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Edited Transcript of TUI1.DE earnings conference call or presentation 13-Aug-19 8:30am GMT

Q3 2019 Tui AG Earnings Call

Hanover Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Tui AG earnings conference call or presentation Tuesday, August 13, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Birgit Conix

TUI AG - CFO & Member of the Executive Board

* Friedrich Joussen

TUI AG - Chairman of Executive Board & CEO

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Conference Call Participants

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* Cristian Nedelcu

UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst

* Jaafar Mestari

Exane BNP Paribas, Research Division - Analyst

* Johannes Braun

MainFirst Bank AG, Research Division - Director

* Kathryn Helena Louise Leonard

Numis Securities Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the TUI AG Conference Call Regarding the Full Year Third Quarter 2019 Results. (Operator Instructions) Let me now turn the floor over to your hosts, Mr. Friedrich Joussen and Ms. Birgit Conix.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [2]

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So thank you very much, and good morning. A very warm welcome from rainy Hanover. I hope you are all well. And I'm very happy to guide you through the Q3 result as well as the strategy update, and Birgit is here to focus on numbers and financial performance as well.

So let me start with the presentation, with the brief strategic update, and maybe you turn to Page #4, which actually is a page highlighting our business. We have, as you know, a unique integrated business model with 2 major pillars, Markets & Airlines and Holiday Experiences. The Market & Airlines piece has the 21 million customers with leading market share of 20% to 40%. The average spend per customer is EUR 900, and that is important particularly when we focus on future opportunities. The business represents 1/3 of profit, and that was, of course, traditionally in early days much higher. And as you know, the business here is under cyclical pressure. Overcapacities particularly in airlines result into a non-recovery of cost. When you look at the German market, for example, you have Ryanair, there's EUR 170 million of loss last year; easyJet, EUR 160 million -- or the other way around, I keep forgetting. And then you have EUR 215 million of loss in Eurowings. So cumulative loss last year in airlines in Germany, just in Germany, was between EUR 500 million, EUR 600 million. And that is, of course, something which is potentially not there forever, but today, we are under cyclical pressure, that the consolidation will happen, but it has not happened yet.

And then we have Holiday Experiences, 380 hotels, 17 cruise ships. ROIC, 1/3 higher than peers. That is because of 21 million customers in the market, so the scale in our market is actually the synergy driver and it actually puts us in a very different position in this Holiday Experiences; peers 2/3 of profit pool in the meantime; high profit resilience, you will see that also in Q3, I mean, despite all movements and so on and so on. Hotels & Cruises are delivering extremely superior returns, high investment and cash returns.

Now when I look into the landscape and say what are the 4 strategic initiatives we need to take in order to play our game, and I will highlight each of them in separate slides. But in summary, we have to grow and we want to grow our Hotel & Cruise business, let's say, in a tempered approach. And that is something which it's very clear, we want to be disciplined. And that discipline also is a little bit having influence on the scalability of the business. But if you want to go over 15% ROIC, you need to be selective, otherwise, you will not be going that pace; and also a little bit more asset light in the future, and we come to that. We want to retain and, where possible, extend market position in airlines and -- Markets & Airlines. We have strong positions. We have the 21 million customers. We don't want to lose market share. Of course, we will act rational, but that's definitely important. And in order to achieve that, we need to be very strict on cost and need to change our operating model. I come to that in a minute.

And then we have our 2 growth platforms. One is the GDN-OTA, so our activities in markets that we don't have active soft markets today as well as to attract new customers to our brand as well as more -- sell more to our customers in the right fashion, for example, activities which we have invested into over the last quarters.

So when I look at now the Hotels business in particular and the strategy here, and you'll see that on Page #5, there's a good geographical diversification. We have opened 23 hotels; the hotels' rates are up, you will see that in a minute; 3 cruise ships added; very high resilience; very high ROIC. The way forward is actually communicated -- as communicated a quarter ago or maybe was it even 2, TUI Blue will be our main brand. We will make it to the world's largest leisure hotel brand from 10 hotels to 100 within a couple of years, and that will be, of course, done in a very appropriate fashion. We will rebrand some of the TUI-operated brands like Sensimar or Family Life into TUI Blue.

Why is it important? Because when we have a -- when we want to build TUI Blue as a marketing platform, we need a big brand. It is all digital, and in the digital world, we need to address sales capabilities in China, we need to address sales capabilities in the U.S. And a strong brand is absolutely preconditioned in order to achieve that. And also, the whole protocol stack, the whole stack of TUI Blue will be also designed to be for a franchise as well. So over time, that will be more and more third party which is taking advantage of our distribution capabilities. So that's something where you see is already a little bit -- falls a little bit more asset light than it has been done in the past. And it's on purpose because it is a little bit more asset light than it has been in the past.

So when we come to #2 of strategic imperatives, Page #6, and we have the Markets & Airlines. And here, we are using the cyclical pressure to unlock scale benefits. And what do we mean by that, you see on the left side. CRM, we will be striving to increase revenues by upselling to our customers with, for example, activities and other products which they might want to purchase. And here it's important that through the digital approach we are taking, the scale of 21 million is not contradicting individual offers. So mass individualization, that's what you can achieve with a digital approach, and our systems facilitate for that. And that is something which has started already, and you will see that in a minute when you see the first successes and actually the experiences field of our business.

Then Hotels. We operate all hotels. And also, we are a big purchaser of capacity. The third-party hotels here, we have actually started to implement a new purchasing system of full commercial benchmark and purchasing system. The first versions are live now. So the question of do we purchase in the most intelligent way, do we use our inventory in the most intelligent way, do we market our inventory also in the most intelligent way, that is what these systems will guarantee. It's a very important part of our future road map.

Then Airlines, 150 aircraft. As I said, overpopulated market now, consolidation potential ahead, active ops, our status. We are not driving consideration ourselves, but if you can take benefit, we will take benefit and aside that we manage our costs, being fuel efficiency but also competitive fleet financing. I could also have mentioned common IT systems, as with all airlines, and so on, and so on, and so on processes.

Distribution. From retail to online to mobile, you will see that in a couple of slides, more efficient over time and more direct customer access, which is important.

And then overhead. And this is actually the new thing. We have actually decided not to do common systems here and there.

We will be, in 18 to 24 months, just on a single protocol stack when it comes to IT. And this is -- I always say they built the car once, and then the markets can drive the car however they want. I mean they have the P&L, but at the end of the day, building actually is a central responsibility. And we have actually fought to achieve that under my leadership together with Dave Burling, who runs all the Markets & Airlines; and Frank Rosenberger, who runs our IT. We will come together with all responsible managers every month, and then we monitor progress and make sure that it really happens. And the road map is there and that you see an extra commission statement which we have published in our organization. I think it's one of the biggest transformation programs we are doing, similar, I would say, to the transformation from being a trading company to a product company, now becoming from a product company to a digital platform company. That's what it's all about.

And on top of that, you see on the right side here and they are tactical, making our business more streamlined and more simple. We have sold Corsair, for example. As you know, yesterday, we announced the sale of German specialist business Berge & Meer and Boomerang for quite attractive price. That's something which doesn't have synergies in our business and as an indication to be disciplined. It's either we have synergies or we don't have synergies. If we don't have synergies, goodbye. I mean then financing can be achieved from banks. When we have synergies, then we invest into the business. These businesses didn't have the synergies and therefore -- and it would have been too difficult to create synergies and too risky. Therefore, we looked in a structured process for a better home for the business, and we have found one, and I think it's a good position to be in.

Now on the growth area, we have actually 2 initiatives. The new GDN-OTA platform, that's Page #7. Here, we are building reach in countries where we didn't have a traditional business as we had announced in '17, with 2022, 1 million customers when we have enough revenues in countries as well as markets where we didn't have business. We are now on a run rate of 250,000. We think on a yearly basis, we think about if we could maybe accelerate and maybe achieve the 1 million earlier. That is something which we will update you on in a later stage, but we are now -- I just want to make it clear that we are looking at how to accelerate a little bit because I think scale is the most important backbone for our business also on the content side.

And then on tours and activities, we have invested, as you know, into Musement, into hotels, into Destination Management. And now we are expanding the business. For example, Ctrip will go live as we speak. We are looking at other strategic partners. We are also looking into expanding our portfolio. Also here we would be ready to invest more if we found the right opportunities. Again, these are the 2 platforms. Historically, as I said, we transform from trading to hotel and ships, very intensive capital. Now we expand the business to digital platforms. It's less capital intensive but equally challenging.

So let me talk a little bit about the last quarter, and here I would like to turn to Page #9. And you see that we had a profit dilution from EUR 195 million to EUR 100 million, so that is EUR 95 million. And of the EUR 95 million, EUR 117 million of one-off effects, main driver is the MAX grounding. So if you had excluded one-off effects, we would have been able to increase profitability for Q3. That was very different than the position in Q2. Q2 was still dilutive. So we see a bottoming out of the cycle, I would say. And of course, that is support -- that is actually driven by 3 activities: Holiday Experiences; Markets & Airlines; all other segments. You see Markets & Airlines in the middle, minus EUR 31 million. That is a cyclical pressure, so it is something which is still there. But Holiday Experiences and all other segments are overcompensating. All other segments is a major driver. It's actually that we don't have Corsair on board. Holiday Experiences, you will see in a minute; and Markets & Airlines as well.

Well, let me turn to Page #10. Here you see Hotels & Resorts. Underlying EBITA up 26%, that is the bottom box in the middle. And the box on top of that actually says average revenue per bed, and that's what I want to -- the only box I really want to talk about because the average revenue per bed went up from EUR 57 to EUR 60. And that is, of course, all margin because, at the end of the day, if you achieve a higher yield and the costs are similar, then you know that's margin. And the reason is that the margin is building in Turkey. This -- last year, we had the volume. This year, we have volume and margin that's the major driver. By the way, Riu you see flat EUR 58 despite the fact that we have a little bit of overcapacity in Spain. So that's, I think, pretty good.

Then you have Cruises. In Cruises, all brands contribute to the profit increase of 14.4%. The only thing I want to highlight here is a potential caveat you see on the top-left box of the slide, in TUI Cruises, because here you see the average daily rate going down from EUR 200 to EUR 190. Is that actually a sign for future challenges? No, it's not. The reason for that is pretty easy 2 effects. The first one is because of the extension of capacity from 1.2 million to 1.6 million passenger days. The additional routes we had to offer were actually Mediterranean routes. Mediterranean routes -- you cannot have all ships in the Nordics, right, so you need to have a little bit of diversity routes. And of course, Mediterranean routes in summer are less yielding. There's around EUR 5 effect of the EUR 10. And then you have another 3, I would say, or 4 which is actually [Mein Schiff]. Mein Schiff we have decided to run a little bit longer in the fleet. The decision was a little bit late, therefore, we had a shorter marketing window. And so that actually also leads to lower yields, and that is the second effect. Other than that, we see very stable and very resilient daily rates for our Cruise business. And as you can see, in Marella Cruises, you'll see still the traditional uplift in yields; as well as Hapag-Lloyd. So I think the segment is still very well performing.

So then you have Destination Experiences. Volume up 92%; if you took at total turnover, up 164%, so this is booming. It is, of course, non-organic and organic. And also when you look at the underlying EBIT, you see if you exclude the one-off effects of Musement, a stable environment plus 3%. But for the full year, we had guided 20%, and we will achieve 20%. I mean the last quarter -- it's also a seasonal business. The last quarter, it's the important quarter and that -- and we see order bookings and the volumes and this will be perfect. Here, as I said, we are still looking how can we actually accelerate growth and what can we do. And -- but at the same time, it's very reassuring that we have already decent profitabilities in that segment, and that's also something which we value highly.

Then we look at Markets & Airlines. You see from EUR 37 million to minus EUR 104 million, which is more or less MAX grounding effect. Of course, you have Easter timing and prior year airline disruptions and which were positive because of the respective timing effects. And you have the challenging market environment, that's minus EUR 32 million. That said, I think in -- the consolidation might be happening faster -- sooner than later. We are in a good position. We will be beneficiaries. We actually increased our competitiveness with all the efforts I have talked about. I think we are in a good starting position. And if the markets may be challenging a year from now, we have done the right things. And if the profitability will be trailing, we will be in a very good position in order to take the benefits. So I think that's non-regret move to actually -- platform and create all the possible synergies in between the markets.

Now let's turn another page to Page #14. I think Hotels, Cruises and Destination Experiences I have talked about, and it's all -- I would say all very, very, very healthy development. By the way, interestingly enough, openings of new hotels almost 70 since the merger, so we have delivered on that promise as well, and we can tick a box.

Markets & Airlines I think is the most interesting, and therefore, let me talk one minute on this. We have the grounding. As we said, measures in place -- are in place until summer. We don't know, of course, relative to the original term, but if winter is not a big issue, this EUR 300 million scenario is actually we are still in the envelope of the EUR 300 million scenario, as said. We have good volume uplift now in the last quarter. Therefore, that's what the second from the bottom bullet point is. We have actually caught up in our booking status. Now we are down 1% versus last year. Last quarter, we were down 3%. So we are catching up. And as we speak, the bookings are coming in. And when I look outside, it's everything but the heatwave, so the bookings will be okay. And 87% of program sold, which is broadly on the level which we had last year.

With that, I would like to turn over to Birgit to comment a little bit on the financial performance including cash and (inaudible) debt status as well.

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Birgit Conix, TUI AG - CFO & Member of the Executive Board [3]

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Thanks, Fritz, and welcome everyone to our Q3 call.

So with 2019 being a challenging year for the travel industry, I'm pleased to report that after a weak first half, we delivered a solid financial performance in Q3 excluding the Boeing MAX operational costs.

Now if I go to the first slide, on Slide 16, the 9-month bridge. Fritz has already covered the operational performance review for the 3-months period, and my section now focuses on the cumulative 9 months. And we are pleased to see that our Holiday Experiences business are standing strong in this challenging travel market, which demonstrates the robustness of our integrated business model and the results of our recent investments.

During the first half of the year, our Markets & Airlines business was especially impacted by the highly competitive and challenging travel market whilst we saw a stabilization for the first time in the first quarter. The Boeing MAX impact of EUR 150 million weighed significantly on our overall underlying EBITA performance for the first 9 months and the impact being in line with our projections earlier in March.

If we then move to the next slide, #17. And before I go through the details and as flagged in our annual report and also during the first half results, we have applied IFRS 15 and IFRS 9 from the 1st of October '18. And in particular, for IFRS 15, this has resulted in a change to our quarterly and full year '18 comparative revenue and underlying EBITDA. There is a slide in the appendix that you can see where the key changes are outlined, and you will find the corresponding Excel also download -- in a download section on our website.

As you can see, we achieved a turnover of EUR 11.4 billion for the first 9 months of the year, which was up 2.5% compared to the same period of last year. Now as a reported revenue growth in the period was mainly inorganic due to some smaller acquisitions and divestitures, we need to exclude these inorganic effects to look at the true performance. And then our top line increased modestly by 0.6% in the first 9 months on an EBIT basis, showing that we maintain our underlying revenues.

In Q3, we generated revenue of EUR 4.7 billion, which represents an increase of 3.7%. And if we correct that for the aforementioned inorganic effects, the increase is 3.2%.

Now our underlying EBITDA shows a positive EUR 142 million after 9 months. And without the Boeing MAX costs impact, our EBITDA results would be near to last year's results for the same period, benefiting from our past investments into Hotels & Cruises and the integrated nature of the business.

And then it's not on this slide, but I would like to mention it is that our administrative expense for the first 9 months of the year remained flat. And excluding the effect of acquisitions and divestitures, our administrative expenses decreased by 2.3% over the same period versus last year as we are focused on operating leverage and tight cost control.

Then moving to depreciation. This higher depreciation year-on-year reflects our progress of investment strategy, which is now completed, with the final disposal proceeds utilized. The 9-months adjustments of EUR 63 million mainly relate to the Markets & Airlines strategy to drive Markets competitiveness, leading to higher restructuring-related SDIs for the period. I would like to confirm that we expect to meet our full year expectations of around EUR 125 million.

And then reduced interest expenses and higher tax credits year-on-year helps to partly offset our 9-month EBITDA loss, leading to a group result after minorities of minus EUR 320 million. Excluding the impact of the Boeing MAX costs and the restructuring charges in the first 9 months of full year '19 and rebasing full year '18 for the EUR 41 million of discontinued operations, we would have recorded a stable group result after minorities despite the highly competitive market in which we operate. We expect underlying full year net interest to be around EUR 130 million and the underlying effective tax rate to be around 18%, as previously communicated.

Moving to the next important slide on free cash flow, this is Slide 18. This requires some further explanation. As it shows, our expected free cash flow post dividends of minus EUR 721 million for the first 9 months. The substantial decline in free cash flow versus the 9-month prior year period reflects the EUR 150 million Boeing MAX cost impact and negative delta in working capital movement of nearly EUR 450 million and nearly EUR 300 million planned net capital expenditures and investments increased as a result of the reinvestments of the earlier communicated disposal proceeds.

Now moving to the left-hand top bar chart. We report a strong earnings contribution from Holiday Experiences being up EUR 31 million year-on-year in EBITDA underlying, but it equally shows the external challenges in H1 and the Boeing MAX grounding in Q3 in our Markets & Airlines segment. In the right-hand top bar chart, you see a substantial decline in working capital compared to the same 9-month period last year. This development is driven by the following reasons: firstly, lower customer deposits from later booking behavior which amounted to around EUR 130 million; second, a higher payable outflow of circa EUR 150 million from quarterly phasing and also cyclical trading in H1; and thirdly, higher flight and hotel prepayments as a consequence of replacing aircraft for the grounded Boeing MAX as well as securing Eastern Mediterranean capacities in the order of magnitude of EUR 120 million. It was our deliberate management decision to guarantee that our customers keep traveling and can enjoy their holidays with TUI. Then other cash items, which consist of cash interest, tax paid, pension contribution as well as other cash effects, improved overall compared to the same 9-months period last year.

Then moving to Slide 19, the CapEx, which is the second main driver of our cash flow statement. Our cash capital expenditures for 9 months amounts to EUR 890 million and is fully in line with the planned reinvestment of our disposal fees, as communicated over the past years. We continue to deliver our growth strategy with the committed blended run rate ROIC of at least 15%. As you can see in the right-hand pie chart, around 2/3 of our cash capital expenditures for the 9-month period were growth related. And you can also see that roughly 80% of our net capital expenditures and investments related to our planned growth in Holiday Experiences with 2 Riu hotels, TUI Blue, [Robinson], Marella Explorer 2, Hanseatic and our Musement acquisition being the largest assets.

We confirm our full year '19 net CapEx and investment guidance of EUR 1 billion to EUR 1.2 billion, which remains unchanged and is expected to be at the upper end of the range, as communicated earlier. We will continue to closely monitor our capital expenditures in order to make sure that they drive the committed incremental returns and actually return to a normalized net CapEx and investment level of around 3.5% of turnover by 2020.

Moving over to Slide 20. There you can see that TUI is in a robust financial position. And as expected, net debt increased to around EUR 1 billion due to the discussed free cash flow development and our planned reinvestment and financing strategy. For the final quarter net debt, we assume an increase of around EUR 300 million to EUR 400 million due to remaining Boeing MAX impact, the planned CapEx and especially is the planned CapEx and then asset financing. All together, we would expect the full year 2019 average net debt to be around EUR 1.5 billion. Even in this difficult environment, I want to remind you that we have healthy headroom to our covenants. Based on our June 2019 net debt, our net debt-to-EBITDA ratio was 0.8x which gives a headroom of EUR 2.7 billion to our 3x net debt-to-EBITDA RCF covenant. The interest cover under the RCF is at 2.7x for the last 12 months versus the requirement of at least 1.5x, which is almost double the cover we require.

Then on Slide 21. This year's leverage ratio, which takes into account gross debt, pensions as well as the net present value of our operating lease commitments divided by EBITDAR, is driven by our scheduled asset investments and the grounding of the Boeing MAX aircraft. This leads to a full year '19 expectation at the upper end of the range which is 2.25x to 3x. We expect our leverage ratio to improve again after the completion of the aforementioned item.

As you can see, we have a credit rating of BB with S&P and Ba2 with Moody's since 2017, both currently with negative outlook. We are committed to maintain our current position despite the current challenges in the travel market in order to continue to access capital at attractive rates when we require it. We continue to enjoy a solid and healthy financial profile characterized by a strong liquidity and a weighted average maturity of our financial instruments of 3.4 years at the end of June and a weighted average cost of debt of around 1.6% currently with the interest on our bond and Schuldschein at 100% fixed rate. At the end of the third quarter, we had full access to EUR 1.5 billion of undrawn commitment under our revolving credit facilities which covers the seasonal cash requirements of our business.

Then moving to Slide 22. As per our 9-months report released this morning, our guidance remains unchanged. As stated in our outlook announcement on 29 March, we expect underlying EBITA rebased to decrease by approximately up to 26% compared with prior year due to the impact of the Boeing MAX operational costs as a full summer season flight capacity replacement for the ground of 737 MAX aircraft is required. As always, at this point of the reporting cycle, let me share with you our current assumptions regarding the FX impact based on our current foreign exchange rate. We expect approximately EUR 15 million positive impact on underlying EBITA compared with rates prevailing in the prior year.

And then let me finally close my presentation with some final remarks and my finance priorities for the next couple of months. The travel market, as you know, remains very competitive and is affected by current political uncertainties. Our Holiday Experiences segment is performing strongly and is a resilient pillar in the challenging market environment. The return on recently incurred investments is beginning to come through.

My focus for the next couple of months will be on operating leverage and tight cost control related to our initiated market transformation program; a rigorous and disciplined management of net investments being committed to our target to return to a normalized CapEx level of 3.5% of turnover with growth investments as a blended ROIC of 15%; thirdly, optimizing our working capital management and free cash flow post dividends by full year 2020, where we've said that we would target a neutral to a bit slightly negative maybe still free cash flow, but we target to be neutral; delivering on our financial policy and improving our gross leverage ratio in the midterm; and then last but not least, securing access to financing at attractive rates supporting -- supported by maintaining our credit rating.

And with that, I will now hand back to Fritz for a few final words.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [4]

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Okay. Birgit, thank you very much. I think it's very clear. Birgit has strict controls, and that's good -- it's good for the business and see the positive effects.

Let me turn to Page #24. That's how I see it. I mean post merger, '14 to '18, we created an integrated tourism company. Fortunately, only about 1/3 of our business is now Markets & Airline. And if we were in a different position, like in the position in '14, we would be in a much different position. And the transformation was quite successful. Our EBIT CAGR in that time was 13%. And the reinvested -- we divested EUR 2 billion of non-synergistic businesses, invested into growth areas which actually created the superior position in Hotels & Cruises with very premium returns. We have generated EUR 100 million merger synergies. So this is all the past.

And my view on this is the future transformation will be equally interesting, and we will go from an asset-heavy Hotels & Cruises with, of course, disciplined ROIC target of about 15%. We will go into new digital areas. The digital areas will add scale to the business, and there will be platforms, digital platforms, GDN-OTA, more customers for our brand on a global scale, new tourism activities and an enormously interesting market of around EUR 50 billion of revenues and very, very attractive as we have strong access to our customers who align our brands. And at the same time, corresponding to the 150 -- EUR 100 million of merger synergies 4 years ago, we will commit to our competitiveness in Markets & Airlines. We will not be outcompeted on costs in our market positions. And therefore, when the consolidation will happen, it will be in a very good and premium position. So the future transformation ahead is equally interesting and I think value creating as well.

With that, I want to close today and actually open for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question for today comes from Jaafar Mestari who's calling from BNP Paribas.

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Jaafar Mestari, Exane BNP Paribas, Research Division - Analyst [2]

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This is Jaafar Mestari from Exane BNP Paribas. Two questions from me, please. Firstly, on currencies, sterling has weakened a lot. Say if I look at your hedging figures, you're 38% hedged for euro for summer 2020. Is this a good indication of where you stand in terms of hotel price agreements for next year? And if you could maybe remind us what you've observed in terms of customer behavior around the 2016 sterling weakness, so how much did it help you take share in the following summer, summer '17?

And then second quick question, on the 737 MAX costs, so you've incurred around EUR 150 million of costs so far. Q4 is almost 1.5x bigger in terms of volumes and revenues than Q3. So can you help us understand how you're going to stick to the EUR 300 million for the full year? And then purely theoretically, what's a broad estimate of the costs per quarter, the groundings extend far into 2020?

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [3]

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Okay. Jaafar, on the currency and the hedging, I think I will let Birgit take on that. I mean one thing is very clear. The currency itself is something which -- particularly when you look at the pound business, of course, not nice. I mean when you look at the post [vote], it was -- it went from 0.75 to 0.9, which more or less -- was more or less a cost increase of 20%. And now it's from 0.89 to 0.93. I mean long term, it's not a very good trend. That said, who knows what will be happening? I mean therefore, I think we have potentially have seen the biggest movements already, and I would not see too many movements into the future. That's also that I've talked to the banks and to our financing banks and so on. It seems to be a common view. But Birgit will be talking about hedging.

On 737, I think what I'd see right now is we can see that the cost on a per-month basis is somehow -- is somewhere between EUR 35 million, EUR 30 million, EUR 35 million, EUR 40 million, depending a little bit. And for the summer season, so I would say that, that is something which is also something we will be seeing in September -- August and September. But also the underlying performance increases now. I mean you can see that very significantly, when you look at how our position was in Q2 and when you see how our position is in Q3, you can see that the underlying performance increases because of better booking but also because of softer comparatives. So we feel quite comfortable with our EUR 300 million guidance. With that said, Birgit, can you talk a little bit about the hedges?

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Birgit Conix, TUI AG - CFO & Member of the Executive Board [4]

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Yes. And I can also reiterate that on the MAX cost we expect to be at EUR 300 million which are in line with our guidance. And you can see that currently, so far, we incurred EUR 149 million. So the remainder is to be incurred in the last quarter.

So then on the hedging question and if there is more detail, we can then follow up later. But we hedged out on a 12- to 18-months rolling basis for both euro and the dollar which gives us advanced visibility on the level of pricing. And we are almost fully hedged for the season '19 and well hedged for winter '19 and '20. And we have begun to hedge out for the summer '20, so we are protected for the current season. And we also offer a wide range of fully inclusive products which help price-sensitive customers to budget. And we have seen [then the sales] to shorter durations and more all-inclusive packages. So our renewal volumes (inaudible) are constantly hedged then on a rolling basis, so that is what I can currently say, and maybe we can follow up in more detail if required.

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Jaafar Mestari, Exane BNP Paribas, Research Division - Analyst [5]

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I mean it's not so much about the detail of the hedging, but I'm trying to get a sense of how much of your hotel prices for summer '20 are already agreed and secured. And I wanted to check if looking at the 38% euro hedging was a good way to [determine it]. So would you say (inaudible) [35%, 40%]?

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [6]

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I mean Jaafar, we are following up for each and every hotel our new purchasing system, one of the nice features of the new purchasing system right now is that we can follow up with each and every hotel if our costs in that hotel (inaudible) actually are exceeding our [achievable] book prices in the markets. So we are in a constant renegotiation for these prices. And particularly, I think in the world right now where we have a little of overcapacities in independent hotels as well, our position to renegotiate is not a bad one. And we see that already in the summer '19, where when we started into the quarter, we had no commitments, overhangs of quite significant amount, and we have been able to renegotiate the prices also for the summer '19 already. So I would say the position is not a bad position right now.

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Operator [7]

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The next question comes from (inaudible) who's calling from ODDO BHF.

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Unidentified Analyst, [8]

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This 737 grounding, can you give us a rough estimate of a time line? Do you expect them to be operational soon again? Or soon this year, calendar year or next calendar year? Any insight there would be helpful.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [9]

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Okay. I mean here, it's very clear. I mean for the summer, it's a done deal because there we have actually secured capacities. Winter is not a problem because winter is count (inaudible) and that is not creating any constraints. And other than that, we don't have more information than you. I mean it's very clear that it is in between Boeing and the authorities, and it's very clear that we cannot -- we don't have more information. But that said, please keep in mind, we had a very, how do you say, specific and special situation this year because the grounding happened so short term. I mean if it had happened with 3 or 4 months' lead time to main season, nobody would have actually come to the idea to wet leasing. We would have done dry leasing because there's enough aircraft in the market. That's not the point. The point is if you do dry leasing, then you need to register that dry lease onto your tail, and that usually takes 3 to 4 months. And then the summer season would've been over. So we have -- if you like a natural hedge -- but that said, we don't have any additional information to what actually Boeing is publishing and the authorities are publishing.

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Unidentified Analyst, [10]

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So what you're telling is even if it has to stay on the ground for the next full financial year, you would have to have a less severe effect the next year because you're better prepared.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [11]

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Yes. Because we have much more lead time. But that said, it's just pure speculation. I think it's very clear that if you look at everything from public announcements from actually -- to Boeing as well as regulators as well when you look at the share price of Boeing, I mean nobody expects such a long [count] -- but that said, as I say, I mean you need to draw your own conclusions. It is a little bit speculative.

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Unidentified Analyst, [12]

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Okay. And second question is concerning the covenant of your RCF. You are guiding us towards a leverage which is at the upper range, namely 3. And I think you wrote that you have covenant at 3. So are you currently in negotiations with banks to release a covenant?

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Birgit Conix, TUI AG - CFO & Member of the Executive Board [13]

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No. That is -- there is a difference. The difference between gross and net debt. So the leverage ratio is calculated on a gross debt basis and you can see that in the appendix or at least on our website if you want full calculation, we can even follow up in order to give it to you. And therefore, the covenant, if and you can see that on page, let me check, the page -- and so it's on the net leverage ratio, that is on net debt EBITDA that we have our RCF covenant. You can see it on Page 20 in the left, yes, the lower left box. There you see that net debt and then the leverage that we calculate is on a gross debt basis. So there is significant headroom. And you see we're currently at 0.8x net debt-to-EBITDA and the covenant is 3x.

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Unidentified Analyst, [14]

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Okay. And you said before that you -- in 2020, you want to preserve your rating, achieve your leverage target. What are you willing to do if the grounding of 737 remains and maybe summer or spring bookings are bad, and what measures would you be willing to take?

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Birgit Conix, TUI AG - CFO & Member of the Executive Board [15]

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So as my responsibility of the CFO, we look at the entire capital allocation framework. So we will look at working capital. But there we are making improvements already. We have a program in place to improve our working capital. Very possible that some of that is not, of course, indefinite. That is, you have that in the first coming years. Then CapEx. We will have a tight control of CapEx as we announced earlier already in the previous quarters. And then on the EBITDA, I mean it will be a temporary situation with the Boeing to be explained also to the credit rating agencies and then it's -- the forecast and allocation that we will have a closer look at.

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Unidentified Analyst, [16]

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And as a blunt investor, I'm very disappointed that you do not mention the dividend cut.

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Birgit Conix, TUI AG - CFO & Member of the Executive Board [17]

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So currently, we have a dividend policy in place. So that is the only thing I can comment at the moment because we have it in place. But it is, of course, my responsibility to look at the full capital allocation in due time, and that encompasses everything, of course, but currently, we have a dividend policy in place.

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Operator [18]

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The next question comes from Johannes Braun who's calling from MainFirst.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [19]

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Yes. 3 questions from my side. Firstly, back on the 737 MAX grounding. I was wondering when at the latest you need to have certainty that as the plane actually flies for the summer season next year before you need to initiate contingency measures such as leases for next summer. And I guess from what you said earlier regarding the lead times, for dry leasing I assumed this should be February or so. If you could just confirm this.

And then secondly, trading, you mentioned the improving trend. To what extent is the improvement a function of the capacity reductions by Thomas Cook as opposed to the underlying market? And then lastly, you mentioned the improved margins in Turkey. But how do those Turkey margins compared to the margins in Spain currently? And do you foresee margins in Turkey to eventually catch up to the Spain level?

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [20]

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I mean on the 737, I'm not 100% sure that I understood your question. But Johannes, you were asking the 737, was it a timing question or...

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Johannes Braun, MainFirst Bank AG, Research Division - Director [21]

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Basically, when at the latest do you need to have the certainty the plane flies (inaudible)?

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [22]

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I mean the -- I think it's very clear that we do our summer flight plan and we finalize the summer flight plan around the end of January. I would say that would be something which I would envisage. But as I said, the worse, worse, worse that we get 737 NGs, I mean, then we don't have the 15% efficiency in fuel, but that's more or less a very different position than wet leasing. And the wet lease today is a very patchy wet least. I mean when I look at, for example, a part of the EUR 300 million, a bigger part of the EUR 300 million or a significant part of the EUR 300 million is actually DBCs. So and when I look at the DBC ratios of -- with the wet leases in, I would say, it may be 10x higher than average. I mean maybe more. So the aircraft which we had to wet lease and usually have been there in order to replace short-term flight on the weekend. Now we are flying on a concurrent basis. It's a very different proposition. So I think there are many, many things we can do much better if that case happen. But as I said, it is pure speculation in my view today.

On trading, it's difficult to say what is Thomas Cook. I mean I would say also very different in the different countries. I would say maybe we see a little bit of -- when we look at market share numbers, Germany, they are not so losing so much market share today and also the Nordics, they are not losing so much market share. And it might be a little different in the U.K., but there they have also -- Jet2 is a very, how do you say, aggressive player. So I would say in general terms, we are not losing market share, that would be my view.

And then the last thing on margins in Turkey, the margins in Turkey usually are very good. I mean historically, 3 years ago, the margins in Turkey were much better than the margins in Spain. So then, of course, the margins in Spain -- actually was scarce capacity. Now the margins in Turkey are building back and they are, as you can see, overcompensating a little bit the margin pressure in Spain. And my view is also here, once that you have a new normalized level, I would expect that tourism flows are growing like they have been growing in the past and the tourism market should but also (inaudible) shows outperforming GDP also in the next year. So overall, therefore, I believe, the margin situation for hotels will be good, that they're okay to good. But the question is more in combination with aircraft. As long as you have overcapacity and you don't clear the market in terms of capacity, the matter will be flying. If you have -- if you pay, let's say, for a 737 or something EUR 3.5 million or EUR 4 million of lease rate or cargo truck lease rate or whatsoever, you will not let it stand on the ground. And the same is true with the Airbuses as well. I mean as long as you have additional capacity in the market, you will see the situation. Therefore, I think the consolidation will be helpful. But therefore I also believe that the consolidation is -- will be happening soon.

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Operator [23]

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Next up, we have Cristian Nedelcu who is calling from UBS.

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Cristian Nedelcu, UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst [24]

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This is Cristian Nedelcu. 3 questions, if I may. The first one, on your Q3 operating cash flow. So I believe your EBITDA in Q3 declined roughly by EUR 70 million year-over-year, while if I calculate correctly, your operating cash flow declined by around EUR 290 million year-over-year. This declaration as just explained in a moment when your bookings for [targets] come through. Sometimes, don't understand the working capital dynamic there. And if you can elaborate a bit more on the structural and cyclical parts of this working capital deterioration that you talked about in one of your slides.

The second one. Please correct me if I'm wrong, but I believe your guidance for net debt in FY '19 has something slightly increased. I think in the past, you are talking about EUR 1.2 billion to EUR 1.3 billion. Now you are talking about EUR 1.3 billion to EUR 1.4 billion. Roughly what defines this small increase?

And I guess the third one more sort of conceptual one. I'm just looking at the net debt going forward. And I believe next year, there's a bit more asset finance to come, I think roughly EUR 400 million or so of asset finance debt to be added. And having in mind what you told us on the dividend policy a bit earlier, having in mind that the consensus for the dividend is at EUR 0.70, EUR 0.75 for 2020 and 2021, could you give us a bit more detail on the time line of actually taking a decision in terms of capital allocation? I understand you have a policy in place right now. But at what time line should we have in mind for you taking the final decision on the appropriate level of dividend going forward? This is my questions.

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Birgit Conix, TUI AG - CFO & Member of the Executive Board [25]

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Okay. On the last question, what I can say is that we currently have a dividend policy in place, so that's what I can say on the last question. So then on the working capital. So as you pointed out indeed, the first quarter, we had a [decrease] there internally, we look at roughly EUR 300 million in total. And I will explain that to you because we had the same reasons as I detailed earlier, so we are operating -- it's a very cyclical [industry] and it has impacts on the movement in working capital. And in general and in absolute terms, we have a superior financing from a negative working capital which stands at minus EUR 5.5 billion. So therefore, a, you can sometimes have the swings also between quarter.

And looking on the 9-months movement in working capital and also have details in my presentation, this year's movement was based on this lower customer deposits from a later booking behavior and then also higher payables from quarterly phasing and cyclical trading and also the higher flight and hotel prepayment as a consequence of replacing aircraft for the ground of Boeing MAX and also securing the East Med capacity. So for the fourth quarter, we expect an improvement again of working capital. And so then for the full year, we expect to be still slightly negative versus the previous periods, and let's say, around 2 -- let's say, around EUR 200 million to EUR 300 million versus last year. If you compare the change in the working capital movement there, let's say EUR 300 million with minus [3] -- minus EUR 200 million I think for the full year and let's say an improvement in the fourth quarter. I don't want to pin to working capital because that's just really difficult to estimate for the fourth quarter, but let's say our internal planning would be an improvement of EUR 200 million to EUR 300 million in the fourth quarter. So then you can do the math.

So that was on the working capital in the fourth quarter. Did I address? And then the net debt. You asked the question on the net debt. And let me take you through that. So if you look at free cash flow, the first 9 months, we are at minus EUR 721 million. And then in -- for the full year, we expect, let's say, to be around minus EUR 1 billion. And so we also have an impact of further investment, the CapEx, and there, you can also do the math of what is still to be coming. And if I do a quick bridge. So for the fourth quarter, let's assume an EBITDA of around EUR 1.2 billion and then an increased CapEx of, like, EUR 300 million, and then you still further have tax interest and everything else. You -- as a starting position of net debt of EUR 995 million as you see and then a free cash flow negative of, let's say, around was between EUR 200 million and EUR 300 million in the fourth quarter, and then asset financing, another EUR 100 million. Then you roughly come to the provision in the fourth quarter. And we would be around, let's say, EUR 1.4 billion, let's say, in the next quarter, and that would represent a 3.1x leverage ratio for the full year. That would be slightly higher than our leverage ratio, currently between 2.25x and 3x, so it would be at the upper end.

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Cristian Nedelcu, UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst [26]

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Understood. That's very helpful. Apologies. If I may just add 1 question on the 737 MAX. Just in terms of modeling 2020, I appreciate that the costs, the revenue headwinds are going to be much lower. But what should we model roughly based on the sort of information available now?

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [27]

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It's difficult to say. I mean the -- what we know and what we think we know and what -- it will not to have a (inaudible) next year. So that will be my assumption. But that said, it's a little bit speculative.

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Operator [28]

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The next question comes from Kathryn Leonard who's calling from Numis.

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [29]

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It's Kathryn Leonard from Numis Securities in London. I have 3 questions as well please, if that's okay. Just firstly, on the winter '19, '20 season and summer 2020 early bookings, obviously some months very early, but in terms of the just the demand outlook that you're seeing in a minute, you did previously disclose in your Q3 2018 on sort of early bookings. I just wonder whether you might be able to comment on the demand that you're seeing. Obviously, in the late month, you see an improvement but I wonder whether the Brexit deadline obviously being at the end of October, what impact has been on that? And obviously, consumer sentiment in Europe has been weak as well.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [30]

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Okay. That was your first question, right?

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [31]

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That's my first one. Yes.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [32]

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Okay. What you suspect my answer? All right, should I'll answer the first one...

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [33]

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And then -- okay, the second one is just, I'm really sorry to go on but MAX again. I know, I really understand what you're saying it's quite speculative at this stage but just in terms of what we're hearing elsewhere and what the guidance is from the FFA and Boeing in terms of the public arena. Clearly, they talked about a September recertification. Ryanair said just 3 weeks ago that, that has already shifted to October and that's been reiterated by Air Canada, United, Southwest and the big -- other MAX operators who have all taken the MAX out of their schedules until either November or most cases until 2020. I very much understand that this is as expected. So key concern I have or question I have is what -- how you think about the ramp-up of delivery?

So let's just say really speculative, but air worthiness and reclassification does complete by year end and you take your 15 aircraft you currently got off the ground. You then need to think obviously about the 27 aircraft you are hoping to receive by May 2020 and what all the other operators are saying is that it's a challenge for Boeing, it's a challenge for them and it's unlikely to occur to the same volume and I understand it's not incremental growth capacity that you guys have operating leases that you are bound to return. Could you just talk us through what were your expectations on those 27 aircrafts and whether or not you can perhaps continue deliveries into the summer or would you take the NGs instead, but you then forego the long-term benefit of the 15% fuel? Just on that.

And then the third question just on Turkey again but in a slightly different slant. So obviously, the numbers you've reported for your other hotel segment brand on my numbers show that the benefit you're seeing this year is on capacity growth, but predominantly pricing growth, your load factors or your occupancy in those brands have been flat broadly speaking year-on-year. So I'm just wondering what you're seeing going forward? I mean in terms of FY '20 and the growth we might we see from Turkey, clearly, it's been a big driver for Hotels & Resorts this year. Should we expect that to continue next year? Have we kind of reached the peak? And/or is it more of just pricing -- can pricing continue basically at that level?

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [34]

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Okay. Yes. Winter season. Winter season today, bookings are a little bit weaker than last year. But last year, winter season early bookings wasn't still very good because last year, winter season booking at that point in time was still pre-summer hot heat, and therefore, it's a phasing issue as well. When I look on a like-for-like basis for summer, our summer bookings is very early days but pretty good. So therefore, I would say let's wait a little bit. I mean as I said, I think what I see right now is that bookings are improving, particularly short-term bookings are improving. Therefore, we are in quite a good mood.

Now on MAX, the situation is as follows: If it was October, if it was November, if it was December, that is low season for us. So therefore, we have agreed and we are in the process of agreeing, we have agreed that actually we don't take airplanes which we don't need in winter. So for us, the rescheduling of October or November or December doesn't matter. And also we are very cognizant of cost that when they go back into service, there will be a little delay in -- there will be a delay in the deliveries and that is something that will take benefits and so far that they actually push out some of the investment into the next year. So that is also not a big issue because we, of course, say in the early delivery obviously we make the big profitability increases and then over time, the profitability -- of course over time, we want to exchange.

It's not a growth investment; it's a pure exchange investment. We want to exchange all 737 but, of course, each incremental 737 at less offered than the early deliveries. So therefore, I think there will be less investment and because we pushed out a couple of the volumes and -- but on the profitability, I think it's a big hit. And on Turkey, I mean it's difficult to prognose in the future. But last year, you saw volumes coming back. This year, we see volumes and prices coming back. And we have renegotiated last year, but actually, the volumes were under pressure and prices still we renegotiate almost all our contracts. Our profitability will be very premium I think in Turkey. And if nothing happens, I mean then in the destination, I think it will be a very nice destination.

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Operator [35]

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And the last question we have time for today comes from [Tony Lemong] who's calling from ODDO BHF.

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Unidentified Analyst, [36]

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Coming back on the 737, I just want to make sure that I have the correct figures. So the number of aircraft in your fleet right now, it's 15, 1-5, out of 150 aircraft. And I've read that 8 aircraft were expected to be delivered, and we've been talking like in May, and is going to be delivered after the lifting of the grounding? Is that correct? That's what I've read.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [37]

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You are -- that's not 100% correct because, as you know, we are trying to take in deliveries in spring, that's not in winter, right? Because in winter, we don't need the deliveries because in winter, we have low season, that's half the demand of roundabout of summer. Yes. So we have replanted all of our fleet. So it's not correct that we immediately after the ban is lifted, we take on deliveries.

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Unidentified Analyst, [38]

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All right. And my understanding is that you need to pay the highest proportion of the price at delivery, and so is it included? What is included in your CapEx guidance regarding this?

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [39]

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CapEx guidance for next year, we haven't done, right?

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Birgit Conix, TUI AG - CFO & Member of the Executive Board [40]

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No.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [41]

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So there's nothing included because we didn't do any CapEx guidance for next year.

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Birgit Conix, TUI AG - CFO & Member of the Executive Board [42]

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This year, as I've seen, I mean all our assumptions are included.

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Friedrich Joussen, TUI AG - Chairman of Executive Board & CEO [43]

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Okay. So with that, I think that was the last question as the operator said. Thank you very much for tuning in, and we'll keep you updated and talk to you soon. Bye.

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Operator [44]

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The conference is no longer being recorded.