Earnings Call: Q4 2016

Feb 22, 2017

Good morning, everyone, and welcome to Aena's 2016 results presentation. This presentation will be led by our Chairman, Mr. José Manuel Vargas, and our CFO, Mr. José Leo. After the presentation, we will be leaving a short time for a Q&A session. Please note that there is a slight delay on the transition of the slides if you are connected by webcast. I will now hand the floor to Mr. José Manuel Vargas. Good morning, ladies and gentlemen. Welcome to Aena's 2016 conference call for full-year results. I will cover the key highlights of the presentation, as you are able to see it, and then Mr. Leo, the CFO, will continue with the main financial data. Well, in connection with the key highlights and covering the passenger traffic, it is important to remark that we have a historic year in 2016, with a total traffic for the consolidated operations of the company of 244.8 million passengers, which meant a growth of 11% in the Spanish network, arriving to a record of 230 million passengers. As well, a significant growth in Luton Airport, where we arrived to the figure of 14.6 million passengers with a growth of 11.5 million. In connection with the results, the total consolidated revenue increased to EUR 3.7 billion, a 7.2% growth compared to 2015, of which 25% correspond to commercial revenue. I think it's important as well to underline that commercial revenue, together with the real estate activities, for the first time, passed the barrier of the billion revenue. The EBITDA for the period stood at EUR 2.29 billion, just very close to the EUR 2.3 billion, with an increase of 9.3%, reaching a EBITDA margin of 60.8%. The consolidated net profit increased up to EUR 1.164 million. That means a 39.7% increase if you compare to 2015. With a like for like comparison, that would mean a growth of 21.2%. The board of directors of Aena yesterday, in the board of directors meeting, decided to propose to the general shareholder meeting the distribution of EUR 3.83 dividend per share, complying with the commitment of distributing 50% of the net profit generated by the company. The cash flow of the company increased to EUR 1.83 billion at 12.6% growth, which is pretty significant if you take into account that this was a year in which we had a reduction in tariffs of 1.9% since 1st of March 2016. In connection with the debt has fallen from 4.5 to 3.6 times EBITDA, to an amount of EUR 8.22 billion, with a significant reduction as well in CAPEX. The CAPEX that we paid in 2016 amounted to EUR 305 million. In terms of the regulatory framework, it is important to underline that on January 27, the cabinet approved the airport regulation document, the DORA, which included an airport tariff reduction of 2.22% running in the period of 2017 to 2021. The board of directors as well yesterday approved, together with the new tariffs that follow the DORA decisions, a new commercial incentive scheme focusing on new routes and long-haul passenger growth and short and medium passenger growth limited to airports with a special need to foster demand. The macro environment is a rising inflation in Eurozone countries. We have to see whether this is a start of a new trend in terms of inflation. We are not sure, but I think it's important to underline that. I mean, last figures have shown that. We are in a quite uncertain scenario in which refers to politics, clearly connecting to one of our main markets, which is Great Britain, which is currently deciding how to implement the Brexit decision. If we move now to the business trends, and we look at the traffic data slide, we could see that we have a very solid traffic growth, both in the Spanish network and Luton Airport. As well, that has been a pretty significant growth in almost every big airport in the Spanish network, with extremely significant growth in the touristic airports. Look at Group I, 13.2% growth. Look at Palma, 10.6. Canary Islands Group, 12.8. Barcelona, 11.2. Every airport connected to touristic destination has had a significant growth connected to touristic record year in Spain that was 2016. The distribution between international and national traffic remains quite stable with a slight growth of international traffic. If we move now to the different business lines, as I said before, the traffic growth, robust with 11% growth, offsetting the reduction in airport tariffs. Incentives per passenger, compared with the previous year as well, showed a growth connected to the extraordinary traffic performance. In connection with the commercial revenues, I would underline, as I said before, that for the first time, we have passed the billion barrier, which is a very pretty significant growth once again, if you take into account the growth that we have showed in previous year. Every significant business line has had a quite significant good performance. In terms of international, our international figures in EUR are significantly affected for the rate of exchange of the sterling pound, vis-à-vis the EUR. But if we go for the like-for-like figures that we can follow in the following page, it has been pretty good. We have 18% traffic growth in Luton, close to 11% revenue growth as well in Luton, and close to 12% EBITDA growth during the same period. Luton is an airport that is clearly being transformed since we acquired it. Traffic is increasing pretty significantly. We are improving as well facilities, as you could see with the amount of close to GBP 41 million that were invested in 2016. The rest of our shareholdings has had as well a pretty significant performance based, in every case, on a solid traffic growth basis. Well, I now give the floor to Mr. José Leo, who is going to cover in detail the financial results for the period. Thank you, Mr. President, and welcome everybody. Good afternoon. I will talk you through the key financial indicators, starting on slide number 10, where you can see a visual picture of the main figures. Total revenue going up at 7.2% year-on-year, with a pretty stable picture in terms of the relative weight of the different business lines and activities. Maybe the only relevant mention is that the commercial activities are weighting a little bit more, and I would say that would be the trend, particularly after the new tariff determination by the DORA. In terms of EBITDA, clearly, 9.3% growth is consistent with the growth in revenues as well as the growth in passenger and operation numbers, with clearly, once again, the commercial activities taking a slightly bigger share of the total picture. In terms of operating costs, OPEX is, I wouldn't say flat, but growing very moderately, both when looking at the consolidated figures and when looking at Aena's Spanish network figures, excluding Luton. Last, we see the net profit figure, which is up by close to 40%. Although, as the Chairman already mentioned, the like-for-like comparison would render a 21.2% growth after excluding the one-off of close to EUR 154 million, resulting from the reversal of provisions for late interest payments on expropriations. Looking at the income statement, and I would take too much time on it because it's more or less repeating what we have already said. Clearly, passenger traffic and revenue have been discussed already. Maybe just to take a look at operating expenses. We're excluding Luton's figures, you could see that the staff cost or personal expenses are going up. That is a combination of a number of things. Particularly, we have the rise in salaries, pay rise for the first time in a number of years. Also the provisions for a number of costs associated with Social Security audits. None of them are terribly material. Other operating expenses is definitely the caption, which is going up more significantly, and that's for very good reasons. Obviously, those are the costs that underpin, to a great extent, the quality of service and the experience of the passenger in our airports. That includes increases in maintenance costs, security expenses, plus obviously some other bits and pieces relating to provisions. Once again, that's probably the caption, the heading, that we'll more likely see increases over time. In terms of financial expenses, the picture is positive. Net decrease of EUR 46 million. That's a combination of different things. Definitely, we are taking advantage of lower rates, revision of rates in a number of facilities, as well as reduction of the debt principle. Against that, we can see a couple of negative impacts. One of them is the impact of the pound exchange rate on the shareholder loan to Luton, which is affecting the figures by EUR 12 million, as well as some provisions that we have created to deal with potential increases in the cost of some of the loans that we had at the time, as a result of changes in the risk-weighting regime of Enaire and Aena. I would say that the big picture income tax is obviously going up for good reasons, definitely driven by the significant increase in the profit before tax. Then the final picture on net profit that we have already discussed at great length. I would say that's the end of my speech, so we can probably open the Q&A session. Thank you very much. Thank you. If you would like to ask a question, please press the star or asterisk key, followed by the digit 1. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, that's star 1 to ask a question. We will now take our first question from Vittorio Carelli from Santander. Please go ahead. Hi. Good morning. Thank you for receiving my question. First of all, I would like to know if we may receive the estimated amount related to the elimination of a certain amount of the incentives that you have published yesterday. If we could consider that as a sort of willingness to offset the tariff decline that we will have in 2017, which may be at around EUR 50 million, more or less. Secondly, the board of directors approved the accounts, and the question now is that, in that moment, have you also discussed the possibility to present the new business plan? If no discussion, why there was no discussion about that important topic? The last one is, have you also thought about the possibility to improve the liquidity of the shares, considering the volatility that sometimes we have on the share price movement? So, thank you. Okay. Well, thank you, Vittorio, for your questions. Well, in connection with the first question regarding the incentives. Well, first of all, I would like to explain the logic of the change that we have implemented for the new season's incentives. We have had a significant growth in short-haul main airports over the last couple of years. I think that clearly we have overcome the time in which that incentive was required by the market situation. What we have decided is to keep incentivizing the long-haul, which where we believe that we have still a big room of growth, and clearly as well maintain the short-haul incentives related to those airports that, due to its size or due to the lack of growth during the high-growth period we have enjoyed, hasn't had that performance that we believe that could be improved. On top of that, we introduced a new type of incentives, which is connected to the seasonality of different airports as well. Of course, that is going to have an impact in our accounts. A limited impact, I would say. And that impact is going to be connected to the actual traffic that might take place in the coming years. It's quite difficult to give an estimation as far as we, as you know very well, we don't provide traffic projections. Of course, if we would be taking the traffic and the growth that took place in 2016, that incentives will have clearly been reduced because most of the growth took place in the short-haul and was connected to the growth in the main airport, not in the small ones. Clearly, approximately 70% of the total incentive of 2016, connected to the growth in 2016, would have been offset by the change of incentives. But as I said before, precisely, we are giving an increase in incentives in order to develop more traffic growth in the areas where we want to incentivize. And clearly, those areas are long-haul and small airports. In connection to your second question, which is business plan. Yesterday, at the board of directors, we discussed the accounts. We didn't discuss the business plan, because it was not the time. Of course, that will have to come to the board, where as well we need to give some time to the new government in place in order to have time to discuss the future strategy of the company. That will require some time, and whenever we have that business plan ready to be presented to the board, and whenever there is a decision in that respect at the board level, we'll communicate to the market. In connection with the liquidity, up to now, we haven't considered any additional measure of the existing ones to be helping the liquidity of the share. Of course, we will be open to suggestions in that respect. But up to now, we haven't been receiving any demand from our investors. But clearly, if there is a consensus on that, we will consider additional measures. Thank you. Thank you. We will now take our next question from Charles Meunard from Kempen & Co. Please go ahead. Hi, good afternoon, everyone. Three questions from my side. First of all, the CAPEX. The regulatory CAPEX during the DORA is around EUR 2.2 billion, but the total CAPEX plan over the same period is EUR 2.6 billion. If you could give more clarity on the EUR 460 million of unregulated CAPEX, would that be related to commercial activities or also real estate? If you could comment on that. Second, on the EBITDA margin. You stated before that the 2015 EBITDA margin was most likely not sustainable, but you actually achieved better than that last year. How should we look at 2017? The last one, just a follow-up on the capital allocation plan. I understand that it's taking a bit longer than expected because of the government, but do you have internally your plan ready, or are you still working on it? Thanks. Okay. Thank you very much, Charles, for your questions. In connection with the first question about CAPEX, the difference between the two figures are mainly regulated and overall CAPEX, which includes the non-regulated CAPEX. As you know, the limitation that is covered by the law is connected strictly with the regulated CAPEX. The total figure we provide to the market includes as well the commercial CAPEX and non-regulated CAPEX. Okay. In connection with the second question, I will take your question as a congratulation. Because, of course, despite difficulties of maintaining and improving EBITDA margin, we are going to keep our commitment with our shareholders in improving EBITDA margin. But it's clear that the existing, the current EBITDA margins are extremely high. And extremely high. Therefore, there's always risk to go below this, right? This year, 2016, has been an extraordinary year in terms of traffic growth, in terms as well in maintaining the effort of cost controlling. I am going to keep saying to the market that these levels of EBITDA margin are extremely demanding, because I think that is the truth, right? Of course, if we keep growing at this path, we will be maintaining these kind of margins. I think it is difficult to foresee that the kind of growth we have been enjoying over the last couple of years is going to be very much sustainable over the future years, right? In terms of capital allocation, as I said before, no decision has been taken by the board. Whenever there is a decision of capital allocation, we will be communicating this to the market. Thank you. Okay, thanks. We will now take our next question from Philippe Lhaies from BPI. Please go ahead. Hi. Hello, everyone. I have two traditional questions. The first one related with RAB, and if the review of the useful life of the runway and taxiway assets that you announced during this quarter. If at all will have any impact on RAB, and if you can quantify such impact. My second question is related with Barcelona Airport, and when should we expect the retender of the food services spaces, because I believe that the current concession will expire during this year, and if the structure of the tender will be similar to the previous one, namely, if it will include minimum annual guaranteed returns. Thank you. In connection with the second question of Barcelona Airport, we've already called for the process of the food and beverage in Barcelona. The structure is going to be slightly different from the original one. Of course, it's going to include MAG within the process. We expect that tender to be successful and to be able to improve the revenues and the margin of Barcelona Airport. We will be seeing that in the coming months. As I said before, the process has been already launched. In connection with the RAB question, I give the floor to Mr. Leo. Hello. I understand you mean whether the impact of the technical review of the useful life of runways and taxiways could have an impact going forward. What we have done is just to review, technically, that part of our depreciation. Those assets are technically complex, so there are different layers that may end up having different useful lives. We are refining and improving the way we address those kind of things. This year, we took the view that some of those, if you like, assumptions would need some adjustment. The impact you can see here, the EUR 18.5 million, is to just the catch up, the historic catch up with the past. So that means that going forward, we will apply the new useful lives, but by no means the impact would be that material. The figures involved will be dramatically lower than that EUR 18.5 million. Okay, thank you. We will now take our next question from Andrew Lobbenberg from HSBC. Please go ahead. Oh, hi there. Can I ask about just the DORA. There were some press reports that one of your shareholders was considering running a legal challenge against it. I appreciate that is not necessarily your decision, but, is the DORA finished and complete in your eyes? Secondly, can you just update us on the timing of when you are going to be presenting your details of the real estate plan? Well, in connection with the first question, yesterday we conducted a board of directors meeting, where we were analyzing the DORA. On top of that, I have had, of course, contact with my board members and therefore with my shareholders. As of today, I do not see the necessity of challenging the DORA. Of course, there are things in which we would prefer to be different, but overall, we respect the rule of the DORA, and the way in which right now has been implemented. If at some point we see that there are decisions that are confronting with the law, we will, of course, challenge the decision. But right now, I think that the decisions that the DORA has taken are in line of the capacity of decision of the regulator. So, yesterday, the DORA, of course, was covered by the analysis by the board of director. Of course, no legal action was decided at the board level. As far as I know, no legal action has been decided by any of the different shareholders of the company. In connection with your second question, real estate activities, we are progressing. We are progressing in the analysis of our real estate activities, but we have no conclusion up to now. Whenever is the time of arriving into conclusions that are relevant for the market, of course, we will let the market know. Up to now, we keep studying. It is a quite complex and quite a big issue, the real estate activities of the company, and they are still under study, but progressing. Okay, thanks. We will now take our next question from David Min from JP Morgan. Please go ahead. Good afternoon. I have three questions and then one small technical one. First on traffic. In January, you reported quite good traffic even against very hard comps versus last year. Can we make a read-through to the full year? If not, why is January so particularly strong, and what are you seeing for summer bookings? The second question is on dividends. Is there any consideration that you might increase the payout? Because currently the cash flow is quite strong and net debt has decreased quite a bit in 2016 as well. The third question is on M&A opportunities. Do you see any scope to go into the market for that? The last question is the technical one. I think you said that the reversal of provisions is about 205 on the statements. But if I look at one slide earlier, you're saying that's 150. Could you just clarify on that point, please? Thank you. Well, thank you for your questions. Well, in connection with your first question about traffic, as you know very well, we don't provide traffic projections. It's clearly up to you to really infer that the performance of January is going to be reflected in the rest of the year growth, right? I tend to think that it is quite challenging to really repeat the kind of growth we had in 2016, right? The regulator seemed to agree with me, if you look at the DORA traffic projections, right? So, between what you see and you can infer from the traffic in January and what the regulator has just provided the market, I think there would be something in between or I don't know. It's difficult for us. We can say that up to now, the touristic behavior in connection with Spain is still very strong, right? In connection with the dividend policy, I repeat what I have said in the question connected to capital allocation. That is something that hasn't been covered yet by the board of directors. I understand, I take the point. That is something important for investors. At the time we really know any kind of variation from the current dividend policy and the current capital allocation policy, we will let the market know. M&A, we are always looking at opportunities in the M&A environment. As you said, we have the firepower for doing them. But we are following very cautiously all of them. Because you have 2 types of M&A opportunities in the existing market. First, connected with the Western countries, extremely demanding in terms of low IRR, and more risky opportunities in the developing countries or non-OECD countries. We are going to keep looking at those opportunities. We are going to keep looking with interest on both types of markets, but we will comply with the compromise we have given the market that said that we will only proceed with the opportunities where we see that it's going to be clear value creation. Thank you. I now pass the floor to Mr. Leo, who is going to answer the question regarding the impact on the P&L of the provision reversal. Apologies if there has been any misunderstanding. Clearly, the EUR 204 or EUR 205 million is pre-tax. The EUR 153 million is post-tax. Just to clarify on the traffic, are you saying that January traffic is still very strong because of tourism? No, I am saying that January traffic is still very strong because the trend that we have seen in November, December is continuing in January. Thank you very much. Thank you. We will now take our next question from Arthur Truslove from Credit Suisse. Please go ahead. Hi there. Two questions from me. The first question is, would you just be able to confirm if there needs to be any regulatory approval of the new incentive plan? Secondly, you mentioned that the risk weighting from the Bank of Spain circular had changed. Could you just give a bit more detail on that and could you let us know if there is any chance that that will change any further? Thank you. Well, in connection with the first question of the regulatory approval of incentives, well, as you know, commercial incentives are strictly connected to the decision of the company, as they are not part of the expenses that could be included in the regulated tariffs. Right? The DORA established a communication process with DGAC as regulator, and a communication as well process with the airlines associations. Both processes has been completed before these incentives has been approved by the board of directors. So no further approval or communications are required for those incentives to be in place. In connection with your second question, Mr. Leo is going to cover that. Yeah. Well, as we inform in the accounts and the management report, the new circular, the new rule of the Bank of Spain, Banco de España, implies that some of our lenders would have to adjust the risk weighting of particularly Aena, which is the main borrower in those facilities. As a result of that, they will have an an additional requirement of capital. We are negotiating the cost of that. We have provided for anything that has been required and requested by those institutions so far. Nothing else has been required. Going forward, we expect that if there is anything new, that wouldn't have a significant impact in the global picture. That's our understanding and our estimate at the minute. Brilliant. Thank you very much. There are no further questions from the telephone. Thank you very much for attending this call. We remain at your disposal for any further question, and have a nice day.