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

Good morning and welcome to Groupe ADP 2024 First Quarter Revenue Conference Call. Today's call will be recorded. [Operator Instructions]. I now hand the call to Cecile Combeau to begin to this call. Please go ahead. Thank you.

Good morning. Thank you. Thank you for being with us this morning for first quarter revenue publication. I am Cecile Combeau, Head of Investor Relations of Groupe ADP. And I am here with Philippe Pascal, our CFO, who will go through some prepared remarks before taking your questions. [Operator Instructions] Before we start, I remind you that 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 these, I refer you to the disclaimer statement included in our press release and on Slide 26 of our presentation. And with that, let me hand it over to Philippe.

So thank you, Cecile, and good morning, everyone. Let's jump directly to Slide 2 with the highlights. Q1 shows solid start to year in line with expectation. Our total revenue is standing at EUR 1.3 billion in this first quarter, up 10.9% compared to last year. Traffic has been developing in line with our assumption with strong momentum in our international assets, except for Amman. In Paris, spend per pax was strong, up 7.8% to EUR 32.7. Some headwinds are expected to kick in later in the year. Teams are fully mobilized and getting ready to welcome the Olympians, the Paralympics game, in addition to the summer traffic. GMR, we continue to expect the GMR between GMR Airport and GMR Infrastructure Limited, our listed partner, to be completed towards the end of the second quarter. Moving on to Slide 3. The latest Skytrax ranking was issued last week. Paris Charles de Gaulle continued to be the best airport in Europe for the third year, and Orly is now ranked as best regional airport in Europe, but is a huge improvement for us. 5 other airports of the group are also in the top 100, including Delhi and Goa, which had opened in January 2023. Every day, our teams try to deliver the best quality of service to passenger, and we are delighted with this recognition of our work. This result has also encouraged us to continue to focus on hospitality in line with ADP's raison d'etre. Slide 4 show overall profit evolution. Fully in line with our assumption as I commented earlier. Let's focus on Paris on Slide 5. In Paris, we welcomed 22 million passengers in the first quarter, up 4.4% against Q1. Last year, Q1 has been impacted by some strikes with an impact estimated to 470,000 passenger. 2024 being a leap year, the 29th of February brought an additional 250,000 passengers. On the opposite, air traffic control carried out trials with a new 4-Flight system, leading to some scheduled flight cancellation in January and February. Overall, impact on traffic is estimated, for this reason, to 1 million passengers. Traffic with mainland France show a decline of 4.8%, reflecting the impact of the 4-Flight trial and the closure of several domestic routes compared to before COVID. For international traffic, this traffic is strong, up 6.5%. Traffic with North America sees strong momentum, it is up 7% overall, driven by traffic with Canada, in particular, which is up EUR 31.9 compared to last year. Traffic with Asia Pacific is up 41.9%. This is notably driven by traffic with China, which was 6x higher than Q1 2023. There are currently around 48 flights per week between Paris and China, which is around 60% the frequency of the pre-COVID winter season 2019. We are not seeing this frequency to evolve in the coming months. The share of low-cost traffic is close to 6 points of percentage above pre-COVID level to 26.7% of Paris traffic. Let's now move on to Slide 6 with a focus on Extime Paris spend per pax. Performance remains very strong to EUR 32.7, up EUR 2.4 or 7.8%. Bear in mind that Q1 2023 was the first quarter of the operation of Terminal 1, which was not yet at full speed, providing a favorable basis of comparison. We continue to see strong performance in [ Parisian ] and luxury goods, which is the greatest contributor to sales in our airside shops. This growth is driven by international traffic in the flagship terminal, Terminal 1 of course, but also terminal 2E as well. Spend per pax in food and beverage continue to grow with additional selling points. Media and advertising is performing very well with a strong contribution to SPP in the first quarter, driven by advertising campaigns ahead of Olympics. In the coming quarters, we expect to see the effect of the reopening of Terminal 2E and 2C, material leading from the second quarter. I remind you that this terminal was closed to upgrade the security system of luggage system; the retail offering in Terminal 2E and 2C being less powerful compared to Terminal 1, International. The reallocation of a portion of the international traffic to this terminal is expected to create a downward rebasing of SPP starting in Q2. Effects of work in Terminal 2E-K are now not material for the moment. Slide 7, moving to Slide 7, with a focus on our 2 main international assets. As a reminder, TAV numbers are fully consolidated in our accounts, and GMR Airports' results are equity accounting. As you can see on the left part of the slide, traffic growth at TAV Airport was excellent, up 21.8%. In TAV's international network of airport, traffic is up 26% with outstanding growth at Almaty. The new international terminal at Almaty is expected to open in June, and we can reach a capacity to 13 million passenger at the end of the day. TAV Airport in Turkey saw strong growth as well, up 18.2% with international traffic growing 30.6% compared to Q1. On the right side, general airport traffic was solid, up 10.7% compared to Q1 2023. Here as well, international traffic is seeing the strongest growth. Overall traffic growth in the international asset of Groupe ADP was up 14.3%. Moving on to Slide 8. Revenue reached EUR 1.3 billion in Q1, up 10.9% versus last year. Aviation revenue is up EUR 17 million. The segment is growing 4%, in line with traffic growth in Paris. Keep in mind that the regulated tariff increase of plus 4.5% in average is being applied from first of April 2024, so no impact in our numbers for the moment. The retail and services revenue is growing EUR 42 million, including the scope impact of minus EUR 13 million, corresponding to the change consolidation method of Extime food and beverage which is now equity accounting. Real estate revenue segment is up for plus 4% versus Q1 2023 due to new assets, but also in addition to rent indexation. Overall, TAV Airport has gone EUR 71 million, bringing by far the biggest contribution to revenue growth this quarter. Amman airport is impacted by the geopolitical context. To conclude, let's move to Slide 10. Our traffic assumption and financial guidance for 2024 and '25 are confirmed. We continue to expect traffic in Paris to grow this year between 3.5% to 5%, and above 8% at Group level. Our target to deliver at least 4% growth in EBITDA is also confirmed. Achieving this objective involved a high degree of discipline given the OpEx increase expected this year. Again, have commented already in the past quarter. Investments are expected to ramp up this year in Paris. We are guiding for EUR 900 million on average between EUR '23 and '25. And you remember we were low that number in 2023. All our other targets are confirmed. And with that, let's open the line for the Q&A. Thank you.

[Operator Instructions]. We have a first question from the line of Cristian Nedelcu from UBS.

Maybe the first one in terms of your M&A strategy. In terms of potential future acquisitions, how much would you be willing to increase your net debt/EBITDA leverage in the context of M&A? There are some investors that are expecting you made some larger acquisitions, so I was curious if you can give us some color there. Secondly, the retail spend per pax performance, apologies, it's a technical question. But when you compare Terminal 1 versus the Terminal 2A, 2C, could you comment a bit about the retail spend per pax in each of them and the differential? And could you remind us the passenger capacity in Terminal 2C and 2A? Just to get a better picture of that dilution that you mentioned in spend per pax. And if you allow me the last one on traffic, modernization of air traffic control, can that potentially further negatively impact your traffic in Q4, or is that done? And equally so the entry-exit system starting later this year, can you comment anything on the preparations? And if you believe there is any risk of disruptions once the entry-exit system comes into force?

So thank you for your question. So about your first question about the M&A strategy. So for the moment, we have some targets, but we work a lot about that, not substantial for the moment in terms of deal flow. In fact, we have some small targets but also some huge potential acquisition, but it's not for the moment. So we can confirm our guidance in term of debt net/EBITDA. In fact, if we have a huge opportunity or a good opportunity with a strong [ volatile ] impact at the short term, but also at the long term, we can assume that impact in our net debt without a huge struggle in terms of sustainability, of financial sustainability, in our account. So all in all, for the moment, it's not a question, obviously. But if we have a good opportunity, we can give more color directly to the market if we need. So no issue in terms of retail. So to be very clear, we expect some headwinds in Q2 with the reopening of Terminal 2E in May and Terminal -- 2C in May and 2E later in the year. As a portion of the highly contributive international traffic currently allocated to Terminal 1, this portion is expected to be redirected to Terminal 2E and 2C, which has less powerful commercial offering. So we have mechanically a slight dilution. It's not a question in terms of capacity for the terminal, to be clear. So with your question, it's more the question of the relocation of airlines. So if we try to optimize our strategy, we need some additional capacity, is the reason why we reopened the terminal, for capacity for the summer. But the main question, it's not the number of passengers but the quality of the traffic and the mix traffic. So for that, we try to manage this situation. Remember that Terminal 1 is our best performance in CDG with sales per pax around EUR 75 per pax, compared to the Terminal 2E-K with EUR 65, EUR 70 per pax. For the Terminal 2E and 2C, it's difficult to compare because we closed this terminal during the COVID crisis with not the same quality of the traffic and with not the same level for each airlines. And probably not the same airlines in Terminal 2E and 2C compared to pre-COVID. So it's not a good comparison. Terminal 2E and 2C, we have good brands, good luxury brands, but the main impact is due to the fact that it's not an Extime terminal for the moment, first of all, with the same quality in terms of atmosphere, the same quality in terms of retail area. And the second point, it's the main point, the fact that we have less synergy in the flow of passenger with a net number of square meter in terms of retailer. So mechanically, we can expect a dilution, but we don't disclose the figures. For the question in terms of the 4-Flight system. So we have in our guidance. And in our assumption in terms of traffic, some buffer, buffer for the trials and the 4-Flight system. But also buffer for strike. For the moment, it's not -- we can -- we confirm and we fully confirm our assumption in terms of traffic in Paris. We don't expect a huge impact in the next year about this system without -- and we don't expect a huge trouble with the implementation of this system. With this system, we expect more robustness and more capacity to manage a huge number of movement. So thank you for your question.

We will take the next question from Andrew Lobbenberg from Barclays.

Philippe, on your remarks about guidance and the EBITDA goal, you highlighted the pressure you're going to have from rising costs. So I wondered if you could just give us -- remind us a bit of the scale of those pressures. And when we look at the results today and you've beaten the consensus on international and retail, how easily should we think those revenue beat drop through to EBITDA? And then can I just ask on the transaction in India? You previously guided to a EUR 100 million noncash impact, but you flagged that it will be higher. Clearly, the scale of the share price rise for GMR is quite dramatic. So whilst the details are not there, can you help us understand the scale of that outperformance, the scale of the increase in that cost? Is it going up 10%? Or is it going up 5x? How large a noncash expense should we expect to come in that second quarter?

So thank you for your question. So clearly, we can see a very strong first quarter in terms of revenue. But we, at the same time, we confirm our guidance in terms of EBITDA. Our guidance in terms of EBITDA, it's quite realistic because we continue to expect a challenging OpEx increase in 2024. In line with, we can comment during our annual results in February, we know that we have some impact in terms of inflation. When you see our figures in '22, '23, we can see that we don't have a huge impact in terms of inflation, but we are very clear now, we have an impact in term of inflation due to the renegotiation of a huge part of our purchase agreement, due to also to the fact that we don't have the same impact in terms of energy cost before in '22, '23, we have some hedging, but we don't have fully this year. We work to cover our energy cost for '25, '26, '27. But now in '24, we manage the situation with mechanic increase in terms of energy costs. At the end of the day, we have also the main driver of our OpEx, that is a number of square meters in our terminal. And as you know, we reopened the Terminal 2E and 2C. And we have a mechanic increase in terms of OpEx, operational cost, due to cleaning, due to all the operation in the terminal. And finally, we have a part of cost linked by the Olympics and Paralympics game, but it's not so huge. It's -- and we have an impact in '23, as you know, but also in '24. But not so huge, but it's also manageable. We expect for '24 an impact in terms of Olympics, in terms of OpEx between EUR 10 million or EUR 20 million. So it's not so much. But at the end of the day, we have an impact in term of OpEx. So all in all, we confirm our EBITDA guidance, plus 4% compared to '23. So -- and we assume this guidance. But it's clearly not in line with the strong growth in terms of revenue. In terms of your second question about GMR. So in fact, when we disclose this operation, we have clearly disclosed the fact that we have a one-off effect with a strong impact and with 2 main explanation in terms of financing impact of this operation. The first effect, it's an effect in term of ratchet earnouts and also dilution in our economic interest. And for this first issue, we expect negative -- a first, negative impact. We have also a second impact that is the integration of the asset of New GIL whose net value is expected to be negative at the date of merger. So all in all, we know that we have a strong impact, higher than EUR 100 million. It's difficult to know and to give you figures now due to the fact that we have to know the level of stock market valuation at the moment of the operation. But it is likely to increase significantly due to the valuation of the stock of GMR Infrastructure Limited. This one-off will impact the net result which the basis of calculation of dividend, 60% payout policy number. Nevertheless, our dividend policy also include the floor at EUR 3 per share to protect our shareholders. So no issue. It's a pure accounting impact, it's a one-off, and we don't expect a huge bad news in terms of dividends due to the floor.

We will take the next question from the line of Luis Prieto from Kepler Cheuvreux.

I have 2. The first one is focusing for a moment on next year's aeronautical tariffs in Paris. Should we continue to assume that there should be a pass-through of the remaining impact of the environmental tax? Do you expect any area of meaningful disagreement with the regulator in the situation? The second one is, in the past, you have talked about the need to stabilize the rules of the game before the reinstatement of an ERA regulatory framework. Could you provide us with an idea of when this could be, as well as the amount of time that the preparation for the switch could take?

So thank you for your question about regulation. So about regulation and the tariff. Clearly, the tariff proposal, it's the consequence of a business plan for the next year. So we -- when you propose a tariff, we have to give some color about the business plan, the regulated business plan for '25 and '26. Why we have to give 2 years? It's the reason why we have aviation rules. And the tariff, it's between April '25 and March '26. So when we did this business plan, the French regulator check the level of traffic and the assumption in terms of traffic, check the level of OpEx, check the level of CapEx with the regulated asset base as a consequence in terms of regulated asset base. And at the end of the day, check the regulated ROCE. If this regulated ROCE, the estimation of this regulated ROCE is higher, the assumption of regulated WACC. We don't have a formal approval in terms of tariff. So your question about the tax and the capacity to offset this tax through the tariff. It's a question of the global balance. In fact, mechanically with this new tax, we have a mechanic decrease in terms of regulated ROCE. So this decrease creates a room of maneuver to increase our tariff. It's mechanic. It's a law, it's the rules. So no issue. All in all, it's not an issue. But your question, it's more the question of the dynamics in terms of traffic, it's a question of the real level of WACC for the French regulator and the capacity for us to deliver our CapEx plan. So mechanically, for the month, it's a little bit alary to provide an outlook on 2025 tariff and to anticipate the nature of the discussion with the French regulator. But globally, we try obviously, to find the good economic balance to offset the other part of the tax. So the second question about the economic regulation agreement. So in fact, we have more visibility in terms of traffic. We have also more visibility in terms of industrial strategy with the decarbonation in Paris, with all our needs in terms of maintenance, and with all our capacity to increase our square meter, welcome more passenger in Paris. So clearly, we have more visibility. We have also more visibility in terms of regulation with a new law that we can confirm and the French government have just published. That is a new way to appreciate one of the term of regulation, that is the moderation of tariff increase. This moderation of tariff increase now will be -- should be appreciated on average. When we have an economic regulation agreement, that is good news for us and probably a good opportunity and a good incentive to try to have an economic regulation. As you know, now, we are not so incentivized before this law to conclude an economic regulation agreement because, with an annual basis, we can have more capacity to manage our situation, to create the room of maneuver, to increase our tariff. If we had a global appreciation in a 5-year basis, it's probably more -- it's probably better for us for that. And we are -- it's a good incentive to try to have an economic regulation again. So we have to work about that. And if we start the work now, we need 2 years to manage the negotiation; the signatures; and after, the implementation of economic regulation agreement. So if we start now, we can have an economic regulation agreement in '26, perhaps more in '27. But we have to decide, and it's not the case for the moment. But will give you some color in the next few months.

We will take the next question from the line Ruxandra Haradau-Doser from HSBC.

Congratulations on the Skytrax rankings. Impressive performance of both Aéroports de Paris and Air France. Two questions, please. Could you please give us an update on the CapEx in Antalya? And could you please remind us about the bridge loan at Antalya Airport? Have you concluded discussions with banks to replace this loan? And second, could you please talk about the current shopping behavior of Chinese passengers relative to pre-COVID level? And what is the feedback you received from airlines and capacities to China? I understand that some European airlines consider to cut again capacities to China due to weak yields. Do you expect this also in Paris over the next months?

So thank you, Ruxandra. So about your first question, Antalya. So as you know, we finalized all the financial issues and transitioned all the financial issues. So for the moment, we, in terms of bridge loan, and we secure a huge part of the refinance approach. So no issue for us at this day. So I don't have more color about that. About your second question about Chinese traffic. So as you know, traffic with China is contained by low frequencies by the 2 countries, France but also China. And the airlines capacity today. For the moment, we have currently around 48 weekly flight scheduled that is globally 60% of the pre-COVID capacity. And we don't expect a huge recovery in '24. Clearly, we don't expect a huge recovery, perhaps more in '25. So thank you. Thank you.

We will take the next question from Graham Hunt from Jefferies.

Yes. Maybe just a couple of short questions. On the -- just coming back to the China capacity. Maybe just get your longer-term thoughts in terms of how you're performing relative to some of your European peers who are seeing, for other reasons, Chinese capacity back at pre-COVID or above. Does that worry you from a long-term competitive standpoint? And is there anything that you're doing maybe on the digital front to remain engaged with the Chinese consumer? That's question one. And then second question, just on the GIL-GAL merger, do you expect that to -- sort of coming back to this point about transactions and potential M&A. Do you expect the GIL-GAL merger to create new opportunities for you in the Indian market once that completes?

So thank you for your 2 questions. So about China, we are confident to have a full recovery at the end of the day in terms of traffic compared to pre-COVID situation, but not in '24 and probably not in '25, perhaps more in '26. We have a good dynamic in terms of discussion. We know that, for the moment, it's linked by the fact that we have expensive price in Paris for hotels, for example, but we have also the question of the capacity to reopen some routes due to the frequencies, the allowed frequency by the 2 countries. For your second question, the merger between GIL and GAL, the main target is to have liquidity and to reveal the value. It's not to create new capacity to develop the group. Perhaps at the end of the day, yes, it's -- we can create some capacity. But now our target, it's more to deleverage the company than to develop as a group. If we have a good opportunity, obviously, we work about that. And -- but the reverse merger, it's not a question to create the capacity to develop the group at the end of the day. It's more a question of robustness. It's more of the question to reveal the value. It's more a question to have liquidity, a liquid shareholder structure for us.

We will take the next question from line, Dario Maglione from BNP Paribas.

Three questions, if I may, quick ones. On spend per pax was very strong in Q1, more than 40% above 2019 levels. from the numbers, and is an acceleration compared to Q3 and Q4. So I'm just wondering, is there like any one-off or anything that is playing such a big jump in Q1? Second question on GMR Infrastructure. So it's the listed entity. I mean, the share price has almost doubled over the past 12 months. Some people may say it's a bubble. What do you make of the current valuation? And last question maybe a bit technical on the OpEx allocation from tariffs between regulated and non-regulated yield. I understand that you make a proposal to the regulator for the tariff in 2024. I believe, EUR 10 million to EUR 15 million. Is this enough in your view, or should we expect more OpEx to go -- to be shifted?

So thank you for your question. So about the spend per tax. Clearly, we don't have a one-off effect in this first quarter. It's an organic growth. But we have one effect that is very important to have in mind. It is the fact that, last year, we don't have the full impact of the Terminal 1 for the first quarter. So we have mechanically a base effect in our figures. So that is the first main point. The second point, it's the fact that it's organic and structural rules. But we expect, for the next month in 2024, 2 main headwinds. The first is the reopening of Terminal 2E and 2C, and the struggle is the in works in Terminal 2E-K. So globally, it's a structural performance. It's not a one-off performance. About your second question about the share price for GIL. So Indian market rose significantly in 2023, significantly. It's mainly due to the good performance of the Indian industry. And also the question of the balance between India and China. Regarding the regulation sector in India, the Indian government and the industry stakeholders are all aligned to build India as a regional hub. So mechanically, we -- the GAL expansion in the works are fully consistent with this plan. And we try to have all -- and to take a great position to catch this profitable growth. So all in all, we have the explanation of the level of share price. We have also good news that is good news for GAL that is good to support the value, the good tariff and the favorable arbitrage and bidding minimum annual fees, and a good quality in terms of assets with high demand. So all in all, we are comfortable for the moment with this valuation. In -- about your question about the cost allocation system in Paris. So we continue to work about this cost allocation, we are in the transitory period which is until the end of 2025. We have a lot of workshop with airlines. We challenge all our allocation team, we have to continue this work, but we don't expect a huge impact in terms of cost allocation due to the fact that, for ADP, the cost allocation system, it's a system based on an operational key or physical key. When you check with the infrastructure, it's not a cost allocation base of economic figures or financial figures. So mechanically, when we have checked all the square meter in a terminal, we have the result of the cost allocation system. That is the policy of ADP. So no huge and substantial impact for the next months for us.

We will take the next question from Elodie Rall from JPMorgan.

Sorry, I joined a bit late, so I don't know if these questions were asked. But the first question would be on the retail margin, how you think about it for the rest of the year given the context of a slowdown for luxury brands generally in Paris. And my second question is on the drop-through into EBITDA for the revenue in retail and international that was slightly above consensus. If you could give us some color.

So about your first question, we don't expect a bad impact for the next months, except the 2 main explanations that I gave. So -- but not over-dilutive impact for us. About your second question, what is exactly your second question about revenue?

Sorry. Did you ask about my question? Because I just had a big plane going on. I don't know if you had the big plane. No, my other question was the drop-through in EBITDA for the retail international beat from this morning?

No, it's a global -- it's -- we don't have this kind of effect for us. Clearly we can check and we can come back if you want. But globally, when you check the question of EBITDA, we have some challenging OpEx increase in 2024. That is the main explanation of the difference between revenue and EBITDA. So be careful. But all in all, no specific impact in terms of retail and international revenue.

We will take the next question from the line, Marcin Wojtal from Bank of America.

Yes. Two short questions. The first one is on M&A, which was mentioned a couple of times on this call. I'm just wondering, when you think about international acquisitions, can you confirm that this will be done essentially via TAV and via GMR? Or would you also consider some transactions from your French entity? Secondly, on GMR, do you believe this company will require any capital increases over the next, say, 3, 4 years? And would you be willing to participate in those?

So thank you for your 2 questions. So about the second question, we don't expect any injection in GMR. Our purpose is to deleverage the company, to have robust financial figures in this company, not to inject a new capital. About your first question. So for the international development, obviously, if it's -- we have opportunity in Middle East and [ some part of Asia ], we take this opportunity for TAV. If we have opportunities in the rest of Asia, India, South of Asia, it's for GMR. So it's not an opportunity for the ADP mother company. But if we have an opportunity in Americas, for example, and in other countries, and if we want to finalize the capacity for ADP to develop the group through a specific holding structure, we have to implement that, or we have to take the opportunity in Americas. And mechanically, in this part of the world, it's for ADP mother company. So for the moment, we have a lot of opportunity all over the world, but we are very selective and very opportunistic.

[Operator Instructions] It appears no further questions at this time. I'll hand it back over to your host for closing remarks.

All right. Thank you very much, everyone, for having logged on to our conference. Our next financial communication will be on the 23rd of July. We will release our H1 results just a few days before the opening ceremony of the Paris Olympics and Paralympic games. And in the meantime, we will attend some conferences and we'll seek to meet you in road shows. We will also have our AGM on the 21st of May and we are looking forward to seeing you all in the coming days and weeks. Feel free, obviously, to get in touch with Elliott and I at the IR team for any follow-up questions. And with that, good day, everyone. Bye-bye.

Thank you for joining today's call. You may now disconnect.