Earnings Call Transcript - ASR Q1 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to ASUR's First Quarter 2023 Results Conference Call. My name is Paul, and I'll be your operator. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. 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, CEO

Thank you, Paul, and good morning, everyone. Before I start discussing our results, I want to remind you that some statements made during this call may contain forward-looking statements. These statements are based on management's expectations and beliefs and are subject to several risks and uncertainties that could result in actual outcomes differing significantly, including factors that may be outside our company's control. Additional details about our quarterly results are available in our press release, which was issued yesterday after market close and can be found on our website. After my presentation, I'll be available for questions. Before I review our quarterly financial results, I want to highlight that our latest sustainability report is also available on our website, and I encourage you to take a look. Last year, during the first quarter conference call, we outlined seven key strategic objectives that the company aims to pursue in the short and medium term. Notable progress has been made in achieving these goals, notably through the establishment of the Sustainability Committee. This committee, consisting of three members, will assist the Board of Directors in making decisions related to environmental, social, and governance matters, integrating them into the company’s long-term strategy. Additionally, the company will support efforts in integrated sustainability and corporate social responsibility at the highest levels of governance. The committee held its first meeting earlier this year. We also made strides in reducing greenhouse gas emissions in 2022. Operations have commenced at the Cancun airports, which will generate 900,000 kilowatt hours annually at each site. We are already witnessing benefits in terms of reduced greenhouse gas emissions in-house. Our objective for next year is to extend this project to other airports within the group. As we continue to progress towards our goals, we will provide updates as appropriate. Now, let's take a look at our operational and financial results along with insights on travel demand during the quarter. All comparisons refer to year-over-year results unless specified otherwise. We are excited to report record-high passenger traffic revenues and EBITDA in the first quarter of the year, though we approach the rest of the year with caution due to easy comparisons from Omicron in the first two months of 2022 and the operational suspensions of two Colombian airlines during the quarter. We experienced sustained growth in passenger numbers traveling to our airports, which increased by 19%, totaling nearly 18 million. Mexico showed the highest growth with total passenger traffic up 23%, reflecting increases across all our airports. Domestic travel is up in the high 20s, with traffic at our airports above pre-pandemic levels, and we expect this to fully recover this year. Conversely, international traffic also rose in the high teens, primarily driven by steady demand from the United States and Europe, as well as a recovery in Canada, which has returned to pre-pandemic levels in the first quarter. All regions we operate in have now recovered to pre-pandemic levels from 12 months ago. Puerto Rico saw a traffic increase of 22%, with domestic travel up in the high teens and international travel increasing by nearly 50%. Traffic in Colombia rose by 9%, with domestic growth slowing to the middle single digits, while international passengers grew in the high teens. This slower growth was anticipated due to the VAT increase from 5% to 19%, which impacted traffic trends and the suspension of operations by Viva Colombia at the end of February and another airline in March. These airlines accounted for 17.4% and 1.9% of 2022 passenger traffic in Colombia, respectively. On a consolidated basis, the share of domestic traffic remained steady at 59.3%, compared to 60.1% in the first quarter of 2022. Moving to the profit and loss statement, please note that all references to revenues and costs exclude construction revenues. Revenues increased by 22%, reaching an all-time high of 6.3 billion pesos. This strong performance is attributed to solid growth in both aeronautical and non-aeronautical revenues across our three geographic regions. Mexico made up 75% of total revenues, Puerto Rico accounted for 15%, and Colombia contributed 10%. Commercial revenues continued to trend upwards, increasing overall by 22%, with Mexico up 23%, Puerto Rico up 18%, and Colombia up 13%. Per passenger, commercial revenues increased to 123 pesos from nearly 121 pesos in the previous year. By region, commercial revenues per passenger ranged from 145 to 147 in Mexico and Puerto Rico. These figures reflect the impact of the strengthening Mexican peso, which appreciated by 10.36% and 36.23% against the U.S. dollar and Colombian peso, respectively, since the end of last year's first quarter. Commercial revenues per passenger in Colombia rose in low single digits in Mexican pesos, affected by currency depreciation that increased 37.8% locally, alongside the opening of 29 commercial spaces over the past year. In terms of costs, total comparable operating expenses rose by 12%, which is below the 22% revenue growth during the quarter. Comparative costs exclude a 196 million pesos expense recovery recognized in the first quarter of 2022 due to the Transat implementation in Puerto Rico. In Mexico, expenses increased in the low 20s, which is below the 26% revenue growth. The rise in costs was driven primarily by personnel, energy, and maintenance, along with higher technical assistance and concession fees in line with the increased EBITDA. We have worked diligently to control costs, though a 20% increase in the minimum wage negatively impacted cleaning and security contracts. In Puerto Rico, costs remained relatively stable, as reductions in the medium sectors offset increases in service costs. Costs in Colombia were generally flat compared to a high single-digit revenue increase. Strong passenger traffic growth, coupled with higher commercial revenues and increased operating leverage, led to another solid EBITDA quarter, reaching 4.5 billion pesos, an increase of 23%, with an adjusted EBITDA margin of nearly 72%, up 90 basis points from the previous year. We saw high profitability in all three regions. In Mexico, EBITDA rose 28% to 3.6 billion pesos. Puerto Rico's EBITDA increased 4% to 520 million pesos, while Colombia's EBITDA grew 12% to over 415 million pesos. The adjusted EBITDA margin improved by 80 basis points in Mexico to nearly 77% and by 150 basis points in Colombia to just over 3%. However, Puerto Rico experienced a 260 basis point decline in adjusted EBITDA margin to nearly 55%. To summarize, we had another strong quarter with record-breaking traffic and revenues. The combination of these achievements and our operational efficiency resulted in a 15% increase in net majority income, hitting 2.5 billion pesos for the quarter. On the balance sheet, we maintained a strong cash position of 50 billion pesos and a balanced debt profile. Accounts receivables saw a 44% increase, largely reflecting high passenger traffic across our airport network and recognition of other revenues in Puerto Rico, which we anticipate collecting within the first half of 2023. In minor terms, outstanding receivables from Viva Colombia and others totaled 22 million pesos. Capital investment during the quarter was 143 million pesos, allocated as follows: nearly 50% to Mexico, 47% to Puerto Rico, and 6 million pesos in Colombia. Before we move to the question and answer portion, I want to make a few closing remarks. We are pleased to have started the year strongly. However, we expect that the year-over-year comparisons will be less favorable as the year progresses. As I mentioned before, two Colombian airlines have recently ceased operations. We will continue exploring ways to improve our cost structure and enhance margins. Our balance sheet remains healthy, and we will keep investing to support future growth. Separately, in the news, at the end of the quarter, the President of Mexico submitted a request to Congress to reform 23 lots. This proposed bill aims to grant the Mexican government additional powers to modify or revoke licenses, authorizations, and permits. It is uncertain whether Congress will pass this bill, but it could significantly affect the Mexican economy and our operations. We expect Congress to discuss this bill in the third quarter of this year. In conclusion, with a focus on delivering value to our shareholders, our Board of Directors has proposed an ordinary net cash dividend of 9.93 pesos per share, payable in May, and an extraordinary net cash dividend of 10 pesos per share, payable in November, for each of the ordinary shares. This equates to a total of nearly 6 billion pesos in dividend payments. Shareholders will vote on these items at our annual general meeting on Wednesday. That concludes my presentation. Paul, please open the floor for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Guilherme Mendes with JP Morgan. Please proceed with your question.

Guilherme Mendes, Analyst

Hi Adolfo, good morning, thank you for taking my question. I have two questions. The first one is related to the regulatory noise that you just mentioned regarding the concession deal sent by Amla to Congress. The question is if you see any kind of risk for your upcoming MDP negotiation? I understand there's still a lot of doubts, and we haven't seen the full definition of it. But what's your best guess on how this could potentially impact the sector as a whole? And the second question is regarding Colombia. As you mentioned, you have two fewer players operating in the region. How do you see the competitive environment in the region and the potential impact on traffic going forward?

Adolfo Castro, CEO

Hi, good morning. There isn't a concession deal per se. The deal affects all entities that have received a license, permit, or approval from the government for authorization or a concession. It goes beyond just concessions and includes other provisions aimed at strengthening the power of the Mexican government in this area. I’m not a legal expert, but you can refer to the 20th report for my lawyers' analysis of this document. Regarding Colombia, I learned last night that the Ministry of Transport has approved the merger between Viva Colombia and Avianca with certain conditions. This could support the restart of operations for these airlines. I've also received a notification from another group indicating they want to commence operations. This may enhance the situation in Colombia because I believe Avianca and LATAM currently lack the capacity to accommodate all the passengers left behind by these airlines. I hope these developments lead to improvements, and I anticipate updates in the coming week.

Guilherme Mendes, Analyst

Okay, thanks very much. Have a nice day, Adolfo.

Adolfo Castro, CEO

You’re welcome.

Operator, Operator

Thank you. Our next question is from Rodolfo Ramos with Bradesco BBI. Please proceed with your question.

Rodolfo Ramos, Analyst

Thank you and good morning, Adolfo. A couple of questions from my side as well. The first one is, if you can share a little bit on your expectations for international traffic, particularly coming from the U.S. I don't know if you have any visibility as to bookings or anything. We were looking at air travel searches from the U.S. to Cancun, and it looked like they are a bit off from what we saw at this time of the year last year. So I just wanted to get your thoughts there. And I have a second question, a follow-up on the first one.

Adolfo Castro, CEO

Okay. Rodolfo, hi, good morning. We do not have too much additional information than what you have. Of course, we have the bookings up to the end of the winter season, which ends almost at the end of April. What I expect is more stable growth in the case of the U.S.; the important point will be the summer for the U.S. and domestic travel; and towards the end of the year, again, the Colombian traffic.

Rodolfo Ramos, Analyst

Okay. Thank you. And a follow-up on the previous question. On your MDP, I mean, I don't know if there's anything you can share regarding the progress of your MDP. I mean you mentioned that this reform doesn't contaminate, so to speak, the process, but just wanted to get any initial comments that you can make regarding perhaps tariff expectations or any projects in terms of CapEx. Just anything for us to have visibility at this time when the regulatory concern is a little heightened.

Adolfo Castro, CEO

Well, the only thing that I can say about the MDP is that in the first half of the year, normally, the authority is busy at each one of the airports basically to check two things. One is what we call the inventory, or the real status of every single piece of the infrastructure at the airport. The second is to review each one of the projects we have proposed to them. What I can say is that this program of visits has started, and they are at the airport as we speak. Towards the second half of the year is when the government starts checking the passenger traffic, which can relate and time our calculations.

Operator, Operator

Thank you. Our next question is from Alberto Valerio with UBS. Please proceed with your question.

Alberto Valerio, Analyst

Adolfo, thank you for taking my questions. I would like to do another follow-up on the MDP. You are the only one to provide a CapEx estimate for the following five years of the current MDP. And if I'm not mistaken, in 2018 you provided a CapEx estimate. Can you ensure that it's related, if it makes sense, or if it does not make sense anymore? And another point is that CapEx postponed from the external generic MDP in 2021, if you could also incorporate this extra CapEx into your planned CapEx from 2018? And just to complement, do you think that the spread above the 10-year bond of Mexican bonds could be close to what we got in 2018, close to 1%? Or do you think it can be higher for the next year MDP?

Adolfo Castro, CEO

Hello. Your line is going. I couldn't hear your question well, but let me say that in the case of the 2 billion pesos that were postponed from the previous CapEx, of course, those will be considered in the current MDP numbers. And also in the case of the situation of this postponement is due to the fact of the new passenger traffic forecast. The projects are postponed because if we do not reach the levels of passenger traffic required to make the projects, the government takes the decision to postpone those projects in order not to affect the maximum rate. I know that you had some other questions, but I couldn't hear.

Alberto Valerio, Analyst

Can I try again? It's better now?

Adolfo Castro, CEO

It's really poor.

Alberto Valerio, Analyst

I can follow up. Thank you very much.

Operator, Operator

Thank you. Our next question is from Juan Macedo with GBM.

Juan Macedo, Analyst

Hi Adolfo, thanks for the call, and congrats on the results. I have two questions. My first question is regarding the commercial segment. We saw great results in the net revenues per passenger on Colombian concessions despite the Mexican peso's appreciation. Could you give us some color on that dynamic? Is it due to commercial expansion? Or does it come from passenger behavior?

Adolfo Castro, CEO

Well, this is coming from what we have done there. As I mentioned in the remarks, we have opened 29 spaces in the case of Colombia. And those are producing strong results. Of course, as I mentioned during the initial remarks, probably we are not seeing the full effect of this in Mexican peso figures because of the appreciation of the Mexican peso against the Colombian peso, which was 36% over the last 12 months. So if you consider all of these on top of the numbers we presented in the report, you will see that the results in Colombia are very good.

Juan Macedo, Analyst

Yeah, agreed. Thank you. And my second question is regarding tariffs. Could you give us some detail on when and how the tariff increment implementations occur during the quarter?

Adolfo Castro, CEO

Well, remember that the type or the level of how much we reach of the maximum rate is measured once per year in a calendar year. So last year, we ended up around 96%. I believe, with the current inflation expectations this year, probably we will be at 98% this year.

Operator, Operator

Thank you. Our next question is from Bruno Amorim with Goldman Sachs. Please proceed with your question.

Bruno Amorim, Analyst

Good morning, Adolfo, thank you for taking my question. It's a follow-up on MDP as well. I know you cannot comment on the outcomes, of course. But maybe you can help us understand where we stand in terms of traffic, the need for CapEx, and the cost of capital, right? The first question would be, is it fair to say that traffic is now above what was initially expected when you and the regulators agreed on the extraordinary revision during the pandemic given the sharp recovery in traffic? The second question would be, is there spare capacity to accommodate this additional demand without the need for higher CapEx? Or all else held constant, should this eventually stronger-than-initial-expected traffic rebound drive higher than initially expected CapEx? And the last question would be on cost of capital. At the moment, when you reset the tariff and the CapEx plan during the pandemic, has the regulator adjusted the cost of capital as well or not? I'm asking this because, at that moment in time, 10-year rates in Mexico were well below the current level. So this could have implications for the direction of the tariffs as well.

Adolfo Castro, CEO

Hello Bruno. In the case of traffic, yes, in some cases, traffic is higher than expected in comparison with what we presented in our assessment during the first quarter of '21, but that's for some airports. For others, it is not. Overall, I would say, it is probably higher, but just a bit. Regarding high CapEx, what I can say is that the important projects will come in the case of Cancun Airport. We're talking about terminal expansion. Remember that the 2 billion pesos or the most important portion of the 2 billion pesos that was postponed in CapEx was the expansion of the gate in the case of Cancun terminal 4. Those will be included in the new MDP. Regarding the cost of capital, that will be measured, as I said, during the third and fourth quarter of this year. Remember that the government uses the last 24 months of the Mexican paper issued in the international markets for the long term. So we will be able to answer your question around the third or fourth quarter this year.

Bruno Amorim, Analyst

Yes. But just a follow-up on the cost of capital. When you and the regulator agreed on the extraordinary revision during the pandemic, has the allowed return been adjusted at that moment in time, reflecting the cost of capital at that time or not?

Adolfo Castro, CEO

It was adjusted, yes.

Operator, Operator

Our next question is from Philippe Nielsen with Citi. Please proceed with your question.

Philippe Nielsen, Analyst

Adolfo, good morning or good afternoon, and thanks for taking my questions. So I have two questions on my side. The first one is with the MDP review on the horizon, how should we think about the technical assistance fee? And do you think that it's reasonable to consider that fee, given that ASUR is much more experienced versus back in 1998? And the second question is now that we are in the halfway mark of the 50-year concessions, do you think that it's fair to assume that ASUR could have some sort of opinion to renew its concessions? Or if it's too early to say, maybe some color on those two points.

Adolfo Castro, CEO

Hello. In terms of the technical assistance, it's important to say that this is not for free. We have an agreement with ITA that they have to comply with. Additionally, I have to mention, this is one of the most critical moments where they have to deliver, which is the case of the MDP. Regarding the renewal of the concession, the contract states that it's for 50 years and can be renewed. The contract doesn't specify how. I'm sure that I'm not going to be here in this company, or perhaps this world when this occurs. So for the moment, I'm not concerned about the renewal because that should occur in 2048.

Operator, Operator

Thank you. Our next question is from Gabriel Himelfarb with Scotia Bank. Please proceed with your question.

Gabriel Himelfarb, Analyst

Hello, Adolfo, thanks for the call. I have a follow-up question regarding the MDP. For modeling purposes, do you believe it's suitable to add a risk premium to the discount rate because of the current regulations being discussed in Congress? Additionally, should we consider extra capital expenditures, such as linking the terminals or any possible tariff increase related to the Tulum airport?

Adolfo Castro, CEO

In terms of the cost of capital or the defined discount rate in the industry, this is determined by the Mexican paper issued in the national market over the past 12 months, averaged over the last 24 months. This information will be shared during the third and fourth quarters of this year. As for your mention of the connection, we are currently collaborating with the government to link the necessary infrastructure with the airport, and this should definitely be taken into account in the next MDP.

Gabriel Himelfarb, Analyst

Okay. And in the case of the Tulum Airport, if the airport is approved, do you think the government will allow you higher tariffs that compensate for the traffic drag?

Adolfo Castro, CEO

To allow for higher traffic, remember that how we calculate is to forecast our passenger traffic in the future. That, of course, includes all the effects, the economy, the different trends, hurricanes, and other airport factors.

Operator, Operator

Thank you. Our next question is from Francisco Suarez with Scotiabank. Please proceed with your question.

Francisco Suarez, Analyst

Hello, good morning. And also thank you for the call. A question on your sustainability report. I was noticing that you are doing a really good job in overall energy consumption in absolute and relative terms compared to 2019 figures. But I just noticed that in terms of water consumption and nonhazardous waste, that is not the case. Can you explain a bit about why it might be happening? And what is your overall strategy to cut the gross consumption of water in your terminals in Mexico?

Adolfo Castro, CEO

Absolutely. In the case of water, that's a good question because our net MDP, or I would say the focus of the MDP is water. It's clear that we have not yet completed most of the things that we can do there. Of course, what you see in the numbers includes the water we have to consume to construct the expansion of the buildings. So that is why probably you observe some higher numbers in the case of some other airports. But we will see improvements once we finish those works.

Francisco Suarez, Analyst

Great. And if I may, a follow-up on this. It is interesting because when we discuss potential retrofits in other types of structures with companies, those can be challenging in terms of economics. But in your industry, it seems that you are in a great position to place that on the MDP as well, to make a retrofit in the terminal, for instance, and with that cut your overall energy and water intensity in those buildings. Do you think that, that might be a possibility? And if it's actually correct what I'm saying, that perhaps if this type of CapEx is placed on the MDP as you're planning to do that now in the next one, that is actually the way to profit from those investments that in other industries seem to be more challenging?

Adolfo Castro, CEO

Well, in the case of energy, you will have to go back to the agreement we issued on December 15, 2015. You will see that we announced that we signed an agreement with a company called SunPower to purchase energy from solar sources. That, at the moment, represented 100% of energy consumption at the airport. Today, that is probably around 78% of the consumption because, after that, we opened Terminal 4, and all reductions we have managed to implement. We are waiting for approvals for the solar farm from the energy authority in Mexico. The solar farm has been ready since the first quarter of last year. Once they get this approval, our increase in solar energy will be very significant.

Francisco Suarez, Analyst

Got you. But going back to my initial question, do you think retrofits to your existing buildings, the older terminals can be included in the MDP and with that, not only cut your overall energy and water intensities but also earn a profit from these investments?

Adolfo Castro, CEO

I don't know the precise definition of your recommendation, but let me say the most significant energy consumption is linked to air conditioning. Of course, when we construct new equipment, it will be more efficient than the older ones. That's where we get the benefit from new equipment or when we replace old buildings. You’re welcome. Thanks.

Operator, Operator

Thank you. Our next question is from Alan Macias with Bank of America.

Alan Macias, Analyst

Hi Adolfo. Thank you for the call. My question was answered, but can you just repeat your dividend payment that you mentioned?

Adolfo Castro, CEO

Yes. The general shareholders meeting is going to take place tomorrow. The proposal is 9.93 pesos in an ordinary dividend to be paid in May and an extraordinary 10 pesos per share to be paid in November.

Alan Macias, Analyst

Thank you.

Operator, Operator

Thank you. Our next question is from Lucila Gomez with Compass Group. Please proceed with your question.

Lucila Gomez, Analyst

Just a quick follow-up on Cancun Airport after all these expansions, what is the annual capacity that the airport has right now in terms of traffic? And where do you think you'll be reaching for this year?

Adolfo Castro, CEO

The capacity, of course, has to do with the level of service. It's very difficult to say what is the full capacity of a building in just a single number because restrictions such as security filters are something that you can solve with, let's say, 100 lanes. But if you want just a single number for Cancun Airport, it could be 31 million, 32 million passenger traffic a year, okay? More or less what we have today. So we are very close to the defined capacity concerning the desired level of service. So in other words, that doesn't mean we can't accommodate more passengers. However, at certain times of the day and some days of the year, you may perceive that the level of service is not optimal.

Lucila Gomez, Analyst

Okay. So just as a follow-up, if you wanted to add more passengers, what would be the moment you would need to reach that?

Adolfo Castro, CEO

Okay. In the MDP, we project our passenger traffic line for the next 15 years, and then we convert this into usage per hour in each part of the airport. The standard is that we can operate with a lack of capacity for just 30 hours a year. So if there is demand at the 31st hour of the year, we need to address the technical capacity, which means enhancing the security filters, increasing lanes, and so on. That's how we construct the MDP.

Operator, Operator

Our next question is from Fernanda Radia with APG. Please proceed with your question.

Fernanda Radia, Analyst

Good morning, Adolfo. Thank you for addressing my questions. I have two. Firstly, I've heard that this year is expected to be a record in terms of traffic. Could you share your thoughts on how this might affect Cancun Airport? Secondly, you mentioned being net cash as of Q1. Could you elaborate on your plans for capital allocation beyond dividend payments? Are you considering further expansion, and if so, which regions are you focusing on?

Adolfo Castro, CEO

Fernanda, thank you for your question. I don’t believe that this year is going to be the record year. I believe that 2018 will continue to be the record year. But it’s true that we are noticing an increase, and these hotel owners are doing extraordinary work in maintaining occupancy every single day. In the case of cash, yes, having 15 billion pesos is a very good number. But as I mentioned, I will be paying 6 billion pesos of those 15 billion pesos during the year. It's true that we have a low CapEx level this year, but we need to be prepared for the next year.

Operator, Operator

Our next question is from Mauricio Butrago with AM Advisors. Please proceed with your questions.

Mauricio Butrago, Analyst

Hello Adolfo. I have two quick questions. The first one is how did the closure of operations of Viva Air in Colombia impact your results in the quarter? And the second question is just if you can repeat the guidance of CapEx and EBITDA for this year, please?

Adolfo Castro, CEO

Hi Mauricio. In the case of Viva Air, as I mentioned, they stopped operations at the end of February, which affected some passenger traffic during March, and they represented 17.4% of our traffic in 2022. So the impact in the case of Colombia, we all saw that with matched passenger traffic figures, there was a significant adjustment in March compared to February. As for EBITDA, what we are expecting is around 700 million pesos in Mexico and around 20 million pesos in Puerto Rico, and probably 10 million pesos in Colombia.

Operator, Operator

This concludes our question-and-answer session for today's conference call. I would now like to turn the conference over to Mr. Castro for any closing remarks.

Adolfo Castro, CEO

Thank you, Paul, and thank you all for participating in the first quarter results conference call. On behalf of us all, we wish you a good day.