Earnings Call Transcript - ASR Q4 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to ASUR's Fourth Quarter 2022 Results Conference Call. My name is Colin, and I'll be your conference operator. At this time, I'd like to welcome all participants. All participants are in listen-only mode, and we'll conduct a question-and-answer session towards the end of today's conference. As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead.

Adolfo Castro, CEO

Thank you, Colin, 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's 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 close and is available on our website in the Investor Relations section. Following my presentation, I will be available for Q&A. Now on to the results. We closed the year with another strong quarter, reporting record high passenger traffic revenues and EBITDA. We are pleased to continue witnessing an uptick in passenger flying. Travel demand remained strong with a record of 17.6 million passengers taking to the skies and passing through our airports, an 8% year-on-year increase and nearly 26% higher when we compare with the fourth quarter of 2019. For the full year, a total of 66.3 million passengers traveled through our airports. Our three geographies contributed to this solid performance. Now, taking a look at performance by country of operations compared against the fourth quarter of 2019. Colombia again posted the strongest recovery, maintaining a steady 37% increase in traffic with domestic travel expanding in the low 30s and international travel in the high 60s. On a cautious note, we do not expect this strong level to continue over the coming months as the BAT in Colombia was raised to 19% from 5% effective this year, which may impact traffic trends. Traffic in Mexico rose 26% during the quarter, driven by growth across all airports. International traffic increased in the high 20s, while growth in domestic traffic is slightly increasing in the mid-20s. This overall robust performance was driven by travel demand above 2019 levels across all the regions, with the exception of Canada, which remains at 77% of 2019 levels. Going forward, travel from Canada is likely to return to winter season levels during the first quarter of this year, while traffic from the United States and Europe is expected to continue posting steady growth. In turn, domestic corporate travel is expected to lag behind leisure travel. As anticipated in our prior call, traffic at Merida Airport recovered this quarter, beating 2019 levels, while we continue to expect Veracruz Minatitlan and Vermosa to fully recover this year. Lastly, in Puerto Rico, traffic increased by a single digit. Domestic travel was up over 10%, partially offset by nearly a 1% decline in international traffic. In sum, we forecast good traffic demand over the winter season with recoveries expected in certain remaining regions such as Canada in the first quarter, helping to compensate for any possible slowdown caused by the global inflationary environment. Now, turning to a review of ASUR's income statement. As a reminder, all references to revenues and costs exclude construction revenues. Starting with our top-line results, revenues were up 23% year-on-year to a record of MXN5.9 billion and up nearly 54% when we compare to pre-pandemic levels of fourth quarter 2019. This strong performance was driven by both our aeronautical and non-aeronautical revenues across our three geographies. Mexico accounted for 74% of total revenues, Puerto Rico, 15%, and Colombia 11%. Commercial revenues maintained a solid trend, up 50% against the fourth quarter of 2019 and in the mid-teens year-on-year, reflecting increases of 16% in Mexico, 14% in Colombia, and 7% in Puerto Rico. On a per passenger basis, commercial revenues contracted by a low single digit, normalizing to nearly MXN112 or above the MXN92 posted in the fourth quarter of 2019. By region, commercial revenues per passenger were in the range of MXN137 to MXN147 in Mexico and Puerto Rico, up 25% and 39% from fourth quarter 2019 levels. Of note, these figures include the effect of the strong Mexican peso. Our results in Colombia were impacted more by currency depreciation, declining 11% in Mexican peso terms. By contrast, commercial revenues per passenger increased 18% when measured in local currency, driven by the opening of 28 commercial spaces over the past 12 months. The share of domestic travel over total traffic remains steady at 65% when compared with the fourth quarter of 2019. Moving down to the P&L, total operating expenses increased in the mid-teens, but below the 20% revenue growth in the quarter. Costs in Mexico were up slightly, but below revenue growth, mainly driven by higher costs of energy, personnel costs, and also increasing dental assistance and concession fees in line with higher EBITDA. Puerto Rico's costs declined by a mid-single digit as a reduction in maintenance reserves and savings in water consumption more than offset higher costs of services. Costs in Colombia were up nearly 12%, reflecting the sustained pickup in business activity, higher costs of energy, concession fees, and costs of services. However, this was below the 20% year-on-year increase in revenues. When compared to pre-pandemic levels for the fourth quarter of 2019, costs under our control increased in the low 20s and significantly below the 60% increase in revenues, reflecting the efficiency measures implemented over the past few years. As a reminder, costs under our control refer to total costs minus construction, depreciation, and amortization, together with technical and concession fees. We achieved another quarter of record high EBITDA reaching MXN4.4 billion, up 38% year-on-year and 82% from 2019 levels. This also translated to higher margins with adjusted EBITDA margin reaching 75%, improving 6 percentage points year-on-year and over 11 percentage points when compared to pre-pandemic fourth quarter 2019 levels. Again, this quarter's solid passenger traffic growth, along with increased commercial revenues and operating leverage, more than offset higher concession fees. Importantly, we achieved high profitability across our three regions of operations. EBITDA in Mexico increased by 30% year-on-year to MXN3.2 billion. In Colombia, we saw EBITDA up 85% to nearly MXN420 million. In Puerto Rico, EBITDA increased nearly 5% year-on-year on a comparable basis. Note, this excludes the recognition of non-recurring other revenues of MXN30.4 million this quarter from a judgment ruled in favor of Aerostar in connection with the right to charge a canola aviation fuel that was dispatched at the airport during 2013 to 2021. By geography, adjusted EBITDA margin in Mexico was relatively stable at nearly 75%. In turn, Colombia and Puerto Rico continued to deliver year-over-year margin improvements, both up 2 percentage points to 63% and over 53% respectively. Compared to pre-pandemic levels for quarter 2019, the adjusted EBITDA margin increased nearly 0.5 points in Mexico and 19 percentage points in Colombia and was stable in Puerto Rico when excluding the one-time event this quarter. In summary, we delivered another robust quarter with traffic and revenues at record highs, which together with operating leverage resulted in a 27% increase in net majority income to MXN2.6 billion in the quarter, up from MXN2 billion in the fourth quarter of 2021 and MXN1.3 billion in the fourth quarter of 2019. Looking at the balance sheet, we maintain a strong cash position and healthy debt profile. We ended the quarter with just over MXN13 billion in cash and cash equivalents. Net debt to last 12 months EBITDA and interest coverage stood at healthy levels of 0.1x and 12.6x. Accounts receivables were up 35% when compared to the prior year, reflecting the higher passenger traffic across our airports together with an increase in Puerto Rico in connection with the non-recurring revenue recognition I mentioned earlier, which we expect to collect during the first half of 2023. Lastly, we remain committed to capital investments of nearly MXN1.5 billion during the quarter, the majority of which was allocated to Mexico, slightly over 14% to Puerto Rico, and nearly MXN10 million were invested in Colombia. During the full year, capital expenses totaled MXN2.3 billion. For 2023, we are planning a CapEx program of almost MXN1.2 billion with funds expended mainly in Mexico and Puerto Rico. Before we move to the Q&A portion of the call, some brief closing remarks. We delivered extraordinary 2022 results, including record passenger traffic revenue and EBITDA. These results underscore the higher consumer demand for travel and our ability to consistently deliver strong profitability while investing for the future. Our balance sheet remains strong, and at the same time, we remain mindful of maintaining our financial flexibility. As we look to 2023, many uncertainties remain in the macroeconomic landscape from economic policies, consumer demand, inflation, supply chain, war, and geopolitics. While Canadian traffic still lags our other markets, we're cautiously optimistic that we will see a pickup in winter traffic and be able to recompare 2019 levels during the first quarter of 2023. Our solid results throughout the year are a great testament to the quality of our team and the consistent execution of our strategy. As I mentioned earlier, we will continue to invest in the business to fuel and sustain growth with the underlying strength of the core business, and we are confident we have positioned ourselves for sustained profitable growth, strong cash flow generation, and value creation for our shareholders. Operator, please open the call for questions.

Operator, Operator

Thank you. Your first question comes from Juan from Bradesco BBI.

Unidentified Analyst, Analyst

The first one is on the MDP negotiation. I mean, on one hand, you have a higher traffic base with tariffs below the maximum rate. On the other, you have high inflation pressure, OpEx, and CapEx estimates. So my question is, how do you see the higher level of bond yields and the broader inflationary environment impacting the negotiations of a potential adjustment in maximum tariffs? Related to this, what are your thoughts on the new PAC estimate for the Tulum airport I've seen in the news, it's like $5.5 million right now. I understand that you have included $3 million in the negotiation, but I just wanted to confirm whether it will be updated with the new estimates? Or how do you see this play out?

Adolfo Castro, CEO

Thank you for your question. Well, in the case of the MDP, what I can say is we have delivered our proposal to the government at the end of last year, and we will be reviewing that document throughout the entire year. In terms of rates, I believe we're going to be discussing those towards the end of the year, let's say, in the fourth quarter. So today, we cannot say too much about it. In terms of the Tulum Airport, I have not said that we have included MXN3 million. Hello, can you hear me?

Unidentified Analyst, Analyst

Yes, I can hear you now.

Adolfo Castro, CEO

What I was saying, I did not say that I have included MXN3 million in the case of Tulum Airport. We have made our estimate of how much this airport will have, and how the effect is going to be in our airport of Cancun. But again, we will be discussing that towards the second half of this year. So that's what I can say today, Juan.

Unidentified Analyst, Analyst

Understood. And just a follow-up on one of your comments. You said $1.2 billion in CapEx for 2023. Just wanted to confirm this.

Adolfo Castro, CEO

Yes. That's around $700 million in Mexico and the rest in Puerto Rico.

Unidentified Analyst, Analyst

Thank you so much.

Operator, Operator

Your next question comes from Alan Macias from Bank of America.

Alan Macias, Analyst

Just a follow-up question on CapEx. Important CapEx requirements that you see during your next development plan term? And if you can just give you any guideline in terms of CapEx levels for this period.

Adolfo Castro, CEO

Alan, your line is not so clear, but basically, in terms of CapEx for the next MDP, the most important expansion projects are, of course, in the case of Cancun Airport. Maybe some expansion in the case of Oaxaca Airport, and no further expansion in the others. We will be able to disclose or to talk about these numbers once the government reviews the document and approves it. For the moment, I do not have any guidance to share with you.

Alan Macias, Analyst

Thank you.

Operator, Operator

Your next question comes from Philippe Nielsen from Citigroup.

Filipe Nielsen, Analyst

So I have two questions on my side. The first one would be if the company has any room for additional capacity in Colombia? And if you're seeing or if there could be any airline using Colombia as a staging base for broader South America service? The second one would be if you could give us any sense regarding plans to build new hotel infrastructure in Southeast Mexico or Puerto Rico?

Adolfo Castro, CEO

Well, in the case of Colombia, one of the main problems we have, and I have been saying this for a while, is that the airport in Rionegro is almost complete in terms of capacity. The government has authorized at the end of the fourth quarter additional works to expand the capacity of this building. But of course, all of these works will last for a very few months, I would say, probably two years once those are completed. The reality of Colombia is that it is important to say that they need a novel terminal building, and this is something that we have been talking and discussing with the government over the last couple of years. We will let you know once we know more about this. In the case of flights from Colombia to the United States, the most important situation of Colombia today is that they have been expanding flights to Mexico, and also, there's one that is going to Puerto Rico, that's in progress, and some to the United States. In the case of the United States, we're talking basically with more frequencies to the places where they are flying.

Filipe Nielsen, Analyst

And regarding the new hotel infrastructure in Mexico and Puerto Rico, do you have any color?

Adolfo Castro, CEO

Well, in the case of the CapEx this year, we are basically completing the expansion of Terminal 4 in Cancun, and we are refurbishing runways and taxiways in Puerto Rico, and completing the remodeling of the terminal.

Filipe Nielsen, Analyst

Okay. That’s super clear.

Operator, Operator

Your next question comes from Javier Gayol from Santander Asset Management.

Javier Gayol, Analyst

Can you hear me?

Adolfo Castro, CEO

Hello, Javier.

Javier Gayol, Analyst

So first of all, congratulations and a quick one. My question is in terms of the cash. I mean, I think you will imminently have by the end of 2023. Can you give us how you are looking at it? Where are you comfortable in terms of leverage there in terms of—I know you prioritize flexibility right now, and the markets are very volatile. But just to understand how you are looking at the current cash position or the imminent cash position that you will have for the next year? Or should we expect more buybacks, dividends, or maybe M&A? Just to understand how you're looking at capital allocation for the cash that you will most likely have for 2023.

Adolfo Castro, CEO

Well, thanks for your question. Yes, you're right. We're closing the quarter with MXN13 billion in cash in hand. Apparently, that is too much. Of course, we cannot forget what we have gone through over the last couple of years in the case of COVID. But it's true that this is too much. Not just that, the CapEx program for this year, the MXN1.2 billion, of course, is very low when compared with other years. And I'm almost ready to present my dividend proposal to the Board and then to the shareholders' assembly. So you will have to wait for that in the coming, I don't know, 30 days.

Javier Gayol, Analyst

Super. Thank you.

Adolfo Castro, CEO

You’re welcome.

Operator, Operator

Your next question comes from Adam Morton Carter from GBM.

Unidentified Analyst, Analyst

Also congrats for your results. I just have a quick question. I understand, I mean, on a consolidated basis, the non-aeronautical revenue per passenger decreased. I know that most of it comes from peso appreciation because actually in the domain, it increased a lot. But in some Mexican concessions, it did decrease. So I just wanted to understand what kind of dynamics are you seeing there? Or if you could provide some color on what's the mixture from lost revenues to pesos to better understand what's around that.

Adolfo Castro, CEO

Well, as I have said during the initial remarks, the effect of the strong peso has an impact on the commercial revenues. When you say non-aeronautical, remember that a portion of this is also regulated. So the best way to see there is total revenue, excluding construction, managed commercial revenue that's regulated. But you're right, it was a decrease; the 24% depreciation of the Colombian peso in the case of the Mexican peso and around 5% in the case of the U.S. dollar had an impact on that number.

Operator, Operator

Your next question comes from Gabriel Himelfarb from Scotiabank.

Gabriel Himelfarb, Analyst

Congrats on the results. Just a quick follow-up question about the MDP negotiation. Are you considering any tariff impact based on the Tulum airport? And also, are you considering an additional CapEx on the Merida terminal, which I believe is the capacity constraint?

Adolfo Castro, CEO

Gabriel, well, in the case of Merida, let me start with your second question; in the case of Merida, we have expanded the building. And today, Merida has much more capacity in comparison to what it had a year ago. So I don't see that Merida airport as constrained. In terms of the question about Tulum, yes, of course, that will have an implication on the tariff of Cancun because of the passenger traffic that they will take, but that's a normal procedure. Remember that the maximum rate is calculated with the future passengers or the expected future passengers in all the airports. Of course, if we are saying that Tulum will have some passengers, that is considered in our calculation.

Gabriel Himelfarb, Analyst

Sure. Okay. But just if there’s like a sort of rule of distance between airports, I believe it’s 110 kilometers far from another airport, it triggers the negotiation, or may it be admitted it’s like more distance than the minimum part for competing assets? I don't know if I explained well.

Adolfo Castro, CEO

Yes. Well, the final location is 130 kilometers away from our airports. But some of the passengers that use our airports today should be using Tulum, and that is why this number has been included in our proposals.

Gabriel Himelfarb, Analyst

Okay. Thank you very much.

Operator, Operator

Your next question comes from Pablo Monsivais from Barclays.

Pablo Monsivais, Analyst

I have two quick questions. The first one is on the cost of services for Puerto Rico. I want to check why was the lower maintenance and what should we expect in the future? That's number one. And number two is a more broad question in terms of commercial revenues in Cancun and Puerto Rico. I remember that early when you bid for the concession, the objective was to close the gap to Cancun. How do you see commercial revenues in Puerto Rico reaching that goal a few years after that? Do you think there's still room for upside? Or should we now expect a more steady state?

Adolfo Castro, CEO

In Puerto Rico, one significant factor regarding the cost of services is the maintenance reserve, which we reduced due to savings from the necessary work. In Cancun, we are facing congestion at the terminal buildings during certain times, impacting our ability to provide optimal service and limiting our potential for commercial revenue. Until we expand the terminal buildings, we will likely miss out on some opportunities. Currently, Puerto Rico's commercial revenues per passenger are comparable, if not slightly higher, than those in Cancun. Moving forward, we should anticipate steady growth, though the easy gains may have diminished. Nonetheless, we must capitalize on the passengers we have and focus on converting flyers into buyers to maximize opportunities.

Operator, Operator

Your next question comes from Julia Orsi from JPMorgan.

Julia Orsi, Analyst

I have two questions on our side. The first one is, what should we expect from EBITDA margins going forward? This quarter, EBITDA margins were pretty solid? And is this sustainable in the midterm? And the second question is what's your expectation on the FX upgrade in your category one?

Adolfo Castro, CEO

Well, in the case of EBITDA margins going forward, you will have to make your own calculations in terms of revenues and costs. What I can say to you is that we have seen—we are starting to feel the inflation in the case of the three airports. You have seen the numbers and those have increased more than inflation to catch up on some pieces of what we have saved since 2019. If we see in real terms, our costs today in comparison to how it was in 2019 is lower than what it was in real terms. So we will see some effect. Just to give you an idea, in the case of energy, during the quarter, the cost of energy here in Mexico increased 8%, 8% for the quarter is a very strong number. And that, of course, will have an impact through the rest of the year.

Operator, Operator

Your next question comes from Lucia Gomez from Compass Group.

Lucia Gomez, Analyst

Sorry, I got disconnected at the beginning. So I don't know if you've talked about this, but I just wanted to see if you could give me your outlook for specifically the Mexican traffic moving forward? Are we going to start seeing a slowdown on this higher traffic levels we've had? Or do you think it's going to keep up at current levels?

Adolfo Castro, CEO

Well, Mexican traffic has been very strong, particularly in the case of leisure. It is not the case in terms of corporate travel, as I mentioned, in Veracruz, Minatitlan, we expect these airports to recover 2019 levels during this year. In the case of leisure, we expect this to continue. We are seeing strong demand there. Of course, that will depend on the tourism activities during the summer. So far, if we see the first month of the year, the numbers have been very strong. Of course, I would say the first quarter of this year is going to be strong because the first quarter last year was affected by Omicron. The important point during the year is going to be the summer. But again, I can say to you that we expect steady growth on leisure travel.

Operator, Operator

Your next question comes from Regis Cardoso from Credit Suisse.

Regis Cardoso, Analyst

One question from my side with a broader, longer-term perspective. Thinking of your assets in Mexico, where do you think we are in terms of either investing further? Or on the other hand, generating free cash flow to pay back the concession reference value? As we approach the next MDP, right? Should we continue to invest further? Should we be thinking about does it make sense to allocate—and if it is up capital, does it make sense to allocate capital into assets that have a longer-term maturity, mixed-use buildings, industrial parking lots? I mean, what would be the use of cash? Or do you think it will revert to higher shareholder distributions in the future?

Adolfo Castro, CEO

Well, in the case of Mexico, we're still 20 years away, 25 years away from the end of the concession. So we are, I would say, in the middle of the 50-year period. We normally invest or we propose our investments according to the demand we expect. That's what I was saying, the most important effect in terms of the proposal we have presented to the government is Cancun because we expect more traffic in that airport. In the other airports, basically, we do have the capacity for future demand, so we do not perform major expansion works, with the exception of Oaxaca. For the next MDP, we are going to be, let's say, catching up in terms of that; we have the capacity there with the exception of Cancun.

Regis Cardoso, Analyst

Understood. And probably as we enter sort of the second half of the consumption period, I would assume at some point, free cash generation from those concessions will increase. And in light of that 25-year remaining, does it make sense to invest in further mixed-use buildings? Or do you think the majority of that free cash flow would eventually become shareholder distribution?

Adolfo Castro, CEO

Yes. I have to agree with you because if we see the results for the first 25 years, basically, most of the cash flow generation has been invested in the airports, with the exception of the dividend payment which mostly has been invested there. This trend should reverse towards the end of the concession.

Operator, Operator

Your next question comes from Francisco Suarez from Scotiabank.

Francisco Suarez, Analyst

Thanks for the call. Also, congrats on the superb results. And thank you for your initial remarks. Those were very helpful on your overall outlook. Can you give us an indication of what is also happening on supply in the Riviera Maya? Do you see further investments adding perhaps more to demand in addition to your remarks on trends in air travel from the U.S. and Canada?

Adolfo Castro, CEO

Yes. Thank you for your words. In the case of room supply, there are several comments there. First is there has been a lot of Airbnb that have been constructed over the past couple of years. I do not have visibility as I had in the past because it was easy to see or to track hotel rooms. In the case of Airbnb, we do not have a number of how many there are and how many rooms they have by unit. So you can see Airbnb's growth in what we call North of Cancun. That's one piece of the puzzle. The other piece is the case of Isla Mujeres that has been growing really fast over the last couple of years. So all of this contributes to our airport. In the case of Cancun, I have been saying for many years that there was no more space in the hotel zone of Cancun, and now there is a project there for another 2,500 rooms. So even though we say there's no space, there are some constructions ongoing as we speak. Finally, in the Riviera, the most important region in terms of growth, of course, is close to the new airport there.

Operator, Operator

That concludes the question-and-answer portion of today's conference call. I would now like to turn the conference back over to Mr. Castro for closing remarks.

Adolfo Castro, CEO

Thank you, and thank you all again for participating in the fourth quarter results conference call. We wish you a good day. Goodbye.

Operator, Operator

Ladies and gentlemen, this concludes ASUR's fourth quarter 2022 results conference call. We'd like to thank you for your participation. You may now disconnect.