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 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Daniele Tutino, Head of Investor Relations. Please go ahead, sir.

Good afternoon, everybody, and thank you for joining us today on our first half 2024 results conference call. I'm Daniele Tutino, Head of Investor Relations. Today, our CEO, Pasqualino Monti, will take you through our progress during the first half of this year, and then our CFO, Luca Colman, will cover in more detail the financial results, and we will then welcome your questions. And with this, I will now hand over to our CEO, Pasqualino Monti.

Thanks, Daniele, and good afternoon, everybody, and thank you for taking the time to join us today. Let's start with the key points about our first half results and our recent progress. We have delivered a solid performance in the first half, and we are very pleased of the strong set of results delivered. We have built faster on our good start to the year. The excellent traffic performance is continuing month after month. We are seeing a widespread increase in travel demand boosting the traffic trend in this first part of the year. We are providing our service with our usual strong commitment, guaranteeing the highest levels of safety and quality. In the first 6 months of this year, the number of flights managed by ENAV recorded an increase, exceeding the double-digits growth for en-route traffic, which was up 10.2% compared to the first half of 2023, and that plus 9.3% year-on-year for terminal traffic. This strong performance confirms the role of Italy as a top touristic destination. Benefits have also arisen from the lowering of the limit of the free route space across the entire Italian airspace. As you know, ENAV is the only European service provider which have reduced the altitude from 9,000 to 6,500 meters, almost 2 years in advance of the deadline set at the European level, December 2025. Thanks to this lower limit, even domestic flights will benefit even more in terms of fuel savings and lower CO2 emissions, and these determines benefits for the airlines themselves, optimizing flight times, planning and operating costs. The strong increase in flights led to a strong growth of service units with en-route traffic exceeding [ 5.2 million ] of service units in the first half of 2024, up 10.9% versus the first half of 2023. And this result in Italy was higher than the Eurocontrol member states where the figure at the end of the first half of 2024 was [ up ] 8.5% compared to 2023. Also, terminal traffic showed a strong growth, and it was up 11.5%, exceeding 500,000 service units. Let me also provide you some key figures for the first half of 2024. Total revenues were at EUR 461.3 million, up 5.7% compared to the first half 2023 due to the performance of the core business driven by the strong increase in traffic that I have just commented. Profitability increased as well with EBITDA up 5.5% to EUR 99.9 million and with a strong margin at 21.6%. Below the line EBIT stood at EUR 42.7 million, up about 30% year-on-year, and we are seeing strong progresses at the bottom line exceeding a 25% increase compared to the first half of 2023. And net results stood at EUR 23 million compared to the EUR 18.4 million of the first half of 2023. In terms of CapEx, the amount in the first half accounted for EUR 35 million, and it increased by 15% compared to the first 6 months of 2023. Net debt accounted for EUR 424 million, and the increase versus the end of 2023 is mainly due to the dividend payment in May. We are still confirming a solid leverage with the ratio net debt EBITDA at 1.4x. And free cash flow stood at EUR 28.3 million with a strong increase versus the first 6 months of 2023 when it was negative for EUR 3.2 million. Before showing you more in depth all these strong results, let me briefly provide you an update on the latest progresses about both Regulated and Non-regulated business. In terms of regulation, as you know, the current Italian performance plan will be valid up to the end of this year, and we are now under negotiations with the regulator for the next regulatory period that will cover '25-'29. The latest news refers to the publication by European Commission of the Union-wide performance targets related to the RP4. In particular, the efficiency targets for en-route services for each year from 2025 to 2029 were defined equal to an annual variation of minus 1.2% of the determined unit costs. On the back of this target, we are currently working on the performance plan, which will be submitted to the European Commission by the beginning of October. And after the review, the plan and the main elements of the tariffs are expected to be approved by the end of this year or the beginning of 2025. We are working at, also in the Non-regulated business, and we have been awarded with significant contracts around the world, in particular, in Kosovo, Cambodia, Libya, Kenya, Croatia, Romania, Dominican Republic, Fiji and Tunisia. A couple of weeks ago we announced an important contract for Sigonella military airport for the supply, installation and commissioning of a new radar for air traffic surveillance carried out by the Italian airports. These latest contracts confirm that the strategy we are pursuing to increase our exposure in the non-regulated market is building [ fluids ]. And we are fully reconfirming the double-digit growth expected in 2024 for non-regulated revenues, as set in 2024 outlook already disclosed to the market. And with this, I want to hand over to Luca to run through the first half traffic performance.

Thank you, Pasqualino, and good afternoon, everybody. It's a pleasure for me to show you the strong progresses we had on our traffic during the first 6 months of this year. Starting from en-route traffic, service units were about 5.2 million, up 10.9% year-on-year, driven by a solid increase in international and overflight traffic, which grew 17.9% and 10.2%, respectively. National traffic recorded an almost stable performance at minus 0.6% year-on-year. In the chart on the left, you can easily recognize the typical seasonality of our business, with the second and third quarter traffic being the highest contributors. And this year, en-route second quarter traffic volumes were up 12.5% versus 2023. In terms of mix in the pie chart, you can see as national traffic accounts for 17%, international accounts for [ 41% ] and overflight traffic, which is the most profitable for us, accounts for 42%. Yes, the performance was driven by an increase of European-Asia connections and inter-European flight. With regard to airline, in the first half 2024, flight activity in the low-cost segment remains central to the volume of air traffic produced in Italy -- in Italian space, with Ryanair, Wizz air and easyJet with significant performances. Among traditional tariffs, increases were recorded among Middle East companies such as Qatar Airways and Turkish Airlines. While between the main European companies, Lufthansa [ in the national ] carry, ITA Airways also posted a significant result in terms of volumes produced. This positive traffic trend is progressing with an impressive data as confirmed by the number of flights in July, which is up 7.9% compared to the July 2023. And now let's see the performance of terminal traffic. Also terminal traffic had a very positive performance. Service unit grew by 11.5% year-on-year, showing a generally positive trend throughout all 3 charging zones. More in detail, Zone 1 is up 27.2% with a strong increase as its recovery in the post-pandemic period, it was lower than the other 2 zones. Very good performance in the first half for Zone 2, up 8.6%, and Zone 3 up 6.8%. The traffic growth was continuous and consistent in this quarter and the second quarter terminal volume was up 12.3% compared to 2023. In terms of destination, the international component, representing the 67% of the total traffic, increased by approximately 16%, while the residual 33% related to the national traffic grew by 3.7%. And now let's move to the first half key group metrics. First of all, let's see the performance of revenues. In the first half 2024, revenues were up nearly EUR 25 million year-on-year, standing at EUR 461.3 million, with a strong increase of 5.7%. This is driven by a solid performance in traffic volume for both en-routes revenues, which are up 5.8% year-on-year, and terminal revenues, up 10.6% year-on-year. We have already discussed about the strong traffic performance of this period. So let's have a look to the other components of the revenues. Moving now to the balance. You can see in the first half of 2024, the balance at a negative EUR 25.3 million, slightly below last year due to the following elements. First of all, the balance accrued in the period of positive EUR 22.6 million, coming from EUR 25.9 million balance related to inflation, which reflects the inflation increase compared to the forecast figure reported in the performance [ plan ], while EUR 4.2 balance for charging Zone 3 related to the cost recovery mechanism. EUR 3.7 million balance due to the traffic risk mechanism having generated in the period at higher level of service units than the forecast period, and then EUR 3.8 million related to the other minor balance components. In the first month of 2024, we also accounted a balance reversal of minus EUR 47.9 million, mainly related to the second tranche of the balance accrued in 2020-2021 and [ cancelling ] throughout this year tariff. Moving to [ not ]-regulated revenues. In the right chart of the slide, you can see the evolution of the non-regulated revenues, accounting for EUR 15 million in the first half of 2024. The difference with the first half of 2023 is mainly due to the contribution from the activities performed in Qatar related to the performance of air navigation support service in 2023. As commented by our CEO before, in the previous slide, we are working hard on the [ not ]-regulated business. We have been awarded with several contracts around the world, and we are now building our backlog. As Pasqualino said before, in the first half of the 2024, the not-regulated revenues benefited from the contribution of an important contract, just like the supply of the new air traffic management system in Kosovo and Cambodia, the modernization of the installation of the system at Romania, sorry -- at the [ Libyan ] airport, the control activities of radio assistance systems in several airports in Kenya, Croatia, and Romania, the transition project to the aeronautical information management for the Dominican Republic and then various maintenance project for software products [ supplied ] to customers on a global scale. So very -- a lot of things. And now let's see the cost evolution during the first half 2024. Total operating costs accounted for EUR 361.4 million and were up 5.7%. As you can imagine, this is mainly due to the increase in personnel costs in response to the high volume of traffic managing in the period. Staff costs, in fact, was up 6.1%, mainly for these reasons. More in detail, the increase in variable remuneration for EUR 6.7 million year-on-year is mostly due to the flexibility and overturning allowance for the air traffic operators to manage traffic peaks. Also, the fixed components of the remuneration were up EUR 5.3 million, mainly due to the renewal of the labor contracts happening in September 2023 and to the increase of the head count for 60 average units at the group level, primarily controllers and technicians. The social security contribution, which grew by EUR 3.4 million compared to the first half of 2023 due to the above-mentioned increase. And then the other operating expenses, the line increased by 3.3%, equal to [ EUR 2.5 million ], mainly due to the maintenance costs and the professional services that was partially offset by a reduction in energy costs. And then the last in line, the capitalized internal works related to the group personnel activities and investment projects are almost [ stable ] compared to the first half 2023. And now let's see below the line item. The comments provided for the top line and the cost evolution led to an EBITDA that stood at EUR 99.9 million in the first half of 2024, reporting a 5.5% increase year-on-year, benefiting from the strong traffic volume reported in the period and only partially offset by the related increase of personnel costs. G&A stood substantially in line year-on-year, while provisions and write-off decreased by EUR 3.7 million, benefiting from the lower write-off of receivables compared to one half 2023, and the release of provision accrued at the end of 2023 due to the closure of some litigation. As a result of this, EBIT was at EUR 42.7 million, up about EUR 10 million and with a 30% improvement compared to the first half 2023. Moving down to the net financial expenses, amounting to EUR 4.5 million in the first half, decreased by [ 30% ] due to the higher financial income on deposits and from the balance actualization mechanism that was partially offset by the impact of rising interest rates. Current and deferred taxation overall amounted to EUR 15.2 million due to higher taxable income and impact of deferred taxation. On the bottom line, stood at EUR 23 million, up 25% year-on-year, reflecting the standing performance of this period. Moving on to cash flow. Let me now briefly update you on the liquidity and financial position, which, as you can see, remain very strong. We ended the first half 2024 with EUR 200 million of cash, with additional undrawn credit line for EUR 199 million, out of which EUR 150 million are committed, along with a loan commitment of residual EUR 80 million related to the EIB financing signed in October 2023 for an original amount of EUR 160 million. Net financial debt stood at EUR 424 million, increased by about EUR 100 million compared with the net debt at the end of 2023 of EUR 322 million, mainly due to the payment of dividends of EUR 124.4 million in May '24, and partially offset by the cash generation of the period. Now let's look at the free cash flow, that stood at EUR 28.3 million. I remember that it was minus EUR 3.3 million in the first quarter 2023, and that's mainly driven by net cash in from operation of EUR 66.8 million, equal EUR 29.5 million in the first quarter '23, which increased of EUR 37.3 million compared to the first half of 2023. And we have a cash out for EUR 38.8 million related to the CapEx. As a result of this change, net debt-on-EBITDA ratio stood at 1.4x, slight increase compared with the ratio at the end of 2023, [ that ] was 1.07x, but remains still in solid and strong. Before moving to your questions, let me now conclude that ENAV today is at a favorable environment, driven by a solid traffic perspective. Our disciplined approach, coupled with our use of strong commitment, which guarantees the highest level of safety and quality, will continue. And on the back of these results achieved in this quarter, we confirm our 2024 outlook. Thanks for your attention. Now, let's move to your questions.

[Operator Instructions] The first question is from Carlos Caburrasi of Kepler.

I just have 2 quick ones. The first one is related to the non-regulated activities. Considering that H1 revenues stand EUR 3 million below 2023's level, where would you expect to close the year without any further M&A or new contracts? And my second question is on traffic. And I was wondering if you could shed some light on your second half and 2025 expectations? I'll leave it there.

Excuse me, Carlos, we didn't hear the second question. Can you please repeat just the second question?

Yes, sure. On traffic, if you could give us your expectations for the second half of the year and for 2025?

Okay. So I will answer first the second question. For what concern the traffic right now, we are managing a level of traffic that -- as you have seen in the presentation about 11% of en-route service units. And right now, the traffic is around 8% in July, in terms of flight, not in terms of service unit. In service unit normally it's at least 1 percentage point more, so still this value. At the moment we believe this could be value that should be reached by the end of this year. We prefer to expect the end of the summer season to be more precise about the traffic -- I mean, the final 2024 traffic level. Also because now we are still recording very high level of traffic coming from the [ Balkan ] area, they're moving towards [ half ] and this is something that we were managing this with the operative areas. Now, for this reason, we will be definitely -- the foreign cash given to Italy by Eurocontrol and -- but we prefer, as I said, with the end of the summer season, so with September to confirm or increase our 2024 traffic [ point ].

And on the first question, the difference with the first half 2023 is mainly due to the contribution from the activities performed in Qatar related to the performance of [ air ] navigation support services in 2023. Now we are working hard on the non-regulated business. We have been awarded with several contracts around the world, and we are now building the new our backlog. In the first half of 2024, the non-regulated revenues benefited from the contribution of important contracts, just like the supply of a new air traffic management system in Kosovo and Cambodia, the modernization and installation of systems at Libyan airports, the control activities of radio assistance systems installed at airports in Kenya, Croatia and Romania, the transition project to the AIM, Aeronautical Information Management for the Dominican Republic and various maintenance projects for software products supplied to customers on a global scale. These latest contracts confirm that the strategy we are pursuing to increase our exposure in the non-regulated market is [ building ] [ fluids ], and we are fully reconfirming the double-digit growth expected in 2024 for non-regulated revenues, as I've said, in 2024 our outlook already disclosed to the market.

The next question is from John Campbell of Bank America.

I've got 2, if I can. So if I start looking at your tax expense, it almost doubled essentially year-on-year. And I was reading the notes, you talked about a deferred tax impact. So perhaps, could you give some clarity on sort of why the tax expense has grown in this period so much year-on-year? And then what's behind that deferred tax? The second question I had related to your employee expenses. So I think the fixed component of labor cost is quite well understood. But there has also been, of course, a growth in variable employee remuneration. How much of that is the case of traffic volumes being higher? And is there any pay increase reflected in those numbers as well? Have you had to give a higher flexibility allowance for your air traffic controllers?

Thank you for your question. I'll start with the second one. As you can imagine, most of -- I mean all the traffic that we are managing really is very important volume. If we look at the volume of traffic we are managing now, is not only higher than last year, but it was even much, much higher than 2019, that was our record before the COVID. So the point is be able to manage as [ better ] as we can with a safety and quality environment all this traffic. So we are having a lot of pressure on the people, our controllers. What our CEO is doing now is pushing the productivity, try to work on the flexibility on the worker, and that is what we are in some way registering even in the cost side. If you look at the variable part of the costs increasing, that is good when the traffic is high -- very high like now. That means that we are trying to manage the peak with a variable part of the cost, while the traffic will cool down little bit or not in the summer season, the level of traffic would be lower, we will be able to reduce the variable part of the cost. So I guess, we believe this is a good approach. And that's the reason why actually we are doing this performance -- EBITDA performance in the first quarter 2024, just because the duration between the cost -- increase of traffic [ story ] and revenue and increase [ at ] costs are still positive for us. See, that -- for what concern the tax [ instead ] -- for what concern with tax, -- normally, our tax rate is around 40%, as I said, as you probably know. What's happened in this semester, I mean, this 6-month is related to the fact that we had an increase that was related mainly to 2 things. The first one is higher taxable income, and that is a good thing actually, and the second one is related to the deferred taxation. And I would underline a few things about this. The first one is the reversal of provision of first half 2024. This will kind of free up some revenue that were -- composition, sorry, that were taxable actually. And then with the reversal balance actualization, that's another point that increased the tax -- Yes, the volume actually. Did I answer your question?

Thank you. Could I just maybe get just a clarification on the first question? So when we think about this variable employee remuneration, and correct me if I'm wrong, but is this -- the increase in that variable remuneration, is that all from traffic volume? Or is there an element of your paying people more as well? So is it all volume? Or is there a mix between volume and pay?

I would say both, because to increase the productivity, as I said before the flexibility of the work, we had to touch the labor contract, introducing this flexibility. You know that flexibility allows us to use people out of the normal period of work in anticipating or participating the regular time, and this is kind of at a cost. On the other side, most of this is relating to -- most of the cost is related instead of the extra time that we are paying to manage the traffic. So both of components are impacting the variable part of the cost.

The next question is from Aleksandra Arsova of Equita.

A couple of my side. The first one is maybe again on the outlook. You mentioned that maybe after the summer season you will increase the guidance on traffic. So I was wondering if this will also imply a potential increase in the guidance on EBITDA? Is the first one. The second one is on regulation. You basically confirm that you will send the individual performance plan in -- during the fall. So since currently we're seeing some airlines downgrading their guidances for the year and also the macro is worsening, so do you see a change in the negotiations with the regulator making it may be more difficult for you to negotiate the higher tariffs? So maybe some color on this?

For what concerns -- Yes, I understand what your question is for. Let me see -- Yes, we believe that the negotiation will be not easy, but this doesn't mean that we will not to be able to bring -- what is within the target that has been given to us to reach the performance that is asked. So from one side, targets are being set. Let me say, the only point I would now -- underlying the decision is the pressure that [ all the ] European service -- navigation service providers having -- managing more traffic and to connect this with the cost level. This probably would be the -- not the issue, I will say, the item of discussion at the European level for the next regulatory period. I don't see at this moment extra pressure from the airline. They always put pressure because this is their job when we do the performance plan. But actually, in this moment, we don't foresee any extra pressure on this. For what concern you said the guidance. Just -- Okay. On the first question on the guidance. As you may have seen, we have delivered a solid performance in the first half of 2024, mainly driven by the strong traffic evolution that is continuing month-after-month. And the summer period will be crucial to better understand the path to the end of the year. So we decided to wait until the next quarter, and then we will decide about it.

Next question is from Cristian Nedelcu of UBS.

The first one, can you give us some color on the Middle East exposure? And in the case of further geopolitical escalation there, how do you see the impact on your overflight traffic? And the second question on the Lufthansa-ITA deal. And we've seen comments from Lufthansa to significantly increase the number of wide-bodies station in Rome versus the current levels at ITA. So how do you think -- Can you give us a bit of color, how do you think are the potential implications here for traffic for the next few years? And lastly, just coming back to the staff cost, the personnel cost. I mean, Ryanair talked recently about air traffic control delays intensifying through Europe due to shortages of labor. So just simplistically, how should we think about your Q3 personnel cost growth year-over-year? Is it at similar level to the first half? Or should it increase -- you should increase the cost more to reflect the peak season and the pressure on the network?

For what concern the ITA-Lufthansa deal, we are happy of this actually because everything that could be a chance to increase our traffic for us is good. So we don't have any, at moment, update on this in terms of potential traffic that could increase, but the sound is good, and we definitely believe that could be a good thing. So we will see in the next few months what will happen. But as I said, the feeling is positive. For what concern the Middle East, at the moment, we don't foresee in particular, I mean, problem for us, in the term that we don't have actually a big exposure on these countries in the regulated and the [ not ]-regulated business. So personally, we believe that no big impact. In terms of traffic, as you normally know, when there is a problem with the state, they flight in some -- I mean, they don't overflight the state to pass next to the state. But this has happened actually, it's far away from us, probably we don't think that at the moment we could have important impact on -- if something happened in that area. Let me just check the third question, the cost evolution for what concerned the -- okay. I'll leave the floor to Pasqualino for the staff cost solution.

In the first half 2024, total operating costs accounted for EUR 361.4 million and were up 5.7%. As you can imagine, this is mainly due to the increase in personnel costs in response to the high volume of traffic managed in this period. Staff cost, in fact, was up [ 60.1% ] mainly for this reason. For what concern cost personnel, yes, for the rest of the year, we expect a further increase due to the high volume to be managed, but less proportional if compared to the effect of that on the top line.

May I add just a quick follow-up question. If I look at your overflight service units, which I believe are 25% higher versus '19 levels, so they seem to have increased more than the international flights or domestic service unit. Could I just confirm what has been driving this strong growth in overflight versus the rest of the segments? And how do you expect this to evolve over the next couple of years?

I would say, mainly 2 things. First on quality of service that we give. We publish -- I mean, as we said during the call, there is a lot of problem of delay, problem -- pressure on the delay on the Europe airspace. So we are still, we say, one of the best performer in Europe. And this is the reason why a lot of traffic above all during the summer when there are pressure on some other countries next to us, they prefer to pass through us. And this is good from one side, but from other side, actually, increase complexity to manage all this volume of traffic. That's the reason why -- sorry, and there's another reason also. We just lowered the free route from 9,000 meters to 6,500 meters. And this is another important thing that we did actually the whole in Europe in this moment, that make the overflight pass through Italy easier and much easier than other countries. So if you put the 2 things together, you can understand why the overflight are increasing so much. That's the mainly 2 things.

The next question is from Marco Limite of Barclays.

I've got 2 questions on regulation. So first of all, I appreciate the European Commission has published the cost efficiency target. But is there any initiative going on at European level in order to, let's say, significantly improve operational efficiency and disruption going forward? This is the first question. Second question. Clearly, the cost efficiency targets have been set, but there are still a number of other key drivers to be discussed. When should we expect in terms of timing, for example, to know a bit more around -- for example, around CapEx or cost of capital? And the third question is a bit more technical. In Q1, the balance reversal was fairly small, while in Q2, now we have booked pretty sizable amount of balance reversal from the pandemic period. Can you just explain how the accounting of that works?

I just answer to the last question. From my point of view, the balance reversal of the [ Q ] -- you asked what's the [ difference ] between the balance reversal [ of ] Q -- sorry, 2023 and 2024, actually first quarter, right? First half, right?

A bit in Q1 and Q2 of '24, yes.

Okay. I'll just go straight to this answer. Let me just take my paper. Okay. So let me check the [ list ]. Okay, because in my mind I was quite right. The balance reversal in -- it was quite -- actually quite similar. But I remember this because we had EUR 45.7 million balance reversal last year, last half and EUR 47.9 million. So the difference is more or less EUR 2 million of difference. So the reversal is more or less the same one. Because, as I said, the main impact was related to the 2020-2021 traffic [ months ]. So actually -- I don't know if I answer your question, it was something else about the balance, then we can move to the other question.

It's more like -- my question was in Q1…

Okay. Q1, [ sorry ].

Yes, balance reversal was very small. Now is -- [ yes ], first half is much larger. Yes.

Okay. I [ get ] what was your question. What's happened actually in Q1 [ rather ] than Q2, the main difference between these 2 Qs are related to the fact that this year in 2024 we recorded the inflation started from Q1. Instead, last year in 2023, Q1 didn't have any inflation balance. The reason was it mainly related to the fact that once as the inflation was very low, we usually started to [ put ] from the first half ahead the impact of the inflation starting from, let me say, this year -- in fact I would say, yes, this year, as the impact is quite important. We prefer just to bring it directly to the first quarter. That's the reason why you find the difference between Q1 and Q2 in terms of balance inflation. Okay. That's it. Then the other one was kind of -- sorry, the other 2 questions. The first one, maybe -- sorry, can you, Marco, repeat the first and second question because I…

Yes. My first question was quite generic at the industry level, but clearly, there has been a lot of disruption for air traffic control in Europe. So I'm just wondering whether -- while you're having your discussions for the next performance plan, whether there are proper incentives that have been put in place or new incentives to improve operational efficiencies across Europe?

Yes. You got one of the point of the discussion because before setting the target, actually, there was a lot of pressure from the states towards the European Commission about how they're going to set this target. One of the reason -- one of the item of discussion was actually exactly what you said. It was a was related to the fact, there was a capacity target, there was a lot of pressure on the delay, as you said. And so, there was a very strong discussion to push the commission to ask a better balance between cost efficiency and capacity. And that is one of the reason why actually the approved -- the target when we set at 1.2%, some states were not so happy about this and still are not. I cannot say anything more about other countries about this item, but this is actually one item, one point. In the same decision when they set the -- European Commission set in July the cost efficiency, they've set also the capacity -- the guidance for the capacity that at the European level they want to reach. Now this capacity target is in some way break down to each country. But this is something that the single national authority is doing directly with the air service provider. But the target has been set in the same moment that the cost efficiency targets -- European level will set at the same time that we will set the cost efficiency target. So what concern the other 2 areas. The safety, you know, is paramount. There is the target, but it's not any performance on -- actually any [ bonus/malus ] on this. And the other one is the environment. The KPI that was set is considered by the most of the state not mature. And so the European Commission, as it was the first time it set actually a real target, but there are still some problems to be applied. It's very [ technical ]. If you want in a call then we can actually go through this point. But in general, the point is the state -- most of the state prefer not to have a [ bonus/malus ] target on this environment target. So the target will be given, it's given. But actually, if state can decide -- every national authority can decide to put [ bonus/malus ] on the [ circuit ] or not. For what concern us at the moment, we are not going to do the [ differences ]. Did I answer your question?

Sure. Can I just clarify -- sorry for taking too much of the time. But can you -- just to confirm, there is no new bonus/malus mechanism in order to incentivize quality? Or for example, is there an incentive on getting to the capacity target? Or has that [ not ] been defined yet?

Okay. No. For what concern the capacity target, is one that we're -- exactly as it was in the other [ RP ]. So target would be set. Bonus/malus and the mechanism of bonus/malus, that will be set by each state and agreed with the national authority and European Commission at a level that could be very close to RP3 mechanism, very close mechanism, similar mechanism. So you think -- you should think that a bonus/malus on capacity or quality as you want to call it, would be set. But this is the really national one, not as a cost efficiency. The cost efficiency is a common for all European country. The quality, so the delay, the capacity target would be set by each state directed with the national authority according with the European Commission. But this is the process that is going -- is ongoing now. It will be set in the performance plan that would be submitted in October -- yes, early October.

[Operator Instructions] The next question is from Luca Bacoccoli of Intesa Sanpaolo.

Two questions from side. The first one regards the cash flow generation, which is almost doubling in the first semester versus last year. So I was wondering if -- should we expect a similar trend in the second half? Or there are going to be some, let's say, [ or lots of ] changes, for example, on CapEx, which were very low in the first part of the year, maybe deterring the strong trends seen so far? And the second question is on the efficiency targets. You mentioned that some countries were not happy on those targets. So I was wondering if you, let's say, were expecting less strict efficiency target or you are okay with it?

For what concerns the second question, go straight to the point, I guess, I don't know what the other country is going to do. I mean, I can imagine, but it's something that, I guess, is their point. For what concern us, we are very focused to meet the target that was given to us according with this huge amount of traffic that we are managing. In this moment, this is our approach. For what concern you said the cash, in general term, we are generating a lot of cash, more cash than last year. If you look at the half of this second quarter, end of the second quarter, we have generated more than EUR 28 million versus the last semester -- sorry, of 2023 that was negative, it was minus EUR 3 million. So in general terms, we are generating more cash and this impact [ only ] positive. Most of the impact of the cash we expect now in the third -- in Q3, because, as you know, the billing cycle foreseeing that the traffic of 1 month is cashed in 2 months later. And that's the reason why all the important traffic -- important volume traffic that we are managing now, even the last part of the second Q, would be cashed in now and the next month. So our cash generation will, in general terms, increase, pushed by this increase of traffic that is actually billed and cashed in. Is it okay, the answer, or do something else?

No, that's okay.

The next question is from Nicolo Pessina of Mediobanca.

I didn't really understand what are the changes under discussion to the bonus/malus system. So can you please repeat the explanation?

Sorry, are you talking about the capacity target or some other targets, Nicolo?

Well, as far as I know, today, there is a bonus/malus system applied to the quality of service measure in terms of being a delayed flight. So I didn't really understand what is going to change potentially with the next regulatory period?

No, the change is definitely -- the only -- okay, I now understand what you said. The commission said as there are a lot of pressure on capacity actually, so they allowed the service provider to manage better the bonus/malus mechanism, more or less is [ activity ] thing. So is just more flexibility on set of the target and [ I will ] say, the scale, the mechanism where the bonus/malus is provided. So in general term you should think RP4 as more or less a same mechanism of RP3 and RP2. In general term, the European Commission as the -- general performance in Europe internal capacity and so delay is not so good. It's more pushing to the state to perform well. And that's the reason it's more focus to set the target for each state that are achievable, but also challenging. And that is actually the discussion in the moment.

And the system?

Yes, the system would be, actually, the same. Definitely, I mean, as we know, the mechanism will more or less continue to be the same.

I understand now. I would also have another couple of questions. The first one is on the potential expansion into the airport business. You talked about this in the business plan presentation back in March. I wonder if you have done any additional thoughts about this? And if anything is moving in this direction? And second question on a new agreement with the Labor Unions that the Unions announced last week, and I would like to understand a little bit more about what they refer to?

For what concern the first question, I guess you said the part related to the [ not ]-regulated business and M&A opportunity?

Right.

Okay. In this moment, we are in a phase of starting, looking at some opportunities. We have some small, medium company that we are looking at, at the moment. Nothing ready to start to analyze, but it's always -- I mean, are some targets that are related to our core business. I mean, activities that we in some way can complete our business -- our core business and also help us to be more proactive and push in [ not ]-regulated business. So nothing related to airport if it was a question of this, but it's more small target very, very close to our business, within the guideline we give in terms of technology area related to us and software and cybersecurity. That's still what we are looking at. For what concern the second question, yes, it was related to the agreement with trade unions. On 30 July, 2024 at the end of a signing agreement with the unions. And this agreement will refer to the renewal of the normal fees part issue [indiscernible] of the contract. As you know, the financial part was already updated in 2022. We have -- I mean [ in ] sometime we can split this in 2 part. The financial part was agreed in 2022. And then if we have some update to do on a normative part, we do after that. That was done and it was close on 30 July, 2024. And let me say the 2 things that touched, the first one, we actually also talked about our core, and it was related to the productivity. So we aim to incentivize the [ presence ]. In terms of cost, this doesn't really have a significant overall impact, very, I would say, little, in terms of variable components of remuneration. In some way in the other question we [ kind of ] introduce these items of the productivity. And the second point is we have better [ rules ] in to start working. We have to define better the rules put in the contract. And some other items in the area of welfare for the staff, very small thing, not a big impact.

So if I understand correctly, there is a new agreement on productivity impacting the variable component of staff cost. So should we expect an increase of this component becoming more relevant going forward and driving to an additional growth of staff cost going ahead?

Yes. The idea was to work more on flexibility and productivity, and there was -- we used this agreement also to be able to work on this side. This is -- as we said before in another question, we believe this is the right way to manage -- the correct way to manage the increase of traffic. And this will help to manage the peak of traffic during the summer and the situation that [ makes ] the traffic will increase by 20% [ accrue ] before [ you ] need to increase also the -- I mean fit-to-hire more and more people, but it's something that at the moment we are managing in this way. It's a mix between new people come in, and this is something that's happening actually, and able to manage with the flexibility the peak of the traffic.

The next question is a follow-up from Aleksandra Arsova, Equita.

A short one on free cash flow. Just to be crystal clear, so if I remember correctly, during the strategic plan presentation in March, you mentioned that free cash flow for 2024 should be at least in the region of 2023 free cash flow, which was about EUR 140 million. Do you confirm the fact that in 2024 we will see at least EUR 140 million or above?

At the moment, as we confirm the guidance -- yes, the outlook or the guidance that we actually confirm also the level of free cash flow generation, as long as-- Okay. No, no. We say, no, no -- we have said -- sorry, just the internal check. But we said that -- in the meeting, we said that more or less the generation 2024 will be more or less 2023 generation. That is what we said actually, it's more we confirm this thing. Then after the summer season, the traffic would still continue to be very, very high. We may review also this point and see if it'd give another guidance or [ whatever ], together with the other guidance.

Next question is a follow-up from Marco Limite, Barclays.

I've got just one left. So when we think about the CMD for next year, when you're, yes, going to explain the plan around the regulated business, I remember in the past you were quite vocal about cost savings coming from SEC consolidations and then a lot of cost savings that, yes, [ and obviously ] implementing. Just wondering whether you're going to, let's say, clarify and specify or quantify the amount of cost savings also that you expect to achieve [ in ] your next regulatory plan? And whether, yes, that basically comes on top of the unit cost target set by European commission, so it's all cost savings that you can keep for yourself?

What we can do -- we can say now [ while ] the process is ongoing with the negotiation with the regulatory, we confirm what we said in the Investor Day in March when we said we need to finish, we need to close negotiation. We have the target set by the end of this year, the beginning in the next year, because actually when the European Commission will approve, the performance plan is something that will depend from us. [ And ] we believe we've foreseen that more or less the process should be closed within the end of this year, the beginning -- first month of 2025. Right after that we will deliver our -- we will -- yes, we will deliver our business plan. And together with this, we will give some more flavor on what you are asking now, with more detailed information that will be provided to all of you. But we still need to wait the end of the process before adding some more detail. This moment is not something that we could disclose, we can't disclose it.

The next question is a follow-up from Cristian Nedelcu from UBS.

Could I please follow up on the Qatar contract in the non-regulated business? So just to clarify this, if you exclude this contract, what was the revenue growth year-over-year in your non-regulated revenues? And then just to make sure I understand correctly, for the second half of the year, this Qatar contract revenues, what happens to revenues year-over-year, they are up, they are down or -- just to confirm? And so just another small one regarding the traffic in the next regulatory period, is this already decided? Or can it still be subject to change, so the traffic for the midterm will be decided at the end of this year or beginning of next year? Or -- if you could kindly clarify?

Thank you for your question. The first one, is it just a different distribution. So the point if we compare the [ not ]-regulated revenue in this half versus 2023, is a different distribution year. And that's the reason why we have EUR 2.8 million less than last year, just because we had the Qatar project that was very important last year and this quarter is not -- sorry, in this half is not, I mean, so important in term of revenue. But this doesn't mean that we will not reach a target -- the outlook, the guidance that we have given. We definitely confirm that was in line. I mean the growth on [ not ]-regulated business is, at the moment, in line with what was our planning, our budget. So we knew that we are going not to push to have so great performance in this part of the year because contracts are coming in now. So we have to -- before adding the contract and then to develop it. So the second part of the year was planned -- and we confirm it, planned an increase of revenues coming from [ not ]-regulated business to let us reach the target in terms of growth that we have given, double-digit growth, as we said in our outlook. For what concern instead the second question, that was related -- sorry, I'm little bit [indiscernible]

I can quickly repeat it.

Yes, the traffic. Now, that's a good question because the point is [ now ] Eurocontrol give their last forecast, the public -- I mean, the one everybody knows. This forecast, at the moment, for the future year is not so -- for what concern at the least the base scenario is already in some way -- actually -- old, actually, yes, we can say old. A little bit more concerned with the base scenario for 2025-2026. Actually, we are reaching now the level forecast Eurocontrol in 2025 for Italy, actually. So that's the reason why we are thinking about using a mix between the -- always using the scenario, but not using the base scenario, not using, for example, part of the high scenario. You know that in the forecast, there is a high base and low scenario. Normally, [ we use ] -- [ we have ] suggestions to use the base scenario, we can easily use another scenario or a mix between 2 scenario. This is something we are thinking about now for RP4 because, as I said before, in-- sorry, 2024 traffic result that we're having now is very, very important and it's kind of getting better the 2025, the base scenario of Eurocontrol. So that's the reason why we should expect probably in the first couple of years more or less a difference between the base scenario of Eurocontrol. And then at the end of the RP4, probably we will meet it in terms of growth -- percentage growth. But you should still wait our decision. This is just a flavor that I'm giving to you. We are thinking these days how to work on this item. And that's one of the reason we are waiting for the summer season to -- beginning of July and August are our 2 most important months of the year, that's important -- that's the reason why we are really focus to manage well the traffic, to increase the traffic, [ has ] to see [ then ] part of the traffic then having a very strong forecast in RP4.

The next question is a follow-up from John Campbell of Bank of America.

I wanted to follow-up on this RP4 traffic forecast. So can you clarify if you will use February 2024 Eurocontrol updates? Or should we expect you to use on October 2024 update? That is when Eurocontrol typically update all of their forecasts. And any other details you can give on that would be helpful. I realize you were talking about the mixture of low and high and medium scenarios. But mainly, I'm interested in, are you going to use February? Or are you more likely to use October if and when it comes out?

At the moment, there aren't any public forecast given by Eurocontrol. They are not going to foresee -- I mean they are not going to publish, at the least, for what I know, any update on traffic before closing the -- sorry, the planning for RP4. So even if they publish on October a new traffic, but the performance has to be delivered within the end of September, beginning of October, we will not be able to use. So each country use the latest Eurocontrol forecast, and they are thinking how to plan the traffic, using that traffic, using also internal forecast -- internal study. We have our studies [ in site ], we have analysis, actually, we put on the top of the Eurocontrol forecast, we put this analysis that we have, and we [ try ] to find the best forecast for us. I cannot see anything else actually before, we haven't decide. So I cannot give you any other, let's say, information about this other than the flavor in the way we are -- I'm happy now, but it's really something that is not easy. There's not any Eurocontrol update, this doesn't really help us to be more precise, and also announcement, but in general, in the forecast. So we probably use the latest forecast, as I said before. And on this, we will have our -- we will do our analysis and our decision.

Gentlemen, there are no more questions registered at this time. I'll turn the call back to you for any closing remarks.

Yes, thanks a lot for attending this conference call. And obviously, the Investor Relations will be available for follow-up should you need them. So thanks again. Good evening.

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