Aena S.M.E., S.A. (AENA) Earnings Call Transcript & Summary

Good afternoon. This is the conference operator. Welcome and thank you for joining the Aena 9 Month 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jose Leo, Economic Financial Director of Aena. Please go ahead, sir.

Thank you. Good afternoon, everybody, and welcome to this third quarter '22 results presentation. On the call today, we have sitting next to me Ignacio Castejón, who is the new Finance Director of Aena. He joined just 3 weeks ago. He has a wealth of experience, both in the finance side of the business and in the airport industry. I will hand you over to Ignacio, who will be welcoming you and saying hello.

Thank you, Jose. Good afternoon, everyone. It's a real pleasure being today with all of you. I'm really looking forward to start working with you in the near future and I hope that we are able to interact very soon. Thank you, Jose.

Thank you, Ignacio. And we start with the revenue. We'll start going through the main slides of the presentation. Starting with the key highlights. I think we are presenting to you today good set of results. Honestly speaking, it is a good set of results, and I will do my best to make you convinced that this is the case over the rest of the call. To start with, the traffic numbers are going really well. We see a significant growth indeed in the Spanish network, more than 140% year-on-year. And similarly, more than 153% across the group. We will later on comment on how this involves a significant improvement vis-a-vis 2019 and improve them vis-a-vis our expectations a couple of months ago -- 3 months ago on the guidance that we provided exactly at that time. The total revenue is growing by 65.6%. As we discussed over the last results presentations, this is not in line with the passenger number growth, due mainly to the accounting adjustments impacting the commercial revenues that we will discuss as well in a minute. The EBITDA is now reaching a really meaningful figure. EUR 1.3 billion in EBITDA is a very, very healthy figure, taking into account, well the background, where we are coming from and the challenges of the industry, reaching already more than 44% EBITDA margin going in the right direction and trajectory. The net result is healthy as well, close to EUR 500 million in net profit. Obviously, now entirely out of the tunnel of the losses from the challenges of the COVID experience. Finally, I would like to stress very, very importantly the performance in terms of cash. We have generated more than EUR 1.56 billion in cash. The difference between the cash generated by the operation of activities and the EBITDA is precisely the impact of the accounting adjustments impacting the -- or affecting the commercial revenues, as they are obviously deducted from the EBITDA that they have no impact whatsoever in cash terms. And I would like to stress that this is the company back in it's good health of generating very healthy cash very, very quickly and now in full compliance with the covenants and the obligations stated in the commitments. Moving on to the next slide. The most relevant thing here is that, as I said before, we are already recovering a good chunk -- a very significant chunk of the 2019 traffic. For the whole group, we are close to 86% of the total traffic of 2019. In the case of Spain, in the Spanish network, this is 86.1%. For Luton, it's slightly less. As we discussed a number of times, in the U.K., the traffic recovery is going slightly slower, but it's still 71%. And in the case of the Brazilian Airports, we have already exceeded the 2019 figures. Particularly, in the month of September, the traffic in that group of airports exceeded the September 2019 traffic by 8%. So this is a very good signal of how attractive and healthy EBITDA that particular market might be. Taking into account that the October traffic is also going in the right direction, to the point that it's showing a level of recovery even above the, you know, our experience in the months of -- in the summer months. We are now indicating that we expect to close the year with a level of traffic that will be slightly above the upper end of the range that we provided some months ago. So we will be north of 85%. I don't propose to dwell any longer on this slide, so we can move on to the next slide. As you know, in the month of August, we were awarded the concession of 11th airport in Brazil. We are providing here some -- let's say descriptive information. We may provide more insight into this project when we share with you the strategic plan in the coming weeks. Probably you are aware that we are planning to share with the market to arrange Capital Market Day on the 16th of November. And at that time, on that occasion, we will probably dwell a little bit more on this. But in the mean time, I would like to share with you the strategic side of this transaction. Of course, when you travel abroad, when you are acquiring airports in other countries, there is always an element of risk, extra element of risk, if you like, that is the knowledge of the market whether or not you are right strategically, whether or not you feel that you can apply some of the experiences and templates you applied in your own country. Well, we believe that Brazil is ideally shaped for Aena to deliver the sort of values that we have delivered in Spain over the last decades. The reasons for that, first of all, this is a large country. It's a country where the tourism industry hasn't been developed to the extent that we believe it could be developed. It is from the, let's say, volumes and the level of revenues that the tourism industry is generating in Spain. But we believe Brazil is ideally placed to do this and even more. On the other hand, for the country, the air transport connections are critical for obvious reasons, I don't need to tell you why. There is still a huge headroom to develop the low-cost carrier business proposition. Of course, there are very healthy low-cost carriers there, but still they have room to grow and to improve that industry. And also it's a country where honestly our experience of operating over there in the Northeast region is extremely positive in terms of the seriousness, the -- how trustworthy the regulation and the institutions are. So with all that in mind, we believe this is a good country to be in long-term. This is a good country to try and apply the similar, obviously some differences, but similar, let's say, experiences that we have -- already have in Spain, and a little bit there is value to be generated there. Now we are going to manage 20% of the total traffic -- air traffic in Brazil. More than 40 million passengers, 17 airports and the second largest airport in the country. So we believe there is value on that proposition. I just wanted to share this with you, of course, there would be more questions later, I'm pretty sure. And then finally, I go straight to the slides on commercial revenues and OpEx. The commercial revenue performance that we can see on Page 10, because you know that one thing is the headline revenue figure. Different thing is the real underlying business. When we look at the fixed variable rents that we are invoicing and collecting every day, we are reaching now a level of EUR 903 million, in fact it's 136% more than in 2021, which is not a surprise at all. But when you look at the next slide, Slide #11 and compare these figures with the 2019 figures, that was a year, exceptional year in terms of traffic as you know, the best in history. Can we move on to Slide #11, please. You can see there that the performance of the business has been improving quarter-by-quarter to the point that in Q3, overall, our rents are exceeding the same period rents in 2019 by 8.5%, with only 1 activity or only 1 commercial line, the specialty shops underperforming for obvious reasons, because this is the part of the business that was more affected by the COVID, in the sense of the number of shops ended up shutdown. And they remain shut down until we, let's say, put them again in the market through different vendors. So in total, we are now at close to EUR 900 million of fixed variable rents, billed and collected on a regular basis, against EUR 897 million in 2019. For me, this is good performance. And we can discuss the drivers, we can discuss the reasons, we can discuss whether or not this is a structural or it's just a matter of time that this can be impacted by other factors, that frankly nobody knows in full. But good news, this is good performance. Finally, on other operating expenses, what we can see is that what we have been telling you a number of times is being the -- well, there is a reality. The operating costs of this business excluding the electricity costs is at levels of 2019. And I believe this is going to be the case for the rest of the year, there or thereabout. This can be seen as bad news by some. This can be seen as a reality and the confirmation of something that I have been sharing with you for years already. They have already shared with you the reasons. I'm happy to answer again questions about what is behind this. It is a combination of structural changes in the business. It's a combination of quality standards required by regulators and passengers and airlines and stakeholders. It's a combination of course, of change in the reality of the Spanish market, the Spanish labor market so on and so forth. Then with regard to the electricity cost, this is the result of the evolution of the market conditions. We are not hedging yet. I'm sure you will be making questions on that and I will be very happy to provide some answers, that the electricity is the maverick element of this year's operating cost base. And let me finish -- spend 5 minutes trying to wrap up a number of things. Obviously, I'm not going to be focusing on every particular slide. I think Aena's situation coming out of the COVID tunnel is really good. To start with, we have improved right in the way we manage through the crisis in terms of our resources. And we are not experiencing, we are not facing any of the havoc situations other airports are experiencing across Europe. So we are accommodating a significant amount of growth and providing what I believe is a very good, very good -- perfect, very good operational experience. We have no issues whatsoever, other than obviously strikes in some of the airlines and things like that inevitably we have to face. But other than that, we haven't experienced any of the terrible situation, but obviously we're not happy with that some of our colleagues faced over the last months. Secondly, the traffic is performing really well. It's surprising us positively. Believe me that we were not expecting this kind performance to become a reality so quickly. Of course, no one knows what is behind or around the corner as a result of the macro conditions, nobody really. The airlines themselves are, let's say, watching out, monitoring this by the day. So far, they have no indication of any set back that they remain vigilant and we're doing the same. Thirdly, the revenues, the airport revenues, the airport charges are what they are. They are not coming as a surprise. You know, all the regulation, you know what the level of charges is set by the regulator. You know that we are, until 2026, we have it up and this is it. So no surprises. In terms of the commercial revenues, in my view, we are performing really, really well, I believe exceptionally well, much better than we could do 6 months ago. Obviously, the headline figures are affected by the DF7 adjustment. But that makes no difference to the cash and that makes no difference to the reality of the business. In terms of cost, the operating cost evolution is nothing. We are celebrating, of course. But it's not coming as a surprise, other than the energy costs that I'm prepared to take any hit you want to give me. In terms of cash, the business is generating EUR 1.6 billion in cash. And as a result of that, the debt is evolving very, very well, very healthy. And the impact of the changes in the market conditions is not going to be huge. We can discuss later. It's not going to be sort of make-or-break kind of situation in terms of the financial costs, because we have already now, as we speak, 80% -- this is not what you can see in the presentation, but we are already now hedged under fixed rates for 80% of our debt. In terms of the international experience, Luton and the Northeast Brazilian airports are performing really well. They are contributing already a meaningful amount to our EBITDA and this is going to improve over time. So they are good contributors, they are good businesses. And in the case of Brazil, the recovery of the traffic is amazing. In the case of our international strategy, I shared with you my -- our strategic news about Brazil. But of course, I'm ready to discuss further in detail. Finally, in terms of developing new businesses, the real estate business is already let's say moving on, with the award of the first slot -- sorry, lot of land with a very good result. So no doubt, of course, this is not the world we were used to in 2019. But I believe, honestly, that China from any angle is coming out of the COVID crisis in a very positive and a very attractive manner. This is it. Now we can open the Q&A session. Thank you very much, everyone.

[Operator Instructions] The first question is from Nicolo Pessina of Mediobanca.

Yes. I have about 3 questions. The first one, we read about the approval of the new strategic plan. So I'm wondering if you can give us any visibility on that dividend policy. Second question, maybe if you can provide an update on the level of yield dilution and concentration in the 9 months? And if you can give us any visibility on the full-year figure and on the 2024 K factor? And last question on the new airports in Brazil. If I look at the material made available by ANAC in Brazil, I see a regulated target of approximately BRL 16 per passenger in 2023, increasing 50% in 2024, which is well below the 43.6% you indicate, for example, for Congonhas in the press release this morning. So I'm wondering if you can explain how tariffs work in the contract? Which kind of tariff you expect to implement, and if it's correct to assume a 50% increase over the next year?

Okay. Well, with regard to the dividend policy, please bear with me. We should wait until the 16th of November. I think this is the kind of information that should be part of the strategic plan presentation, one of them. We've been discussing it today. In terms of the K factor and the yield dilution, I can share with you this data so far. This means in Q1 we had concentration by EUR 38.7 million. In Q2, we experienced dilution by EUR 29.3 million. In Q3, we experienced dilution by EUR 48.1 million. So in total, now we are in a position of EUR 38.6 million of dilution -- yield dilution accumulated. For the rest of the year, we may try to give you some indication later on. But frankly, I would say probably it's going to be there or thereabout with Q2 maybe, or something between Q2 and Q3. But please don't take this as categorically, okay? But what is clear is now the passenger mix and growth of the business and the load factors are taking us in the direction of further dilution, coming back to the situation we experienced over a number of years before the COVID, okay? With regard to the Brazilian revenues, I would rather ask you to be provided with this information at the time of the -- sorry, the strategic plan presentation we will be shedding some light on that. What is clear is that the analysis we have made of that airport is a combination of 2 things. One thing is definitely financials, of course. Otherwise, we wouldn't be there. On the other hand, don't forget the strategic perspective. We are going to be there for 30 years, 30 plus years, in one of the largest air traffic markets in the world, and managing 20% of the traffic of that country. So any views based on assessing the coming 2, 3 years would be in my view shortsighted.

The next question is from Cristian Nedelcu of UBS.

The first one, if we look a bit at the cost of living crisis and potential implications for 2023, I know it's very early on, but could you give us any color on how you see the moving parts in 2023 traffic in Spain? Maybe what's the worst-case scenario? And can we say 90% of '19 traffic is the worst-case scenario and a recession in '23, could it be more or less? Secondly, the retail revenues per passenger, the strong growth versus '19, could you elaborate there how much of that is in the structural? You think there are still some temporary benefits in there and how you see the next few quarters? Do you think there is room for further improvement versus what you had in Q3? And the last one, if I may, can you comment a bit about the recent new wage inflation proposal for Spain, for public servants in '23 and over the next 3 years? When do you expect to see a final decision there?

Okay. Starting with views or expectations. Frankly, Cristian, you know we don't provide or at least we are not providing any news on 2023 for the time being. What I can tell you is that we don't know what the worst-case scenario could be. It depends very much on the severity of the evolution of the macroeconomic conditions, the war as well. I think this is definitely an element that everybody in Europe, at least should keep in mind. So we don't know. What we know is that so far there is no indication whatsoever of any worsening of the current trends. And when I say that, it is not only because Aena is monitoring that, it is because we are talking day-in and day-out to the airlines, and they don't see any indication of that. They are insisting that today the ability to predict the evolution of the bookings is, let's say, almost -- it has diminished dramatically. So they are mainly looking at the next month or next month at maximum. But at the same time, they don't see any indication of issues. And you have to take into account as well that they are -- there is a large market closed so far, which is the Asia market. I don't mean this is a dramatically important market for Spain, I recognize that. But this market is going to open as well sooner or later, probably sometime next year. And this will have a knock-on impact, a knock-on effect. So frankly, I cannot tell you what the worst cases scenario would be. What I can tell you is that everything seems to be heading in the right direction. The consequences of any macro conditions or war conditions worsening, we need to monitor it day-by-day. With regard to commercial revenues, well, the answer is yes. I think the way the commercial revenues are going, I think -- I cannot tell you whether this is a structural or not in the sense -- of course there are number of behaviors, social and personal behaviors taking place in our industry and other leisure industries that seems to be driven by psychological reactions on things like that. But on the other hand, we have headwinds -- sorry, tailwinds, coming from potentially the evolution of the dollar and the U.S. travelers coming to Europe or more, the fact that the U.K. citizens are now out of the -- obviously, they -- we can apply them duty free, let's say, prices things like that. So I can tell you, short-term -- and by short-term I mean this year, probably good part of this year, subject to the conditions I mentioned before. I don't see any reason to see the revenue per passenger going south at all. This is not a prediction. This is just an impression. Because also there, we expect specialty shops to also join at some point in time. The churn, they are lagging behind big time for aviation. So I don't see any reasons to believe that this is going to change in the coming, let's say 12 months or so. Wages. Well in Spain, the wages are for the civil servants and as you know, Aena is subject to the same rules. I already agreed to the best -- let me think twice. I think this year we have a 3.5% salary increase, so wage increases. And then combining this years, 2023 and 2024, because the agreement has been -- is subject to final signing, but I would say you can take it for granted. Combining 2022, 2023 and 2024, I think the compound growth in salaries will be probably around 9%, between 8% and 9%. I can't check that number for you specifically, but something between those 2 figures. And this is given, it's already done. So this is the kind of salary, wage increases that you should wait across the Board for Aena's personnel.

The next question is from Luis Prieto of Kepler.

I had a couple of questions. I have seen that there is a year-on-year acceleration of cost from Q3 versus Q1 and Q2. Can you shed more light on this and then your views on the [indiscernible] from now on or do you looking price [indiscernible] for time being? And the second question is, if you could provide us with any [indiscernible]. So what could happen in the [ operations ] over the next couple of years, as you see in the context of today's inflationary environment?

Okay. Well, with regard to the energy costs, the increasing in this quarter is all driven, well, maybe there is an element of consumption, but frankly it's all driven by the price of the electricity. In Spain, the price of electricity -- well normally in Spain, the price of electricity, the spot price is something that is called OMIE, that you can check online if you wish. And if you look at that, this has been going south, going down, since I would say, mid -- I would say mid of the year, slightly later than that. But that was combined with the approval by the Spanish government from June 2022 till the March 31, 2023 of a so-called gas price cap. This gas price cap is suppose -- and this is indeed benefiting the whole system overall, because the price of producing electricity across the country has gone down because the gas producers have their price cap. But on the other hand, this should be obviously, money isn't falling from the trees. So there is a levy or is an extra cost imposed to final that across the different users. If you add to the, say, market price, the cost of this cap, the cost of electricity for Aena and for everybody else in the third quarter has been much higher than any quarter before, I think something like 30% from memory. I mean, if you add those components, the total cost has been not very far from EUR 300 per megawatt hour over the last quarter. So that's the reason. If you look at the market today, it's interesting, because the gas reserves has grown across the continent. The autumn is relatively warm, is really warm and the gas is being accumulated and not consumed. And as a reason of that, the price is falling. If we look at the price today, yesterday, probably it is EUR 300 per megawatt hour. It's probably something in the region of, I don't know, EUR 200. So significantly lower than that. So when we look at this -- and you can imagine they struggle to make decisions on hedging. Because what you can see today is that the prices of electricity fell over the last weeks. Obviously, nothing that you can compare with the trade prices, but there are still prices that look more attractive. So why not you are going to hedge? When we look at the hedging prices, they are higher. On the other hand, the liquidity of the market is really, really slimmed. So it's very, very difficult if not impossible to hedge more than a very, very small portion, unless you are prepared to push the prices up. And then when we look at the futures, the future market is indicating that 2022 -- sorry, 2023 is not looking good either. That June 2023, things improve. Well, who knows. This is what the market is signaling today, the futures. It's very difficult. What do you hedge? Taking into account the 2023 prices today are, let me double-check, well on average EUR 253, is what I have here. So EUR 250, let's say, for the sake of argument, per megawatt hour to hedge on 2023. Not easy. So it's not that we are skipping this. Simply the market is sending signals that are difficult to buy into. And on the other hand, once again, the hedge capacity is very, very limited, very limited, listing in this country or in this market to be more precise, because this is the Iberian market. It's both the Spanish and Portuguese market together. Of course, we are working on a long-term solution. The long-term solution would be a combination of our deployment of solar panels. It is already part of our plan, well before this took place. Secondly, we never throw some PPAs. We never throw some PPAs with the right conditions on the temporary basis, because as I said before, for 2024 onwards, the market is signaling a significant reduction, let's say, a significant fall in prices to the tune of 1/4 of the 2023 prices. I hope this helps. It's not simple. It's a very convoluted and cumbersome situation, that I think we're now experiencing.

The next question is from Stephanie D'Ath of RBC.

The first one is regarding the Brazilian Airport exhibition, and you mentioned we would know more in your presentation during the strategic plan. But I was curious to know if we look at about EUR 0.5 billion acquisition and about EUR 1 billion of CapEx news. How are you thinking about financing that, what kind of cost of debt are you able to have locally? And you did mention 80% was hedged, but I'm not sure I did get your comment right is that regarding the Brazilian debt. And my second question is regarding the strong operating cash flow of the third quarter. You had a positive impact from working capital. What should we expect for the last quarter, still positive impact and for the full year? And then finally regarding other operating expenses, if I'm not mistaken, you've historically said that absolute amount of increase compared to 2019 for every quarter, we kind of remain in the same range. I think for the first quarter, we were above EUR 60 million higher at operating cost versus '19, for the second quarter about EUR 75 million. And for the third quarter, that number turned to EUR 105 million. So what should we expect for Q4 in particular, inside of the commentary you just made that electricity prices have been coming down and that therefore hopefully the energy headwind for this fourth quarter won't be as high?

To start with, I may need to ask you to remind me some of the question, sorry. Anyways, to start with the Brazilian, what I'm going to share with you now about the Brazilian, the new acquisition is numbers, to make the numbers clear, because I think there is some confusion around that. The enterprise value of this acquisition is BRL 3.2 billion. BRL 3.2 billion, if I'm not mistaken, is something like EUR 700 million. And how we can come to this figure? First of all, there is an obligation to inject BRL 1.64 billion by way of capital in the company. Secondly, we offer BRL 2.45 billion of let's say to pay that for the concession, the upfront payment. So this in total means, some BRL 4.1 million, shy of that figure BRL 1 billion. Out of the -- leaving the BRL 2.45 billion, going to the company and straight away will be paid to the Brazilian authorities. The BRL 1.64 billion of capital will be used to deal with a number of costs, including the redundancies of all the staff in the airports, as it happened with other concession in Brazil before. But then there will be something like BRL 800 million left in cash in the business. So that means that the enterprise value of this transaction deducting that cash is BRL 3.2 billion. This is the figure. Nothing else, there is no more -- there are no more payments to be made. Our plan is to, one, how to leverage, how to raise debt to pay for that is a matter that we are working on. Now as we speak, what is clear for us, the equity element is BRL 1.64 billion, okay? What I'm sharing with you, what is the particular solution we are going to implement to gain the business. But this business, as it happens in the Northeast Airports, all the CapEx, all the capital, all the developments will be funded via debt. And in Brazil, that debt is always internal or to a very significant extent provided by the public banks, by the BNDES in particular. And then we may need to add some Capital Market -- some amount of debt raised in the Capital Markets over there. But normally, the majority of this funding is coming from the -- long-term is coming from the public institutions in Brazil. I don't know if that helps. Otherwise, please let me know. Then there was a second question, sorry?

On the working capital side.

Okay. Well, don't be too fixated on the working capital, because the reason why the working capital is better this year than the previous year is because remember, we are accumulating MAGs. And this time we are accumulating very little by way of MAGs. So I cannot predict to the year how the working capital is going to be evolving over the coming months. But this is, in the current circumstances where the MAGs have very little weight in the business, this is not the big deal. If you can say that the EUR 1.55 billion of cash generated is exactly the EBITDA plus the DF7 adjustments, so obviously in the past where we have a very significant amount of MAGs being accumulated to be built and collected at the end of the year, that could play a much more significant part. But definitely in 2021, it was massive, that was massive, was unbelievably high. You know why? Because we have this EUR 700 million accumulated that we are now taking to P&L. But in normal circumstances today, this is not going to be a major element. And if anything, it may involve let's say some of the cash to be collected 3 months later, 3 months earlier, things like that, but nothing critical. And then there was another question I believe.

The last question was on OpEx and the trend in terms of...

Clearly, you've got me. So now I'm going to more prudent. I would say the total costs excluding energy for the whole year, it's going to be there or thereabout at the 2019 level. This is my summary. Of course, there are always elements of the cost that you cannot predict fully, because in this business the traffic and the impact of the volumes is sometimes, let's say, de novo a bit. But by way of headline, this is it, excluding energy. Energy is something I cannot commit. Energy today seems to be going in the right direction. So I would have thought that my expectation is to have an energy bill in the fourth quarter that will be below the third quarter. But I cannot commit to that because we are entirely subject to the evolution of the market and the price cap -- sorry, the gas price cap element as well.

The next question is from Elodie Rall of JPMorgan.

So my first question is on the debt, and you said that 80% of your debt is fixed rate. But could you remind us of the portion of debt that is maturing between the next, like between '23 and... [Technical Difficulty]

Elodie, for a while you, let's say, dropped from the line.

Okay. Is it better? Do you hear me better?