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

Good morning, and welcome to the Groupe ADP 2024 9 Months Revenue Conference Call. Today's call will be recorded. [Operator Instructions] I will now hand you over the call to, Cecile Combeau. Please go ahead. Thank you.

Thank you, and good evening, everyone. Thank you for being with us this morning for our 9 months revenue publication. I am here with Philippe Pascal, Groupe ADP, CFO; and Antoine Crombez; Deputy CFO. Philippe Pascal will first go through some prepared remarks before taking your question with Antoine. 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 28 of our presentation. And with that, I will hand it over to Philippe.

So thank you, Cecile, and good morning, everyone. Let's jump directly to Slide 3. You can see here the key figures for the first 1 month with total revenue standing at EUR 4.6 billion, up 11.7% compared to last year. Two key message for this publication. First one is that the performance recorded so far fully supports our financial targets, which are confirmed, even if traffic in Paris this year is now expected in the lower part of the assumption range, taken in February and which was 3.5% to 5% growth versus 2023. The second message for this publication is that we continue to develop the group as materialized by 2 bolt-on acquisitions concluded recently and which Extime hospitality offering. Remember that, we have also finalized the completion of the GIL and GAL merger end of July. Moving on to Slide 4, with overall traffic evolution, group traffic is 8% higher than last year, driven by continuing strong trends in our international asset. In Paris, traffic has been developing within our assumption range, up 3.8% in the first 9 months. But, as you know, summer traffic was slightly less dynamic compared to growth rates recorded in the first part of the year. That was particularly true in July, and Olympic-related traffic did not offset the impact of travelers arriving in Paris. As commented in previous quarters, the comparison basis in the second half of the year is tougher, one notably because traffic with China increased from Q4 last year. Accordingly, we expect traffic growth in Paris this year to be the lower part of the 3.5% to 5% assumption range. Let's move on to Slide 6 with a bit more granularity on Paris traffic. Traffic with Mainland France show a decline of 5%, affecting a structural decline. But with a better Q3, domestic traffic in August was just above that of last year due to the Olympics. International traffic is growing by 7.2%. Traffic with the Middle East is down 5.4% due to the deterioration of geopolitical context. But on the opposite, traffic with North America continues to see a strong momentum, up 6.6% driven by both U.S. and Canada. Nevertheless, Q3 sees weaker growth compared to previous quarters. Traffic with Asia Pacific is 27.7% higher than last year. This is mostly driven by the recovery of traffic with China, which was still below 25% of pre-COVID level in the first 9 months of 2023, and has been now around 60% recoveries. Moving on to Slide 6, with traffic in international assets, which were also solid traffic growth of 9.5%, driven by our 2 main international assets. As you can see on the left side of the slide, traffic growth of TAV Airport was strong, up 11.7% overall. TAV's international network of airports sees the strongest growth with traffic up 19.3% and notably a solid contribution from Almaty, where traffic is up 21.2%. TAV's Airport in Turkey saw solid growth up 8.1%, with international traffic growing 9.1% compared to the first 9 months of 2023. On the right side, we can see GMR Airport traffic. GMR Airport traffic growth was solid as well, up 9.8% compared to the first 9 months of 2023. Here, as well, international traffic is seeing the strongest growth. Let's now move on to Slide 7 with a focus on Extime Paris spend per pax. It stands at 31.4%, plus 5.6% higher than in the first 9 months of 2023. As expected, Q3 grew at a slower pace in the previous quarter, reflecting notably the rebasing effect driven by the reopening of Terminal 2A and 2C since May. Our premium terminals continue to deliver strong growth in SPP, sustained by growth in international traffic. Media and advertising have been performing particularly well. Revenue is up by close to 50%, this was driven by increased advertising campaign ahead and during the Olympics. So clearly, this outstanding performance will not repeat next year. And going forward, we expect lower revenue from advertising next year. Travel Essential also benefit from positive momentum, thanks to Olympics merchandising hence our expectation of slower growth in Q4 here, as well. In terms of outlook, we keep an unchanged cautious stance linked to the internal headwinds, which you are well aware of including the works in Terminal 2E-K that are already ongoing and will intensify at the beginning of 2025, but also taking into consideration some sign of conjunctural softening. We nevertheless are in a position to confirm our guidance for 2025 of spend per pax 3% to 5% higher than in 2023 and continue the deployment and strengthening of the Extime model to fuel future growth. Indeed, you can see on Slide 8 that we are pursuing the development of Extime with 2 bolt-on acquisitions closed just a few days ago of Paris Experience Group, as was announced last July and Private Suit formally now. First, on Paris Experience Group, with this acquisition, Extime's value proposition in hospitality is being extended to the entirety of the stay of tourist in Paris with a strong belief that greater quality of service and greater experience create more value. We see significant potential driven by notably premiumization and enrichment of the offering, consistent with Extime operational excellence standards. Also driven by the enlargement of clientele from other countries like China or the Emirates by mutual leasing with the Extime network, but also driven by marketing of VIP hospitality service. Then regarding our acquisition of Private Suites, the company operates exclusive terminal for VVIP commercial passenger, with a niche market but with a strong potential. Private Suite employs close to 300 people, and it is present in 4 airports in the U.S., including Los Angeles and Atlanta, which are in operation and Dallas and Miami under development. After the opening of the Extime exclusive reception launch in Paris last June, ADP becomes now a key player in luxury airport hospitality. We now operate an international network of exclusive terminals, well positioned to conquer future opportunity in new geography. Private Suites give us access to enlarge database of qualified clients for VVIP offering and has proven successfully in high-quality operating process. Our short-term priority is to successfully welcome and integrate the Paris Experience Group and Private Suite team with Groupe ADP and start together this new growth journey. Moving on to Slide 9. Revenue reached EUR 4.6 billion in the first 9 months of '24, up 11.7% versus last year. Aviation revenue is up EUR 87 million. The segment is growing 6%, reflecting the combination of traffic growth in Paris and the regulated tariff increase of 4.5% on average applied since April this year. The Retail & Services revenue is growing EUR 137 million, driven by both the traffic growth and the solid sales per pax dynamic. Real estate revenue segment is up 3.7% due to new assets and rent indexation growth. Abroad, TAV Airport is growing EUR 252 million, bringing the biggest contribution to revenue growth in the first 9 months, while Jordan Airport is still impacted by geopolitical context. Let's move to Slide 10. Here, let's have a focus on the latest budget development in France with the finance bill for 2025. First, on the infrastructure tax. As you know, the tax has been enforced since the beginning of '24. We are now -- no change introduced in the bill of '25. So no change. The tax impacts our OpEx for around EUR 130 million per year. It was EUR 64 million in the first half of this year. And this tax going in the same proportion of ADP SA revenue. The regulated part of this OpEx around 2/3 can be offset with the regulated tariff. We consider that the 2024 tariff increase implemented in April plus the proposed tariff increase for '25 will have fully offset regulated portion of the tax. The second item of this slide was the temporary income tax increase. According to the project, this additional contribution of the income tax will apply to '24 and '25 fiscal years only. We estimate the additional tax expense to range between EUR 120 million and EUR 130 million in '24 and between EUR 45 million and EUR 55 million in 2025. I encourage you not to draw any conclusion of or extrapolate this number on the group financial, because the fiscal result is calculated in French GAAP and is subject to some accounting adjustments that can be very different from the operational results. So no extrapolation, please. Offsetting this full regulated tariff is only partially possible because it is only a temporary measure and because the increase in the tax rate has a negative impact on the WACC. Therefore, limited the room for a tariff increase in spite of the decrease of the ROCE. So we have, at the same time, a decrease in the ROCE and the decrease in the WACC. So the room of maneuver to offset this increase is very light. The third item, the funding of security activities. As you know, the French state currently only cover 94% of the security cost borne by ADP. The finance bill provides that this coverage drops to 90%. It's just a project. It's a bill. The further 4% of cost borne by ADP will have an impact of around EUR 25 million and it's EUR 25 million in the non-regulated scope in the form of lesser revenue from security. So no direct offsetting is possible here. The fourth and last item in the proposed -- is the proposed increase of tax on plane tickets. This has no direct financial impact on ADP, but we will be sensitive to the potential negative impact on flight demand at the end of the day and the negative impact on the competitiveness of Paris as a hub and that our partner holds the airlines. So it is not possible for us to quantify this at this stage because it depends on price elasticity and only of price elasticity. So the finance bill is currently being discussed in the parliament and therefore, still subject to modification until the adoption of the finance law at the end of December, and we are fully committed to try to decrease this impact. To conclude this presentation, a word on our outlook on Slide 12. Our traffic assumption and financial guidance for '24 and '25 are confirmed. In particular, we expect traffic in Paris to grow this year in the lower part of the range, so very close to 3.5% hypothesis and continue to expect the group traffic to grow by more than 8%. Our target to deliver at least 4% growth in EBITDA in '24 is also confirmed. Our CapEx guidance is unchanged and confirmed. Investments are expected to ramp up slightly this year in Paris. We shall spend around EUR 900 million on average between '24 and '25, driven by infrastructure improvement as already outlined. All of our other '23 and '25 targets are confirmed. And with that, let's open the line for the Q&A. Thank you.

[Operator Instructions] We will take the first question from Elodie Rall from JP Morgan.

The first question is with regard to winter capacity schedule. I was wondering, if you have an update on that front from your different airlines. And my second question is on the CEO succession, if also you have an update there now that we have a government in place. Well, I know it's a decision from the President, but I was wondering if there's any update. Third question is also on China, where we are today, what you expect recovery to look like in '25 and the impact on retail. And then on the tax front, so thanks for all the details. That's really helpful. If the tax was -- so the new corporate tax, if it was actually permanent and what do you think about the likelihood of that, by the way, would it be actually possible to offset that through tariffs? I understand now it's you have a limited maneuver. But if it was to be permanent, would actually be -- would you be able to actually offset that?

So thank you, Elodie. So your first question, it's about the winter capacity and the level of traffic. So at this stage, we -- there's enough flight schedule for the winter season are consistent with our traffic forecast and our assumption for '24, but also for '25, and we can confirm this assumption with this traffic growth -- '25 traffic growth between 2.5% and 3% compared to this year. Remember that we have a slight impact at the end of this year and the beginning of next year about the 4 flight system. We expect some impact in Q4 indeed due to the deployment, consistent with our expectation of traffic growth in Paris, in the bottom part of our assumption. So that is for winter capacity when you check with all the airlines, we can see that all the airlines are traditionally optimistic. We are a little bit more cautious, but we can confirm our trajectory, our assumption. For the CEO succession, so as you know, as announced at the last AGM on May, Augustin de Romanet will step down as Chairman and CEO of the company on December -- end of December, last day, 31 December. The Board of Directors will propose to the French President -- President of the French Republic, a candidate chosen among its member for nomination by decree as new Chairman and CEO. The candidate will undergo addition by the 2 relevant Parliament Commission, which is may oppose such designation. So for the moment, no, we don't have no news, particular news in this topic. For the Chinese traffic, for Chinese traffic, currently we have around 48 weekly frequencies scheduled. This compared with 93 weekly frequencies during the summer scheduled in 2019. So, 48 now compared to 93 before COVID. So we are globally at 50% to 60% pre-COVID capacity. We wait for recovery. We don't have a strong visibility of that. Probably it's mainly in '25 and probably more in '26 to have a full recovery. But for the moment in terms of retail, Chinese traffic is just an upside, but it's a good upside at the end of the day. And when you see our performance in terms of retail, it's possible to have a good upside for the next period of development. In terms of tax, clearly the tax now is just temporary. It's a traditional way in France to try to decrease the level of debt. All the governments, the last 30 years, use this methodology to increase for 1 or 2 years strongly the corporate tax. So it's a traditional way. And it's traditionally temporary. So we don't modernize the capacity for the moment to be a permanent increase. That is the first point of the answer. And clearly, it's difficult due to the fact that you have a decrease in terms of work, but also a decrease in terms of fortune to manage the capacity to offset. Obviously, if we have a permanent tax that is not to project, and we don't have any element about that, we have to check in the dynamics, the dynamics in terms of the level for the ROCE and the WACC. Perhaps create a slight room of maneuver, but it's not consistent for the moment. So, thank you very much, Elodie, for your question.

We will take the next question from line Eric Lemarie from CIC Market Solution.

Yes, thanks for taking my question. Regarding the possible next regulation contract, you mentioned it in the recent past. And I was wondering if you continue to, or you looked at least more optimistic regarding a potential new regulating contract. Could you confirm you can, I don't know, start negotiations sometimes in 2025, 2026, maybe 2025? That's my first question. I've got a second question regarding this exceptional corporate tax in France. So you mentioned these figures, EUR 120 million, EUR 130 million for 2024. I was a bit surprised because I thought the level expected in 2024 was basically the double of what would be expected in 2025. And I was wondering if you can explain the difference, but maybe it's just my own calculation. And the last question in terms of sales per pax, I understand the Chinese are not fully back. And I was wondering which type of travelers are responsible for the current level of sales per pax, which is not bad at all, actually?

So thank you for your question. So for your first question about the economic regulation agreement, an economic regulation agreement, it's a long way. We have 2 years to prepare and to negotiate to implement on this contract for 5 years. 2 years, the first step, it's an internal step, and we have started this works. It's a long way to stabilize a good initial project in terms of CapEx plan. It's a long way to try to manage the dynamic in terms of regulated OpEx, but also to stabilize the cost allocation system. The structure of tariff is not just a level. It's also a balance between landing fees, parking fees and passenger fees. So we have a lot of elements to prepare. After that, so we start the works and we have to wait the next CEO to define the strategy. After that, we have to propose formally an economic regulation agreement balance. And for that, we have to publish a specific document probably at the end of '25 to negotiate in '26. The negotiation, it's not just commercial negotiation. It's a very formal process with a specific condition with all the stakeholders and the airlines, with the French government and at the end of the day, with the French regulator. So it's a long process. Now we prepare that. But we -- for the moment, we don't have a decision internally. We wait the new CEO to start the formal process. Your second question about the exceptional corporate tax, clearly, it's hard for you to modernize, due to the fact that it's calculated in French GAAP -- with fiscal results, not the IFRS system. And in this specific fiscal result in France, it's subject to some accounting adjustment due to the exceptional operation that we don't have any impact in IFRS methodology, but a strong and positive impact in the fiscal results. So we give you some color about that because we know exactly that it's difficult for you to modernize. But at the end of the day, in fact, we can confirm the figures for '24 between EUR 120 million and EUR 130 million and for '25 between EUR 45 million and EUR 55 million. Your first question about the geography for SPP. Clearly, the main performance is led by the international segment, with a strong growing geography. First, the main contribution, it's the 3 main geography, Asia, North America and Middle East. For the moment, we have a strong momentum with North America, but also a good performance with Middle East. And Asia, it's an upside. We have a good performance with the current clients. But if you have more passenger and more weekly frequency, mechanically, we can improve our performance in terms of SPP. So thank you for your question.

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

I have 4 questions. The first one on the tariff proposal, if I understand correctly, 4.5% year-on-year increase. What ROCE are you targeting for 2025? Second question on the spend per passenger in Q3. Could you maybe quantify the impact of the Olympics? Then third question around the acquisitions, which makes sense to me. I read that it costs around EUR 360 million. Could you maybe tell us more about the contribution to EBIT that you would expect or net income? And the final question on the security activities. This proposal basically to reduce the cost coverage from the state. Is that a permanent change proposed or a temporary one?

So thank you for your question. So about the first question, the tariff proposal of 4.5%, we don't disclose exactly the regulated ROCE that we want to target, clearly. It's part of the game, not for the investors and our shareholders, but it's a part of the game with the French regulator. That is a key element. Obviously, in this way, we -- it's very important for us to obtain the maximum possible, but to secure the capacity to have a formal approval. The second question about the SPP Q3. It's difficult for us to have -- to identify clearly the impact of Olympics. In terms of SPP, clearly, we have a very important and favorable impact in media and advertising with a strong figure, as I mentioned. But we have also a very good momentum in Travel Essential due to the goodies and some specific goods in these shops. And in terms of pure retail and F&B, globally, it's neutral for this year, globally, quite neutral. Not really mean that no good news and no bad news. It's no specific impact. So in the security activities, your fourth question, clearly, we -- it's a bill. It's just a bill project. And this project try to be permanent. But what is very important to know is the fact that the funding of security activities seems questionable to us, and we are petitioning for change in the framework. The partial refunding of security cost is triggered when the security cost per pax are above EUR 9 per pax. If security costs were below that level, then we have be fund with a fee covering 100% of our security cost. This EUR 9 threshold was set back in 29 as an incentive to cost control. But due to the inflation, due to the other element linked by the prescription of the French state, it is now unrealistic. We are petitioning for a reevaluation of this level to be adjusted upwards and be indexed with this future inflation. If we obtain just this element, we have the capacity to -- with a good and strong cost control to be below the new threshold and mechanically not to have this ticket to paid but to be fully offset by the tax. So globally, we work hard to be -- to have the capacity at the end of the day to offset this impact. For the consequence of -- in terms of EBIT with Paris Experience Group and Private Suite, combined revenue for the 2 company was in the range of EUR 150 million in '23 with only 1 terminal, Los Angeles operated by Private Suites at the time with -- versus 2 now included Atlanta opened at the end of '23. This acquisition brings additional revenues and additional EBITDA and will be relative at EPS level in the midterm, not now, but in the midterm, and we are very comfortable with that. The strong growth profile of Private Suite implies possible future capital injection in the future. So good for all. So sorry not to be disclosed clearly all the figures, but we have to work about that.

[Operator Instructions] We will take the next question from line of Augustin Cendre from Stifel.