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

Good day, and welcome to today's Groupe ADP conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. [Operator Instructions] I'd now like to hand the call over to Cecile Combeau, Head of Investor Relations at Groupe ADP. Please go ahead.

Thank you, and good morning, everyone. You've seen last night that the merger of GMR has successfully been completed. So we thank you very much for joining us this morning last minute and on a very busy period. So today with me are Augustin de Romanet, Chairman and CEO of Groupe ADP; Edward Arkwright, Deputy CEO; Philippe Pascal, CFO; and Alex [indiscernible], Deputy CEO of GMR Airports and now New GIL. We are all very pleased to be with you this morning to discuss the merger listing. We will start with some prepared remarks from the management before the Q&A session. And 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 these, I refer you to the disclaimer statements included in our press release and on Slide 24 of our presentation. And with that, I will now give the floor to our Chairman and CEO, Augustin de Romanet.

Ladies, gentlemen, dear friends, I'm happy to be with you today to announce a very important step in the history of ADP. In fact, we announced today, together with our partner, GMR, the completion of the merger of GMR Infrastructure Limited which we call GIL, and GMR Airports Limited, which we call GAL. As a reminder, Groupe ADP has invested in 2020 in GAL, it means GMR Airports Limited, a private company. In March 2023, we've announced a global operation paving the way for a merger of GAL and GIL. Since then, all the required approvals by the various Indian authorities, creditors and shareholders have been obtained. All conditions precedent have been met. And yesterday, we filled the merger order to the register of company. The merger is now effective, and the new shares issued to ADP in the listed entity will be trading within around 1 week. This merger achieves three main objectives. First, it simplifies and clarifies the capital structure of the airport holding company, ensuring a direct ownership of airport assets for the shareholders of the listed company. Second, it reveals the value and provides access to liquidity for ADP's stake. As you can see on the slide, the 49% stake, which were acquired in 2020 for EUR 1.3 billion in a private company, became a 45.7% stake, valued at EUR 6.3 billion into a now listed company. This means a multiplier of 5x to our initial investment. And third and lastly, the newly merged entity with a strengthened balance sheet and access to capital markets will be a more agile platform to size growth opportunities in its very dynamic region. Let's now look at the framework of the operation, the new structure of governance, and then Philippe Pascal will walk you through the accounting impacts for Groupe ADP. I'm now on Slide #5. Let me start briefly with the remainder of the structure of the operation, which was already explained in March 2023. With this operation, our participation into GMR is now divided into two instruments. On the one hand, ADP holds ordinary equity shares of the merged entity. This will correspond to a [ 32.3% ] shareholding alongside GMR Group, which stays the largest single shareholder, owning 33.7% in ordinary shares. This enabled GMR Group to keep the control of the company. Our ordinary shares, which are newly issued ones, will be traded in a few days once the stock exchange formalities are completed. On the other one, ADP also holds, from today, an additional pocket of preferred shares called OCRPS for optionally, convertible, redeemable, preferential shares. These OCRPS have the same economic [ rights ] as ordinary shares, in particular, the same rights to dividends, but no voting rights. They will be automatically converted into ordinary equity shares after 20 years. This combination of ordinary shares and OCRPS of preferred shares,provides for Groupe ADP's total economic interest in New GIL for 45.7%. All in all, this operation makes our joint venture and partnership with GMR even stronger, maintaining the control of New GIL by GMR, while preserving the strong exposure of ADP with exactly the same economic exposure as before. Now let's move on Slide 6. This strong partnership is reflected on this slide, where you can see the governance structure of New GIL. Similar to the situation in GAL, Groupe ADP holds five seats at the Board of Directors in New GIL, same as GMR Group. The Board, which will soon be reconstituted, will also have 10 Independent Directors as per Indian company law, with a broad set of experiences and skills, thus, and showing the highest governance qualities. Aside Director positions, Groupe ADP enjoys extended governance rights into New GIL, similar to the ones we had in GAL, providing for a significant influence. We also continue to appoint the same key management personnel in GMR Airports Infra Limited, including Deputy CEO, [indiscernible], who is with us this morning, Global COO and -- and we appoint also Global COO and Financial Partnership Officer. It was the big picture of our participation in New GIL. And I now give the floor to Philippe Pascal to deep dive into the accounting impacts for Groupe ADP.

Thank you, Augustin, and good morning, ladies and gentlemen. I am now on Slide 8. Since the announcement of the operation, there have been four main things that we have worked on together with our partner, GMR. First, this balance sheet has been strengthened with the cleaning of all the main non-airport liabilities. This was a commission that ADP put for the merger to happen. This has been possible, thanks to the FCCB convertible bond issued by GIL and subscribed by ADP in March '23. As a consequence of this [ cleaning ], GIL is now a [ few ] airport player, and we'll come back to this later. Second, during the last 60 months, we are settling all the ratchets and earnouts closed, coming for the initial acquisition deal for only a part of the possible impact. We are free of any acquisition provision now. And in all, we have obtained all required approval by the competitive authority in India and all the necessary approval by the creditors and the shareholders of both GIL and GAL. Now, I suggest you move to Slide 9 with a focus on the first work stream, the cleaning of GIL liabilities. You see here's the premerger capital structure. On the bottom part of the slide, we focus on the balance sheet of GIL to explain how it was prepared for the merger with GAL. Before March '23, GIL was still holding some liabilities, which were linked to non-airport activities of GMR Group. This was [ digital ] exposure to activities that has [ emerged ] to [indiscernible] in '22. For ADP, it was a very clear target and condition precedence that just liabilities were to be cleared before GAL merged into GIL. This is why ADP subscribed fully to convertible bonds, the FCCBs, for EUR 331 million, enabling GIL to accelerate the clearing of these liabilities before the merger. In the end, the only material liabilities of GIL is, therefore, the FCCBs held by ADP. Moving on to Slide 10 with the merger of GIL and GAL. ADP Now holds 45.7% economic interest in the merger company, combining GAL and GIL. All shareholders have now direct access to airport assets. You see them on the asset side, and the company's only material liabilities is FCCB I just mentioned. As previously explained in our communication, the merger operation leads to recording a significant noncash accounting impact this year. This impact is a result of two effects. First, ADP's stake is reduced to 45.7% compared to previously 49%. In GAL, this reduction is recognized at the book value of our stake. Secondly, and more importantly, in compliance with IFRS accounting rules, ADP has to recognize the share -- the value of its share into GIL's assets and liabilities, excluding GAL. In other words, we integrate our stakes of what was until now only at GIL level and to reach ADP, had to non-exposure to when it was a shareholder of GAL, the IFRS accounting imposed to account it at fair value. As you can see on the screen and as explained before, there is no material asset in GIL apart from GAL. However, there is one material liability, which is the FCCB subscribed by ADP. And because it is a convertible instrument, the fair value of this FCCB has been driven by the very strong performance of GIL stock price. As a consequence, the net asset value of GIL excluding GAL is strongly negative and will generate a material noncash negative one-off in '24. I propose to move to Slide 11 to see the full sequences of accounting impact from this operation, combined with the reduction in economic interest, the integration of GIL's net assets and liabilities will indeed generate a noncash one-off in the range of EUR 400 million to EUR 500 million in '24. It will be accounting for in the line other operating income and expenses. I would like to highlight that this is not the only accounting impact to expect from this operation. First, in the coming years, as long as the FCCBs are not converting, we will continue to see our P&L each year variation linked to the fair value of these instruments, mostly driven by the evolution of the share price of New GIL. Secondly, and more importantly, upon the year of the conversion of FCCB in 2033, at least -- at latest, but very likely before that, we will account for a sort of reversal of today's accounting loss. This is because, when these bonds will convert into equity, tendering further GIL balance sheet, it will indeed increase its value. On the flip side, we expect also to account at the same time for dilution effects linked with this connection, but that impact will be calculated at book value and be less material. Moving on to Slide 12. It is important to keep in mind that the impact of the operation on '24 financial of [ ADP ] is a one-off item coming from the application of IFRS rules and without any cash element. Regardless of the final amount of this impact on our '24 net [indiscernible] group share, our shareholders are protected through our distribution policy, which is confirmed at 60% of net [ present ] payout, but with the floor of EUR [ 3 ] per share. In application of this floor, the expected dividend for '24 remains similar to the average of the last 10 years. Moreover, at the end of the day, what really matters in that the value of our stakes, it's now revealed through a direct listing of the shares we hold. The applied variation and valuation at market price show that the value of assets was multiplied 5x compared to the initial acquisition price of our stakes. If we were to fair value our entire stake the same way we have to fair value the small portion of liabilities, which are FCCB, we will recognize this year a huge profit, which is the case according to French GAAP. This is why from a financial perspective for Groupe ADP operation, it is extremely value accretive regardless of the one-off impact. And I will now hand it over to Alex, the Deputy CEO of GMR Airports, since today, Deputy CEO of New GIL; to give you an overview of GMR Airports and strong positioning to capture the growth of India and the Asian aviation industry.

Thank you, Philippe. So India is already one of the major aviation market worldwide, following the 8% compound average growth of sales over the past [ decade ]. But this growth will continue according to the aircraft order placed by several Indian airlines like IndiGo, Air India or Akasa Air. To host these new aircraft, the Indian infrastructure system is going through significant developments. First, existing airports were recently extended such as Delhi, which is now one of the few airports worldwide with 100 million passenger capacity. Second, new airports are being built, either by public authorities or by private players, to increase capacity and to improve the country's connectivity. Third, to accelerate the investment segment, the concession pipeline should remain dynamic in the coming years, with already several projects announced by the government. Keeping in mind the size of the country and its location in Asia, the major Indian airport will also leverage on the opportunity to becoming [ hubs ]. Moving on to Slide 15. It is important to say a few words about the regulatory framework. Letting the first concessions in a decade 2000, the airport's economic regulatory authority remains in charge of all regulatory monitoring and approvals in India, which gives continuity and maturity in the processes with the airport operators. In a nutshell, the regulatory mechanism can be summed up into three key principles. The tariff basis is calculated from the regulated asset base, which includes the realized investments and also the 5-year projections on traffic and expenditures. The hybrid sale model contemplates a 30% cross-subsidy from non-aeronautical activities, leading to a balance between the support to aeronautical activities and incentive to develop the commercial initiatives. Last, the [ true-up ] mechanism allows a fair approach with an adjustment in subsequent control period, should there be any excess or shortfall in revenues collection. As we speak, Delhi Airports is entering into its fourth control period of 5-years each and Hyderabad Airport is currently in its third. Moving on to Slide 16. The airport portfolio of GMR is made of four airports under operations and three under development. This rich and diverse network relies on different airport profiles, the leading Capital Airport in the tenth busiest worldwide, Hyderabad being a regional hub and Goa, a tourism destination airport. Along the years, GMR has developed expertise all across the airport value chain, for instance, with duty-free operations, car parking, food and beverage and cargo. This allows the group to leverage on its knowledge to address the passengers expectations and to capture the network organic growth. The airport side also offers substantial real estate opportunities like the hospital district in Delhi Aerocity with worldwide hotel [ brand ] or the Industrial Park at Hyderabad Airport hosting aircraft maintenance activities, factories and warehouses. Delhi and Hyderabad are also at the forefront of the environmental commitment and ambition in the Indian airport sector. Both airports are [ level ] focused in airport carbon accreditation program, counting on 100% renewable energy mix and daily targets to become net zero carbon emission in 2030. Let's move on to Slide 17. For the strategic priorities for the years to come will be to continue growing, to keep improving the overall performance and to upstream cash from the assets and commercial activities. So the growth will be first organic within the current portfolio. In a dynamic, domestic and regional markets, the group will also look at value-accretive new concession opportunities in and outside India to strengthen and develop the portfolio. Last, GMR will pursue the development of its commercial and related activities. On the performance side, it will rely first on the traffic strategy, including new international routes, capacity optimization and implement [indiscernible] approach. While Delhi and Hyderabad Airports are continuously well positioned within Skytrax ranking, Goa just entered the top 100 for its first year of operations. Passenger experience is, thus, a key driver within GMR strategy to be further improved through innovation and airport connectivity. The industrial partnership between GMR and ADP will also continue to exchange and develop projects in operations, sustainability, innovation among many other [ things ]. On the financial side, in the coming years, the assets like Hyderabad and [ Delhi ] should start giving dividends to their shareholders, meaning New GIL. Adding on top of that, the expected revenue generation from the commercial activities carried out by the [indiscernible], this combination should give some margin to the group to pursue deleveraging, to fund value accretive investments and to target positive free cash flow to equity at New GIL level. I will now give back the floor to the Chairman and CEO of Groupe ADP, Augustin de Romanet.

Thank you, [ Alex ]. As you know, we are really very happy today with this completion of this operation, which was envisaged from the start of our adventure with GMR. This transaction provides for a direct reveal of the strong increase in value of our assets, with implied market value of our stake, as we've already said, 5x the acquisition price. Indian -- India's population is growing fast and especially its middle class. This will translate in a sharp increase in air travel, which will be possible thanks to the development of the appropriate infra. We want to be ready, and we're convinced that GMR Airports, an agile company listed on the Indian stock markets, will be in prime position to [ seize ] these additional development opportunities in these markets. ADP's development strategy is built on a unique network and model consisting in Groupe ADP itself, listed in Paris, on our two regional development platforms, TAV and GMR, now all of them being listed companies. We are very happy and confident with these strong partnerships. And the success of today's merger makes me -- makes us particularly proud. As we target to increase overall Groupe [ ROCE ] going forward, a healthy development aside Paris [ regulated ] activities is absolutely key to balance and diversify our profile. That is the rationale behind our international development. As a global and multi-local player, we will thus pursue our ambition to create value for all stakeholders, putting decarbonization as a common objective in all our airport platform. Thanks for your attention. And let's now open the lines for questions [indiscernible] you have the floor. Hello? The floor is to questions.

[Operator Instructions] Our first question comes from Luis Prieto from Kepler Cheuvreux.

Luis Prieto here from Kepler. I have three questions. The first one is I just want to make sure I understand correctly. Again, excuse my [ voice ]. What is the New GIL balance sheet structure after the merger and the listing? Is there anything else beyond in terms of net debt, beyond the convertible bonds? The second question is regarding potential new investments, beyond what's on the table for the company today. How would you intend to finance those? Could a capital increase at some point in the distant future be considered by the shareholders? And then the -- I had a third question regarding Noida. And to what extent do you consider that a competing asset or something that could erode business at New Delhi Airport?

So thank you for your questions. So I start by the last two question, question two, about the new airport, Noida. So as you know, GMR Airport is located at 75 kilometers from Delhi's [ center ], which implies 2 or 3 hour journey by car. So this -- with an initial capacity of 12 million passengers, it will primarily address the catchment reallocated in its direct utility like Noida and other city from the state of Uttar Pradesh. With the opening of the new Terminal 1 in Delhi, Delhi Airport has 100 million passenger capacity. So airlines do not have any development constraint in the airport. So [ DI ] airport name three [indiscernible] post some freight flights and chart all flights, operated by the regional or low-cost airlines. So for us, for the moment, we don't see any issue about this. In the second -- your second question, so the question about the capacity for GIL to raise more capital, so the objective and the strategy is not to raise capital on the market of GIL at this stage. GIL has various options of financial, which are enhanced from the operation. The first option is to go to bank and financial institution. We have also the capacity to have cash flow from [ commission ], thanks to strengthening of the structure, direct access to -- of the asset and strategy of revenue generation at the holding level. So that is another element to take in account. And the third question is the possibility of stake monetization, minority stake of monetization, is there is a need and an opportunity like Cebu 2 years ago. So many options to finance growth, access to capital markets, not necessarily at this stage, but just additional option we have opened with this good operation. In your first question,about the balance sheet of GIL, New GIL will share its merger financial in due time, but you can keep in mind that the airport assets are, by far, the biggest contributor. So you may refer to GIL in investor presentation to have quite a fair view of the business metrics. We have also to take in account an important fact that we have operational debt, but not at the holding level, but the asset level. So for us, in the New GIL, we have a strong asset that is the share of all the [ SPV ] for the older assets, and we adjust the FCCB in terms of liability. So thank you for the three questions.

So just to clarify, so at holding company level, you have the FCCBs and then the ring fences around the -- each one of the assets and there's asset debt at those levels, right?

Yes, yes.

We will now go to our next question from Ruxandra Haradau-Doser from HSBC.

First, when do you expect New GIL to be in a position to pay dividends to Groupe Aeroports de Paris? Second, I understand that there are currently around 120 airports in India and the government plans 220 airports by 2026. So is it correct to assume that most of the new airports you mentioned on the slides will be commissioned over the next 2 years? And if I divide 1,700 airplane orders by 220 airports, it implies less than eight airplanes per airport. So do you think that your airports are positioned to overproportionately attract capacities in the Indian market? And if yes, why? Thanks for the comments on the Noida. I understand that Delhi is also a gateway for Taj Mahal today. And Agra is currently upgraded from a military airport to an international airport. So do you see Agra as a risk for Delhi Airport over the next years, airlines to switch airplanes from Delhi to Agra?

So thank you for your question. So about the dividend, what we can say, GMR Airports went and is still going through a heavy CapEx program with some airport process, not operating debt. Due to this, the company currently has a negative contribution to the group results. But we expected traffic trend in India also apply more frequent investment phases than in other geographies. However, it is a strategic priority for us to upstream the cash flow from the asset in the coming years. The return to profitability can be expected in the next few years. But the exact perspective and -- may vary, depending on the trajectory of current development projects, regulation outcomes and the additional project that New GIL may pick up in the long time. Our common goal will be that New GIL is in a position to deliver positive free cash flow to equity at new GIL level towards the end of the decade, the end of the decade. Dividend payment itself, it's a capital allocation later, but will be -- [ arise ] depending on GILs position and needs at the time. So in terms of capacity, what we can say is the fact that we have increased strongly the capacity in Delhi, but also in the Hyderabad to welcome our passengers. In fact, with the new policy of, for example, Air India, we have to continue to grow in Delhi, but also in Hyderabad to welcome more passengers and more international passengers. That is a key element in the development of GMR Airports. For the development in India, you have a huge market, very huge market. We await some privatization of regional airport. That is probably a good opportunity to develop the group. But in fact, we are very cautious. We try to catch all the opportunities, but not on anytime. We have to change our business model to try to take the good opportunity at a good price.

On the third question, I would like to remind you quickly some figures. So for the last financial year, Delhi Airport achieved 73 million passengers. And as we said in the presentation, the airport capacity is now at 100 million passengers. On Hyderabad side, the passenger traffic last year was 25 million passengers for capacity at 34 million, which would be easily upgraded to 40 or 40 plus. So both airport capacity gives us some room for the years to come. And I think we already answered the question on the potential competitors like [indiscernible] as a competitor as we speak.

Maybe if I'm allowed to ask one more question. First, 1,700 airplane deliveries is a very high number. But the main topic in the sector currently is that the airplanes are not delivered or if delivered, to significant delays. I know it is very difficult to estimate how many airplanes will be delivered in India in, let's say, 2026. But would it be possible to share with us an overview how airplanes are scheduled to be delivered in the Indian market over the next years?

So sorry, it's not possible to give you some color about that. We don't have -- we have to ask this question for Airbus and Boeing but not [indiscernible].

We will now take our next question from Dario Maglione from BNP Paribas Exane.

Congratulation for this good investment. I have four questions for Philippe. First one, the presentation mentioned a valuation of EUR 6.3 billion for ADP's stake in New GIL. Can you confirm how this is calculated? Second question, what is the value of the FCCB foreign currency convertible bond that ADP issued to GMR? And when could you monetize it? Third question is a technical question. You mentioned that in the future, on Groupe ADP P&L, the fluctuation of the fair value of the FCCB will impact net income. How will this noncash fluctuation impact the dividends? And final question on tariffs at New Delhi, which are under discussion. What shall we expect? Would they increase 3x in the next regulatory period?

So thank you very much. So for your last question, we wait the final answer of the Indian government in the next few months, so we -- in terms of tariffs for Delhi. So for the moment, we don't -- it's a little bit early to speak about that. But in fact, we have good news, it's very, very good for the financial trajectory of GMR Airports. For your second question about the noncash effect and the fact that -- and the impact in the dividend, so remember that our dividend policy is to -- it's a payout of 60% of the net results. So mechanically, when we have the net results impacted by a noncash effect, we have theoretically less dividend. But in our dividend policy, we don't have just 60% of payout [ per share ], but we have also assured of EUR 3 per share. So mechanically, we offset this [indiscernible] and we offset the noncash effect, that is a key element. So to have more color about the FCCB and specifically the maturity of FCCBs, so the FCCB has a maturity of 10 years, so until 2033. That is the maximum date, not the [indiscernible]. Our [ contract scenario ] is better than that. [ Contract scenario ], it is that general [ top price ] to purchase the FCCB earlier than that. We can do it at any time, thanks to the collection they hold. So ADP will get cash for a total of EUR 331 million plus interest. ADP's balance sheet will be clear for the FCCB and related derivative and [ since ] clearing ADP net debt. And GMR Enterprise will convert the FCCB into New GIL equity, which will generate the dilution of ADP [ increment ] interest, but a positive impact on the equity value of New GIL due to the expansion of the related liability. So globally, FCCB is a good thing for the both partners. As additional production for ADP, we have the put option, allowing us to monetize the FCCB for the fifth year, so that is 2028. And the possibility to convert the FCCB or the [indiscernible] is to put -- is not [ honored ] after some time. So globally, theoretically, the rules, if the FCCB had a maturity of 10 years. But due to the collection, due to the put option, it's maximum date, and it's not the [indiscernible].

So the EUR 6.3 billion, it is just the value of the stock price today.

Yes.

Our next question comes from Manish Beria from Bernstein.