TUI AG

XETRA:TUI1

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the TUI AG conference call regarding Q1 results for 2020. [Operator Instructions] Let me now turn the floor over to your hosts, Mr. Friedrich Joussen and Ms. Birgit Conix.

[Friedrich Joussen, Chairman of Executive Board & CEO]

Thank you very much, operator. Good morning, everybody, from Hanover, where we have our Annual General Meeting in due course. I'm very happy to update you on the latest quarter result. Before I do that, a very short recap of last week's development where we actually sold our 100% AG -- on the 100% Hapag-Lloyd Cruise into the JV with TUI Cruises. That has been, and I think you know, a very strong and good transaction for us. It has been part of the Holiday Experiences asset-right expansion strategy piece. So it is the question of how to grow our businesses with the right input of capital. Now when you look at the acquisition, we sold Hapag-Lloyd for an enterprise value of EUR 1.2 billion, which is, when you compare it to our EBIT, a very strong multiple, I would say. We had that business -- we have had to restructure the business. We now, on top of the EUR 1.2 billion, we keep a net present value of around EUR 300 million, EUR 350 million plus for the 50% profit pool including the synergies. The transaction is largely debt financed and will be closing in June or around summer 2020. When you look at the strategic benefits and financial benefits. On the strategic front, we had 2 businesses which were more or less not growing anymore, TUI are not growing fast enough; TUI Cruises, because of the yard capacity for big ships; Hapag-Lloyd, because of the internationalization, which was not really possible with the German brand, and also the financing of new ships. So we put these 2 together, and suddenly, TUI Cruises can grow via Hapag-Lloyd, and Hapag-Lloyd can grow because it's part of an international group including the debt facilities of that company. So it's a win-win situation. At the same time, we keep control of the brand, of the product, of the marketing and sale, ask the others contributing the international global footprint. So that is also, from that point of view, great. And we keep our powder dry for digital expansion, which we'll come to later. So strategically, it's good, but also financially, it's good. As I said, the value crystallization of EUR 1.2 billion plus the retained profit pool, so that's something good. TUI Cruises could finance the transaction largely through debt. A little bit of EUR 75 million of equity had to be injected, but think about it, EUR 75 million equity, EUR 1.2 billion of enterprise value, plus EUR 300 million, plus additional benefits, so it's a no-brainer of a very good transaction. Now in -- and also in our numbers, you will see that, but it's not part of our numbers today because, as usual, we only put this into our numbers when the closing has happened. But just the offloading of debt would have generated -- or will generate a cost leverage decreased by 0.1x to 0.2x. The net cash proceeds, of course, we said we would largely use for deleveraging the company. So I believe it is a great transaction. So that actually is a pre-phase for our today's results announcement. Let's talk about the Q1 for a moment. We had an exceptional start in Q1. And you can see that in the winter trading, and you can see that in the summer trading. In the winter trading, we are now 83% sold. At the same time, you'll see the pax growth on average is 3%. The sales price is actually up 6%. And what that really says is -- by the way, revenue growth was 10%. That's also clear as a combination of pax and average sales price. When Thomas Cook went insolvent, the capacity movement was largely fixed, and therefore, we had a little bit of wiggle room, that is the 3%. But the big benefit came on price. So that's how the winter went. And interestingly enough, you see all regions a little bit similar. In the summer trading, we have more room and had more room for actually extending capacity. That's why you see the capacity growth of 14%. We still kept an eye on profitability, saw also the sales price up 3%. And we -- you can see that also that we actually have been -- how do you say, model it with our capacity growth. So we are now on the load factor, which is important as well, at 36%. Now the question, of course, is how are we doing with that? My view is twofold on this. The first one is, I think in the big markets, after the insolvency of Thomas Cook, I think what I see today is a shrinking of the market. So we will have taken overproportionate number of customers from the market because we secured the Thomas Cook hotels, particularly in Turkey. But there, Thomas Cook was very big. Others will have taken capacity, but all together, it will be smaller than Thomas Cook has been before the insolvency. Now I have been asked also, do I believe that is long term? Maybe it is and maybe it isn't. If it wasn't, then I would say it's even a better message because then we have seen not the full effect yet because then the full effect would come in late trading, that would be very good as well. So if the market has shrunk, I would say then you have seen the effect. If it does not, then at least we don't have not seen it yet because today the market has been small. Now let's see how it works, we don't know, but we are prepared. Let's talk very briefly on -- so trading is very good. And by the way, when I come to guidance -- when we come to guidance, we will say we had EUR 950 million to EUR 1.050 billion, that was the range where we set the original guidance range, and we said that excluded the additional Boeing costs and so on. Yes, it's true. So we are now saying upper end of it, yes, and we are saying high single-digit growth in revenue. Of course, when you see these numbers here, you would argue, why not high -- why high single digit? Well, at the end of the day, we are preferring cautious approaches because we have seen hot summers and so on and so on, and we don't know how the next summer will be. But at the end of the day, I can't say we never had a stronger January in our company history. So the January was very good, and let's see how it will go on. Now on the downside a little bit is, of course, 737 MAX. And you have been all seeing that the new announcement is middle of the year, whatever that means, we have decided that we take on board a more cautious approach and say it will not be available this year. So it might be either 1st of September or 1st of October. We will be incurring a little bit less costs than we had said. Originally, we had said EUR 220 million to EUR 270 million additional costs. Now we talk about EUR 220 million to EUR 245 million. At the end of the day, we don't know 100%. The only thing we know is this time of the year, actually, the market shares are distributed. Thomas Cook went insolvent. We are more or less extending our program with 20, 21 aircraft. We are extending the program with 21 aircraft because we believe it will stick. Otherwise, we wouldn't do it, right? So we believe it's a long-term sustainable growth, what we are talking about. And now the market shares are distributed. We have actually got the hotels of Thomas Cook, so we believe we will be a long-term beneficiary of the development, even if it costs a little bit more than the 737 MAX being at wet leases or dry leases. So that's a little bit how I see it. And also, how I see is it's not nice. It's big numbers, yes. We might also see the first compensation this year. At least the negotiation are shaping up. At the end of the day, it doesn't hinder us to take the market share. It doesn't hinder us to do the strategic transformation. And the strong trading, I think, will be more visible also in the bottom line numbers as soon as the MAX effects will be off our shoulders, and we hope it will be not too far in the future. Now a very brief word on sustainability because also in the Annual General Meeting today, that will be a big subject. We've always been having -- working very hard on sustainability. And over the years, you can see a couple of examples being the #1 or #4 airline in terms of efficiency or having 85% of our -- or the 83% of our Hotels & Resorts with certifications. So we take this very serious. We are working on our new sustainability strategy for 2020 to 2030 in line with the UN goals. That means not only ecological but also social and economic, we believe everything needs to come together, so we are driving very hard. By the way, many people talk about purpose of business. So what is the purpose of the business? I think one thing is very clear. Without tourism, inequality in the world would be bigger. In most of the countries, we are the biggest investors, sometimes the only source of value. Our customers bring benefits to destinations. By the way, if you are interested, you can see in my Annual General Meeting speech, which will be published and we can also send to you, a comparison between Haiti and Dominican Republic, 2 states on the same island. The only difference is 10x the tourism in the Dominican Republic, and you see what it does. So anyway, so that's a small excursion in terms of our strategy in sustainability. Let's look very briefly on the numbers. In the first quarter, we were 7 -- on the 7% turnover up. As I said, for the full winter, it will be more around 10%. So it started first quarter a little bit slower, then it became stronger. And for summer, we are up 17%, as you could see, so we believe that's very strong. That also resulted in underlying EBIT decrease. Of course, because of the MAX, if you like-for-like excluding MAX, it's a little bit up, but this little bit only is little bit because we have so much more program right now in Turkey. That actually is additional capacity which, of course, doesn't generate any results in the winter. So it's a very strong trend. Then reported EBIT up 25%, this includes a one-off effect of a disposal of Berge & Meer, one of the businesses, we have -- and we had a book gain. And then the guidance, we will be talking later. It's a composition of upper end of trading shaping up to the EUR 1.050 billion and more control, less uncertainty on Boeing, unfortunately, a higher number of costs, but maybe even also some mitigating factors, also maybe a little bit of payment as well. We are very certain that including everything, we will not be below EUR 850 million. And if you compare that, so we still can't achieve the upper end. We will not be below EUR 850 million. I mean just to give you an idea, when we started the year, the lower end of trading would have been EUR 950 million. The upper end of the Boeing additional cost would have been EUR 270 million. So if you add these 2, then we would have started at EUR 680 million. So we are now talking we are not below EUR 850 million. So it's shaping up nicely to the upper end of what we believe, and the basis is particularly the strong trading which is there to stay even after Boeing is -- actually the Boeing grounding will be actually ended. Now on the Holiday Experiences, and you see a couple of trends which -- but the quarter is small. I think the most important trend you see is the average revenue per bed, it's up EUR 3. So that is something which shows capacity is scarce. Now that said, of course, we have a bigger program. Of course, we have more in Turkey and so on and so on. So we have a couple of underlying negative effects because of the seasonality of the whole program, but we believe that actually we'll be shaping up nicely over the year. On the cruising, very strong. Maybe the only caveat we have here, so very strong capacity growth, stable average daily rates and so on and so on. One slight caveat is Marella because you see an increase in the per DMs from EUR 137 to EUR 143. Unfortunately, it's still a negative development in EBIT. There's a couple of one-off effects, but there's also a sustainable one-off effect, and that is our recurring effect, and that is actually fueled cost development and regulation. Here, we need to watch out a little bit. That said, it's not worrying. It's still on a high level. But compared to the super strong last years, it's a little bit of a deterioration. On Holiday Experiences, Destination Experiences, I mean we had, last year, as you remember, an EBIT increase of like-for-like, excluding one-off costs for integration, of around about 40% plus; even if you included integration, it was 20% plus. This year will be also good but profit-wise, not that good because we obviously have said, here, the market is consolidated as we speak -- or consolidating as we speak, so we will invest into growth and put priority onto growth for the time being. And you see that your total turnover is 35% up, the volume was 17% up even in a very small quarter. So I think that's also good. Now on the Markets & Airlines. We have a couple of effects, which you see on the bottom right: the previous year hedging, which we had actually disclosed; the MAX impact, which last year was not happening, both are negative, positive. This is actually the start of the increase of the trading, which is EUR 24 million, that is more to come in the next quarters. So we believe that's good. You see also here on the customer front, you see the 3%. So I mean at the end of the day, it's a starting consolidation, and we believe that we will be a beneficiary of that environment. Now the only thing which is maybe a little bit astonishing, that online distribution isn't growing. On the top left, this is despite the fact that in all countries, the online penetration is growing, but the issue is that Germany is growing in number of customer faster than the Nordics. Actually, Nordics is more or less flat. And Nordics has a very high online penetration, Germany has a very low online penetration, and therefore, the mix has actually pulled down a little bit. But all markets, I think, in Germany, we are more or less online, something obvious between 30% and 50% up right now. So also Germany is now catching up in terms of online. Outlook, all good. The only gray area we have is actually Cruises because of the fuel price development. Maybe on the top right, you see 36% of summer sold, which is up 2%; 14% booking up; 3% price up. I think I have actually not seen a January like this since I'm here. So -- and January, as you know, is the strongest trading month we have, so I'm quite bullish for the year. With that, I would like to hand over to Birgit.

[Birgit Conix, CFO & Member of the Executive Board]

Thanks, Fritz, and a warm welcome to everyone to our full year '20 first quarter results presentation. For our Markets & Airlines business, I'm pleased to report that the first quarter has started well with exceptional bookings for our summer 2020 program. Some of the challenges we saw in 2019 in the travel industry remain. And we continue to see, in particular, the Boeing MAX grounded, which has cost us EUR 45 million in this first quarter. As covered by Fritz, we now expect a full year impact of the Boeing MAX grounding. And while I will comment on implications for the full year '20 guidance later on, I would like to reiterate our continued strong focus on our financial priorities, which are cost efficiencies, improvement of our operating cash flow and our focus on our capital allocation with a disciplined investment approach. We focus on growth with an asset-right strategy. This is further evidenced by the announced Hapag-Lloyd Cruises transaction which, apart from its strategic intent, also enables us to strengthen our balance sheet. Before I start with the slides, one comment on IFRS 16. So this is the first quarter that we have adopted the IFRS 16 standards. And in order to make the year-on-year comparisons more meaningful and present the numbers in line with our guidance, the following slides also show the Q1 financials on a pro forma calculation according to IAS 17. So moving to Slide 21. As in the previous quarters, I kick off my financial update with our Q1 underlying EBIT bridge, where I will focus on the most significant items. So as you can see from this slide, whilst the fundamentals of our Holiday Experience business remains strong with top line growth in each segment, we have seen some minor headwinds in Q1 with our Hotels segment, for instance, in particular -- this is due to higher winter costs from portfolio expansion, some adverse foreign exchange effects from the Turkish lira and reduced capacity at Riu against strong prior year comparables. Additionally, as expected, there was accelerated investment in our Musement platform, which led to a negative contribution year-on-year for Holiday Experiences. And then you can see the next block. Markets & Airlines businesses saw a solid underlying trading, up EUR 26 million at constant currency versus prior year. And excluding MAX costs and prior year hedging gain, this results in a growth like-for-like versus previous year. And this is a clear uplift in the bookings following the insolvency of one of our key competitors. The positive in all other segments is driven by the noninclusion of Corsair winter losses. This leaves us with an operational EBIT performance of EUR 104 million, which year-on-year grows when we exclude, as I said earlier, the one-off hedging gain in Q1 and the costs of the MAX grounding. We incurred EUR 45 million of operational 737 MAX costs during this first winter quarter, which is in line with our expectations. Including the MAX grounding costs, we delivered underlying EBIT of minus EUR 148 million at actual rates and minus EUR 149 million at constant currency, about 1/3 lower versus previous year on a like-for-like basis and entirely attributable to the Boeing 737 MAX impact. And let me now comment this one position, the EUR 1 million that you see there. You need it -- I would like to highlight that this impact of EUR 1 million from IFRS 16 in the first quarter is lower than expected and is due to adverse foreign exchange effects as well as phasing, which we expect to at least partly reverse over the remainder of the financial year. Then moving on to the next page, the income statement. As indicated earlier or already, I will focus on the year-on-year comparison with pro forma IAS 17 figures, which is the second column. So given our customer growth and strong trading in Markets & Airlines, we achieved a turnover of almost EUR 3.9 billion in the first quarter of full year '20, which was up 8% compared to the same period of last year and up 7% on a constant currency basis. And here, I would like to highlight the following. While our underlying EBIT is down by EUR 65 million versus last year, it is up plus 8% excluding the EUR 45 million MAX grounding costs and EUR 29 million prior year hedging gain, despite an increase in depreciation, which reflects our transformational investment strategy. The adjustments are significantly better year-on-year due to a EUR 91 million gain on disposal of our German specialist business. This was Berge & Meer and Boomerang, as you know from previous communications, which closed in October 2019. Our full year guidance of EUR 70 million to EUR 90 million adjustments remains unchanged. As a result of the positive adjustments, reported EBIT is up plus 25% compares to last year. There were no significant year-on-year movements for interest expenses, income taxes and minority interest. And our guidance for underlying ETR remains at 18%. Given that the positive adjustments always compensate the adverse effects of the MAX grounding entire year hedging gain, our group results after minorities and basic EPS is up 20% year-on-year. And then referring to the reported figures under IFRS 16. Both depreciation and interest charges are higher as a result of IFRS 16. As already mentioned, the underlying impact on EBIT is lower than expected in the first quarter, which is likely to reverse during the remainder of the year. Then moving over to our free cash flow statement on Slide 23. I'm pleased to let you know that we were able to realize an operating cash flow broadly in line with last year despite the Boeing 737 MAX impact. As anticipated during our full year '19 results presentation, the typical and seasonal working capital outflow saw a minor increase due to our capacity growth and related working capital commitments. I would also like to highlight that the free cash flow of minus EUR 1.6 billion is more than EUR 250 million higher than in the previous year. And it is driven by a lower level of investments for full year '20 as per our guidance, some phasing and also the disposal proceeds from the German specialist businesses. Please note that cash from financing has increased because we have drawn EUR 530 million from our RCF and received another EUR 200 million from both commercial paper and bilateral financing arrangements to fund our seasonal working capital requirements. And as you can see from the IFRS 16 column of the cash flow statement, the higher operating cash flow is offset by a lower cash flow from financing due to increased payments for finance lease liabilities. And as you can also see, total cash flow is the same under IFRS 16 and as it is under pro forma IAS 17. Again, I would like to highlight and reiterate here our continuous focus on cash flow generation, and I will keep you updated during the upcoming quarters. If we then move to the next slide which is the slide on net debt. So starting off with an opening net debt position of EUR 910 million, the Q1 closing net debt based on pro forma IAS 17 numbers increased to around EUR 2.8 billion, and this is the last dark blue bucket on the right. And this is in line with the usual seasonal swing and driven by the discussed development of free cash flow in the first quarter. And then referring to the last bar in orange on the right-hand side, so there you can see compared to the previous year, our seasonal swing in net debt has slightly improved to minus EUR 1.9 billion on a pro forma IAS 17 basis. So you can see on the right-hand side, on the lower part, you see the provision in the first quarter of full year '19. So regarding the other elements of the movement in net debt apart from free cash flow, asset financing increased according to plan, with roughly 2/3 relating to committed aircraft re-fleeting of no Dreamliners and the remainder relating to cruise ship financing of around EUR 120 million. And then you see this other bucket, it mainly includes foreign exchange translation effects on financial liabilities. So as expected and due to the first time adoption of IFRS 16 and associated lease liabilities, net debt is higher as expressed in reported IFRS 16 figures. As you see, that is the bigger block with minus EUR 5.1 billion under IFRS 16. So then moving to the last slide, which is Slide 25, our guidance for the full year '20. So as already indicated by Fritz, we updated our guidance and therefore show our updated full year '20 guidance in the left column, next to our previous guidance as of December 2019. So we expect our current strong trading trends for our Markets & Airlines business to continue and therefore expect a high single-digit percentage turnover growth. And if we translate this strong revenue growth to our original EBIT guidance from our full year '19 results communication, which still assumes, as you know, a Boeing MAX return as of April this year, so this would have corresponded to the upper end of our EBIT guidance. And our previous guidance included a EUR 130 million cost impact from Boeing until April 2020. And in light of the recent official release from Boeing, we now face a prolongation of the Boeing MAX return to service. And this leads to additional costs versus our previous EBIT guidance but which we narrowed to EUR 220 million to EUR 245 million compared to our earlier estimate. And we will equally include mitigating factors to partly offset these additional Boeing MAX expenses, such as cost measures and a certain level of compensation from Boeing. So therefore, we widened our EBIT range and opened the bottom end with a maximum of EUR 100 million while keeping the top end of our guidance. And based on this, we updated our guidance range and now expect an underlying EBIT range of approximately EUR 850 million to EUR 1.050 billion. And as a result of the updated underlying EBIT range, there are corresponding changes to some other elements of our full year '20 guidance, including a lower level of assets and debt financing as well as net debt as a result of the now delayed aircraft delivery schedule. And finally, I would like to highlight that our guidance is provided at constant currency on a pro forma IAS 17 basis and pre TUI Cruises' acquisition of Hapag-Lloyd Cruises. And with that, thank you. I will now hand over to the operator for Q&A.

[Operator]

[Operator Instructions] The first question is from Jamie Rollo of Morgan Stanley.

[Jamie David William Rollo, Managing Director]

Three questions, please. First, just trying to get a better handle on the actual change in the underlying guidance. It looks like it's up by about EUR 180 million in total if we strip out the extra -- strip out all the MAX costs. So it's fair to say I think about EUR 50 million is the sort of better operating performance. Is it fair to say that Boeing compensation is sort of EUR 100 million, EUR 130 million? And what do we assume for that compensation next year? We're trying to get a feeling for the underlying sort of base figure to work off. Second, on the hotel size, you have a score today for the bottom line performance. I think it has a quality sort of one-offs mentioned in the detailed report. I mean perhaps the basic question to ask is, do you expect hotel profits to be up or down this year on a full year basis? And then finally, if I understand correctly, the EUR 450 million reduction in asset financing, that will just come back next year, is that right? It's just delayed with the aircraft deliveries? And also, the year-end net debt guidance post the Hapag-Lloyd disposal will be EUR 1.1 billion lower net of the equity investment, is that correct?

[Birgit Conix, CFO & Member of the Executive Board]

So thanks, Jamie. These are a lot of questions. I need to think of the last part. I'll check here with the colleagues what that was. On asset financing, let me start with that. Yes, indeed, it is a delay, and it depends upon the return of deploying MAX into service. And this is why we see a reduction now in fiscal year '20 as we will not have any aircraft. Also, on -- we didn't include any numbers on Hapag-Lloyd. Then on the guidance, so we do see -- so we are not going -- I am not going to decompose it, of course. But we include -- there is various factors that are important. 3 elements in total. So first of all, this very strong trading, and there, I'm not to go into detail of what we exactly expect, it would be upper end of the guidance. Or even in a very positive case, it could even go over, but it's -- that is early to see. And then second, we have -- obviously, we would have cost measures in place, mitigating actions versus this fairly high additional cost of EUR 220 million to EUR 245 million. And then a certain level of compensation that this may also be the regular contractual compensation, but it may also be other compensation measures that we discussed with Boeing, that's to be seen throughout the year, that is early to comment on that because of the positions. And that they are -- could swing in a fairly big way, this is why we said, okay, the bottom would be EUR 830 million given what we see on trading, et cetera, and also these other mitigating factors. But we still keep the upper end of the guidance, and this is due to the fact that, yes, it's all still moving a bit. And maybe, Fritz, you would like to comment as well.

[Friedrich Joussen, Chairman of Executive Board & CEO]

Jamie, I mean your first quarter was up 7%, winter is up 10%, summer is up 17%. I mean so you see it up -- shaping up nicely. And it's not only volume, it's also price. I mean this is driven by, I say, I mean the top end of the EUR 1,050 million. Underlying is very trading related. And also when you see the high single digit now on revenues, we are cautious people. I mean we have seen the summers happening and these kind of things, you'd never know exactly. I mean, personally, as I said, have seen -- never seen the summer trading in January like this. So it's very strong. And also, you have seen a little bit of sustainability. Or the question is can we keep more or less? There's all reasons to assume that we can, otherwise, we would not have increased our fleet by 21 aircraft. I mean that's also clear. But that said, the future is uncertain, and nobody knows exactly. But there's good reasons to assume that the market is consolidating and we see positive effects, which we also had assumed.

[Birgit Conix, CFO & Member of the Executive Board]

Yes. And you also asked a question around the hotel profits, and there, we still keep our full year guidance. As I said, there were some additional costs during to -- due to additional capacity. But we still expect a single-digit growth in EBITDA for the full year, so that remains unchanged.

[Jamie David William Rollo, Managing Director]

These were the question on net debt was simply that the guidance at the moment excludes the Hapag-Lloyd proceeds and removing the debt within Hapag-Lloyd. So you have EUR 1.2 billion EV. I think EUR 75 million of that's going to get back in, so is it fair to assume the year-end net debt guidance to be more like EUR 300 million to EUR 600 million when that completes?

[Birgit Conix, CFO & Member of the Executive Board]

Yes. Yes. It's -- broadly, let's say that the -- let me talk about debt in terms of leverage. It's around 0.2 impact for 2020. And yes, let's say, yes, 0.4 to 0.7, yes. That's a number that you can assume.

[Jamie David William Rollo, Managing Director]

Okay. And then sorry, if I could have one more. The EUR 50 million underlying increase, Fritz, you mentioned there, that's obviously more than a 2% margin on the actual revenue, but it looks like more like 5% or 6%. So is that correct that you're now looking for a much higher conversion margin than your previous guidance?

[Friedrich Joussen, Chairman of Executive Board & CEO]

The average is the depth of, actually, management. I mean the average of average of average. I mean at the end of the day, we achieve -- we have said that we would do capacity upgrades of, let's say, double digit. Now we've achieved a growth of 14% and at highest increase of 3%. Of course, that is for that -- this kind of top end trading is very, very good. Now the question is, of course, is it sustainable? And we all know that the late trading is somehow critical sometimes. The big trend is, of course, generally late trading is critical. But that is also something which you see in our numbers. We are on the load factor 2% up as well. So therefore, I would assume that it will be a healthy environment, and that's also the reason why we said we go to the top end. That's also the reason why we do all these wet leases and extend our programs because we believe, at the end of the day, the sustainable thing is the underlying business which has come -- which has become quite strong.

[Operator]

The next question is from James Rowland Clark of Barclays.

[James Rowland Clark, Research Analyst]

I've got 3 questions, please. Can you, first of all, comment on the nature of the compensation you're expecting from Boeing? I know in the past, you refereed to better financing and potentially cash back. But if you are any further knowing what that might look like, that would be helpful. And then on the second one, in terms of cost savings, could you just elaborate on exactly what they are? And looking forward to 2021, would you expect to roll out more of these, or do you really think that would just sort of hold your costs flat? And then finally, internally, what are you working towards for the 737 MAX returning to service? And have you started to plan for this sort of winter 2020, '21 season, either way, returning or potentially needing to find any other aircraft?

[Birgit Conix, CFO & Member of the Executive Board]

Yes. So thank you. Let me first take that first question. So on the compensation, as I've said earlier, it can vary. It can be just the contractual agreement, but it can also be that we have further in our discussions with Boeing, and it depends on what that compensation would look like. It's really too early to see. But in many cases, this has a cash component and then discounts on future deliveries. That is a possibility, but it's really early to comment on that. And then as to cost, we just continue to focus on cost, and it depends because, as I said, there's a lot of moving parts, so we commit to at least the bottom end will not be down further versus the EUR 850 million. So depends on the other moving parts. But if we then would need to, then we can also think of cost reductions that are of a one-off nature, but it all depends on the rest of the moving parts. It's just a further focus on cost like we already have and especially in the Markets & Airlines, where we also have the Markets & Airlines transformation initiative, and as we start seeing the first results of those, but it's still, let's say, the beginning phase of that journey. But -- so maybe, Fritz, you would like to comment further on that?

[Friedrich Joussen, Chairman of Executive Board & CEO]

Yes, sure. I mean as Birgit said, we don't comment in the best interest of our company on negotiations with Boeing. So -- but we are -- it's very serious, and they'll be okay. I think that they'll be good. Now on the return to service, we have actually said we are fleeting or we are putting our capacity in place to return on the 1st of September. Now that said, we have a little bit of wiggle room, and that's the reason why we have the EUR 220 million to EUR 245 million for the September itself. So if September we will come back, then it would be at the lower end, definitely, and we would actually not employ all wet leases in that period. As it is the last big month, then we might also keep them flying. It depends a little bit. Now that said, it's not a big uncertainty right now anymore. It is now certain that -- I think pretty certain that we will have these additional costs. And even with that uncertainty, we -- I think we have been tidying up because we have mitigating measures, yes. So that's how you should read it, yes.

[James Rowland Clark, Research Analyst]

So could I just ask one follow-up on the costs? You've left your investment in the GDN-OTA unchanged. So does this -- given the cost mitigation measures you're putting through this year very effectively, does this give you the opportunity to invest further in the GDN-OTA near the top end of the range?

[Friedrich Joussen, Chairman of Executive Board & CEO]

No, no, we -- I think we said very clearly, we have 2 strategic digital platform businesses, and they will be prioritized.

[Birgit Conix, CFO & Member of the Executive Board]

Yes.

[Friedrich Joussen, Chairman of Executive Board & CEO]

And so we have the plans. It was part of the budget. It is actually not -- it will not be changed. And also, we have a clear plan of guidance, particularly GDN-OTA to achieve the 1 million customers earlier than we had said. So we'll update you on that. And also that, for example, I think Birgit said in -- on Friday, particularly when it comes to now the free cash we will have or we will get from the transaction with Hapag-Lloyd, that will be focused on deleveraging. And we had -- because we had prioritized investments, we feel fine. We do the right things. It was not limited by funds. It was limited by sensible steps to do in that point in time. We are not limiting available money for -- or available investment for these 2 strategic transformation pillars of our business going forward. Therefore, it's not tactical. So we are not saying, obviously, more money before money added. That actually is a disciplined approach.

[Birgit Conix, CFO & Member of the Executive Board]

Yes. And also to add to that, we will also not reduce our investments into GDN-OTA platform as a mitigating item. That remains untouched.

[Operator]

The next question is from Jaafar Mestari of Exane BNP Paribas.

[Jaafar Mestari, Analyst]

Two questions from me, please, very related. The first one is on your scenarios for how much volumes you expect to win in the economics of this year. It'd be great if you could go through the estimates that you've given us in December and update those. So you said at the time, you expect to capture between 1.4 million and 1.5 million extra customers. You expect pricing to be around GBP 800, and you expect the margins to be between 2% and 3%. So it would look like maybe volumes are lower end of that, but then pricing is supportive, and as already discussed, margins are much better. Is that correct? And then separately, if you could maybe talk a little bit about the market share wins or the customer growth by region. Because if I look at your Q1 customer development, obviously, the Nordics is very much business as usual there in terms of competition. Not much has changed. But what surprised me is how much volume growth you get in the Central region, where, obviously, Thomas Cook commercial retail is gone, but Condor still exists and trades pretty much as before. So how is it that you're winning so much in the Central region, basically, in line with what you're winning in the Western region, which would seem a bit more obviously you can win there?

[Friedrich Joussen, Chairman of Executive Board & CEO]

Okay. That's a good point. How I see it, I don't see how 14% can be at the lower end. So -- but maybe this is something different. But I mean it's dangerous to say. We now said we'll go in line with our plans. Actually, we're exceeding a little bit with our plans. That's the reason why the load factor is higher. Now it's not 100% sure how the late trading will stack up, and therefore, it's only 35% of the big season are now booked. So -- but its zero load factor is up too. So it's a little bit ahead of our capacity planning, and that's also the reason why the prices are exceeding. Now on the question of Germany and U.K., so it's a very good question because, in all fairness, in the winter, particularly after the insolvency, we have seen not that much movement as we had seen a lot of Condor bookings that the airline was still booking. Now I think what I believe or what I see now is it was rebookings from Thomas Cook which actually has been -- because Thomas Cook was gone, the actual rebook was Condor. And because they had vacation, rebookings there was high. Now it seems to be that now customers make a more free decision that, at least in Germany, we are taking market share. And I think that is something I see everywhere except the Nordics. In the Nordics, it's a very different thing. But everywhere, I think I see that we are getting market share, and actually, the market itself is reducing. Now the question is how much it will be reducing or if we have a late trading and it will be catching up. That is something which is not 100% clear. But yesterday, I also saw that also the airline movements in Germany are going backwards or has been going backwards lately. So it's all a little bit up in the air. The only thing I see is double-digit volume growth for summer in all of our markets. And as long as I see that, I'm less fused about what the market does.

[Jaafar Mestari, Analyst]

And then maybe just a follow-up on the 2 countries where we're not quite clear how the Thomas Cook insolvency will end up, Belgium and France. Any color on what's happening there in terms of your market shares?

[Friedrich Joussen, Chairman of Executive Board & CEO]

France is not a part -- France is a different element. As you know, we are restructuring France, and we are progressing in line with our plans. Less so important is Thomas Cook. In Belgium, we have said, because of Belgium and Netherlands, both are very slow because of Brexit, so we have actually not added capacities, but we are now qualifying seat-only into package. And that's the reason why you will be seeing in -- particularly in Belgium and the Netherlands, you'll see with very good margins because you know that we -- and by the way, we have the package. Interestingly, the margin is higher. And because we have restricted seat-only now, even on seat-only, the margins are okay-ish, right? So I think I would say I keep fingers crossed that the next weeks are good. Let's see. I mean it's always -- but as I said, I have -- the start is very strong. And I cannot recall a strong start like that for the summer season in the last 7 years.

[Operator]

The next question is from Adrian Pehl of Commerzbank.

[Adrian Pehl, Head of TMT and Consumer]

Two questions left from my side. Well, first of all, sorry to bother on Boeing consideration again. But given that you've taken accumulated hit of somewhere in the region of EUR 650 million for the 2 years, I was just a little bit wondering, it seems that the cash compensation you are planning in for this year's guidance is not necessarily high versus the demand. So you were already referring to potential discounts. Technically, how should you think of it? Are you basically trying to negotiate this year, let's say, an equivalent compensation for the total hit? Or is it just an initial step that we see in the negotiations with Boeing? And the second question is more accounting related. As obviously, Q1 had a very small effect from IFRS 16, I was wondering how we should think of the distribution over the upcoming quarters and the overall effect for 2020?

[Friedrich Joussen, Chairman of Executive Board & CEO]

In this, I mean, please, on the Boeing negotiation, allow me not to elaborate too much. I mean because I think whatever we say right now and whatever we do will not improve our position. That said, there will be a combination of cash, cash equivalents as well as discounts. And it's not only the absolute amount, but it's also the maturity of payments, which is very important, and the maturity of, actually, P&L impact, which is very important, right? So therefore, we will be balancing that, that these things are not only show up in the far, far future. It should be also today because we see the effects today as well, right? So -- but that said, it is so early. That's also the reason why you don't have -- and it's not so early, let's say, but it is too early to determine exactly what it will be. And we also believe is to be too hard on trying to achieve something soon. Actually, we mitigate also the total value of which will be possible to achieve. So that said, leave it with us. We are pretty sure that we will be talking about it in due course. And of course, the materiality of the damage is, in a way, that's very clear. We are taking the negotiation very serious. That said, on the IFRS 16?

[Birgit Conix, CFO & Member of the Executive Board]

Yes. On the IFRS 16 and if you refer to the call that we had in -- it was -- when was it in...

[Friedrich Joussen, Chairman of Executive Board & CEO]

In December.

[Birgit Conix, CFO & Member of the Executive Board]

In December. Yes, in December, on the IFRS 16 changes, so there -- and there is a slide on that, that you can find it on our web page, we said that we would expect a plus EUR 75 million more or less on underlying EBIT. But now -- but what we see is that foreign exchange is relatively unpredictable. So if it stays as of now, then there is a further deterioration to that number and that's just a translation into -- from IAS 17 into IFRS 16. So maybe not the full amount of the EUR 75 million because of that FX, but we can detail that later. Then we can -- and we can also take it offline. And also throughout the course of the year, we will give further updates on what it exactly translates to.

[Operator]

The next question is from Richard Clarke of Bernstein.

[Richard J. Clarke, Research Analyst]

Three questions, if I may. Just one, just to clarify the situation on the 737 MAX for this year, you said the current message from Boeing is the middle of the year, whatever that means. But probably -- obviously, your guidance implies that you won't fly it at all this year. You won't take any delivery of any Boeing 737 this year. Is that fully committed, or could it possibly be better than that? Could you actually get some claims before the end of the year? Have you got full control over where that asset finance comes in or not? And then second question, sorry, again on compensation. But is that the reason why the guidance range is now EUR 200 million rather than EUR 100 million before? Is that because there's uncertainty around the size of the compensation? And then the third question, your working capital movement for Q1 is pretty flat compared to Q1 2019 despite the fact that you've had this big increase in summer volumes, winter volumes. So maybe you could just explain, is that because you're financing the hotel -- the Holiday slightly differently? And what might that make us think for kind of Q4 working capital inflows given that we're kind of flat at this stage?

[Birgit Conix, CFO & Member of the Executive Board]

So yes, I'll first comment on the first quarter working capital. So there, we always deal with prepayments. And as we are increasing our capacity, of course, that has an impact. And there we see some shifts, but -- and there's also a shift from seat-only to packaged holidays with differences in advanced payments. But we see, all in all, our working capital for the first quarter was in line with what we internally expected. So from that angle, everything is progressing as planned. Yes, Friedrich?

[Friedrich Joussen, Chairman of Executive Board & CEO]

On the 737 -- I mean we need to have operational stability, and therefore, we need to secure the mix of dry lease and wet lease. We have now secured wet lease and dry lease to the 1st of September. Now do we expect additional delivery? No, we don't. Because even if they came up and the production would be up, we don't expect deliveries. But we have grounded own aircraft, which, actually, we have been one of the guys who've received it too early or very early in the early stage, so that would be the relief. And that actually says, in September -- if in September, it will be flying, then we would be actually able to put out a little bit of the wet leases. That's a difference between -- largely the difference between EUR 220 million and EUR 245 million which you see. So that is the December wiggle room, if you like. Now if it was August, maybe it would be even a little bit better, but we have to -- for stability of our flight plans, we are not assuming it right now. Yes? On the compensation, yes, it is exactly as you say. I mean it is not known, and that's the reason why it might be at the lower end, it might be at the upper end, it might be whatever. It must be also several years, or it might be only 1 year. Because the damage is known, we have some mitigating factors. But the other factors are not known, and that's the reason why we haven't kept the deliveries more broad in spite of the effect that our trading is firming up at the higher end, right? So we have broadened the range a little bit, but the cost is less uncertain, the trading is less uncertain. That's what it is.

[Birgit Conix, CFO & Member of the Executive Board]

Yes, yes. It needs to be reiterated that it's on the back of our strong trading that you see this better guidance and that the other factors are still unknown, and it's really early to comment. And as you can understand, we will not be able to comment on potential compensation when we -- and even on a start of a discussion or anything.

[Richard J. Clarke, Research Analyst]

So just a follow-up there. Given this inability to comment on this, why have you included the compensation in your guidance now? You didn't include it in December. But why now have you decided to include it?

[Birgit Conix, CFO & Member of the Executive Board]

So it's -- you can argue whether you think it's included or not, but what we see is there is just a minimum level of compensation is included because we have a contractual agreement with Boeing for aircraft. So it's really early to say, but it's on the back of our strong trading that we think, okay, we can -- and also on the back of the -- we reduced the MAX grounding prolongation costs somewhat. So we believe, and with other factors which are a bit unknown at the time being, we believe we can commit to the -- at least to the lower end of the guidance. That should be the positive message, I believe, that you should remember. That is what we commit to. And we really do see strong trading, so that's the main factor, actually. And then, of course, as we are prudent in our guidance, we just wanted to highlight the bottom end, that's it, and it's due to this mitigating factors.

[Operator]

The next question is from Stuart Gordon of Berenberg.

[Stuart John Gordon]

Just a couple of questions from me. Could you give us some color on how much of the double-digit millions in the digital transformation budget was spent in the first quarter? Secondly, what was your gross debt leverage at the end of December if we use the last 12-months rolling EBITDA? And thirdly, just on your guidance page, I think the -- at full year, you stipulated the old numbers were pre-IFRS 16, but I don't see pre-IFRS 16 on the new guidance. Is it now post-IFRS 16? So it's now including the improved EBIT from IFRS 16 changes.

[Birgit Conix, CFO & Member of the Executive Board]

So on your last question, I can already say no we keep our guidance comparable. So we will do that throughout the full year. It will all be based on IAS 17. So that is definitely the case. Then on the costs related to digitalization, that is -- I mean we do not detail them separately by quarter, but they are according to plan. So what I can tell you is that, by the end of this year, we will still have spent this double-digit million investment, and we are just well on track. I think we have a very clear time line, which Fritz discussed already earlier, in terms of digitalization, and we are spending accordingly. So -- and then the other question, what's that again?

[Friedrich Joussen, Chairman of Executive Board & CEO]

The leverage.

[Birgit Conix, CFO & Member of the Executive Board]

Yes, the leverage. So the full year '19 leverage, okay, so that's what you asked, that if it was 3x. If you would have excluded the Boeing MAX effect, we would have been at 2.7x. This is our gross leverage ratio, as we always communicated also in the past. So it's gross debt, not net debt. And then...

[Stuart John Gordon]

Sorry. It's actually what -- at gross debt leverage, what was gross debt leverage at the end of December, not at the end of the year? Not the end of the financial year, the end of the calendar year.

[Birgit Conix, CFO & Member of the Executive Board]

At the end of the calendar year, it would be 3.3x. That is -- but that is, of course, that is before the TUIfly transaction and everything. And it's also -- but that's normal. I mean the first quarter, we always have a higher -- what is that? Yes, we never -- yes, okay. So yes, 3.3x would be for the first quarter. Obviously, we go down. We expect it to be well within our guidance for the full year even before TUIfly. So after TUIfly -- I mean, after the Hapag-Lloyd transaction, that will be significantly lower. You would -- you could say around -- as I said earlier, the leverage would down by 0.2x, so let's expect 2.8x, more or less.

[Stuart John Gordon]

Okay. And just one quick follow-up. Can you just confirm how much of the one-off cost in 2020 will be cash?

[Friedrich Joussen, Chairman of Executive Board & CEO]

No. No. Oh, you mean -- no, we don't disclose it.

[Operator]

Ladies and gentlemen, the question-and-answer round has now come to an end. Let me turn over to your hosts, Mr. Joussen and Ms. Conix.

[Friedrich Joussen, Chairman of Executive Board & CEO]

Thank you very much for dialing in. It was a pleasure. Talk to you soon.