Pacific Airport Group Q3 FY2021 Earnings Call

Good morning, and welcome to GAP’s Third Quarter 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will open the floor for questions, and at that time instructions will be given if you would like to ask a question. It is now my pleasure to turn the call over to GAP’s Investor Relations team. Please go ahead.

Thank you, and welcome to the Grupo Aeroportuario del Pacifico’s Third Quarter 2021 Conference Call. Presenting from the company today, we have Mr. Raul Revuelta, Chief Executive Officer, and Mr. Saul Villarreal, Chief Financial Officer. Please be advised that forward-looking statements may be made during this call. These do not account for future economic circumstances, industry conditions, or the company’s future 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 current expectations. For a complete note on forward-looking statements, please refer to the quarterly report issued Wednesday. Due to the pandemic that took place in 2020, comparing 2021 results to 2020 results would reflect an extraordinary increase that is not an accurate indication of real growth. As a result, the company will be comparing third quarter 2021 results versus the third quarter 2019 instead. This will provide a better understanding of the financial and operating performance trends for GAP and thus are more realistic indicators. Thank you. At this point, I will turn the call over to Mr. Revuelta for his opening remarks. Please go ahead, sir.

Thank you, Maria. Good morning, everyone, and thank you for joining us today. In the past 1.5 years, GAP has successfully navigated one of the most challenging moments to impact our industry. I’m very proud to say that we emerged a stronger company coming out of the pandemic than we were going into it. This quarter reflects more than just a recovery; it also demonstrates a strong performance compared to the precedent period. During the third quarter, traffic reached nearly 12 million passengers, which is more than twice the level reached in 2020 and only 1% lower in passenger traffic compared to the third quarter of 2019. We are pleased with the significant recovery of our airports in Mexico, especially throughout our leisure destinations. This recovery reflects a robust quarter despite industry circumstances. The outstanding result was attributable to the U.S. vaccination rollout that positively impacted our economy and travel trends. We had strong consumer sentiment, and pent-up demand were met with encouragement regarding the lifting of restrictions in some markets. For example, in September, Canada lifted all travel restrictions for international traffic. Additionally, the U.S. government recently reopened land borders for fully vaccinated travelers beginning in the first week of November, which was good news for the Tijuana Airport. While in America, activity continues to be temporarily back due to the travel restrictions imposed by that government. We are confident that passenger traffic for the last quarter will reflect a strong overall recovery. Specifically, we expect an upturn from the Canadian market for the winter season regarding Montego Bay and Puerto Vallarta with the reopening of routes from Toronto and throughout the Montego and Vancouver, Toronto, and Montreal to adapt. In Tijuana, we foresee another boost in passenger traffic on the CBX offering for non-American products. Moving on to our revenue performance. Excluding IFRIC, this alignment increased around 24% compared to 2019, reaching MXN4.3 billion in the third quarter of 2021. Aeronautical revenues increased by 29%, driven mainly by the recovery of passenger traffic in the third quarter as well as the increase in the maximum tariff approved for the 2020-2024 period. On the commercial side, we continue supporting our tenants, offering discounts over the minimal rent fields in accordance with the decrease in passenger profits at each airport compared to 2019 passenger traffic. This is for any given month. Including our revenue shares, the outstanding passenger traffic recovery has resulted in traffic growth at some of the airports compared to 2019. This will explain the commercial revenue increase of 10% during the third quarter. Food and beverage revenue at duty-free stores account for most of the increase. This was offset by lower revenues from advertising and the IP launch. In the case of advertising, we faced an important change in the industry. Companies have been adjusting their marketing strategies due to the pandemic, and at this point, during 2020 and 2021, they have canceled most of their advertising expenses. However, we expect a significant increase for 2022, as economic trends are positive for the majority of industries. Due to the excellent passenger profit recovery and increased spending per head in the commercial areas and in addition to tight cost controls, these two together contributed MXN3.1 billion to the EBITDA, an increase of 27% compared to the third quarter of 2019. This has grown our EBITDA margin to 71%. It is important to point out here that this is an outstanding EBITDA, particularly in light of the current global situation. On the balance sheet front, cash and cash equivalents reached MXN10.7 billion as of September. During the third quarter, we paid the GAP-16 bond certificate for MXN1.5 billion as well as MXN4 billion of capital reduction approved at the shareholders’ meeting held in September 2021, resulting in a total distribution of MXN11.6 per share this year. As a reminder, we restarted the share repurchase program on March 1 of this year. And as of today, we have repurchased 11.3 million shares for a total of MXN2.5 billion. We expect that the repurchase program will continue for the foreseeable future. Regarding debt, on October 15, we issued a MXN2.5 billion bond certification to fund investment commitments under the master development program for 2021 and part of 2022. This issuance includes GAP’s first group of bond certificates for MXN1.5 billion, which will be used to finance deemed eligible projects, showing our commitment to sustainability with a focus on our four key environmental areas: energy and emissions, biodiversity, solid waste management, and water management. Moving on to CapEx, there was a higher report. We continue with the construction of the recycled runway as well as the construction of the new commercial mixed-use building, which will include a hotel, corporate office, and commercial spaces. We expect that this will be ready by mid-2023. In Tijuana, we continue with the construction of the terminal processing building, which will be completed and ready to begin operations in December of this year. We believe that this new building will be a game-changer for the airport by attracting more flags for international markets. Indeed, we already have a new IATA code TIJ. This means that if a passenger is booking a flight to San Diego, they have the options to select either San Diego Airport or Tijuana Airport via the CBX complex. It is remarkable to see the shift in passenger profiles in Tijuana, which despite the closure of CBX since March 2020 has already surpassed pre-pandemic passenger traffic levels. This data suggests that more American citizens have been using the bridge for travel between the Mexico and U.S. markets, mainly traveling to leisure destinations. We also continue expanding the Los Cabos International Terminal building as well as designating the second terminal building in Puerto Vallarta. Looking ahead, we expect that the continued recovery trend in passenger traffic posted this quarter will further strengthen towards the end of the year as the winter season approaches, vaccination rollouts accelerate, and the government continues to lift travel restrictions. While we are not sure what future issues may arise, we do expect sustained travel growth in the coming years. We are confident that our business remains strong and ready for the challenges that may face in the future. To conclude, I wish to thank our team for their continued commitment to the implementation of our strategy. Thank you for your attention. Now I have the operator open the floor for questions.

Thank you. Now I will take our first question from Alejandro with Credit Suisse.

Good morning, Raul and Saul. Thank you for the opportunity to ask questions. I just have a few questions regarding Jamaica. Could you give us some insight on what’s going on there? How do you see the recovery coming? What is the current situation of the MDP renegotiation? And when could we expect it to conclude?

This is Saul. Well, we have continued talking with the authority. They implemented a negotiating team, which will be integrated by different ministers. Indeed, we have a meeting in person next week, and we will be trying to speed the revision of our proposal. Currently, we don’t have any change. We are still in the middle of this negotiation. We expect to conclude probably in the first half of 2022. It’s complicated because they have some travel restrictions, and they are expecting a better recovery in passenger traffic on the island. So we expect that it could take the following months in the first half of 2022. We expect a positive outcome.

Okay. Thanks a lot. And just if I may, just a follow-up regarding Montego Bay, where we have been seeing margins over 60% for the past two quarters, which is way above the historic average of around 50%. How do you see this going forward? Should we expect them to normalize? Or is this level sustainable?

It will normalize, Diego, because according to the concession agreement in Montego Bay, we have an additional concession fee, which is paid according to a revenue projection in the concession agreement. In which during 2020, we were below that, generating a credit that is applied during 2021. That means that for the following years, it will normalize to the 50s in terms of EBITDA margin.

Okay. Perfect. Thank you.

Welcome.

We will take our next question from Guilherme Mendes with JPMorgan. Please go ahead.

Hi Saul, good morning, and thanks for the quick question. I have two questions actually. The first one is a follow-up on this margin topic. Can you expect the same trend in Mexico? So we saw once again strong margins for the quarter. Do you expect any kind of normalization? Or should we expect these low 70%s for the upcoming quarters? And the second question is regarding your traffic recovery. We have some of your airports already back to 2019 levels. In terms of corporate demand, what should we expect going forward? Should we expect any changes in your normalized corporate demand? Thanks.

Okay, Guilherme. This is Saul. In terms of the EBITDA margin, it's difficult to predict that we will maintain 70%. We anticipate that our full-year margin will be below 70%. We need to keep in mind that Mexican airports usually operate around a 70% EBITDA margin. However, with the consolidation of Montego Bay and Kingston, we expect to see an EBITDA margin of approximately 68% to 69% for the full year. Therefore, it's reasonable to say that the low 70% range is what we foresee for GAP.

And, hi Guilherme, this is Raul. Talking about traffic, specifically on corporate demand, I would say that we will begin to see a recovery for the coming year. I mean today, we have two kinds of effects on corporate demand. The first is related to home working and in some way, the cancellation of meetings and exports that is happening not just in Mexico but around the world. In the case of GAP, we have been impacted on the most important corporate routes in Mexico: Guadalajara, Mexico, or Mexico Hermosillo. These three airports, as you can see from the reports, have a lower recovery than the rest of our airports. But the effect of corporate demand traffic, I think that also is affected by a lack of capacity in Mexico airlines. At the end of the day, it is important to remember that with the reduction of seats due to the fact that Interjet is not operating anymore, we lost almost 27% to 30% of the total Mexican market. So I would say that, in these corporate markets, we are seeing really low load factors. So we could expect that in the coming months or years, as airlines begin to bring additional capacity, we will see a full recovery of these specific routes.

Thank you.

We will take our next question from Stephen Trent with Citibank. Please go ahead.

Hi, good morning, gentlemen and thanks for taking my question. By the way, can you hear me okay?

Yes. Perfect, Steve.

Great. Great. Thanks, Raul. Sorry, I had trouble with my phone here. Just two quick questions for you here. The first is, could you refresh my memory on whether there are plans by the hotel industry or kind of theme park industry to do build-outs in Mexico’s Pacific Coast, near your airports? And two, aside from Barbados, are there any other foreign airport opportunities that might be of interest to you?

Hi, Steve, this is Saul. Additionally to Barbados, we don’t have any other projects right now. It’s complicated times for airports in general in the world. We will be looking for any other projects. But for now, only Barbados is in the pipeline.

Hi, Steve. This is Raul. In the case of what is happening mainly in Los Cabos, I could see that the construction of additional hotels or additional hotel rooms is happening. I mean, Los Cabos shows that in the next two years, at least it will have around 12% additional rooms for that specific destination. And in the case of Vallarta, the entire area of Nayarit or Nuevo Vallarta also has a really important increase in hotels. We have, for instance, a huge project from the Magan Resorts; they are developing the Sidosi hotel and parking in that area. For almost eight months, that project, in some way, has slowed down its implementation and construction due to the pandemic, but I could say that today, they are restarting all these projects. So I could say like in the coming two years, that will open, for instance. The total number that we are seeing that will increase in the area will be around 10% in the next two years.

Okay. Very helpful. Thanks guys and I will let someone else ask a question. Thank you.

We will move next with Naoki Otsuka with GBM. Please go ahead.

Good morning and congratulations on the results. I was wondering if you could give us some insight on tariff increments. So do you expect to fully increase the tariff during this year?

Hi, Otsuka, this is Saul. Well, we are on the path to reach the maximum tariff approved by the authority. We already adjusted the specific tariffs in some airports because the business passenger is not recovered yet. Probably we will not reach 100% of the maximum tariff. We are trying to get closer to the maximum tariff, but we are expecting to see business travelers during the end of the year, mainly for Alara, Guanajuato and Hermosillo airports. The traffic that we expect is hopefully going to reach the levels of 2019.

And also, I will add that we are struggling with the fulfillment of the maximum tariff. We have a direct problem of inflation in some ways, going really even higher than our original projections. And as you can remember, as everybody knows, we can only change our specific tariff every six months. So in some way, the inflation is going even higher than we originally projected. Therefore, we will need some additional increase on the specific tariffs to reach 100% of the maximum tariff. But we expect that we will continue on that in growing specific tariffs to reach the target of the 100% in the coming months.

All right. Thank you very much.

We will move next with Gabriel Himelfarb with Scotiabank. Please go ahead.

Hi good morning. Congratulations on the results. Just two questions. Do you think that rising inflation could impact the projected CapEx for the MDP? And the second question, do you think that there could be some pressures about the labor incorporating outsourcing into the cost? Thank you.

Thank you. This is Raul. In terms of the CapEx, for sure, we will have an impact. For sure, we are seeing really high inflation in the construction industry. But it's important to remember that our commitments in terms of our concessions contracts include adjustments by the construction inflation index. So for sure, we will see a nominal increase in CapEx and an increase in commitments. But on the other hand, we will adjust our maximum tariff and our revenues for this additional inflation. Therefore, we will see impacts if the trend of inflation continues in the country and in the world; for sure, we will see impacts on CapEx, but also on revenues.

Yes. And regarding your question about labor changes, we already applied all these changes. And we don’t expect a huge impact on the cost of service. We foresee around MXN40 million to MXN50 million at the end of the year, which is not very relevant to the cost of services.

Okay. Thank you.

We will take our next question from Manuel Barra with Barclays. Please go ahead.

Good morning. Just a quick question on my side. Did you see the new airport of Santa Lucia as a significant driver for the Mexican travel industry in the coming years, considering the recent comments from Volaris and Viva, who are willing to operate there?

In general terms, I will say, just about what Volaris mentioned, we know that the area of Santa Lucia airport has almost 4 million people living in the area. So the catchment of this Santa Lucia airport by itself is interesting. It's important. It’s a midsize city. So it will be natural that some specific robust routes will appear at that airport. So I will say at this beginning we are seeing the announcement of the Cancun-Tijuana routes. It will be normal that in the coming months or years, we will see something on Guadalajara, Monterrey, or other major routes that still exist in our market. But I mean, in general terms, as an ARPU net, we want to be really happy to receive additional infrastructure and to receive additional planes. For instance, in the case of Tijuana, the announcement of the Santa Lucia-Tijuana route makes us more than happy to receive this additional seat. I would say that it will not be, in the case of these specific routes, some kind of competition or transfer of passengers from Mexico to Santa Lucia; rather, we think that the direct route from that area of Pachuca to Santa Lucia will incentivize flights for the region and will bring additional passengers to our network of airports.

Thank you.

At this time, we will take the webcast questions. I will now turn the call over to management.

Well, we have a few questions, and this is from Kuan Tan from Bradesco. How are you seeing traffic recovery in Guadalajara and the business segment?

Thank you. This is Raul. We are seeing that the recovery in traffic in the business segment will happen in the coming months and in a much bigger way in the coming year. For instance, in Guadalajara, one of the most important demands for this business segment came from the Expo, the exposition center here, the biggest one in Latin America. We are expecting some good news foreseeing the recovery of this market. I could say that, for instance, the announcement of the first week of December that the book exposition, one of the biggest book expositions in the world, will again be happening this year in the first week of December. This is the kind of good news that we need foreseeing a more robust recovery of the segment. That is the first part. Secondly, we are seeing healthy load factors in the business segment routes in Guadalajara, so it will be a matter of time to see additional seats coming from other airlines to see a stronger recovery in these specific markets.

Thank you, Raul. We have some questions from Pablo Coloma from MetLife. The first one is, can you tell us your plans about future dividends, share repurchase program, and capital distributions?

Hi, Pablo. This is Saul. Well, we will continue making distributions to our stakeholders according to our targets for the coming year. We expect a very good year for 2021 due to the active traffic recovery, the commercial revenues, spend per head, and everything, all the decisions and strategies followed by the management. So we will continue, as we have historically distributed. We will continue with the same policy. So no changes for the future. You will see in the next years, the same trend.

Thanks, Saul. The second one from Pablo also regarding CapEx, what can we expect for 2022 and 2023?

Hi, Pablo. This is Saul again. Regarding CapEx, we have a huge commitment with the government according to our master development program. We will make some additional investments in terms of commercial projects like the construction of the hotel and mixed-use complex with corporate offices and commercial areas at the Guadalajara airport. We are also planning to expand the parking lots for Guadalajara, Tijuana, and some other airports. So we will continue with this expansion and investment. By the way, we will continue leveraging 100% of the CapEx according to our last year’s strategy. We have that—the MDP committed with the government plus all the commercial investment.

And the last one also from Pablo. Could you give us some guidance about your net debt-to-EBITDA ratio for 2021 and 2022?

Well, regarding this, and in line with our previous comments, the net debt-to-EBITDA ratio for the end of 2021, including the recent bond certificate issue this month, is expected to be around 1.65. For 2022, we expect to receive the approval for the new bond issuance from the Board. But for 2022, we are not expecting to exceed a 2x net debt-to-EBITDA ratio for that year.

Thank you, Saul. This was the last question.

And we have no further questions over the phone either. I would now like to turn the program back to management for any closing remarks.

Thank you, everyone, again, for joining us today for our third quarter results conference. We appreciate your interest in our company, and we look forward to providing updates on our business initiatives as they become available. In the meantime, the teams remain available to answer any questions that you may have. On behalf of GAP, we wish you a great day.