Enav SpA
MIL:ENAV
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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the ENAV First Quarter 2018 Results Conference Call. [Operator Instructions] I must advise you the conference is being recorded today, Monday, the 14th of May 2018. I would now like to hand the conference over to your first speaker today, Stefano Songini. Please go ahead.
Thank you, operator. Good evening, ladies and gentlemen, and welcome to ENAV's First Quarter 2018 Results Call. We have released our earnings release a couple of hours ago, so now we'll walk you through a formal presentation. I have our CEO, Roberta Neri; and our CFO, Luca Colman, in the room with me who will walk you through a formal presentation, after which we will be happy to take your questions. With that, I will hand the call over to Roberta.
Thank you, Stefano, and good evening to everyone and welcome to ENAV's first quarter 2018 results call. The year started with highly encouraging traffic dynamics, which confirmed the trends we witnessed in 2017 and which indicated a solid rebounding in the Italian market. As you listen also, the traffic in April was very, very strong with a growth of 8.5%. So the data until the end of April is 7.8% of increase. So this was despite the ongoing closure of the Libya airspace and the issues involving Alitalia, so that is very, very good. As you know, our business is highly seasonal, and the first quarter of the year is typically the weakest in terms of traffic and top line.
Our net revenue in the first quarter 2018 has decreased by 0.5% year-on-year, reaching EUR 175.5 million, with a strong growth in revenues from operations, up 5.9% year-on-year, offset by negative balance in the period. As we will explain in further detail, the negative balance is mainly the result of higher balance reversal in tariff applied in 2018, driven by the 4% reduction in the regulated tariff included in the performance plan.
Moving back to the growth in revenue from operations. En-route revenues came in at EUR 120.5 million, up 8.1%. And our terminal services reached EUR 44.2 million, growing 1.7% over Q1 2017. As I mentioned in the first quarter of this year, we recorded a negative balance of EUR 4 million compared to a positive balance of EUR 6.3 million recorded in the same period of 2017. In our nonregulated business, the first quarter was also positive, with revenue increasing 0.1% to EUR 3.1 million. In Q1 2018, we continued to focus on cost efficiency and achieved a solid reduction in external costs, which enabled us to increase our EBITDA by 4.3% year-on-year to EUR 30 million, with the margin increasing 0.8 percentage points to 17.1%.
As I mentioned before, the first quarter reflects a strong seasonality, with a weaker top line due to a lower traffic proportion, coupled with a leaner trend in costs, which lead to a lower margin in this first part of this year. The seasonality effect also drove to the bottom line, where we recorded a negative net income of EUR 4.4 million compared to a net loss of EUR 4.2 million recorded in Q1 last year. Our capital structure remains very solid, with a net debt to last 12 months EBITDA at 0.3x, providing us with significant flexibility for the future. As you know, on April 27, 2018, we held our second GM, and as a listed company, which approved the payment of a dividend for 2018 of EUR 101 million equals to EUR 0.1864 per share.
Moving to the next slide on our quarterly results. The slide show the traffic trends recorded in our en-route and terminal business. En-route traffic performance was particularly strong, driven by a sharp increase in our flights which service units up 11.7%, which we attribute in part to the positive effect of the Free Route services, which encourages airlines to use the Italia space for a longer distance as well as the first signs of normalization of traffic from countries like Turkey, Egypt, Greece and Tunisia.
International flights also posted solid growth, up 7.5% in terms of service units, thanks to an increase in the number of flights and an increase in the average distance flown. The performance to and from all continents was positive, with Europe accounting for 77% of international service units. Lastly, national en-route traffic performance was also positive with service units increasing by 3.3% despite the 0.7% growth in flights. And it is a result of greater distance flown driven by more flights connecting directly in northern and southern Italy, where [indiscernible] is less competitive. Overall, our performance in en-route in the first quarter this year has been the strongest amongst the big 5 European countries, and it is also at the end of April.
Terminal traffic growth was also solid in Q1 2018, with a 5.2% growth in service units, driven by positive performance in all 3 charging zone. So in fact, in Terminal Zone 1, the decline in national traffic was more than compensated by strong growth in international traffic, whereas in Terminal Zone 2 and Terminal Zone 3 service units increased both in national and in international. The strong traffic trends confirm the rebound of the Italian market and clearly demonstrated our diversified business mix with a favorable exposure to international traffic trends. In Q1 2018, only 21% of our en-route services are related to domestic flights, about 43% of them are generated from international flights, and over 36% are generated from other flights.
Let's now have a look at our revenue breakdown, and it is on Slide 3. Net operating revenues increased by a solid 5.9% year-on-year, mainly driven by growth in en-route revenue, up 8.1%, resulting from an increase in traffic, coupled with a substantially stable tariff of EUR 79.98. Terminal revenue growth in the first quarter was also positive, with an increase of 1.7% year-on-year, driven by service units growth of 5.2% overall and positive in all charging zones, partially offset by the lower tariffs applied in the 3 charging zone versus last year.
The balance was negative for EUR 4 million compared to a positive balance of EUR 6.3 million in Q1 last year. And it is mainly due to a significantly lower en-route traffic balance recorded in the period, thanks to the strong traffic trends, which reduced the gap between actual and planned traffic to minus 2.8%, coupled with the higher balance reversal in 2018 tariff of EUR 10 million. The EUR 10 million is compared to about EUR 6 million recorded in Q1 2017. While the reversal has a negative impact on revenues, it represented the cash in of balance revenue recorded in the previous year, with a positive effect on cash flow, as you can see further in the presentation. We also recorded a terminal balance in Q1 2018, which was positive for Zone 1, negative for Zone 2, and positive for Terminal Zone 3 which, as you know, follows cost recovery logic.
Revenue from our nonregulated business were stable year-on-year, exceeding EUR 3.1 million. The main positive revenue drivers were flight and special services in Italy and abroad; the building of the control tower in Mitiga airport in Libya; and the Independent Checking Consultant activities for the Kuala Lumpur traffic control center. These compensated the reduction of the revenue from the redesign of the single Emirates sky in United Arab Emirates, with the contract amount is in its final stage; and the finalization of the contract in Morocco in 2017. So we have an offset effect. The item, other operating income, for EUR 8.6 million is mainly related to revenues grants for safety and security of EUR 7.5 million, as provided for the law 248/05, which were stable year-on-year.
Last -- next slide, moving on the costs in the first quarter 2018. We continued to work on streamlining our costs. In the first 3 months of the year, we recorded a decrease in external OpEx of 4.9% over the same period the last year, despite the significantly higher traffic managed. The main savings were related to the reduction in purchasing costs driven by a more efficient spare parts management, the reduction in telecommunications costs related to the connectivity of our single full IT digital network, and the renegotiation of the contract as well as lower unit price on utilities costs. We also continue to see the benefits of the in-sourcing of, first, on the facility services and the closure of certain offices rental contract with the relocation of our personnel to our own premise in Ciampino.
We also managed to maintain personnel costs under control with a decrease of 0.1% over the previous year at EUR 118 million. This result, the reduction of personnel and labor costs, is all the more significant since it include an assumption of -- regarding the potential effects of the labor contract renewal as well as the relevant portion of the performance share FTI plan.
In Q1 2018, we also saw a reduction in the variable salary component, which, in the first quarter last year, had been negatively affected by an increase in the overtime associated to the launch of the Free Route service as well as a reduction in average count of 50 units. The count as of March 31 is of 4,236 people, including 73 temporary labor units that perform several pilot simulation activities. Finally, we also recorded a lower social security cost, having reached the ceiling for pension contributions, partially offset by the voluntary redundancy costs of EUR 0.6 million. On the labor contract renewal, we continue to actively discuss with the trade unions but have still not reached the final agreement. As you know, under Italian law, the old contractor remains in force until the approval of the new one.
So I leave the floor to Luca for going more deep in economics and financial data.
Thank you, Roberta. Looking at Slide 6. You can see that our net sales decreased marginally in the first quarter of 2018, with a strong performance in our revenue from operations, offset by a negative balance. The main contribution to the year-on-year growth in revenue from operations comes from en-route activities, which saw a revenue increase of EUR 9 million. Terminal activities also posted a positive performance, with revenue increasing EUR 0.8 million over last year. It is worth noting that both results were driven by the strong increase in traffic, only partially affected by the lower tariffs applied in 2018 on the 3 terminal zones. As Roberta said, the tariffs for en-route was more or less stable versus last year.
The positive contribution of revenue from operations was, however, fully offset by a negative balance variation for an equivalent amount, mainly resulting from a combination of lower en-route traffic balance as the difference between planned and actual traffic has shrunk to minus 2.8%, thanks to the sharp increase in traffic and significantly higher balance reversal in the tariff of 2018, which has a negative impact on the P&L but has a positive effect on cash flow. I would also add that there was a positive terminal balance recorded in Q1 2018 in relation to Terminal Zone 1 traffic as well as for Terminal Zone 3 where, as you know, we apply full cost recovery logic.
Despite the marginal decrease in top line, our EBITDA increased by 4.3% to EUR 30 million, driven by the continued focus on cost control, in particular in the areas of purchasing, telecommunication and utilities and real estate, with an increasing recourse to in-sourcing of certain activities. We also had a positive contribution from the marginal reduction of personnel costs. Thanks to the both dynamics, EBITDA margin increased by 0.8 percentage points to 17.1%. As Roberta mentioned before, the first quarter margin is seasonally the weakest due to the top line and traffic being the lowest in the year while our costs are linear.
Moving on to our P&L on Slide 7 and item below EBITDA. As you can see, depreciation and amortization net of CapEx contributions was stable over last year at approximately EUR 32 million, reflecting the normalization of our investments over the past 2, 3 years. In the first quarter of 2018, EBIT was negative for an amount of EUR 1.7 million, improving by 40% over an EBIT of minus EUR 2.9 million recorded in the same period last year. Financial income in Q1 '18 was materially lower than Q1 '17, mainly due to the decrease in balance receivables actualization for Terminal Zone 3, following the decree issued on April 24 of '17, which settled the credit outstanding for an amount of EUR 26 million, and which had a significant positive effect on Q1 '17.
Financial expenses were substantially in line with the previous year, with a marginal increase in interest expense due to the drawdown of the second tranche of the European investment bank facility at the end of 2017. As a reminder, the interest on this loan is 1%. The higher income taxes in Q1 '18 were due to the increase in taxable income recorded by certain subsidiaries. As a result of the above, our net result was negative for EUR 4.4 million compared to a net loss of EUR 4.2 million recorded in the same period last year. As mentioned, this reflects the seasonality of the first quarter.
Moving on to Slide 8. Let's have a look to our balance sheet and capitalization. As you can see, our net fixed capital mainly includes net fixed assets for EUR 1,135 million, declining marginally over December 31, '17, mainly as a result of G&A being higher than CapEx; financial investments which relate to our investment in Aireon and which declined by EUR 1.4 million as a result of FX; and noncurrent trade receivables and the payables, which increased by EUR 5.7 million, driven by the balance recorded in the quarter.
Our net operating capital -- operating working capital, intended as trade payables and trade receivables plus inventories in the first quarter of 2018 saw a decrease in trade receivables for EUR 4.1 million, due to lower invoice traffic in February and March compared to the last few months of 2017, an increase in trade payables for EUR 4.8 million related to the cash-in of the pre-financing on the Connecting European Facility costs, offset by lower balance tables for the amount included in our P&L and in the 2018 tariff applied. I just remind that this year, full year, we will recover 70 -- EUR 56 million versus EUR 28 million of 2017 tariff.
The item other current assets and liabilities includes the higher debt for EUR 21 million related to tax and social security payables, higher debt towards the Italian Air Force and ENAC and personnel cost accruals for the period. Our cash balance in the first 3 months of the year increased by EUR 34 million as a result of the positive cash generation from the business as well as the cashing and the pre-financing on the Connecting European Facility costs and other financial projects for an amount of EUR 12.5 million. As a result, our net debt as March 31, '18, decreased by EUR 34 million to EUR 83 million, leading to a net debt-to-EBITDA ratio of 0.3x. We expect the net financial position at the year-end to remain more or less at this level, also included in the CapEx guidance for 2018.
With that, I will hand the call back to Roberta for her closing remarks.
Thank you, Luca. Before opening the floor to your answer and questions, I would like to briefly summarize the key themes of this quarter.
The strong traffic dynamics we saw in Q1 this year allowed us to record a very high performance in our revenue from operations, which grow 5.9% year-on-year. The traffic trends, as we discussed, include the effects of the ongoing limitation in the Libya airspace and the uncertain solution of the Alitalia situation. Our nonregulated business continue to deliver results in line with our expectation, and although still small in absolute revenue terms provided very interesting margins. We will continue to actively focus on these areas of business and plan to increase its weight within our overall revenue mix over time.
ENAV earnings at the forefront of new technologies development. A few days ago, we announced that the launch throughout the Alitalia space of the data-link technology that provides us increased quality of service and safety in the telecommunication between the controllers and aircraft. In the coming weeks, an additional 10 satellites for Aireon system will be launched into orbit, bringing the total satellites in orbit to 60. Aireon plans to complete the deployment of its satellites in 2018, allowing us and our partners to offer this system to clients worldwide next year, in 2019.
Our cost efficiency plan remains on track. In the first quarter, we delivered savings on external OpEx of 4.9% over last year. On personnel costs, we delivered a marginal reduction in Q1, which represents an important result for us. Also, considering that we are including in our costs an estimate on the effect of the labor contract renewal, which was not included in Q1 2017 numbers. It's worth noting that the negative net income includes a higher financial income recorded in Q1 2017 due to the balance receivable actualization. So net of this, net income in Q1 2018 improved by more than 20%, 24%. Based on this, I would like to confirm our guidance for 2018 of flat to low single-digit net revenues growth; stable EBITDA margin of around 32%, and the CapEx in the region of EUR 125 million. We also confirm our target to deliver a 4% increase in dividend per share payable in 2019 for the 2018 financial year, and it is in line with our dividend policy.
So with that, we are now ready to answer any questions.
[Operator Instructions] Your first question comes from the line of Rishika Savjani.
I had a couple of questions, please, that focus around labor. So If I read correctly in the press last week, I think there was a strike by some of the air traffic controllers. Could you just talk about the current kind of industrial relationship situation and how you're expecting kind of the contracts and timing of that to pan out from here? And then my second question, which is also on the labor side. Having announced your long-term strategic plan a couple of months ago, and clearly, a big element of that strategic plan involves your staff and the ATC reorganization. Could you maybe give us a bit of color in terms of how the employees of the new organization have reacted to the plan? That would be very interesting.
Okay. As I told before, the discussion for the renewal of the contract has started. In the meantime, the discussion is considering also our new business plan that we announced last March. And our business plan is very important from an operative point of view. So there are other discussions on table regarding the consolidation of our air control center, regarding the transfer of our, obviously, approach activities from a certain numbers of airports to our air control center; and regarding the future amortization of our terminal utilities for a certain number of airports in Italy. So in the dynamics of the discussion and the dialogue with the trade unions, we have already put in place -- we have already considered the potential strike, some potential strikes. And we are managing with stronger relationship with the national traffic -- sorry, national representative of the trade unions, so that we managed also the importance to have a strike in the meantime of discussion to manage the employees. So we are not worried about the strike. We are -- we know very well that the discussion regarding our -- the new contract -- labor contract and also, the understanding -- the better understanding of our employees regarding our business plan is not already finalized. But we are very confident on the successful of the discussion because the national representative of the trade unions has already evaluated our industrial plan as very [Foreign Language]...
Sensible.
Very sensible from an industrial point of view. We can consider that the impact coming from the plan is mainly related to the geographical movement of our employees that is a normal condition in our company. And all the effect coming from the reduction of the number of employees are managed through the natural and incentivated retirements. So the discussion is a good one. We have to meet again the trade unions, and we are optimistic about the right finalization of the agreement.
Okay, great. That was very clear. And can I just maybe just quickly follow up and check for calendar Q2. There won't be any kind of notable financial impact of the strikes? Or is there something that we should mind as we think about the next quarter?
Yes, at the moment, we don't -- we calculate the impact as really low because as you can imagine also with our protection, [ traffic ] protection, we had -- I mean, we can, in the economic view, reduce the impact to a very small impact.
Your next question comes from the line of Nicolò Pessina.
First question is on balance generation. Would you expect in 2018 a negative balance generation in Zone 3, as it was in 2017, due to the traffic growth about the estimates utilized to set the tariff at the beginning of the year? This was the first question. Second question, again, on the balance, in particular, I'd like to know what your best estimate for the total amount of balance reversal is for 2018. And final question, I wonder if you could update us on where we stand in terms of discussion with Eurocontrol for the next regulatory period, if you have already had contact with the regulator, and more in general, if you see any potential change to the overall framework to be implemented?
Okay. Starting with the first question. Obviously, we love this increase of traffic because it is -- as you can imagine, as our mechanism -- traffic mechanism kind of help protect us when the traffic goes down, as we always record, after the 2%, we always recover 70% of the traffic lost with the balance. So within this range, so between 10 -- sorry, until minus 2% of the difference between the actual and the planned costs, we -- the recover that we are having now actually impacted really low, in the 7 -- 3-0, 30% is impact positive in our revenue as the traffic was already covered with the balance. In general term, we always prefer to recover with a tariff more than with the balance, because the balance will impact the future tariff indication, actually. So this is good. At the moment, we are at minus 2.8% of traffic, so the actual one versus the planned in the tariff. So this means that we are reaching that zone that is, for us, all increased. So as long as we -- the traffic will increase, as Roberta said, also in April increased. So we are continuously improving. And if we reach that bend, perhaps it will be all upside. And this is interesting, there's a minus 2% to 0%, and plus 2% to 0%. We have 4% where all the differences are on our shoulders, so it would be positive impact on our P&L. This is for the first -- I don't know if I answered to your first question.
Well, actually my first question referred essentially Terminal Zone 3. The traffic growth is very strong and that the tariff was set assuming costs and, I don't know, a traffic estimate presumably below the strong traffic growth we are seeing in these first few months of the year, I'm wondering if you expect anything to [ new ] back to the airlines at the end of the year because of higher than due income?
Okay. Sorry, we had a problem at the beginning with the volume, so I didn't get your question at your total -- your first question fully. Just say that probably you are referring also to the balance for Terminal Zone 3 for this first quarter, it seems to be high. But the main reason is related to the fact that the calculation of the balance of the year is related to the cost level, more or less in the period, that, as you can imagine, is obviously quite stable in the quarter, while traffic is, in the first quarter, much lower than the second and third one. So what's the point is, in the first quarter, we always record that as cost recovery as Terminal Zone 3 is a cost recovery system. We always recover in that quite higher balance that the one that we normally recover at the end of the year, even if the traffic in the first quarter is increasing very well as it's doing now. So this is mainly related to the fact that we have different level of cost against the sales revenue in the first quarter. But at the end of the period, we don't foresee to have so much difference at the moment, if the traffic will continue at that level. But we will be more precise in the Q2, Q3. Okay.
Tariffs?
Yes, about tariffs. Okay. In 2018 tariff, we are going to recover, mainly in en-route, around EUR 56 million of balance reversal versus 2017 tariff that will recover EUR 28 million. This is mainly -- you can also see these in this first quarter. As you can see, our balance in the first quarter 2018, the recovery was almost EUR 10 million versus EUR 6 million in first quarter 2017. So you can add the money to -- over the impact. Then LP 3, the discussion is going. Actually, the commission is going to present the draft -- the official draft at the end of May in the single sky committee. So the draft of the new regulation, the first draft we have some insight. We are looking at the information right in these days. We have some draft at the moment where -- that we are studying. But the official one would be present to the state at the end of 30th May. The commission's intent to try to close all the approval process within June, July to set the target -- the performance target, I would say, within October -- September, October. And then we have for the official planning from -- planning of -- performance plan from the state. That's the planning at the moment.
I see. And can you disclose any detail of the draft that you have seen so far of the new regulation?
No, at the moment, it's a little bit too early also it's because the very first draft that we are studying. It's like we have 2 days -- I mean, this first draft was given to us 2 days ago. So we are just controlling, and probably we'll also not be the official one, the last one. So I'll just say that at the moment, we are not very worried about -- that's the most we can say.
[Operator Instructions] Your next question comes from the line of Luigi De Bellis.
Three question for me. The first one on the traffic trend for terminal zones. Do you think the trend reported in Q1 are sustainable for all the 2018? The second question, could you give us an indication of the financial charges expected by year-end? And the last question, you are continuing to generate cash. Are there any update on how do you plan to use it?
Luigi, sorry, can you repeat the third one? We couldn't hear very well.
Yes. On the use of cash, because you are continuing to generate cash, if there are any update on how do you plan to use it?
Okay. About the traffic, at the moment, it will be -- I mean, mostly was -- most of the end year will be impacted by the summer season. At the moment, we don't see any change, possible change to the trend that we are having now, so it's a very positive trend. We believe that, at the moment, this trend will be -- we'll see also for the end of the year. As Roberta mentioned before, we just have this more in the data of April, April data, an increase for the en-route, this is the only official one that we have at the moment is 8.5% increase. And if I remember that we had in 2017, April 2017, an increase of 5.4%. So you can imagine the increase that are having now. 8.5% is really a great big increase. So at the moment, we don't have any -- I mean -- and we are not really worried that this trend could change. About tax. I don't know if I understand very well your question but that we're supposed to have the level traffic related to the -- oh, I'm sorry, financial charges, right. Sorry, sorry, sorry. The year-end, at the moment, I don't have the paper with us, but the fact that we are having in the first quarter will be proportionately for the end of the year at the moment. So I would say that this is the regular balance actualization in -- because the main effect that we have -- we had in 2017 was the free up of EUR 26 million that released an actualization of EUR 1.1 million. So this is the main impact that we had in 2017 that we will not have in 2018. For the rest, we will be more or less the same, the financial expenses. And then which -- Roberta, I don't know if you want to...
I suppose the last question related to the cash flow during the last 3 months and the expectation of free cash flow over last -- the rest of the year. We are confident of the fact that the net financial position at the end of March that improved of EUR 55 million will remain stable at the end of the year. It means that we are going to pay our dividend of EUR 101 million, and the cash generation of the rest -- the near future over the coming year is aligned to maintain more or less stable, the net financial position that we achieved on the 31st of March.
Your next question comes from the line of Juri Zanieri from Kempen.
Just a quick update. I was wondering if you have any news on the privatization process of your main shareholder, the Ministry of Economy. If you can provide us any insight or view. Would we expect the privatization to materialize within 2018? Any light will be appreciated.
No items regarding the potential further privatization of the company is on the table, considering that we have not a government in Italy. And so I believe that we have to wait the new government. And I don't -- we are not aware of the possibility that one of the main items of the new government will be the privatization of ENAV.
There are no further questions at this time. Please continue.
Okay. Well, thank you very much, ladies and gentlemen, for being with us on this call. If you have any follow-up questions, obviously, reach out to me with my usual contact. Thank you, Roberta. Thank you, Luca. And we will speak for our first half results in early August. Thank you very much. Bye-bye.
Bye-bye.
Bye.
That ends our conference for today. You may all now disconnect. Thank you for participating.