Earnings Call Transcript - ASR Q2 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to ASUR's Second Quarter 2020 Results Conference Call. My name is Hannah and I'll be your operator. Now I would like to turn this call over to Mr. Adolfo Castro, Chief Executive Officer. Please go ahead, sir.

Adolfo Castro, CEO

Thank you, Hannah, and good morning everyone. Thank you for joining us on the conference call to discuss ASUR's second quarter financial and operating results. I hope you and your families have managed to stay healthy and safe since our last earnings call. Please remember that some statements made during today's discussion may be forward-looking and based on our current management expectations and beliefs, which are subject to various risks and uncertainties that could lead to actual results differing materially, including factors beyond our company's control, such as the impact from COVID-19. For further details on these risks, please refer to our filings with the US Securities and Exchange Commission and the Mexican Stock Exchange. As we expected, this quarter's results were significantly affected by the COVID-19 pandemic, which disrupted global travel trends starting mid-March. Nonetheless, we ended the quarter with a solid balance sheet, which I will elaborate on shortly. Regarding global traffic conditions, since mid-March, flight restrictions mandated by various governments have been claimed to help prevent the spread of the COVID-19 virus. Consequently, airlines worldwide continue to operate at limited capacity, and few people are booking flights due to government restrictions or concerns for their health and the health of their families. At ASUR airports, operations in Mexico and Puerto Rico remain open, although with significantly fewer flights and much lower passenger traffic. Additionally, only essential commercial spaces in Puerto Rico are currently open to the public, influencing our non-aeronautical revenue in that region. Colombia has faced stricter restrictions, with the government suspending domestic and international commercial air travel since the third week of March, and international flights are expected to resume on September 1st. In terms of domestic traffic, on July 1st, the Colombian government launched a pilot program for flights between cities with low levels of contagion, allowing local municipalities to restart domestic flights if there is mutual agreement. Due to the complexity of this process, our six airports in Colombia have not restarted operations. These factors contributed to a 94% decline in passenger traffic during the second quarter, with near-total decreases in Colombia, 94% in Mexico, and 86% in Puerto Rico. All three countries reported declines in both domestic and international passengers. When viewed over the first half of the year, accumulated passenger traffic dropped almost 51% year-on-year. In addition, since March, certain airlines and sub-commercial tenants at our airports have requested assistance through discounts on payments or extensions of payment terms. In June, we began implementing some measures to support the recovery process. Most of our commercial agreements with tenants include a minimum guarantee payment per passenger; therefore, if no passengers are traveling, tenants are exempt from rent payments. While three of ASUR's main airline customers in Mexico, Avianca Holdings, and LATAM Airlines Group, filed for Chapter 11 bankruptcy protection in the United States, these companies have continued making regular payments as permitted by the relevant courts. Thus, we believe we have sufficient liquidity to meet our obligations and operate normally. Now, let me quickly outline the steps we've taken to address the various risks related to COVID-19. In terms of health and safety, in line with guidance from health authorities, we have maintained effective protocols for both employees and passengers at our airports. Preventative measures, such as wearing face masks and continued sanitization practices, are in place. On the expense side, although our cost structure is largely fixed, we have swiftly implemented cost reduction measures across ASUR's operations to minimize cash burn, with personnel and utilities representing the largest share of expenses. We focused on reducing maintenance and energy costs. For instance, we temporarily closed terminals two and three at Cancun airport in mid-April, but reopened terminal 2 in July and now operate terminals 4 and 2 to support social distancing according to the current passenger levels. We also closed one of the airport's runways and are prepared to take similar actions if necessary across our operations. Moving on to ASUR's financial health, despite the ongoing impact of weak travel demand on our performance, we are operating from a financially sound position with ample liquidity and minimal principal payments due soon. We continue to meet all financial obligations and are ready to scale up operations when travel demand increases. It's worth noting that even though the second quarter was ASUR's worst quarter ever, we observed a slight improvement in traffic performance in May compared to April, and again in June compared to May. At the end of the third quarter, we had cash and cash equivalents of MXN 7.1 billion, up 15% from MXN 6.2 billion at the end of last year. Mexico accounted for over MXN 650 million of this increase, while Puerto Rico and Colombia contributed nearly MXN 330 million and MXN 49 million, respectively. Total debt at the end of the quarter stood at MXN 15.5 billion, a 13% increase from year-end 2019, mainly due to peso depreciation against the US dollar and a $10 million drawdown from a commitment line of credit to support ongoing CapEx projects at the LMM airport in Puerto Rico. We have a solid debt maturity profile, with principal payments of only MXN 388 million, or 2.5% of ASUR's total debt, maturing in the second half of the year. Additionally, only about MXN 830 million in principal payments, slightly over 5% of total debt, is due in 2021. The majority of our debt, 54%, is denominated in US dollars, with the Star subsidiary in Puerto Rico accounting for nearly 26% of the remaining debt in Mexican pesos and 20% in Colombian pesos. To summarize, ASUR maintains a strong balance sheet with net debt to the last 12 months EBITDA at 1.1x at the close of the second quarter 2020, compared to 7.7x reported at the end of the first quarter, reflecting weaker EBITDA due to COVID-19 impacts. I want to emphasize that the current crisis affecting ASUR's performance is not our first. Over the last two decades, we have successfully navigated challenges, from 9/11 to the 2008 financial crisis and the H1N1 flu, and in all cases, passenger traffic eventually rebounded. Historically, between 2000 and 2019, Mexico's annual traffic grew at a compound annual growth rate of 6% to a historical high of over 34 million passengers in January this year. After each crisis, we quickly resumed delivering consistent profits for our shareholders. Undoubtedly, the current situation is the most severe we have faced, and while travel demand may remain low for the foreseeable future, ASUR has a robust balance sheet and continues to manage cash and expenses effectively. Now, let me highlight other key points from our second quarter results, with more details available in the press release issued yesterday evening. Revenue ex-construction declined 77% year-on-year, largely due to a similar fall in aeronautical and non-aeronautical revenues. Puerto Rico contributed nearly 51% of our revenues this quarter, whereas Mexico comprised almost 34%, with Colombia representing 5% of the total due to strict travel bans. Consolidated commercial revenues per passenger were slightly over MXN 350 compared to nearly MXN 100 per passenger in the same period last year, however, this increase primarily reflects the sharp drop in passenger traffic alongside limited commercial spaces with fixed rents per square meter. Operating costs and expenses, excluding construction costs, were down 24% year-on-year as we reduced airport operations and maintenance and experienced decreased energy consumption, especially in Mexico and Colombia. Mexico reported a 34% decrease in costs, driven by reductions in maintenance and energy expenses, along with lower sales costs related to directly operated convenience stores. Income and concession fees, both variable costs, also declined during the period. While lower costs in Colombia were down 41%, primarily from maintenance and energy savings, higher security expenses and reduced professional fees also played a role. Conversely, costs in Puerto Rico increased by nearly 6% year-on-year, largely due to FX conversion impacts that exceeded declines in service costs and concession fees. In dollar terms, total costs in Puerto Rico decreased by 17% year-on-year. Regarding profitability, reported consolidated EBITDA fell 98% year-on-year to MXN 51 million, affected by the COVID-19 pandemic, with both periods benefiting from insurance recoveries linked to Hurricane Maria. In the second quarter of 2020, this amounted to MXN 35 million, while the previous year’s amount was close to MXN 163 million. Excluding these recoveries, consolidated EBITDA would have dropped 99% year-over-year to MXN 16 million. The EBITDA of MXN 203 million in Puerto Rico was counterbalanced by EBITDA losses of 140 million in Mexico and 47 million in Colombia. Adjusted EBITDA margin, excluding the insurance recovery in both quarters, declined to 2.8% this quarter from 65.4% in the same quarter last year. On capital allocation, total capital expenditures were MXN 616 million in the second quarter, with 77% invested in Mexico for continuing the phase one expansion of the Merina airport terminals. For the full year, our master development plan in Mexico calls for approximately MXN 5.3 billion in investments. In the first half of the year, we invested MXN 714 million in this region, and we remain on track to complete the parallel taxiway to the second runway at Cancun airport and initiate the first expansion phase of terminal 4. Although we expect to finalize phase one of various terminal expansions and start the second phase this year, there have been disruptions due to stay-at-home orders in Mexico, and we have kept the government informed about related delays. CapEx in Puerto Rico totaled MXN 128 million this quarter, primarily for significant maintenance repairs in taxis. Finally, we invested slightly over MXN 1 million for major maintenance in Colombia as our CapEx commitment for that operation concluded last year. Looking ahead, we anticipate only making major maintenance investments in Colombia. In conclusion, ASUR continues to strengthen its financial position while carefully managing cash and calibrating variable costs to align with current demand conditions as we navigate this crisis. We remain confident in our ability to do so. That wraps up my prepared remarks. Hannah, please open the line for questions.

Operator, Operator

We'll go first to Alejandro Zamacona with Credit Suisse.

Alejandro Zamacona, Analyst

Thank you. Hello, Adolfo. Thank you for the call. Our first question is on the renegotiation of the MDP process. So on that context how many times are you expecting for this renegotiation? And what would be the expected CapEx for this renegotiation or the expected outcome for this renegotiation.

Adolfo Castro, CEO

Alejandro. Hi, good morning. Well, you may know the only way to revise our maximum tariff in an extraordinary way on the great conditions is once the Mexican GDP drops by more than 5% during the last 12 months. I estimate that will occur during this year and once the final number is published by the official authorities, we will be able to file our request to the authorities. Having said that what I expect is that we will be able to file that in the first quarter next year. How much time it will take, I really don't know. There is no timeline for that, but I would expect at least three months. So during the second quarter of next year we would be able to know more or less what the outcome of the negotiation process will be. In terms of the numbers, of course, today we cannot give you a precise or an accurate number of how much the CapEx will be reduced because the CapEx is not reduced because we want, it's basically reduced as a result of the low demand. So once we know the outcome of the low demand for this year, we will be able to make the necessary calculations to see which projects are no longer needed because of this low demand and those are going to be the ones that will have to be postponed, it's not cancelled, it's postponed or deferred until the demand is there again. So one year from now we will be able more or less to tell you the outcome of that process.

Alejandro Zamacona, Analyst

Okay. So I guess it's just a delay on CapEx rather than reduction on the total amount you are willing to negotiate, right?

Adolfo Castro, CEO

Okay. Let me explain again. So let's talk about the expansion today of terminal 4, okay. That expansion is needed or was needed because the demand was growing. There are certain standards that we have to comply with in accordance with our concession packet. So a certain amount of square meters of terminal every peak hour passenger traffic. So if the passenger traffic demand decreases, that work is not necessary or for the moment is not necessary and we will have to find the point in the future where these will have to be made. But that is the origin of this process to review what is needed and what is not in accordance with the demand we have. So once we know what the effect on the demand is and because of this situation, we will be able to calculate these numbers again and to say if this is going to be one year, two years or three years.

Alejandro Zamacona, Analyst

Okay. Thank you, and my second question, if I may, it's on the aeronautical business for Puerto Rico. So is there any possibility for airlines to renegotiate the fixed payment contract?

Adolfo Castro, CEO

Well, the contract has been written and the contract can be renegotiated of course in accordance with the contract. But I do not see any chance for now to see that regulation process.

Operator, Operator

We'll go next to Mauricio Martínez from GBM.

Mauricio Martínez, Analyst

Hi. Good morning and also thank you for taking my question. My question is kind of a follow-up Alejandro's topic. Do you expect to, well knowing that you already have some delays in CapEx deployment probably for this year? What is the amount that you expect to deploy for that MXN 5 billion that you committed to in the current master development plan? And if you expect to need a federal pushing it forward for the next year?

Adolfo Castro, CEO

Mauricio. Hi, good morning. I do not have yet a final figure that I can share with you at the moment. It's clear that there were around three months where there was no construction in the country. And there was a decree issued by the government where they said that all cement, steel and glass in the country had to be used in their programs in their works. So because of that we were not able to continue the process of our expansions. You cannot construct or you cannot expand the building without these elements. So we're in that process and I do not have a figure yet.

Mauricio Martínez, Analyst

But the chance is that maybe it would be lower than those MXN 5 billion?

Adolfo Castro, CEO

Well, the chances that these MXN 5.3 billion is lower are very high.

Mauricio Martínez, Analyst

Perfect and maybe ask a second question, if I may. Regarding the accounts receivables, we practically, we didn't see any change, if it's not a reduction from the previous quarter. Maybe if you can give us a bit more color on that, how negotiations would be especially with the payments of the airport, how was that negotiation? And if you can give us a color on the shape of your tenants going forward?

Adolfo Castro, CEO

Okay. As I said in the initial remarks, most of the commercial contracts have a clause where they have to pay the higher amount of a minimum currency payment per passenger or a percentage of sales. Because of the low traffic, of course, they were not selling too much, it's clear. But in that case what applies is the minimum payment per passenger. So as I said here in the initial remarks, if there are no passengers, they do not have to pay rent because sales are zero. And the minimum guaranteed payment per passenger has to be multiplied by the amount of passengers. So in that sense we have not been renegotiating or negotiating with all the commercial tenants. So in most cases, the adjustment is automatic. It is clear that some are suffering a lot and some of them are not paying, but the cases that they are not paying is because they are working in some other airports where they have to pay a fixed rent. And of course, let's say they are using the money from here to put it there. In some cases, we are renegotiating with some commercial tenants, but in some others, basically the adjustment is made automatically.

Operator, Operator

We'll go next to Rodolfo Ramos with Bradesco BBI.

Rodolfo Ramos, Analyst

Thank you and good morning. I appreciate you taking my question. My first inquiry is regarding traffic. Could you provide some insight on your traffic performance so far? If you have the figures available up until the 20th of the month, how is the decline progressing? Additionally, regarding the previous question about Puerto Rico, while a contract renegotiation is not currently on the table, have you noticed or do you anticipate any airlines ceasing service to Puerto Rico, which might prevent them from making payments? How do you view the stability of these revenues moving forward? Thank you.

Adolfo Castro, CEO

Rodolfo. Hi, good morning. In the case of the traffic, the only thing that I can say to you is that as I said during the remarks, May was better than April, June was better than May, and July, I believe, is going to be better than May. But nevertheless, the amount of traffic we're seeing today is extremely low. This situation is not going to recuperate fast. What we have seen in the past going back to 2008 with the financial crisis plus the H1N1 flu's effect flows and the bankruptcy of airlines here in Mexico, it took us 36 months to go back to the previous levels. This could be worse if a vaccine is not found or a cure is not being found. We have seen recent developments in terms of the vaccine, that's very positive news. So I believe the vaccine is going to be ready by the end of this year. So in that sense, maybe we can see some recovery process next year. But of course, the final recovery process is not going to be there until more or less a cure is found. So I don't believe that the world will go back to normal just with the vaccine. In terms of Puerto Rico, this is not the first time. You can go back and see what has happened during Hurricane Maria in September 2013. There was a sharp decline in passenger traffic and of course you can trace the comparison between analytical revenues and these sharp declines. So that's what we are experiencing today as well. And I don't see any difference from that.

Operator, Operator

Thank you, Adolfo. And just if I may squeeze in last one, we saw a maximum red alert in terms of COVID, Cancun, the services sector seems to continue operating as they have been since the middle of June. I was wondering if there's anything to update on that front and whether you're seeing any businesses or sectors in particular follow this federal directive. Thank you.

Adolfo Castro, CEO

Well, yes, what is red is the south of the state, not the case in Cancun; Cancun is still orange. So Cancun is still in normal operation. When I say south of the state, I mean south of the area.

Operator, Operator

We'll go next to Roberto Versioni with Citi.

Unidentified Analyst, Analyst

Hello, Adolfo. Thanks for the call. Just a quick question. What are your thoughts on the development of the Mayan train? And just another one, I know you mentioned this already but could you give me some more color on international traffic? Are the infection rates arising in Mexico? And do you think this could push back the timetable on normalization? Thank you.

Adolfo Castro, CEO

Hi. Good morning. Well, in the case of the Mayan train, what I understand is it's a project that is ongoing. In the case of the Cancun airport, where it has been announced last week, it's a light train that goes from the city to the airport connecting also with the Mayan train. And basically what I understand is that this project is ongoing. In terms of international traffic, today we're just having international traffic to and from the United States, and there are some flights, few flights from Canada. In the case of the United States, which is the most important for us today, there's a very low factor in that sense. So still we have some flights with a very low factor because of lower demand. And that of course will depend on how the situation evolves in the United States. The United States is a very large country; we cannot say the same in terms of what is happening today in New York in comparison with California. California has subsided their cases in New York and New Jersey, which are basically controlled. In terms of proportion of the traffic, New York is more important for us than California. So in that sense, I'm not so afraid of that situation. Of course, we really don't know what can happen there; if there's another rebound it could affect our traffic for this network.

Operator, Operator

We'll go next to Alan Macias with Bank of America.

Alan Macias, Analyst

Hi. Good morning, Adolfo. Just one question on traffic in Colombia and what you're seeing there regarding the pandemic. I understand that domestic flights can reinitiate? Just can you give us further color? Thank you.

Adolfo Castro, CEO

Alan. Hi, good morning. Well, the process, as I mentioned during the remarks, is now more complicated than it was in the past because now even though the federal government has said that the municipalities can approve this, it has been very complicated to find two measures or the pair of series of these two measures to approve the case. And the most important ones, the case of Bogota, the majority of Bogota is very reluctant to open the airport again. So in that sense, I don't know what the outcome will be, but I still believe that for some time the airports in Colombia will be closed.

Operator, Operator

We'll go next to Pablo Monsiváis with Barclays.

Pablo Monsiváis, Analyst

Hi, Adolfo. Good morning. Thanks for taking my question. I have one question. Do you mind sharing your opinion on the status of Mexican airlines? Because we have integrated that they just received fresh capital from private investors. And on the other hand, Mexico is going through a restructuring process, so that might likely mean that they will reduce their capacity overall. What are your thoughts on the medium-term impact of this? Thank you.

Adolfo Castro, CEO

Hi. Good morning, Pablo. Well, the most important example is to go back again to the periods from June 2008 up to August 2010. If you see our presentation on page 17, you can find the history of this. More than 50% of the aircraft were lost during this period. So around eight or nine airlines in Mexico went bankrupt. So of course there was an impact on our passenger traffic. There was an important impact, I would say three months, four months from August to December 2010, when the large one, which was Mexicana, the largest one, went bankrupt. The situation today is different in terms of the offer because what is low is the demand. There is no demand, so even though we can say that in case we lose some of these airlines because of the situation, the problem is not how many planes they will have; the problem is how many people they would like to travel and be transported with them. So today I don't see too much trouble in the reduced capacity. The reduced capacity is a result of the low demand. What is important to recover is the demand.

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, CEO

Thank you, Hannah. And thank you again for participating in our second quarter results conference. On behalf of ASUR, we wish you a good day, and please stay safe. Goodbye.

Operator, Operator

Ladies and gentlemen, that concludes ASUR's second quarter 2020 results conference call. We would like to thank you again for your participation. You may now disconnect.