbank A/S, Research Division - Head of Equity Analysis & VP [2]

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I just have a question regarding your unit cost and now even if we adjust for the strike, you say that unit cost have been flat this quarter. And we are going through a period where you gain very much from your efficiency, SEK 900 million this year, I can't remember when you've done that last time. And how is your view going forward on your ability to lower unit cost? You're in an environment where almost all of your competitors are lowering their cost.

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Rickard Gustafson, SAS AB (publ) - President & CEO [3]

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Yes, you're right. We acknowledge that we have not been able to reduce the unit cost with a pace that we would desire. We acknowledge that most of our efforts in terms of creating cost efficiency within the SEK 900 million for this year would basically be to mitigate inflation. And we need to do more. And that's why I announced this organization. I believe that in those 4 areas that I outlined during the presentation, I'm absolutely convinced that there is more cost efficiency to derive from those and we need to realize and capture them. It's not going to be a quick fix. It's not something that you can expect in the quarter. But over -- starting now and over the next [2] years, you will see a constant involvement of SAS in all of those areas that will help drive further efficiency and reduce our unit cost. But in terms of actual (inaudible) or kroner and the implication on the unit cost, I need to come back at a later stage when we're a bit further down the planning for this.

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Jacob Pedersen, Sydbank A/S, Research Division - Head of Equity Analysis & VP [4]

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That's perfectly understandable because a single type fleet, I acknowledge that, that will bring you some positives, but it's some years until we're there. So in the meantime, all your competitors will be moving. And I think looking for the past couple of years, you've had the advantage of lowering costs faster than your competitors. I mean it seems to have switched now. And do you feel confident that this organizational change, combined with other things, will bring you back in the lead when it comes to unit cost decrease?

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Rickard Gustafson, SAS AB (publ) - President & CEO [5]

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Yes, we have to. We have to continue to lower our cost. We are fully aware of that and we need to drive further productivity and efficiency in our business. And we're brutally aware of the fact that if we can't do this or airlines can't continue to drive a rapid pace in its transformation, while they run into significant problems, then many of them cease to exist. And SAS have demonstrated an extraordinary ability to drive efficiency in the last 3 years and we've nothing to maintain that momentum. Of course, it's getting more and more complicated as we move forward, but it's clear that we have a line of sight of some significant improvement in these areas that we need to go after and realize as quickly as possible.

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Jacob Pedersen, Sydbank A/S, Research Division - Head of Equity Analysis & VP [6]

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Okay. And then more short-term question. You had a steep earnings decline so far this year. What are your views? And what are the ups and downs in terms of trying to stop it or at least lower the earnings decrease in the last quarter of 2018, '19?

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Rickard Gustafson, SAS AB (publ) - President & CEO [7]

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Well, the good news that we bring to your attention, which is I'm pleased to say that we have been able throughout this year to hold up our unit revenue and our yields. In the short term, as we look forward and we go into the next winter program, we see that for the first time in many, many years, we see a flat growth in terms of capacity. Normally, we get 5 -- around 4%, 5% capacity growth every single program or season and this year is flat. So that's a short-term good news, I believe. And I also think that some of these issues that we have related to fuel, we're going to reach kind of the end of that tail as we move into fourth quarter as well. So there are some other dynamics as we move into the fourth quarter, but the macro development in the Swedish kroner will remain an issue.

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Jacob Pedersen, Sydbank A/S, Research Division - Head of Equity Analysis & VP [8]

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How about the 737 MAX coming into service at some point in the future (inaudible) knowing their growth aspirations for 2020 because of the MAX issues. When do you say -- and Boeing has continued producing the MAX aircraft. So will there be a catch-up effect of a sudden increase in capacity once these come fly again?

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Rickard Gustafson, SAS AB (publ) - President & CEO [9]

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Well, it's a good question. I think, to some extent, carriers have replaced the MAXs through ad hoc wet leases, so they basically maintain some of their capacity. There is, of course, a longer-term risk that there will be -- we will see overcapacity and the so-called catch-up effect from the MAX. There might be something as such a scenario, but it's a bit early to tell. But as I mentioned, I think a large part has been replaced already through ad hoc wet leases among many of the operators.

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Operator [10]

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And your next question comes from line of Hans-Erik Jacobsen from Nordea.

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Hans-Erik Jacobsen, Nordea Markets, Research Division - Senior Analyst [11]

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With regard to development in Sweden, according to official data, at least domestic traffic have been down quite considerable during the summer. And if I understand you right, you said that you have no drop in demand in Sweden. Can we assume that you continue to gain market share in Scandinavia and then particularly in Sweden?

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Rickard Gustafson, SAS AB (publ) - President & CEO [12]

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Well, it is correct that there has been a drop in general demand for domestic aviation or capacity in Sweden. That is correct. We have also noted that Swedavia, the main airport operator here in Sweden, what they have reported. And they have reported a significant drop in terms of domestic passengers. In our numbers, we maintain or we have -- well, domestic -- Swedish domestic business is flat versus last year in terms of number of passengers. But we also have been able to maintain some of our margins. So from that point of view, I think the answer is yes, it would and must imply that we have gained market share in Sweden.

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Operator [13]

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And the next question comes from the line of Achal Kumar from HSBC.

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Achal Kumar, HSBC, Research Division - Analyst [14]

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So just following up on the last question about demand. I know you talked about the Sweden demand. But if you could please further elaborate in terms of demand in the context of building environmental sensitivity and not only in Sweden but across the Nordic market. So if you could please elaborate on that, how do you see that going ahead?

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Rickard Gustafson, SAS AB (publ) - President & CEO [15]

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Right. The whole kind of movement related to sustainability is definitely something that is top of mind among many -- within media and I think in the broader general society. I think some other transportation means have seen a significant positive impact of this, i.e., I think you'll see rail-based services has increased, at least in Sweden, and in Denmark as far as I am aware. But the demand for aviation or for our offering is hard to articulate that we've seen a clear shift in the demand or in booking levels despite maybe Sweden that we talked about. Otherwise, it's been holding up pretty flat and we have reported strong numbers throughout July and June. And I believe that also our competitors has reported stronger numbers in terms of passenger loads for the summer. So far, we don't see a significant implication from the sustainability debate, but it's definitely something that we take extremely seriously. We agree that, for aviation, it is an existential issue and we need to drive towards a more sustainable industry quickly in order to avoid that we will see a negative impact in demand, in order to avoid that the new kind of regulation being put in force and trying to reduce ability for people to travel. So if we don't do things right here, we may see this in the future. But here and now, I can't point to a significant drop in demand driven by the sustainability debate as of now.

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Achal Kumar, HSBC, Research Division - Analyst [16]

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Okay. In the same context, do you see any further -- any risk of further increase in the environmental tax from the government?

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Rickard Gustafson, SAS AB (publ) - President & CEO [17]

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Yes. I think it's pretty clear that across Europe and other parts of the world, this is a very, very significant topic and it creates a lot of political interest and pressure. And I believe that if aviation as an industry fails to articulate a trustworthy roadmap towards a more sustainable industry and not just hide behind an aggressive goal by 2040, by 2050, but articulate a clear roadmap from now to the future with tangible sub-goals. If we can't do that, I think the risk for further political involvement and regulation is significant.

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Achal Kumar, HSBC, Research Division - Analyst [18]

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Right. Understood. On the -- otherwise, I wanted to understand. So you have already reported 9-month results and still you have kept your outlook unchanged. So it's just a question of one quarter. So what sort of uncertainty do you see in the Q4 which has held you from giving any explicit profit guidance? So how big is that uncertainty, so, if you please speak about that?

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Rickard Gustafson, SAS AB (publ) - President & CEO [19]

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I will, I'll start and then maybe, Torbjørn, if you want to join in this conversation as well. I'll draw your attention to 2 things. Firstly, we are still concerned about the development of the Swedish krona. It has further deteriorated during the summer and that trend is something that creates an headache for us. We also note -- even though I've said that as of now we haven't seen a significant shift in demand, but we know that the demand for aviation services, as I said, is clearly correlated to GDP development. If we now are kind of on the edge or at the crossroads where we might have to live with a different economical environment for a while, that will have implications. And therefore, we said that there's still so much uncertainty so we maintain our prognosis of forecast from Q2. But Torbjørn, would you like to add to this?

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Torbjørn Wist, SAS AB (publ) - Executive VP & CFO [20]

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No. I mean, if you look at, call it our results year-to-date, we are SEK 440 million in negative territory in terms of results before items affecting comparability and given the uncertainties and the -- that Rickard just mentioned, we still see it's going to be a bit challenging to reach a positive contribution. So that's -- that is why our prognosis remain unchanged.

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Achal Kumar, HSBC, Research Division - Analyst [21]

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Right. Okay. Other thing I wanted a bit more understanding about your new organization structure, so you put it like you want to cut the cost and hence you are coming up with a new organization structure. I get that, but if you could please elaborate a bit more on this, that how you are trying to increase your bottom line through -- via doing this via new organization structure. I mean, I understand that you're distributing the liabilities and all that sort of things, the responsibilities and everything that I could understand. But how could you sort of improve your bottom line by doing this, please?

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Torbjørn Wist, SAS AB (publ) - Executive VP & CFO [22]

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Short term, I think there are some opportunities to flatten the organization and thereby eliminate some of the overhead cost, short term. I think by consolidating some units, you will find that there will be some synergies by -- there are some overlapping responsibilities that we combine into one entity and that will drive some cost savings. But to be -- to manage expectations here, I think those are tangible and will be delivered. But the long term where we have some more kind of sizable opportunities will be under those headings that I described that we need to get more in-depth plans and details around. We know that there is a price to gain if we go down that path. We have need to define the roadmap and the activities to realize that potential. So there's some potential, yes, from the reorganization in terms of cost take-up but it's fairly limited versus where the big value lies in those other headings that I described.

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Achal Kumar, HSBC, Research Division - Analyst [23]

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Right. Sorry, the last question, and I'm so sorry for such a long list of questions. I just -- the last thing I wanted to understand about your regional operations, about your -- about white labeling operations. So now what's the status? Who's doing it and then what level and then [-- that's all,] please?

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Rickard Gustafson, SAS AB (publ) - President & CEO [24]

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Right. Now we have a fairly sizable work lease operation. It's -- we operate a number of aircraft on wet lease basis, primarily regional jets and turbo props. We deploy 32 or 34 aircraft, depends a bit on season, on a wet lease basis through a handful of partners where CityJet being the largest partner of ours at the moment. So it's a sizable operation for us.

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Achal Kumar, HSBC, Research Division - Analyst [25]

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And in terms of profitability?

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Rickard Gustafson, SAS AB (publ) - President & CEO [26]

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Well, it has really helped to improve our overall profitability. And those routes that these aircraft operate, we could not do with a large 320neo operation. But now we can keep them and we can maintain them and add profitability. And they provide and also free the traffic into our main airports in Oslo, Stockholm and Copenhagen. So they are an integrated part of our business model and they operate -- so they enable us to operate a number of thinner flows in a profitable way that we could not do in our own regime.

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Operator [27]

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And we have a follow-up question from the line of Jacob Pedersen from Sydbank.

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Jacob Pedersen, Sydbank A/S, Research Division - Head of Equity Analysis & VP [28]

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It's been -- I'm just coming back now. It's been some months now since the pilot strike. And what is your feel for upcoming negotiation toward other employee groups in terms of their wanting to push through salary increases and improve the conditions in light of what the pilots achieved?

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Rickard Gustafson, SAS AB (publ) - President & CEO [29]

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Right. Good question, Jacob. I am hopeful. In this respect, I think, it was pretty clear to all of us that the negative implication from a conflict and the -- how that hurts the company and how that actually erodes our ability to provide job security. I believe that we have, throughout the years, been able to work a strong commitment and engagement from our employees, drive significant change in this business. We will need to continue to do that going forward. And I'm positive. I believe that we should be able to do this in collaboration with our unions because, at the end of the day, we strive for the same objective. We want to create a long-term, sustainable and profitable company and that is the only kind of job guarantee that is worth its name on the paper.

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Operator [30]

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As there are no further questions, I will hand it back to the speakers.

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Rickard Gustafson, SAS AB (publ) - President & CEO [31]

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Right. I think we are -- the hour is up. So I'd like to thank you for joining us this morning. I thank you for your interest in SAS, and I wish you all a very good day. Thank you. And I think we close the call now.

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Torbjørn Wist, SAS AB (publ) - Executive VP & CFO [32]

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Thank you.

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Operator [33]

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This now concludes our conference call. Thank you all for attending. You may disconnect your lines.