Earnings Call Transcript - ASR Q2 2025

Operator, Operator

Good day, ladies and gentlemen, and welcome to ASUR's Second Quarter 2025 Results Conference Call. My name is Christine, and I'll be your operator. As a reminder, today's call is being recorded. Now I'd like to turn this call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir.

Adolfo Castro Rivas, Chief Executive Officer

Thank you, Christine, and good morning, everyone. Before I begin discussing our results, let me remind you that certain statements made during the call today 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. Additional details about our second quarter 2025 results can be found in our press release, which was issued yesterday after market close and is available on our website in the Investor Relations section. Following my presentation, I will be available for Q&A. As usual, all comparisons discussed on this call will be year-on-year figures and are expressed in Mexican pesos, unless specified otherwise. During the second quarter, we served 17.7 million passengers across all airports we operate with traffic remaining largely flat year-on-year. Once again, better performance in Colombia and Puerto Rico offset softness in Mexico. Puerto Rico was the best performing market this quarter, posting 3% growth in passenger traffic, supported by domestic traffic and sustained strength in international traffic. In Colombia, traffic was up 1% with international travel up 12% and domestic contracting a low single digit. Lastly, Mexico reported a decline of nearly 2% in total traffic with an increase of 1.2% in domestic, offset by a decrease of 4.5% in international travel. International travel in Mexico continued to experience year-on-year declines from all regions during the quarter. Passenger volumes from Europe were down 4.7% from the U.S., 5.3%; South America, 2.7% and Canada, 1.6%. A meaningful portion of this decline, approximately 38% is attributable to the ramp-up of the new airport in Tulum, which continues to draw some passenger growth previously concentrated in Cancun. Beyond this shift, we believe the broader softness in international traffic reflects broader market dynamics, including a more cautious demand environment across several sorts of markets. While the underlying drivers vary, some of these pressures are also evident in other international markets as well. Looking ahead, we expect traffic in Mexico to gradually stabilize over the course of next year as the effects of the engine-related aircraft problems appear to have bottomed out and Tulum airport reaches a more normalized level of operations. With respect to the potential U.S. Department of Transportation restrictions on Mexican carriers, ASUR does not expect a material impact on our operations from these measures as our exposure to the affected airlines is minimal. To put this in context, Aeromexico accounted for just 0.3% of total passengers traveling between our airports and the U.S. while Viva Aerobus and Volaris together represented approximately 1.3%. As I've noted in prior calls, we see long-term growth potential for both Cancun and Tulum, each driven by the specific demand dynamics of their respective catchment area. While the broader macro environment remains uncertain, history has shown that travel-related disruptions, particularly those tied to U.S. and Mexico demand, tend to be temporary in nature. Now turning to a review of our financial performance. Recall that all references to revenue and gross figures exclude construction. Total revenues increased 5% year-on-year to MXN 7.4 billion, reflecting top line growth across operations, particularly in Puerto Rico and Colombia. Mexico, which accounted for 72% of total revenues, posted a low single-digit increase of 0.7% with relatively low growth in aeronautical and non-aeronautical revenues. Puerto Rico contributed 17.7% of the total revenues with top line growth in the high teens. This compared to growth in the high 20s in the prior quarter that was supported by the foreign exchange rate benefit resulting from a weaker peso. Colombia, which accounted for 12% of the total revenues, posted a 15.4% top line growth. This accelerated from growth in the low 30s achieved in prior quarters. This was driven by both aeronautical and non-aeronautical revenues, which benefited from the continued recovery in domestic traffic and international traffic and the opening of 35 new commercial spaces over the past 12 months, partially offset by a strong Mexican peso. As part of our ongoing strategy to enhance our commercial offerings, we opened 47 new commercial spaces over the last 12 months. As I said, 35 in Colombia, 7 in Mexico, 5 in Puerto Rico. This expansion supported high single-digit growth in total commercial revenues, driven by strong performance in Colombia and Puerto Rico and a modest increase in Mexico. On a per passenger basis, commercial revenue reached nearly MXN 140 in the quarter, representing mid-single-digit year-on-year growth with contributions from all three regions. Colombia led with a 22% increase, followed by a 12% gain in Puerto Rico, both achieved despite less favorable exchange rates. In Mexico, commercial revenue per passenger rose nearly 3% to MXN 159 even as passenger traffic softened. Moving on to costs. Total expenses increased nearly 10% year-on-year. This accelerated from the 18% growth we saw in the prior quarter. In Mexico, costs rose 7%, primarily reflecting the 12% increase in minimum wage effective at the start of the year. In both Puerto Rico and Colombia, costs increased in low teens, benefiting from the depreciation of the Mexican peso against the U.S. dollar and the Colombian peso. As a result, consolidated EBITDA rose slightly 2% year-over-year, reaching MXN 5 million in the quarter. Notably, Puerto Rico and Colombia posted double-digit EBITDA growth of 20% and 15%, respectively, while Mexico saw a 1.6% decrease in EBITDA, in line with passenger traffic, the negative impact of the strong peso, and the higher costs I just explained. The adjusted EBITDA margin, which excludes construction revenue, stood at nearly 68% compared with 69% in the same quarter last year. The slight margin contraction was mainly attributable to a 170 basis points decline in Mexico while Colombia posted a 20 basis point decrease. Puerto Rico, on the other hand, delivered a 120 basis point margin improvement in adjusted EBITDA margin. Our bottom line this quarter was negatively impacted by a foreign exchange loss of MXN 1,200 million driven by the appreciation of the Mexican peso against the U.S. dollar. This compares to a foreign exchange gain of MXN 942 million in the same quarter last year, which reflected the opposite effect driven by the depreciation of the peso during the period. Moving on to our balance sheet, we maintained a strong cash position, closing the quarter with nearly MXN 20 billion in cash and cash equivalents, up 32% year-on-year. Net debt-to-EBITDA ratio increased slightly to 0.1x, reflecting the drawdown of a loan facility in Mexico for MXN 9.5 billion in the quarter. Turning to capital allocation, reflecting our solid financial position. In May, we paid a MXN 50 per share cash dividend, funded from accumulated retained earnings. In addition, we will be paying two extraordinary dividends of MXN 15 per share, each in September and another one in November. Capital expenditures in the quarter totaled MXN 1.4 billion, with most of this investment directed towards modernization and expansion projects at our Mexican airports. This includes the ongoing reconstruction and expansion of Terminal 1 at Cancun Airport and the terminal expansion at Puerto Rico Airport. All construction activities continue to take place outside operational areas to ensure no disruption to airport operations. Lastly, on the governance front, during the quarter, Mrs. Isabel Prieto was appointed to our Board of Directors as an independent member following the resignation of Mr. Ricardo Guajardo Touché, with 57% of our Board comprised of independent directors and female representation increasing to 36%. We thank Mr. Guajardo Touché for his valuable contribution and years of service on the Board. Mrs. Prieto brings a wealth of experience in both the public and private sectors, beginning her career in financial services. To close, our second quarter performance underscores the resilience of our diversified portfolio and our sustained focus on efficiency improvements. We continue investing in infrastructure, elevating the passenger experience, and delivering sustainable long-term growth. We also remain attentive to evolving global macroeconomic conditions and believe our healthy financial position will help to mitigate potential risk. This concludes my prepared remarks. Christine, please open the floor for questions.

Operator, Operator

Our first question comes from Jens Spiess with Morgan Stanley.

Jens Spiess, Analyst

I have basically two questions. One is regarding non-aero revenues. I was wondering what drove the sequential decline in non-aero revenues. Was it the mix of the type of passengers or is anything else explaining it? And secondly, I mean, you already mentioned the DOT situation with the U.S. not impacting you. But I was thinking that maybe one outcome might be that the capacity restrictions in Mexico City might be lifted, which would end up benefiting potentially the passenger traffic in the system as a whole. In case that materializes, how much of a positive impact would you expect?

Adolfo Castro Rivas, Chief Executive Officer

Thank you, Jens. Well, in the case of non-aeronautical revenues, of course, the exchange rate played an important role during the quarter. Now I would say, of course, a slight difference in the passenger mix, international versus domestic, and also in the case of domestic, the situation that we have in Terminal 2. In terms of your second question, I don't know if you saw 30 days ago that the Mexican government decided to ease the restrictions they have in Mexico City Airport from 43 to 44. This announcement explained that they have made an analysis of the airspace in Mexico City and also an analysis on traffic, and that's why they decided to increase that from 42 to 43. One additional operation in Mexico City Airport reflects more or less 1 million passenger traffic in that airport. I was expecting this restriction to be lifted towards the end of the year. I have my serious doubts that this will happen after what we saw in this announcement. Of course, the situation of the DOT came later, and I believe the Mexican government will have to review the situation and see what they are going to say after what the DOT has expressed. As I said, the situation between the traffic to and from the U.S. from our airports is basically managed by U.S. airlines. As I said, Aeromexico 0.3%. In the case of Viva and Volaris together, 1.3%. So it's 1.8%, 1.6% of the total traffic between these two countries. So I do not expect any major implication of this in our case. Of course, as a result of this, the government decided to increase the operations in Mexico City, that will be beneficial to us.

Operator, Operator

Our next question comes from the line of Stephen Trent with Citi.

Stephen Trent, Analyst

The first, just quickly on Tulum. Is it still the case that charter traffic is the primary piece of the pie that's leaving Cancun and shifting to Tulum? Or are you seeing a little bit more of a tilt in commercial?

Adolfo Castro Rivas, Chief Executive Officer

Hello? Yes, Adolfo, can you hear me? Yes. But could you repeat your question because you were not...

Stephen Trent, Analyst

Sure, sure. No problem. Yes, I was just curious in terms of what you're seeing in Tulum Airport and the traffic impact to Cancun. Am I thinking about this correctly? It's still primarily charter traffic that's going there? Or are you seeing a little more of a shift of commercial traffic there, too?

Adolfo Castro Rivas, Chief Executive Officer

Well, of course, you can find some charter flights there. But basically, I would say most of these are commercial flights coming from the U.S. A small piece is coming from Mexico, but the most important region in that sense is the U.S.

Stephen Trent, Analyst

Got it. I appreciate that. And just a very quick question on the balance sheet. I saw there was a MXN 1.5 billion investment in financial instruments in 1Q that is no longer there in 2Q. I was just curious what was the rationale behind the shift?

Adolfo Castro Rivas, Chief Executive Officer

The rationale is the huge amount of cash we have in the bank in investments. So we decided to invest a piece of that in a fund instead of the usual instruments we have been using just to try to get some more return for that amount of money.

Operator, Operator

Our next question comes from the line of Guilherme Mendes with JPMorgan.

Guilherme G. Mendes, Analyst

The first question is a follow-up on the traffic outlook. You mentioned at the beginning that you expect some normalization on Mexican traffic into next year. Just trying to understand what this means for the second half of this year? I understand that the base of comparison is relatively easier. So is it fair to assume that we could expect some kind of traffic growth, let's say, mid-single digits on Mexican traffic into the second half of '25 when compared to the second half of '24? And the second question is on the FX impact. You mentioned the negative impact on aeronautical revenues. Can you clarify what is the actual impact on commercial revenues during the quarter?

Adolfo Castro Rivas, Chief Executive Officer

Yes. The domestic traffic, as reflected in the numbers for the quarter, is no longer declining and has experienced a slight increase. This improvement is largely attributed to the Pratt & Whitney engine issue reaching its lowest point. Volaris reported yesterday that they have six aircraft grounded due to this same issue, which mirrors the figure from the first quarter. This indicates we are at the bottom of the curve. Based on the current numbers, we should expect an uptick in domestic traffic moving forward, which I believe is crucial. The situation in Mexico City also contributes positively to this. Additionally, there was a minor increase in the capacity restriction from 42 to 43, suggesting that conditions should continue to improve. Regarding the foreign exchange impact on commercial revenues, it reflects the fluctuations in exchange rates as well as duty-free factors. Lastly, the conditions at Terminal 2 have contributed to the lower non-aeronautical revenues in the second quarter compared to the first quarter of this year.

Guilherme G. Mendes, Analyst

Maybe put in a different way, do you have high-level numbers on what is the USD exposure you have on your commercial activity?

Adolfo Castro Rivas, Chief Executive Officer

It's not that easy because, of course, the only one related to U.S. dollars is duty-free. The other expenses in terms of food and beverage prices are in pesos, but that doesn't mean that the people will spend more if the Mexican peso depreciates, which is not the case in the stores. In the stores, again, the prices are in pesos. But people tend to spend more if the Mexican peso depreciates.

Operator, Operator

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

Pablo Monsivais Mendoza, Analyst

A follow-up on the commercial revenues question. What should we expect for the next two quarters with the situation you're describing on Terminal 2? Should we expect a couple of quarters of still soft commercial revenue activity? And my second question is, what percentage of the rents that you have in your tenants at Cancun are in U.S. dollars?

Adolfo Castro Rivas, Chief Executive Officer

In the case of Terminal 2, we should expect that for the next four quarters. It will be up to the third quarter next year when we will be able to open the new reconstruction and expanded Terminal 1, which should alleviate the situation in Terminal 2 significantly. My pricing, or the way that we charge in the commercial revenues, is basically a minimum guaranteed payment per passenger and a percentage of the sales. Normally, what they pay us is a percentage of the sales. As I said before, if their sales are in pesos, this is basically in pesos. It's not the currency that explains the passenger spending behavior. In the past, I used to say, what Russian is to U.S. clients in the duty-free. It has to do with packaging, not with what is there.

Operator, Operator

Our next question comes from the line of Pablo Ricalde with Itaú Asset Management.

Pablo Ricalde Martinez, Analyst

I have two questions. The first one is on the Mexico profitability or EBITDA margin. Can you explain a little bit further what happened on the cost line? You mentioned we saw an increase in labor cost and utilities. But just wondering if maybe you registered a provision or something, and that's why expenses grew that much and profitability declined that much? And how should we think of profitability in Mexico going forward? And my second question is on your balance sheet and your cash on balance. If I'm mistaken, 60% of your cash is in USD. I just want to double-check that number.

Adolfo Castro Rivas, Chief Executive Officer

Yes, Pablo. In the case of the margin, normally, I don't like to talk about margins because revenues and expenses are basically independent. The expenses side grew by 7%, primarily because of the minimum wage increase of 12% effective at the start of the year. It was less than what we had in the first quarter. We had to take some actions due to the situation of the weak traffic. The combination of both is what you are seeing: a decrease in the margin. That is something that we need to see on an independent basis. Regarding your question about the balance sheet, what was your question?

Pablo Ricalde Martinez, Analyst

Like what percentage of your cash is in USD? Trying to understand what the FX loss on your P&L was. If I'm not mistaken, around 60% of your cash is in USD.

Adolfo Castro Rivas, Chief Executive Officer

Yes. In the case of Mexico, at the end of the quarter, we had $700 million in dollars.

Operator, Operator

Our next question comes from the line of Fernanda Recchia with BTG Pactual.

Fernanda Recchia, Analyst

Two here from our side as well. The first on the dividend policy going forward: we saw that despite the payment of the first tranche, your leverage is at a pretty comfortable level. Just wondering what we can think about next year onwards if we could expect a similar good dividend payment like we saw in 2025? And second, still a follow-up on Tulum. If you could elaborate a little further, when do you expect this airport to reach full capacity? And when do you expect it to stop hurting Cancun's figures?

Adolfo Castro Rivas, Chief Executive Officer

Thank you, Fernanda. Well, regarding figures for next year, let's try to conclude this year first. Now we have another payment in September and another one in November, and then we will have to evaluate the situation for the year and the results of operations. Then next year, we will propose something to the Board and then to the shareholders' assembly. In the case of Tulum Airport, over the last 12 months, Tulum Airport reached around 1.5 million passengers. If we look at the last 12 months ending December last year, it was 1.2 million. So there was an increase of 300,000 passengers during the first half of the year. I was expecting a better ramp-up; if you go back to my first conference call of the year, I was expecting 2.9 million for this airport, but recent news basically showing cancellations of some routes, indicating that this airport will not reach what I expected at the beginning of the year. This airport should ideally handle 2.9 million, considering its location. So, going back to your question, when we will not be affected by this is once the airport reaches that 2.9 million. In the meantime, we will have to continue discussing the ramp-up of Tulum.

Operator, Operator

Our next question comes from the line of Andres Aguirre with GBM.

Andres Aguirre, Analyst

I was wondering if you could share the rationale behind the new debt. Given your current high cash balance, how are you thinking about deployment going forward and possibilities for further leverage for CapEx?

Adolfo Castro Rivas, Chief Executive Officer

Hi, Andres. Well, the net debt has to do with taxes, expenses in Cancun Airport. We thought that it was important for us to maintain some cash on hand for the future, given the fact that the proposed dividend for this year is a total of MXN 24 billion. So it was important to ensure that we were able to fund that situation.

Operator, Operator

Our next question comes from the line of Abraham Fuentes with Banco Santander.

Abraham Fuentes Salinas, Analyst

We have seen a drop in the number of tourists visiting the U.S. Do you think that Mexico could capture any of those passengers? If that is the case, when do you think we can begin to see its effect in terms of traffic?

Adolfo Castro Rivas, Chief Executive Officer

This is true. There is a decline from all regions to the U.S. in terms of tourism. We have approached some Canadian airlines and discussed the situation. Basically, what they're saying is that they will evaluate the situation towards the end of the year. If this continues, they will likely jump into our region. For the moment, they have expressed that they do not want to lose their slots in their most important airports in the U.S. Basically, I do believe that next year we will see some positive effects from this, particularly from Canada and from Europe.

Operator, Operator

Our next question comes from the line of Enrique Segura with Fundamenta Capital.

Unidentified Analyst, Analyst

I wanted to quickly dive into international traffic dynamics in Mexico. More specifically, during this first half of the year, we have seen international traffic fall 7.5% in the first Q and 4% in the second Q. I know this has been happening basically with Tulum not ramping up. How do you expect international traffic to continue in the second half of this year? And should we expect Tulum to ramp up in 2026 and hinder growth next year?

Adolfo Castro Rivas, Chief Executive Officer

As I mentioned earlier, 38% of the decline in international traffic this quarter is due to Tulum Airport. The remainder is linked to a weaker market across all regions, with negative trends in Canada, the U.S., Europe, and South America. Future expectations will depend on regional economics, macroeconomic factors, and U.S. migration policies, as well as visa issues affecting Brazil, Peru, and Colombia in South America. The Mexican government has analyzed these factors. Considering the potential gains from the World Cup in Mexico next year, they will likely need to take action.

Unidentified Analyst, Analyst

Great. Just a quick follow-up, if I may. Regarding domestic passengers, we should not continue to see it fall, but do you expect a strong rebound? Do you see that when talking to Volaris and Viva Aerobus? Or do you think it will be a more gradual change?

Adolfo Castro Rivas, Chief Executive Officer

What I do expect is a better performance. So I do not expect any more decreases in domestic traffic and a slight growth for the rest of the year.

Operator, Operator

Our next question comes from the line of Alberto Velez with UBS.

Unidentified Analyst, Analyst

One remaining question from our side here: it's about CapEx. How should we expect the pace of CapEx deployment for the next quarter? This quarter came in a little bit below what consensus and us were expecting. So how should we see the deployment of CapEx in the following quarters?

Adolfo Castro Rivas, Chief Executive Officer

You're welcome. Well, I have to say that in the case of CapEx, we are above our internal budget for the first half of the year, slightly above. What do we expect for the end of the year to comply with what we have, they are written in our MVP, roughly speaking, MXN 7 billion. Remember that most of this is spent towards the full quarter.

Operator, Operator

Our next question comes from the line of Alan Macias with Bank of America.

Alan Macias, Analyst

Just if you can give us some color on what's happening or what are the drivers for international traffic in Puerto Rico and Colombia. They're growing double-digit levels. Is this sustainable for the second half of this year?

Adolfo Castro Rivas, Chief Executive Officer

You're welcome. Well, in the case of Puerto Rico, this has to do with what's happening there with concerts and everything related to music. Puerto Rico is really benefiting from that and some international traffic is taking the opportunity to go there because of that. In the case of Colombia, basically, it’s the U.S....

Operator, Operator

Mr. Castro, are you still connected?

Adolfo Castro Rivas, Chief Executive Officer

I'm connected, yes.

Alan Macias, Analyst

Yes.

Operator, Operator

Our next question comes from the line of Federico Galassi with TRG.

Federico Galassi, Analyst

Quick question regarding Chilean operations. I can see a jump in the cost of services in terms of revenues year-over-year. The question is, is there any one-off or is this the level we should expect for Mexican operations in the near future?

Adolfo Castro Rivas, Chief Executive Officer

This is what you should expect for the coming quarters, yes.

Operator, Operator

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.

Adolfo Castro Rivas, Chief Executive Officer

Thank you, Christine, and thank you all again for joining us today for our second quarter 2025 conference call. We wish you a good day and goodbye.

Operator, Operator

Ladies and gentlemen, that concludes ASUR's Second Quarter 2025 Results Conference Call. We would like to thank you again for your participation. You may now disconnect.