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 9 Months 2023 Results and Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Francesca Mazza, Investor Relator. Please go ahead, madam.

Thank you, Sherry. Good afternoon, ladies and gentlemen, and welcome to the ENAV 9 Months 2023 Results Call. Now we will be running you through the presentation. After that, we will be happy to answer your questions. With that, I leave the floor to Luca.

Thank you, and good afternoon, ladies and gentlemen. Before analyzing ENAV's 9-months performance, please accept our apologies from the CEO, who is unable to join the call due to some connection issue that we are having now as the CEO is in Emirates and for a business trip, and we have problem to connect him to this call. So he is very sorry, but we cannot manage this issue -- connection issue. So, I will drive you through the presentation. So first of all, I would like to highlight the favorable high traffic trend that [indiscernible] this summer season and that is continuing to positively impact the Italian airspace in recent months. We are very satisfied with this robust rebound and acceleration, which will certainly allow us to achieve a significant target. Let us now analyze the results of the 9 months of the year, where the air traffic volume showed a solid growth year-on-year in term of service units, with an increase of approximately 11% in both enroute and terminal, as a positive consequence of the excellent performance during the summer season. This increase was also confirmed by the comparison of the enroute volumes for the 9 months of 2023 with the pre-pandemic volumes of 2019, which in terms of service units exceeded by 4% of the traffic of 2019, a record year in terms of volumes or EBITDA. Revenues from operating activities in the 9 months increased by 7.2% compared to the same period of over last year, amounting to EUR 756.8 million, and they boosted the total revenue at EUR 740.2 million, increasing by 3.6% despite partially offsetting of the negative balance of EUR 44.6 million. The positive performance of revenues totally offset the 5.2% increase of the cost, mainly due to the higher personnel cost, plus 7.3% and other operating costs, plus 1.1%. As a result of these effects, the Group closed with an EBITDA of EUR 22 million, substantially stable year-on-year with an EBITDA margin of 29.7%. Let me remind you that ENAV closed the first half of 2023 with a lower EBITDA compared to the same period of 2022. The amount spent in CapEx was EUR 54.4 million, while net financial debt was EUR 329.9 million, an improvement of EUR 78 million compared to the EUR 407.8 million recorded at the end of 2022. Therefore, the net debt-to-EBITDA ratio decreased at 1.2x compared with 1.5x reported at the end of 2020. Cash totaled EUR 38 million at the end of the 9 months of 2023, confirming the solidity of the Group with a free cash flow of approximately EUR 97 million. Now we can go deep dive -- we can deep dive into the details of the 9-months results. Moving to Slide 3. Let's look at En-route traffic trend reported in the 9 months of 2023. Service units went up 11% year-on-year, driven by a solid increase in international and overflight traffic, which grew 17.1% and 12.7% [ respectively ]. This robust result was fueled by a combination of a successful summer season and a widespread increase in travel demand, despite the generalized increase in price for goods, particularly airline tickets. National traffic decline has been marginally year-on-year, having yet recovered pre pandemic volumes, starting from the last year, and therefore, far earlier than the other traffic composite. Analyzing the various components of the en route service unit, we see that the most significant one is still the Overflight, accounting for 44% of total, growing 10.7% compared to the pre-pandemic year 2019. These outstanding outcome has been driven by an increase of flights in all destinations and particularly related to the intra-European flights. As already anticipated, it's notable that en-route traffic flows units showed a full recovery in the 9 months compared with the pre pandemic level, exceeded 4%. Regarding flight, I can also test that this impressive trend is continuing with a 9.4% increase recorded in October 2023 compared to October 2019. Let me remind you that in term of service unit, usually those register, in average, a growth, which is a few percentage points higher than the one seen in the number of flights. And let me tell you that just a couple of hours ago, Eurocontrol published their October traffic result with an increase of 14.7% in term of service unit compared to October 2019. And if you look at the year-to-date increase, we have a 5.1% increase at the moment, so year-to-date. And let me tell you also that even in November is producing a very good performance at least this very first days of the month, very close to October. So, what concerns the terminal traffic is that we can see on Slide 4, service unit increased by 10.7% year-on-year, showing a generally positive trend throughout all 3 charging zones. This growth was mostly the consequence of a positive summer season performance and a rise in travel demand. Considering the terminal traffic by division, we can see how international components increased by 18.1%, while the national one remains relatively stable having recovered, as for the en-route, the pre pandemic levels ahead of the other component. This growth has been steady and consistent quarter-after-quarter, reaching in the third quarter 2023 and 99.8% of the volume managed in the same period of 2019. Moving to Slide 6. You can see that the Group revenue in the 9 months of 2023 grew 3.6% or EUR 25.8 million year-on-year, reaching EUR 740.2 million, driven by a positive contribution of the core business. Within the total revenue, en-route and terminal increased both by 7.3% and 9.1% year-on-year, respectively, supported by the rise in traffic volume, especially during the summer season. Let's now analyze what happened [indiscernible] the balance in the 9 months of this year, where we registered a negative balance contribution for EUR 44.6 million, mainly due to EUR 35.2 million positive balance accrued in the period, mainly coming from a positive balance from inflation of about EUR 49.2 million. Continued the inflation reported in October 2023. This is higher than the figure forecasted [indiscernible]. The positive balance of the period was partially offset by a negative balance linked to depreciation, new grants and the other minor changes related to the terminal traffic [ listed ] by Eurocontrol. And then we had a EUR 78.5 million of negative balance reversal related to the one accrued in the combined period 2020/2021 and cashed in throughout the tariffs started from January 2023. And then we have EUR 1.3 million of negative balance related to the balance actualization of the business. On Slide 7, we can show -- we can see the cost for the 9 months 2023 in comparison with the same period of last year. The total operating costs were EUR 520.2 million, up 5.2% or EUR 25.6 million year-on-year, mainly due to the increase in personnel costs. For what concern Top 93 units, amongst controllers and technicians, that coupled with the renewal of the labor costs completed in the fourth quarter in 2022, pushed up fixed remuneration by EUR 6.7 million. Actions to put in place to manage the high level of traffic related to higher and higher air traffic controllers over time, the adjustment of the MBO and the agreement with the operative staff, which introduced more flexibility on the current working hours, this component driving up variable remuneration by EUR 11.5 million year-on-year. As a consequence of these few components, also social security contribution grew in the 9 months by EUR 5.1 million. Other personnel costs also increased, mainly due to the redundancy incentive in the period and the higher price of health personnel insurance compared with the 9 months 2022. Considering external OpEx, they increased EUR 1.2 million year-on-year, mostly due to the increase in maintenance cost for EUR 3.9 million, a rise in the Eurocontrol contribution, which went up by EUR 4.6 million and a EUR 1.3 million growth in costs related to the personal business. These increases were more than offset by the reduction in energy costs. The capitalized internal works increased by EUR 4.7 million compared with the 9 months 2022, mainly due to the group personnel activities in investment projects. Moving on to the next slide, we can comment EBITDA and the movements below. EBITDA stood at EUR 220 million, substantially stable year-on-year as a result of the higher revenues in the 9 months, thanks to the intensive air traffic volume reported in the period, which completely offset the increase of total costs, mainly the staff expenses. D&A, provisions and write-downs stood substantially in line year-on-year. Moving down to -- moving down in the P&L. The net financial expenses amounting to EUR 7.8 million in 9 months, increased approximately by EUR 10 million, mainly due to the increased interest rate on debt, which resulted in financial expenses totaling approximately EUR 17 million, partly offset by EUR 9.4 million for financial income, primarily coming from the balance actualization mechanism. With regards to income taxes, we recorded negative EUR 37.6 million, decreasing EUR 3.9 million year-on-year due to the lower taxable income. As a result of these movements, we recorded EUR 86.3 million net result in the 9 months. Given the current and expected traffic volumes, supporting our positive economical and financial performance, we confirm 2023 outlook already known to the market. In the last slide, we present ENAV's liquidity and the financial position, which, as you can see, remains very strong. We closed the 9 months with roughly EUR 310 million cash, and additional undrawn credit lines for EUR 199 million, out of which EUR 150 million are committed. Net financial debt stood at EUR 330 million, decreasing EUR 78 million compared with a net debt of EUR 407.8 million as of the end of December 2022. More specifically, the change in net debt is mainly driven by net cash in from operations for EUR 140.9 million, an increase of EUR 11.6 million compared to the 9 months of 2022 that reported a cash gain of EUR 129.3 million. Cash outflow of EUR 44.3 million related to the capital investment and cash outflow for EUR 2.2 million related to 500,000 treasury stocks to the buyback that was preformed between January and February 2023 for the management LTI. A negative change for EUR 16.4 million in non-current commercial debt, mainly related to the gross negative balances to be returned to airline. As a result of these changes, net debt on EBITDA ratio at 1.2x, slightly decreased compared with the end of 2022. And with that, we can now open the Q&A session.

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

I would like to understand what your view on the traffic for next year. Eurocontrol suggests an 8% growth compared to 2023. So you are aligned with your control estimates for 2023. I wonder if you're also agreeing with your control for next year. Second place on the tariff. Airlines today seem to be in a good shape, so arguably, this could be a favorable environment to put as much balance as possible into the tariffs. And this is presently something you are discussing with Eurocontrol in these days. So I'm wondering if you can give us an update on where the tariffs could land next year? And a final question on the new strategic targets. Back in August, you mentioned that an update would be provided to the market by the end of November. We have seen no mention today so far. So, I wonder if this plan is confirmed. So if we should expect an update over the next couple of weeks.

Okay, Nicolo, I will start with the last one. As you know, we are actively working, as the CEO said, the last time, with a primary strategic consultant firm on updating of our industrial plan, which is considered by our CEO as an essential step for our Group. We are aware that the previous indication about the closing of the updating was the end of November. But in this moment, we need a further effort for the fine tuning, given also our current strong commitment to manage the high increase of traffic volume that we are registering and managing in this moment. Therefore, the intention is to finalize the update in the very first month of the next year. And as soon as it will be completed, it will be presented to the financial community. So you still have to wait, let's say a couple of more months. I don't know, Nicolo, if I answered to your last question.

Yes, it's clear.

Okay. Perfect. So I will move to the first one about the traffic for the next year. As you can imagine, we are in connection with Eurocontrol. We will talk with them. We kind of compare our feeling with their feeling where they do the forecast. So we're very updated on what they do. In general term, at the moment, we are kind of waiting for the forecast of next year, before -- I mean the real forecast, the one everyone is looking for and that would be used for, let me say, for the RP4 performance plan, will be the next one. The one that will be published more or less in April next year. So till now, yes, we believe there could be a good forecast for 2024, the one done by -- the one forecasted by Eurocontrol for Italy at the moment. But we would like to wait for April 1 to better summarize our figures for the performance. We will need that one, that volume, that better value not only for 2020, let me say 5, 6 and 7 but also 8 and 9. So what concerns our budget, probably we will use for 2020 for the forecasted Eurocontrol published in October. For what concerns the second question, I'm not sure that I've well understood your question because we just changed our telephone. This was not a very good idea because the Microsoft is not that good -- is not very good. So I -- did you ask about how the RP4 is going in terms of negotiation or something else? So, if you could, Nicolo, please repeat your question. That would be nice.

I'm wondering if you can give us an idea of the tariff for next year. For the en-route tariff. We know it took of course...

Yes, okay. I'll get it. Sorry. So what concern En route because I guess it's the main one, we are going to present it officially in the larger committee that would be addressed on 21, 22 of November, in just a couple of days. Right after that would be more -- I mean for us, it would be easier to give you some more details. But at the moment, the tariff is going to be a little bit less than the one that we apply now for the reason that you probably know, because we have to give performance year after year, and other than the balance that we can put in our tariff. This is going to be reduced to just a couple of euro from 2023. I cannot at the moment to tell you any more details, just for a technical reason. We have to wait for the approval. It's really technical approval, but it's still approval of Eurocontrol after the large committee that will be held in a couple of days.

The next question is from Aleksandra Arsova of Equita.

2 my hand. The first one, maybe on dividend, dividend policy. So if you will provide in the update of your business plan also an update of the dividend policy for 2023 and beyond. And if you are, let's say, comfortable with the current consensus on 2023 dividend of more than EUR 0.20 per share? And then the second one is on RP4, how is the discussion with the regulator undergoing? And if you can share some color on the evolution you expect.

Okay. Aleksandra, let me say, what's concerned with the dividend, as you know, are very -- we pay a lot of attention to this item with our CEO. We really take care of what would be the next dividend -- sorry, 2023 dividend. We are starting to think about, but we would like to wait for the end of the year to be sure of our figures and then finalize our thought on the dividend. As you already know, our dividend policy is quite flexible. Even if you look at the consensus of our -- at the moment, even if we apply the 80%, if you look at the consensus of our net results. depreciation and CapEx, you can already imagine that the dividend is going, just applying the 80% of the dividend policy is already a good dividend. Apart this, we are thinking how to manage the 2023 dividend, but still something work in progress that we will finalize right after closing -- having the first final data of 2023. So what concerns the evolution of the discussion of RP4, let me tell you that we don't have, at the moment, any particular update. In general terms, Europe and European Commission is very focused on capacity issue. There is a capacity issue because the increase of traffic is very, very important. Even if in some -- even if [ something ] haven't reached yet the volume of 2019 volume yet, the, increase year-by-year has been so important that a lot of countries are [indiscernible] to manage. You can see it from what -- I mean the discussion -- current discussion also with the other service provider in Europe, at least the main one or the most important one, the biggest one. So that -- so we focus -- very important focus on capacity issue and for what concern instead the cost efficiency, you know that Eurocontrol has issued -- sorry, not Eurocontrol but PMB has issued a study, not really a proposal, but just a base of discussion, whether it's a range 0.7 through 3 point -- I guess 3-point-something, a range of cost efficiency that has to be at the base of the discussion for the next regulatory period. On base of this, there was no discussion yet. There was some discussion, some live discussion within [indiscernible] provider some of the environment, but not really with the regulator, international regulator. So I think everyone is now focused to close the year, and then on the base of this value also if these numbers also have a deeper discussion on this after. You know that we are going to finish all the discussion within the 1st of June as the commission has to publish the targets. And so from now to, let me say, from the beginning of the next year, January next year to May, there will be a discussion. But at the moment, I can -- I don't really have any particular update.

The next question, sir, is from John Campbell of Bank of America.

I wanted to ask how you see operating expenses evolving in 2024. I suppose on the positive side, you should hopefully have a little bit of a benefit from lower electricity or utility costs, although it's not the main area of your operating expenses. But how should we be thinking about that? And also the evolution of labor costs that you see so far?

Sorry, are you asking for the next year or this year?

For 2024 and even beyond, if you have any view.

Perfect. Okay, 2024, yes. We are now under budget process. In general term, we don't expect to have an increase of external costs or other operating costs, important increase from 2023. The point is actually to better understand what will be the impact of this increase of traffic next year on the staff costs. At the moment, we are working on this result together with HR division. And maybe we need to update our feedback on this point, because actually -- it's a work in progress. We are going to bring our budget in our Board of Director in December, late December, and so we are now finalizing all the analysis and discussion and planning.

Could I just ask a second one as well? So I think it was a previous analyst was asking about your traffic expectations for 2024. And I think the analyst mentioned that in 2024, Eurocontrol sees en-route traffic in Italy at basically 14% above pre COVID levels. So, should you want me to confirm that you feel generally comfortable with that assessment, given the sort of consumer pressures that people are seeing so far in Europe? Do you see any signs of that in your industry so far?

Yes. This is the point as you are on the line and also Nicolo before, there has been a huge increase. We believe maybe it's a bit too much. But before I say that, we have tried to understand how to manage, how to -- I mean, we would like to go deeper on this value because as long as 2023 values was in line with our expectations, remember also in the half call that we have half result that we had in August, we continue to say probably we will close the 2023 at 6%. Actually, now we are 5.1%. So, really close to the figure we're planning. We are not so confident that this increase that was forecasted for Italy by Eurocontrol for 2024 is correct. But yes, it's something that we are now analyzing also in line with our capability -- capacity, actually, because you know that we have hired some new controllers. We have a basket of new controllers that we can take from. But still, it's a process that is going in this moment. So it's very difficult for me to give you a feedback on the balance between this traffic volume that probably is a little bit too high. And the cost of -- staff cost and all the -- staff cost that we needed to have to manage this traffic. This is a [ consideration ] that we are doing -- we are actually doing this moment, and I don't have particular feedback. So we have to, as I said before, come back on this item in a couple of weeks. Just to be more -- yes, to give you more detail on this one.

The next question is from Marco Limite of Barclays.

The first question I've got is on CapEx. So there is a guidance out there for EUR 350 million of cumulated CapEx across 2024. Last year, you did less than EUR 100 million. This year, the run rate is -- takes to probably less than EUR 100 million for the full year. So the question is, if you still expect to hit the target of EUR 350 million cumulative, which implies next year CapEx to pick up? And then I mean, still on CapEx, on the mid-term, in a way, you do have already a business plan out there in terms of ACC consolidation and so on. So what we should expect on CapEx in the medium term? Shall we expect CapEx to stay above the EUR 100 million for the next 3, 4 years?

Yes. As we said last time, we had some problem after the COVID with the purchasing process above all related to the, let me say, to buy goods and some new law that came out in Italy for controller, for security and stuff like that, says that we cannot -- we loaded down 2023 process in term of CapEx. So we believe to have a level of CapEx that will be -- I mean we say EUR 100 million, probably could be some million less, just some million less. But more or less, our target is still EUR 100 million. We probably -- we are not so sure to get this plan, but we'll be somewhere around EUR 100 million for 2023. For the next years, '25 -- '24, '25 and so on. As you said, we already have our operative business plan in place and we are going to catch up in term of purchasing process, and we believe to be back to our normal level that is around EUR 115 million. We already know -- we don't know yet if we will be able to do right after next year as we hoped. But in the -- if you have to consider an average between now and the next year -- sorry in '23, '24 and '25 although you can keep EUR 115 million as a target that company is giving.

Okay. And then maybe a quick one on the Q3 balance. If you could clarify, please, what a balance -- negative balance linked to depreciation is. If you can just refresh the theory around that.

Yes. The negative is just mainly related -- the balance. Negative is mainly related to the fact that we have a reversal balance. As you know, we have a EUR 650 million more or less of a credit -- balance credit from 2020, 2021 traffic that was almost 50% down to the level that was in some way agreed with the regulator in the tariff. So this amount of money, EUR 650 million were allowed to divide in 5 years, starting from 2023 and so, more or less, if you divide EUR 650 million in 5 years, you have 100-and-some, that is the balance that we have in the tariff. And the way we manage in our P&L is, as we ask, it's balance of the year in 2020 and 2021. And then it became balance of the --- sorry, a balance reversal when we ask it to the airline to pay. So as we have this cashing coming from the tariff on the top line, we have to offset in our P&L by a negative revenue. So, balance, a negative balance of EUR 70 million, EUR 80 million in the period versus a EUR 35 million of a positive balances that is the one that is related to the other items, the balance of the [ related ]. So the net of these 2 items, the negative and the positive, is a negative one. We believe that by the end of the year, to have EUR 105 million of balance reversal, so negative balance registered in our P&L. This is automatically coming from the tariffs. On top of this, you have to put the balance of the year that we expect to have more or less, probably around EUR 70 million.

Okay. I thought it was some sort of other balance relative to depreciation of assets or other things. Okay, clear?

Yes, everything is inside the reversal because as I said in the speech, maybe I was a little bit too fast. In the EUR 35 million of a positive balance, this is kind of -- is a number of balance in this value. There are the inflation balance for EUR 49 million, EUR 49.2 million. And then we have some adjustments or negative balance related to the depreciation, as we said before, new grant in Eurocontrol cost. So just some adjustment that brings from EUR 49.2 million to EUR 35 million. So if you take out all this balances, this negative from EUR 49 million, you have the EUR 35 million positive and then you have the EUR 78.5 million of negative balance result that is offset of this value. Is it clear now?

Yes, it is.

[Operator Instructions] Mazza, Mr. Colman, there are no more questions registered at this time.

Well, thank you for joining us on this call. For any further questions you may have, please feel free to follow up with Investor Relations. Goodbye to everybody and thank you.

Bye to everybody. Thank you for attending the call.

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