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

Hello, and welcome to the group ADP 2023 Half Year presentation. My name is Holly, and I will be your coordinator for today's event. Please note, this call is being recorded. For the duration of the call your lines will be on listen only, however, you will have the opportunity to ask questions at the end. [Operator Instructions] I will now hand you over to your host to begin today's conference. Thank you.

Thank you, and good evening, everyone. I am Cécile Combeau, Head of Investor Relations at Group ADP. And with me are Augustin de Romanet, Chairman and CEO; Edward Arkwright, Deputy CEO; and Philippe Pascal, CFO. After going through some prepared remarks about our first half results, we will open the line to Q&A. And in order to allow a greater number of you to dialogue with the management, I would like to kindly ask you, please, to limit your questions to one or 2 each time you get the line. As a reminder, certain information to be discussed on today's call is forward-looking and is subject to risks and uncertainties that could cause actual results to differ materially. For this, I refer you to the disclaimer statement included in our press release and on Slide 42 of our presentation. And with that, let me hand it over to our Chairman and CEO, Augustin de Romanet.

Good evening, ladies and gentlemen. Hello, guys. Thank you, Cécile, and good evening. Thank you for joining us to talk about our first half results. And let's move directly to Slide 3 with the highlights. So the half year performance is in line with our expectations. We are posting EUR 2.5 billion revenue, up to 26.9% compared to last year. EBITDA is up to 22.9% to EUR 863 million, representing a margin of 33.9% of revenues, in line with our forecast. Net result is up plus 31.8% to EUR 211 million, and we've improved our net debt-to-EBITDA ratio to 4.3x EBITDA. All of our traffic assumptions, forecasts, and financial targets for 202 -2025 are confirmed. We are keeping a strong focus on deploying our 2025 Pioneer strategic road map, acting to decarbonize industry, and prepare for the upcoming sports events organized in Paris later this year. I want to speak about Rugby World Cup, mainly and next year. Looking at traffic in the first half on Slide 4, we see traffic developing just in line with our assumptions, both in Paris and internationally. Recovery rates against 2019 stands at 97.3% for the group, representing a growth of 30.3% against the first half of 2022. In Paris, traffic grew plus 25.7% compared to the first half 2022. We welcome more than 47 million passengers in the last 6 months, representing 90% of 2019 level. Further, our floating to airport this summer and on certain big day, we will have exceeded 2019 traffic in prior year, and we will be getting close to 2019 record levels at Paris-Charles de Gaulle as well. Everybody can count on all Group ADP employees and the entire airport community who are fully mobilized to welcome passengers in the best conditions possible. This leads me to Slide 5 with a focus on the initiatives deployed in Paris for this summer. As you know, hospitality is very important for us. It's our priority. Our airports need to be efficient at every stage of checks and formalities, and pleasant in terms of contact with reception staff and while you wait in the boarding lounge. At the same time, we have a wonderful challenge with the upcoming major sport events. I've already talked about the Rugby World Cup in 2023 and for sure, the Olympics next year. They provide a unique opportunity to showcase our expertise in terms of performance of our operations and infrastructure for peak management. Therefore, to meet these challenges, we are putting in place additional resources; human, organizational, and equipment. I will just give you 2 examples. First, we've redesigned the queues, especially the queues for the control of passport and deployed additional workers to better support and guide passengers to the queues dedicated to them. Second, we've carried out preventive maintenance on our luggage systems and asked our service providers to increase the number of maintenance technicians especially during the weekends. Moving on Slide 6 with some examples of projects commissioned in the last few months and ongoing. I will highlight, in particular, the work that is underway in Orly to build the future multi-model station, which will notably accommodate the extension of Metro Line, Line 14 and the future Line 18. With Line 14, operational in June 2024, it will take only 25 minutes to travel to the center of Paris from Paris-Orly. We consider that this will be a game changer to access to Orly, which is currently 80% by road. Within this future multimodal station, we opened in April 2023 a new car park with more than 2,000 parking spots, and the former underground car park has been closed at the same time. All in all, more than half of our capital expenditure program is devoted to maintaining our assets and ensuring regulatory compliance. 2 recent examples of that are: first, the upgrade of the luggage sorting system for the Terminal 1 in Paris-Charles de Gaulle that started operations at the opening of the terminal. Second, the new firefighter station in Paris-Le Bourget Airport, you can see that on the right of the Slide #6. Last highlight, I would like just to tell a few words tonight about the launch of our new employee shareholding plan called Abelia. Following the authorization of shareholders, we have launched in June a new employee shareholding operation. Its rollout will be phased in 2023 and 2024, and Abelia is a 2-step operation. First step, a free allocation of shares for each employee of the company. Second step, an offer to acquire shares on preferential terms for employees who are subscribed to the group savings plan. It means everybody will be able to do that. This operation is fully part of 2025 Pioneers Road Map in which we had set an objective to carry out at least one employee shareholding operation by 2025, for sure is indeed to develop a new culture of value sharing, involving employees in the company's performance. Speaking about performance, it's now the time to give the floor to Philippe Pascal, who will comment more in detail our first half financial results.

So thank you all, thank you Augustin, and good evening everyone. Let's move on to Slide 9, you see on traffic in Paris. Traffic continued to recover in line with our assumption, traffic with the Mainland France show a lower recovery, mainly due to closure of several domestic routes compared to before COVID crisis. Traffic stood at 76% of 2019 in the first half, 74% recovery in Q1, and 76% in Q2. Traffic with Europe has recovered very well to 93% of 2019 traffic in the first half. We saw an acceleration in the second quarter and traffic with Changan was nearly at full recovery in Q2 with 99%. For international traffic, this traffic stand at 92% of 2019. North America had reached 101% in Q1, but a weakening a bit in Q2. It stands at 99% overall in the first half. Traffic recovery with Asian Pacific is gradual as expected, mainly due to the slow recovery of traffic with China, which is at 15% of 2019. There are currently 34 flights per week compared to 93 flights per week in 2019. We continue to expect an acceleration in recovery of China traffic from the end of the year but probably more in 2024. Slide 10, now if we look at how this traffic translates into our retail business in Paris, we see that performance continued to be strong. Sales per pax reached EUR 29.6 in the first half, confirming the structural improvement driven by the deployment of Extime. In starting that, sales per pax in the new international area of Terminal 1 is now greater than that of Terminal 2E or K, which is also reaching a record level. So in fact, in the second quarter, both they are well above EUR 60 per departing passenger, 54 in Terminal 2E or K and 69 in Terminal 1. On the right side of this slide, you can also see the latest development regarding the rollout of Extime, notably with the launch of the new Extime.com, digital shopping included Click & Collect and the new Extime rewards program. We can also see Extime Media now operational and launch the operation for 11 years until December 2034 under the new brand name that is Extime JCDecaux Airport. Lagardère was selected as a partner of ADP in the JV that is will operate Travel Essentials business for 10 years starting in 2024. Moving on to Slide 11 for our 2 main international assets. On the left slide, overall recovery of TAV Airports at 95.8% of 2019 level with this remarkably strong passenger traffic at Almaty. This reflects an increase in both outbound and inbound tourism and business in Kazakhstan. On the right side, GMR Airports traffic stands at 108.4% recovery. In Indian airports, the strong recovery continued to be driven by domestic traffic standing at 114% of 2019 levels. Goa Airport opened on January 5, 2023, and welcome more than 1.6 million passengers in the first half. Moving on to Slide 12. By nature, our activities are seasonal with a stronger H2. That is very important to understand. As you can see on the left-hand graph, in Paris, we historically welcome a lot on a range of around 48% of the passenger in the first half and 52% in the second half. This seasonal effect is even stronger in Turkey, in line with tourism season. On the right of this slide, you can see that retail activities are also subject to seasonality with 53% of the volume of sales in our air freight shops made in the second half of the year. Post-COVID, as activity recovers, we see in the airlines of things, trends that sometimes seasonality effect which could further improve performance in the second part of this year. Now Slide 13. Getting back to our financial performance. In the first half with a solid growth in all P&L indicators, an expected move down in EBITDA margin and controlled net debt to 4.3x EBITDA. I focus more directly to Slide 14 for more details on our revenue. So Slide 14, revenue reached EUR 2.6 billion in the first half of this year, up 27% versus last year, which was still affected by recession linked to COVID in the first quarter of '22. Driven by the traffic recovery in Paris, the aviation segment revenue is up 24% year-on-year. The Retail and services segment is up 31% versus H1 2022, helped by the strong sales per pax in addition to traffic. Real Estate segment is up 8% versus H1 2022 with additional rents from assets taken overall in a full ownership last year about the growth of TAV Airport has been strong, driven by both its airport assets and its services company. Almaty Airport in Kazakhstan grew EUR 53 million, driven by the strong traffic momentum as mentioned earlier. Moving on to Slide 15 with EBITDA up standing EUR 863 million, up 23% compared to H1 2022. EBITDA growth is driven by the recovery of traffic, impacting positively our revenue. At the same time, are in line with our previous comments, we are seeing an increase in our OpEx margin. Expenses linked to consumables are up EUR 93 million. Nearly half of this increase is due to Almaty, where the cost of purchasing of fuel grew massively compared to last year. The external services for the external services costs evolution remain, commensurate with traffic growth, up from EUR 124 million. Going forward, as some of our contracts are being renewed this year, and we expect to see some pressure on this side of the P&L for the next month and the next year. Staff costs increased by EUR 112 million versus H1 2022, reflecting the first effect of the recruitment made in 2022 and ongoing in 2023 as well our fellow managing in Paris and at TAV as well in inflationary context. We expect pressure on our OpEx to continue in '24 and '25, notably due to the renewal of some of our purchasing contracts from 2024, including new energy contracts. And we expect to also reinforce of our staff base of hospitality and operational resilience purpose. In all, EBITDA margin for the first half 2023 stand at 33.9%, reflecting the combined effect of business seasonality, but also the trend in OpEx and normalization of Almaty's performance after a particularly strong year in 2022. Below EBITDA on Slide 16, Amortization and impairment increased by EUR 40 million, driven by the increase in amortization of airport operating right for several airports at TAV as they are amortized according to the level of traffic. Our share of results is associated and JV is down EUR 12 million, mainly due to the deterioration of the contribution for GMR Airport, reflecting the reinstatement of concession fees payments for Delhi Airport after the 2 years' fourth measure period during this payment has been stopped. Financial result is down for EUR 18 million compared to H1 2022, including an increase of gross cost of debt of TAV Airport for EUR 17 million. Income tax increased by EUR 51 million, including EUR 28 million increase in unrecognized deferred tax assets, resulting in effective tax rate of 33% in H1. We paid more tax because we have a better result. The share of net income attributable to minority shareholders had an impact of EUR 24 million. In all, net income stands at EUR 211 million, up 31.8% versus H1 '22. Moving on to Slide 17, you can see on this bridge, the main items explaining the reduction in our net debt. In addition to the usual cash outflows, which are the dividend payment for EUR 309 million and CapEx for EUR 353 million. This semester, we had 2 specific cash outflows. First one is the subscription of FCCB, Foreign Currency Convertible Bonds for EUR 331 million, issued by our Indian partner. This one is part of the merger project announced in March between GIL & GAL and we get at 6.76% interest from this loan. Just about cash outflows is EUR 119 million up-front payment made by TAV to the Turkish Airport Authority, representing 25% of the rent for Ankara concession. As of June 30 net debt is just above EUR 8 billion, showing good control with a ratio of 4.3x EBITDA. And with that, we will hand back to Augustin de Romanet. Thank you.

Thank you very much, Philippe. So to close this presentation, I would like to give you a few comments on our outlook starting with our guidance. So Slide 19, you see that our traffic assumptions and financial guidance for 2023 are unchanged. First, we continue to expect traffic in Paris up to 93% of 2019 and for the group at a level close to 2019 traffic. Second, EBITDA guidance. It is still between 32% and 37% of revenue, reflecting seasonality of the business with EBITDA margin in the second half of the year expected to be higher than the first half. Third, dividend policy of 60% payout with a minimum of EUR 3 per share. Fourth, our guidance for CapEx is around EUR 1.3 billion per year on average between '23 and '25, of which EUR 900 million for ADP SA only. These CapEx tend to be back-end loaded, and we expect CapEx to remain below this average this year with the ramp-up in the following year. All of the financial objectives for '23-'25 are maintained. Last, I would like to highlight our continued focus on acting for low-carbon aviation on Slide 20. As you know, the de-carbonization of aviation is our license to grow. At the Paris Air Show, we've presented several experiments, currently underway, some of which we hope to deploy before the Paris Olympics. The 2024 Paris Olympics is indeed a wonderful opportunity for Group ADP to accelerate actions, contributing to its long-term vision, not only in terms of quality of service and passenger experience as we've seen earlier, but also in terms of de-carbonization of the sector. To illustrate that, I will mention 2 things. First, the launch of hydrogen airport, the engineering and consulting joint venture we launched with Air Liquide to help airports all around the world integrate hydrogen projects within their infrastructure. Second illustration is the operational progress towards the launch of eVTOL services by summer 2024. eVTOL are electric aircraft with vertical takeoff and landing, which will allow new uses, especially for medical purposes. Now with that, Philippe, Edward and myself will be happy to answer your questions. Now you can open the line for Q&A.

[Operator Instructions] And our first question comes from Elodie Rall with JPMorgan.

Hi, good evening, thanks for taking my question, I'll limit them to 2. First of all, in terms of the fact that you're seeing some increasing cost pressure from upcoming renewals of contracts, does that mean that you'd consider increasing tariffs again in '24 and '25 to offset the cost pressure? That's my first question. And my second question is on the outlook for traffic. I mean we've seen some weakness in June across the space, mostly because of airlines, I think, focusing on yield on cutting capacity. So I was wondering what your views are about the structural impact from the airline's position and if you think that could help air traffic recovery in the midterm? Thank you.

So thank you, Elodie, for these 2 questions. So your first question about the increase in cost and the consequences about the tariff. So as you know, the regulated scope, we have a cap in terms of value creation. The cap is the level of regulated WACC, but we don't know exactly the level because it's a decision of the regulator. So the question, it's not just the fact that with an increase in cost, we create some room of maneuver to have a tariff increase. The question is the comparison between the regulated share and the regulated WACC. As you know, we have a strong recovery. And all in all, we have to check before to say if it's possible to increase the tariff or not what is a good level of our regulated ROCE for the next year and the year after and what is the level of the regulated WACC, what we can try to estimate from the French regulator. So it's the increase of cost, it's not warranted to increase the tariff. It's more complex due to the other factors like CAPEX level like treasury position and so on. So it's not mechanic. For your second question about traffic for the moment, we don't see any structural impact in Paris. We have a good dynamic, and we can see that. For the moment, we expect a very good summer and in line with our assumption and in line with our guidance. Thank you for this question.

Thank you.

And our next question comes from Cristian Nedelcu with UBS.

Hi, thank you for taking my questions. Maybe the first one on the OpEx in Paris. It seems that in the first half, it came a bit higher than the consensus expectations. And maybe can you help us simplify a little bit? What's the sort of delta in OpEx in Paris this year versus last year, or next year versus '23? Could you give us a bit of a range once you add up together all the headwinds? What are we talking about? Just to sort of in the interest of transparency and simplifying the picture there. And then secondly, maybe, I think there's this cost allocation regulatory review, and I believe a decision from the regulator is expected in January 2024. Could you elaborate a little bit on your expectations at this stage? Is it reasonable to assume there may be some regulated costs move to the nonregulated perimeter? Thank you.

Thank you, Cristian. So 2 questions first about OpEx. So in fact, we have higher OpEx. That is due to several factors. First, it's what you have to have in mind is the fact that before this year, we don't have an impact about inflation and now we can observe a good dynamic in terms when you have a renewal in terms of contracts, but I explained during the presentation, that is very important for that. The second point is the fact that we have a kind of normalization now due to the fact that we have a higher performance in 2022 due to the fact there were a strong recovery but not strong recruitment plan in '22. But we recruit a lot in '22 and during the year '22, and we continue to recruit in '23 that we have full impact on the full year basis. In terms of staff costs, to give you more color about that, so we have a recruitment in 2022 for around 530 people. Around 100 people have also retired or resigned and we have to replace that. We have also implemented salary increase as explained in previous quarter, for around in the first step, EUR 14 million impact in the first half for ADP mother company. And we continue to have a normal increase, a mechanic increase due to our rules in our company. Major implemented in July represent around EUR 4 million impact in H2, so in full year basis, around EUR 8 million. This year, we continue to recruit, and our recruitment's trajectory is exceeding our initial expectations simply because we see the need to reinforce the staffing in preparation of the big sport event, and we need some to reinforce our operational teams to have more resilience. So this will impact our staff cost base, but I can confirm our guidance in terms of OpEx per pax, for '24 and '25, and I can also confirm the guidance of margin for '23, '24, and '25, obviously. Have in mind that at TAV, we have also staff cost increase, driven by salary increase linked by the strong inflation. And the salary increase for TAV, it's around EUR 65 million, and we have also increased in terms of staff in TAV for EUR 11 million. So all in all, clearly, we have a dynamic in term of our OpEx. We confirm that. We can see for the first time this dynamic, but we confirm at the same time our guidance. For the first allocation system. So as I explained previously, we have workshops with all the airlines, and this workshop provide an opportunity to make sure that each allocation can actually be explained or justified by one operational basis. So we have 10 workshops with all the airlines to explain allocation key by allocation key. That is a huge work. Now we have to put on the table a proposal for our tariff homologation, and in this proposal, we include in the overall tariff homologation, our correction in terms of cost allocation. For the moment, we don't expect a huge impact. We have some correction, obviously, to try to check. But for the month, we don't expect a huge change. But remember that it's not a decision of the French regulator to accept or to choose our cost allocation system. It's a global decision about our tariff homologation. So globally, in this item, we have to wait also a few months, but we are globally confident.

Excellent. Thank you very much.

Thank you.

And our next question is from Andrew Lobbenberg with Barclays.

Can I ask about the recovery of the Chinese traffic, which is obviously important for retail? And I think that becomes a bit political because the Air France are trying to manage the pace of the recovery of traffic rights for the Chinese. So how do you see this thing playing out? And how hungry are you? How confident are you that you'll get back the high standing Chinese passengers? And then can I ask just more broadly about the Olympics? And obviously, you spoke about needing to employ staff and undertake some costs. But obviously, it's extremely prestigious for you guys to handle the Olympic traffic, but will it be profitable?

So thank you for your questions. So first question about the China traffic. So traffic with China is developing in line with our expectation. We expect an acceleration in the few months. We are currently, as I said, only 34 flights per week. But until 10th June, it was only 70 flights a week, load factor, is just below 80%.

It was only 16 flights per week.

16 flights per week, excuse me, 16 flights. So going forward, Chinese airlines may open additional routes, and we expect Air France to progressively ramp up its capacity, if it's possible for Air France. Nevertheless, we still do not expect a full recovery in 2023 but also in 2024, notably because of continuing constraints on demand. The tourism industry has been massively disrupted, and it takes time for Chinese people to renew their passport and obtain VISA. And the hotel price and travel package have also been subject to inflation, which we continue to await somewhat on demand. But we hope the Paris Olympics will help accelerating the return of Chinese passenger. For the traffic of Olympic games, we don't expect a huge rebound in terms of traffic during this event. When you check historically, the former Olympic games, we can see that we have kind of restitution. So we have a good international traffic, but we have less other traffic due to the fact that the downturn is very crowded. For the impact of Chinese traffic with sales per pax, for the moment, we can see the same dynamic in terms of sales per pax. But a strong dynamic in terms of sales per pax without Chinese traffic. So what we know and when you see our guidance in terms of sales per pax we can see a target in '25, we expect some bad impact. For example, the works in Terminal 2 and the reopening of Terminal 2E and 2C, but also, we expect some offset of this budding impact but favorable impact, that is the recovery of the Chinese traffic. But all in all, for the moment, we can make the proof that without Chinese traffic, we have a strong performance. So Chinese traffic is just upside. In terms of cost, due to the Olympics, we need some additional CapEx, but we have in our guidance in the envelope of the CapEx disclosed previously. We have enough element to implement our plan, and we can confirm our guidance about that. In terms of OpEx level, we can confirm that we our guidance in terms of OpEx per pax with the impact of ramping games. And obviously, we have some impact due to the fact that we have to welcome all the guys for Olympic with a specific measure. Thank you for your question.

And our next question comes from Dario Maglione with BNP Paribas Exane.

Hi, good afternoon, 2 questions. One on GMR. You mentioned the very airport and the concession payments, they may -- they will start. Can you tell us a bit more about what's going on and the regulation there? Second question on cost, sorry to ask you again about this topic, just as a simple kind of sort of time, OpEx in Paris for H2 should be similar to H1? Or is there like any significant increase that we should keep in mind, apart from the increase in salary that you mentioned around the EUR 8 million throughout 1st of July? Thanks.

So thank you for these 2 questions. About GMR. So as you know, during the COVID crisis, GMR stopped to pay the concession in the airport, and now after the end of this crisis, we paid the concession of this year. And we have a bad impact for around EUR 40 million, so it's not really bad impact. We have a favorable impact before during the crisis. And now we start the concession fees for the custom. So in fact, we have a dynamic in terms of recruitment and when we recruit, we recruit for a long time. So mechanically, the recruitment in '22 and obviously, the additional recruitment in '23 have an impact for the next months and we can have a full year basis. We have this impact. A part of the accelerating plan, it's due to the our needs in terms of hospitality and our need in terms of resident measure, we have to assume the fact that we have to increase the maintenance staffing, and we are also delivering our CapEx plan. And this element plus the fact that we have to improve strongly our hospitality due to the current event, all these elements have a consequence in terms of staff cost.

Sorry, a quick one. On the concession payment in Delhi, do you also need to pay the concession payment during COVID period?

So we have a claim for during COVID period, and we expect a favorable decision. But for the month, litigation, it's ongoing.

Our next question is from Ashish Khetan with Citigroup.