Earnings Call Transcript - CAAP Q4 2021

Operator, Operator

Good morning, and welcome to Corporación América Airports Fourth Quarter 2021 Earnings Conference Call. A slide presentation accompanies today's webcast and is available in the Investors section of the Corporación América Airports Investor Relations website. At this time, I would like to turn the call over to Patricio Inaki Esnaola, Head of Investor Relations. Please go ahead.

Patricio Inaki Esnaola, Head of Investor Relations

Thank you. Good morning, everyone, and thank you for joining us today. Speaking during today's call will be Martin Eurnekian, our Chief Executive Officer; and Jorge Arruda, our Chief Financial Officer. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Note that for comparison purposes and for a better understanding of the underlying performance in our presentation today, we will be discussing the application of IFRIC 12, which became effective in July 2018. Additional information in connection with the application of rule IAS 29 can be found in our earnings report. Now let me turn the call over to our CEO, Martin Eurnekian.

Martin Eurnekian, CEO

Thank you, Iñaki. Hello, everyone, and welcome to our fourth quarter 2021 earnings call. Our performance this quarter underscores the multiple initiatives we have been undertaking since the onset of the pandemic. Today, we have a leaner cost structure, a strengthened financial position and have made important advances in further enhancing the equity value of our business. We continue to see a recovery in passenger traffic throughout our operations, reflecting an overall relaxation of traffic restrictions and consequently higher travel demand. Over 13 million people traveled across our airports during the fourth quarter, with traffic levels at just over 63% of the 21 million passengers served in the fourth quarter of 2019. This also was a significant sequential improvement compared to the 46% of pre-pandemic levels reached in the third quarter of 2021. Higher traffic also brought around a strong recovery in commercial revenues, reaching 90% of the fourth quarter of 2019 levels. As a result, revenues Ex IFRIC 12 nearly doubled year-on-year to $200 million, reaching close to 70% of fourth quarter 2019 revenues, up from the 55% of pre-pandemic levels achieved in the prior quarter. We also delivered substantially higher profitability in the quarter with comparable adjusted EBITDA of $92 million, doubling the levels reported in the fourth quarter of 2020. In addition to improved top line performance and a leaner cost structure following the cost reduction initiatives implemented over the past 2 years, results benefited from a $26 million compensation related to the re-equilibrium of the Brasilia Airport, which is a testament to the increasing strength and value of our concessions. Note, this applies for the full year of 2021 and was only recorded this quarter. We also accounted for a EUR 9.5 million or the equivalent of $10.9 million government grant in Italy. On the balance sheet front, during the quarter, we refinanced a combined amount of $425 million in Argentina and Uruguay to strengthen the company's liquidity position and improve the debt profile. We also obtained new funding for more than $350 million in these two countries, including the $174 million that we just raised last February. Jorge will go over these advances in more detail shortly. Turning to Slide 4. During the fourth quarter, travel restrictions were relaxed across all our markets of operations, which is reflected by the green boxes on this page. Only some requirements remain in place, such as antigen or PCR tests and vaccination certificates. Now turn to Slide 5 for a deeper look at passenger traffic performance. As anticipated, traffic continued to recover with October, November, and December gradually improving to 58%, 65%, and 67% of the respective months of 2019, as we show on the left chart. Armenia and Brazil led the recovery, reaching 90% and 82% of fourth quarter of 2019 levels, respectively. Also note that traffic in Armenia was slightly above 2019 levels each of the first 2 months of 2022. In Ecuador, traffic continued to improve, reaching 76% of pre-pandemic levels with routes to the U.S. and Panama above those in 2019 for several months now. Passenger traffic in Italy reached over 60% of pre-pandemic levels, posting a strong sequential improvement despite experiencing some impact from the emergence of the Omicron variant in December. Finally, traffic in Argentina and Uruguay, which endured through a long government-imposed travel restrictions, stood at 53% and 50% of fourth quarter 2019 levels, respectively. Traffic, however, posted a significant sequential improvement, reflecting the reopening of borders at the start of November. Looking at traffic performance in the first two months of 2022, we saw a slight slowdown in January, reflecting the impact of Omicron with the recovery resuming in February. In Brazil, for example, some airlines were forced to cancel a number of flights due to positive COVID cases within their crew. Turning to Slide 6. Cargo operations continued to perform well, reaching 80% of fourth quarter 2019 levels. While growth was driven by all countries of operations, we saw strong contributions from Argentina, Brazil, and Uruguay, which together accounted for over 80% of cargo activity. Italy and Uruguay also stand out with cargo activity above fourth quarter of 2019 levels. I will now hand off the call to Jorge, who will review our financial results. Please, Jorge, go ahead.

Jorge Arruda, CFO

Thank you, Martin, and good day, everyone. Starting with our top line on Slide 7. Total revenues Ex IFRIC 12 continued the steady recovery reaching 70% of pre-pandemic levels in the fourth quarter of 2021. Aeronautical revenues increased over 1.5 times year-on-year mainly driven by higher passenger EUCs, which more than tripled, reflecting improved operations across all segments, particularly in Argentina, Armenia, and Italy. Commercial revenues grew 66% year-on-year and reached over 90% of 2019 levels with strong contributions from Argentina and Armenia. Notably, Cargo revenues increased by 23% versus 2019, mainly driven by tariff adjustments in Argentina. Now turning to profitability on Slide 8. In addition to sustained revenue growth, we continued to benefit from a lean operation, reflecting the cost reduction plan implemented at the beginning of the pandemic. When compared to 2019, cash operating costs and expenses declined this quarter by 26%. Remember, this excludes concession fees and construction costs. As we anticipated in previous quarters, we expect to see some increases in certain cost lines as our operations gradually return to pre-pandemic levels. At the same time, we also expect to benefit from a more efficient cost structure. Now moving down to the P&L. We achieved comparable adjusted EBITDA of $91 million, up from $44 million recorded in the same quarter last year and is slightly below pre-pandemic levels. Importantly, this quarter, we achieved positive adjusted EBITDA in all countries of operation. In Brazil, adjusted EBITDA benefitted from the $26 million economic compensation received in connection with the re-equilibrium of the Brazilian concession for the full year of 2021 that was recorded in the fourth quarter. Results in Italy were also positively impacted by the EUR 9.5 million grant, also accounted in the fourth quarter 2021. Now turning to Slide 9. We continue to achieve significant milestones in the process of obtaining economic re-equilibrium of our concession agreements. Following the successful negotiations in Argentina, Italy, and Brazil that we executed during the first year of the pandemic, in 2021, we advanced in the following fronts: As noted earlier, in Brazil, we obtained a $26 million compensation in connection with the economic re-equilibrium of the Brazilian concession from the impact of COVID-19 in 2021. In Argentina, following the 12% increase in international tariffs that took place in March 2021, we recently obtained a 250% increase in domestic tariffs from ARS 195 to ARS 614 effective March 1, 2022. This also includes the commitment to adjust domestic tariffs over time to a reference value equivalent to $5. In Ecuador, last July, we successfully completed the economic re-equilibrium process to compensate for the impact of the COVID-19 for the Guayaquil concession, which, among other things, included a 2-year extension of the concession term and a reduction in the concession fee. In Uruguay, in November, we signed an agreement with the government to amend the existing Puerta del Sur concession, which included the extension of the concession term for an additional 20-year period from November 2033 to November 2053, the addition of 6 regional airports, and a CapEx plan of $67 million to be deployed by 2028. And finally, in Italy, in August 2021, we cashed in on a EUR 10 million grant to compensate for the COVID-19 impact in 2020. And more recently in December, we accounted for an additional amount of EUR 9.5 million in government support. Turning to Slide 10. Following the successful execution of the debt refinance in 2020, during 2021, we completed a fuse of transactions that further strengthened our balance sheet. Starting with Argentina. In September 2021, AA2000 successfully placed a $30.5 million linked bond in the local market at an annual interest rate of 4% and a 2-year maturity. In November, we completed the exchange offer of a portion of the Series 2017 and Series 2020 notes with the issuance of $209 million Series 2021 notes due 2031, and we also raised $126 million in new money. Also in November, we refinanced $95 million in bank loans, extending the final maturity of these loans until November 2024 from February 2023 with a 15-month grace period. More recently, last February, we successfully completed a local offering of $174 million linked notes in two tranches, $138 million with an annual interest rate of 5.5% and a 5-year grace period with quarterly amortization starting in May 2027; and $36 million with an interest rate of 2%, maturing in February 2025. Proceeds from this offering will be used to fund infrastructure works within the National Airport system and to redeem a portion of the preferred shares equivalent to $100 million in accordance with the terms of the executive decree, which provided for the 10-year extension of the AA2000 concession agreement. Note that the amounts redeemed under the preferred shares will be counted towards our CapEx obligations under such concession agreement. In Uruguay, last November, we completed the exchange offer and issued $246 million of 6.875% Senior Secured Notes due 2034 in exchange for the Series 2050 and Series 2020 notes with a grace period until May 2025. We also raised $52.9 million of new money with the issuance of additional notes due 2034 under the same terms. Moving on to total investments and liquidity on Slide 11. We ended the quarter with total debt of $1.4 billion. Our net debt to last 12 months adjusted EBITDA ratio remains above historical levels but is improving quarter-over-quarter reflecting the recovery in adjusted EBITDA. Net debt has remained fairly stable over the past quarters. All our subsidiaries remain in compliance with the debt covenants and remember that CAAP itself has no direct indebtedness. As a result of all the liability management initiatives executed over the last 24 months, we were able to improve our debt maturity profile, which allowed us to strengthen our balance sheet and liquidity position as well as comply with our mandatory CapEx program. Notably, we delivered five consecutive quarters of positive operating cash flow across most of our segments, underscoring our financial discipline. I will now hand back the call to Martin, who will present our closing remarks on Slide 12.

Martin Eurnekian, CEO

Looking ahead, we expect to see a sustained recovery in passenger traffic trends, driven by pent-up demand and lower travel restrictions. While we observed a slowdown in passenger traffic in early 2022 on the back of concerns about the Omicron variant, we already saw signs of improvement. In the near term, we are closely monitoring the impact of Omicron and remain vigilant of the geopolitical environment in Europe and its potential impacts. In the meantime, we remain fully committed to advancing in our action plan, which has proven to deliver strong results even while passenger traffic levels have not fully recovered yet. This includes: first, finalizing the economic re-equilibrium processes in Brazil and Armenia to fully restore the equity value of our business; second, terminating the Natal Airport concession and collecting the corresponding indemnification payment; third, preserving liquidity and further strengthening our balance sheet remains a key priority for us, as reflected in the ongoing debt management initiatives that have demonstrated our financial discipline and improved our debt profile; and fourth, we will continue to maintain a strict control of our cost structure to benefit from the efficiencies and operating leverage we have built over the past 2 years as travel demand resumes. In addition to advancing our action plan, we are also actively developing additional value creation opportunities and expanding capabilities. For example, given the small nature of the Peruvian operations and lack of long-term sustained growth prospects, last December, we exited our 50-50 joint venture in that country. This is part of our long-term strategic plan that seeks to concentrate efforts and resources toward the core and relevant assets in regions with long-term meaningful growth opportunities. Recall that our Peruvian operations were not consolidated in GAAP results. This year, three large-scale real estate projects will begin construction, calling for a total investment of approximately BRL700 million. This investment will be funded by our operating partners. Starting towards the end of 2023, with full completion scheduled for the first half of 2024, comprised of a Lifestyle Center, as well as an entertainment center and additional non-aeronautical revenues to Infra America and will contribute to tourism and the local economy. In addition, we have established a multi-disciplinary team composed of employees and best-in-class partners focused on urban air mobility, a new concept of air transportation based on electric vertical takeoff and landing. I am pleased to announce that we have recently signed a memorandum of understanding with MRR and NDAs with several other strategic partners with the purpose of analyzing and designing our business model in the mobility ecosystem to service and support the entry of urban air mobility in Europe and South America, particularly in some major cities in Italy, Argentina, and Uruguay. On the ESG front, we published our inaugural sustainability report mid last year. Building on our commitment to sustainability, in November, we signed the World Economic Forum's 'Clean Skies for Tomorrow 2030' to accelerate the supply and use of sustainable aviation fuel technologies to reach 10% of global jet aviation fuel supply by 2030. This is an important first step in our long-term plan to lower carbon emissions and our impact on the planet. In closing, I would like to take this opportunity to thank all of our stakeholders for their continued support. With this, I would like to thank you for your participation. We are now ready to answer your questions. Operator, please open the lines for questions.

Operator, Operator

Our first question today comes from Alejandro Demichelis from Nau Securities. Alejandro, your line is now open.

Alejandro Demichelis, Analyst

So one question, one follow-up. First question is how are you seeing the recovery in traffic in Argentina, particularly thinking about some loss of connectivity in both the domestic market but also in the market abroad? And then as a follow-up, with that kind of traffic, how are you thinking about cash flows, CapEx for this year or next year, particularly thinking about the redemption of the preferred shares in AA2000?

Martin Eurnekian, CEO

Thank you, Alejandro. This is Martin here. Regarding traffic in Argentina, we are observing a steady recovery since the major restrictions that lasted a long time. Currently, international traffic is nearing 50% of pre-pandemic levels, while domestic traffic is approaching 80%. We expect these trends to continue into 2022 and hopefully 2023, aiming to reach pre-pandemic levels. The pace of this recovery will be influenced by various factors, including decisions by airlines concerning connectivity. However, there is ongoing interest and announcements from airlines negotiating slots and airport availability to restart services in Argentina. Thus, we see a steady recovery towards pre-pandemic levels. That would be the answer. Naturally, there are challenges within the airline industry, but so far, we see consistent recovery. Regarding cash flows, perhaps Jorge can elaborate. With the recent restructuring and exchange of bonds in Argentina, as well as new issues we’ve initiated, the company is prepared to meet all its obligations related to capital expenditures, preferred share redemptions, and debt responsibilities. We're pleased with the efforts made by the company and the financial team to enhance cash flow and financial standing. We now feel confident in our ability to tackle the challenges ahead and continue with our capital expenditures and preferred share redemption, which aligns with our contractual terms requiring that funds for share redemptions be allocated to trust funds for capital expenditures at the airport. All of this contributes to fulfilling our obligations outlined in the concession agreement.

Jorge Arruda, CFO

Thank you, Martin. I would like to provide an update on our financial plan, which we finalized about a year ago. Late last year, in the fourth quarter, we completed an exchange offer that extended the maturity of our existing bonds and borrowed an additional $126 million as part of those transactions. Recently, in the first quarter, we issued new bonds totaling around $175 million, which includes approximately $100 million in dollar-linked notes in the local market with a 5.5% interest rate over 10 years, fully amortizing with a 5-year grace period, and $36 million in 2% interest rate notes with a 3-year bullet maturity. We ended the last year with about $180 million. This new funding, combined with cash flow and additional revenues, means we are fully funded for our CapEx obligation of $406 million. Regarding the preferred shares, as mentioned in our script, they will count toward the $406 million CapEx program, utilizing the trust mechanism. If there are any further questions or doubts, please let me know.

Alejandro Demichelis, Analyst

Okay. No, that's great. And as a quick follow-up, two follow-ups. The first one is, how are your discussions with the regulator going regarding the rebalancing of the contract? Because, obviously, your passenger flow has been a bit weaker. Now we are kind of into this flexibility on the CapEx with the preferred shares. So maybe you can give us some insight on that. And then the second part related to that, how is the situation regarding the payments from Aerolineas Argentinas into AA2000, please?

Martin Eurnekian, CEO

The discussions with the regulator are lengthy and intricate. As we emerge from a crisis, we need to observe the upcoming changes to the regulatory accounts to grasp how they will develop and how we will engage with the regulators. Concerning Aerolineas Argentinas, we are currently in a favorable position regarding our collections from them. However, we remain attentive to their financial status to better understand their financial health and capacity to settle their accounts.

Operator, Operator

The next question today comes from Bruno Amorim from Goldman Sachs.

Bruno Amorim, Analyst

I have a couple of related questions. First, is it reasonable to assume that if traffic continues to recover in 2023, EBITDA should be able to cover CapEx and financial expenses, potentially leading to some positive free cash flow generation? If so, what can we expect from the company next year? Will you consider paying dividends once that happens, or do you have a specific plan for the positive free cash flow whether it begins in 2023 or 2024? Will you prioritize dividends, or are you looking for new investment opportunities? What are the most likely opportunities you are considering? Would you focus on airports globally or specific assets?

Jorge Arruda, CFO

Yes, we expect to be cash flow positive on a consolidated basis. Over the next couple of years, we will maintain liquidity within the company while starting to focus more on new acquisitions. We are open to various geographies, with a trend towards Latin America and the Caribbean, especially given our presence in Italy and Eastern Europe. We are also considering opportunities in Africa, keeping in mind the different regulatory environments across the continent. So, to answer your question, our primary focus for the free cash flow will be on capital expenditures, with a stronger emphasis on acquisitions.

Operator, Operator

There are no additional questions waiting at this time. So I'd like to pass the call over to Martin Eurnekian for closing remarks. Please go ahead.

Martin Eurnekian, CEO

I would like to thank everyone for joining us today. Thank you for your interest in the company, and our team is here to answer any questions you may have. I look forward to seeing you on our next earnings call. Thank you very much.

Operator, Operator

That concludes today's conference call. Thank you very much for your participation. You may now disconnect your lines.