ENAV S.p.A. (ENAV) Earnings Call Transcript & Summary

Good afternoon, this is the Chorus Call conference operator. Welcome, and thank you for joining the ENAV Full Year 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Vittorio De Domenico, Head of Investor Relations of ENAV. Please go ahead, sir.

Thank you, operator, and good afternoon, ladies and gentlemen, and welcome to ENAV's 2021 results call. I'm joined here by Mr. Paolo Simioni, ENAV CEO; and Mr. Luca Colman, ENAV CFO. They will be running you through the formal presentation. After that, we will be happy to answer the question. And with that, I leave the floor to Paolo.

Thank you, Vittorio. Good afternoon, ladies and gentlemen and welcome to ENAV's full year 2021 results call. 2021 has been again, a soft year due to several waves of COVID-19 pandemic with related safety restrictions, which have impacted the entire aviation sector. Despite this challenging environment, we preserve full business continuity, maintaining the highest safety standards and at the same time, taking care of the health and the safety of our employees. ENAV confirmed that once again its position as best-in-class [ A&C ] in regulatory services, among the members states subject to EU performance gains with the lowest average minutes of hourly delay per flight provided to airlines. With regards to the -- to our cost business as occurred in 2020. Also in 2021, the protective regulatory framework that is seen by European level, limited the impacted from the pandemic. Today, I'm glad to announce that the European Commission has notified the Italian state that the performance targets included in the performance plan submitted in November 2021 are compliant with the EU-wide target for the third regulatory period. In the coming days, the EU commission will publish the decision. Moving forward to the nonregulated business, our focus on digitalization and innovation resulted in a double-digit growth year-on-year of nonregulated revenue. We continue to proactively manage the emergency with the health of our employees as top priority, and we have looked forward signing an agreement with the union to manage the post pandemic smart work. We also gave our contribution to Italian economic recovery, signing agreement -- signing agreements with the government for a total of roughly EUR 110 million related to the national recovery and resilience plan. On the ESG side, we approved and started the implementation of the new and more challenging 2021, 2022 sustainability plan and we obtained the prestigious science-based target initiative validation with regard to our climate change strategy. On the financial side, we optimized OpEx and CapEx in preparation for full traffic recovery at the prepandemic level. Based on the financial results of the period, and the other relevant elements just mentioned, the Board of Directors has resolved to propose to the general assembly meeting to distribute dividend for a total amount of EUR 58.5 million equivalent to EUR 0.108 per share. Moving to the next slide. Let's focus our attention on 2021 group results. Service units for both en-route and terminals increased year-on-year by 44.9% and 36.3% respectively, showing solid signs of recovery and reaching respectively 57.6% and 54.2% of 2019 levels, that I remember was the best years of our performance in the ENAV history. Traffic volumes were better than expected, especially during the summer when managed flights were close to prepandemic level. Net revenue in 2021 increased by 8.5% year-on-year, reaching EUR 836.6 million, driven by revenue from operation as well as revenue from nonregulated business. This grew -- this grew double digit, 22.3% year-on-year to a record level of EUR 33.0 million of nonregulated revenues. Even if costs increased year-on-year, following an almost back to normal summer season that prolonged is set up to the end of October, EBITDA showed solid performance, increasing 5.5% year-on-year to EUR 222.4 million, with EBITDA margin at 26.6%. Net profit grew by 44.6% year-on-year, reaching EUR 78.0 million. CapEx was EUR 85.6 million, 6.4% lower than 2020 and in line with the guidance provided during the year. Net financial debt, as expected, raised in 2021 and reached EUR 484 million because of cash in from operations still lower than the sustained cost with a net debt on EBITDA at 2.17x. Despite the debt increase, our liquidity profile remains solid with a cash balance of EUR 225 million. On the Slide #3, we can find the -- our route traffic volume 2021 related to the four largest European countries, as usual show during this meeting. Italy is the fourth largest country by en-route service unit behind Spain, Germany and France. Traffic volumes in 2021 increased year-on-year with Italy showing a stronger traffic recovery by 44.9%. Then, in the other major European country, which saw an average growth of 26.9% year-on-year if considering all countries adhering to the Eurocontrol. With regard to the operational performance in terms of average minutes of en-route delayed per assisted flight compared with the assigned target set by a regulator, ENAV delivered the best performance amongst the bigger four member states, subject to EU performance scheme. The result has been achieved, thanks to the ability of all our staff in providing ATC services efficiently and with the highest safety standards despite the fast changing traffic volumes recorded during the year. This performance would have qualified us for the bonus and [indiscernible] under the bonus-miles mechanism established by the regulatory, which was suspended for 2020 and 2021 in order to support the transportation sector in this difficult period. On the sustainable front, I'm proud to show you in the slide our 2021 achievements. We delivered tangible results under each pillar on which our new 2021, 2023 sustainable plan is based. We completed the development of our platform for the management of a sustainable supply chain, and we obtained the ISO 37001 anti-bribery certification. We completed in the same airport, the integration of the approach -- our approach system into the -- [indiscernible] control center. And at the same time, we developed and started to implement an internal communication plan to enhance the employee sustainability culture. We define moreover, and we publicly announced, ENAV sustainability purpose, and we were able to obtain validation from a science-based target initiative with regard to our climate change strategy. Finally, I'd like to highlight that our effort in fighting the climate change doesn't stop at direct and indirect emission, but goes beyond. Thanks to our Free Route technology, we allow the airlines to reduce carbon emission for a total of 152 million kilograms of CO2 in 2021. And with this, I'll leave the floor to Luca for a detailed view of the results.

Thank you, Paolo, and good afternoon to all of you connected to the call. On Slide 5, let's take a look to the overall traffic where service units increased 44.9% versus 2020, driven by a solid and very long term season, which started into the second half of October. We have seen good traffic in national and the overflight segment posted the highest percentage increase, 51.3% and 51.2%, respectively, with International segment growing 36.7% year-on-year. As you can see in the first graph, overflight remains the most important component and accounts for 45% of the total traffic, while international for 33% and national for 24%. In the second graph, you can notice a return to standard seasonality within 2021 quarters, even if volumes are still lower than prepandemic levels. But the noteworthy element is the quarterly traffic trend, which shows sequential improvement compared with 2019, moving from 69.4% decrease year-on-year in the first quarter to a 15.7% decline in the fourth. One final good news on the traffic on the en-route traffic, in the month of March 2022, managed flight were approximately 89% of those managed in the same period of 2019. [indiscernible] concern, terminal traffic as shown in the next slide, service units increased 36.3% driven as for en-route by solid and prolonged summer season. Within terminal traffic, the domestic component increased 44.6% year-on-year while international increased 31.6%. Traffic rise in all three zones with zone 2 and 3 showing the highest increase. As for en-route also for terminal traffic, it is important to highlight the 2021 quarterly traffic trend, which shows again the tradition -- again, the traditional traffic seasonality together with a sequential improvement compared with 2019 prepandemic trends, moving from 74.3% decrease in the first quarter to 22.2% decline in the fourth. Now before commenting 2021 financial results, let me provide you some good news on the regulation. After the resubmission to the EU Commission in November '21 of our RP3 performance plan, the European Commission with the document [indiscernible] final has notified to the Italian state that the performance targets include the performance plan submitted in November '21, are compliant with the EU target -- wide target for the third regulatory period as set in the decision #2021/891. In the coming days, the EU Commission will publish the decision, as Paolo said before. This is the final act of a process that took almost 2 years to be completed and that was needed in order to consider the effect of the COVID-19 pandemic on aviation sector, not only in the last few years, but also and more important, in the period from 2022 to 2024. Now all the elements of uncertainty on the regulatory framework have been withdrawn and [indiscernible] back to normal with tariff reset based on updated traffic forecast. Moving now to Slide 9. We can see total net revenue at EUR 836.6 million, increasing by 8.5% year-on-year reflecting a solid performance in the regulated, nonregulated businesses, which determinate a lower balance accrual in comparison to 2020. This year, en-route revenue increased by 39%, while terminal revenue by 66.5%, thanks to the higher traffic managing 2021 because of the reduced year-on-year impact from COVID-19 pandemic. The higher traffic managed in both en-route and terminal has determined a balance decrease year-on-year by 23.2%. For the combined period 2020, 2021, balance has been determined following the EU regulation [2020/1627], sorry, of 2020, published, in fact, in November 2020 with the 2021 amount taken also into account the commission's cost efficiency target on determining its cost that was published in June 2021 and the performance plan submitted by -- to the EU Commission in November 2021. Moving from the core business to the nonregulated one, we can see a double-digit increase year-on-year in nonregulated business revenue, reached EUR 33 million. The notable performance was mainly driven by IDS AirNav, solid commercial activities, [indiscernible] -- where several new contracts were signed in 2021. Turning to Page 10. We can see the effect of the above-mentioned traffic increase on 2021 total operating costs, which increased by 9.6% year-on-year. The rise in cost was mainly booked during the long summer season we experienced in the year, and was mainly related to the variable component of the personnel and other operational costs. As shown in the first graph, personnel costs went up by 8.3% year-on-year due to a rise in the variable remuneration, which was caused by the lower use of [indiscernible] balance for approximately EUR 11 million, that was brought almost to zero in 2020, setting an unfair point of comparison with 2021. Second -- and the second one is the higher cost for approximately EUR 5 million related to the already mentioned traffic increase, which during the summer, which should help overtime and holiday working of our controllers. Social security costs and other personnel costs rise was mainly due to the early retirement scheme for executives, accounting for EUR 11.5 million. It is to be noted that this is a one-off event accrued in the 2021 P&L and that we'll see the related cash out in '22 and '23. Looking at external costs, those increased by 11.9% year-on-year, mainly driven by high expenses for EUR 1.1 million related to the increased activities in not regulated business. Second one is in Eurocontrol's expenses for EUR 3.6 million. Then, cost of energy for EUR 2.6 million due to increased unitary price, maintenance costs on owned equipment for EUR 2.5 million. And controls business trips and other costs for EUR 1.9 million in connection to the restart of nonoperation. On the next slide, we can see ENAV's revenue and EBITDA evolution in 2021 compared to last year. The revenue increase of 8.5% was driven by both regulated and nonregulated revenue growth, partially offset by lower year-on-year balance attributed in that period. Within revenue from operations, the largest year-on-year increase was recorded in the en-route component which grew by EUR 90.9 million and in terminal revenue, which went up by EUR 54.4 million. Both solid performances were driven by positive evolution of traffic, especially during the summer season. Not regulated business contributed to the total revenue growth with EUR 6 million. Another effect deriving from the traffic recovery is the lower year-on-year amount of balance secured for approximately EUR 90 million, less than last year. Once again, for the combined period 2020 and 2021, balance has been determined following the EU regulation at 1627 with the 2021 amount taken also in account the commission's cost efficiency target on Determined Unit Cost, that as you remember, was published in June 2021. And also -- and the performance plan that was submitted, the 3-year commissioned November '21. Minor contribution to total revenue came from EUR 0.8 million increase in revenue from exempted flight, and EUR 2.2 million in other operating income. As a result of the solid operating performance, EBITDA stood at EUR 222.4 million, increasing 5.5% year-on-year with EBITDA margin at 26.6%. Let's now look at the items below EBITDA where D&A decreased by 6.1% year-on-year, mainly as a consequence of reduced capital expenditure in more recent years. Provision and write-downs decreased EUR 7.8 million year-on-year, mainly to the higher than usual provisions in 2020, in part related to some litigation of the tax we disclosed in '21, coupled with the write-down of some old equipment performance in 2020 and not repeated in 2021. As already referred in previous quarters, we have a public financial income and expenses. Half of the EUR 10 million year-on-year of delta is related to the reversal of the actualization of the previous year's balance and half is related to the interest income coming from the assignment without recourse of the previous year's tax credit related to the IRS. We have cashed in the principal amount of the related interest, which has been included here as an income. Those positive contributions more than offset financial expenses in the year. Moving now to the income taxes. We can see a year-on-year increase mainly due to higher taxable income in the period and lower deferred tax related to the [indiscernible] balance. As a result of these movements in the P&L, and thanks to the regulatory protection fully visible in the balance accrued in the year, we achieved a net profit in 2021 of EUR 78 million. In the next slide, we can see a summary of ENAV's liquidity and financial position, which remains solid despite pandemic effect on our cash in. We closed the year with EUR 225 million of cash, EUR 91 million decrease versus year-on-year 2020. In addition to the available cash, we also have undrawn credit line for EUR 294 million, out of which EUR 220 million are committed. Looking now to financial -- the net financial debt, it reached EUR 484 million compared with a net debt of EUR 245 million at the end of 2020. The changes mainly due to cash in from operation, which in average during the year, remained lower than sustained cost -- sorry, cash cost. To be noted that despite the low 2021 [indiscernible] airlines during the summer season, traffic level were enough to put us in a cash-neutral position. With regard to this year, we expect to be cash positive given the tariff has been rising and [indiscernible] traffic as expected for 2022, which should be, remember, 85% of the prepandemic level estimates that it will look at the recent weekly trend seems to be conservative. With that EBITDA ratio for 2021 stood at 2.70x compared with 1.1x which is at the end of last year. We have, for sure, noticed a new line in the table, showing EUR 42 million of noncurrent trade payables to be considered as debt following the Consob indication n. 5/21 issued in May '21. This amount includes only the gross negative balance to be given back to airline after the next 12 months. Of course, the balance accrued in the P&L as revenue is net and already discount this EUR 42 million. Compared to previous years, this is a novelty excluding which the net debt should have been EUR 442 million, and the ratio to EBITDA would have been 2x. Moving on to Slide 14. Let's have a look at the main movements in our cash flow. Cash balance decreased in '21 by EUR 92.1 million as a consequence of different cash movements. On the positive side, we have already commented on both the net profit of EUR 78 million and the D&A contribution for EUR 129.3 million, which more than offset the investment we had for EUR 85.6 million, out of which EUR 59.9 million cash. On the negative side, both net working capital for EUR 74.8 million and other assets for EUR 289.6 million absorbed cash. Net working capital decreased mainly to the mix of the trade receivable payable, still impacted by the COVID-19 pandemic, which also drove the reduction in assets and liability, which mainly includes [indiscernible] the balance. Finally, on the debt front, we repaid existing debt for EUR 63.7 million and at the same time, we cashed in EUR 180 million from the new loans signed in July. As a result of this movement, we closed the year with a net cash of EUR 225.3 million, which remains more than [indiscernible] given the tariff reset performance starting from January 1, 2022, and the traffic trend expected also for the year. Last slide, before leaving the floor to Paolo, shows our shareholders' remuneration trend. After 1 year of pause in the distribution of dividend due to the COVID-19 pandemic -- in part on our cash flow, the Board of Directors resolved to propose to the General Assembly Meeting to distribute a dividend in relation to the financial year 2021 for a total amount of EUR 58.5 million, equivalent to EUR 0.1081 per share. Record date will be October '22 after having cash in the summer season's revenue. And with that, I hand the call back to Paolo, who will close the presentation with our 2022 outlook and key figures.

Thank you, Luca. With regard to our 2022 outlook, we expect traffic on 2022 full year basis to recover at approximately 85% of pre-COVID levels with en-route reaching 8.5 million service unit with the summer season peaks at almost prepandemic level to offset [indiscernible] negative impact fees in the first quarter of the last year. Total revenue and nonregulated revenue are expected to grow low single digit year-on-year as well as EBITDA, while CapEx is expected to rise at roughly EUR 105 million. So the next slide, and the other key takeaways before opening the floor to your questions. Despite the challenging environment, we posted solid operational and financial results, ensuring full business continuity with the highest safety standards, confirming once again our position as the best-in-class provider of operating performance amongst the big European service providers. Our relentless effort towards digitalization and innovation allowed us to reach a record level of nonregulated revenue since the acquisition of IDS AirNav in 2019. We have reinforced our ESG commitment, deploying a new and more challenging sustainability plan receiving the science-based target initiative validation for what concern our climate change strategy. On the regulatory front, the EU Commission informed the Italian state that its performance plan was compliant with the EU-wide target set in June 2021. Our outlook, as already said, is positive for the year 2022, especially for the concern, the summer season, and we expect a marginal impact on our business coming from the Ukraine and Russia conflict. Based on the financial results of the period and the other relevant element just mentioned, the Board of Directors has resolved to propose at the General Assembly Meeting to distribute dividend per share for the fiscal year 2021 to be paid in October 2022. And with that, we are now ready to answer your questions.

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

First, can you explain the reason behind the dividend? The total amount suggests payout on the normalized equity free cash flow of approximately 40%, while we were used to at least 80% in the past. So should we take this as a new policy for the future also? Second question on the regulation. Is the notification of European Commission of 13 of April be technical final approval of the framework for the '22, '24 period? Or is there any other document that has to be released to get to the final approval? And last question on the guidance. Revenue and EBITDA, both growing low single digit in 2022 seems to suggest no operating leverage. So can you explain the trends that you expect for OpEx in 2022 and the key drivers behind these trends?

Okay. Nicolò, I will take the questions. I'll start on the last one -- sorry, from the regulation -- concerning the regulation -- what the normal European Commission does is to send the communication to the state member, and then to each state, and then to summarize in a so-called decision that they normally publish after a couple of days, a couple of weeks. So they have sent to the old European state what is the, say, the notification, right, that's the real technical term. And the notification to each state with a document that shows exactly what is that they confirm or not of what concerns the compliance with the EU target. And then the, as I said, they can summarize in one only document. So we don't expect any problem now because the notification is something formal that has been sent to the state actually. But it's not actually public the decision. That's the reason why we just waited for the official -- the final official because officially, actually, they send the notification to the state. It is something that's been done, and we have this notification.

From the regulator.

From the regulator, right. Thank you.

We received the regular -- from the regulator, this kind of information with a formal way, not with information by phone or also with the paper that represented the decision of the European Commission related to our performance plan.

Okay. For what concerns your first question about the dividend, what we have done was to distribute the profit -- net profit produced by the ENAV for the parent company. So that is what we have done. We fully distribute that in part. Better value. Concerning cost, you think that as the traffic is increasing, we have plan and we've foreseen to have, I would say, single-digit higher cost in terms of operating costs. Operating cost for me is external costs and personnel costs. Just to keep -- to manage the higher level of traffic that is put in the budget and as foreseen in performance plan. And let me say it is actually -- what is actually happening in these days.

In the last 7 days, the percentage of traffic that we had in our RF center control reached 85% to 90% of the traffic level of the 2019. So we are now at this kind of level just managed during the last weekend and during the last 7 days.

Okay. It's very clear. If I may, just a quick follow-up on the dividend. Should we think of the 2022 dividend with the same approach you applied to 2021?

Okay. Now we have [indiscernible] on place. I guess the Board of Directors will see how the year will come -- will go on, and then we decide the real amount, the final amount.

In other words, as I said, the last year, during this kind of meeting, after the approval of the situation of 2020, I said that I confirm to provide another quarter to the shareholders like ENAV has always done. But ensuring that this does not press the medium-term prospects of the company. So in other way, we are -- our dividend policy, as a guidance and as in contrast, I think you may today measure our return to the dividend with the concrete decision that we had for the next year, we will see the same guidance and at that time, we will decide what will be possible to do, taking in place our dividend policies clearly.

The next question is from Aleksandra Arsova of Equita.

Can you hear me? Okay. Just a brief actually follow-up on the previous question. So can you hear me now?

Yes, yes. We can hear you.

So a follow-up on the previous questions. There seems now you have this notification by the regulator. Can you provide us the figures of determine cost and tariff you have submitted -- you submitted in November for, not only 2022, but in 2024? And then a second question, again, on the guidance, especially the EBITDA guidance seems to me, quite conservative. So do you see any potential room maybe for some management actions or maybe higher traffic, allowing you to get maybe a better, let's say, result performance?

Okay. Starting with the second question, let me say this is the figures that we have now on our budget and our planning. And this is something that we think that we can reach. Say that, I mean we can always improve, but the period is not so clear, the future is not so clear. So we prefer to have this target set and work to beat this target. For what concerns the data, the tariff and the information inside the performance plan, we need to wait -- we want to wait the decision of commissions, what they publish. And related to that, we will decide what to publish in relation to what they actually -- they will do.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Thank you, everyone, for joining us for this call. Thank you, Paolo. Thank you, Luca. For any further follow-up questions you may have, please feel free to follow up with us in Investor Relations here in Rome. Thank you, and bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you. .