TUI AG (TUI1) Earnings Call Transcript

Good morning, and welcome to today's TUI Group Q3 Results Call. My name is Seb, and I'll be the operator for your call today. [Operator Instructions]. I now hand you over to Nicola Gehrt, Director of Investor Relations. Please go ahead.

Thanks, Seb, and good morning, ladies and gentlemen. A very warm welcome to our fourth quarter 2026 results presentation here from the TUI Group campus in Hanover on this wonderful summer stage. My name is Nicola Gehrt, and I'm Group Director of Investor Relations, and I'm delighted to be joined for the presentation by our CEO, Sebastian Ebel, and our CFO, Mathias Kiep. Today, we are pleased to present to you a resilient set of Q3 results, highlighting the strength of our business in this challenging geopolitical environment. Following the presentation, we will open the floor for the Q&A. And with that, I have the pleasure of handing over to Sebastian.

Thank you, Nicola. And a very warm welcome also from my side and, of course, from Mathias with this beautiful picture of our hotel in Santorini. When we, 12 months ago, presented our outlook, our guidance, we assumed record profits, and we had excellent 5 months until the war in and with Iran started, which had direct impacts, the 2 cruise ships stuck the repatriation cost for the Middle East, for the Far East, the fuel impact, but also for a time period, 3 months less bookings, especially, of course, Middle East, also Far East, but also to some of the Eastern Mediterranean countries. And this, we do see in the second half of this year. The good development is that we now can see the business is coming back. It's normalizing, and we have seen strong weeks. What we also see is that our transformation is well underway and supported the results which we can present today. That said, Q3 revenues were roughly EUR 6 billion, more than 5% below last year. EBIT was down at EUR 86 million and positive, which was not the case a couple of years ago, but Matthias will go more into the details before. If we look into the 9-month numbers, if we take out the direct one-offs, we are still above last year. If we take them into account, we are EUR 40 million down and with revenue 1.5% less. So that's why we say a very resilient 9 months. And to just remind you, the 2 specific direct one-offs are EUR 60 million: the Iran war and the 2 ships, the repatriation, and, which is almost forgotten, the EUR 21 million Jamaica hurricane cost. As I said, suffering from high fuel costs, the Eastern Mediterranean softness, and customer consumer caution. So having said that and seeing that the business is coming back, bookings are coming back considerably, we are able to confirm the guidance, EUR 1.1 billion to EUR 1.4 billion. If we go into the details, hotel is stable. We had lower occupancy, mainly triggered by the Middle East impact, stable rates, slightly bigger offering. And if we take the Jamaica impact out, we are almost on the same level. Cruise, very, very strong. If we hadn't had the 2 ships stuck in the Middle East, it would have been even up compared to last year. Now we are slightly below. And we are in the first 9 months, we are significantly above. What is really amazing is that if we take the 2 ships out, occupancy is above last year, and prices are also very strong. By the way, this is not only true for TUI Cruises, but it's also the same for the U.K. business, Marella. TUI Amusement is strong despite fewer customers; we are able to sell more products to customers and especially our own-produced products where we have a higher margin. If we go into the market and airline space, we lost EUR 65 million compared to last year, which is, in these circumstances, probably a resilient, at least from our point of view, resilient result with the impact we discussed almost on the same level as last year. And occupancy is still at 91%, at a reasonable level; sales are growing. And we have seen that the U.K. is positive, but there is a decline in Germany because of the significant long-haul business, which was not there, was negative, and the Western region is slightly improving. If we look at what has also happened with our main initiatives to build the TUI of tomorrow, we are more and more differentiating between the core value TUI products, the differentiated products with our strong brands with our airline, and the dynamic produced products. This has worked extremely well in Germany with Atour. And therefore, on this infrastructure, we have launched Sun& Beach last week to give people the right answers if they want to have a differentiated TUI product or a dynamic package, a very price-attractive product there. Also supported by the strengthening of our sales approach with our app. We now have integrated semantic search, which has a real shift in conversion. And we are rolling that out until the beginning of next calendar year to all the other markets. So a very good development. We have built the connections to the LMMs, where we do see good conversion and a very attractive sales channel, including the integration into social media. We just started with our loyalty program in the Nordics, so Scandinavia plus Finland. And recently, very recently, in the U.K. and Ireland, great success, and that should strengthen our TUI ecosystem to keep the customer with all the benefits they can achieve in our ecosystem and make them even more loyal customers. One of the most important projects we have is the commercialization of our airline. And I'm just saying airline, not anymore airlines, because operationally, it's now one airline with all the efficiency gains we see now from the marketing and sales side; we will act as one commercial airline with a full impact on summer '27 when it comes to network, when it comes to sales activity. And this is a major breakthrough because the right combination between seat-only third-party and own customer is adding a lot of value. When we look at Holiday Experiences, we had the successful start naming of Mein schiff Flow. Outstanding NPS- I can't remember having seen that in any other business before: 95%. So customers are really, really happy with it. It's fully booked out. Occupancy levels above 100% because of the beds for the kids. And what we brought into the market also, for the foreseeable future, is selling extremely strongly. We believe in carbon neutrality and emission reduction. Therefore, we will start operation now with the 2 newbuild LNG ships, not with fossil LNG but with fracked LNG, but with bio-LNG out of biogas. And therefore, we can reduce the CO2 footprint to almost 100%, 95%. It's also very, very important. On the hotel side, yes, we have one or the other where we have invested in an asset. We will open a Robinson Club on Comfort next spring, and the year after in the Eastern part of Africa, Zanzibar, but the main growth comes from management hotels under the TUI Blue brand. Now we have started business in cities, not for business travel but for tours. These are leisure hotels. We are starting with Civil and Lisbon. We will roll that out to all major cities as the brand is well recognized, and we can give value to the hotel and to ourselves. So a lot of things of transformation in TUI. And therefore, we are looking forward to the remaining part of the year and to the coming year. After the Prosaic, Mathias, the numbers.

Thank you. Thank you very much, Sebastian, and a very good morning. Let me just summarize the quarter and then summarize the EBIT bridges for the 3 months and 9 months before I would then share, as usual, details on P&L, cash flow and net debt. And thereafter, Sebastian will cover bookings, and we will talk about the resulting guidance once more. Now, when I look at the quarter and the 9 months year-to-date, from my perspective, in summary, this is a very robust and resilient result despite a challenging market environment and despite the specific TUI challenges that Sebastian has just described, again, that you also know from our Q2 results. This quarter, as a result, supports well our guidance of EUR 1.1 billion to EUR 1.4 billion profit. And I think what is important, and it's important to me, is that also the elements below EBIT, the financial profile, very much supports our journey. And this is something which is in line with our initial expectations even prior to the situation in Iran, which I think is very pleasing. Now, as you said, Sebastian, this is, again, a positive third quarter. It's also a positive 9 months. And at the same time, this result is probably not as well in line with 2024 for the quarter and is significantly better for the operational profit for the 9 months in 2024. So I think that is good in order to put this into perspective. And in summary, as you see from the waterfall and holiday experiences slightly below the prior year. If you take out the direct impact of the straight of Foremost on TUI Cruises, then that would be in line with the prior year broadly. I think if you go through the segments, it's Cruises, as Sebastian described, continues to perform outstandingly well, both in the U.K. and in the German market. Hotels is in line with the quarters before. So very strong and good results. At the same time, the super profitability that we saw in the prior years. We currently don't see it because of the situation in Mexico, where we see market softness. So it's not, let's say, a structural difference, but it's a bit of market headwind in one region and then amusement with this very continuous improvement. And naturally, markets hit the most by the booking environment, at the same time, supporting extremely well our hotels and cruise amusement business. Just anecdotally, if you look at the result in Turkey, what we call gateways to the market overall is down, and our revenue intake in the hotels in Turkey is actually up. So that is how well the vertical integration works. The picture for the 9 months, as described, is even showing that without these direct costs that TUI has to carry this year, we would be up, again, a result of this very strong winter. I think that is important because also the market prior to Iran was not very strong, was soft. And in this environment, we created actually a very good result. Now, of course, with this direct impact and with the indirect impact on bookings, fuel price, et cetera, the geopolitical events had, we are below. But again, this is more than double the result that we had in 2024. Now when we look at P&L, cash flow and balance sheet to conclude the quarter, I think I'm very pleased that everything below EBIT is in line with our expectations and our plans. So we can effectively reconfirm everything that we saw for Q2; in particular, interest is expected to be at the lower end, and the Q3 interest expense in the 9 months more than supports this so far. Then if you look at EPS, again, a positive EPS in the third quarter, which is something that is very important to our financial structure. And then on cash flow, again, we see a similar picture that is also reflected on the balance sheet. Structurally, more investments offset by less lease and asset financing amortization, less pension costs, and less interest costs. At the same time, what you then see on a net basis other than earnings is working capital, which is a natural result of the booking profile that we currently have. This is as of the 30th of June. Naturally, the positive booking environment, as Sebastian will mention and conclude and summarize in a second, will have a positive impact on that. At the same time, this is naturally behind last year, and that is something that we currently also see as a result on the balance sheet. So if you go to the balance sheet structure, then net cash is lower, and that is a one-to-one reflection of what we see in the booking intake and the result of the working capital profile. So effectively, seasonality rather than structural impacts. The other comment on the balance sheet is that the intake on the aircraft side is according to plan. So you see a bit more asset financing, a bit less leasing. We take profit from the very supportive direct financing market there and our credit quality. At the same time, the Boeing delivery portfolio is something which is in line with plan and which is naturally impacting our balance sheet and the way you see it here for the third quarter. I think that's overall, again, a very robust Q3, again, profitable for Q3 and the 9 months. And with that, very supportive of our full year guidance.

Thank you, Mathias. And trading and outlook. As said, we had quite a challenging month, March, April, May into June. We have seen now, over the last 4, 5, 6 weeks, a very different business for summer and winter. If we look into hotels, we see a strong average daily rate. We have seen a slight increase in capacity, and occupancy is now 3% behind last year. Before, when we had the same number 3 months ago, it was significantly higher. So we are catching up here. On cruise, occupancy, as said, is amazingly on the same level, same very high level. Also, rates are up, while we have 12% higher capacity. And amusement is in line with what we have seen before, very robust business. When it comes to market and airlines, we have improved by 1% now to 6%. If we look into the last weeks, we have seen encouraging momentum. And the last week and this week, again, are better than weeks 4 and 5 weeks ago. So the momentum is gaining speed. You have to see that in light of the fact that we voluntarily cut risk capacity because otherwise, we thought we would get into the significant price war we have seen in the market. So capacity and demand are now aligned by this decision to reduce risk capacity. ASPs are holding up well, which has also been very important to offset inflation. And as I said, the last 4 weeks of trading have been very encouraging, with booked revenue up 7%. That, I say, also surprised me because the weather, with the heat wave now lasting for 2 months, was not what I had expected. So that is a good development. Winter started slowly, but we have seen the same momentum now also for winter. And it's still quite a long time; summer lasts until October, winter starts in November. So we are confident that we will see a good winter. What we should have in mind when we look at these numbers, we always had a strong long-haul business. And the U.S. business is significantly down because of the political situation. Middle East is 0 because, with the package regulation, it has not been allowed to sell to it. Also, the Far East has been significantly impacted because of the very high flight rates. And then we had some destinations like Egypt, Turkiye and Cyprus, where we traditionally have been strong, which were very much impacted during the 3 weeks in order intake. This now has been normalized, and we are looking forward with optimism. And this clearly shows that we have seen, after the 14th of June when the first ceasefire was announced, a resilient and improved intake, and also the running week is doing extremely well. So that's why we expect that the risk capacity and the demand are in line. Yes, of course, last minute, the margins are less, but they are supporting our guidance very much. And that led to the clear message we can confirm the guidance, EBIT guidance. Matthias, some more details from your side.

Yes. Thank you. On the segments, we talked, and what I think, again, to highlight in this call is adjustments, net interest in line with what we guided as modeling assumptions in the last quarter. Net investments, and that's something you also saw from Q3 and 9-month results, we reduced, so in line with the efforts to effectively bring in countermeasures against the developments in earnings. We now see that we can reduce that to a level of EUR 810 million to EUR 830 million this year from a prior range of the lower end of EUR 860 million to EUR 900 million. The rest of the guidance and the modeling assumptions remain unchanged. I think an important comment, because I get the question a lot, is on net debt. I think naturally, we already talked about an increase in net debt this year because of the Boeing deliveries and adding more lease and asset financing liabilities on the balance sheet. Now a question will be what is working capital doing at the end of the year. You have seen what the 9-month position is. That is naturally the peak. So the impact will naturally per 30th of September lower than that and will be a product of what is now the last week's booking development, what's October, and what's the incoming winter. So there's a bit of volatility, which is more than we usually would have at that point in time. And I think we have our own view on that. At the same time, on a net basis, we would say there's not like a material change in our corridors, but at the same time, there will be an increase in net debt versus last year. I think that's something which I wanted to bring across in this call as well with a view to September. And with that, Sebastian, I think that's on the financial side for you to the summary.

Thank you, Mathias. As said, when we look at what we wanted to achieve, we are personally disappointed. We are happy that we have seen in these extraordinary market circumstances and can present a resilient result, especially looking forward to the 12 months. This resilient result was, of course, and will be, of course, the result of cautious capacity planning of more profit against growth and because of the transformation. And therefore, seeing now that the transformation, which, by the way, includes significant cost reductions, will put us in a good position when business and demand return. Therefore, it's our commitment to deliver sustainable growth and improved shareholder returns. Maybe the good thing is that with this unexpected event, we had to be more drastic in what we do when it came to cost, when it came to transformation, looking even more intensively at where we invest, how we even better steer into our own assets. And what supports that is not only a great finance organization here, but also that we brought all the activities under one head, our new COO, Marco Ciomperlik, and that has helped us again to be even more focused on what we want to achieve. So, bad environment, quite promising outlook. And I'm really happy to see all the changes, which are quite often triggered by AI, because this is the disruptive change in our business model and in tourism. Thank you. And maybe some rain would also be nice.

Operator, we are ready for the Q&A.

[Operator Instructions] Our first question comes from Jamie Rollo with Morgan Stanley.

Three questions, please, all on markets and airlines, I'm afraid. So the last 4 weeks, obviously, pretty encouraging 7% growth in revenue, but you do describe a price war. So is it fair for us to assume all of that 7% is volume? And what are prices down maybe in the last 4 weeks to stimulate that volume? Secondly, you've cut capacity another 1% or so. How much more could you take out for this season if pricing remains tough? And how are you thinking about capacity for the winter season and next summer? Then finally, I think you normally give some figures for the winter season this time of the year, particularly for the U.K. But you also mentioned some structural reasons why it's going to be a tough season given the long-haul exposure has been curtailed. So is there any flavor you can give on winter bookings? And is it also fair for us to assume that actually winter could be very difficult indeed given some of that long-haul program would have gone? Thank you.

Maybe I said something wrong. For our products, we don't see the price war. We see that at the end of the season, margin is normally lower. But on top of that is nothing we can see because we are very much in line with demand. So if I said something wrong, please apologize that. And we don't see the necessity to take out any capacity anymore for summer unless there is some unhelpful event, which we actually hopefully will not see. So there is, from that side, no pressure. The pressure all comes from the 3 months after the war has started. If we look into the winter, I am also a finance person, but as Mathias is in charge of the finance, he said we should be very cautious on that, although I'm cautiously optimistic not only because of the recent bookings, but I think that the ones which were not traveling in summer may go into the shoulder months. We have increased our footprint for November, February, and March. And therefore, I'm positive there. We haven't increased the risk capacity. We have slightly less risk capacity, but we are flexible enough to react if there's bigger demand or less demand. And you are right. And that's also quite interesting to see some of the customers who went to the U.S. go to Canada, only a portion. Some of the customers who didn't go to the Caribbean, Mexico has a weakness, go to Egypt. Others haven't gone long haul, but have gone on a ship. So I assume that it will take a couple of months for long haul to recover, even if we assume that there hopefully will be some more peace in the Middle East. Therefore, it has always been good that the risk capacity is except for the flights to the Caribbean, which are also very strong for us, is more a non-risk play where the impact on margin is less important. So that's why a slower start for the winter, but encouraging if I look at where margins should come from when it comes to occupancy, not occupancy utilization of the aircraft. And of course, we have optimized a lot. We took closed long haul in Belgium. We put this machine, the planes, into Amsterdam, a very slot-restricted airport, and with good success; that's the reason why we have seen a small improvement in Western Europe, hopefully more to come in the coming season. So I look quite encouraged for the winter. And we will be very cautious about capacity.

Just maybe as a follow-up, given all the pressure in Markets and Airline, if we take the low end of your full year EBIT guidance of EUR 1.1 billion, that suggests Q4 Markets & Airline profit of under EUR 400 million, which would be a drop of around EUR 250 million year-on-year. And that would be about 4x the profit drop you just reported. I'm just wondering, is that still a realistic scenario to be at the low end of the full year EBIT guidance?

I mean, as I'm sitting next to Nicola and Mathias, I'm actually very cautious about what I say, which is a little bit surprising when it's August, with some uncertainty from River Cruise, which has to stop operations due to fuel prices, the last open position. Let's answer it that way. And hopefully, I'm not killed from right or left. I would be very disappointed with EUR 1.1 billion. Is it allowed to say? Maybe this answer helps a little bit.

Next question is from Kate Xiao with Bank of America.

Can I ask a quick follow-up on the guide? How about the high end of the range then? Do you still have the ambition to potentially get back to last year's EBIT level? And if you were able to get there eventually, what would need to happen at this point? Second question also on your capacity. I was wondering if you could elaborate a little bit more on your risk capacity cut: how much is dynamic through partners compared to owned? And with the recent more positive momentum in booking trend, are these bookings going through your own capacity or dynamic?

Will you do the first one before I say something wrong?

Yes. Let me cover the guidance indeed. So I think when we compare to our Q2 position, we set out a corridor of 1.1 billion to 1.4 billion in Q2, and there was clarity about how the market return would be linked to how quickly the situation in the Middle East would be resolved. We've seen the very positive impact from the peace treaty at the time. We've seen the very positive impact whenever the situation came down. There's another element, which is fuel prices, where there was a question: would they come back quickly, which they did in one window, but did not really stabilize on that level. So I think if you take a step back, those impacts we not only see in Markets & Airlines, as a lot of questions are, but it's also something on the related activities in the hotels, Turkey, on the footprint that we have there, Cyprus with the cruise. So there are a lot of ingredients that we had when we set out the guidance in Q2. Now we are 3 months further advanced. And I think what a very good picture is, and how we look at this, is that naturally, we have narrowed the corridor. So I think, as Sebastian said, given the volatility around us, you can't exclude the lower end or the upper end because otherwise, we would have done that. But at the same time, naturally, with the trajectory that we have, you come in a narrower corridor. But at the same time, this is unfortunately not the time to specify this further.

Yes. Thank you, Mathias. On the risk capacity, as I said, at least I and some other colleagues didn't expect that the business now would come back as it came back. And maybe we could have been less price-focused when we would have known that the business would come back as it is, because our own flying, our own risk hotel capacity is sold as it should be sold. So whatever now comes is the majority, the huge majority is on dynamic capacity, and it's mainly to destinations like Turkiye, some Greece, some Egypt. Therefore, the impact is on margin and fixed cost coverage, but it's not on getting a better load factor because this opportunity is limited. And therefore, if destinations keep stable, the risk is limited, but also the opportunity is limited; the opportunity comes from a dynamic part and from a few countries.

Our next question is from Leo Carrington with Citi.

I also have 3. Just one on trading and a couple of strategic. On trading, in terms of the Markets & Airlines business, do you get a sense of why the bookings originating in the U.K. are still lagging Germany? And then separately, on the TUI Fly platform, is this an ambition: a platform mostly for the winter months? Or would you expect some of your summer capacity to be on there in 2027? And then lastly, I was interested to see you highlight the TUI Blue Hotel. I mean, not necessarily about that property, but in general, I'd be interested to know how you perceive the future of, let's say, nonurban leisure destinations given the trends for travelers to look for cooler locations and atypical summer destinations.

Germany, our German business has always had a significantly higher share of dynamic packaged product. And as the market has gone in 2 directions: one, the differentiated higher-end product on the one hand and the price-sensitive dynamic package product, this has worked extremely well in a very difficult market has worked well with the TUI brand for the differentiated product with our own hotel product, own flying and a tour for the dynamic packaged very price-sensitive products because it's when I say it worked well, if you take the long haul out, the rest is extremely stable and doing well. And long haul, I think it's very clear that there is no business to the Middle East; there is no business. The approach in the U.K. was different. We brought everything into the TUI brand, and we had to learn from consumer intelligence that were a little bit, in some areas, we lost the trust of the consumer set with TUI: I want to have a TUI flight. I want to have a TUI hotel. Maybe I want to have less dynamic packages with other airlines over long-tail hotels. And that was the reason why we where we introduced Sun deals to make very clear this is this kind of product, and this is the other kind of product. Therefore, whenever the dynamic is stronger than the differentiated product, we will benefit from both segments. And when you cut capacity, as we did in the U.K., but also in Germany, but mainly in the U.K., then the focus is on that. You are not getting the customers who then go to the beach or holidays or other great companies who offer a dynamic, and we want to get our fair share from this as well because one thing is clear: we want to grow. Blue Hotel, I didn't know that we have a hotel in Blue Hotel, but apparently, we have one. We are growing in this area as well. We very much believe in the city leisure destinations. We are going to open the third hotel in New York. What is interesting, people always think a leisure hotel in the city is the same as a business hotel. It's a very different distribution. It's a very different product. As much as business travel is at the moment not an easy business, leisure is growing significantly because the second, third trip per year goes quite often into a city. And there, we will benefit because we know how to distribute this product. Therefore, the Rio hotels in London are doing very well, and Toronto is doing very well. And Dublin is doing well. And that's why we also have the focus on that. And one side effect: we are now opening the first hotel in Lisbon; maybe there will be a second, hopefully soon. It helps build our brand in this destination where TUI is not known as we are in England or in Germany. So, with getting customers in the hotels, we will also be able to sell the connected trip product and so on. And so it's part of the integrated model. And that is slightly different from a year ago. Today, we look even more at how we can get the benefits from the vertical integration. So whenever we go to a destination with the TUI Blue Hotel or Rio Hotel, it will be a leisure hotel where we have our own agency where flying could happen. So very strong focus on vertical integration. Changing customer preferences, not the consumer change; climate change is quite interesting. I was in Türkiye last week. The weather was cooler than here in Hanover, which was almost the case the whole time. It was dry, and here it was humid, and it was windy, and here, there was no wind. So I was quite surprised that the customer was there is by far better than what I've seen in Germany. So the feedback is very positive. And that's why we haven't seen that this has a major impact on our business at all. Although the wildfires didn't do it because they were not all in non-touristic areas; in the touristic areas, we have had, up to now, hopefully, they will stay less than the years before. The change has been how the hotels have to be equipped. In the past, it was air conditioning in your room. Now it's about air conditioning also in the dining facilities and the sports facilities. By the way, for the longer shoulder season, we also need heating. So this has been a change. So no real impact. And if you talk about the boom to Nordics, yes, it's a 50% increase from 100,000 to 150,000. That is nice, but it's not game-changing.

That's interesting. And on the Reef platform, just summer...