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Edited Transcript of FLU.VA earnings conference call or presentation 14-Nov-19 10:59am GMT

Q3 2019 Flughafen Wien AG Earnings Call

Vienna Airport Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Flughafen Wien AG earnings conference call or presentation Thursday, November 14, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Schmidt

Flughafen Wien Aktiengesellschaft - Head of IR

* Günther Ofner

Flughafen Wien Aktiengesellschaft - CFO & Member of the Management Board

* Julian Jäger

Flughafen Wien Aktiengesellschaft - COO & Member of the Management Board

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Stephanie Fabienne D'Ath

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Vienna International Airport conference for Q3 results. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Head of Investor Relations, Christian Schmidt. Please go ahead, sir.

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Christian Schmidt, Flughafen Wien Aktiengesellschaft - Head of IR [2]

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Hello, ladies and gentlemen, welcome to our conference call for the 9-month results of Vienna Airport. Today's presentation will be held as usual by our Board members, Mr. Günther Ofner and Mr. Julian Jäger. The presentation will be followed by a Q&A session where you will have the opportunity to ask your questions. The call will be recorded and will most likely be available on our website by tomorrow noon. The slides of the presentation that will be held now are also available on our website under Presentations.

Before handing over to the Board members, please allow me to introduce myself. My name is Christian Schmidt, and I am the new Head of Investor Relations of Vienna Airport, succeeding Judit Helenyi. Having previously spent over 10 years with the Lufthansa Group, I bring plenty of industry expertise to my new position, and I'm looking forward to working for and with you.

And now I would like to hand over to our CFO, Mr. Ofner. Please go ahead.

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Günther Ofner, Flughafen Wien Aktiengesellschaft - CFO & Member of the Management Board [3]

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Good afternoon to anybody on the phone. We are very happy to present to you good results for the first 9 months. This is true both for our financial results, especially also for passenger numbers.

So in the group, passenger numbers went up by 16.6%. And on our airport here in Vienna, it was 19.5%, but also Malta plus 6.5% and Kosice 5.5%. So a healthy growth. We achieved 7.8% revenue increase. This is mainly due to the fact that, especially in the Handling business, we had to digest the new contracts so we saw a very flattish revenue development there. On the other hand, we are glad that we could utilize more than half of the passenger growth into our other parts of revenue development. EBITDA improved by 10.2%, EBIT by 12.9% and net profit for the period by 14.4%. So almost the same percentage than the group passenger growth, what is, I think, a very good result given the fact that there are many start-up incentives for new destinations, and these incentives will melt down further down the road.

We can confirm the positive outlook for the rest of 2019. As expected, the growth rate is slowing a little bit, but will still be sound. And we have no visibility of anything right now that could endanger our guidance given so far. In regard of the guidance, I would like to make the remark that, as every year, we cannot exactly predict where we end up with our investment projects. So there, we could stay even substantially above the EUR 220 million we had so far for our CapEx, simply due to the fact that there might be some minor delays in some of the periods accounting for the full scale of the investments.

If you look at EBITDA margin, you'll see, again, a slight improvement compared to the first 9 months of 2018. And I think this is a clear signal that the growth is profitable and the company is keeping cost discipline so that we are clearly exactly on course what we planned before.

If we look at additional information, you see that the financial results are more or less even. This is partly due to the IFRS adjustments and looking at the net profit for the period after noncontrolling interest, you see an increase of 14.7%.

As I mentioned before, consumables are fully in line with our planning and expectations. Personal expenses are up 7%, roughly 2% of that increase is due to the full consolidation of our daughter company, GetService, and the rest is partly due to the collective agreement and the wage increases at the area of 2.7% from 1st of April '19 until the 30th of March -- 31st of March 2020. And what we also have included is that due to the extremely low level of interest rates, we had to adapt some parameters in regard of the provisions.

You see the high degree of cost discipline also looking at the operating expenses, clearly depreciation is going up now because we invested more in the last periods and given the ongoing cycle of investment, this will also result in depreciation figures. Despite that, we could further reduce our net debt position, as guided to now below EUR 150 million, in fact EUR 126.3 million, and we saw a strong cash flow from operating activities of altogether EUR 285.6 million. Also, the free cash flow increased, CapEx increased, equity increased, equity ratio is slightly down.

Still our main debt is the EIB loan. It's melting down by roughly EUR 25 million per year. And the rate is due on June each year. Where we have been successful is that we could further reduce the cost of the collateral, but we cannot change anything in regard of the conditions of this loan.

The development in free cash flow underlines our financial strength and this shows that it will be possible to finance the terminal enhancement program and our Office Park 4, mainly out from cash flow so that the level of debt will not substantially rise in the foreseeable future. On the other hand, I would like to remind you that we changed our dividend policy. So the next step in increasing the payout ratio will be effective for the year 2019.

If you look at the share price, the market cap is roughly at EUR 3.2 billion, and the share price is currently oscillating somewhere around EUR 37, which is, I think, more than justified regardless of development, also the future expectations for our company. We are strongly engaged to merge our airport into an innovation hub. So the close partnership in cooperation with Plug&Play is intensified and it's more fruitful day by day, especially important is that we include business partners for the development of the innovation hub, so established companies in Austria -- throughout Austria, and what we expect is that this will make our Airport City even more attractive for companies to come to the airport. And we are heavily engaged in discussions with many interested parties who plan to come to the airport, so 2 new contracts are currently discussed and negotiated and might be signed early next year.

The work for our Office Park 4 are fully within the plan and also within budget. The start of operations will be next May, and we see strong interest from prospective tenants and it will also add a very attractive conferencing center to our offerings. This clearly has been a weakness, so far, and it will be one of the key initiatives after the new office building is operational. What we think will be more important for many airports throughout the globe is to look at energy efficiency, what we started long before [the GRATAs] and others have pointed at that issue. So in fact, we started our energy efficiency program in 2012, and we see very substantial results from that. So an overall decrease of energy consumption of roughly 40% and decrease of CO2 of more than 70%. And if everything develops as we expect now, we should be more or less CO2-neutral in our operations in 2 to 3 years from now.

What should be also very important in regard of political decisions in the coming months and years is that we try to reduce flight traffic burdens to our neighbors. So starting from next year, a new model with massively increased noise charges will be effective. You might be aware that aviation sector is part of the European trading -- CO2 certificate trading system, and currently Vienna Airport is certified as ACAS Level 3, and maybe we will be one of the first who passes through Level 4.

So finally, as already said before, we confirm our outlook for 2019, and we'll finally see the total CapEx will end up.

That's from my side. And I hand over to my colleague, Julian Jäger.

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Julian Jäger, Flughafen Wien Aktiengesellschaft - COO & Member of the Management Board [4]

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Good afternoon, ladies and gentlemen. I will continue with the segment results, starting with the Airport Segment. In the Airport Segment, we had an increase of roughly 8.6% in external revenue and a plus of 7.9% in our EBIT. The major drivers of revenue were the aircraft-related fees with a growth of roughly 11%, passenger-related fees increased by 6.5% and infrastructure-related fees and services by 16%.

The Handling & Security Services Segment still shows after Q3 a negative development compared to Q1 to 3 in 2018. We had an increase in revenue by 1.1%, but a decrease in EBITDA and EBIT, a decrease of 31% in EBIT. This is a bit misleading because you might recall that we had a negative EBIT in the last quarter of last year. So we will compare a very good Q4 2019 with a negative Q4 2018. And therefore, we will manage to improve the EBIT of this segment vis-à-vis 2018, not by EUR 10 million as I indicated at the beginning of the year, but by EUR 5 million to EUR 6 million. All the measures being done in the Handling Segment are working now. We had an excellent Q3. And so ground handling did very well in this area. And therefore, as I said, we will see in February, March next year, an increase in EBIT by roughly EUR 5 million to EUR 6 million vis-à-vis 2018.

The external revenue development was very good although it doesn't really show with the 1.1%. The major negative driver of revenue was the cost reductions for Austrian Airlines. You might recall that we reduced prices for Austrian Airlines 1.5 years ago. So we saw already negative impact in 2018. You see again a negative impact in 2019. On the other hand, we got this year Wizz Air as a new customer, we got Hainan, we got Lauda. So they are the airlines which are growing in Vienna, our customers. And so therefore, we saw a slight increase in the external revenue. But we have to work much more and much harder to earn more or less the same amount of money. And that's why, yes, we are happy that in Q3 now we see a very positive development, both in terms of quality but as well in terms of financial results. You might recall that we had -- that we started earlier this year a punctuality project together with Austrian Airlines. And from summer on, we are delivering excellent results with our Handling Segment and introduced the -- produced by our handling department very, very significantly.

Maybe one addition to the Airport Segment, what I forgot to mention before, obviously, which is always of interest, is the average revenue per passenger from charges. I think I said at the last time that we will earn roughly EUR 13 net per passenger in 2019. We are sticking to this forecast, and I'm optimistic that we will end the year plus/minus on the EUR 13 as indicated last time.

A very positive development you can see in the Retail & Properties Segment. On the back of our very substantial passenger growth, we managed to increase revenues, EBITDA and EBIT quite significantly. The external revenues increased by 12.8% to EUR 120 million. EBITDA increased by 19% to EUR 79 million and EBIT by 23% to EUR 66 million.

You can see that parking was growing very nice with nearly 14%. Rentals, I mean there's no direct relation with this passenger development, plus 5.3%. Center management and hospitality, you might recall that we changed here the configuration of this segment, an increase of 15%, whereby we see slight downturn in advertising by 1.4% because 1 very advantageous contract was -- ran out. And we can see a very positive development in shopping and F&B, plus 15.6% in terms of revenues for us. And passenger services, lounges above the growth of our passenger numbers, plus 24.5%. So overall, I think a very positive development.

And in terms of PRR, if you -- just to compare like with like, we are insignificantly down vis-à-vis in terms of shopping and F&B. Last year, we had, in the first 3 quarters, EUR 1.83. And passenger revenue rate this year, it's below that, average EUR 1.77. And if you combine everything, the revenue per passenger is EUR 2.56 in the first 3 quarters in the center management and hospitality areas.

Malta. Again, excellent results, growth of 6.5%, above average growth in terms of the total revenue, plus 9.2% growth in revenue, plus 15% EBITDA and plus 14% in EBIT. So again, an excellent development. We started to invest now significantly in parking. We are building a new parking garage. We started planning for -- and the whole process for the development of SkyParks 2. This is the Airport City in Malta, and we are pushing forward our terminal development project where we are going to enlarge the waiting and the retail and the security area in the years to come.

A few words regarding Kosice. Passenger numbers are up by 5.5% this year. Last year, we had a revenue of EUR 13 million, EBITDA margin of 31%, net profit of EUR 2.6 million, and we don't expect any significant changes in Kosice in 2019.

Maybe a few words regarding our terminal development project and something I would like to outline because I'm not sure if this message came clearly across. We have not adjusted or changed anything in our terminal development program because of the substantial passenger growth. So this project is mainly a project which had to be done in any case because of the age of some of the terminal areas, because of the technical conditions of some of the terminal areas, because of the lack of proper retail and F&B space and because of the lack of proper security area. So we have not adjusted this project.

These are all initiatives and investments, which we would have done even with a lesser passenger growth. But I can report to you that we are so far on track. We are right now refurbishing Terminal 2. We intend to finish the Terminal 2 project by the end of next year. As soon as Terminal 2 is finished, we are going to close Pier East for 2 years, which will be a hassle for us, our staff and our passengers because we have to accommodate 20% of our passengers in the rest of the airport. This will obviously be a challenge, but I'm sure we will manage this very well. And then finally, the Terminal 3 south extension, which is, I think, the most important project definitely in terms of retail space, should be finished in 2023.

A few words regarding traffic results, although I don't want to bore you with the first 3 quarters, I mean you know the figures. The group had an increase of 16.6%, Vienna 19%, Malta 6%, Kosice 5%. We saw growth essentially all across-the-board for most airlines. And mostly -- or in all regions, we saw very significant growth to North America, close to 30%. We saw very significant growth to Asia and the Middle East, and very substantial growth within Europe.

October was good as well, not that much growth anymore as anticipated, growth of 10% in Vienna, plus 10% local growth, plus 11% transfer passenger growth. Flight movements growth is now going a bit down as well, plus 3.8% as anticipated. Significant increase in the seat load factor, plus 2.3 percentage points. And cargo, still a decrease, but November already looks a bit better. So I hope that we see now in the last 2 weeks, the first time of a bit of a better situation in terms of cargo.

You know about our developments and new long-haul routes this year. ANA, Tokyo-Haneda, Austria-Montreal; Air Canada, Toronto; China Southern, Guangzhou and Ürümqi. Significant growth from Austrian and all the low-cost carriers. And the Arabia started Sharjah in September. So this means that we are looking at a growing winter schedule although by far not the kind of growth we saw in the first 9 months of this year. So we expect seat numbers to grow by something between 6% and 6.5% in the winter schedule, which started on the 1st of November.

It's obviously too early to talk about 2020. From today's point of view, I would say, I'm cautiously optimistic that we will see a bit more growth. I think we will be ready in the morning and evening peaks flying out and into Vienna pretty full next year. Nevertheless, there's room for a bit more growth, but we will give you an update on that in January and the more concrete figure there. Until the end of March, we will look at growth. And as I said before, we expect to see capacity to grow by around 6% and then it depends on the seat load factor, what this means in actual passenger number. Again, the Vienna Airport Group will have roughly 38 million passengers for the full year, more than 10% growth in 2019, and in Vienna, more than 31 million passengers. So this is our best guess today.

Yes, this is from our end. We're looking forward to discuss your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Stephanie D'Ath with Royal Bank of Canada.

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Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [2]

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My first one was a follow-up on -- you mentioned seats up 6%, depending on the load factor -- sorry, I didn't catch you. You were speaking about the winter '19/'20 outlook and I know it's a bit early for 2020, but could you give us maybe a base of deceleration you're expecting and whether you still expect positive growth for next year?

Second question is on capital allocation. Could you please let us know, now that your net debt has come down that much, if you intend to lever what your strategy here is in terms of the dividend, share buyback, external growth and maybe give us an indication of where you expect CapEx to go? I know it's, again, a bit early to give 2020 numbers, maybe more the long-term average CapEx spends you expect. And then finally, in terms of personnel expenses, are you expecting them to continue to go up? Have you hired more staff in order to deal with the increased flow of passengers? And would you consider that as a more fixed cost or one where you have a lot of flexibility?

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Julian Jäger, Flughafen Wien Aktiengesellschaft - COO & Member of the Management Board [3]

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Yes, I would start with the traffic question. I said that we expect to have around 6% to 6.5% more seats in the winter schedule if you take it all together. Obviously, we hope that seat load factors would increase a bit, but there's no guarantee for that. So I would leave it up to you to create your own guess on what this means in passenger numbers. For this year, as we said, we will have more than 31 million passengers, probably something around 31.5 million. And for the winter schedule, it is 6% to 6.5% more seats. The summer is, I think, still too early to be discussed in detail. I mean this week, there is an IATA Slot Conference in Brisbane. So the Austrian slot coordinator is right now negotiating with the airlines, which slots he probably can take, which slots he can sit in. So I said before, I'm cautiously optimistic. So I think we will see some passenger growth next year. But obviously, the big question mark is if and when a consolidation in the market happens because the current price level of the tickets is not -- are not sustainable. This is absolutely clear. Austrian, you probably read about it. I hope to have 0 result this year. Ryanair increased their expectation of losses of Lauda just a couple of weeks ago. So I think sooner or later, there has to be a reaction in the market, probably not next year, but definitely then in 2022 -- '21 or '22. So that's why we hear all the announcements of the low-cost carriers, how much more capacity they want to put into Vienna. But I think the first major question is how much more slots can be fit in flying out of Vienna? And the second question is, will this actually happen? And the third question is, will there be a reaction in the market next year? And so therefore, from what I see today, I think there will be passenger growth in Vienna next year. But to which extent, I think we -- I hope we have a better picture in January when we discuss this further.

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Günther Ofner, Flughafen Wien Aktiengesellschaft - CFO & Member of the Management Board [4]

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Yes. I want to remind you that we already guided that the payout ratio will go up for the dividends of 2019 to 60%. And our share buyback program is already effective since beginning of November, and it will go on until the 30th of June in 2020. The CapEx will be as planned. So we are -- with all our projects more or less within budget and in line with the time lines identified, so you will see some -- definitely some increase of the CapEx in '20, '21, '22, finally '23 so that you can expect more or less that our cash flow will be digested with higher CapEx in this period. And for the time being, the payout ratio will stay at 60%.

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Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [5]

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And the personnel expenses?

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Operator [6]

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Stephanie, are you done with your questions?

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Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [7]

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I had also asked about personnel expenses.

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Günther Ofner, Flughafen Wien Aktiengesellschaft - CFO & Member of the Management Board [8]

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Yes, we have slightly increased the staff numbers altogether because, for example, in security control, if you have 20% more passengers, that cannot be handled by the same number of people. But that's relatively minor. Given the fact that you have to see roughly 2% as the effect of consolidation of GetService, so that's not a cost increase. It's just another form of the cost because it was already part of our expenses, but for services from subsidies. So if you put 2.7% for the collective agreement, roughly 0.5% for extraordinary measures and 2% for GetService, you are at 5.2%. If you add to that, the additional expenses for lower interest rates, it's more or less slightly above even overall. So again, and as follow, since 8 years, a very, very strict cost discipline and especially high gain in productivity throughout the whole company.

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Operator [9]

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And we'll move to our next question from Andrew Lobbenberg with HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [10]

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I think just at the end, you mentioned that you're starting to see the early -- the morning and the afternoon peaks, so can you just talk about where we are seeing -- where you're seeing congestion in terms of runway, in terms of terminal, in terms of night stands, perhaps, I don't know, and whether that ends up being strategic and stocking the low-cost carriers exiting? Or so yes, congestion, really, and how it applies. And then what follows on from that is the question about the new runway story because not so long ago you're going, "Don't worry, we're getting permission for this runway, but we're not going to build it for ages, ridiculous idea to build a runway, ridiculous, going to be in a very long time." And now suddenly we're coming on full. So does that make you want to change your thinking on the timing? And equally, on the runway, how does the environmental debate play? Because -- is that approval safe in the environment where -- in the situation where the environmental sensitivity is so much bigger?

And then the third question, maybe it's fourth, would be around airport charges. Can you just update us as to what we should expect on airport charges into next year given this remarkable growth that you've just had?

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Julian Jäger, Flughafen Wien Aktiengesellschaft - COO & Member of the Management Board [11]

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Sure. I'll start with your first question regarding capacity. I think what we are seeing now is that we have extraordinary growth from airlines which are based in Vienna. So that's why I think the challenge for the slot coordinator will be the morning peak out of Vienna and the evening peak into Vienna. We have, in our mediation process, had an agreement that we have a [C] runway operation in the evening from 9:30 so we have a limitation there. We have a limitation in the night. We have 4,700 night slots per year. So therefore, I think the biggest limiting factor for the low-cost carriers based in Vienna to increase capacity out of Vienna will be the morning and the evening. And in this respect, we are -- yes, I'm very curious to see the outcome finally when the slots are finalized in a couple of weeks.

I don't see a shortage in terminal capacity in the foreseeable future. I don't see a shortage of stand capacity. I mean we have a constant program to increase stands over the years, but I think these things will not be a limiting factor in terms of growth. I think next year, we will be definitely pretty full in the morning and in the evening wave, and future growth would then have to come from bigger planes, higher occupancy rates and filling up the gaps in between and probably from airlines flying into Vienna and not only out of Vienna because, of course, these flights have a different pattern and that they would fit probably quite well into our peaks, which leads to the 3rd Runway. We don't intend to change the cost of this project in any way due to the development in recent years. I think we always said we are going to build a runway when it's financially viable, when there's the demand and when we are in a position to have a clear visibility on all these factors. Obviously, we would have to discuss the 3rd Runway project with all our customers. And right now the situation is that we -- from a legal perspective, it's absolutely done in Austria. There's no competency of federal government in any kind. So even a new government, which might be more critical in terms of aviation in Austria, could not change the situation. In the end, it's the decision of Vienna Airport Plc if we want to build our runway or not. But before we're in a position to take this decision, there are a lot of things which have to be done. On the one hand, we are still in the process to buy the land. Obviously, it would have been completely irresponsible to buy the land, not having the permits in hand. So this is a process which might take a few years. I think it would be irresponsible to start to build the 3rd Runway before you're actually really full and all your -- really you are chockablock. So therefore, we stick to our timetable that the earliest we could open the 3rd Runway for business would be in 2030. And in the years to come, we will work on all the things necessary. There has to be a road which has to be removed. There is a pipeline which has to be removed. So that's a lot of things which have to be done from the project perspective. If we are, we are going to intensify discussions with the people who own the land, and we're going to start discussions with our customers, but without any hurry. We -- the same applies as we have always said, the earliest we can open the 3rd Runway is in 2030.

And coming to your last question in terms of airport charges. Our airport charges will be reduced with the 1st of January. We will reduce everything around landing and the aircraft-related charges by 0.8%, and everything around passenger-related charges by 1.67%, with the 1st of January 2020.

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Operator [12]

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(Operator Instructions) And we do have a question from Stephanie D'Ath with Royal Bank of Canada.

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Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [13]

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The first one on share buyback. Could you please walk us through the rationale? And longer term, if you continue to do share buybacks, what point would trigger a delisting of your stock?

And secondly, could you give us retail spend per passenger in the third quarter and growth year-on-year?

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Günther Ofner, Flughafen Wien Aktiengesellschaft - CFO & Member of the Management Board [14]

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Yes. Starting with your first question, I think one of the main rationales is as discussed also in our general assembly when the motion was passed, that we think that our shares are at a very reasonable level to be bought back, and we will see roughly 3% of return on that. What you should be aware is that the shares can be sold again if we consider this should be the case. The program itself is limited with 1% of total outstanding shares. And there is no plan and no agreement from our side to a delisting. On the contrary, we think one main reason for the successful performance of our company is the listing. So we will keep that, and our main shareholders are also backing the situation as it is.

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Julian Jäger, Flughafen Wien Aktiengesellschaft - COO & Member of the Management Board [15]

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Regarding your question, what was it, PRR or PSR?

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Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [16]

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Retail spend per passenger, yes.

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Julian Jäger, Flughafen Wien Aktiengesellschaft - COO & Member of the Management Board [17]

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Retail spend passenger was EUR 7.88. Though the absolute increase in sales was 4%, the decrease in PSR was 8%. But the PRR, due to new contracts, was insignificantly down by 1.2%. So the PRR in the third quarter was EUR 1.68 vis-à-vis 2018 EUR 1.70.

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Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [18]

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Sorry. Can you repeat it because I didn't get the difference between the plus 4 or the plus 8 and the minus 1, please?

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Julian Jäger, Flughafen Wien Aktiengesellschaft - COO & Member of the Management Board [19]

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PRR was down 1% and sales were down per passenger 8%. In absolute numbers, they were up 4%.

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Operator [20]

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All right. And I do show we have no further questions in the queue at this time. I'd like to turn it back over to the speakers for any additional or closing remarks.

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Christian Schmidt, Flughafen Wien Aktiengesellschaft - Head of IR [21]

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Okay. So ladies and gentlemen, thank you very much for your time. In the meantime, if any other questions arise, please feel free to contact us, and we will get back to you with the answers afterwards. So thank you very much. I wish you all a nice afternoon. Have a nice evening. Thank you, gentlemen, for joining the conference here in Vienna. And yes, goodbye.

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Operator [22]

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And that does conclude today's conference. We thank you for your participation. You may now disconnect.