Grupo Aeroportuario del Sureste SAB de CV (ASR) 2022 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to ASUR's Second Quarter 2022 Results Conference Call. My name is Anna, and I'll be your operator. (Operator Instructions) As a reminder, today's call is being recorded.

Now I'd like to turn the call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir.

Thank you, Anna, and good morning, everyone.

Before we get started covering the highlights from the quarter and then taking your questions, let me remind you that certain statements made during the call may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to several risks and uncertainties that may cause actual results to differ materially, including factors that may be beyond our company's control, including the impact from COVID-19. As usual, additional details about our quarterly results can be found in our press release, which was issued yesterday after market close and is available on our website, Investor Relation section.

Now moving on to a review of passenger traffic and travel demand during the quarter. Total traffic was over 39% year-on-year and exceeded second quarter'19 levels by 19% to a record of 16.7 million passengers in the quarter. We continue to see steady growth throughout the quarter across the 3 geographies.

Now looking at recovery trend by region against pre-pandemic levels of the second quarter '19. Once again, Colombia posted the strongest recovery, up 43% with domestic traveling increasing in the low 40s and international travel in the low 50s. Puerto Rico saw a 15% increase in traffic, mainly driven by domestic traffic that was up in the high teens, although relatively flat sequentially.

In turn, international travel continues its gradual recovery, reaching 88% of the second quarter 2019 levels. Traffic in Mexico surpassed second quarter '19 levels by nearly 13%. With international travel up in the high teens despite higher air fares driven by strong leisure travel demand from all key regions, with the exception of Canada, which remains at 57% of the last 12 months 2019. This has been more than offset by strong U.S. traffic, while the last 12 months European tourism is just 8% below pre-pandemic levels.

Looking ahead, staying with Mexico, we expect traffic from Canada to resume during the winter season, mainly in November through April next year. While we expect to see a steady performance from the U.S. and Europe, we also anticipate domestic travel to continue its gradual recovery. As I have mentioned before, business travel is expected to continue to lag leisure.

As a result, we believe that traffic at Veracruz, Minatitlan and Villahermosa airports, which this quarter were on average 7% below second quarter 2019 levels, will continue to recover at a slower pace. In Puerto Rico, we are seeing domestic traffic trending to normalize after a very strong performance over the last several quarters.

Lastly, traffic in Colombia remained surprisingly strong, and we expect this to continue throughout the year, driven by addition of grounds and investments in tourism, which have driven a structural shift in demand. Traffic trend remains solid underscored by pent-up demand. We believe that if any of this acceleration resulting from the increasingly inflationary global macro environment could be mitigated with the recovery expected to come from some markets like Canada.

Now turning to the P&L, starting with our top line. Note that all reference to revenues, costs, excludes construction revenues and that all comparisons are against pre-pandemic levels of second quarter '19. Revenues increased in the mid-40s, reaching MXN 5.7 billion, a record high for any given quarter. This good performance was driven by growth in both aeronautical and non-aeronautical revenues.

All geographies posted sustained revenue growth with Mexico accounting for 70% of the total revenues in the quarter, Puerto Rico 17% and Colombia 12%. Commercial revenues were up 44%, driven mainly by passenger traffic growth with increases of 39% in Mexico, 60% in Puerto Rico and nearly 41% in Colombia. Commercial revenues per passenger amounted nearly MXN 120, about MXN 100 reported in the second quarter '19 and is slightly above the level achieved in the prior quarter.

By geography, commercial revenues in the quarter were in the range of MXN 143 to MXN 149 in Mexico and Puerto Rico. In commercial, in Colombia, commercial revenues per passenger reached MXN 40, clearly in line with second quarter 2019 levels. Note that 12 months level more than doubled those achieved over the same period of 2019.

In terms of traffic mix, the share of domestic passenger remains at 2019 levels, but we'll continue to see growth in the U.S. and the share of higher spending Europeans back to pre-pandemic levels, the number of Canadian travelers remain at 56% of 2019 levels.

Now moving on to cost, total operating expenses increased by high single digit, excluding MXN 175 million expense reimbursement in Puerto Rico, operating costs and expenses would have increased 18%. Nonetheless this was significantly lower than the 45% growth in revenues.

In Mexico, costs were up 27%, but still below the 48% increase in revenues. This reflects higher technical assistance and concession fees resulting from higher revenues and EBITDA, together with higher cost of services, including the cost of sales from directly operated stores that continue to see strong activity.

Puerto Rico in turn benefited from MXN 175 million expense reinvestment under the American Rescue Plan Act. Excluding this benefit, cost would have increased 10%, while revenues were up 33%. Finally cost in Colombia declined 26%, while revenues were up 37%.

In summary, the significant efficiency measures during the pandemic levels have allowed us to maintain the costs that are on our control at 95% of the second quarter '19 levels and 79% on a per passenger basis, even with higher revenue levels than in the second quarter of '19. These numbers includes total cost minus construction, depreciation and amortization, technical and concessions fees.

We achieved record high profitability this quarter with consolidated adjusted EBITDA up 47% to MXN 4 billion. Passenger traffic growth increased commercial revenues per passenger, higher tariffs and operating leverage contributed to this performance. Mexico leads this growth with adjusted EBITDA up 57% to MXN 3 billion. Puerto Rico in turn posted a 7% increase in EBITDA to [MXN 580 million], while profitability in Colombia continued to recover with EBITDA up 62%, reaching just over MXN 400 million.

Adjusted EBITDA margin ex IFRIC 12 increased 100 basis points nearly to 71% this quarter. By geographical region, adjusted EBITDA margin improved over 4% points in Mexico and Colombia to nearly 76% and 58%, respectively. While the margin in Puerto Rico was close to 59% this quarter compared with 73% in the second quarter of 2019.

All in all, we delivered a solid set of results with traffic and revenues at record high levels. These together with operating leverage have contributed to more than doubling net majority income to MXN 2.6 billion in the quarter, up from MXN 1.2 billion in the second quarter '21 and MXN 1.4 billion in the second quarter '19.

Turning now to capital investments. We invested nearly MXN 440 million during the quarter, of which 79% was allocated to Mexico, 20% to Puerto Rico and 1% to Colombia. In Mexico, we completed the expansion of the Tapachula terminal as anticipated. We also remain on track with the expansion of the Terminal building in Merida with the third phase of the project to be completed by year-end.

At Cancun Airport, we are making the steady headway to finalize by the year-end, the first phase of the Terminal 4 expansion, which consists of adding 2 boarding gates in the international front. On Puerto Rico, we continued to advance with the remodeling of Terminal B and major maintenance referred to runways and taxiways.

Now a few comments on the balance sheet. We maintained a robust financial position with cash and cash equivalents of MXN 7.3 billion at the quarter end. These follows the dividend payment of MXN 4.5 billion paid last June as we returned additional value to our shareholders. In turn, net debt last 12 months EBITDA was just 0.4x at June 30, with interest coverage at 10.5x, only less than 1% of our debt maturities in the second half of the year with the next major maturity taking place in 2025.

Finally, accounts receivables were practically flat year-on-year. Before moving into the Q&A portion of the call, a quick recap. We welcomed a record number of passengers during the second quarter, surpassing second quarter 2019 levels, with robust growth across our markets that was driven by a strong pent-up demand.

Although Canadian traffic remained low versus pre-pandemic levels, despite the higher fares in the U.S. traffic, this was particularly strong with European traffic has nearly recovered. We expect Canadian traffic to normalize this winter season, which would help offset any potential slowdown in the traffic; that could of course eventually arise from the still inflationary environment across the world.

Nonetheless today we are seeing healthy traffic trends supported by a strong pent-up demand. Also gratifying was our record profitability this quarter, thanks to the effective efficiency measures and expenses control that drove our cost levels well below pre-pandemic levels, offering leverage kick in the strongly on the traffic growth. I will leave there.

Operator, please open the floor for questions.

(Operator Instructions) We'll now take a question from Alejandro Zamacona with Credit Suisse.

And a quick question on the cost of services. We have seen a strong cost control even despite the drop in [amenities]. So in this context, what could we expect going forward, especially what you just mentioned concerning the high inflation environment? When we look at the cost of service, the work in the units, even excluding the [involvement] for this quarter close to about MXN 64 while in 2019 was roughly MXN 70. So just wondering if you can give us some color on what can we expect?

Yes. We have been facing very difficult times with high inflationary in all the geographies. As you can -- as you have seen, that is the case of Puerto Rico with a very strong increase in the cost side. In the Mexico side, we have been able to manage some of these increases. Of course, going forward, we will see some additional impact if these level of inflation continues. The best case in terms of control has been Colombia, where things are or have been better than expected.

And then my second question, if I may, on (inaudible) I know it's early, but I believe you will start to negotiate the project this year. So can you give any color on the expected price for this negotiation?

As you know, we are working to construct that proposal that we have to deliver by the year-end to the government. So today we cannot say anything about it yet.

Our next question comes from Lucila Gomez with Compass Group.

My question is more about the inflation effects during this quarter. And I believe that there were a contract that were going to be adjusted to inflation during this quarter. Have you faced any problem so far with the tenants?

No. If you're talking about contracts in terms of the cost side, which is not the tenant, some of them have been adjusted, and they are adjusted. Normally, we have annual contracts and when they mature. So those are adjusted with inflation. So far, we have done that as of today. So no major things are going in front.

We'll take our next question from Stephen Trent with Citi.

I have 2 for you. The first, I know that the Federal Aviation Administration did lower Mexico to Category 2 aviation safety rating. And in that regard, can you tell us whether there are any specific items that ASUR may or may not have to change or is this something that really doesn't affect you and it's all happening in the eyes of the regulator.

A year ago when this happened, if you remember, we published a 6-K, where we basically said that 0.5% of our traffic in 2019 to and from the United States was in domestic carriers. For the year 2020 it was 0.3%. Why is all of this is because what we have is destination airports, basically Cancun is a destination Airport. So the people is coming from the U.S. to Mexico. And basically they are coming in U.S. airlines. They are not coming in domestic airlines. So that is why we do not see and we do not have a major impact from this category to situation.

And as my follow-up question, we have seen in the U.S. and places like one in Heathrow, what have you, difficulties in airports and ground staff. Is it fair to say that's not the case with any of your airports, you guys feel good about your throughput of ground staff at various installations inside and outside Mexico?

Well, that's a good question. When this happened in Europe basically is because they basically fired 50% or 60% of their people and once the traffic came back again. They were not able and they have not been able to recover all the people that was fired. In our case, since day 1, we decided to not fire anyone in the company because of this COVID-19 situation. So today, we have no problems when the traffic has returned. So we are working without the difficulty that you are seeing in the case of the European airports.

We'll take our next question from Rodolfo Ramos with Bradesco BBI.

I have one follow-up to your initial remarks, and that was on the pent-up demand. Just wanted to clarify in the case of Canada and Europe, how much of the percentage is back from 2019 levels? And if you can tell us how much does it represent from the total international Mexican traffic?

In the case of the European traffic last 12 months, passenger traffic compared with last 12 months 2019. Europe is 92%. So we are below 8% of the pre-pandemic levels. In the case of Canada, it's 56%. Why Canada has not come back in that sense because normally, the Canadian traffic has a very strong seasonality, which is November through April. So if you remember the last season, the last November to April, it was lost because of Omicron. So that's why we've been saying that we will see the -- or we're expecting to see the recovery up to the winter season. So in the case of Canada, the other 44% that is pending to be recovered will be or should be recovered in the next winter season.

And just to mention and to put in perspective, this pent-up demand. How many million passengers would this represent if you are to book, to look at how much you represent?

Yes. In the case of Canadians, the maximum that they had in 2019 was 2.7 million passengers. In the case of Europe in 2019 was 2.1 million.

And just a follow-up, is that to encounter my follow-up. Just wanted to get your thoughts on the Mexico City system. We've seen a lot of news around slot restrictions and airlines trying to move to [Toluca] and Felipe Angeles, given how important it is for your system. What are your thoughts there as far as it being an opportunity or a bottleneck for developing domestic traffic?

Well, the good news there is that we have a new complimentary airport, which is the Felipe Angeles. The other good news is that some of the airlines that were extremely reluctant to operate in Toluca, there are back again. So in that sense, what we are seeing is that we have additional capacity from these 2 airports. And of course, flights there will start growing as we speak, and I'm expecting to see a very nice level of traffic in those within the next 2 years.

We'll take our next question from Anton Mortenkotter with GBM.

Also congrats on your results. I have 2 quick questions. One is related to the non-aeronautical room revenues. I just was wondering if you could provide some color regarding how is that from behaving with your tendency in the sense of how much of the revenues you're getting are come from the fixed part of your rental and how much of it is variable given that you already returned to pre-pandemic traffic levels?

In the case of the fixed and variable things, if you remember in the second quarter 2020, we saw a huge increase in the case of Colombia. That was because we should -- well, the passengers were almost 0. And we had a fixed revenue and the amount on a per passenger basis jumped up to MXN 4,600 and something. In case of Colombia is the one that has more fixed revenues per passenger. It's not the case and Mexico is not the case in Puerto Rico. So that is why you are seeing this number coming down from the 4,000 something to the 39 points something during the quarter. So the fixed amount or the fixed revenues are less important ones that traffic has come back to, the case of Colombia today is 33% more than what we had or what we saw in the case of 2019, so most of the revenues in the case of Mexico and Puerto Rico are coming from the variable side. And in the Colombia side is now -- I don't want to say level, but basically, the fixed amounts are less important than they were before during the pandemic levels.

And also, my another question is one of a follow-up from Stephen's question. As you mentioned, a lot of your traffic is serviced by international carriers. So I was wondering, through your conversations with these international carriers, what are the thoughts on increasing capacity at your airport? What are the thinking, how much fleet are they ordering or how are you seeing those dynamics?

Well, too many. It's too many airlines that are flying to Mexico from the U.S. And basically, what is driven the capacity is basically the load factor and the load factor they have. It's a very nice today. So that is why they have been increasing the seats also to Mexico. And that is why you see this increase in -- this very nice increase from the U.S. traffic.

And have they mentioned like maybe any specifics on trying to increase like 10% of capacity on Europe or something like that?

No. I don't have any specific number to share with you from the U.S.

Our next question will come from Pablo Monsivais with Barclays.

I just have a question on your outlook of the traffic on Colombia. It's being very strong over the recent quarters. In your view, what should we expect going forward?

Well, Pablo, as I said during the initial remarks, we are extremely surprised of the traffic level we have seen in Colombia, despite the fact that around 35% of this strategy is between Medellin and Bogota and this should be related to business structure. Why is these so strong several things. One is, of course, some issues in the case of Bogota. So some of the airlines have decided started to start connecting in Medellin. Secondly, the case that New Orleans have come to Medellin, and they are starting very strong. And the third probably is the effect of a country that was closed completely for 6 months. So I believe that this has created a lot of pent-up demand in the case of this country.

We'll now take our next question from [Gabriel Himelfarb with Deutsche Bank].

Just a quick question. Can you give us a bit of color on how the commercial discussions with Avianca and LATAM Airlines about the (inaudible) and what do you expect in the coming months and also about Aeromexico?

Well in the case accounting, accounts receivables, the only problem we have is the case of Interjet, that they didn't pay us around MXN 73 million, and all of these have been reserved in the previous quarters. And that is the only real problem we have. The rest of the airlines are paying basically on time. So I don't have any problem with Avianca, LATAM nor Mexico.

(Operator Instructions) We'll now take a question from Guilherme Mendes with JPMorgan.

Two questions actually. The first one in terms of capital allocation and considering your low leverage close to a net cash position. Would it make sense for you to accelerate the dividend payments going forward in addition to the one already approved it. And the second question is for a follow-up related to costs and margins. Can you explore a little bit better, what are the main cost initiatives they have been achieving and if we should continue to expect margins above the 70% levels?

Well, in terms of digital payments, we just paid a dividend at the 1st of June and this happened this quarter, it was around MXN 4.5 billion. And this was divided in 2 pieces, an ordinary dividend of MXN 903 and extraordinary of MXN 6. So we just paid dividends. Going forward, we will review as we have done over the last 20-something years every year. In terms of margins, again, I don't like to talk about margins because the cost and the revenue line dependent as we have seen during the pandemic period. So if we see high traffic, and we are able to control the cost as we have done today. Of course, margins should be expanded. That's very simple.

We'll now take a follow-up from Anton Mortenkotter with GBM.

I'm sorry, I don't know if you mentioned it in the initial remarks. It's just regarding the ARPA law. Are you expecting any more benefits going forward?

Well, there is something pending, I don't remember exactly the amount. It should not be so significant as it was in the past with the CARES Act, but not too much in front.

(Operator Instructions) And it appears there are no further telephone questions. So that concludes the question-and-answer portion of today's conference call. I would like to turn it back over to Mr. Castro for closing remarks.

Thank you, Anna, and thank you again for participating in our second quarter results conference call. On behalf of ASUR, we wish you a good day. Goodbye.

Ladies and gentlemen, that concludes ASUR's Second Quarter 2020 Results Conference Call. We would like to thank you again for your participation. You may now disconnect.