Earnings Call Transcript - ASR Q2 2024

Operator, Operator

Good day, ladies and gentlemen, and welcome to ASUR's Second Quarter 2024 Results Conference Call. My name is Ezequiel 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, Ezequiel, 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. 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 section. Following my presentation, I will be available for Q&A. Before moving on to our performance for the quarter, let me provide an update on recent developments on the sustainability front. We have compliance with ESG reporting requirements, including the Mexican Stock Exchange, the United Nations Global Compact, and the Mexican Register of carbon emissions. We are also implementing a data collection process that will allow us to calculate our scope-3 carbon emissions. This process is approximately 90% complete as of the end of the second quarter for the Mexican airports. We also renewed our social project with Pronatura, which supports local fishing communities and promotes sector tourism in the Yucatan Peninsula. This project will include four additional direct beneficiaries and approximately 100 indirect beneficiaries. Additionally, we have been in conversations to strengthen ASUR's alliance with UNICEF and extend the activities of this agency to all airports across our group. Lastly, we are also in the final stages of establishing a strategic alliance with a nongovernmental organization that aims to prevent human trafficking. We look forward to providing more updates as we continue to advance in our sustainability journey. Now starting with a review of ASUR's operational and financial performance for the quarter. As usual, all comparisons in this call will be year-on-year unless specified otherwise. Passenger traffic was up 3% year-on-year to nearly 18 million passengers, a record high for the second quarter. Traffic growth in Puerto Rico and Colombia more than offset a softer performance in Mexico. By region, Colombia posted the strongest performance with traffic up 21% year-on-year driven by increases in domestic and international in the high teens and in the high 20s. Traffic in Colombia continued to benefit from easy comparisons following the suspension of two operators in February last year, which accounted for 20% of the traffic. We expect this positive recovery trend to continue during the remainder of the year as Avianca and LATAM airlines regain some lost routes. Puerto Rico delivered a 9% increase in traffic driven by growth in high single digits in domestic traffic and double digits in international traffic. As anticipated, we are seeing a normalization in the traffic of Puerto Rico as last year benefited from the increased operations by Frontier Airlines. Lastly, traffic in Mexico declined close to 5%, reflecting single-digit contractions in both international and domestic traffic. In terms of international traffic, we saw declines from all the regions, except Canada in the quarter. In turn, domestic traffic remains impacted by the initial effects of Pratt & Whitney engine problems experienced in the past few quarters as well as the capacity reduction of higher traffic movements at Mexico City Airport since early this year. As a reminder, Mexico City Airport accounted for 45% of ASUR's domestic traffic in 2023. We expect the situation to continue negatively impacting domestic traffic this year, which would post a small decline in the year. Now moving on to P&L. As a reminder, all references to revenue and costs are excluding construction. Total revenues increased nearly 18% to MXN7 billion in the quarter. Colombia stood out with the top line growth in the 30s, mainly benefiting from the pickup in international traffic. Mexico delivered revenue growth in the high teens and Puerto Rico in the middle single digits. Mexico accounted for 74% of the total revenues posted an 18% top line increase even as passenger traffic declined 5%. Revenue was driven by high 20s growth in aeronautical services, reflecting the adjustment established in the recent domestic airline plan and the impact of the weaker peso, taking into account that international tariffs are based in U.S. dollars. In turn, non-aeronautical revenues increased low single digits. Puerto Rico accounted for 15% of the total revenues and delivered a 5% growth in the top line, reflecting high single-digit increases in non-aeronautical while aeronautical revenues increased by low single digits. In turn, Colombia, which represented 11% of revenues posted a 35% increase in top line, reflecting a good performance in both aeronautical and non-aeronautical revenues, which benefited from international traffic growth. As we continue to execute our strategy of expanding our commercial offering, we opened 45 new commercial spaces over the past 12 months. Of these, 17 were opened in Mexico, 4 in Puerto Rico, and 33 in Colombia. As a result, commercial revenues were up 7%, more than double the growth in passenger traffic, mainly reflecting increases of 4% in Mexico, 9% in Puerto Rico, and an impressive 40% in Colombia. On a per passenger basis, commercial revenue increased 5% year-on-year to nearly MXN128 in the quarter. This performance was mainly driven by growth of 16% in Colombia, 9% in Mexico, while Puerto Rico was relatively flat. Mexico reported record high commercial revenues per passenger at MXN154.5 million beyond the typical levels achieved in the pandemic benefiting from a strong U.S. dollar. Moving down to P&L. Costs and expenses increased nearly 30% year-on-year. On a comparable basis, excluding the MXN252 million recovery in expenses in Puerto Rico under the Coronavirus Response and Relief Supplemental Appropriations Act in the second quarter of last year, total costs were up 16%, slightly below revenue growth. By geography, costs in Mexico were up 18%, resulting from increases of 80% in the concession fees established by the Mexican government and 20% in minimum wages, mainly in cleaning and security, both effective January 1. This was partially offset by a 50% reduction in the technical assistance fee. On a comparable basis, Puerto Rico reported a 10% increase in cost, which was below revenue growth while Colombia were up 19%, above revenue growth. Consolidated EBITDA was up 18% year-on-year to MXN5 billion in the quarter, while-adjusted EBITDA margin, which excludes construction, was relatively unchanged at 69%. Note that, on a comparable basis, excluding the recovery of expenses in Puerto Rico in the second quarter of last year, EBITDA would have increased 26% and the adjusted EBITDA margin would have expanded by 435 basis points year-on-year. This good performance was driven by strong profitability across our three regions of operation. Puerto Rico presented the strongest performance with comparable EBITDA up over 90%, Colombia followed with a 49% increase, while Mexico posted an 18% increase in EBITDA. Turning to the balance sheet, we maintain a healthy financial position with cash and cash equivalents of nearly MXN15 billion after taking into account the dividend payments totaling MXN6.3 billion during the quarter, equivalent to a cash and cash dividend of MXN10.926 per share and an extraordinary cash dividend of MXN10 per share. Lastly, in terms of CapEx, we made investments of nearly MXN650 million during the quarter and close to MXN820 million in the first half of the year. We are currently in the process of project planning and carrying out the bidding process to select contractors. Key projects include Cancun airport, the expansion of Terminal 4, and reconstruction and expansion of Terminal 1. Finally, the expansion of the terminal in Riohacha Airport. Note that all construction works will take place outside the operating area and will not affect the operations of these efforts. In closing, we delivered a solid second quarter with net majority income up 50% year-on-year to MXN3.7 billion. This strong performance also benefited from the foreign exchange gain of nearly MXN950 million this quarter, resulting from the 10% quarter depreciation of the Mexican peso against the U.S. dollar, compared with a MXN350 million FX loss reported in the same quarter last year. This quarter was not without its challenges, notably the ongoing issues of Pratt & Whitney engines and the reduction of capacity in Mexico City Airport, but we navigated through this and delivered strong results in the quarter. This ends my prepared remarks. Ezequiel, please open the floor for questions.

Operator, Operator

Our first question is from Rodolfo Ramos from Bradesco BBI. Please go ahead.

Rodolfo Ramos, Analyst

Just a couple from my side. The first one is on traffic. I wanted to get your sense of where we stand in the recall of Pratt & Whitney. You're one of the least exposed. Just wanted to get your thoughts on where we stand there. And on traffic as well, if you would expect, given the rhetoric that we've seen so far from the U.S. election campaign, whether we can expect a similar impact from what we saw last time around in terms of the U.S. international bond traffic. So that's my first one on traffic. And secondly, if you can just give us a sense of pricing of where you currently stand. You had mentioned in the previous call that you increased prices in April. So just wanted to see where do you stand versus your maximum tariffs and what to expect there going forward?

Adolfo Castro, CEO

Well, in the case of Pratt & Whitney, of course, I do not have exact and precise data. But what I understand is that the most affected are the blades; they sent 19 airplanes during the fourth quarter and 26 during the first quarter. The time of the recall is around 300 days. So, I would expect those planes to come back to production, I would say, at the end of September this year. From now until September, the planes are not going to improve, and after that, I believe they will stabilize up to the first quarter of next year, and then they should improve. Regarding the U.S. elections, yes, I do expect, and you can see that very clearly, that the Mexican situation will be a talking point for all the candidates. They will be blaming all the problems we have here, and that may affect traffic during the fourth quarter. In terms of pricing, we have adjusted our prices, and we are working towards achieving close to 99% compliance with the maximum tariffs for the year.

Operator, Operator

The next question is from Guilherme Mendes from JPMorgan. Please go ahead.

Guilherme Mendes, Analyst

I was wondering in terms of the commercial revenues. As has been surprising to the upside on a per passenger basis. And you mentioned about opening a bunch of new commercial spaces in the three regions. How should we think about this segment going forward, meaning in addition to the investments that you're going to make in Cancun Airport, should we expect additional openings or ramp-ups on the commercial front? And my second question is on traffic, following up on the previous one, but I think about Puerto Rico and Colombia. You mentioned in the past conference call about a normalization on the trends of both Colombia and Puerto Rico accelerating and decelerating. Just wanted to double-check if that's still your base case expectation?

Adolfo Castro, CEO

Well, in the case of commercial revenues, what you saw for the quarter was driven by parking and also car rental; those were the two winners for the quarter. I have to say that, of course, in the case of Mexico, which has reached a record high of MXN154 per passenger, we were positively affected by the Mexican peso depreciation. Regarding the traffic of Puerto Rico and Colombia, yes, I do believe that Puerto Rico should normalize during the remaining of the year. In the case of Colombia, what I expect is the recovery process towards the end of the year for what we lost last year with the grounding of those two airlines that represented 20% of the traffic during 2022.

Operator, Operator

The next question is from Jens Spiess with Morgan Stanley Investment. Please go ahead.

Jens Spiess, Analyst

I just wanted to ask about the realized tariff. I think you reported MXN326. Doing some math here, I get that it represents around 95% of your maximum tariff if we rate it by the traffic of the individual airports. Does that sound about right? Or are we missing anything? And a follow-up to that, are you worried about the depreciation in the Mexican peso? I think that a further depreciation could potentially result in a high-end risk of exceeding the maximum tariffs and potentially having to give some discounts towards the end of the year?

Adolfo Castro, CEO

In the case of the maximum tariff, there's a key part in the Mexican section that says what was the weighted average maximum rate obtained during the quarter. What I was saying last year is yes, we reached 95% and what we are expecting is close to 99%. Of course, that will depend on what you just mentioned in terms of the Mexican peso. The devaluation of the Mexican peso will help us reach these objectives as the tariffs for international flights are based in U.S. dollars. Remember that the maximum rate is in pesos, so that will help us meet our objective.

Jens Spiess, Analyst

Okay, perfect. And if I may, just one follow-up. In terms of traffic, comparing it to what you forecasted in your tariff review, we're not even close to reaching the 3% clawback, are we? Any thoughts on that?

Adolfo Castro, CEO

In terms of traffic, what I would say is that the impact we were expecting from Pratt & Whitney and the decrease in international traffic has been higher compared to what we were expecting at the end of last year.

Operator, Operator

The next question is from Fernanda Recchia with BTG. Please go ahead.

Fernanda Recchia, Analyst

May I ask you to provide an update on Punta Cana?

Adolfo Castro, CEO

We don't have any updates. The legal projects have been established, and that will take time as I have said during my previous earnings conference call. The project is expected to take at least one year.

Operator, Operator

The next question comes from Andres Aguilar with GBM. Please go ahead.

Unidentified Analyst, Analyst

I was wondering if you could provide an overview of expected traffic mix, considering you're not seeing domestic passengers for the remainder of the year?

Adolfo Castro, CEO

As I mentioned, domestic traffic for the remainder of the year is going to be affected by the situation in Mexico City. So, we should expect these to be negative throughout the whole system, not just in this case.

Operator, Operator

The next question comes from Anton Mortenkotter with GBM. Please go ahead.

Anton Mortenkotter, Analyst

Adolfo, congrats on the results. I have two quick questions. One is related to your cash balance. I was wondering if you can tell us how much of that is dollarized? The second one is, considering the cash flow generation that you have right now and with the CapEx commitments, even though they are really high for the next coming years, it seems like you will end up with a significant cash balance of around MXN20 billion. I was just wondering what your thoughts are on the possible use of that cash?

Adolfo Castro, CEO

Basically, all - you can see the numbers, Puerto Rico is in U.S. dollars, Colombian pesos, and in the case of Mexico, some of this is in U.S. dollars. Roughly speaking, in Mexico, we should be around $400 million in dollars and the rest in pesos. In terms of cash flow generation, yes, we have substantial CapEx in front—very high numbers in the coming years. But as always, we will review this at the end of every year regarding the tax situation, the cash balance, and the CapEx commitments, and we will propose the dividend to the Board of Directors and then to the shareholders. As I had mentioned, during May and June, we paid MXN6.3 billion in dividends—an ordinary dividend of MXN10.926 and an extraordinary dividend of MXN10 as we did last year.

Operator, Operator

Ladies and gentlemen, that concludes the question-and-answer portion for today's conference call. I would like to turn it back over to Mr. Castro for closing remarks.

Adolfo Castro, CEO

Thank you, Ezequiel, and thank you all for joining us today for the second quarter 2024 conference call. We wish you a good day and goodbye. Now you may disconnect.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes ASUR's second quarter 2024 results conference call. We would like to thank you again for your participation. You may now disconnect.