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 First Half 2023 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, Alessandra, and good afternoon, ladies and gentlemen. Welcome to ENAV First Half 2023 Results Call. Here with me, there are Mr. Pasqualino Monti, the CEO, ENAV; and Mr. Luca Colman, the CFO. They will be running you through the presentation. After that, we will be happy to answer your questions. And with that, I leave the floor to Mr. Monti.

Thank you. Thank you, Vittorio, and good afternoon, ladies and gentlemen. As you know, I have been at the Head of ENAV for about 3 months now. And before illustrating the results for the first half of 2023, I would like to give you a net shot of the strategic initiatives undertaken, initiatives on which I will focus my attention in the coming months. In fact, I'm working on updating the industrial plan with the objective of closing the year -- by the end of this year. I intend to refresh the group mainly through the implementation of 3 strategic lines. First, I want to continue expanding the nonregulated market, which I consider a key point for improving the group's margins. Secondly, I intend to grow the groups itself in an organic way by assessing and exploiting any acquisition opportunity offered by the market, but consistent with the nature of our business. Finally, I intend to carry forward a significant technological upgrade, functional both to the group and the improvement of the operational performance of air traffic management. This will remain ENAV's core business, which aims to maintain and consolidate its strategic positioning, which sees the group as a leader in the air transport sector. I will update you on details as soon as the business plan is completed. Let us now analyze the results for the first half of the year. In terms of service units, air traffic volume increased by double digits year-over-year with a 16% growth in en-route traffic and a 13.7% increase in terminal traffic. In order to better understand the dimension of this growth, it is sufficient to note that the volumes and less in the en-route. Again, in terms of service units in the first half of 2023 exceeded by 4.2% even the prepandemic volumes of 2019, a record year for flights for Italy. Revenue from core business, which totaled EUR 442.7 million and climbed 12.8% year-over-year. Q2 higher traffic was the primary factor in the first half of the year to total revenue growth of 5.9% to EUR 436.6 million. Due to the rise in OpEx and personnel costs, EBITDA came to EUR 94.7 million, a minor decrease of 2.4% from the previous year. EBITDA margin was 21.7%. As a result, in the first half of 2023, we reported a net profit of EUR 18.4 million. The amount spent in CapEx was EUR 30.3 million, while financial debt was EUR 415.5 million, nearly matching the EUR 407.8 million recorded at the end of 2022. Therefore, the net debt-to-EBITDA ratio stayed nearly constant at 1.5x. Cash totaled EUR 270 million at the end of the first half of 2023. So thank you for your attention. And now I turn the floor over to Luca for further details on the first half results.

Thank you, Pasqualino, and good afternoon also from my side to all the attendees. Moving to Slide 3. Let's look at the en-route traffic reported in the first quarter -- first half 2023. Service units went up to 16% year-on-year, driven by a double-digit increase in international and overflight traffic, which grew 21.7% and 20.6%, respectively. The strong performance was driven by the increased demand for travel that has been widespread despite the generalized increase in price for groups, in particular for airline ticket. National traffic was flat year-on-year, having yet recorded prepandemic volumes, starting from last year and therefore, much early than the other components. Analyzing different components of en-route service units, we see that the most important one remains the overflight, accounting for 43% of total, growing at double-digit, 13.3% back to the prepandemic year 2019. This outcome has been driven by a recovery of flights in almost all destination and particularly to and from Asia and Africa. As we already anticipated, it is notable that en-route traffic in the first half as well as in the first and second quarter this year exceeded by 12.3% of the volumes we managed in the same period of 2019, marking the highest volume in terms of service units as recorded in Italy. Regarding flights, I can also attest that the upward trend is continuing, with a 1.2% increase reported in July 2023 compared to July 2019. In terms of service units, let me remind you that usually those registering averages, a growth which is a few percentage points higher than the ones in the number of flights. For what concern the terminal traffic on Slide 4, service units increased 13.7% year-on-year, showing strong performance in all 3 charging grounds, driven by the increased demand for travels. If we look at the terminal traffic by destination, we can see our international components increased by 21.7%, while the national one increased only 2%, having recovered, as per en-route, prepandemic volumes early than the other company. This growth has been continuous and consistent in the past quarters. And in the second quarter 2023 it has brought terminal volumes at 98.3% of the volume management in the same period of 2019. Moving to Slide 6, you can see that group revenue in the first half 2023 grew 5.9% or EUR 24.5 million year-on-year, reaching EUR 436.6 million, driven by a positive contribution of regulated and not regulated businesses as well as not regulated ones. Within the total revenue, en-route and terminal increased both by 12% year-on-year, supported by the rise in traffic volume, especially in the second quarter, which marked the beginning of the summer season. At the same time, as shown in the second graph on the right hand of the page, the not regulated revenue grew 42.7% year-on-year, thanks overall to the supporting activities performed in Qatar. Let's now analyze what with negative balance in the first half of this year, where we registered a negative balance contribution for EUR 24.1 million compared to positive [indiscernible] recorded in the same period of 2022. The negative contribution this year is due to a EUR 45 million negative balance reversal related to the one [indiscernible] in the combined period 2020, 2021 and cashed in throughout the [indiscernible], starting from January 2023. A positive balance from inflation for EUR 15.1 million, taking into account the actual inflationary increase recorded in the year 2022 in comparison to the figure forecast in the performance revenue. This is the first time we see inflation balance in the first half results, given it is also the first time that we have a meaningful amount to carry forward from the previous year. Please note that given there was no inflation balance from the year 2021 to be added into the first half 2022 figure, the year-on-year comparison is homogeneous. Then, we have a positive balance for EUR 6.5 million accrued in the first half and are related to Terminal Zone 3, and another positive balance for EUR 1.5 million accrued in the period and related to Terminal Zone 1. And then, we have some minor negative adjustment for a total of EUR 1.4 million related to Eurocontrol and other change. On Slide 7, we show the cost for the first half 2023 in comparison with the same period of last year. Total operating costs were EUR 341.9 million, up 8.5% year-on-year, due to the increase in both personnel cost and external cost. What concerned staff costs? It went up by 8.2% due to a year-on-year increase in headcount in the group for 110 units amongst controllers and technician. That, coupled with a renewal of labor contract, completed in the fourth quarter 2022 that pushes up fixed remuneration by EUR 8.8 million. For this reason, the year-on-year comparison is not homogeneous, given that the first half 2022 cost base did include the renewal of the labor contract. Higher overtime paid to air traffic controllers and the accrual of the MBO was a result of the increase in traffic recorded in the first half 2023 that pushes up variable remuneration by EUR 4.4 million year-on-year. As a consequence of these 2 components, also social security contributions grew in the first half by EUR 5.2 million. So what concerned external OpEx? They increased EUR 5.2 million year-on-year, mostly due to a rise in Eurocontrol contribution, which went up by EUR 3 million; an increase in maintenance cost for EUR 1.6 million; and then we have EUR 1.4 million growth in costs related to the personnel business trip and the increase in external service for approximately EUR 0.9 million. This increases were partially offset by a EUR 2.4 million reduction in energy costs. Moving on the next slide. We can comment to EBITDA and the movements below. EBITDA stood at EUR 94.7 million with margin at 21.7%, but somewhat declining year-on-year -- over year. However, it should be noted, as I explained in the previous slide, that the first half 2023 includes a step-up effect not present last year, such as the renewal of the labor contract signed at end of November 2022, which became effective from 1st January 2023, as well as some new property maintenance contracts and effect of the rise in the inflation rate. Let me also remind you that for what concerned inflation, we are fully covered on the [ real 1 ] as per EU regulation. Moving down in the P&L. Another discontinuity is within the net financial expenses amounting to EUR 6.6 million in the first half, mainly due to increased interest rates on that, which resulted in financial expenses totaling EUR 10.4 million, partially offset by EUR 4.2 million of financial income, primarily coming from the balance actualization mechanism. With regard to income taxes, we recorded negative EUR 8.1 million, decreasing EUR 4.2 million year-on-year due to the lower taxable income. As a result of these movements, we recorded EUR 18.4 million net result in the first half, which is in line with ENAV's seasonality. Given the current unexpected traffic volumes, supporting our positive economic and financial performance, we confirm the outstanding 2023 outlook. In the last slide, we present ENAV's liquidity and the financial position, which, as you can see, remain very strong. We closed the first half with EUR 270 million of cash, an additional undrawn credit line for EUR 214 million, out of which EUR 165 million are committed. Net financial debt stood at EUR 415 million, increasing EUR 7 million compared with the net debt of EUR 408 million as of the end of December 2022. In more detail, the change in net debt is mainly driven by net cash in from operations for EUR 29.5 million, which is almost double as compared to the first half 2022 cash in of EUR 16.2 million. Then, we have the cash out worth EUR 32.7 million related to the capital investment, so the cash CapEx. And then a cash outflow for [ EUR 2.2 million ] related to 500,000 treasury stock buyback, performed between January and February 2023 for the management LTI. And then we have a negative change for EUR 2 million in noncurrent commercial debt, mainly related to gross negative balances [ we recorded through ] airlines. As a result of this change, net debt on EBITDA ratio remained stable at 1.5x compared with the end of 2022. And with that, we can open the Q&A session.

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

I would have a few questions on the strategic guidelines mentioned to be included in the new business plan at the end of the year. First of all, I'd like to ask if you can elaborate on the diversification of the business through M&A. Do you refer to the regulated or...

Sorry, Nicolo. Sorry, just a second. The line is very bad. We cannot hear you properly. Can you try to do one question at a time and maybe near -- lower near the microphone? Sorry. Thank you so much.

Can you hear me better now?

Yes. Now it is better, yes.

All right. So on the strategic guidelines of the new business plan, I'm wondering if you can elaborate on the diversification of the business through M&A. In particular, I'd like to understand if you refer to the regulated or the nonregulated business. And if you can explain what you see in the market, if you see plenty of opportunities and how you see the competition for these potential targets? Second question on the technological upgrading. I'm wondering if you refer to internal development of new technology, if you see revenue opportunities approached to this new technology and what it implies in terms of CapEx. And the last question is on the capital optimization. How relevant is it in the new business point? Should we assume that M&A has the priority over an increase of the shareholder remuneration? Or would you be open to increase the dividend in case no M&A opportunity materializes?

Sorry. Sorry. Just -- we answer. Just a second. Okay.

Hello? For questions, we are looking for M&A. We are looking at both, regulated and not regulated. Sorry. The second one, I confirm what I said to the beginning of the call. I will update you on the details as soon the business plan is completed, maybe in November or December.

Nicolo, can you repeat again the third question, please.

Capital optimization in the new business plan, will you prioritize M&A over shareholder remuneration?

I think I can answer this for you. The answer is no. As of now, there is no prioritization on the 3 main items that we are looking for. So the M&A, the remuneration and let's say, in the capital allocation, the technical development.

In general term, maybe, Nicolo, what you have to do to wait for the business plan. Just wait couple -- I imagine that you probably have a lot of question about these 3 items, but I think we should leave the CEO and the company work on the business plan. In a couple of months, we will give you all the answer or the detail in the case, not just at this moment. Maybe in general, that is too early to give you detail on this point.

The next question is from Ivar Billfalk of UBS.

Maybe if we start with your guidance. You have confirmed your outlook, it was included in mid-single-digit revenue and EBITDA growth. And in the first half of the year, we see that revenue is in line with this, but EBITDA seems to be lagging. Can you please walk us through the building blocks that you expect to lead to catch up in the second half of the year? And perhaps somewhat linked to that, for the traffics -- en-route traffic, I believe [indiscernible] going about 7.5% above 2019 levels as we achieved a total of 6 million service units underpinning the guidance. And in the context of a number of airlines, which seem to be suggesting that they're scaling back capacity to an extent owing into operational challenges. What is it that you expect to lead to this acceleration?

Okay. For what concern the EBITDA growth, and I said in the explanation of the slide actually we have the perimeter of the airline cost, not [indiscernible] between first half 2022 and 2023. So what we look at the second half to catch up, for sure traffic because traffic will increase. And so I thought we also answer to the second question. Eurocontrol traffic is forecast at 6% increase versus 2019 for Italy. We still believe this is the air traffic that we can meet. We move after the summer season, but what we are seeing in the summer season where now in July -- in June -- sorry, July, we are reaching the peak as another management during these days. So the subject is very, very strong. So that's the way we believe to cover -- or we catch up with our EBITDA margin. For what concerned traffic, as I said before, we still believe the 6% versus 2019 forecast is still value. Did I answer your question?

Absolutely.

The next question is from Aleksandra Arsova of Equita.

Three on my end. So the first one, a very short follow-up on the strategy and the new strategic plan. Just to go back to the inorganic expansion, both in regulated and nonregulated. Do you intend to -- or you are looking broadly at opportunities in Italy? Or abroad in Europe or worldwide? Then the second one is on operational criticalities and the bonus/malus. So if the disruption here, witnessing in Europe and everywhere, will lead to a lower bonus versus the, I believe -- or more or less EUR 6 million you had in mind during 2023? And the last one, on the next regulatory period before, so now in my understanding, you are beginning the discussion with the regulator. So what do you have in mind as a strategy? What will be the main items you will try to achieve in this new regulatory period?

We are looking at good opportunities on the market in Italy or everywhere. For the second question about this bonus/malus, we are still talking with euro regulator. Let me see, we are not really worried about that in this moment. We have up until the end of the year to close the issue. So actually not -- no issue at the moment. Sorry, our attention is more in Italy.

The next question is from Marco Limite of Barclays.

Not sure if I missed that, but is there -- can you just give us an update on the performance plan for starting 2025, please? What's the timing? And how that is progressing? And my second question is actually a quick follow-up to a previous question about the building blocks for EBITDA this year. So did I get right that you expect 6% traffic in the second half? And how does that compare to July that was only plus 2%? And third question on CapEx. I think you have reiterated the guidance for 2023, which also included EUR 100 million CapEx for this year. You have done only EUR 30 million in the first half. So if you still think you will be spending EUR 100 million or actually you will be spending less?

I'll move to the last question, on the CapEx. Yes, the guidance is around EUR 100 million. We believe to stay more or less very close to these numbers at the moment. Normally, we have a seasonality also in the [ fermentation ] of our investment plan that's foreseen actually the last quarter as the -- I mean the heavier one. So we, at the moment, still believe to close around EUR 95 million to EUR 100 million CapEx by the end of the year. For what concerned before, yes, we believe that -- I mean negotiation is actually starting now, not yet officially. What is happening is that we're looking at the European Commission. We want to change some, I mean, general regulation. And we have seen until now, there's no time to change. It's not -- given that, it seems to be now going have to change the regulatory framework. So more or less expect to have a P3 framework, say, that by the end of the year, at the beginning of the next year to 2024, we will start to negotiate the cost efficiency target with the European Commission, with all the other states. European Commission said that within the end of the spring, so at the beginning of the summer, they should start to define the cost efficiency target, the common cost efficiency target for all European country. And after that, we will start to show our performance plan. Our performance plan will be given to the regulator in September, October 2024. And then the commission will have 3, 4 months to check and get everything ready to start the new regulatory period, that's 1st January 2025, with the new tariffs near the performance plan. That's more or less the planning the timeline. So we'll come to the second question.

Can you say this again? Sorry. Can you repeat it, please?

Sure, sure. If I got that right, you said that in the second half, you expect 6% traffic growth, which is going to drive the growth in EBITDA year-over-year. But if I'm not wrong, you're saying that July is only 1% up in 2019. So yes, do you just expect volumes to quickly ramp up in the second half?

Okay. First of all, always take into consideration that when we talk about traffic and service unit, it's not exactly the same. When we said 1%, 1.2% increase in July of traffic, this means that at least 3 more 0.3 -- 3.5 more percentage point of service unit. So we are now in the summer season, around 4.5, more or less, the profit that we expect to have also in July. See that -- we have seen in the last 2 years, last year the rule that the summer actually doesn't really stop in August, at the end of August or middle of September, but it continues to normally. Also, the second part of September and October overall. So what we have seen, an increase -- an important increase on traffic also in autumn. And this is something that will help to reach the 6% of the service unit increase by the end of the year. This is our thought at the moment. I guess it would be important to wait for the end of the summer season to have a better than -- forecast for the end of the year.

Okay. And if I can follow up to this question, sorry for being long. So I guess in Q2, you already booked something like 4% service unit growth, but EBITDA was flattish year-over-year. So I guess, why that will be -- will change in the second half? Why similar growth trajectory of 4%, 5% -- 5%, 6% is going to drive the EBITDA growth?

Yes. As we said in the presentation, if you remember, in the first half, what we have is not the correct -- I mean full comparison between the cost -- all the personnel costs 2022 versus 2023. So the reason why that we signed the renewal of personnel contract, subcontract in November 2022. So that, the first half doesn't really have all the costs. So when you compare the EBITDA cost and EBITDA of this half, probably you don't have a fully comparable situation. By the end of the year, the effect in 2022 of the renewal of the contract will be full. So an impact would be 100%. And so the EBITDA margin will be affected by this. So you look now the EBITDA that we have now, that's very close to last year without considering the fact the cost of personnel that I just -- I'm just telling you. You can imagine that the traffic is increasing. Cost EBITDA ratio between revenue and cost will perform better in the next quarter. So you can imagine why we are quite confident that the EBITDA margin will increase in the second half. And then we have also some action put on the place with our CEO to pushing on cost controlling and flexibility on some areas, that will also affect the EBITDA.

The next question is from Luca Bacoccoli of Intesa Sanpaolo.

Can you hear me?

Yes. Yes, Luca, we can hear you.

Okay. Good. So my first question actually is a follow-up on the personnel cost evolution. If I understood correctly, it seems that in the second part, the plus 8% that we have seen in the first semester should slow down at least for, let's say, an easier comparison as I'm referring to the new contract signed last year. And the second question regard the gap, the widening gap that you were mentioning between a number of slides and the growth in the service unit, which I think is really very easy to understand on the domestic service unit. And so the question is, how this widening gap is improving the overall productivity and at the very end, the profitability of the company, so if this is a potential major driver.

Yes. For what concern the first question, let me say that just to summarize what we have to the P&L is [indiscernible] we expect to have 4% total increase by the end of the year coming from the renewal of the contract, 2% signed at the end of 2022. So -- sorry, just to be clear. 4% is the total. Of that, 2% is related to the contract -- the renewal of the contract signed in the last year. And then we have 1% increase of headcount, more or less. And then over time, to manage all the traffic and the -- everything that's related to the increase of traffic that there will be, more or less, a 1% impact. So we have a 4% increase full year. For what...

So sorry, Luca, I have just have a few -- so it means that in the second quarter -- sorry, second semester, the personnel cost should be flat year-over-year?

Yes, more or less. The second one -- sorry, for what concern, Luca, the second question. I don't think we get -- we go to the question. Can you please repeat it? There's always problem with...

Yes. I'll try to rephrase the question. So you mentioned that the traffic -- sorry, service unit growth is higher than the number of flight growth. And this gap is widening versus the past. So my question is, if this trend, first of all, will continue and how it can impact the overall group profitability given that the implied result of that is right now you had a productivity because you have basically lower movements, but higher revenues for each movement.

Okay. In general term, I mean, the main difference is made by the distance, flown by the airplane on our flight.

Flight, yes.

Yes. So the good point is if you see the overflight, now is -- overflight, the weight of the flight is 43% of our total en-route traffic. So on this 45%, the increase of overflight until now is around 13%. I guess here, we said before, it was around 13%. So the increase is very, very high. And the distance that normally is flown by this flight is much more important than the one that is landed in our country. So this is a good point. So that's the reason why I believe that given this figure, these numbers, we believe that this difference between the flights and the service unit, it will also continue -- 3 points, 3.5 points difference will continue also in the next month. We have seen the different scenes last year. So it's not something that is happening now. It's always been also in the next month. So we believe this will continue also, actually, by the end of this year.

So basically, you have on one side, longer distance operated and as well as, I think, a larger size of each aircraft moving. That's the point is -- right. Okay. So a...

Yes, it's a -- sorry. Sorry.

A combination of the 2? Yes.

Yes, it's combination of the 2.

Yes. So it means probably higher revenues for each movement, is that right?

Yes, but always consider that the weight -- sorry, the distance -- let me say, the weight of the distance is higher than the weight of the weight in the formula. So the distance flow is much better than -- so most of this difference is made by the distance more than the weight in the flight. Okay.

[Operator Instructions] The next question is from John Campbell of Bank of America.

I've got 2 quick ones, if I can. I noticed in the presentation, at least in the first half or in the second quarter, it seems that the accounting treatment for the inflation balance mechanism has been slightly tweaked. It appears that perhaps you're spreading the accrued inflation balance that was captured, I suppose, in 2022, fairly evenly over the 4 quarters. So could you perhaps explain that change? And then the second question was related to a clarification of a point on the call. So did I understand correctly that the inorganic growth opportunities that you're canvassing are based mainly in Italy? Or are you also still looking in Europe?

Let's say that the regulation allowed to recover the actual inflation, the real inflation. Let me say that's what's happened. We haven't had any inflation in the last 5, 6 years, seen last year. So it's the first time that in 2022, we had really difference between the inflation forecast [ that's inventory ] and the actual inflation. So that's really the first time. That's the reason why in the first half, we have recorded the inflation that was after inflation -- we have reduced -- sorry, we have post the after inflation, 2022 after inflation, waiting -- still waiting for 2023 inflation in the next quarter. As usual, as normal, the inflation forecast in the year, we wait the third quarter. But the one, if it carry forward of the previous year, is something that is given, it's done and is also checked by Eurocontrol by the 2022 actual figures. That's the reason why this hasn't been -- last year discussion was no inflation. And then also, if you remind, last year, 2022 -- sorry, not -- 2020 and '21, the regulation will be changed and will be different. It was kind of we were allowed to recover actual cost. And recovering actual cost, this means that there's already inflation sign -- if there are any of inflation. So there was no inflation to carry forward in 2022 for the reason because we recover the actual cost. Did I answer your question?

Yes.

Next question is a follow-up of Nicolo Pessina of Mediobanca.

Yes. Just a quick follow-up on the performance of the nonregulated business, which is up more than 40% in the first half of the year, which makes the target for the full year of a high single-digit growth fairly conservative. So I would like to better understand the evolution of this Qatar contract, and if you still confirm this high single-digit growth for the full year in the nonregulated business.

Yes, Nicolo, at the moment, we confirm the guideline because we are in line with that budget and is exactly the figure that we have seen and the guidance we have given. Qatar is going well. So no really any particular update on this yet.

Gentlemen, there are no more questions registered at this time.

Good afternoon. Thank you, Alessandra. Thank you so much, everyone, who have joined in the call. For any further question you may have, you have the IR contact. Please free to contact us. We thank you again, and we wish you a good evening.

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