Earnings Call Transcript - ASR Q4 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to ASUR’s Fourth Quarter 2023 Results Conference Call. My name is Doug, and I will be your operator. At this time, all participants are in a listen-only mode. 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.

Adolfo Castro, CEO

Thank you, Doug, and good morning, everyone. Before I begin discussing our results, let me remind you that certain statements made during this call may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to several risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company's control. As usual, additional details about our quarterly results can be found in our press release, which was issued yesterday after market closed and is available on our website in the Investor Relations sector. Following my presentation, I will be available for Q&A. Before getting into a discussion of the quarterly results, let me start today's call with a recap of the recent developments. A significant milestone for the quarter was the December 2023 approval of the 2024-2028 master development plan for our Mexican Airports. This approval occurred under the government's new regulations and an increase of the concession fee to 9% from the 5% of total gross revenues starting from January 3 of this year. Some key highlights of the new MDP include the efficiency factor used to annually adjust the maximum tariffs, which increased from 0.7% to 0.8% in the prior MDP. The methodology to calculate the discount rate is now based on the weighted average cost of capital compared to the cost of equity before. The new MDP for 2024-2028 also calls for a total CapEx commitment of MXN 28.5 billion measured in December 2022 tariffs for the five-year period. Of this five-year CapEx, 75% equivalent to MXN 21 billion or approximately $1.4 billion, will be invested at Cancun Airport, 70% of which will be allocated to expansion works. Key projects include the second phase of the expansion of the International Terminal 4, which includes an additional four boarding gates that have been delayed due to the pandemic, and a new road connecting the terminals to the major trains. We also plan to rebuild and expand Terminal 1 as well as to expand airport roads. These investments support a new growth phase for Cancun in the years ahead. The remaining 25% will be allocated across our eight smaller airports in Mexico, with approximately 7% allocated to Oaxaca, where we plan to reconstruct and expand the terminal building, along with minor terminal expansions at four of the other airports. For 2024, we plan to invest a total of MXN 3.5 billion, 73% of which will be invested in Cancun. Also, note that the new MDP rebalances the impact of the recent opening of the Tulum Airport. We ended the year with a 98.2% maximum tariff compliance, which includes the effect of the 10% passenger fee discount granted during November and December as a result of the agreement reached with the Mexican government. During the quarter, we concluded negotiations with our strategic partner, ITA. Starting January 2024, the technical assistance fee has been reduced to 2.5% from 5% of the EBITDA generated by Mexican operations. On December 21 of last year, the Supreme Court of Justice rejected the appeal filed by the Airport International Bavaro against a judgment that suspended the permit to start construction previously issued by the Civil Aviation Institute. More recently, on January 5, the president of the Dominican Republic issued a decree canceling the previous decree issued by the previous President, which had approved the establishment of Bavaro International Airport. On January 19, an appeal for consideration review was brought before the Constitutional Court against the Supreme Court of Justice, notified in December last year. On the sustainability front, during the fourth quarter, we completed the installation of solar panels in the airports of Tapachula and Huatulco. We will generate a combined output of 1.5 million kilowatt hours in the first year of operation. This is in addition to the solar panel projects already completed in the airports of Cancun, Medellin, and Oaxaca. We generated a total of nearly 632,000 kilowatt hours of solar energy during the fourth quarter. As part of our continued sustainability efforts, our airports in Mexico renewed their certification at Level 2 under the Airport Carbon Accreditation program. This program is organized by the Airport Council International to provide a framework for measuring, reducing, and compensating carbon emissions. Also in the fourth quarter, we became signatories of the science-based targets initiative, with the goal of creating a roadmap to achieve zero emissions by 2050. Among the community projects ASUR involved in, we provided support to promote ecological tourism activities in the Mayan-speaking rural communities in the northern region of the state of Yucatan. Locals are provided with training and equipment to supplement their income from traditional fishing activities. By the close of 2023, 49 tourist sites with approximately 100 economic dependents were provided with training, and we intend to scale up these activities to additional communities in 2024. We plan to publish our 2023 Annual Sustainability Report next month and encourage you to read it. Let's review ASUR's operational and financial performance for the quarter. As usual, all comparisons discussed will be year-on-year unless specified otherwise.

Operator, Operator

Mr. Castro, are you there? One moment, ladies and gentlemen. It appears that we have lost Mr. Castro. I'm going to try and reconnect.

Adolfo Castro, CEO

Thank you, Doug. Let's review ASUR's operational and financial performance for the quarter. As usual, all comparisons this quarter will be year-on-year unless specified otherwise. Starting with traffic, we saw nearly 18 million passengers travel across our airport network, the highest level for a fourth quarter. Even with this growth rate, it accelerated to 1%. This brought total traffic for the year to a record high of over 70 million passengers, with an annual increase of 10% in Mexico, 18% in Puerto Rico, and partially offset by a decline of nearly 10% in Colombia. Looking at the quarterly performance by region, Puerto Rico delivered the strongest growth, with traffic up nearly 13%, driven by solid performances in both domestic and international traffic. In Mexico, traffic increased 4% supported by low single-digit growth in domestic and international passengers. Traffic driven from the United States and Canada remains the key growth engine, while domestic traffic is experiencing the initial effects of Pratt & Whitney engine problems. Also, note that starting January 8, the Mexico City airport reduced its air traffic movements per hour to 43 from 52. This airport accounted for 45% of the domestic passenger traffic in 2023, and this is also expected to negatively impact domestic traffic this year. Additionally, the strength of the Mexican peso has been impacting the results for the quarter. Lastly, Colombia posted a 13% decline in traffic, and domestic travel remained impacted by the suspension of two local airlines in February of last year, partially offset by a 2% increase in international travel. Recall that these two airlines accounted for 20% of all traffic in Colombia in 2022. Avianca and Latam Airlines have been absorbing some of that traffic, and starting this March, we expect to start seeing a recovery in traffic growth in Colombia. Now turning to the P&L. As a reminder, all references to revenues and costs exclude construction and cost revenues. Total revenues increased nearly 5% to just over MXN 6 billion in the fourth quarter, as growth in Mexico and Colombia was partially offset by weaker performance in Puerto Rico due to the exchange rate. Mexico, which accounted for 74% of revenues, posted a 6% increase in the top line, driven by need to high single-digit growth, with aeronautical services up 5% and non-aeronautical services increasing 7%, mainly reflecting higher passenger traffic. Puerto Rico, which accounted for 14% of total revenues, reported a 1% decline in revenues mainly due to the 4% decrease in aeronautical revenues, partially offset by a 2% increase in commercial revenues. Lastly, Colombia, which represented 11% of revenues, posted a mid-single-digit top line increase, supported by a growth of 3% in aeronautical revenues and 8% in non-aeronautical services, reflecting our sustained focus on expanding our commercial offering across our airport network. Commercial revenues were up 70%, above the 1% increase in passenger traffic, driven by the high single-digit increases in Mexico and Colombia, both up 8%, together with a 3% growth in Puerto Rico. On a per passenger basis, commercial revenues reached MXN 119, up 6% on a consolidated basis, and for the country in Mexico and Colombia, commercial revenues per passenger increased 4% and 20% respectively, while Puerto Rico decreased nearly 9%. In local currency, Puerto Rico and Colombia posted increases in commercial revenues of 15.2% and 1.2% and in commercial revenues per passenger of approximately 2.4% and 19.1% respectively. These increases partially reflect our initiatives to continue enhancing the passenger travel experience. These include the opening of 65 new commercial spaces across our airport network during the last 12 months. Of these, 17 were opened in Mexico, 4 in Puerto Rico, and 44 in Colombia. Comparable consolidated EBITDA, excluding other non-recurring income in the year-ago quarter, increased 1% to MXN 4.1 billion. Recall that the fourth quarter 2022 results included a one-time income of MXN 300 million in Puerto Rico in connection with a federal judgment regarding the right to charge a fee for each gallon of aviation fuel dispatched at the airport between 2013 and 2021. Mexico remains the main driver of profitability, with EBITDA up 5%, followed by Puerto Rico with a 1% comparable increase. By contrast, Colombia posted a 23% drop in EBITDA, impacted by disrupted passenger traffic. In turn, the comparable adjusted EBITDA margin, which excludes construction as well as the other non-recurring income from the fourth quarter 2022, was nearly 68% versus a comparable margin of 70% in the fourth quarter 2022. Lastly, moving on to the balance sheet, we closed the year with a strong cash position of nearly MXN 16 billion and a negative leverage ratio of 0.2x. Wrapping up, we'll finish 2023 on a very solid note, which we believe puts us on a solid path going into 2024 and 2025. Our long-term opportunities are supported by our ongoing investments to further enhance the travel experience of passengers traveling to our airports, continue to expand our commercial offerings and extend capacity to support future growth, while maintaining a balanced use of cash. This ends my presentation. Doug, please open the floor for questions.

Operator, Operator

Our first question comes from Juan Ponce with Bradesco BBI.

Juan Ponce, Analyst

I have two questions, one regarding traffic and the other about expenses. First, how much of an impact is the Pratt & Whitney inspection schedule having on domestic traffic? Volaris has mentioned they secured additional capacity to offset this impact. What are you observing on the ground? If possible, could you quantify the effect on domestic traffic in Mexico? My second question pertains to operating expenses, which rose more than anticipated this quarter. Can you provide more insight into where you see the margins for this year?

Adolfo Castro, CEO

Well in the case of Pratt & Whitney, as I said in the initial remarks, we are seeing weaker passenger traffic on the domestic side. How can we measure this? It's very clear when we see upward seats and when we see the increase in the load factor. It's very clear for me that Volaris has increased their load factor and they also have increased their rates. And of course, this is creating a lesser number of passengers in the case of domestic traffic. That is not the case of Viva. So in the case of Viva, they were able to increase the average seats and also the increase of passenger traffic, but they were not able to offset the decrease from Volaris. The other thing that is extremely important from now on from January 8 is what I just mentioned, in the case of Mexico City. The case of Mexico City reducing their air traffic limits per hour from 52 to 43. And of course, that is also having an impact on our passenger traffic. I believe these two factors will be seen during the first quarter of this year. In terms of expenses, the main increase in expenses was coming from Colombia. That increase was due to raising salaries. We adjusted salaries, things we had not been doing or that we paused due to the pandemic situation. So that is why the increase in Colombia is so strong. But of course, together with the decrease in passenger traffic, the results in Colombia don't look good, but I hope that this year, with the end of the situation with the two airlines, starting in March, we will see a different situation.

Operator, Operator

Our next question comes from the line of Pablo Monsivais with Barclays.

Pablo Monsivais, Analyst

I have two on my side. The first one is if you can provide the amounts on each project that you have in Cancun and the Terminal 1 and the additional gates? And also my second question, I heard you say something about the Dominican Republic, but if you can tell us again what's the update there?

Adolfo Castro, CEO

Well, in the case of the projects, as I said, MXN 21 billion is allocated to Cancun and 70% of that is for expansion projects. Those expansion projects include the site of Terminal 4, which will add the four additional gates that were not completed due to COVID. If you go back to March 2021, the delayed CapEx or the performed CapEx was nearly MXN 2 billion. Additionally, in Cancun, we plan to reconstruct and expand Terminal 1. Those are the three major projects in terms of terminal expansions, plus the additional connection to the major train and the roads to the airport. In the case of the airports in the Dominican Republic, there was a legal process that halted the beginning of construction. That was confirmed on December 16 last year. Also, on top of that, the President issued a decree canceling the previous decree issued by the former President authorizing the airport. We have presented legal recourses for both matters, and we will have to wait and see what happens with these legal processes. It's clear to me that the project has been put on hold at least for the next 12 months.

Operator, Operator

Our next question comes from the line of Anton Mortenkotter with GBM.

Anton Mortenkotter, Analyst

Congrats on your results. I just have a quick one. Any thoughts about capital allocation, maybe an extraordinary dividend or some buybacks now, also considering the potential savings from the reduction in the technical assistance?

Adolfo Castro, CEO

Well, it's two different things. One is the case of capital allocation. We will review this once we have completed the year and we will review the results and the current situation, the future CapEx, and all of that, and we will make our proposal to the Board of Directors that will meet the first week of March, and then to the shareholders assembly. The case of the technical assistance fee was in accordance with what we received from the Mexican government during the negotiation process. So basically, we were able to negotiate with ITA the adjustment in the fee to a 50% reduction.

Anton Mortenkotter, Analyst

Sorry, just to know, see if I hear you right. So the reduction in the technical assistance fee was something that was also discussed with the Mexican authorities and incorporated in the MDP?

Adolfo Castro, CEO

Well, the Mexican authorities in their new rules have reflected that adoption in the recognition of the technical assistance, and that is why we have to negotiate with ITA.

Operator, Operator

Our next question comes from the line of Andressa Varotto with UBS.

Andressa Varotto, Analyst

I have two questions on my side. The first one is on how is the implementation of the new maximum tariff going so far? If you can provide maybe a timeline that you are expecting to reach the maximum tariff. And I have one question on Colombia, where we saw a passenger drop but an expansion in both aeronautical tariffs and non-aeronautical revenue per passenger. So, just wanted to know, what is driving that and also if the strong cost expansion in Colombia in the quarter, if it includes any non-recurring events?

Adolfo Castro, CEO

Okay. In the case of the new maximum rate increases that we saw from the MDP, we have already started the process for that. It will take more or less four months, so I do believe that from the month of April, the new increase in tariffs will go into effect. During the first quarter, you will see no increases, and the increases will come as of April. In the case of Colombia, no, we do not have any non-recurring items. It's important to view Colombian numbers in Colombian pesos, and that way, you will better understand the situation there. During the quarter, the Colombian peso appreciated against the Mexican peso, and this was the first quarter over the last couple of years. So, if we see what's happening there in Colombian pesos, let me go into the case of the passenger. The commercial revenue per passenger, as I said before, in Colombian pesos, the increase was significant during the quarter. Therefore, I recommend making the analysis on a comparable basis, excluding the FX.

Operator, Operator

Our next question comes from the line of Isabela Salazar with GBM.

Isabela Salazar, Analyst

Regarding the technical assistance fee reduction, I understand that this is a very positive action. However, I was wondering if you could provide us with more color behind the rationale for the reduction. Because I would like to understand if it will result in some costs moving to the upward level or if it will be a direct saving.

Adolfo Castro, CEO

First, it depends on how you measure this. If you see the new maximum rates, well, those are the ones that will be in place from this year. If your forecast was considering for this year 5%, then you can place a 2.5% instead of the 5%, and then it will be a reduction or a saving for you.

Operator, Operator

Our next question comes from the line of Gabriel Himelfarb with Scotiabank.

Gabriel Himelfarb, Analyst

Just a quick question about the dividend policy. Are you planning to propose a higher dividend or keep the dividend stable? I know it's up to the Board, but what's the strategy the company is seeking for the dividend for this year?

Adolfo Castro, CEO

Well, you know that we do not have a written dividend policy. We review that every single year. Once I finish with you, I will start referring that proposal for the Board and then to the shareholders assembly, as I said before. Our next Board of Directors meeting will be the first week of March. So, I believe that the first week of March you will figure out what I have proposed and what they have accepted.

Operator, Operator

Our next question comes from Jay Singh with Citibank.

Jay Singh, Analyst

I'm just Jay Singh calling in from Stephen Trent's Group. I just want to ask two questions on my end. First one is, what are you seeing on tourism bookings to southeastern Mexico? And my other one is, should the authorities block the airport project in the DR? Would ASUR be looking at any other overseas investments? And what seems to be going wrong with the process right now?

Adolfo Castro, CEO

Could you repeat your second question?

Jay Singh, Analyst

Sure. So, should the deal or the airport project in the DR get blocked? Would ASUR be considering any other overseas investments? And if so, what seems to be going wrong with the process right now with the Dominican Republic?

Adolfo Castro, CEO

Let me first address the bookings. In the case of bookings, as I mentioned in my initial remarks, we are seeing very good bookings coming from the U.S. and Canada. It's not the same for domestic bookings, given the issues we are facing with the government with respect to the Mexico City Airport. Just to illustrate, during January, we lost around 100,000 in terms of domestic traffic to and from Mexico City. That will have an impact. These 100,000 are not willing to go to Santa Lucia. Yes, Santa Lucia is growing, but it is not absorbing all of these passengers. In the case of the Dominican Republic, as I mentioned before, until we receive the final rulings on these legal procedures we have there, we will not be able to start the construction of the airport. My expectation is that all of these will take at least the whole year.

Operator, Operator

There are no further questions in the queue. I'd like to hand the call back to Mr. Castro for closing remarks.

Adolfo Castro, CEO

Thank you, Doug, and thank you all of you again for joining us today in this fourth quarter 2023 conference call. On behalf of ASUR, we wish you a good day and goodbye. Now you may disconnect.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.