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

Two questions from me. One on GMR and the merger process between GMR Infrastructure Limited and GAL, it should happen in H1. I mean one of the aims of this transaction was to review the true value of ADP stake. So maybe roughly speaking, how much should we expect ADP's stake will be boost after the completion of the transaction? Second question on the guidance for next year. It's a wide range. And of course, there is the new tax. Excluding the effect of the tax, do you expect to be more on the top or at the bottom of that 35% to 38% range on EBITDA margins?

Okay. For the first question, if I understand well, it's the impact of the reverse merger and globally, also the level of share of ADP. So for the moment, we have 49%. Globally, at the end of the day, we have a decrease in our shares, but a strong increase in the valuation of the company. So globally, it's a good thing for ADP. The preparatory steps are developing in line with the planning, as you say, and we are confident that the merger can be completed in the first half of 2024. But keep in mind that upon completion, we will record noncash expenses translating for 2 points. First point is the change in economic interest of Groupe ADP, including a settlement of ratchet clause as well as liquidity premium. And the second thing is the fact that the integration of the assets and liabilities of new GIL, the new company after the reverse merger with expected net value at the date of merger, and we expect that this net value will be negative as the asset and liabilities of new GIL that are taken into account in the calculation obviously exclude GAL, GMR Airports, but the liabilities include the FCCB granted by ADP. So the impact was estimated at around EUR 100 million on Groupe ADP net income from ordinary activities in March. That is the key point. We disclosed that in our press release. The exact amount will be determined updated at the reverse merger, the date of the reverse merger and for the moment, the treatment of the FCCB GMR Infrastructure Limited account are still to be determined. So at the end of the day, current value of deal, it's 2 or 3x of the acquisition. So at the end of the day, we are shareholders and a huge shareholder of a large company. So it's a good deal. Further guidance. So perhaps to have a global point of EBITDA guidance. We start by the traffic. And after that, we can have a point about the EBITDA margin guidance. For the traffic. So as I said, for 2023, what we can see, we can confirm that Paris traffic should reach the upper part of our assumption, so close to 93%. For '24, our traffic assumption is unchanged at this stage between 19% and 100% compared to 29%. We expect traffic to grow compared to 2023. So mechanically, it's more than [ '23 ], but full recovery looks more light in '25 or perhaps 2026, but probably more in '25, if look at what is missing to reach full recovery. For the moment, we have a domestic traffic that is not in full recovery. It's like 75%. But also the international traffic. We don't have the full recovery of the international traffic, we expect an increase specifically for China, but mechanically, for China, it's better [ 123 ]. So globally, for traffic, we can now, if we understand well, [ modelize ] in the right manner. For the EBITDA margin, following EBITDA margin for '23, we can confirm our EBITDA margin guidance between 32% and 37%. We posted 33.9% margin in the first half of '23. And we expect for the second half, an EBITDA margin higher than the first half, driven by the seasonality, by the traffic, by the retail growth. So globally, we can see that we expect higher than 33.9%, but below the 37%. For '24, we are currently in the progress of updating our budget for '24. It's a little bit early to quantify precisely. So we don't give you more color. But in the meantime, we can refer to our EBITDA margin range of 35% to 38% from '24, '25. But bearing in mind that it excludes any impact of the new tax. So this guidance is without the new tax, without the new tax. At this stage, and despite expected growth in traffic, our '24 EBITDA margin, we should mechanically be in the lower part of this range. So the lower part of the range of 35% to 38% due to the combination of the Olympic games. First, it's not a surprise. We take in our guidance, but we are still in our guidance due to the Olympic games, but also the evolution of staff, the inflation in Paris, but obviously also the inflation and the evolution of staff in Turkey. That is a key point. And finally, for the overall tax increase, it's not possible for the long to have a clear view without our budget. But remember that our guidance is without tax and probably without that in the lower part of this range.

We will take our next question from Manish Beria from Societe Generale.

Yes. So my first question is on the regulated aviation business. So of course, I mean, you are taking 3 tariff hikes now to cover the tax impact, 2 or 3 hikes to cover the tax impact. But in the meantime, there is also inflation. So how should we think about it? Like you take the tariff hike to just cover the tax impact and then the inflation feeds negatively to the EBITDA evolution, I mean?

So just to summarize, if we can increase the tariff, we increase the tariff, but we have a cap. And you understand the different cap in our regulation, the cap in terms of the regulated WACC, the cap in terms of moderation and the cap in terms of to cover the related OpEx by the regulated [ aeronautical ] fees. So our regulation does not provide for any direct pass-through mechanism from inflation to tariff. We can ask for a tariff increase, obviously, and we try to ask. And due to the fact that we expect an impact due to the inflation due to the new tax in our regulated [ ROCE ] that creates some room of maneuver to increase our tariff, but we have to be below the regulated WACC calculated not by ADP but by the regulator himself. So cost inflation or any other effects that we put pressure on the regulated ROCE could therefore provide room of maneuver, obviously. But we try to manage now. It's to increase the ties due to the part of inflation and part of new tax, just to manage a trajectory in our tariff increase to be just below the cap, but not higher because if we have higher than the cap, we don't have the moderation. So it's a little bit early to have the results of this debate. We have to have a debate with the airlines. And we had also to submit our proposal in November for the French regulator.

So can I ask like what is the cap on the tariff hike each year that you can do?

We don't know. It's the French regulator has to clarify the position of the WACC, first of all. The second question is about the moderation, the second cap. The moderation, it's a subjective approach linked by the fact that if it's acceptable or not for the airlines. But we know that for [ Nice ] in France, the regulator accept 4.9% increase. So it's around between 4 and 5...

Okay. And then the second one is just on like is there any plan to monetize the international asset in the medium term or in the near term? I understand you are listing this Indian asset. I mean the merger that will reveal some value. But other than that, is there any more plan to, I mean, reflect more value for ADP or to monetize the value of international assets?

Two points about that. First, we are an industrial company. We are not a fund. So we are not here to monetize. But we are just here to create value due to the operation of the airport. But second part of my answer, it's clearly that if we have a good window with a good opportunity, we monetize partially or totally, for example, now we have TAV sell a part of [ TIBA ], and GMR sell [ SIBU ] and that is a good example, but we don't have a plan, our strategy is to deleverage TAV, to deliver GMR and to deleverage slightly ADP.

We will take our next question from Nicolas Mora from Morgan Stanley.

Just a few for me. First, big picture, can you talk about the winter schedule, what do you expect in terms of airline capacity over the next 5 months? That's number one. Number two, just coming back on the retail, if you don't mind. I mean, on the positive side, supporting retail we've had. So we had the Terminal 1 international opening. You've got China accelerating from a low level. What about inflation? I mean and really about the impact of renovation from the [ 2-E old K ]. At the end of the day, I'm not quite sure how big the impact is. I mean, to be honest, can you help us understand a little bit just how much of the terminal is genuinely closed for now, just forced to assess a little bit the mathematically impact? And then again, on retail, I mean, Extime is more than duty-free. Can you talk a bit about the other drivers of growth? I mean we see advertising is reaccelerating, food and beverage pretty good. Any specific comments there. And very last point, can you say a word on CapEx? Are you still very late in spending pattern? Are you holding up a little bit because of the concession tax discussions with the regulator? Just give us a little bit of a point of where you stand after a pretty soft first half of spending.

So for the winter schedule. So we have now a clear view about the winter schedule. We can see the seat capacity at Paris, and we can see that the seat capacity come down. But that is clear for us, it's the fact that this impact, it is a slight impact, not so huge, is due to the deployment of ETC modernized traffic management system. This new system is called [ ForeFlight ] and the French airport slot coordinator COHOR published some information on his website with details regarding the exceptional capacity reduction that will occur from January and February '24 in Paris area. We have an impact on, but it's not so huge. Eventually, the objective of this new system is to increase traffic control efficiency, allowing for optimized routes for the decarbonization and so on. So all in all, at the end of the day, it's a good news for Paris in terms of ETC. But in fact, when you see the winter schedule, we can see the reduction between the mid of January and the mid of February. So I think it's my answer, yes. For the second question, Christelle.

Yes. So on SPT and retail performance. So clearly, in the performance to date, there is a part of conjectural effect. You were speaking about inflation. So inflation has helped us a little bit over the past 2 months in our performance, the same for the FX rate. We know that it emptied us and helped us to reduce performance. But clearly, it's difficult to quantify the precise impact of those conjectural elements. But the big part of this performance is due to our Extime strategy. Looking forward, as we were mentioning, maybe there could still be this impact of inflation. But at the same time, we see also a sign of economic slowdown. So this could maybe lead to a slowdown the positive impact we had, thanks to inflation. So this is the reason why we stay present. There could be in the structural impact. You mentioned China. So Philippe explained our assumption in terms of China recovery in terms of traffic. We don't expect a full recovery in 2024. So clearly, the performance will also depend on this rate of recovery regarding Chinese traffic. And indeed, the structural performance thanks to Extime strategy could be negatively impacted by the renovation of the terminal 2-E old K. So far, we haven't seen a huge impact. So the road just started a few months ago. Clearly, as I mentioned, in the performance to date in Terminal 1 and Terminal E-K, old K we don't see any impact of this world because as I mentioned, we posted a performance above EUR 60 in Terminal 2-E old K and even a little bit higher for Terminal 1. It's not a closure of Terminals 2-E K, but in the 2-year program, there could be some specific color on some luxury shops. So that's why also we remain very cautious on that. We don't have enough experience so far on the beginning of the swap to tell really to quantify the impact it could have. Regarding the other Extime activities. So yes, we don't speak often about them. And indeed, in terms of advertising, there is a good performance thanks to some recent events, the World Cup would be and the Olympics will be a good accelerator of the performance regarding advertising activities. In F&B, it's also an important part of our strategy. And as mentioned in the presentation earlier on, we recently had the Green light of the French authority competition to implement our JV with SSP. So it will be the opportunity for us now to implement clearly our strategy and to rethink the allocation of specific F&B shops to put inside the terminal. So we also expect a positive impact of all other activities even if, of course, duty-free represent, I think, 80% of the global performance of retail performance.

We will take our next question from Cristian Nedelcu from UBS.

The first one, could I come back to the Middle East traffic, did I understand also other than Israel and Lebanon, you are not seeing any erosion in demand for traveling to the Middle East base? So any airlines reducing capacity to other countries or hearing about bookings weakening or anything like that? So that's the first one. Secondly, on the regulation on the cost allocation between regulated and nonregulated. Is there any update there? And do we have a time line when we're going to have a final outcome from the regulator on how OpEx will be split between regulated and nonregulated? And the third one, just you talked in the past about the electricity and sort of hedging more and trying to use the RN facility. Is there any progress at this stage, you can tell us for 2024 electricity cost or how much they could increase?

So for your first question. It's a little bit early. We don't see for the moment a real impact, but we are very cautious and we have to wait. So a little bit early to speak about that. For your second question for cost allocation. So as you know, the [ IFPA ] decision dealt with cost allocating principle. And for the moment, we are in line with the general principle of the French authority. So no new issue and concerns about that. But at the same time, we have launched a process to explain all our key cost allocation system with the airlines. The outcome of this review is not going to end, but with the decision for the regulator. So we don't expect for the moment a huge impact. All in all, this cost allocation will be included in the overall tariff normalization. And we are going to propose some correction as early as the next tariff proposal, so in November. It's a very slight correction due to the discussion with the airlines without a huge impact in the economic model. So for your third question about the energy cost, so as you know, our energy hedging structure has been defined now and price for the portion of electricity we need to buy on the market has been fully secured for 2024 and partially for 2025. Our hedging structure is based with 3 pillars, the market, the PPA and the RN system. Globally, at the end of the day for '24, the mix price is approximately 2x higher than 2023 price. So remember that for '22, the electricity cost for Paris was around EUR 30 million. So we expect globally EUR 60 million, a little bit more because we have some dynamics in terms of volume. We are in the process of building our budget. So it's a little bit early, but we assume this impact. This impact was also in our guidance. In the meantime, you can refer to our EBITDA margin range of 35% to 38%, that I mentioned just previously. The increase in energy cost was anticipated and is included in this range, but not the new tax. And last question, please.

We will take our next question from Eric Lemarie from CIC.

I've got just one actually. Coming back on this regulated WACC you don't know today. I was wondering if you got any idea of the way the regulator could take account of this new rate environment because surely these rates are higher than in the past, and it should be translated into the regulated WACC, I guess. But do you think it could happen?

So for the moment, we don't have additional information provided by the French regulator. The French regulator launched a consultation, and we understand that several buy-side analysts have been consulted by the French regulator. And we trust that investors will provide useful input to the French regulator. But all in all, for the moment, we don't have a clear view. But remember that the WACC assumption is based on leverage, 5 years leverage with historical market data. So mechanically, the inflation or the new rates taken account by the WACC. It's just 1 year compared to 5 years average. So at the end of the day, we have mechanically dynamic and increase in our WACC. But we know also that the French regulator wants to have perhaps a new methodology, and we don't have a clear view about this new methodology for the moment.

Now I would like to turn the call back over to the speaker for closing remarks.

Yes. Thank you very much. So yes, thank you, everyone, for having logged on to our conference. So we will be attending actually several investor relations meetings and conference. So we'll be traveling to meet you in the coming weeks, and we are looking forward to that. We will then release our full-year 2023 results on the morning of the 15th of February next year. So feel free, of course, to get in touch with [ Elliott ] and me here for any follow-up questions. And with that, good evening, everyone. Bye-bye.