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

Hello, and welcome to the Group ADP 2022 9 months revenue. I will now hand you over to your host, Madam, Cécile Combeau to begin today's conference. Thank you.

Thank you, and good morning, everyone. I am Cécile Combeau, Head of Investor Relations of Groupe ADP, and it is my pleasure to welcome you to our 9 months revenue conference call. I am here with our CFO, Philippe Pascal; and our Deputy CFO, Christelle Jacquemet. Philippe will walk you through our presentation of the 9-month revenue, and we will open the line to Q&A. Before we start, I would like to remind you and draw your attention to our usual disclaimer related to forward-looking statements. You will find it on Page 31 of our presentation. That being said, Philippe, the floor is yours.

So thank you. Thank you, Cécile, and good morning, everyone. Let's jump directly into Slide 3 with some key figures. And you can -- as you can see, Groupe ADP recorded a strong performance since the beginning of the year, with revenue standing at more EUR 3.3 billion in the first 9 months. All of our activities are going, Aviation and International segment are driven by the continuing recovery in traffic, both in Paris and abroad. The acceleration seen in Q2 was confirmed in Q3 with a recovery rate at 86.8% in Paris just for the third quarter and 85.9% in TAV Airport for the same period. It was a very strong for us. Retail and services have benefited from a strong rebound in the sale per packs in Paris at EUR 26.1 per passenger, up 5% against last year and clearly above our initial expectations. Real estate is also ground notably, thanks to the building takeover in full ownership last year. So on this basis, we are in a position to adjust upward our financial forecast for 2022. This is the second time this year. And I will come back to that in the conclusion of this presentation. So moving on to Slide 4, with a focus on the annual process of tariff approval, which has started this month regarding the 2023 tariff. As you know, in the absence of an economic relation agreement, tariffs are subject to compliance with 2 regulatory requirements. First one, it is treated on the left hand of the slide concerns the airport public services activities. We can show the [indiscernible] which overall revenue cannot be higher than the associated costs. The second requirement is a fact that for the full regulated TIL, the regulated ROCE cannot exceed the regulated WACC. In addition, tariff evolution must be moderate. So all in all, the tariffs notified to the Transport Regulation Authority for 2023 are therefore been built to respect this requirement. And if we focus on the second one around ROCE and WACC topics, we can see that the regulated ROCE evolution is driven by the change in traffic, in OpEx, in tariffs and in the regulated asset base. Considering the current recovery of traffic, considering our OpEx control, considering also our management in terms of CapEx, we can see that the regulatory ROCE will mechanically go up for years to come. You can see it in the illustrative graph on the left. So we have illustrated a higher ROCE and less high ROCE, but directionally regulated ROCE is mechanically going up. Given this element, our proposal for 2023, the tariff fees compared to 2022 at Paris-Charles de Gaulle and Paris-Orly. The French regulator will examine this proposal in the next 2 months and make its decision public by the beginning of 2023. So if you move on Slide 5, just a word on some significant steps on the environmental and social fronts. So 2 elements. First, our commitment to reduce CO2 emission is full, and we have included into our 2025 pioneer road map. And we try to improve our energy efficiency. We try to control our energy consumption and the development of renewable energy. We have signed a power purchase agreement in February 2020, and I am happy to share with you that [indiscernible] solar farm has started production at the end of September of this year. 2 additional parts are expected to be commissioned in 2023. So group ADP has undertaken to purchase all of the electricity produced by this farm for 21 years, which will help control electricity purchase cost. So second point on this slide, it's the social front. As you know, people is key for the airport, people is key to be able to accompany the recovery of traffic. So we have launched at the beginning of September one platform to promote employment in Paris area airport platform. The project, which has recently been awarded is a successful means to improve sourcing of candidates. This type of initiative has a positive impact for territories, and we believe it's also allow Groupd ADP to differentiate itself as our employees and the platform workers in general, it's a key asset for the quality of service in our airport. It's also key to accompany the roles. I am now on Slide 7 with the traffic. As I commented in introduction, the acceleration seen in the Q2 was confirmed in Q3. For the first 9 months, traffic recovery against 2019 stands at 76.6% at group level and 7.2% at Paris level. Given the trends we see in terms of bookings, we now expect the traffic recovery for 2022 to be in the upper part of the target range with a [indiscernible] already last July. So for Paris, we expect now a level of 78% to 82% of 2019. And at group level, we expect a level of EUR 77 million to 83% of compared to 2019. So a new target at the upper level. Slide 9, specific focus on Paris. We can see that traffic with Europe was very strong during the summer. We can also see that we have a good dynamic in terms of low-cost traffic, with strong growth and we can see that the share of traffic in Paris for low-cost carrier reached 27.7%, so higher compared to the pre-COVID situation and 22%. For international traffic, which is a key point because it's the most contributive traffic for us for the regulated scope, but also for the nonregulated scope. This international traffic represents 39.6% for the first 9 months of this year. That is below historic reference due to the still weak traffic with Asia, but below, but with good and strong dynamics. With this in mind, you can appreciate the strong performance of our retail activities in Paris. Sales per packs clearly outperformed our initial expectation to reach EUR 26.1 for the 9 months compared to EUR 22.7 in 2019. In particular, we are seeing sales luxury growing faster than the traffic. All in all, this number demonstrates of the relevance of ADP Groupe's retail offer and airport hospitality model, which meets the demand of passenger. The reopening of Terminal 1 at the end of this year will be an important milestone for our new retail concept ex time, and we trust that with these new strategies, 2023 numbers will confirm this very good performance and this very good dynamic. Moving on to Slide 9, specific focus on TAV airport traffic. At the end of September, we can see that TAV airport traffic stands at 79% of the 9 months compared to the 9 months 2019 with a strong Q3. The dynamic in tourist across of TAV has been very strong since the beginning of the year and especially this summer for all the airports, ntalya, Bodrum, Izmir, we had the strong dynamic and during the summer, higher than 90%. This performance is due to the 2 elements. So first, it's a strong growth of traffic in Turkey where traffic with the U.K., Germany, Poland stands above 2019 traffic. And the second element to a lesser degree it's the resilient of traffic with Russia, which was very impacted in Q1, but has been progressively recovering, reaching close to half of 2019 level. As of the end of September, in additional Almaty continued to be the best airport in terms of recovery with passenger traffic 9% above 2019, with a strong performance in term of cargo, a strong performance in term of fuel activities in this airport in -- with a good trend for Almaty. The performance recorded in the first 9 months in Almaty is therefore above historical results and is expected to normalize progressively for Q4 and in 2023. Slide 10, we recorded around EUR 3.4 billion of revenue in the first 9 months of the year, up 80% versus '21. Within this growth, please remember that EUR 225 million are linked of the integration of Almaty Airport which contribute for only 5 months last year. In Paris, the Aviation segment performed well. And also for the retailers and services, we are nearly double the performance of last year. Real estate revenue are growing by 7%, driven by the return to full ownership of building in Paris, bringing additional rentals and by some development in cargo area. International revenue have doubled and with a strong impact of Almaty. To conclude, Slide 12. You can see that we have a new financial target for 2022. The passenger traffic development and the results recorded since the beginning of the year are strong. So on this basis, we are improving our financial forecast for 2022. This is the second time for this year. As commented earlier, we are now expecting traffic recovery against 2019 to be in the upper part of the target range we gave in July. The EBITDA margin for 2022 is now also expected to be in the upper part of the uplifted target range. That said, at least 34.5% of revenue. The group financial discipline has resulted in a reduction in CapEx for this year, which are now expected between EUR 500 million to EUR 550 million for ADP model company. And as a result, we now expected an improvement -- strong improvement in the debt ratio to a level below 5 to 5.5x EBITDA as early as December 2022. This does not take into account any impact linked to the unwinding of the cross-sharing with Royal People Group, which could happen any time from now and before May 2023. So all of our objectives set within 2025 remain unchanged. The last point, Slide 13. It's one element that is important for us, and we like to wrap up this presentation by reminding you some fundamentals of our 2025 roadmap. At the root of our road map is the need for our industry to transform and our commitment to participate in decarbonization. That is the a first commitment. The second commitment is to create value for our shareholders, included evidently our shareholders -- all our stakeholders with a return to sustainable and profitable growth. So we believe that airport, it's a key element for the world, key element for the economic and for the culture and for the peace around the world. We believe that for the long haul distance, airport transport, it's a key element. And we need this element to manage the business around the world. So therefore we anticipate that in Paris the share of short-haul traffic will gradually decrease and shift to rails. And collectively with the share of international traffic will increase. This is positive for our earnings structure as international traffic is more accretive. Accordingly, we are focusing on the optimization of our infrastructure to drive value creation, thanks to capital need. As a complement, we have been developing our international footprint in areas where demographic and economic patterns show significant growth potential. This diversification helps mitigating risk. We now have a greater diversity in terms of nature of assets, concession of full ownership. We also have a more diversified exposure to various legal models and economic models. We now have a very well-balanced portfolio in terms of growth patterns. Looking ahead, we've focused on consolidating our existing trench, quality of service and hospitality with improving of environmental footprint and ensuring we are well positioned to catch profitable and sustainable growth. So all in all, we are very happy to try to build a new economic model more accretive for our shareholders at more reasonable in terms of environment issue. So thank you for this element, and we are now available to answer for all your questions. Thank you.

[Operator Instructions] The first question comes from the line of Cristian Nedelcu calling from UBS.

The first one on low-cost traffic, it increased to 28% of your total traffic, used to be 23%. Do you expect this to further grow in the next year? What are the low-cost carriers telling you about their intentions and which carriers in particular you expect to see more growth? He second one, if I calculate well, your retail sales per pack in Q3 is pretty much around your 2025 target. So are there any temporary benefits here that we should be aware of in Q3? We haven't had the Asian tourists come back. You're also talking about more self-help going forward. So could you help us a bit think about 23, '24 in terms of retail sales per pack to grow further versus Q3 levels? And then the last one, if I may. Very useful your slide with the regulated work. And could you tell us in a scenario where the regulator comes out and says the WACC should be at the middle of the range or 4% or something like that, roughly, what would be the impact on your 2024 tariffs? How much would they need to decline if that's the way going forward?

Thank for your questions. So your first question about low cost traffic. So as you know, before the crisis, the pre-COVID situation, the low-cost traffic in Paris was mainly lower than our competitors with 20%, 23% of the total traffic. Now we know really after this -- the COVID crisis that we have a strong recovery for the low-cost carriers, especially easyJet, Transavia in Paris. And it's a strong recovery faster than the international traffic and all the legacy carriers. But all in all, it's like a normalization if you compare this with our competitors. Globally, with 27%, we are on average at the same level of our competitors before COVID situation. So it's like a normalization with a fast recovery of low-cost carriers. The main point and the main explanation of this fast recovery is the strategy of Transavia in the Air France Group, but Transavia tried to increase strongly its footprint with a huge base in Paris-Orly with a very, very strong and competitive platform. As you know, when you operate in Paris-Orly, we have a very short taxi time. We have a very short turnaround. So it's a very efficient for low-cost carriers. For the next year, we expect like a good normalization in this low-cost carriers and the consolidation of the position of Transavia, Vueling. As you, Vueling have new slot after the transformation of Air France KLM. So a specific slot for Vueling, a strong increase of Transavia and strong position historically of easyJet. Your second question about the retail. So clearly, the performance recorded in the first 9 months, it's very solid and promising. The rebound of traffic comes with more contributive type of traffic, but we have also a very performance infrastructure in terms of retail area with strong brands, luxury brands, that is the main explanation. As you know, when we adapt our structure of retail in 2017, 2018 before the crisis with more fashion and less core business, we know very well that we can have a good dynamic. The crisis, it's like an acceleration. And it's -- we can now have the proof that our new concept with more efficient new concept in terms of hospitality with time, it's a very, very efficient concept. So we expect for the future a good dynamic. It's a little bit early to speak about sales packs for '23, '24, '25. We are historically cautious. But clearly, in Q3, and now it's not a punctual performance, but it's like a structural dynamics. An important milestone will also be the reopening of Terminal 1 in Paris-Charles de Gaulle the end of the year. Terminal rebounded with our new concept time with a strong luxury brands. So all in all, we expect a good performance in terms of retail, and we try to make the proof that the concept, it's a good concept to create value for the future. Your third question. So the question is -- your question is to know exactly what is the level of the regulated WACC for the French regulator. Our specific valuation of the regulated WACC, it's 6.2%. So we can see in our slides the range of the work, regulated WACC for the French regulator, but it's a little bit -- its communicate for the French regulator 1 year ago. Probably now the French regulator have to adapt this range between 2.6% and 5.2%, probably higher. We expect a new Chairman for the French regulator. And we expect mechanically due to the macroeconomic situation and an adaptation of this regulated WACC. But we try to manage with our tariff proposal, it's the trajectory of regulated ROCE. Globally, it's not a scoop, but we are currently in the range of the IFT WACC. We know that we have the room of maneuver to increase our accountability, but we know also that it's -- we have to manage this trajectory in a good way to increase the competitiveness of the airline to a guarantee, a good quality of our infrastructure in Paris. And we know also that we have a good dynamic in terms of traffic. We have a mechanic recovery in terms of regulated ROCE. It's the reason why we prefer now and manage in a good way this tariff proposal to be able to focus our efforts in the performance of our infrastructure more than a huge debate with the French regulator and the airlines. Have you another question, please? So no questions.

Sorry, I apologize. Yes, we -- the next question comes from the line of Stephanie D'Ath calling from Royal Bank of Canada.

Well done on the strong sales results. My first question is on Schiphol Group. Could you please remind us what happened in mid-2023 if Royal Schiphol hasn't sold the 8% stake in ADP to a third party, what would be the mechanism in terms of cash in and outflows I guess, for you? And then secondly, just wanted to double check the EBITDA margin upgrade is driven by the better traffic only? Or is there anything else behind this guidance improvement? And then finally, on your traffic for winter '22, '23, what were your recent discussions with airlines? Where do they see their capacity against re-pandemic? And any commentary around if you expect the sustained 80 -- or close to 90% recovery rates to be maintained in the coming months.

So thank you, Stephanie, for your questions. So in terms of traffic and traffic into the winter season for the moment, at this stage, the booking dynamic for the rest of the year, for the beginning of next year it's very good, strong, and we see no sign of impact from inflation or a reduction in purchasing power at this stage. No impact in terms of macroeconomic situation, no impact in terms of geopolitical situation. So we are for the moment confident and we can -- we remain prudent historically. But we can clearly confirm our forecast and our guidance for 2023. And as I said, we changed our guidance for 2022 to be in the upper part of our range fix in July. So for the moment, no impact. We are confident for the trajectory in terms of traffic. In terms of margin, margin, clearly it's a recovery in terms of traffic. As you know, we -- when we have a recovery in term of traffic, we have like a step when we have 1 million passenger -- 1 extra million passenger, we have to reopen the terminal, a global terminal for 10 million passenger. So when we reopen and when we have not 10 million, but 12 million, mechanically we have a good performance and a good margin. First point. The second point, it's OpEx control. We implement a huge OpEx control during the crisis, and we try to manage this OpEx control during the recovery. But in this element also we have some step. And we know that for '22, we managed well this recovery for '23. Just to have in mind the fact that in terms of wages and salary, we have a natural inflation of wages, historically around 2%, 2.4% of personnel costs. We have also the full year effect of the major, the salary measures decided in July for a full year impact of EUR 26 million on a full year basis. In terms of recruitment, that is a key element to accompany the traffic, we are in a good way to -- and we start a strong recruitment plan to manage the return of the traffic. But we can, at the same time, confirm that we have a strong organization now, and we can manage the airport in Paris without 700 people less. In terms of external services, we expect a modest impact of inflation in 2023 -- in 2023. For the moment, we wish to manage this element. It's a one-off element to explain the freeze in terms of tariff also. We will be -- but at the same time, we have to prepare the huge events in Paris, like Le Bourget, the Rugby World Cup. We have also the limping games in '24. So we can have in the next months exceptional OpEx, but we have to implement. One element that is also key and what we do we have in mind when we work about our margin, it's Almaty. Almaty in '22 outperformed for a lot of reasons. First of all, because we have a strong recovery in traffic. Second reason, it's the ban in terms of air traffic in Russia, strong performance in cargo in Almaty, but also one element that is a key element for the margin, it's the question of jet fuel. The performance of Almaty driven by the jet fuel activities, which was particularly strong due to the ban of Russian airspace that I said. But also the virtual activities benefited in 2022 from subsidies. That is probably not the case in 2023. So for the moment, we -- as you know, we changed our guidance for '22 in terms of EBITDA margin to at least guarantee margin higher than 34.5%. But we don't change for the moment. We don't change for the moment our guidance in terms of EBITDA margin for '23. We are cautious. It's a little bit early, and we have to manage all these elements. For your first question...

Sorry to interrupt. So could we potentially see a margin decline next year from more than 32.5% to...

It's too early. For the moment, we confirm the range between 32% and 37%. We can give you some color about our outperformance for '22. But for '23, it's a little bit early. We have a lot of elements. And we -- it's difficult for the moment to give you a clear view. So we prefer confirm our guidance in the same term. For your first question for you about Royal Schiphol Group. So in the interest of all parties, we have to close before May '23., we have to. We have a good discussion with Royal Schiphol Group and we mechanically we know that our Marvelous company is very attractive, and we have investors for 8% of our shareholding structure. All in all, for the moment, just to remind the process, Schiphol has to sell 8%. And after that, ADP sells the 8% of Schiphol Group directly to Royal Schiphol. So I can give you more color -- I cannot give you more color about that. It's -- we are in an ongoing process. Thank you.