Earnings Call: Q3 2020

Nov 12, 2020

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Enav Nine Months twenty twenty Results Conference Call. As a reminder, all participants are in a listen only mode. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Vittorio de Domenico, Investor Relations Manager of ENAB. Please go ahead, sir. Thank you, Claudia, and good afternoon, ladies and gentlemen. Good morning to those of you connecting from The United States. Welcome and we invite you to the Ana nine months twenty twenty results call. I'm joined here by Paolo Simeone, Ana's CEO and Luca Colman, Aeron's CFO that will be running you through the formal presentation. After that, we will be happy to answer your questions. And with that, I leave the floor to Paolo. Okay. Good afternoon, ladies and gentlemen. Welcome to another nine months 2020 reduction. As you know, in the first nine months of 2020, the aviation sector has been heavily impacted by COVID-nineteen with the service unit down 59.658.8% for our route and terminal, respectively. After the lockdown, when the traffic was down approximately 90%, we saw traffic volumes recovering during the summer season, with September traffic traveling at minus 60.1% year on year. Second wave of COVID-nineteen currently afflicting Italy and Europe has halted this recovery, leaving October traffic at approximately minus 60% year on year. Despite this challenging environment in which we are operating and the lockdown measures undertaking in Italy from March to May, we keep full business continuity. And at the same time, we took care on the health and safety of our employees. Let's focus now on our nine month 2020 financial results. As you may see, the net revenue decreased by 14.8% year on year from EUR 691,300,000.0 to EUR 589,100,000.0 despite a 62.6 year on year decline in revenue from operations, largely offset by a positive balance, which includes our best estimate on the effect of the temporary derogation to the performance scheme regulation proposed in July and published the fourth November by the European Commission for 2020 and 2021. In the first nine months of 2020, we were able to offset a large part of the €102,300,000 net revenue decline, thanks to several cost efficiency measures put in place, leading to a €175,700,000 EBITDA, down €61,200,000 or 25.8% year on year. EBITDA margin stood at 29.8%. Notwithstanding the revenue decline, we closed the first nine months 2020 with a net profit of €55,300,000 compared with €98,800,000 achieved in the same period last year. This is thanks to the efficiency measures put in place and the solid traffic risk sharing mechanism. CapEx was EUR 47,400,000.0, that means 12.1% lower than twenty nineteen. As you see as you will see later in the presentation, Enel is well equipped to deal with COVID-nineteen dramatic situation, thanks to a solid balance sheet and a strong liquidity profile further enhanced by two new ESG linked term loans recently signed for a total amount of €150,000,000 Let's move on to Slide two to look at the traffic trend recorded in the first September 2020. Our group service unit decreased 59.6% year on year, reflecting the effect of the COVID-nineteen pandemic. This decline is combined effect of a very strong growth in traffic experienced in January and February, where service unit growth was 8.511.2%, followed by a sharp slide in March, reaching a 90% decline in April and May, a recovery starting in June until the September, which saw a year over year decline approximately 60%. It's worth noting that within our loop, the largest percentage of decline over last year was related to international flights with national traffic and overflight recording a less severe decrease. You can see the traffic splitting the upper right of the slide. Our flight accounts for 20 for 42% of total traffic, international for 36%, and national for 22%. To be noted also that traffic decrease in Italy in the first nine months of the year was in line with the other major European countries' performance. As a core for our group, terminal traffic was also severely hit by COVID-nineteen pandemic, showing a service unit decrease of 58.8%. All three charging zones were impacted with Terminal Zone 1 having the largest percentage decrease year over year, followed by Terminal Down 3 and Terminal Down 2. As already said, in the second wave of COVID-nineteen, currently afflicting Italy and Europe has halted the traffic recovery leaving October traffic in line with the first nine months of 2020 at approximately minus 60% year on year. Looking on Slide three, as already said in the highlights, we can see net revenue decreasing by 14.8% year on year from €691,300,000 to €589,100,000 due to a 62.6 percent decline in revenue from operations, largely offset by a positive balance amounting to €286,700,000 We saw a material decrease in both our route and terminal revenue, down 65.563.4%, respectively, mainly as a result of the COVID-nineteen pandemic, combined with the lower 2020 tariffs versus last year. It's worth highlighting that the just mentioned positive balance posted in our first nine months twenty twenty accounts was mainly driving by materially lower than forecasted traffic for both Arout and Terminal and includes our best estimate on the impact of the European Commission new regulation on temporary derogation to RP3 performance scheme for 2020 and 2021 approved November 4. As we know, the derogation indirectly poses a cap on the amount balance that can be recovered by the service provider over these two years in order to have the air traffic sector in such a difficult scenario. This best estimate is built on our assumption of a reduction of Enel's total actual determinative cost of 2019 to be applied to the cost recoverable in the tariff of 2020, assuming a recovery over five years starting from 2023 of the capped balance culminated in 2020 and 2021. Non regulated business in nine months 2020 almost doubled year over year, reaching million, mainly driven by revenue from EDS Air NOW that was not consolidated in the first six months of twenty nineteen. Finally, other operating income was €26,400,000 compared to €29,400,000 recorded in the same period last year, mainly due to a lower level of EU public projects. Moving now on Slide four, we can see that in the first nine months 2020, we continued to deliver on our cost efficiency plan to offset as much as possible the revenue decline and reduce our cash flow. Overall, we were able to reduce total cost by 9% year on year at 413,400,000 As shown in the graph, in the first nine months of the year, we recorded a 10% year on year equal equal to €10,000,000 external cost savings, driven by lower facilities and telecommunication costs resulting from lower consumption in our facilities for most administrative staff is not working from March or worse. The lower costs related to our full IP digital network, the lower cost SGA and business trip costs are coming from the reduced mobility coming from COVID-nineteen countermeasures undertaken. This meaningful reduction were partly counterbalancing by higher costs for external services linked to COVID-nineteen specific initiatives undertaken by the company, including the extraordinary sanitization of our facilities. It's worth noting that the external cost savings, excluding the impact of EDS S9, which was not consolidated in the 2019, would have been a material 14.2 on a like for like basis. That's why cost of the current amount decreased by 8.5% year on year to 342,900,000.0. This notable result was mainly driven by a material decrease in valuable pay and social security costs, thanks to reduced over time, especially during the summer period and the use of outstanding vacation balances of all our personnel. The fixed salary component increased 2.1% year on year due to mainly the inclusion of EDS as NAV employees, not included in the first half of twenty nineteen, coupled with 2019 labor contract revenue. Also, the earnings are worth noting that excluding three years of now, personnel costs would have decreased by a material 9.8% over last year. Lastly, capitalized internal works remained stable over year over year at €20,000,000 So let's move to Page five, which summarizes certain developments occurred in the first nine months of this year. As you know, Enava is undertaking several measures to cope with the consequences of COVID-nineteen and had and will have on the aviation sector for 2020 and beyond. Auto control and most of its member states continue to postpone the payment of traffic charges due to by due by airlines to a and spin related to the period of February, May 2020 from November 2020 onwards. The aim was to allow airlines to deal with the liquidity issues they are facing. As shown in the slide, February 2020 invoice will be cashed in in this month, while March, April and May payments will be postponed to 2021. However, it's worth noting that in April and May, traffic was down approximately 90%, which means that a minimal impact on cash flow of roughly €35,000,000 in total for the three months from March to May. Starting from the traffic flow in June, the normal two months during a settlement cycle has been restated and the receivables from airlines have been cashed in regularly. Let's start to Slide six, where you can find a summary of the regulation status. As you will recall, the RP3 regulatory framework was approved in January 2019, and the EU wide cost efficiency targets were set in May 2019. Based on this framework and target, each company submitted its performance plan for RP3 at the 2019. The approval by European Commission of Country Specific Performance Plans for RP originally scheduled for May 2020 was put on hold due to the current pandemic. In July 2020, the European Commission published a proposal that has been approved on the fourth November for the temporary delegation to Single Sky performance and charges scheme, following a special rules for setting a best setting of revised union wide performance targets for 2020 and 2021 in order to mitigate the impact of the COVID-nineteen pandemic and ensure the long term viability of the sector. Based on this proposal, the Commission expects the National Supervisory Authority to provide us data and information about CapEx forecast for the third preference period by December 2020 as input for the setting of the revised union wide performance target for RP3. Then the commission should adopt the revised performance target for RP3 within May 2021. Later, the national supervisory authorities should submit their new RP3 performance plan up to 2024 to the commission within October 2021. Finally, the commission should approve the RP3 performance plan by year end 2021 or in the 2022. Let me now pass the floor to Luca to detail the view of the nine months 2020 financials. Okay. Thank you, Paolo. As you can see on Slide eight, Genafe's net revenue in the first nine months of the year decreased by 14.8% year on year, driven by negative performance in both Enroute and Terminal revenue, which were largely offset by positive balance. Within the revenue from operations, the largest decline year over year came from the en route component, which decreased €354,400,000 while terminal revenue went down by €113,300,000 Both performance were mainly caused by COVID-nineteen pandemic, coupled with lower tariff supplied in 2020 on both en route and terminal. The year over year increase in balance of €362,600,000 over nine months 2019 offset a substantial part of the decrease in revenue from operations. As previously mentioned by Paolo, the balance recorded in the first nine months of 2020 was defined as the best estimate by the company on the new rules published on November 4 by the European Commission. With regards to the temporary delegation for 2020 and 2021 to the single European Sky performance and charging scheme of LP3. Thanks to our relentless focus on cost optimization, we managed to contain to €61,200,000 the EBITDA decline despite the €102,300,000 reduction in the top line. EBITDA for the first nine months 2020 came in at €175,700,000 with an EBITDA margin of 29.8%. Looking at the below EBITDA items in the P and L on Slide nine, you can see as D and A remained stable year over year at approximately EUR 95,000,000. Provisions and write downs in the first nine months of twenty twenty due to EUR 3,700,000.0 due to the application evaluation model that lies to measure the recoverability of receivables in light of the current issues faced by the air traffic sector. This is purely prudential accounting approach since, as I mentioned before, we did not have any issue with the receipt of payment used so far that we are fully cashing. The item net financial income and expenses increased to €4,400,000 in the first nine months of twenty twenty compared to the €3,100,000 recorded in the same period last year, mainly due to the balance of capitalization. Moving on to income taxes for the period. The material decrease was driven by lower taxable income and by the positive impact of deferred taxes for the larger part related to the bank sector addition. As a result of the bold movements, we were able to have a net profit of EUR55.1 million in the first nine months of twenty twenty despite the severe impact of revenue caused by COVID-nineteen. In the last slide, let's have a closer look at our cash flow and financial position. Enel's liquidity and financial position remain solid. In addition to the cash available at the September 2020 of €156,000,000 We also have a financial investment for €25,000,000 and undrawn credit lines for €297,500,000 Our net financial position as of September 30 decreased by €365,000,000 compared with the end of last year, reaching a net debt of €228,000,000 mainly due to the lower cash inflows by the sharp decline in traffic and to the postponement of receivables due from airlines as well as the payment in May of dividends for €112,100,000 Do note that en route and terminal charges from June onwards has been cashed in regularly, which means that within this normal two month billing and settlement cycle. On the cost side, we have reduced our average cost run rate from approximately €50,000,000 per month to €45,000,000 per month, thanks to further cost cutting initiatives. We also have two additional liquidity buffer coming from the postponement of €40,000,000 CapEx and the new ESG linked term loans for a total EUR 150,000,000 signed at the October 2020. With regards to CapEx, as already said that in the past, on a twenty twenty full year basis, we expect to spend approximately €80,000,000 compared to the pre COVID expectation of €120,000,000 Finally, I would like to highlight that we have no material debt maturities until 2022. With that, we are now ready to answer your questions. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. Our first question is from Niccolo Pesina with Mediobanca. Please go ahead. Yes. Good afternoon, everyone. Thanks for taking my questions. The first one is on the debrigation to the regulatory framework approved by the European Commission. I wonder if the impact of potential €65,000,000 to €70,000,000 you provided in September is confirmed also considering the recent downturn in traffic in the classic evolution of these days? Second question, as you have related to this delegation, would you say that the million euros the 65,000,000 to €70,000,000 is also a good proxy of the reduction in operating costs you may achieve in 2020? And final question, I'm wondering if there has been an internal discussion or reasoning that you may be able to disclose on the dividend. Thank you. Okay. Very easy day. You should review and do dividend or what? Talking about the degradation, yes, I consider at the moment our forecast of EUR 65,000,000 to EUR 70,000,000 of high cap for what concern the balance could be a good proxy of the one we will have at the end of the year 2020. Even if the traffic is decreasing even if, at the moment, the traffic that we are registering, I mean, we are recording is not so bad as, you know, what the what we can hear from other operators. In this month, we are the last month, October, we were around 60% decrease versus 2019. So still in line with what we had in September. Let's see what will happen in next month. But yes, I confirm also because the devaluation, just to be more clear, not answered, it will also happen to the second question that you asked. As for 2020, 'twenty one and 2021 will be a kind of cost recovery with a cap of the costs that are available, if eligible in the tariff that would they have to be lower than 2019 level. If we reduce costs even more, they will not impact the balance. So the balance will be the one I already told you. And more or less, our cost reduction would be not at this level. We will not be able to reach this level of cost reduction. For the level eight, I mean the level of higher cap of the balance. Regarding the dividend model, the current situation, as we all see, remains very vulnerable, especially given the second wave of COVID-nineteen currently ongoing in Europe. And it's now difficult to have a clear position on dividend for next year. We will continue to monitor our cash flows and to evaluation of the business in the coming months. And based on this, we will discuss the topic with the Board that closed the 2020 financials. As already stated in the past, in any case, I confirm that in general terms, I'm in favor of the company providing another paid return on its shareholder like Enel or as always, but ensuring that this doesn't stress the medium term prospects of the company. Our next question is from Luigi Benlis with Equitasium. Please go ahead. Yes. Good afternoon. I have a different question. The first one on the regulation. So last November, the European Commission approved the draft published last July. So can you update us on the ongoing negotiation? How does it affect the negotiation that traffic is not recovering, as hoped, given the second wave? Can the news about the vaccine somehow affect the traffic forecast for 2021 and beyond? And are you more or less optimistic that you can achieve a recognized cost level similar to the pre pandemic level? The second question regarding the cash flow. So payments due from airlines in the period of February, May have been shipped due to the liquidity difficulties encountered by airlines a few months ago. Given the current traffic trend, do you expect the airlines will ask for another postponement of payments? The third question is on the cost. If the traffic situation does not improve significantly, do you think the faster cost efficiency action are are possible? And the first question is on the net financial position. Can you provide us an indication of the net financial position expected by year end and tax rate for 2020? My last question is if you have an idea on when do you expect to present the new business plan for the market? Luigi, long list of questions, try to put together. So the first one was about the negotiation and the level of cost and some level of traffic. So in general, let's say that the negotiation now has been focused until a couple of weeks ago to close the new regulation framework. So with the publish when the European Commission published last November, November 4, the new regulation for us was a very important first step. In that first step, actually found everything we expected to find. So we worked together with our national authorities to be sure that this could be driven in the correct and the right way for for Italian interest in general way. So looking at the future of the pipeline, we are satisfied with what's happening is nothing that we could reach at that level. So saying that now, as before the c CIO said, next step will be the single every state has to present the the performance sorry. The first draft of of planning, the cost, the planning and traffic planning within the December 15. On the basis of that, the European Commission will take the we will try no, try. We will propose some targets, cost efficiency targets that will be discussed and agreed with the state within the 11/01/2021. The level of traffic that we assume to take is the one that we were control published just couple of days ago. They show three scenarios. On these three scenarios, what we no matter what their control is saying to take the the the the the the base one, the middle one, so the second missionary. So you may find this information on the EuroControl website. And if we are using that one, you will find that the scenario one is is, I would say, best scenario, the medium scenario, and in a worst scenario. Talking about our liquidity, we don't foresee at the moment to have other, I would say, of payment from the from the airline. We just had to talk with Eurocontrol yesterday about how is the the the payment of February. As you remember, we we stopped for four months our billing and our cash our cash in cycle. November is supposed to be the month where we should cash in the February traffic that was delivered in build in April. At the moment, our control will see that this is this is happening. It is the very first day of the month, so it's not still we are not still able to to understand if the payments will be full. But in general terms, our control will see that this is happening. So we will we could be more precise by twenty of the month or November 20, where we could understand it's the amount of money. It's a matter of weeks. But at the moment, I feel I mean, we feel that it's okay. For what concern the final net debt at the end of the year, let's say that we didn't give any disclosure on that. But in general term, if you look at the position that we are now, that would be a little bit lower, I mean, of course, if you give in some way. So but not so much, actually. So this is by the 2020. I think we if I say everything, I'll leave the floor to Paulo for the last question. Yes. Strategic plan. We kicked off a review of our strategic plan twenty twenty, twenty twenty four at the September. And together with the management team and our consultant, we expect to have the new plan at the 2021. Let me say, aware we that our strategic plan will depend on the targets that the European Commission will set in the mid-twenty twenty one. As such, we have not planned towards an Investor Day to present a new plan, and we will hold and we will only officially communicate our targets after we have a clear indication from the European Commission. So in terms of business initiatives, our updated strategic plan will maintain continuity with regard to the core activities included in the previous one and will then grow the new elements that we provide a new link to the company within the contract. Thank you very much. And our next question is from Arthur Travlova with Credit Suisse. Please go ahead. Good afternoon, everybody. A couple for me. So you obviously mentioned that you saw a 65,000,000 to $70,000,000 headwind as a result of the temporary delegation. So just a few kind of questions around that, really. And firstly, is that as a result of the determined unit costs being applied in 2020 and 2021 being lower than what you previously expected? And if so, if you have an idea you can give us about what that term unit cost was would be very helpful. Secondly, does it relate in any way to concerns about your ability to actually utilize that balance. And in particular, are you gonna be able to charge the airlines the necessary to actual health to be able to do that? And then the yeah. So it's a that'll be for now. Thank you. For for concerning aircraft, we we confirm what we said before. We believe that could be a good proxy of what will be the the aircraft by the end of the year. For what concerns the balance, still, we we would believe that we give the new regulation and we'll have also the airline to pay when they will be to pay the the balance, when they will be in a in a better shape. As you remember, the new relation say that that from 02/2023, we will start to recover for five years the these these parts. So it will be split in more than one year. So we believe it. Can we get I mean, we think that the there will be no any problem to to recover it. So just expanding on your that second answer a little bit, if I may. I mean, obviously, I don't know what you have in mind for the pounds receivable kind of at the end of next year or indeed at the end of the regulatory period. But I mean, one assumes it's sort of €500 €600,000,000 or so, then clearly, one would assume that tariffs are going have to go up quite materially. And I guess my question would be, is that a reasonable way to think about it? And secondly, how confident are you that you would actually be able to raise the traffic control in terms of some of the airlines? I guess one of the first try to better explain this point. I guess it's useful also to see what are the new regulations underlying. From 2022, the tariff would be, let's say, reset even if the the process of approving the the the performance plan will be not ended before the beginning of the, you know, 2022 year, fiscal year. We will be able to apply the new tariffs that we will present in October 2021 in the performance plan, so the proposal one. So this means that even in 2022, the tariff, even there is no balance, the target will increase because the tariff the traffic that is planned now that we are planning now for 2022 is still much lower than the one that's normal is like in 2019. So the tariff will increase 2022. There will be let me say, no more balance created in this year. And in the future year, where the balance of 2023, we will start put the balance in the tariff, the traffic should be more or less in line with the one we are used to have before the COVID pandemic situation. So this happened that, in part, the tariffs will not increase sorry, the tariffs will not increase so much in 2022 level as we will have a substitution between the traffic that will increase and the cost that will increase by balance that we will put. Ladies and gentlemen, there are no further questions registered at this time. Well, thank you, everybody, for joining us on this call. Thank you to Paolo and Luca. For any further questions you may have, please don't hesitate. Feel free to follow-up at Investor Relations hearing room. Have a nice evening, and bye bye to everybody. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.