Earnings Call Transcript - ASR Q3 2022

Operator, Operator

Good day ladies and gentlemen, and welcome to ASUR's Third Quarter 2022 Earnings Conference Call. My name is Elaine and I will 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 the call over to Mr. Adolfo Castro, Chief Executive Officer, please go ahead, sir.

Adolfo Castro, CEO

Thank you, Lynn and good morning everyone. Before we started covering the highlights from the quarter and taking your questions, let me remind you that certain statements made during this call may constitute forward-looking statements, which are based on current management expectations and beliefs and are subject to several risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our company's control. As usual, additional details about our quarterly results can be found in our press release, which was issued yesterday after market close and is available on our website in the Investor Relations section. We reported another solid quarter with record passenger traffic, improved cost efficiencies, and strong profitability. Starting with our review of travel demand, total traffic grew over 24% year-on-year and exceeded the third quarter's 2019 levels by nearly 23%, reaching a record of 17 million passengers in the third quarter. Airports across our three geographies all contributed to solid growth compared to pre-pandemic levels, the third quarter of 2019. Colombia maintained a stronger recovery of 37% with domestic travel expanding in the low 30s and international travel in the high 50s. We expect this trend of strong recovery to continue over the coming months, supported by a structural shift in demand driven by new routes and airlines. Traffic in Mexico was up 22% against the third quarter of 2019, driven by both international and domestic passengers, with all the airports contributing to this growth, particularly international traffic growth which accelerated to 30%. This strong performance reflects high travel demand from all regions of this market, exceeding 2019 levels except for Canadian demand, which has remained slightly over 65% of the last 12 months of 2019. Looking ahead, traffic from Canada is expected to resume its winter seasonal levels mainly from November through April next year. While the U.S. and Europe are expected to continue delivering steady growth. We expect that business travel will continue to lag behind leisure. We expect Merida airport to recover 2019 levels during the rest of the year, with Veracruz, Minatitlan, and Villahermosa airports recovering in 2023. Finally, in Puerto Rico, traffic continued to normalize after very strong performance in previous quarters, posting a high single-digit increase in traffic compared with the third quarter of 2019, with domestic passengers up 9% and international travel practically recovering to pre-pandemic levels. Overall, we continue to expect solid travel demand underscored by pent-up demand which has exceeded expectations in some remaining markets such as Canada, helping mitigate any potential deceleration that could result from increasing inflationary global contexts. Moving now toward financial results, please note that revenues and costs exclude construction revenues, and all comparisons are against third quarter 2019 levels. Revenues increased 50% to MXN5.8 billion. This was again a record high for any given quarter, driven by good performance in both aeronautical and non-aeronautical revenues across geographies. Mexico accounted for 72% of total revenues in the quarter, Puerto Rico 15%, and Colombia 12%. Driven by traffic growth, commercial revenue remains strong, up 45%, with increases up 57% in Mexico, 20% in Colombia, and nearly doubling in Puerto Rico. Commercial revenues per passenger were nearly MXN117 above the MXN99 reported in the third quarter of 2019 and nearly flat year-on-year. The best commercial revenues in the quarter were in the range of MXN141 to MXN161 in Mexico and Puerto Rico. In Colombia, commercial revenues per passenger were MXN37 slightly below the third quarter of 2019 levels. Note that the Colombian peso depreciated 24% against the Mexican peso over the last 12 months, while international passengers account for nearly 17% of total traffic in Colombia. Regarding the composition of our passenger traffic, the portion of domestic passengers remained the same as of the third quarter of 2019. However, we benefited from additional growth from U.S. tourism, and from European passengers spending at pre-pandemic levels. The number of Canadian visitors remained flat, at 65.5% of 2019 levels. Moving down to the P&L, total operating expenses increased in the high teens. Excluding expense reimbursements in Puerto Rico in both quarters, operating costs and expenses would have increased nearly 26% but significantly below the revenue growth of 50%. In Mexico, costs were up 26%, significantly below the 67% increase in revenues. This was mainly driven by an increase in personnel costs along with higher technical systems and concession fees. These increases reflect high revenues and EBITDA, along with higher costs of services, including the cost of sales that grows as a result of strong performance at directly operating stores. In Puerto Rico, costs were up 19% or 16% when excluding the benefit of expense reimbursements in both quarters, when revenues nearly doubled in this market. Finally, costs in Colombia were up in the low 20s but below the 30% revenue growth. Efficiency measures implemented over the past couple of years have allowed costs under our control to remain at third quarter 2019 levels, and at only 81% of these levels when comparing them on a per-passenger basis. This was true even with a 50% increase in revenues during the period. Note that of course, costs under our control include costs minus construction costs, depreciation, and amortization as well as technical and concession fees. We achieved a record high profitability this quarter with consolidated adjusted EBITDA of MXN4.1 billion, up 64% from 2019 levels, driven by solid performance across key metrics. Sustained growth in passenger traffic together with higher commercial revenues and operating leverage more than offset higher tariffs. Mexico turned in a very strong performance with adjusted EBITDA up 51% to MXN3.1 billion. Colombia continued to recover with EBITDA of 67% to MXN455 million. Puerto Rico, in turn, posted a 7% increase in EBITDA to nearly MXN417 million, although down 16% year-on-year, reflecting the 7% decrease in passenger traffic and increasing the cost of services primarily due to rising energy costs. By geographic region, adjusted EBITDA margin improved nearly five percentage points in Mexico to 75.3% and 10 percentage points in Colombia to nearly 64%. The margin in Puerto Rico was slightly over 49% this quarter, 70 basis points above the third quarter of 2019, but below the 59% reported in the same quarter last year, reflecting the impact of Hurricane Fiona during the quarter, resulting in closing the airport for a day and a half. In sum, we report another solid quarter with traffic and revenues at record highs, which combined with operating leverage resulted in a 42% increase in net majority income to MXN2.5 billion in the quarter, up from MXN1.7 billion in the third quarter of 2021 and MXN1.3 billion in the third quarter of 2019. In CapEx, we invested nearly MXN550 million during the quarter, of which 88% was allocated to Mexico, nearly 12% to Puerto Rico, and MXN1 billion to Colombia. We remain on track with our CapEx plan across the regions. In Mexico, we completed the first phase of terminal four expansion of Cancun Airport, which consisted of adding two international boarding gates. And we continue moving forward with the expansion of the terminal building in Merida, with the third phase of this project to be completed by the year end. We are also on track with the remodeling of Terminal B and major maintenance, repairs to runways, and taxiways in Puerto Rico. Commenting on the balance sheet, we maintained a strong liquidity position and a healthy debt profile. We closed the quarter with cash and cash equivalents nearly MXN14 billion, with net debt over the last 12 months' EBITDA adjusted to 0.1 times at the quarter end, with interest coverage at 10.7 times. Finally, receivables increased nearly 17% year-on-year, reflecting increased activity across our airports. Before we move to the Q&A portion of the call, a quick recap of the quarter, we welcomed another record number of passengers in the third quarter, surpassing 2019 levels once again, thanks to robust travel spending. While Canadian traffic remained below its pre-pandemic levels, traffic in all other markets was above 2019 levels. Also, we expect Canadian traffic will finally normalize this winter season. This recovery will help offset any fall in demand that could eventually arise from the inflationary environment that persists in the U.S., Europe, and elsewhere in the world. As of today, we see healthy traffic trends that are supported by still strong pent-up demand. Lastly, I noted earlier, we were able to deliver strong profitability as additional passenger growth drove operating leverage that we have achieved by significantly improving efficiency levels throughout our business over the last two and a half years. Please, Lynn, open the call for questions.

Operator, Operator

Thank you. We will take our first question today from Rodolfo Ramos of Bradesco BBI. Please go ahead.

Rodolfo Ramos, Analyst

Good morning Adolfo. Thank you for taking my question. I have a couple. The first one is on your outlook for traffic. International has clearly been the leader here. Given your expectation of this pent-up demand from Canada, it seems that will continue to be the case, but I wanted to get your thoughts on the domestic side. Volaris reported earnings and it seems like they're having a little bit of trouble getting down with fares. It seems like there's a high level of elasticity demand for leisure destinations on the domestic side. So just wanted to get your thoughts on that side on the domestic traffic recovery and how you expect this to evolve in this winter season? And then I have a second question as well if I may?

Adolfo Castro, CEO

Yes, Rodolfo, hi, good morning. In the case of domestic, basically in Mexico, because you mentioned Volaris, it's very clear for me that usually, business traffic is above what we call capital series. I just mentioned the case of Merida that has been recovering nicely over the last couple of months, which is not the case for Veracruz and Villahermosa and Minatitlan. I do not expect them to recover until next year. So we will suffer in that sense, not being able to recover 2019 levels. But in the case of tourism, I'm very confident that we will continue on the path we have been for the last couple of months. It's important to mention, and if you see the reports, the passenger traffic reports. Comparing passenger traffic in Mexico for total traffic in January 2022 versus September 2022, normally, tourism traffic in September is the lowest month of the year. Let's try to compare seasonality in the previous years, and you will understand why I'm saying this. So when you see the comparison between January and February, you will understand that we still have some room to increase in the first part of next year.

Rodolfo Ramos, Analyst

Yes, thank you, Adolfo. And secondly, on your MDP, I mean, it's still early, not yet concluded, but just wanted to get your thoughts on whether you've seen any changes in the process. And if you're still looking to incorporate the potential impact of the new Tulum airport potentially starting operations in 2024? Thanks.

Adolfo Castro, CEO

Well, the MDB, once we close the quarter, we will work very hard to be able to deliver our proposal by the year-end to the government. I don't see any changes in the process. And of course, what you're mentioning will be included in our proposal.

Rodolfo Ramos, Analyst

Thank you, Adolfo.

Adolfo Castro, CEO

You're welcome.

Operator, Operator

Thank you. We move now to Alejandro Zamacona of Credit Suisse. Please go ahead. Apologies, we're moving to Filipe Nielsen of Citi. Please go ahead. Your line is open.

Filipe Nielsen, Analyst

Right, thanks, so good morning or afternoon all. Thanks for taking my questions. I have two on my side. The first question would be what long-term opportunities do you see in terms of increasing commercial revenue per passenger in Colombia? I noticed that you've mentioned Brazil contributing negatively, but I wanted to have a little more color on your initiatives on that. And the second question would be if you have any color on new airport auctions and studies, opportunities outside Mexico for new airports? Thank you.

Adolfo Castro, CEO

Okay, Filipe, hi, good morning. As I mentioned in the initial remarks, we face a 24% Colombian peso devaluation versus the Mexican peso. So, if you include these variables in the results of Colombia, you will understand why the growth in Colombia apparently was very small, but when viewed in Colombian pesos, it was very strong. In terms of initiatives, you can see in the report what we have done in Colombia over the last year and a half. You will see that we have made many initiatives in the case of Colombia. So we are happy with those. We are seeing some results, of course, but the devaluation of the Colombian peso had a severe impact on the report. In terms of new opportunities outside Mexico, I don't see any significant opportunities in front of me today.

Filipe Nielsen, Analyst

Great, thank you.

Adolfo Castro, CEO

You're welcome.

Operator, Operator

Thank you. I now move to Gabriel Himelfarb of Scotiabank. Please go ahead.

Gabriel Himelfarb, Analyst

Hi, good morning, thanks for the call. Just a quick question, could you give us a bit of color about the maximum tariff? About how much are you what percentage are you this year? And do you think that under the current inflation conditions, it could impact or have some effect on the master development on the next master development plans? Thank you.

Adolfo Castro, CEO

In the case of the maximum rate, of course, you can follow the trade fees in the quarterly report. You can see the weighted power connecting rates for the quarter. If you follow me, you will find that there was an increase in the quarter. But of course, with the high inflation situation we are facing now, I can estimate that we're not going to be able to reach 99.8% compliance as we usually do. We have made a catch-up from last year; it will not be enough to cover the types of emissions we are seeing now. And I don't see any impact of that during the next MDP.

Gabriel Himelfarb, Analyst

Okay, thank you.

Operator, Operator

Thank you. We now move our next question to Anton Morton Carter of GBM. Please go ahead.