Aeroports de Paris SA (ADP) Earnings Call Transcript & Summary

Good evening, everybody. So I am very happy to announce that Groupe ADP had signed a share purchase agreement to buy 49% stake in GMR Airports. As you know, GMR Airports, it's a huge brand in the airport activities in India. So our acquisition, if you look at Slide 1 in our presentation, it's an acquisition of 49% stake for a total of EUR 1.3 billion. We are in line with our strategy to build a huge first global airport network. We have 3 main platform of development, Groupe ADP. TAV Airports and GMR Airports. With these 3 main brand, we can develop the company for a long-term period. We can also combine our expertise to extract more value in Paris, but also now in around the world with all airports. Slide 2, we have the description of GMR Airports. That is the GMR world-class airport asset, with 7 airport in frequency, India, Philippines, Greece and we have a specific subsidiary called GADL. That is engineering branch, that is the performance. It's like a project management subsidiary that is very complementary with ADP engineering. The 2 main assets, Delhi International Airport, but also Hyderabad Airport, are controlled by GMR Airports, with a strong growth perspective for Delhi International Airport. We have now around 70 million passengers and with a CAGR in terms of growth traffic around 11%. And we have also a long concession period, with 30 years plus 30 years extension option that is because of the mechanic expansion. For the second main asset in Hyderabad, we have 21 million passengers; for CAGR in terms of passenger traffic, around 14%; and also a long concession period, 30 plus 30 years. When you see the main -- the key figures, we can see a good dynamic in terms of EBITDA and probably a good perspective for the next year. When you have Slide 3, the strategic deal and the strong industrial partnership, we can see the main characteristic of this deal. First, we have an acquisition by Groupe ADP in 2 stake. So first closing for around 25% stake will arrive in the coming days, the second closing for the remaining 24% in the coming months after regulatory approval in the next weeks. As the transaction terms, when you look at transaction terms, we have, obviously, the price, EUR 1.3 billion. But you will see the EV -- the multiple of EBITDA. What is very clear for us, we have a good multiple of EBITDA in the low average of previous comparable transaction. As you know, when you check the previous comparable transaction, we have a range between 16 and 21 multiple, that is -- so we have in the low average range of this multiple. In IRR -- of IRR in Indian rupee is good, higher than 10%, like a low teen. The government side are very, very strong. We can develop this point because we have a strong position in the Board. We have equal Board member. If you compare with GMR, we have a lot of right to appoint a key senior executive at the GMR Airports level, but also at the asset level and we have a lot of right to develop our strategy like a co-control company, but without the co-control. We have addressed -- we are close to the co-control, but not a co-control. GMR family have still the control of the company with 51%. In terms of impact for Groupe ADP, we are in terms of consolidation under the equity method. We have a strong improvement of Groupe ADP's ROCE of the mid and long term, not at the core term, in the mid and long term. We can confirm our payout ratio policy at 60% of NRAG. And in terms of EPC -- EPS impact, we can say that we have a broadly neutral EPS impact during the next 5 years, which -- like transition phase and after, we have a strongly accretive impact after 2025. We can look the shareholding structure after our deal, Slide 4, with Groupe ADP at 49%, GMR Infrastructure at 51%, with the 3 main assets, Delhi Airport, Hyderabad Airport and Mactan Cebu Airport; and 4 development -- under development assets, Bhogapuram Airport, Nagpur Airport, Goa Airport and Creta Heraklion Airport and we have also the engineering branch, GADL. If you look the macroeconomic perspective, Slide 5, we can see that India is the strong aeronautic growth potential. We can see the huge increase in terms of traffic, but also the expected traffic growth for -- between 2018 and 2038, plus 6.5%, with very good resilient international traffic growth, plus 6.7%. When you see all the figures in this slide, you can see that, obviously, India is a very resilient economy, and we can see that also in Slide 6, with the macroeconomic in this, well-oriented on the medium term, and the AVR equity investment into India, in a good way, we can see the increase the last 4 years. So growth, faster if you compare with the other company -- or other country in Asia; faster, if you compare with China; and we have a good perspective in terms of development. For the development, Slide 7. Our growth, the main driver for our growth, it's capacity, regulation, retail and real estate. When you see the capacity, we can see that in the main asset of GMR Airports, we don't have any constraints. In terms of regulation, we have a strong regulation with good visibility, good perspective and a good stability. In terms of retail, we have a significant potential to growth in the duty city, but also in the food and beverage activities. And in terms of real estate, that is the heart of the strategy for the moment in Delhi, we have a huge number of square meters under development. That is a huge potential, very close to the heart of the economic activities in Delhi, but also in Hyderabad. In terms of drivers for assets under development, we can see that we have, in India, a government strategy to privatize a large part of the mix and the future airport, many dozens of opportunity in the next 10 years. So to summarize, we have the Slide 8 and 9. First of all, it's not just an acquisition of concession, it's an acquisition of a cluster in Asia. And we have a very complementary platform of development, with TAV in the Middle East, with the heart in Turkey; with GMR in [ Asia ], with the heart in India; but also with the Groupe ADP stand-alone in the other country. In particular, we want to develop the company in line with our strategy announced in April last year. But we see our strategy in Slide 9, we want to build a global airport network around the world to create value, to have a strong industrial partnership with the 3 main brands, TAV, GMR and Groupe ADP, 3 complementary brands where -- and with GMR, specifically. We conclude, at the same time, an industrial strategic partnership with market access for service company, good development, expertise in operation, CapEx management, retail and passenger experience, but also in IT innovation and engineering. We have a specific industrial partnership to merge our knowledge, to merge our expertise. We have exchange in terms of people, a lot of India come in Paris, and we have to launch a new graduate program, but also a new high school aviation in India. So thank you. I am now available for your questions.

[Operator Instructions] And our first question comes from [ Eric Lua ] with JPMorgan.

Just 3 from me, if I may. On the debt of this group, we're trying to understand what the net debt was for GMR and what essentially gets to the actual multiple kind of [ sold ]. I understand that it's around 16, 17x, but if we can get a sense of the net debt, that would be great. In terms of the regulatory environment, we're looking to get a sense of what type of regulatory regimes these airports are at. Essentially, are they dual-till or are they single-till regime? And then finally, the last question is why is there a limited impact for the next 5 years for the EPS profile and how do we expect that to grow after that?

So for the third question, in terms of EPS and the 5 next years' profile, as you know, India, it's emerging country. So we have a lot of CapEx due to the fact that you have a huge dynamic in terms of traffic. So obviously, we have to invest in the company, and after, we have to develop the company to accompany the growth of traffic. So at the short term, it's not a relative investment. But step to 2025, we have a strong dynamic and a very relative investment, with a strong and the very resilient performance in the long term. When you see the dynamic in terms of traffic, we can see that it's a strategic deal. It's not a good deal for the short term, it's a strategic deal for an industrial company like ADP. So -- but I can confirm at the same time that for the next 5 years, we don't have a huge negative impact. It's a broadly neutral EPS impact during the next 5 years. After, we have a strong [ entities ] impact after 2025. Your second question, about the regulation. India airports are regulated under a special regime and by an independent regulatory authority. Like in Europe, the concept is similar to many practices in Europe. And when you see the airport, we can see airports are playing to cover the regulated investment expenses as well as the cost of capital. So it's very, very close to the regulation in Europe. In Cebu, in Philippines. In Cebu, tariffs are regulated after the concession agreement with inflation adjustment mechanism. So it's a very stable regulation if you compare with other regulation around the world. It's a very major regulation for us, and it's a key point. As you know, we -- this deal, it's -- we know very well the GMR family. We worked a lot with this family during 3 years, so you know very well. And we check the regulation, and we now confirm that it's a good regulation to create value in -- specifically in Hyderabad and in Delhi. In Delhi, it's like an adjusted till, not really a dual-till system, but it's not a single-till. It's an adjusted till, and we can see that like every till, we have a strong performance in retail and in real estate. The main value creation for the moment in Delhi it's linked by the real estate, and in the couple of years, a very relative value creation linked by the retail activities. In Hyderabad, it's also the same regulation, but with a strong stability. It's an adjusted till, like in every till, because we have a 30% gross subsidies from the commercial revenues, but at the end of the day, we have a strong value creation. For your first question about the debt, for the moment, if you speak about the debt of GMR Airports, we cannot disclose this debt, but it's -- when you -- if you want to check the multiple of EBITDA, if you can see the average with the comparable transaction, and we are on line with this low average of previous comparable transactions. So if you are very, very, very good in mathematical, we can have the -- mechanically, we can reduce the net debt. It's not so huge. So thank you for your question.

And our next question comes from Jenny Ping with Citi.

Firstly, you emphasized in some detail that the return on capital employed is beneficial for the long term. What should we expect short term in terms of the ADP Groupe's returns? Secondly, can you give us a sense of the timetable in terms of the closing of the deal? How should we expect the numbers of ADP to look, as in whether you're going to include it in your EBITDA as a net income number, or is it just going to go into your JV and associate line? And then just to try and get an understanding of how you perceive this will impact the Paris regulatory review. Obviously, you have been quite somewhat a clean company, very locally French-based, and that has contributed, to a large extent, in terms of the input of what the regulator allows in terms of returns, et cetera. Now with TAV and also with this transaction announced today, how do you then envisage the regulator will look at you in the context of the inputs for returns?

So thank you for your question. First question, in terms of short-term in ROCE, in fact, we don't expect a strong accretive impact in the short term. But at the same moment, we can -- we say clearly in our presentation that it's a broadly neutral EPS impact. So clearly, we don't have a good impact, but also we don't have a negative impact in the 5 coming years after its very, very accretive deal. So it's not negative, it's -- but it's not positive during 5 years. Second question, in terms of timetable. So you have 2 closings. First closing for the 25%, around 25% stake and we can confirm that this closing is expected in the next day, probably. I don't know if it's next week or at the end of February, but it's very, very close to the signing. In terms of -- for the second closing, we just have to obtain a few regulatory approval, a specific RBI approval, and we expect this approval in the next 2 or 3 months. So -- and after we can close definitively this deal, so probably at the end of the H1 2020. In terms of impact in our EBITDA, so we don't have the control of the company. We just have huge rights and the strong ADP government side, but we don't have the control of the company. So the consolidation, it's under equity method, so no impact in terms of EBITDA. Finally, in terms of regulation, we don't have any impact in terms of regulation linked by our acquisition. We don't have impact in Paris, no impact in JV, and also in India. So the economic regulation of airport is not linked by the shareholding structure. And in terms of value creation, with the regulated ROCE in Paris and the nonregulated ROCE for Groupe ADP with retail in Paris, real estate in Paris, but also international development is -- this regulated ROCE is obviously linked by this acquisition, and that is clear for us. We have a strong improvement of Groupe's ROCE into nonregulated parts on the mid and long term. This is clear in our presentation, Slide 3. This deal is clearly in the strategy announced during our Investor Day last year in April. So it's in our strategy to combine the regulated scope in Paris and the nonregulated scope in Paris, but also with the international development to create value in the resilient manner for a long term. That is a key point for us and this deal, obviously, it's an important element in this strategy. So thank you for your question. I have also a question by Stephanie D'Ath. Could you please comment if the privatization is less or more likely after this deal? So clearly, we don't have any link between the privatization, this acquisition and with the privatization or the potential privatization of ADP, where the management are focused to develop the company, to optimize the company in Paris, to invest in Paris, but also to invest in our international development to create value in the long term. At the end of the day, the management are fully mobilized to create value. The question of privatization, it's not the question for the management, it's a question of the shareholders. But when you see the timetable closing, we can see that for the [ term 1 ], obviously, it's probably before the decision of the French government and probably the second closing. I don't know. I am not the French Prime Minister. So thank you for your question.

And our next question comes from Michael Kuhn, Societe Generale.

A few also from my side. Firstly, I think at some point in the presentation, you mentioned you might raise some debt for the transaction. Maybe just an indication on the time line and when you will finalize your decision on how you plan to finance the deal. And then secondly, you speak about a primary injection into the company at some point in the presentation as well. My question would be what amount of the purchase price goes to, let's say, the GMR holding company, and what money goes straight into the airport holding? And then lastly, what do you think was GMR's main motivation to take you onboard? Obviously, there are some reports about some financial stress at GMR group level. But apart from that, let's say, what is the main benefit that you would say GMR is seeing in that corporation?

So thank you very much. So first of all, in terms of primary injection and the amount of the purchase price it must go to the GMR Airports. Clearly, when you see the primary injection, it's just to comfort the GMR Airports to create a platform to develop the group under the group of ADP, but also the GMR Airports group. So that is important for us, it's to stabilize this company because, as you know, as I can say, and we can check that Slide 7, when we buy GMR Airports, we buy a platform to develop and to accompany the future airport privatization in India. So we are now very comfortable with this primary injection to have a good platform to bid and to win the future airport privatization in India. After -- in this deal, obviously, GMR family needs to have cash to reimburse part of the debt of the GMR Infrastructure Limited Company and so it's not just a deal to capitalize the GMR Airports. First question. Your second question, in terms of government side. It's not directly your question, but it's a good way for me to speak about that. For Groupe ADP, we have the same number of Board member as GMR, first point. Second point, Groupe ADP has more than 45 [indiscernible] for the major investment financing renewal of material contract and other key points. The third point, it's that Groupe ADP has some key position, including Deputy COO, Global COO and also further key position at the airport level, including the CCO of Delhi, the CCO of Cebu. That is a strategic key position to develop the value in the group, the GMR Airports group. And finally, Groupe ADP and GMR will have to agree on budget and business plan. That is key for us. We can manage the -- this company like close to the co-control. That is key for us. In terms of debt, for us, we -- for the first closing, probably in the coming days, we have enough existing cash to pay the first closing without new financing. Also probably for the second closing, we have to launch a new bond, but it's a life of this company. And if you look our financial trajectory, if you look at our financial key -- KPI, we can see that with the S&P ratio at A+ level, A+, stable, we are very comfortable to develop this group without a strong impact in terms of net debt. And also, we can confirm the payout ratio at 60%. So thank you for your question. So do we have any other question?

Yes, we do. Our next question will come from Virginie Rousseau with ODDO.

Could you say a word regarding cash flow generation of the company. I guess, given the current CapEx needed, cash flow is negative, but when do you expect a breakeven? And a question regarding dividend policy. Do you already have an agreement with GMR regarding the dividends in the short and probably in the long term?

So thank you. For the first question about the cash flow generation, at the ADP level, Groupe ADP level, we can see our -- in our Investor Day, a specific slide about the cash flow generation. And in this slide, we can see the trajectory without strong international development. In fact, when you put -- we take account of this international development, we have, at this stage, a negative impact, but not so strong. And clearly, after '25, '26, we have a very positive free cash flow structure in our trajectory. We can see Slide 20 in the presentation of business plan in our Investor Day. Your second question is in terms of dividend policy with GMR. For the moment, we don't disclose the dividend policy with GMR, but obviously, we have a specific agreement and specific rights to manage this stake. At this stage, the main point, it's the fact that we buy 49% of the company in emerging country. Obviously, we are strong. We have to accompany the increase in terms of traffic, so we have strong CapEx. And at the first stage, there is low dividend or no dividend in the first [ 6 ] days.

And our next question comes from Cristian Nedelcu with UBS.

A couple, if I may. The first one, when you talk about the EV/EBITDA multiple, could you clarify if you refer to the 2019 EBITDA or the 2020 EBITDA because these are quite different. Secondly, when you look forward for the next few years, you did talk about the heavy CapEx investments. If you talk about the major opportunities of privatizations in India, do you expect you will need to put in further cash injections in GMR Airports over the next years in order to finance this? And in relation to that, how do you see ADP's net debt-to-EBITDA progressing over the next years, considering you also have CapEx increases in Paris going forward? Or what is the maximum level of net debt-to-EBITDA you would be willing to go to? And the third one, if I may. Out of the EUR 282 million of EBITDA that you disclosed for 2020 for GMR, could you give us a better feel how much of that is generated from Delhi or Hyderabad? So a rough split of that EBITDA number between the major contributors.

So thank you for your question. In terms of multiple of EBITDA, we have the figures from 2019 and 2020. Clearly, we can check with the 2020 figures, but also with 2019. But for us, the 2020 figures, it's a valuation, a valuation. Now it's not at the stage -- the final figures, but these figures, it's good to check the multiple. In terms of CapEx for to accompany the future privatization in India and to accompany the growth of CapEx, we don't need injection, cash injection for the moment. As you know, we have a primary injection. That is a good way to stabilize the company. And after, GMR Airports is in a good situation to develop the joint asset, but also to buy a new concession. In terms of net debt, for the moment, we don't disclose all the figures. And for the EBITDA contribution at the GADL level, for the moment, we can just say that the part -- the large part at the moment of the EBITDA generation is linked by Hyderabad. And after, we can see that Delhi Airport is the future value creation in the next couple of years linked by the retail.

Understood. And sorry, could I add one more, please, if I may? In terms of the regulatory framework, could you tell us if -- when is the next regulatory rollover? So what is the duration of the current regulatory framework and when you expect to roll over in Delhi and in Hyderabad?

So I don't have this element in mind, just to check. But we have a new regulatory approval last year, if I remember correctly, for Delhi. And it's during a 5 years' basis in Delhi, but also in Hyderabad, if I remember well.

And our next question come from Nicolas Mora with Morgan Stanley.

Just to come back on the deal and a little bit the genesis of the deal. I mean this is an asset which has been shopped around for 3 years now. I mean why -- how have you been able to step in? I mean what has sealed the deal for you? That would be my first question. Second one is what's the intention of the family long term? And do you have a preemptive right to maybe buy the majority and fully consolidate the asset at one point? And third one, just on the IRR. I mean just for the sake of simplicity, I mean how do you compute this? Is this an IRR based on the dividend? I mean, considering you might not receive anything for 10 years, which -- just wanted to have an idea on how back-end loaded basically that IRR computation was and how sensitive was it to term value.