Pacific Airport Group Q2 FY2021 Earnings Call

Thank you, and welcome to the Grupo Aeroportuario del Pacífico's Second Quarter 2021 Conference Call. Presenting from the company today, we welcome Mr. Raul Revuelta, GAP's Chief Executive Officer; and Mr. Saúl Villarreal, Chief Financial Officer. Please be advised that forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the company's performance or financial results. As such, statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued Wednesday. Because of the pandemic in 2020, comparing 2021 results versus 2020 results would reflect extraordinary growth that is not a clear indication of real growth. Thus, the company will be comparing second quarter 2021 results versus the second quarter 2019 instead. The company believes that this will provide a better understanding of the financial and operating performance trends for GAAP, and thus are more realistic indicators. Thank you. At this point, I would like to turn the call over to Mr. Revuelta for his opening remarks.

Good morning, everyone. On behalf of GAP's team, we thank you for joining us today, and we hope that you are doing well and staying healthy. At this point, it has been over a year since the beginning of the pandemic. There have been unprecedented challenges for GAP and the industry because of this crisis. Challenges that we were unsure how we would overcome. But we were able to successfully surpass them. Each and every employee stepped up and worked towards the overall benefits of the group and our customers and clients. We managed not only to take a direct hit, but we also learned many lessons along the way. The lessons that made us stronger and better prepared for the future. And while GAP passenger traffic continues to be impacted by the pandemic, we are encouraged by the positive travel and economic trends in the U.S., where the vaccine rollout is supporting the recovery of the economies. However, we are not losing sight of the continuous obstacles that remain ahead. During the second quarter of 2021, GAP transported 11 million passengers throughout our 14 airports. This amount represents a decrease of only 2.7% versus the second quarter of 2019. This was an extraordinary recovery that was driven mainly by the consolidation of international traffic that includes both traffic as well as a boom of international travelers to Mexican leisure destinations, both of which have been accelerated since the beginning of the pandemic in 2020. We also have seen a significant number of Mexican travelers to the U.S. to obtain their COVID vaccinations. It is worth mentioning the outstanding recovery of the Tijuana Airport, which, despite the closure of CBX since last year, has already surpassed pre-pandemic passenger traffic levels. This assures us that we are on the right path in terms of the projects we have in the coming years. With regards to domestic passenger traffic, demand is focused on leisure travel destinations with the business market recovery lagging behind. Despite this lag, more recently, business travel demand showed signs of recovery, which we believe will be key to positive traffic recovery, specifically in Guadalajara Airport. On the other hand, the FAA recently announced the category downgrade for the Mexican aviation industry. This downward trend prohibits Mexican airlines from opening any new route or adding presence to European destinations for the time being. In 2010, Mexico also received a downgrade, which only lasted 4 months. What happened at that time was that the U.S. airlines took advantage of the unattended demand, opening new routes and adding frequencies to various Mexican destinations.

Okay. Thank you, Pablo. This is Saul. Regarding the tariffs, we expect to fulfill 100% of the tariff approved by the authorities. We haven't reached this level until the second quarter, but we will be able to reach this level by the end of the year. Therefore, we are very confident that the level of the tariff will be fully implemented by the end of the year. And regarding the revenues, I don't know, Raul, if you want to say?

I will take it. Thank you, Pablo. Thank you for your question. In terms of the commercial revenue, in the case of Guadalajara Airport, we have two main projects happening right now. The first is related to the mixed-use building that incorporates a hotel, office spaces, and commercial areas. And the second project is all the change of layouts in terminal 1 of Guadalajara. We will have some additional spaces for food and beverage. Both projects we expect will be operating around the second quarter of 2023. With these growth projects, we expect to generate something really close to around MXN 200 million in a 12-month period, but it's around the additional rents that we are expecting for these specific projects.

I wanted to get a sense from you guys about the buyback program that you implemented. If you can share with us the trigger and the rationale behind it. As you mentioned in your remarks, you expect this to continue going forward. Is management expecting to reach the full allowed program of buybacks for the year or just understanding what the rationale is behind it would be very, very helpful? And my second question is regarding the commercial revenue. And you mentioned that you've done some discounts to tenants and you've been doing some reshuffling in the airports in that regard. And I just wanted to get your view on how GAP's commercial portfolio today versus 2019 compares. Do you think that the company's portfolio is better? Are you getting better tenants, better contracts? Just again, understanding the strategy on that part would be great.

Javier, this is Saul. Regarding your question about the buyback program, we will continue with the total amount approved by the joint shareholders' meeting. We expect to continue with this trend. We have been very active in the last weeks. And we will continue on that path. Obviously, it's something that is helping our shares, and it's something that we see as very productive for the company, and we are aligned with the instructions of the shareholders' meeting.

And Javier, on realty commercial revenues. All the programs of discounts to tenants are directly related to the comparison of the results of the month versus the same month in 2019. So I could tell you that, for instance, for July, we will have only six airports that will continue with discounts. We think that in the coming months or at least by the end of the year, we will have between eight to ten airports that could be almost with zero discounts. But in general terms, I could say that the recovery of commercial revenue is doing pretty well. In terms of passengers in the first six months of the year, we have seen a decrease of 23.4%. And in terms of non-aeronautical revenue, we have seen 16.8%. So, in general terms, I would say that we are effectively passing the recovery of passengers to the commercial revenue. And we think that this trend will continue in the coming months. For sure, there are some additional commercial areas that will be in operation in the coming months. For instance, in Tijuana, due to the opening of the new building, we are going to have some additional retail spaces. Also, for the case of Los Cabos International Terminal, the T2, we are working really quickly on changing all the layouts which will provide us with additional spaces for retail and food and beverage. All this expansion and change of the layout in Cabos will be fully in place by the next summer but partially this winter, we will open part of this new retail area for Cabos Airport. So at the end of the day, what we are seeing is that we will see significant growth in commercial revenue in the coming months, and we will continue seeing the same trend of passing all the increases in passengers to the commercial revenues.

And if I just have a follow-up on the buyback program, just to understand, the trigger for restoring the buyback program is it price-related to basically that you guys are seeing the company trading undervalued? Or is it more related to a return to shareholders to maybe compensate for the previous 2020 distribution? Just understanding the strategy there. And also, if you could share with us what is the approved buyback program that you have from the shareholders' meeting?

Well, it's both. It's not only that the price is related to the undervalue of the stock. We believe supporting and continuing with the program is important for the price, but it's not the only target for us. We believe that it's also a return to shareholders. That's the main target, the main point. We understand the difficult times we passed through, and we understand that in 2020 we couldn't make any distribution. So it's in some way to give a return to the shareholders. So that strategy was approved by the shareholders' meeting, and we will continue with that instruction.

Just a follow-up question on Javier's inquiry regarding the commercial business. So I want to try to understand how the contracts work. It's a monthly revision, as far as I understand, and what's the threshold that triggers the end of the discount? When you mentioned that in six airports you are not granting any discounts, I guess traffic must be above 2019 levels, but I just want to confirm that with you guys.

Thank you, Alejandro. Yes, it will be. I mean, all the program is related to the same month of the previous year 2019, and it always goes one month behind. For instance, for July, we're going to close what the number of passengers will be public in the coming days. But at the end of the day, what's going to happen is that we will give additional or we will provide discounts in terms of the results of the July month of 2021 versus July of 2019. In that way, we are always one month behind. But what we are expecting is that gradually more of our airports will have fewer discounts. Obviously, we are only talking about, for instance, June. June was clear that we had positive numbers versus 2019 in Tijuana, in Morelia, in Cabos, Vallarta. So we think that this trend will continue. For July, it will be six airports and by the end of the year, we expect that will be at least from nine to ten airports with zero discounts. The idea is that discounts are completely aligned with the recovery of passengers. So the airports that we could continue with some kind of discounts on the fixed part of the contract will be really small discounts at the end of the year and just in some of the airports that have not fully achieved the passenger numbers that we used to see in 2019.

Congratulations on the impressive results and execution. I have a few questions about Guadalajara, where I have been personally in the past three months. The overall activity there is remarkable, and mobility is increasing. It’s great to see that you are only 5% behind on international traffic in Guadalajara. I would like to hear your thoughts on what is driving this recovery, particularly in Guadalajara. It seems that while your incentive programs play a significant role, there is something else influencing demand. Could you provide insights into what is fueling the increase in mobility, business activity, and international traffic in the city? Lastly, do you have an operator for the plant and the hotel, along with the additional wings currently under construction in Guadalajara?

In the case of Guadalajara, I will tell you that the different routes follow different paths. I would say that leisure routes mainly generating in Guadalajara to go, for instance, to Mexican beaches are doing very well. The route to Cancún, the route to Cabos, or even Vallarta, all are working nicely. The second biggest market for one of the region's markets for Tijuana that is related to the BFR market is also doing well. I mean, the different routes to Southern California are doing well, as well as the routes to Tijuana. Even though the CBX is closed for Mexican citizens, we expect an important boost in that specific route as soon as the border in Tijuana opens again. Two routes or parts of our network in Guadalajara that are recovering at a slower pace are related to business travel. As you remember, Guadalajara has the biggest convention center in all Latin America, the expo, which also plays an important part in the demand for passengers related to business. We are suffering in the Mexico-Guadalajara route and in the Guadalajara-Monterrey route as well. So mainly, what we are seeing is a slower recovery and we expect this is related to the business market. For sure, we are optimistic that this market will recover gradually. But everybody is, in some way, thinking about the long-term impacts of all these home offices and digital work, and how it could affect us moving forward. But I am ones that remain optimistic. I think that we will see gradual recovery, and in some months, we will see better results on these routes. Additionally, I would say that this specific route of Guadalajara-Mexico, the number one and number two operators in 2019 used to be Interjet and Aeromexico. In the case of Interjet, we announced that we will have that offer right now. And for Aeromexico, they also have been amid Chapter 11 with a significant cut in the offer of seats in the last months and weeks. We see an interest and recovery from Aeromexico. As soon as they receive the 737 MAX, they will begin to increase flight frequency in the Mexico-Guadalajara route. In due time, we think we will see better recovery in the business market.

We will take our next question from Rodolfo Ramos with Bradesco BBI.

I have two questions. The first is about the impact on traffic that you may have observed, or a potential slowdown in recovery due to this third wave. I understand we will see the numbers soon, but any comments you could provide would be appreciated. The second question is regarding the international passenger handling facility in Tijuana. You mentioned expecting to start operations in 2022. Can you confirm this? Additionally, any insights on the addressable market compared to current international traffic in Tijuana would be valuable, even with the challenges posed by the pandemic.

In the short term, we are observing a solid recovery in the leisure market for Vallarta and Cabos. Additionally, we continue to see positive trends in Morelia and Tijuana, and we are beginning to see improvement in Aguascalientes and Mexicali. However, business routes, particularly affecting Guadalajara and Bajio, have not yet recovered. Regarding the facility in Tijuana, we anticipate starting operations at the beginning of 2022, with January as a target. If construction remains on track, a potential launch in December is also possible. The new building aims to enhance passenger comfort and processing speed at the border, which could draw more travelers from San Diego and Los Angeles to Tijuana. Our initial focus will be on attracting Central American routes, including destinations like Guatemala, El Salvador, San Jose, and Panama. In the medium term, we hope to reintroduce Asian routes, as Tijuana previously had direct flights to Shanghai and Beijing before the pandemic. For now, our priority is on Central American markets, particularly those with ties to U.S. citizens in Southern California.

Juan, thank you for your question. This is Saul. We have seen an acceleration of the recovery for Montego and Kingston. We also expect that once the Canadian government releases their restrictions, it could expedite the recovery. In any case, due to the level of vaccinations in the U.S., we saw a strong month of June, and we are expecting to continue with that trend.

I have two questions. The first is a clarification on the traffic recovery in Mexico. You mentioned that you're now a little bit more optimistic than before in terms of how fast you could reach 2019 levels. I recall in some past calls you mentioned being fully back only by 2023 and also by 2034. Just wondering how you see this recovery now shaping up and if you could see 2019 levels on a consolidated basis already in 2022. The second question is related to margins. We saw a good improvement now in the second quarter. Just wonder if you could give us more color in terms of what could be the normalized or stable level margins for the second half and for 2022 as well.

Thank you, Guilherme. In terms of the recovery in Mexico, as everyone remembers, on our first view of traffic, we felt that the recovery from this crisis would align more closely with 2024. The levels that we are seeing today and the additional fleets arriving in the market for domestic airlines, such as Buenos Aires, expanding their fleets and also Aeromexico, make us more optimistic about performance in the coming months. I would say that we think full recovery could occur by 2023. But again, it will be a mixed recovery. For instance, today, we have Tijuana or Morelia that have fully recovered. So I would say that in the upcoming year 2022, we will see more of our airports achieving complete recovery. By 2023, we will see more airports that may still exhibit some lack of recovery specifically related to business travelers that will fully recover in 2023.

And Guilherme, regarding your question about margins, we saw a very good EBITDA margin, excluding IFRIC 12, with 71% for the second quarter of 2021. However, at the end of the year, it will normalize to the level we had in 2019 or below that level. This is due to the fact that we will start providing more resources to the airports for maintenance, cleaning, security, etc. In some way, the recovery of traffic is providing stress in the level of service in our airports, prompting us to release more cost expense for the second half of the year. Therefore, the EBITDA margin will likely be slightly below the level of 2019.

Thank you, everyone. This is Alejandra Soto, IRO of the company. We have some additional questions. The first is from Silvia Vito. She's asking, is there any way to estimate how significant was the traffic to the U.S. that went for the mass vaccination program?

Silvia, tough question, but I will try to do my best to explain. I would say that the offer of seats, for instance, to Houston, is now in the same line that we used to have before the pandemic. We know that some of the business travelers are not flying today, but the demand in those routes mainly to Houston from Bajio, Guadalajara, Austin, and from all our airports remains at the same offer. I would say that a significant part of this recovery of traffic will come from the vaccination process of Mexicans flying mainly to Houston, San Antonio, Austin, and some others to Los Angeles. But again, it's really an assumption and it's really difficult to provide any specific number. I can say that the demand for those routes remains strong and at levels comparable to 2019. If that recovery does not occur, we will see that it is not solely related to business mandates that used to fly on those routes.

Thank you, Raul. We also have another one from an anonymous listener. He's asking if you can give some color on the U.S. made some border restrictions. If you think that after land restrictions are lifted, people will fly less or travel more by road and rail/trucks?

I think that in the case of the U.S.-Mexico border restrictions, for the specific case of GAP, it will be great news the moment that these restrictions for land crossings are lifted because, at the end of the day, an important market that we have in Tijuana includes Mexicans going for leisure and business to Southern California. As soon as this happens, we will see a significant recovery and additional growth in Tijuana. The rest of our network, I would say, that the biggest international route in terms of size for GAP is the Guadalajara-Los Angeles route. We are talking about 2,500 kilometers from Guadalajara to Los Angeles. It is not a natural route to go directly by road. So at least on that aspect, we are not seeing any negative impact. On the other hand, we foresee great upside for Tijuana as soon as the border opens again for Mexico. Okay. Thank you, everyone, again for joining us today in our second quarter results conference. We appreciate your interest in our company, and we look forward to providing all this information on our business initiatives as they become available. In the meantime, the team remains available to answer any questions that you may have. On behalf of GAP, we wish you a great day. Thank you, everybody.

This does conclude today's conference. Thank you for your participation, and you may disconnect at any time.